Shares held as stock-in-trade or Investment ?

Shares held as stock-in-trade or Investment
The laws in our country are quite confusing at times.
Circulars issued from time to time clarify these issues.
But what can be done, when the circular creates more
confusion that clarifying the issue?
Gains from investment
We have at hand a crucial situation with regard to the
gains from investment. Whether the same be treated as
Capital Gain or Business Income.
• The point became important with the introduction of
Securities Transaction Tax (STT) and corresponding
lowering of tax rate in case of STT paid Capital gains.
• In majority of cases effective tax rate is lower when
the profit is considered as Capital Gain, than as
business income.
• In the case of FII's it is the other way round, since
they are benefited if the same is considered as
business income due to Double Taxation Avoidance
Agreements.
• Either way without any clear-cut instructions, the
issue is always open for litigation.
Past circular
• The issue was raked up one year back when the old
circular issued by The Central Board of Direct Taxes
(CBDT) through Instruction No.1827 dated August
31, 1989 was issued in the Income tax Department
to be followed to determine the taxability.
• Now again this issue is in the news with the
publication of CIRCULAR NO. 4/2007, DATED
15-6-2007
Present Circular No 4/2007
• The present circular hardly says anything new.
• It firstly refers to The Central Board of Direct Taxes
(CBDT) Instruction No.1827 dated August 31, 1989
• Then it goes on to discuss the findings of Supreme
Court Decisions in the case of
o Commissioner of Income Tax (Central), Calcutta
Vs Associated Industrial Development Company
(P) Ltd (82 ITR 586)
o Commissioner of Income Tax, Bombay Vs H.
Holck Larsen (160 ITR 67), and
o The Authority for Advance Rulings (AAR) (288
ITR 641) and also reference is to the AAR in the
case of Fidelity group
What the present circular has to say
The principles referred to by the Circular are summarized
below :
1. The assessee, who being in a position should produce
evidence from its records as to whether it has
maintained any distinction between those shares
which are its stock-in-trade and those which are held
by way of investment.
2. The emphasis is on facts and not on law.
3. The power to purchase or sell shares in the
Memorandum is not decisive of the nature whether
trading or investment.
4. The substantial nature of transactions, the manner of
maintaining books of accounts, the magnitude of
purchases and sales and the ratio between
purchases and sales and the holding would furnish a
good guide to determine the nature of transactions.
5. The purchase and sale of shares with the motive of
earning a profit, would result in the transaction being
in the nature of trade/adventure in the nature of
trade.
6. Where the object of the investment in shares of a
company is to derive income by way of dividend etc.
then the profits accruing by change in such
investment (by sale of shares) will yield capital gain
and not revenue receipt.
7. it is possible for a tax payer to have two portfolios,
i.e., an investment portfolio comprising of securities
which are to be treated as capital assets and a
trading portfolio comprising of stock-in-trade which
are to be treated as trading assets.
8. Where an assessee has two portfolios, the assessee
may have income under both heads i.e., capital gains
as well as business income.
9. No single principle would be decisive and the total
effect of all the principles should be considered to
determine in a given case
The last para of circular practically undoes the whole
exercise by stating that “ These instructions shall
supplement the earlier Instruction no. 1827 dated August
31, 1989.”
If we analyse the circular there are two new things that
emerge from this circular.
1. An assessee can have two portfolios.
2. The total effect of the guiding principles has to be
applied in a given case.
This reduces the threat faced by the retail investor. Now
some instances of non delivery investments or F&O
transactions will not give blanket permission to the
Assessing officer to consider the total investment as
Business.
Does this circular really gives any relief to the Investor?
Does this circular give any clarity on the matter? The
answer to the latter is definitely negative, but for the
former to an extent yes.
We wish the law makers understand the situation and
clear the dilemma. We would like to take the example of
option given to the assessee to chose Indexation benefit
as an alternate to long term tax at a lower percentage.
A similar option will be a real relief. The FII's have AAR to
take shelter, where does retail investor go?
4 July