Yardstick to classify share income
This query is : Resolved
26 November 2011
What is the Yard Stick to decide whether a person's Share Income i.e.
(i) Long Term capital Gain/Loss
(ii)Short Term Capital Gain Loss &
(iii) Speculation Profit ,
should be shown under Head - Business Profit or Capital Gains ?
What are important Court judgements regarding the same ?
(i) Long Term capital Gain/Loss
(ii)Short Term Capital Gain Loss &
(iii) Speculation Profit ,
should be shown under Head - Business Profit or Capital Gains ?
What are important Court judgements regarding the same ?
26 November 2011
Profit/loss earned by way of intra-day trading is always shown as Business Income.
Profit/loss earned by way of delivery mechanism is treated as capital gain
Profit/loss earned by way of delivery mechanism is treated as capital gain
26 November 2011
There is no hard and fast rules for deciding capital gains or PGBP in the case of dealing in shares / securities. But courts/ tribunal had repeatedly said the following factors are relevant.
(1) What is the intention of the assessee at the time of purchase of the shares? The answer to this can be found out from the treatment given to the purchase in the assessee’s books of account.
(2) Has the assessee borrowed money to purchase the shares, and paid interest thereon? As per the Mumbai Tribunal, money is generally borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining.
(3) What is the frequency of the purchases and disposals? As per the Mumbai Tribunal, “If purchase and sale are frequent, or there are substantial transactions in that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment).”
(4) Is the purchase and sale made for realizing profit, or for retention and appreciation in its value? The former is indicative of the purchases being part of trade; and the latter is indicative of the purchases being an investment. Furthermore, it would be relevant to ask whether the intention behind the purchase was to enjoy dividend, or merely to earn profit on sale of shares. Importantly, a commercial motive is an essential ingredient of trade in this context.
(5) The Mumbai Tribunal also considered that if the items in question were valued at cost, it would indicate that they were investments. Where they were valued at cost or market value or net realizable value, whichever is less, it will indicate that items were treated as stock-in-trade.
(1) What is the intention of the assessee at the time of purchase of the shares? The answer to this can be found out from the treatment given to the purchase in the assessee’s books of account.
(2) Has the assessee borrowed money to purchase the shares, and paid interest thereon? As per the Mumbai Tribunal, money is generally borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining.
(3) What is the frequency of the purchases and disposals? As per the Mumbai Tribunal, “If purchase and sale are frequent, or there are substantial transactions in that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment).”
(4) Is the purchase and sale made for realizing profit, or for retention and appreciation in its value? The former is indicative of the purchases being part of trade; and the latter is indicative of the purchases being an investment. Furthermore, it would be relevant to ask whether the intention behind the purchase was to enjoy dividend, or merely to earn profit on sale of shares. Importantly, a commercial motive is an essential ingredient of trade in this context.
(5) The Mumbai Tribunal also considered that if the items in question were valued at cost, it would indicate that they were investments. Where they were valued at cost or market value or net realizable value, whichever is less, it will indicate that items were treated as stock-in-trade.
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