capital gain v business income v speculative income

Sir, in relation to the said issue my opinion says the following :

As per section 43 (5) a speculation transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scriptts.

Provided that for this purpose, of the clauses mentioned in the definition, following transaction (with reference to your case) shall not be deemed to be a speculative transaction:

(b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations

In light of the above, following points can be clarified :

1. The profit/loss of ABC Ltd. to the extent of the trading in shares is carried on delivery basis shall not be charged under Speculation Business.

2. Now the question is whether the said profit/loss is treated and assessed as Business Income or as Capital Gain.

In the case of Commissioner of Income Tax (Central), Calcutta Vs Associated Industrial Development Company (P) Ltd (82 ITR 586), the Supreme Court observed that:

Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to 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.

On the basis of the above decision if the ABC Ltd. is making any distinction between those shares which are its stock-in-trade and those which are held by way of investment at time of recoding the entries in the books of accounts, then the company itself can decide about the chargeability of it profit/loss. If it is showing the shares as investment then the profit/loss is assessed under Capital Gains and if it is showing as stock–in–trade, then profit/loss is assessed under Business or profession.

The Authority for Advance Rulings (AAR) (288 ITR 641), referring to the decisions of the Supreme Court in several cases, has culled out the following principles :-

(i) Where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction;

(ii) 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;

(iii) ordinarily 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; but 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.

3. As far as Future trading of shares is concerned you are settling the transaction without taking the actual delivery of shares and since it’s profit/loss would be chargeable under Speculative Business only ( and above produced clause (b) will not be applicable to you ).

I think the above presentation would be to you satisfaction to take the appropriate decision. If you want to share further more information in relation to the said topic, I will be glad to share the same with you. If you have any material in relation to the same, please share with me.

Thanks.

CA. PRASAD S. BHANDARI

AHMADNAGAR ( MH )

PH. NO. 098906 73765. E-MAIL : caprasadbhandari @ gmail.com