As per income tax act under capital gain “capital Asset” to include property of any kind held by the assesse whether or not connected with his business or profession, but does not consider any stock or personal assets subject to certain exceptions in the act. As regards shares and other securities, the same can be held either as capital assets or stock-in-trade or both.
Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital assets or stock, is an essential fact-specific determination and has le d to lot of uncertainty and litigation in past.
Principles to determine whether gain on sale of listed shares and other securities would constitute capital gains or business income
After many discussion and CBDT realizing that major part of shares or securities transaction takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further instructs the assessing officer to take into account the following while deciding whether the surplus generated from sale of listed shares of listed shares or other securities would be treated as Capital Gain or Business Income–
(a) Where assesse opts to treat such shares and securities as stock-in-trade:
Where the assesse itself, irrespective of the period of holding the listed shares and securities, opts to treat these securities as stock-in-trade, the income generated through transfer of such shares securities would be treated as its business income.
(b) Listed shares and securities held for a period of more than 12 months:
In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assesse in a particular assessment year, shall remain applicable in subsequent Assessment Year also and the taxpayer shall not be allowed to adopt a different/contrary stand in this regards in subsequent years.
In rest of the cases, the nature of transaction (i.e. whether the income or loss is in the nature of capital gain or business income) shall continue to be decided according the the aforesaid Circulars issued by the CBDT.
It is, however clarifies that the above shall not apply in respect of such transaction in shares or securities where the genuineness of the transaction itself is questionable, such as bogus claim of long term capital gain/short term capital loss or any other transaction of similar nature.
Note: The above principal has been formulated with the sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of share and securities. All the relevant provision of the Act shall continue to apply on the transaction involving transfer of shares and securities.
Special provision in case of Long Term Capital Gain on transfer of shares (Section 112A)
In budget 2018 the government introduce section 112A to impose tax on LTCG on shares and remove the exemption under section 10(38) which exempt LTCG on shares. For this purpose, the central government introducing chargeability of long term capital gain on transfer of specified class of shares and securities. Section 112A provides that notwithstanding anything contained in section 112, a concessional rate of tax @10% 10 will be levy on the LTCG exceeding 1 Lakh on transfer of-
- An equity shares in a company or
- A unit of an equity oriented unit fund or
- A unit of a business trust
To avail the benefit of concessional rate the following are the pre-conditions:
- In case equity share in a company, STT has been paid on acquisition and transfer of such capital asset.
- In case of unit of an equity oriented unit fund or security of business trust, where STT has been paid on transfer of such capital asset.
Note: However, the CG may, by notification in the official gazette, specify the nature of acquisition of equity share in a company on which the condition of payment of STT on acquisition would not be applicable.
Further long term capital gains arising from transaction undertaken on a recognize stock exchange located in an International Financial Services Centre (IFSC) would be taxable at a concessional rate of 10%, where the consideration for transfer is received or receivable in foreign currency, even though STT is not leviable in respect of such transaction.
Adjustment of Unexhausted Basic exemption limit
In the case of resident individual or HUF, if the basic exemption is not fully exhausted by any other income, then such long term capital gain exceeding 1 lakh will be reduced by the unexhausted basic exemption limit and only the balance would be taxed @10%.
No deduction under chapter Vi-A against LTCG taxable under section 112A
Deductions under Chapter Vi-A cannot be availed in respect of such long term capital gain on equity shares of a company or unit of an equity oriented fund or unit of a business trust included in the total income of the assesse.
No benefit of rebate under section 87 A against LTCG taxable under section 112A
Rebate under section 87A is not allowed under LTCG on shares.
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