Income tax - CBDT Circular - 6/2016


(Gaurav Agarwal) #1

CBDT issued a circular in Feb-16, which brought in much needed clarity in classification of income as Capital gain or business income for taxpayer involved in sale/purchase of securities listed in stock exchanges.

Please find circular attached circular-no-6.pdf (715.1 KB)

There are two very important paragraphs in the circular para a) and para b)

Para a)

Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income,

My understanding from this paragraph is - It is upto taxpayer to classify his income either as Short-term Capital Gain (STCG) or Business Income. If one classify his income as STCG then he has to fill up ITR-2. In case of business income one has to fill ITR-4.

ITR-4 is more complex than ITR-2, taxpayer has to fill in a balance sheet and P & L schedule in ITR-4. The advantage is you can claim deduction on expenses related to your business like electricity, internet, salary of help, depreciation etc. Tax will be according to you slab. In case of STCG, tax will be flat 15%.

In spite of my search on web for 2 days, I could find an example of balance sheet (sample )because I think before this circular investment into stocks for less than 12 months were always shown as STCG. Can we develop a sample Balance sheet and P & L for better understanding of community members?

Para B)

In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years;

My understanding is if an investor hold a equity for more than 12 months than he can either treat them as business income or long-term capital gain (LTCG). But if you have chosen to treat such equity as LTCG in AY16-17 then you cannot treat them as business-income in AY17-18. There are advantage and disadvantage to both the approach.

Advantages of LTCG is if STT is paid the income is tax exempt. But you cannot claim anything if you incur a capital loss whereas in business income you have to pay tax according to you tax slab after deducting expenses but you can carry forward your business losses.

Comments invited.

Moderators & community members
I could not find example of income tax discussion on forum. If this is inappropriate, I will delete immediately. Thanks.


(v4value) #2

I have a query. For holding period less than 12 months, is there any rule that if the holding period is less than 1 month it is trading income taxed @30% else between 1 -12 month is short term capital gain taxed @15% ? Thanks


(Gaurav Agarwal) #3

I think the circular makes it pretty clear

that should mean you can hold the listed security for one day or one month it does not matter. If you declare it as business income you should be taxed at your slab rate and not 30% flat.


(v4value) #4

Thanks Gaurav. My question was if you do not declare its as business income. In that case if the holding period is less can the view be taken it is trading to be taxed at income tax rate instead of STCG?


(Gaurav Agarwal) #5

If an investor is taking delivery of listed securities and frequency of trade/investment is high (subjective, not defined by CBDT) and if he wishes to treat such income as STCG and not business income then I think the matter is still not clarified. No clarity on this issue as far as I know.


(v4value) #6

got it, thanks Gaurav.


(Prasad India) #7

Dear Gaurav,
How about IPO? Is STT paid when u have some shares allotted by the company.
Is it to be computed for LTCG as STT is not paid?


(Hemant V Bhatia) #8

It is not important how you acquire the shares. Only when you sell them & if STT paid on that ,you will get benefit under LT or ST as the case maybe.


(Krishnaraj) #9

@v4value My 2 cents on the issue is that IT Dept has kept the interpretation open so that they can ensure they do not lose any revenue. Generally speaking the assessee can be assumed to have a tendency to declare all losses as business income and all gains as Short Term Capital Gains (taking only less than one year cases). Thus the assessee can have a higher tax deductible in case of losses and lower tax outgo in case of gains. Itr is natural to assume that the Dept will ensure that they do not lose any revenue this way.

It is only during sale that STT needs to be paid to claim the preferential treatment for LTCG / STCG not during purchase or allotment as in the case of IPO.


(Gaurav Agarwal) #10

I tried to understand the balance sheet schedule of the ITR-4. Below is what I understood. Please correct me if am wrong.

This not your personal balance sheet. This is balance sheet for your shares & securities business balance sheet.

Balance sheet has two major sections

Sources of Funds
Application of Funds

Sources of Funds

Proprietor's Fund - Fund you bring to the business. 
Loan Funds

Application of Funds

Fixed Assets
	Gross Block - Computer, furniture, office, car you use for business.
Investments
	Long-term investments
	Short-term investments
		Equity Shares, (incl share application money)
Current Assets, loans and advances
	Inventories
		Stores/consumables
		Raw materials
		Stock-in-process
		Finished Goods//Trades Goods
Miscellaneous expenditure not written off or adjusted 

I am struggling to understand will shares in demat account as on 31-Mar be shown as

Inventories -> Stock-in-process
or
Investments -> Short-term Investments -> Equity Shares,(incl share application money)

Disclaimer:
It is for discussion so that we may talk to our CA better.


(amit anam) #11

Friends,

It is very simple, all you have to do is file the balance sheet along with SOA.

If you show your holding of shares as on 31st march as “stock in trade” than profit accrued out of selling it before 1 year will be treated as biz income.

If you show your holding of shares as on 31st march as “capital investment / investment” than profit accrued out of selling it before 1 year will be treated as STCG with 15% tax.


(Gaurav Agarwal) #12

Thanks @amitanam

What is SOA?

  • Stock-in-trade term is not used in Balancsheet schedule of ITR-4. Is it same as Inventories -> Stock-in-process?

  • Should we use market price of Shares as on 31-Mar or should we use purchase price of stocks?


(amit anam) #13

Hi Gaurav, Sorry, i meant computation of income and not SOA.

As per my CA my equity investment are shown as “investment” with actual purchase price of the stock.


(pkk123) #14

See that’s where the ambiguity in law is. Just because you are ‘showing’ your equity holdings and trades as investments, IT department is not obliged to take that on face value. It is upto the discretion (big red flag) of assessing officer. So they can call it business income. Tax on STCG is 15% while on business income is 30%.


(Gaurav Agarwal) #15

Tax on business income of individual is not flat 30%, it is according to you Slab i.e marginal rate.


(Hitesh Patel) #16

The biggest problem individuals face is that he is at the mercy of assessing officer when he is dealing with short term capital gains. (if the IT assessing officer in his whim considers it as his business income then the tax rate goes up drastically). There should be clear cut rules about these things in black and white with no grey areas left to subjective interpretation.

Personally if I was the finance minister I would remove all kinds of short and long term taxes and raise the amount of STT which should compensate for loss of taxes collected through tax on STCG. This would ensure tax at source so no one escapes. Those who trade a lot pay a lot which is actually good. Plus the problems of treating profits as STCG vs business income etc goes away.

And a lot of people still do not declare STCG or pay taxes thereon. So the higher STT takes care of all these issues in a single shot.


(v4value) #17

Hitesh sir what do you do now? Do you use any rule taht 0-1 month holding period treat at income tax, 1-12 months hlding period STCG and 12 month + LTCG? Thanks.


(Hitesh Patel) #18

i treat less than one year holding as STCG and more than one year as LTCG
and pay taxes accordingly.


(Hitesh Patel) #19

I consider less than one year holding as STCG and more than one year as LTCG and pay taxes accordingly.
This I guess is standard procedure unless the assesing officer raises any demand for considering STCG as business income.

The latter issue can be raised if there is a lot of intra day trading or there is a lot of trading in derivatives.


(Somenath Paul) #20

STCG can also be termed as business income?

I thought only LTCG can be termed as business income by assessing officer.