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