The Hindu Business Line : The fifteen commandments

The Central Board of Direct Taxes (CBDT) in its Instruction No. 1827 dated August 31, 1989, had laid down certain tests to distinguish between shares held as stock-in-trade and shares held as investment.

The following supplementary instructions in this regard will provide further guidelines for determining whether a person is a trader in stocks or an investor in stocks:

Whether the purchase and sale of securities was allied to his usual trade or business / was incidental to it or was an occasional independent activity.

Whether the purchase is made solely with the intention of resale at a profit or for long-term appreciation and/or for earning dividends and interest.

Whether scale of activity is substantial.

Whether transactions were entered into continuously and regularly during the assessment year.

Whether purchases are made out of own funds or borrowings.

The stated objects in the Memorandum and Articles of Association in the case of a corporate assessee.

Typical holding period for securities bought and sold.

Ratio of sales to purchases and holding.

The time devoted to the activity and the extent to which it is the means of livelihood.

The characterisation of securities in the books of account and in balance-sheet as stock-in-trade or investments.

Whether the securities purchased or sold are listed or unlisted.

Whether investment is in sister/related concerns or independent companies.

Whether transaction is by promoters of the company.

Total number of stocks dealt in.

Whether money has been paid or received or whether these are only book entries.

The assessing officers are also advised that no single criterion listed above is decisive and total effect of all these criteria should be considered to determine the nature of activity.

The question whether a particular assessee is a trader in shares or the shares are held as capital assets sometimes gives rise to disputes and litigation. Over the years, the courts have laid down the various tests or factors to be taken into account in determining this question.

Certain general principles in this regard were laid down by the Supreme Court in the G. Venkata Swami Naidu & Co. vs CIT (1959 35 ITR 594) case. In this case, the Supreme Court was dealing with a question whether the excess sum realised on the sale of certain plots was assessable as income from an adventure in the nature of business.

The Supreme Court held that in deciding the character of such transaction, several factors were relevant, such as: i) whether the purchaser was a trader and the purchase of the commodity and its resale were allied to his usual trade or business or were incidental to it; ii) the nature and quantity of the commodity purchased and resold — if the commodity purchased is in very large quantity, it could tend to eliminate the possibility of investment for personal use, possession or enjoyment; and iii) the repetition of the transaction.

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