The Hindu Business Line : CBDT circular to discern shares held as stock-in-trade or investment

By notice
Distinction has bearing on characterisation of income and applicable tax rate.
CBDT says it cannot lay out exact conditions to be met.
Circular says it's possible for a taxpayer to have two portfolios

New Delhi June 15 The Central Board of Direct Taxes (CBDT) on Friday came up with a set of guiding principles that could now be used by both the tax collector as well as the taxpayer in making a distinction between shares held as stock-in-trade and those held as investment.

These guiding principles are now set out in a departmental circular, which has summed up various aspects of the somewhat ticklish issue of making a distinction between shares held as investments and those held as stock-in-trade.

A distinction was important as it had a bearing on the characterisation of income and also the applicable tax rate. Incomes from trading in shares held as stock-in-trade are characterised as business income and those arising from long-term investments are treated as long-term capital gains.

In India, the tax rate applicable for business profits is significantly higher than the rate on long-term capital gains and, therefore, the temptation to categorise share purchases as investments.

`No exact conditions'

"The circular that we have issued today is only a compilation of principles specified in various judicial pronouncements on the matter. These are guiding principles. As tax authorities we cannot set out the exact conditions that need to be met," a Finance Ministry official said.

The official also made it clear that the final decision depended on the facts of each case and that the circular provides legal support to the taxpayer as well as the tax collector in such situations.

Apart from specifying the principles laid down by the Supreme Court in the two independent cases of Associated Industrial Development Company and Holck Larsen, the circular also highlighted the stand taken by the Authority for Advance Rulings in the case of Fidelity Group.

Two portfolios

The circular has also emphasised that it is possible for a taxpayer to have two portfolios, i.e., an investment portfolio comprising securities that are to be treated as capital assets, and a trading portfolio comprising stock-in-trade that are to be treated as trading assets.

"Where an assessee has two portfolios, the assessee may have income under both heads i.e., capital gains as well as business income," the circular said.

The assessing officers have now been advised through the circular that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade.