Can share trading profits be taxed as both business income and capital gains?

Is it possible to treat income from buying and selling shares both as capital gains and business income? As per the Income-tax Department, both treatments are possible, depending on various factors. Today's Q&A explains these factors and the official rules in response to a reader's query.

Whether dealing in shares and securities is an investment activity or a business activity has been a very contentious subject between taxpayers and tax collectors. It has been a subject matter of litigation for many years. In case it is treated as an investment activity, the profits are taxed as capital gains and taxed at special rates.

To reduce litigation on the subject and to bring some clarity on the issue, the CBDT (Central Board of Direct Taxes) has issued some circulars clarifying its position. It has also issued instructions to guide its officials.

As per the latest circular on this issue (No. 6/2016 dated 29-02-2016), the CBDT has advised its officers to accept the stand taken by taxpayers with respect to listed shares and securities.

The circular provides that in case of listed shares, which have been held for more than 12 months, and if the taxpayer claims the same to be a capital asset, the assessing officer has to accept the stand taken by the taxpayer.

Irrespective of the holding period, if the taxpayer wants to treat his investment in listed shares and securities as his stock in trade, the tax officer should accept this stand also. However, the stand once taken has to be consistently followed.

The above guidelines are for listed shares and securities.

In respect of unlisted shares, generally, the income has to be taxed as capital gains (irrespective of holding period), unless there are facts indicating that it is a business activity. The CBDT has issued some circulars and instructions earlier on the subject.

The essence of all these prior instructions and circulars is that whether the particular share dealing activity should be treated as a business activity or an investment activity would depend on a number of factors, like:

• Treatment of the shares and securities in an individual's books of accounts

• The volume of the transaction

• Source of funds for making investments

• The organisational set-up

• Nature of the activity

• Intention behind the share dealing activity

• Frequency of transactions

For example, if the intention is to earn dividends and encash appreciation once in a while, the same may be treated as an investment giving rise to capital gains.

However, if the facts show that you are indulging in frequent purchase and sale of the same shares, the same may be treated as a business activity and gains taxed as business income.

The conclusion can only be arrived at after evaluating all the facts in totality.

It seems you are dealing in listed shares and are concerned about the treatment of short-term capital gains, i.e., the asset held for less than 12 months. The above circular gives you the option to treat the way you wish to treat, but the same has to be followed consistently.