Taxes applicable on profits earned from stock market

Profits earned from Stock market is explained as under. Your income will be taxable under the heading Capital Gains (CG) or Profits and Gains from Business or Profession (PGBP).

Capital Gains can be of two types: Long term Capital Gains (LTCG) or Short term Capital Gains (STCG).

Similarly, PGBP can also be of two types: Income from Speculation Business and Business Income.

Share Transactions can be divided in three parts:
1 When shares are delivered in your demat account – Profits will be Capital Gain. It can be further divided in two parts:
a. You hold these shares for Less than 12 months (STCG): 15% Tax
b. You hold these shares for More than 12 months(LTCG): No Tax i.e. profits are exempt

NOTE: It is possible that you hold some shares for less than 12 months and some for more than 12 months. In that case your profits will be bifurcated and profits on shares held for more than 12 months will be exempt from tax and balance will be taxable at 15%.

2 When shares are not delivered in your demat account (e.g.: Intraday Trading, or BTST) – Profits will be taxable as Income from Speculation Business – Tax rate will be determined as par the Income Tax Slab you are falling in. (Slab rates mentioned below)

3 Equity Futures and Options – Profits will be taxable as Business Income – Again Tax rate will be determined as par the Income Tax Slab you are falling in. (Slab rates mentioned below)
You might be thinking what’s the difference between Speculation Income and Business Income when both of them are taxable at the same rate. Well, there is a Major difference.

We all know things in stock market may not go as planned and sometimes we could end up in losses. Income Tax law in India allow us to carry forward these losses to future years and set off from profits that we may earn in Future and thereby reducing our taxable income resulting in tax saving. But there is a limit on number of years such losses can be carried forward.

Loss from Speculation Business
2) can be carried forward only for 4 subsequent years only and can be set off only against Income from Speculation Business only. Other Speculation income are Income from Lottery and Income from Race Horses

Whereas Normal Business Loss
3) can be carried forward for 8 subsequent yearsand can be set off against ANY business income or income from your profession.

Also it is worthwhile to remember that Short Term Capital Loss {Pt. 1(a)} can also be carried forward for 8 subsequent years and can be set off against again any Capital Gain (LTCG or STCG). And Long Term Capital Loss {Pt.1(b)} can also be carried forward for 8 subsequent years BUT can be set off against Long term Capital Gain only. Capital Gains may arise from Sale of Property like Building, Land, Jewelry, etc. Whether they will be LTCG or STCG will depend on how long you have been holding those assets.

Please NOTE that you can carry forward these losses only if you had filed your return before due date and claimed these losses in your return.


Income tax treatment of losses on sale of shares

Shares are held as investments and therefore regarded as capital assets for tax purposes. If shares are held for a period of more than 12 months, the shares qualify as long-term capital assets. The gains from sale of equity shares on a stock exchange are exempt from tax if the equity shares are long-term capital assets.

Therefore, even the losses incurred on sale of equity shares, which are long-term capital assets, on a stock exchange is exempt and is not to be considered in computing the taxable income. If you are therefore thinking of disposing of the shares, it is advisable to do so before the holding period of the shares crosses 12 months, so that you can claim the benefit of including the loss in the computation of your taxable income. Such losses would be regarded as short-term capital losses.

Though the short-term capital gains on sale of equity shares on the stock exchange is eligible for a concessional rate of taxation of 15%, short-term capital losses on sale of equity shares on the stock exchange do not suffer from any disadvantage compared with other short-term capital losses. However, in general, capital losses can be set off only against capital gains and therefore your short-term capital losses can only be adjusted against your other short-term capital gains or against any taxable long-term capital gains, and not against your salary or interest income.

The short-term capital gains against which you can adjust such losses would include not only short-term capital gains from sale of equity shares on a stock exchange, but gains from disposal of any other type of asset, including immovable property. Similarly, the short-term capital losses can be adjusted against long-term capital gains from sale of any type of asset, or against long-term capital gains from sale of equity shares in off-market trades, such as a buy-back by the company or a private sale through a spot transaction. Obviously, the question of set-off of such short-term capital losses against long-term capital gains on sale of equity shares on a stock exchange does not arise, since such long-term capital gains would in any case be exempt from tax.

There is no requirement that the short-term capital loss has to be first set off against short-term capital gains before being set off against long-term capital gains. The rate of long-term capital gains tax on sale of listed equity shares in off market trades is 10%, the rate of long-term capital gains tax on sale of other assets is 20%, the rate of short-term capital gains tax on sale of shares on a stock exchange is 15%, and the rate of short-term capital gains tax on sale of other assets is the applicable slab rate (generally 30% for income above Rs8 lakh).

So it makes sense to first set off any short-term capital losses against short-term capital gains on sale of other assets then against long-term capital gains on sale of other assets which are subject to tax at 20%, and then against short-term gains on sale of equity shares on a stock exchange, and finally against long-term capital gains on sale of listed equity shares which are subject to tax at 10%. This would maximize the tax benefit available on set-off of the short-term capital losses.

Do you have an option not to set off the capital loss but choose to carry it forward for setting off against future capital gains? There is no such option available, and if taxable capital gains are earned you necessarily have to set off the losses against such capital gains. Of course, in case you do not have any taxable capital gains, you can carry forward your capital losses for a period of up to eight years from the year in which the loss was incurred. To get this benefit, you need to ensure that you file your income-tax return for the year in which the loss was incurred within the time limit specified for filing that return.

If your holding period of the shares has already crossed 12 months, does it mean that you can no longer get the tax benefit of the loss that has been caused due to the drop in value of the shares? You need to remember that the benefit of set-off would be lost only if you sell the shares on the stock exchange. If you choose to do an off market sale with a purchaser at the prevalent market price, you can still claim the benefit of the loss in your tax computation. The only precaution that you need to take is to ensure that payment and delivery are simultaneous (which is a requirement for a spot transaction, which is permitted outside the stock exchanges), and that the transaction is carried out at the prevailing market price.

Tax Savings on Long term capital loss from shares

Provision of Tax on LTCG on shares
Before understanding this, we need to understand the taxabilty provisions on Long term capital Gain/Loss From shares and securities
1. From 1.10.2004 onwards sale of a long term security (means where holding period is more than 12 month) ,on which STT paid (Securities Transaction Tax) is not liable for tax and fully exempted from Income Tax.
2. As the long term capital gain from the sale of securities is exempted from tax ,loss from such deals can not be adjusted from the other capital gain and can not be carry forward either.
3. Securities Transaction tax (stt) is payable for transaction made through stock exchanges.
if you are planning to sell the shares on which you will have long term capital loss ,then sell them out of the exchange without paying STT and save tax .lets study with a example.
Example: Krishna has sold a shares for 300000 which he has purchased for 500000 ,13 months back.similarly he has also sold a land for 500000 which he has purchased for 100000 four year ago. Krishna has also salary income for Financial year 2008-09.
calculate tax in two situations
1. shares has been sold through stock exchange means stt paid.
2. shares has been sold to friend out of exchange.
Ans:Case -1:Calculation of tax Case one(through stock exchange)
income from salary =300000
Income from capital gain on capital gain =400000
tax liability=on 150000-300000 @ 10%=15000
20% on 400000 LTCG =80000
Net tax liability=15000+80000=95000
long term loss from shares sold through exchange being exempted income can not be adjusted from LTCG on land,and not not be carry forward either.
Case-2:(shares sold to friend out of stock exchange ) no stt paid
Income from salary =300000
Income from Long term capital gain
LTCG from land =400000
Less:LTCL from Shares=200000
net LTCG =200000
tax liability
salary=10% on 300000-150000=15000
Ltcg=20% on 200000 =40000
net tax liabilty =55000
so in First case Tax Liability is 95000 where as in second case the tax liability is 55000 means saving of 40000 tax by not selling shares through exchange !!!
Further if we have sold share out of exchange this year and made a loss and have no other long term capital gain then we can carry forward the loss for next eight years and adjust the loss from other long term gain,means the benefit is definite if we adjust it in this year or next eight year.
1. To avoid complication in calculation Indexation on cost of capital assets has not been done.
2. Shares and securities word has been used interchangeable though differently defined under the read accordingly.
3. Sucharge and Cess on tax has also not shown to avoid complications.
4. You can also save tax from short term capital loss from same trick.

Trading in Shares – is it Business income or Capital gain

• Where assessee held shares from seven to eleven months, earned dividend and entered into a few transactions of sale of such shares during relevant year even though he held a huge number of shares, income arising from sale of shareswould be taxable as short-term capital gain.
[CIT v. Vinay Mittal [2012] 22 151 (Delhi)]

• Where assessee-company’s main business was investment in shares & securities, shares could not be treated as business assets but income from sale of shares was liable to capital gains.
CIT v. Trishul Investments Ltd.(2008) 305 ITR 434 (Mad.)

Taxability of income arising from sale of shares whether taxable as business income or short term capital gain – Guiding principles Asst. CIT v. Om Prakash Arora [2011] 16 3w6 (ITAT-Delhi)

Following principles, can be applied on the facts of a case to find out whether transaction(s) in question are in the nature of trade or are merely for investment purposes:

1) What is the intention of the assessee at the time of purchase of the shares (or any other item). This can be found out from the treatment it gives to such purchase in its books of account. Whether it is treated as stock-in-trade or investment. Whether shown in opening/closing stock or shown separately as investment or non-trading asset.

2) Whether assessee has borrowed money to purchase and paid interest thereon. Normally, money is borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining.

3) What is the frequency of such purchases and disposal in that particular item ? If purchase and sale are frequent, or there are substantial transactions in that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment).

4) Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation in its value ? Former will indicate intention of trade and latter, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares . A commercial motive is an essential ingredient of trade.

5)How the value of the items has been taken in the balance sheet ? If the items in question are valued at cost, it would indicate that they are investments and where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as stock-in-trade.

6)How the company (assessee) is authorized in memorandum of association/articles of association ? Whether for trade or for investment? If authorized only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity and vice versa.

7)It is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of holdings. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment (or say, stock-in-trade) then onus would shift to revenue to prove that apparent is not real.

8) The mere fact of credit of sale proceeds of shares (or for that matter any other item in question) in a particular account or not so much frequency of sale and purchase will alone will not be sufficient to say that assessee was holding the shares (or the items in question) for investment.

9) One has to find out what are the legal requisites for dealing as a trader in the items in question and whether the assessee is complying with them. Whether it is the argument of the assessee that it is violating those legal requirements, if it is claimed that it is dealing as a trader in that item ? Whether it had such an intention (to carry on illegal business in that item) since beginning or when purchases were made ?

10) It is permissible as per CBDTs Circular No. 4 of 2007 of 15-6-2007 that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios.

11) Not one or two factors out of above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen.

How to deal with Investment in Penny Stocks

After the securities market regulator SEBI has taken action on 59 companies , the income tax department has clamped on individuals misusing the stock exchange platform for evading taxes and converting Black money into white.

On this issue, I think, The Central Board of Direct Taxes has already, directed officers to open cases against individual taxpayers who have booked capital gains or losses by transacting in penny stocks. These are scrips whose value is typically no more than a few rupees each. These stocks are considered easy to manipulate and exploited to convert black money into white, evade taxes and make illicit trading gains. information on individuals who transacted in Penny Stocks was being made available to officers for further scrutiny and reopening of cases under Section 148 of the I-T Act.

According to stock market players, the practice of converting black money into white by using shell companies and penny stocks was rampant a few years earlier, particularly in some stock exchanges in India. Several entities benefited to the tune of thousands of crores by exploiting the exchange platform.

One method used involves buying penny stocks of shell companies when their prices are low. The stock is held for a year, in which time the price is artificially raised around 50 times. As the equity of these companies is controlled by a single group, the price is easy to manipulate. Later, the stock is sold to known parties who pay through benami cheques. As the holding period is over a year, the gains don’t attract tax. Therefore, an individual buying a penny stock at an early stage by spending probably Rs 1 lakh is able to generate Rs 5 crore in his account as legitimate income. The same amount of black money is used to pay the counter-parties to buy the stock at the last stage.

In the recent past, the Securities and Exchange Board of India (Sebi) passed a series of orders against entities manipulating the stock exchanges to evade taxes. Individuals have been found exploiting penny stocks, the small and medium enterprises trading platform and illiquid options to book fictitious losses or gains. Sebi has banned several individuals, companies and brokers from accessing the securities market for being involved in such manipulation.

On the separate issue of tax disputes between the government and some major companies, especially multinationals, the Revenue secretary said few months ago, the arbitration route was not the best way of settling such matters. The better option, he said, was  something on the lines of the mutual agreement procedure (MAP) with American companies; he said he expected to see disputes with some 120 US  companies getting resolved over the next three-odd months through this method.


Investment in Penny Stock is not always considered as bogus or be treated as Cash Credit u/s 68 of the Income Tax Act 1961

Income Tax department investigates alleged trading/investment in shares and securities with share broker by conducting Search/ Survey or by asking details u/s 133(6) of the Income Tax Act 1961. Income Tax department has various sources from where information can be received; such source of information can be obtained from Securities Exchange Board of India (the “SEBI”) in case of manipulation in capital market .

SEBI first conducts enquiry on its own for alleged involvement of share broker or listed companies in alleged price manipulation of the shares, and after conducting enquiry of alleged collusion/connivance, SEBI passes an order debarring / imposed monetary penalty, as the case may be, on the entity involve in the manipulation, thereafter it shares the information/list with other agencies like Income Tax Department. On receiving such information, IT Department investigates upon the assessee involved in the manipulation and tries to prove the LTCG /STCG as bogus or non genuine as added u/s 68 as Cash credit


Type 1)   The purchases are usually accompanied by a backdated contract note showing the purchase of shares by the assessee at less than a rupee or just a few rupees per share, as they were quoted earlier. The purchase consideration could have been paid either in cash or by cheque. The shares are usually stated to have been purchased in physical format and then converted into electronic form. After a year or so, the assessee sells such dematerialized shares in secondary market at the prevalent price and receives payment through cheque thereby converting black money into white. Depending upon how far the contract note for purchase of such shares was backdated, the assessee launders the money by either paying zero or 15% capital gain tax.

The general modus operandi are as follows:-

  1. With the collusion of broker, shares of an unknown company with dubious background are purchased for miniscule consideration. The broker usually issues a fake contract note.
  2. The counterparty is/are usually not traceable or is related to the broker and the broker undertakes off-market transactions to accommodate the assessee.
  3. After a year, the shares are sold back by the assessee through the same broker. In the meantime, the share prices are rigged by the concerned broker to an abnormally high level.
  4. The shares are now sold by the assessee and sale consideration is received. The sale consideration is in fact first paid by the assessee in cash to a trusted confidante of the broker. This cash consideration which is introduced in a banking channel by routing through a number of accounts, finally reaches the accounts of the broker. With this amount, the broker pays the consideration to the assessee.
  5. Thus the assessee’s own cash is introduced and comes back in the form of long term capital gain thereby claiming concessional tax rate.
  6. For arranging these transactions, the broker typically charges commission.

Type 2) : In this type of collusion/ connivance Listed Companies which are not actively traded (Penny stock) on stock exchanges, first raise the funds through series of preferential allotments. Sometime they also issue bonus shares. Consequent to the preferential allotments and bonus issues, the share capital of these companies increased manifold. On reviewing the financial statements of these companies it can be observed that their profit after tax(PAT) and earning price per share(EPS) is constant or consistently decreasing or not justify the increase in the price of the share.

  1. Investor/ Trader identifies the penny stock or illiquid stock with the low price, and then arrange for a meeting with the promoter /management of the company.
  2. Financial performances of these companies are constant or even declines year by year.
  3. Management of the company promises to issue shares on preferential allotment basis when price of the shares is very low.
  4. As agreed between company/promoter and investor, the company issues shares to its investor based on the agreed terms with the lock in period of 1 year as per SEBI guidelines.
  5. Sometime after issue of preferential allotment of share, company also give Bonus shares.
  6. Company increases the price of its share, either by circular trading or by other manipulation to manifold.
  7. Investor sells the shares after the lock in period is over and claims for Long term capital gain exemption.
  8. This way black money is converted into white money. And for doing this company charges commission from its investor.

Now the question is that, Do all the investments made by the investor is seen from the eye of suspicion? Answer is no, it is not necessary that all the investment made in penny stock is treated as bogus or treated as cash credit u/s 68 of the income Tax Act 1961. There are various case laws which are in favour or the assessee, which help assessee to present its case of genuine investments, are as under:-

  1. High Court of Gujarat in case of Commissioner of Income-tax-I Vs. Maheshchandra G. Vakil [2013]40 326 (Gujarat)held that Where assessee proved genuineness of share transactions by contract notes for sale and purchase, bank statement of broker, demat account showing transfer in and out of shares, as also abstract of transactions furnished by stock exchange, Assessing Officer was not justified in treating capital gain arising from sale of shares as unexplained cash credit.
  2. High Court of Gujarat in case of Commissioner of Income-tax-I Vs. Himani M Vakil [2013]10 326 (Gujarat) held that where assessee duly proved genuineness of share transactions by bringing on record contract notes for sale and purchase, bank statement of broker and demat account showing transfer in and out of shares, Assessing Officer was not justified in bringing to tax capital gain arising from sale of shares as unexplained cash credit.
  3. Tribunal at Kolkata in case of DCIT vs Sunita Khemain ITA nos 714 to 718/ kol/2011 has held that :-

The AO cannot treat a transaction as bogus only on the basis of suspicion or surmise. He has to bring material on record to support his finding that there has been collusion/connivance between the broker and the assessee for the introduction of its unaccounted money. A transaction of purchase and sale of shares, supported by Contract Notes and demat statements and Account Payee Cheques cannot be treated as bogus.

  1. Tribunal at Mumbai in case of Tekchand Rambhiya HUF in ITA nos 930/Mum/2012 has held that the Hon’ble High Court, in thecase of CIT vs. Jamnadevi (328 ITR 656) has observed in paragraphs 11 & 12 as under:

“11. We see no merit in the above contentions. The fact that the assessees in the group have purchased and sold shares of similar companies through the same broker cannot be a ground to hold that the transactions are sham and bogus, especially when documentary evidence was produced to establish the genuineness of the claim.

  1. From the documents produced before us, which were also in the possession of the Assessing Officer, it is seen that the shares in question were in fact purchased by the assessees on the respective dates and the company has confirmed to have handed over the shares purchased by the assessees. Similarly, the sale of the shares to the respective buyers is also established by producing documentary evidence. It is true that some of the transactions were off-market transactions However, the purchase and sale price of the shares declared by the assessees were in conformity with the market rates prevailing on the respective dates as is seen from the documents furnished by the assessees. Therefore, the fact that some of the transactions were off-market transactions cannot be a ground to treat the transactions as sham transactions. as a sham transaction.

Thus the fact that some of the transactions were off marked transaction cannot be a ground to treat the transaction In view of the above facts and discussion, as well as the decisions of the Hon’ble jurisdictional High Court, we are of the considered opinion that the assessee has discharged its onus of proving the fact that shares were purchased by the assessee in the year 2002 which were dematerialized in the Demat account of the assessee on 23/5/2003 and therefore these shares were held by the assessee up till the same were sold from the Demat account of the assessee. The transaction of holding shares are reflected in the Demat account and the sale of shares are also through Demat account and consequently the transaction cannot be doubted as sham or bogus transaction.

  1. High Court of Rajasthan at Jodhpur in case of CIT Vs. Smt Sumitra Deviin ITA 54/2012 has held that:-

True it is that several suspicious circumstances were indicated by the AO but then, the findings as ultimately recorded by him had been based more on presumptions rather than on cogent proof. As found concurrently by the CIT(A) and the ITAT, the AO had failed to show that the material documents placed on record by the assessee like broker’s note, contract note, relevant extract of cash book, copies of share certificate, de-mat statement etc. were false, fabricated or fictitious. The appellate authorities have rightly observed that the facts as noticed by the AO, like the notice under Section 136 to the company having been returned unserved; delayed payment to the brokers; and de-materialisation of shares just before the sale would lead to suspicion and call for detailed examination and verification but then, for these facts alone, the transaction could not be rejected altogether, particularly in absence of any cogent evidence to the contrary.

  1. High Court of Allahabad in case of CIT Vs. Udit Narain Agarwal in ITA 560 of 2009 has held that:-

The Tribunal has upheld the finding. It had held that the assess was in possession of the shares in question and had sold the said shares in course of ordinary transaction of sale of shares at stock exchange and if the broker did not file any evidence since the same were seized by the Revenue Department, there is no fault with the assessee. From the aforesaid facts it is clear that the shares in question were allotted to the assessee in the public issue which were held in demat a/c of Stock Holding Corporation of India Ltd. The shares were transferred to Abhipra Capital Ltd. The sale consideration was received by demand draft. Therefore, the transaction in question cannot be said to be fake and is a genuine transaction. The Tribunal has not committee any error in upholding the order of CIT(Appeals) on this point.

  1. Tribunal at Mumbai in case of ACIT vs. Ravindrakumar Toshiwali in ITA nos 5302/Mum/2008 has held that :-

AO has treated the said transactions as bogus transactions on the ground that (a) The sale transactions were not on the floor of the ASEL but were off market transactions; (b) The address of the M/s Buniyad Chemical Ltd. and M/s Talent Infoway Ltd. was the same and the contact person for M/s Buniyad Chemical Ltd. on the floor of ASEL was Shri Mukesh Chokshi. (c) Mr. Mukesh Chokshi had stated that the sale proceeds have been paid to the assessee through the funds provided by the assessee.

As regards point (a) above, we find that the issue is covered by the decision of the Tribunal in the case of Mukesh R. Marolia wherein it has been held that off market transaction is not a unlawful activity and there is no relevance in seeking details of share transaction from stock exchange when the sale was not on stock exchange and relying upon it for making addition.

As regards points (b) & (c) above, we find that the assessee has filed relevant documentary evidence before the AO but the AO has failed to consider the same. The CIT[A] in his order has considered the said evidence and has come to the conclusion that the share transactions are genuine. However, as held by the Tribunal in the case of Rajinidevi A. Chowdhary vs ITO in ITA 6455/M/07 dated 30.04.2008, which is on similar set of facts, the AO could have verified from the Registrar of companies as to whether the shares have been transferred and the names of the shareholders in whose names shares have been transferred. The decision of the Tribunal in the case of Rajinidevi A. Chowdhary has also been upheld by the jurisdictional High Court as taken note of by this Tribunal in the case of Shri Pinakin L. Shah in ITA nos 3030 & 3454/M/08 dated 14.07.2009, to which one of us i.e. the Judicial Member, is a party. In these facts and circumstances of the case, we do not see any reason to interfere with the order of the CIT[A] and the same is upheld.

The Income tax Officer may ask the following details from the assessee and the assessee need to maintain the following documents in order to prove genuineness of the investments:-

Basic documents

  • Source of the investments made.
  • Business activity of the investor
  • Contract note for purchase of investment made and sell of investment
  • Bank statement reflecting payment and receipt of sale of investments
  • Demat statement to prove delivery of shares.
  • Ledger copy of share broker a/c.
  • Copy of ledger a/c of source of investment.

 Additional Documents/information which can even help during scrutiny proceedings or investigation

  • To prepare the justification/ reason to buy shares of that company?
  • Name and address of the person who has recommended the purchase of shares.
  • Analysis of financial performance before purchase of share.
  • Copy of share purchase agreement, if any.
  • Reason for selling the shares. Business of the investor/company investing the shares.?
  • The frequency of analysis of performance of the investee company and kinds of analysis assessee did,
  • How did assessee place the purchase orders with broker? To whom did he speak / instruct for placing the orders?
  • How was the payment made/received to/from broker?
  • What is the status of that demat account ?
  • Source of source , if possible.
  • Justification in case of delay in dematerialization of shares, since it is one of the main ingredient to prove backdated purchase of shares

Share Trading considered as Capital Gain or Business Income? How it has to be treated ?

Purchase and Sale of Shares – Is it Capital Gain or Business Income ? How it has to be treated ?
Decision to choose between Business income or capital, is based on the frequency, magnitude and the volume of the transaction. While deciding this important point the Honorable judges of Andhra Pradesh High Court in (2012) 6 Tax Corp (DT) 50264 (AP) were of the opinion that in deciding the question whether the shares of a company held by a person constitute his capital assets or they constitute his stock in trade various factors have to be taken into consideration to find out the exact character of the transaction. It was also held that the magnitude, the frequency and the ratio of sales to purchases and the total holding would be the evidence from which the Income-tax Appellate Tribunal can come to a conclusion to find out the true nature of the activities of the assessee.

Finally it was held that the voluminous share transactions were in the ordinary line of the appellants’ business ; purchase of shares by them was not for the purpose of earning dividend but with the dominant intention of resale in order to earn profits; the profit made by them is not of mere enhancement of value of the shares, but in a profit made in the carrying on of a business scheme or profit making ; huge volume of share transactions, the repetition and continuity of the transactions, give them a flavour of “trade”; the magnitude, frequency and the ratio of sales to purchases on the total holdings is evidence that the appellants had not purchased the shares as an investment, but with the intention to trade in such scrips. Thus, the profits on sale and purchase of share in the instant case was taxable as Business Income and not Capital Gains” However, We can also take single isolated transactions involving few shares along with salary income etc, under short term or long term capital gains.


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Intraday transaction in equity cash market -whether it is chargeable to Income tax as Speculation income ?

If there is a profit or loss in Intra day transaction in equity cash market arising out of daily on line trading during a financial year ,whether to treat it as speculation loss or loss arising out of business or profession or to treat it as short term capital gain. If during the on line trading, delivery is taken under BTST (Buy Today Sell Tomorrow) or sold subsequent days, whether the profit or loss arising, is short term capital gain or speculation income or income from business or profession?

Income from intra-day trading in shares is treated as speculative business insurance and come as the transaction is settled without delivery. Accordingly, it is charged under the head, ‘Profit and gain of business or profession’. As per Section 43(5) of the Income Tax Act, 1961 speculative transaction means a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is settled otherwise than by the actual delivery or transfer of the commodity or scrip’s.

However, trading in derivatives, referred to in Section 2(ac) of the Securities Contracts (Regulation) Act, 1956, carried out on a recognized stock exchange is not deemed to be a speculative transaction. Recognized stock exchanges are NSE, BSE, MCX Stock Exchange, and the United Stock Exchange of India. The transaction will be treated as ‘Non-speculative business income’.

In intra-day trading, there is no actual delivery as the shares enter and exit from the trading account on the same date and do not enter the demat account at all. However, if shares are purchased on a particular day and sold next day, it is not treated as ‘Speculative business’. The profit or loss on sale of such shares is taxable as short-term capital gain or business income, as the case may be.

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