CBDT GuideLines For Trading Vs. Investing

pkjha30

Well-Known Member
#1
Hi All Members

The relevant circular (Draft) of CBDT which caused so much mayhem in the market is reproduced below.
If you feel you can also send your comments to[email protected].Your comments will be hopefully considered by CBDT before taking a final view. Last Date is 25th May 2006.
Pankaj:)


Draft Circular​

Sub : “Circumstances to be considered by the Assessing officers in determining whether a person is a trader in stocks or an investor in stocks:

The Central Board of Direct Taxes in its instruction no.1827 dated 31-08-1989 had laid down certain tests to distinguish between shares held as stock-in-trade and shares held as investment. CBDT proposes to issue supplementary instructions in this regard to provide further guidelines for determining whether a person is a trader is stocks or an investor in stocks. Before issuing the instructions, CBDT would like to invite comments of all stakeholders.

Comments on the draft instructions may be sent by email or post by 25th May, 2006 to Ms Monica Bhatia, Director (TPL-I), Room No.147D, North Block, New Delhi (e mail : [email protected]).


DRAFT INSTRUCTIONS

Instruction No.

Dated………….


Sub : Distinction between shares held as stock-in-trade and shares held as investment - Tests For –

The Central Board of Direct Taxes in its instruction no.1827 dated 31-08-1989 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:

i. 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.
ii. 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.
iii. Whether scale of activity is substantial.
iv. Whether transactions were entered into continuously and regularly during the assessment year.
v. Whether purchases are made out of own funds or borrowings
vi. The stated objects in the Memorandum and Articles of Association in the case of a corporate assessee
vii. Typical holding period for securities bought and sold
viii. Ratio of sales to purchases and holding
ix. The time devoted to the activity and the extent to which it is the means of livelihood.
x. The characterization of securities in the books of account and in balance sheet as stock in trade or investments.
xi. Whether the securities purchased or sold are listed or unlisted.
xii. Whether investment is in sister/related concerns or independent companies.
xiii. Whether transaction is by promoters of the company.
xiv. Total number of stocks dealt in.
xv. 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.
(F.No.149/287/2005-TPL from Central Board of Direct Taxes)


(Vandana Ramachandran)
Under Secretary (TPL-I)
16th May, 2006


Instruction No. 1827 dated 31.08.1989

Subject : Distinction between shares held as stock-in-trade and shares held as investment - Tests For –

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.
2. Certain general principles in this regard were laid down by the Supreme Court in the case of G.Venkata Swami Naidu & co. Vs. CIT (1959) 35 ITR 594. 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. For instance:-
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.
iii. The repetition of the transaction.
3. The Supreme court observed that the presence of all these factors may be held in the court to draw an inference that a transaction is in the nature of trade' but it is not a matter of merely counting the number of facts and circumstances pro and con what is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction.
4. The Supreme Court in this case also discussed the test of intention. It held that in cases where the purchase has been made solely and exclusively with the intention of resale at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying it or using it, the presence of such intention is a relevant factor and unless it is off-set by the presence of other factors, it would raise a strong presumption that a transaction is an adventure in the nature of trade.


5. In the case of H. Mohammad & Co. Vs. CIT (1977) 107 ITR 637 the Gujarat High Court observed that a stock-in-trade is something in which a trader or a business man deals, whereas his capital asset is something with which he deals. According to the High Court one of the indicators for deciding as to what is stock-in-trade is whether a particular assessee is buying or selling the goods or commodity or whether he has merely invested his money with a view to earning further income or with a view to carrying on his other business. It was further held by the High court that the distinction between stock-in-trade and investment is that of selling outright in the course of the business activity and deriving income from exploitation of one's own assets.
6. These general principles hold good in respect of shares also. However certain specific issues relevant for determining this question with reference to shares have also been decided by the courts. In the case of Sarder Indra Singh & sons Ltd. Vs. CIT (1953) 24 ITR 415, the Supreme Court was dealing with the case of a company which was incorporated with the object, inter alia of carrying on the business of bankers, financiers, managing agents and secretaries and was also empowered to invest and deal with the monies of the company not immediately required for its business upon such securities and in such manner as might from time to time be determined. It was held by the Supreme Court in this case that to constitute business income, it was not necessary that surplus should have resulted from such a course of dealing in securities as by itself would amount to the carrying on of business or if the realisation of securities is a normal step in carrying on the assessee's business. The Supreme Court observed that the principle applicable in all such cases was well settled and the question always was whether the sales which produced the surplus were so connected with the carrying on of the assessees business that it could fairly be said that the surplus was the profit and gains of such business. On the facts of this case it was held that the surplus resulting from sale of shares and securities constituted business income.
7. The aforesaid principles laid down by the Supreme Court was followed by Andhra Pradesh High court in the case of SBH. Vs.CIT (1988) 151 ITR 703. The main business of the SBH was to accept deposits and to advance loans and the money constituted its stock-in-trade. The banking company has to carry on its business in accordance with the provisions of the banking regulation act, 1949. Sec.24 of the said act requires every banking company to maintain in India either in cash or in the shape of gold or in the shape of unincumbered approved securities, 20% of its total time and demand liabilities at any given point of time. It was held by the High Court that what section 24 of the said Act did was to insist on the observance of a normal prudent banking business practice. If the banking company chooses to invest the money in unincumbered approved securities it is only one mode of keeping a portion of its deposits in ready cash or readily-convertible-into-cash securities. Any income arising from the sale of such securities is, therefore closely connected with the banking business and is business income, it was concluded by the High court.


8. In the case of Karam Chand Thapar and brothers (P) Ltd Vs. CIT (1971) 83 ITR 899 it was held by the Supreme Court that the circumstance that the assessee had shown certain shares as investment in its books as well as its balance sheet was by itself not a conclusive circumstances, though it was a relevant circumstance.
9. The decisions in the CIT Vs. Associated Industrial Development co. (1971) 82 ITR 586 (SC) and A.N. Ramaswami Chettiar Vs. CIT (1963) 48 ITR 771 (Madras) may also be referred to for guidance.
10. Although the tests laid down by the courts may help determine the issue in particular cases the decision will ultimately turn on the facts of each case.
11. These instructions may please be brought to the notice of the Assessing officers in your region.
[F.No 181/1/89 - IT(AI) dated 31/08/1989 from Central Board of Direct Taxes]
 

pkjha30

Well-Known Member
#2
Hi

This particular circular should be of your interest. As it talks of Long term capital gains. Tax treatment of day trading, seeks to define stock in trade.
Do send you comments.To them

Pankaj
 

pkjha30

Well-Known Member
#3
Hi All

Today is the last day for sending your comments to CBDT

The question which needs to be debated is ..

Should FIIs be taxed while selling?
Should their activities be treated as an act of investment or business?

Should the period of holding for exemption be increasd to two or three years?


Any answer either way will have implication for the economy and investment sentiments, investors, market participants(traders, day traders, arbitrageures etc.)

The actions of FIIs are still largely unregulated despite the fact that they do not adhere to many conditions attached with approvals. Nobody wants to disturb the party except when it pleases FIIs.

Amit has rightly called SMART MONEY which moves in and moves out before anybody knows about. It causes upheaval in the market.

First of all market movements must be seen as normal phenomena. FII actions also should be seen as their reponsibility towards their shareholders/stakeholders. Its small shareholders who get "scalded"( somebody wrote the word) on overleveraged liquidity. They may not be truley aware of various market mechanisms( regulatory or otherwise) which get triggered in response to extreme volatility.

OK , so small investors overused their optimism and FIIs acted normally but in both cases it is to be seen that extreme speculative activity was involved.

SO far market mechanism has not broken down.So it would be prudent to keep things as it is with necessary twicking here and there( a perfectly normal thing to do all the time).

But let the vast majority of Indians , who are part of economic systemof this country and are scripting the growth story, partake of the benefits.

One way is to tax profits as corporate profits/business profits on account of stock transactions,except for retail investors.

in the short run it may bring the market to its knee but in the long run it might help reduce volatility induced by FIIs(allowed to invest since 1991, I think). If they take profit home they pay taxes to the people.( the circular in question seeks to differentiate between stock in trade and shares held as investment) This discussion was there in an old thread on this Forum

http://www.traderji.com/taxation-matters/1847-short-term-capital-gains-tax-business-income.html
http://www.traderji.com/taxation-matters/3362-capital-gain-tax-tax-income-trading.html

http://www.traderji.com/taxation-matters/92-differential-tax-regime-woos-nri-bourses.html
( It shows that issues of importance has engaged attention of forum members from time to time)

But is it the only way? I think there are more than one solution to a problem and with its attendent pros and cones.

How market participants and public at large will be affected by the proposed solution will be key to acceptance of the same.

I think members may like to continue this discussion in the aftermath(over??????)

and contribute to better understanding of the various factors that affect the market movements.


Pankaj:)
 

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