Short term capital gains tax or Business income

sh50

Active Member
#1
I came to know from someone that unless you hold a share for six months it is treated as business income. I thought it came under short term capital gains tax. I tried to check with a practicing CA and he told me that it was a grey area and though there was no law, if there were too many transactions, the I-tax officer could interpret it any way he liked though as per law if you sell within the same year , it is short term capital gain tax.

If anybody knows, when is one deemed a professional trader?. Just as there is a 40lakh limit for companies to commence audit. Is there any such limit for traders after which he should be deemed a professional. Otherwise what is to stop one from selling in one's personal name and take the advantage of short term capital gains.
 
#2
Good point sh50. I would like to know what happens to someone who is retired and earns from trading/investing in the markets.

I have a problem as I do not know how to file trading profits in my returns! I hope someone can enlighten me on this.
 

pkjha30

Well-Known Member
#3
Treatment of short term capital gains or business profit for share trades depends on the fact how you are earning your livelihood. If you are a salaried person then obviously your gains from share purchase and sales will treated either as long term capital gains or short term capital gains, as the case may be. but you will not be entitled to deductions for business expenditures like purchase of software for share analysis.

On the other hand, if you are trading freaquently and your income primarily consists of income from share transactions then it will be treated as business income and taxed accordingly. In this case your are entitled to claim dedutions on all expenditures incurred in the course of transactions and other allowable and legitimate business expenditures and what is left of your profit is taxed. For example You can claim STT .

I hope this might answer your doubts. As a pensioner you may like to be taxed on capital gains and I-Tax Officer has to logically accept it. Moreover long term capital gains is on the shares held for more than 12 months.
You can consult web site of Income tax department for further information
 

sh50

Active Member
#4
Thanks for the info,pkjha30. Supposing one is retired and living off his investments. Supposing he does a lot of short term transactions than when you say "frequently" , "how frequently". Is it in no of transactions per month or in terms of value?
 
#5
Following article may help to explain whether buying selling shares on a fairly regular basis comes with the meaning of business or investment

Determining tax liability on share trading

Gautam Nayak
15 Dec 2000

Of late, it is common to find persons who actively trade on the stock markets, with frequent purchases and sales. In such cases, the tax liability depends upon whether the person is carrying on an activity of investing or is carrying on a business of share trading. How does one determine this?

Merely because the person states that he is investing or carrying on a share trading business, or is accounting for it as such, does not determine the nature of the transactions. There are many court cases with decisions on how to determine when an activity is business or merely an investment. The thrust of all these decisions is that no single factor gives you an answer to this question - the overall effect of several factors has to be considered, which will determine the issue. What are these factors that help you decide whether a business is being carried on or not?

From a reading of the court cases, and applying them to transactions in shares, these would be :

The motive for the original purchase as perceived at the time of sale
If at the time of sale, it is seen that the original motive of purchase was to earn a quick profit, this would support the presumption that the transactions represent a business.

The period of holding of the shares
The shorter the period, the greater the presumption that the transactions are in the nature of a business. One indicator of this is the definition of long term capital asset vis--vis shares - any shares held for more than 12 months are regarded as long term capital assets. Generally, shares bought with the intention of holding them for more than 12 months would be an indicator that the transaction was intended as an investment.

The frequency of sale of shares
The more frequent the transactions, the greater the presumption that it amounts to a business.

The circumstances responsible for the sale of shares
If the sale is necessitated by the need for funds for other personal purposes, such as for payment of taxes or family functions, the presumption would be that it is merely a realisation of investments.

The presence of a clearly discernible motive for the purchase of the shares
If the purchase was necessitated not merely by motive of profit, but was undertaken on account of other motives, generally, the transaction would be regarded as investment activity. For instance, where the purchase of shares was with an intention to acquire controlling interest in the company, such purchase of shares would be in the nature of an investment. Similarly, the shares acquired by the promoter of a company are generally in the nature of investments.

The relation of the share transactions to the normal business of the assessee
In the case of a sharebroker or an underwriter, acquisition of shares would generally be regarded as an extension of his sharebroking or underwriting business. On the other hand, shares acquired by a professional such as a chartered accountant, lawyer or doctor would generally be considered to be investments.

The treatment of the shares and profit or loss on their sale in the accounts of the assessee
The treatment of the shares as stock-in-trade by the assessee would be one of the indicators of his intention to treat it as a business.

The source of funds out of which the shares were acquired - borrowed or own Investment out of borrowed funds would generally support the presumption of existence of a business activity. On the other hand, acquisition of shares by liquidation of another investment would support the presumption that the transaction is one of change of investment from one form to another.

In the case of a company, the existence of an objects clause permitting it to trade in shares
Since a company cannot carry on any business unless permitted by the objects clause of its Memorandum of Association, its acquisition of shares would normally not be regarded as a business activity in the absence of an objects clause permitting share trading. Since a partnership firm can carry on any activity mutually agreed upon by its partners, the absence of a clause in the partnership deed to carry on the business of share trading would not make any difference.

The manner of acquisition of the shares
Where the shares were not purchased voluntarily but were inherited or received as a gift, the presumption would generally be that the sale of such shares is a capital gain. Similarly, shares acquired from the primary market for long term holding would generally support the presumption of an investment activity, while acquisition of shares from the secondary market could indicate either investment or business activity.

The infrastructure employed for the share transactions
If the assessee employs people to assist him in his share activities, such as analysts, dealing assistants, or acquires various assets such as computer hardware and software, etc. for this purpose, it indicates an organized activity, supporting the presumption of a business. On the other hand, investing through a discretionary portfolio manager is indicative of an investment activity, since the investor does not have to be involved with the activity of investment on a regular basis, but is merely concerned with the rate of return on his funds employed.

Marketability of the shares
If the shares acquired are not readily marketable, generally the presumption would be that they are held as investments. The very purpose of acquisition of shares held as stock-in-trade is to make a quick profit, and the acquisition of non-marketable shares is not consistent with such a purpose.
 

pkjha30

Well-Known Member
#6
sh50 said:
Thanks for the info,pkjha30. Supposing one is retired and living off his investments. Supposing he does a lot of short term transactions than when you say "frequently" , "how frequently". Is it in no of transactions per month or in terms of value?
The article quoted by trader9 is very informative and certainly help.

In practical terms :-

Following would qualify for business income
i. if you are buying in the morning and selling in the afternoon
ii. non delivery based transactions
iii. if your monthly income consists primarily of profits from share transactions
iv. futures and options
v. derivatives
vi. if you have no other source of income and shares are traded on daily or weekly basis or even on monthly basis.There can be no bench mark in such cases and it will be up to AO to take a decision with due regards to factors mentioned in the article quoted by Trader9.

The term frequently is of course a vague term and frankly no of transactions can not be specified. You have to take in to account the nature, source and composition of your income and funding of share transactions among other factors.
Normally a retired person would have his pensions on regular basis and he would invest his retirement benefits and savings in various finacial instruments which may include share purchases. Even if he sells after a few days and makes some profit it will be STCG and afer one year it will be LTCG. However if he has no income other than from share transactions as opposed to share investment than it would be business income.

However Indian Tax laws, its interpretations and various case laws give scope to different interpretation. That is why reforms are much needed.
 

sh50

Active Member
#7
Thanks pkjha30 and trader9 for such explicit articles
Normally a retired person would have his pensions on regular basis and he would invest his retirement benefits and savings in various finacial instruments which may include share purchases
Supposing there are incomes from different sources, then the number of transactions per month would play a role. I think they should make it totally umambigous. The more objective it can be the better it is-both for the assesee and the ITO and eliminate unecesary arguments. Thanks once again; this is really a grey area and reforms needed.
 

pkjha30

Well-Known Member
#8
I agree with you whole-heartedly. Any kind of ambiguity would give tremendous power of discretion to Assessing Officers, which may not always be used begninly. However I think that if you are paying STT for delivery based purchases where settlement is on T+2 or T+1 basis it should be treated as investment.Period of holding need not determine the nature of gains. Both type of treatment may have its own advantages and Assesses may be asked to opt for any one of them either business gains or capital gains.

In case of Govt. salaried class I suppose it would be treated as Capital Gains though It Return form does provide a Column for Income from business/other sources. This is so because a Government Servant is not aloowed to carry on any other business and can not show such income unless it pertains to income from family businesses inherited or joined prior to joining the service.

In other cases it should be left to the assessee in good faith. The total number of IT paying assesses are very small compared to the earning population.It department may do well to concentrate on expanding the base rather than concentrating their energy on assesses who declare their income and pay taxes.
 

sh50

Active Member
#9
if you are paying STT for delivery based purchases where settlement is on T+2 or T+1 basis it should be treated as investment
My father, a CA is also of this view. As for leaving it to the assessee, isn't capital gains better as the tax is less but you cannot set off expenses.

al number of IT paying assesses are very small compared to the earning population.It department may do well to concentrate on expanding the base rather than concentrating their energy on assesses who declare their income and pay taxes.
This is very well said. I have heard/read that the revenue covered my IT deptt is a minor component of total taxes and barely covers the cost of running the deptt itself which if true is a sorry state of affairs. On the whole however IT has been simplified which one welcomes.

The FM minister is a financial intellectual and should spend time with business people to avoid mistakes like fringe benefits,0.1, turnovertax etc.Whether such matters or ambiguity, the less discretion the assessing authorities have (as you have pointed out)the better.
 
#10
It is my personal opinion that tax laws (income tax, excise, sales tax, customs etc.) should be exact and definite and the computation should be a simple procedure.
Confusions like the recent one on fringe benefit tax can be avoided when the word of the law is unambiguous and leaves no room for unwarranted interpretations.
This can root out corruption to a large extent in the Tax Department.

On the topic of categorising profits on buying/selling shares, in my opinion, trading in shares if done on a consistent and regular basis like day trading, swing trading should be business while holding shares for a mininum of (say) 5 to 6 months should be investment business. No discretion with the Assessing Officer what so ever. Definite and Exact.
 

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