India’s Central Board of Direct Taxes (CBDT) recently clarified that income from the transfer of unlisted shares will be taxed as a lower rate capital gain rather than as business income.
The tax department’s move is aimed at avoiding tax disputes/litigation and maintaining a uniform approach. However, such treatment isn’t applicable in situations where:
- The genuineness of transactions in unlisted shares itself is questionable,
- The transfer of unlisted shares is related to an issue pertaining to lifting of the corporate veil, or
- The transfer of unlisted shares is made along with the control and management of the underlying business.
Capital asset defined
The Indian Income-tax Act, 1961, defines the term “capital asset” to include property of any kind held by a taxpayer, whether or not connected with his business or profession, but doesn’t include any stock-in-trade or personal assets subject to certain exceptions.
Shares and other securities may be held as capital assets or stock-in-trade/trading assets or both. Determination of the character of a particular investment in shares or other securities (that is, whether it’s a capital asset or stock-in-trade) is essentially a fact-specific determination and has led to a lot of uncertainty and litigation in the past.
Over the years, the Indian courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock-in-trade. Disputes, however, have continued to exist on the application of these principles to the facts of an individual case, since the taxpayers find it difficult to prove their intention in acquiring such shares/securities.
In light of this, and while recognizing that no universal principle in absolute terms can be laid down to decide the character of income from sale of shares and securities, the CBDT recognized that the major part of shares/securities transactions takes place as listed ones.
Consistent treatment required
With a view to reduce litigation and uncertainty in the matter, the CBDT stated that income arising from the transfer of listed shares and securities that are held for more than 12 months may be taxed as a capital gain, rather than as business income, unless the taxpayer treats the shares and securities as its stock-in-trade. This treatment, once taken by the taxpayer in a particular assessment year, must remain applicable in subsequent assessment years. The taxpayers may not be allowed to adopt a different/contrary stand in this regard in subsequent years.