Circular No.6/2016

Government of India

Ministry of Finance

Department of Revenue

Central Board of Direct Taxes

North Block, New Delhi, the 29th of February, 2016

Sub: Issue of taxability of surplus on sale of shares and securities - Capital Gains or Business
Income - Instructions in order to reduce litigation - reg.

Sub-section (14) of Section 2 of the Income-tax Act, 1961 ('Act') defines the term "capital
asset" to include property of any kind held by an assessee, whether or not connected with his
business or profession, but does not include any stock-in-trade or personal assets subject to certain
exceptions. As regards shares and other securities, the same can be held either as capital assets or
stock-in-trade/ trading assets or both. Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital asset or stock-in-trade, is
essentially a fact-specific determination and has led to a lot ot uncertainty and litigation in the past.

2. Over the years, the courts have laid down different parameters to distinguish the shares held as
investments from the shares held as stock-in-trade. The Central Board of Direct Taxes ('CBDT) has
also, through Instruction No. 1827, dated August 31, 1989 and Circular No.4 of 2007 dated June 15,
2007, summarized the said principles for guidance of the field formations.

3. Disputes, however, continue to exist on the application of these principles to the facts of an
individual case since the taxpayers find it difficult to prove the intention in acquiring such
shares/securities. In this background, while recognizing that no universal principal in absolute terms
ca.n be laid down to decide the character of income from sale of shares andsecurities (Le. whether
the same is in the nature of capital gain or business income), CBDT realizing that major part of
shares/securities transactions takes place in respect of the listed ones and with a view to reduce
litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further
instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following
a) Where the assessee itself, irrespective ofthe period of holding the listed shares and
securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income,
b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the
income arising from the transfer thereof as Capital Gain, the same shall not be put
to dispute by the Assessing Officer. However, this stand, once taken by the
assessee in a particular Assessment Year, shall remain applicable in subsequent
Assessment Years also and the taxpayers shall not be allowed to adopt a
different/contrary stand in this regard in subsequent years;
c) In all other cases,the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT..

 4. It is, however, clarified that the above shall not apply in respect of such tran sactions in
shares/securities where the genuineness of the transaction itself is questionable, such as bogus
claims of LongTerm Capital Gain / Short Term Capital Loss or any other sham tra nsactions.
Er(R ohit Garg) Deputy Secretary Government of India

5. It is reiterated that the above principles have been formulated with the sale objective of
reducing litigation and maintaining consistency in approach on the issue of treatment of income
derived from transfer of shares and securities. All the relevant provisions of the Act shall continue to
apply on the transactions involving transfer of shares and securities .

F.No.225/12/2016-ITA-11