CBDT’s CLARIFICATION ON CONSISTENCY IN TAXABILITY OF INCOME/LOSS ARISING FROM TRANSFER OF UNLISTED SHARES (LETTER F.NO.225/12/2016/ITA.II, DATED 2-5-2016)

Determination of the character of income from transactions in shares and securities, whether the same is in the nature of a capital asset or Business Income, is essentially a fact-specific determination and has led to a lot of uncertainty and litigation in the past.

Over the years, the courts have laid down different parameters to characterize and distinguish the income arising from transactions in shares and securities , as Business Income or as Capital Gains, as the case may be. 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.

 

With a sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities , the CBDT has issued LETTER F.NO.225/12/2016/ITA.II, DATED 2-5-2016 regarding characterization of income from transactions in  shares and securities in continuation to its earlier clarificatory Circular no. 6/2016 dated 29th February, 2016, wherein it was instructed that income arising from transfer of listed shares and securities, which are held for more than twelve months would be taxed under the head ‘Capital Gain’ unless the taxpayer itself treats these as business assets and transfer thereof as its business income. It was further stated that in other situations, the issue was to be decided on the basis of existing Circulars issued by the CBDT on this subject. In this recent clarification, CBDT clarifies that income arising from transfer of unlisted shares would be considered under the head ‘Capital Gains’, irrespective of period of holding.

 

However, it is clarified that the above shall not apply in respect of such transactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain/Short Term Capital Loss or any other sham transactions.