The Central Board of Direct Taxes
("CBDT") with the objective to reduce
litigation and to maintain consistency in approach on the issue of
treatment of income derived from transfer of shares and securities,
has issued circular no. 6/2016 dated February 29, 2016
("Circular"), and a follow up letter no.
F.No.225/12/2016/ITA.II dated May 2, 2016, ("the CBDT
Taxability of surplus generated from sale of listed shares or
A majority of transactions in shares and securities take place
in respect of listed shares and securities. Therefore, CBDT has
instructed the Assessing Officers, vide its Circular, to consider
the following principles for determination whether the surplus
generated from sale of listed shares or other securities would be
treated as capital gain or business income:
If the taxpayer himself opts to treat
the listed shares or other securities as stock-in-trade, then
irrespective of the period of holding of these listed shares and
securities, the income arising from transfer of such
shares/securities would be treated as its business income.
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 taxpayer 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, once this stand is taken by the taxpayer in a particular
assessment year, then the taxpayer will be bound by the same stand
in the subsequent assessment years also and the taxpayers will not
be allowed to adopt a different/contrary stand in the subsequent
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 earlier circulars issued by the CBDT (Instruction No. 1827,
dated August 31, 1989 and Circular No.4 of 2007 dated June 15,
The Circular further clarified that the above principles for
categorization will not apply for those transactions, where there
is a question on the genuineness of the transaction, such as bogus
claims of long term capital gain/short term capital loss or any
other sham transactions.
Taxability of income arising from transfer of unlisted
The CBDT Letter further brings clarity towards assessment
pertaining to income arising from transfer of unlisted shares and
provide that income arising from transfer of unlisted shares would
be considered under the head 'Capital Gain', irrespective
of the period of holding to minimise disputes.
The above assumption would however not apply to situations
the genuineness of the sale of
unlisted shares is questionable; or
the transfer is related to an issue
pertaining to lifting of corporate veil; or
the transfer of unlisted shares is
made along with the control and management of underlying
The Assessing Officer in the aforesaid cases will take a view
depending on the facts and circumstances of each case.
Period of holding for transfer of unlisted shares
Interestingly, the Lok Sabha has passed the Finance Bill, 2016
in the current budget session, whereby a third proviso has been
inserted in Section 2 (42A) which deals with Short Term Capital
Assets. In accordance with the amendment, for the purposes of
transfer of unlisted shares to be considered as a short-term
capital asset, the period of holding of unlisted shares has been
reduced to 24 months (from the current 36 months period)
with effect from April 1, 2017. This Finance Bill
is yet to be passed by the Rajya Sabha.
The characterisation of income arising from transfer of listed
and unlisted shares is a welcome step. The clarification may bring
uniformity in treatment and hopefully, reduce tax disputes and
litigation. Even though certain discretion has been granted to the
Assessing Officers in certain situations (which may leave room for
confusion and potential disputes), it is expected that in majority
of security sale purchase transactions, the assessment of
applicable tax would be simpler and non-contentious.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Cummins Inc. is a foreign company, rendering services in respect of desktop/laptop software license and internet mail facilities to its Indian associated enterprises, i.e. CIL and CSSL which were paying IT charges provided by the taxpayer.
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