Shares income

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

27 September 2011 I trade in the cash segment of the BSE and the NSE daily. When shares bought are in profit, I sell them on the same day. Some times, I take delivery of shares and sell them after some time or the next day or even after one year. Now the question is: Is this business, speculative or both short-term and long-term capital gain as well as partial business trading and partial capital gain? And if this is treated as business, then, for audit, will the limit be the difference of the amount on daily basis? What will be the tax audit limit for delivery-based transactions? Can we treat both short-term and long-term capital gain and business trading in this case?

CA Ayush Agarwal

CA Ayush Agarwal (Expert)
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27 September 2011 From your facts, it seems that your intention at the time of purchase of shares is to make quick profit. So if you make profit during the day, you sell it intraday or else the next day or later as and when profit is made. Hence, your share transactions are more likely to be treated as, ‘Business income'. Profit from intraday sales will be treated as speculative business income, whereas other transactions will be treated as non-speculative business income.

According to Section 44AB of the Income Tax (IT) Act, 1961, tax audit applies if turnover exceeds the limit of Rs 60 lakh from assessment year (AY) 2011-12 (up to AY 2010-11 it was Rs. 40 lakh).

For calculation of turnover for tax audit, the aggregate amount of positive and negative differences arising from dealing in such transactions is the turnover for speculative transactions. For non-speculative business, i.e., delivery-based transactions, the turnover is calculated as total amount of sales.

If you treat the transactions as business income as suggested, then for tax audit the limit will be considered both positive as well as negative differences for speculative intraday transactions. But for other (delivery-based) transactions, only sale proceeds will be considered to decide the limit for tax audit.

Apart from speculative transactions, which are covered under Section 43(5) of the IT Act, the investor has two portfolio options, i.e., he can hold the shares and securities as stock-in-trade or he can hold such shares and securities as investment (refer circular No. 4/2007, dated 15 June 2007, issued by the Central Board of Direct Taxes).

Also, the accounting treatment given by the assessee for such transactions will play an important role to decide if such activities are treated as investment or business activity. If an asset is held as stock-in-trade of the business, it is not a capital asset within the meaning of Section 2(14) of the IT Act. On the other hand, if the assessee held the asset as investment, the gain derived from transfer of asset shall be charged to tax under the head, ‘Capital gain'.

It is advisable to maintain separate demat accounts for trading stocks and investments so as to avoid any dispute subsequently.