Whether delivery of shares have been taken or are kept with the broker, has been suggested as a test to determine whether shares have been purchased for long term investment or for short term trading reasons. A recent Central Board of Direct Taxes (CBDT) circular has asked tax assessment officers to distinguish between stocks held in trade and otherwise, by an individual or business entity, for taxation purposes.
“When an individual or company trades shares and debentures for its main source of income then it is taxable according to normal income tax rates. But when shares are held as held as long term investment, any capital gains on them attract taxes to the tune of 0-20 per cent,†says GP Saini, chartered accountant. CII has suggested the above methodology to remove ambiguity on whether shares are being held for short-term trading or long-term investment. Although the circular recognises the need to make such a distinction, it fails to provide an objective methodology and leaves it to the discretion of the officer, which might lead to disputes.