Delhi's circular on tax liability for share transactions

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NEW DELHI, June 16 (PTI): The finance ministry yesterday asked tax officials to calculate tax liability of those transacting in shares using the principles prescribed by the Authority of Advance Rulings (AAR).
The issue assumes importance as shares held for investment are taxed as capital gains which is ten per cent for short term (less than one year) and nil for long term, while the income from trading in shares is treated as business income and taxed according to the category of the assessee like domestic company, foreign company etc.
While laying down the principles on the basis of the supreme court decisions for determining the tax liability, AAR has said that ordinarily the purchase and sale of shares with a motive of earning a profit would amount to business income.
However, the investments made with the objective of earning income through dividend may be treated as capital gains.
AAR further added that tax officials should take into account nature of transactions, the manner of maintaining book of accounts and magnitude of purchases and sales and the ratio between them, as a guide to determine the nature of investment.
According to AAR, where a company purchases or sells shares, it must be shown that they were held as stock in trade.
In a circular issued yesterday, Central Board of Direct Taxes (CBDT) advised the tax officials to take into consideration all these principles and not one principle while determining the nature of investment and tax liability.
For calculating tax liability of FIIs, AAR observed that tax officials should verify how the shares are valued or held in the books of accounts-whether they are valued as stock in trade for arriving at business income or held as capital assets.