Beware of being branded as a dealer
QUESTION: We find from time to time in the answers in the Tax Forum making a distinction between investor in shares and dealer in shares. What is the difference?
ANSWER: There is material difference in liability to tax in respect of income from business and income from capital gains. The surplus realised by the investor on sale of capital asset, including shares, is liable to tax at 20 per cent. If the asset happens to be shares, in which case, it should have been held for more than a year and in other cases for more than three years. If, however, the asset is held for a shorter period, the income is assessable as short term capital gains at the same rate as any other income, that is, with the top slab rate for the individual or Hindu Undivided Family (HUF) being 30 per cent, while it is assessed at a flat rate of 35 per cent (now proposed to be reduced to 30 per cent) in the case of a firm and companies. Surcharge and cess on tax payable has also to be added.
If the asset had been held as stock-in-trade by a dealer, whether it be shares or any other capital asset, as in the case of properties held in real estate business, the surplus will be assessable as business income. If it were business income, such income is taxed at the normal rate of tax at slab rates for individuals and HUFs and at flat rate applicable for firm and companies.
Where an assessee claims, that he holds the asset as stock-in-trade, it is usually accepted, because such an assessee invites liability for himself at stiffer rate. But then, where an assessee claims that he is holding it as an investment, the assessing officer may find that it is held by him as stock-in-trade or in other words he has to be treated as a dealer and not as investor. There is no simple test for inference as to whether a person is a dealer or investor. An investment is one from which income is expected to be derived, while stock-in-trade is acquired for making profit on resale. It is an inference to be drawn from all facts and circumstances of the case. Where the transactions are frequent, it is usually business. In respect of share dealing, if the transactions are in secondary market with the help of share brokers with large number of transactions during the year, the inference would be that the assessee is a dealer. Similarly, if the assessee acquires shares from funds borrowed for the purpose, it is more likely that he is a dealer, since an investor normally makes investments out of savings.
The feeling that a person should be full-time in business or that a person in employment cannot be a dealer is a mistaken one, as is often found from letters addressed for answer in these columns. For example, it has been asked by one reader, who is in employment, whether he has to maintain accounts for his income from capital gains adding that "I have been investing in capital market and regularly getting short term capital gains." The fact that he is regularly getting short term capital gains leads to the ready inference that he is a dealer, so that his income is from business, notwithstanding the fact that he is in full-time employment. Sec. 44AA would require him to keep accounts in respect of this activity, if his income from such business is Rs. 1 lakh or the turnover exceeds Rs. 10 lakhs. Even if he is not obliged compulsorily to maintain accounts under Sec. 44AA, because the limit is not exceeded, he has still to prove the income from business, so that books become necessary. In fact, even if he were an investor, he would have to prove his income by way of short term capital gains, which is taxable at 10 per cent.
There is no liability in respect of only long term capital gains, while there is a concessional tax on short-term capital gains, on sale of listed shares on which Security Transactions Tax is paid, such exemption being available, when the sale is through a stock broker. It should be borne in mind that nil or lower rate of tax for capital gains is available only for investors and is limited to listed shares, where the transactions are done through stock exchange. If the shares are treated as stock-in-trade meant for re-sale and not capital investments, the benefit of exemption for long term capital gains and concessional rate of tax of 10 per cent for short term capital gains will not be available, even if the shares are listed and transaction is put through a stock exchange suffering securities transaction tax.
S. Rajaratnam
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