Issue of taxability of surplus on sale of listed shares and securities - Capital Gains or Business Income

Circular No. 6/2016 : Income Tax Department

                           Instructions in order to reduce litigation
Sub-section (14) of Section 2 of the Income-tax Act, 1961 ('Act') defines the term "capital asset" to include property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets subject to certain exceptions. As regards shares and other securities, the same can be held either as capital assets or stock-in-trade/ trading assets or both. Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital asset or stock-in-trade, is essentially a fact-specific determination and has led to a lot of uncertainty and litigation in the past.

2. Over the years, the courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock-in-trade. The Central Board of Direct Taxes ('CBDT) has also, through Instruction No. 1827, dated August 31, 1989 and Circular No.4 of 2007 dated June 15, 2007, summarized the said principles for guidance of the field formations.

Subsequent circulars won’t create TDS obligation if circular applicable at time of payment exempted it

Where circular effective at relevant time exonerates an assessee from TDS obligation on payment to non-resident, subsequent circular would not create such an obligation retrospectively

In the instant case the assessee had paid commission to foreign agents on which it did not deduct tax in view of Circular Nos. 23 of 1969, 163 of 1975 and 786 of 2000. The revenue made disallowance of expenditure under section 40(a)(i) holding that it was mandatory for assessee to deduct tax as Circular No. 7 of 2009 had superseded earlier circulars.

The High Court held in favour of assessee as under:

1) The assessee’s assessment would be governed by Circular, which was operative at the relevant time (i.e., assessment year 2007-08) and which did not oblige the assessee to deduct tax at source;

2) The assessee was not entitled to deduct TDS. The department could not have taken different stand in subsequent years or assessment year 2007-08, when the circulars were operative and were not withdrawn;

3) Circular No. 7 of 2009, dated 22-10-2009 withdrawing earlier circulars became operative only from 22-10-2009;

4) The circulars in the relevant year were binding upon the department and assessee could challenge the affect of the Circular but that the Assessing Officer did not have any right to ignore the circulars and to disallow non-deduction of tax at source under sections 195 and 40(a)(i);

5) Thus, as assessment was governed by that circular which was operative at relevant time assessee was under no obligation to deduct tax at source – CIT v. Model Exims Kanpur (2013) 38 taxmann.com 319 (Allahabad)

WHETHER HINDU UNDIVIDED FAMILY (HUF)/ITS KARTA CAN BECOME PARTNER/DESIGNATED PARTNER (DP) IN LIMITED LIABILITY PARTNERSHIP (LLP)

SECTION 5 OF THE LIMITED LIABILITY PARTNERSHIP ACT, 2008 - PARTNERS - WHETHER HINDU UNDIVIDED FAMILY (HUF)/ITS KARTA CAN BECOME PARTNER/DESIGNATED PARTNER (DP) IN LIMITED LIABILITY PARTNERSHIP (LLP)

GENERAL CIRCULAR NO. 13/2013 [F.NO. 1/13/2012-CL-V], DATED 29-7-2013

It has come to the notice of the Ministry that some Hindu Undivided Families (HUFs)/Kartas of such families are applying to become partner/ Designated partner (DP) in LLPs and a question has arisen whether a 'HUF' or a karta can be allowed to do so. The matter has been examined in consultation with Ministry of Law.

2. As per section 5 of LLP Act, 2008 only an individual or body corporate may be a partner in a Limited Liability Partnership. A HUF cannot be treated as a body corporate for the purposes of LLP Act, 2008. Therefore, a HUF or its karta can not become designated partner in LLP.

3. This issues with the approval of Secretary, MCA