While the dispute over capital gains versus business income is still a major area of dispute and debate, the Central Board of Direct Taxes (CBDT) had issued a circular to this effect in early part of the year 2016 which largely clarifies this position on the classification. There are 3 broad rules that the CBDT laid out for ratifying this classification and this can serve as a guide for deciding on business income versus capital gains.

First, if the tax payer opts to classify his equity holdings as stock-in-trade then the income shall be treated as business income. In such cases the Assessing Officer (AO) shall accept the choice of the tax payer and there shall be no grounds for dispute.

Secondly, in case of long term holdings (more than 12 months), the tax payer is entitled to opt to treat the same as capital gains and the AO shall not dispute the same. However, the taxpayer shall maintain consistency in this classification and once opted will not be changed in future years. Consistency is the key word here and assessees must not try to keep flitting between methodologies just to save a bigger chunk of tax.

In all the other cases, basic premise for the classification of capital gains versus business income will be totally dependent on the concept of “Significant trading activity”. This is subjective but broad guidelines are available. If the stock portfolio is churned frequently, then the income shall be classified as business income. The dispute, therefore, boils down to the classification of STCG on equities.