CAPITAL GAINS AND BUSINESS INCOME IN SHARE TRANSACTIONS: A JUDICIAL AND STATUTORY ANALYSIS

A DOCTRINAL EXAMINATION OF THE SECTION 28 — SECTION 45 DICHOTOMY UNDER THE INCOME TAX ACT, 1961

AUTHOR – SANKALP PATIDAR, STUDENT AT CHRIST DEEMED TO BE UNIVERSITY PUNE LAVASA

BEST CITATION – SANKALP PATIDAR,CAPITAL GAINS AND BUSINESS INCOME IN SHARE TRANSACTIONS: A JUDICIAL AND STATUTORY ANALYSIS, INDIAN JOURNAL OF LEGAL REVIEW (IJLR), 6 (8) OF 2026, PG. 76-83, APIS – 3920 – 0001 & ISSN – 2583-2344.

Abstract

The classification of income arising from transactions in shares and securities as either “Capital Gains” under Section 45 of the Income Tax Act, 1961, or as “Profits and Gains of Business or Profession” under Section 28 of that Act remains, more than six decades after the enactment of the principal statute, the most enduring controversy in Indian direct tax jurisprudence. The dichotomy is not a sterile taxonomic exercise; it determines the rate of tax, the eligibility for concessional regimes under Sections 111A and 112A, the applicability of the speculation rules under Section 43(5) and the deeming provision of Explanation to Section 73, the manner of set-off and carry forward of losses under Sections 70 and 74, and the very ambit of an assessee’s compliance burden under Sections 44AA and 44AB. The proliferation of retail participation in Indian capital markets, the emergence of derivative trading at unprecedented volumes, the popularisation of portfolio management services, and the rise of algorithmic intra-day trading have transformed a once-recondite question into a matter of mass concern.

This paper undertakes a doctrinal and comparative examination of the regime. It traces the conceptual origins of the capital-revenue distinction to English common law and the badges of trade articulated by the Royal Commission of 1955, locates the Indian statutory architecture within its constitutional moorings, and analyses through the IRAC framework the line of Supreme Court authority extending from G. Venkataswami Naidu (1959) to Snowtex Investment (2019). It evaluates the multi-factor judicial test, the consolidation effected by CBDT Circulars Nos 4/2007 and 6/2016, and the persistent inconsistencies that survive them. Drawing upon comparative material from the United Kingdom, the United States, Australia and Singapore, the author argues that the Indian regime has reached the limits of judicial elaboration and that further coherence can be achieved only through legislative intervention. The paper concludes by proposing a statutory safe-harbour, a holding-period-based presumptive classification, a binding consistency rule with statutory force, and an elective mark-to-market mechanism for self-identified traders.