Capital asset -investment activity is vocation or business being an adventure or concern in nature of commerce. Income/ loss from such activity will fall under different heads of income.

[C.A. DEV KUMAR KOTHARI]

Relevant provisions:

Section 2 (13)- definition of business,

Section 2(14) - definition of capital asset,

Section 2 (36)- definition of profession.

Section 45(2)- provision to indicate option of assessee to treat a capital asset as stock-in-trade.

Section 50 - depreciable business  assets are also capital assets.

Investment activity:

Investment activity is an activity that require special knowledge and experience in a systematic and organized manner. This involves several type of risks including risk of losses. With increase in different forms of investment and  volume an investor also require a team of different type of people who can assist him in activity of investment for making investment at proper time and in different assets. Thus, activity of investment is in nature of a vocation.

'Business' and 'Profession' are considered two different aspects within the head 'income from business or profession'. However, when a vocation or profession turns into a concern of commerce and/or an adventure in nature of commerce it assumes character of business and in such a case a person engaged in any vocation or a profession carries a business by setting up a commercial concern and undertaking adventure in nature of commerce thus it becomes - a commercial adventure.

Business or Profession

In various provisions of the Income-tax Act, 1961, we find the expression "business or profession"  is used to denote that the words 'business' and 'profession' are different.  For example, few provisions are discussed below:-

Definition of business and profession

In section 2 of the Act, we find separate definitions of the expressions 'business' and 'profession' in clauses No.13 and 36 which are reproduced below:-

2.In this Act, unless the context otherwise requires,—

(13)    "business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture;

(36)      "profession" includes vocation ;

From reading of the above provisions, we find that these definitions are subject to overall limitations of the context in which these words may be used in the other provisions of the Act.  From definition of business we find that an activity in nature of trade, commerce or manufacture with an element of adventure is implicit. On analysis of definition we find that it specifically includes the following:

          Trade.

          Commerce.

          Manufacture.

          Adventure in nature of trade.     

          Adventure in nature of commerce.

          Adventure in nature of manufacture.

         Concern in nature of trade.

          Concern in nature of commerce.

         Concern in nature of manufacture.  

We find that three different activities involving one common feature like trade, concern in nature of trade and adventure in nature of trade are one category of business.

Similarly three different activities involving commerce being commerce, concern in nature of commerce and adventure in nature of commerce are also treated as business.

Again about manufacture also we find that manufacture is common and activities of manufacture, concern in nature of manufacture and adventure in nature of manufacture are business.

Furthermore the above items are included specifically and an inclusive definition provide for flexibility and greater scope of inclusion of similar or relatable items within the scope of the expressions used. Thus  it can said that there may be a real trade like trading of goods and  there may not be a real trade like speculation in any article or thing or commodities or speculation about event etc.

Profession:

We find that profession is defined to include vocation. Therefore, a vocational activity may or may not be carried with the objective of earning profit. However, we find a marked difference to the extent that in case of profession or vocation any adventure or concern in nature of profession or vocation is not included.  Therefore, author feels that profession or vocation appears to be restricted to personalized activities, which may not require any concern or which may not involve adventure.

Profession or vocation turning into adventure as

commercial concern and business:

On analysis of the definition of the above expressions  it can be said that a profession or a vocation can be considered as profession or vocation when there is no element of adventure while carrying the profession or vocation.  However, when a profession or vocation involves certain aspect of adventure or concern then the profession may take color of a business by way of commercial adventure involvement of commercial concern and therefore, in that case a profession may have dual characteristic of profession and business both- the person e.g. a CA will be carrying profession however his concern will be carrying business. It can be said that a commercial concern is engaged in professional activities.

Investment involving risks:

 A person or concern doing organized investment activity takes risks of erosion in value of investments made due to several reasons associated with organizations / industry in which investment is made and also  several other common risks like:

a. Risk of capital invested in fixed assets used for investment activity  and loss of alternative gains on such investments.

b. Risk associated with engaging other persons and carrying activities through others. Loss due to mistakes of employees ,and frauds and misfeasance committed by them are a major risk. 

c. Risks of interruption due to active trade unions of staff of the concern.

Therefore, investment activity is a vocation hence a profession and when  organized  in large scale  activity it assumes character of  is a business activity in nature of an adventure in nature of commerce.

Examples of concern of professionals

Becoming business:

On expansion of organization and involvement of several people to carry professional activities  an organization in nature of commercial concern is setup and several  elements of risk takes place while carrying professional activities in an organized and large manner. Which one may not face while working individually - as a vocational or professional.

Doctor - a doctor may join as a medical officer and may also avail non-practicing allowance.  In this case, he does not take any adventure in nature of commerce.  However, if the doctor foregoes his non-practicing allowance and takes permission from the employer for practicing profession in his time beyond duty hours, he undertakes an adventure in nature of commerce by foregoing his non-practicing allowance and taking a chance to earn more by practicing in his extra time. 

A doctor starts a chamber and without taking any risk starts practicing as a general physician with nominal or without any help of other staff.  In such a case there is no element or hardly any element of adventure in nature of commerce and there is no commercial concern.

 However, if the doctor employ other doctors and set up a  medical concern or  when few doctors combines their skills and form a firm of doctors and set up an organization and employ other people like qualified doctors, commoners, nurses and acquire medical equipments, building for clinics, nursing-home, pathological lab etc. then the activities of these doctors become an adventure in nature of commerce and trade because some trading activities like dealing in certain medicines becomes integral part of the commercial concern set up by them known as hospital, or  nursing-home, or  diagnostic center, or  laboratories etc. as the case may be.

Engineer vs. engineering firm or concern:

When an engineer engages as a consultant and renders personalized services he is caring on his profession. However, when an engineer or a group of engineers set up a concern and deploy capital and engage other people and also combine the intellectual and special partners to carry a systematic organized activity involving certain capital investments, certain fixed expenses then it can be said that the engineers had set up a concern in the nature of commerce and they had undertaken an adventure in nature of trade, commerce and / or manufacture depending on nature of activities carried by them.

Chartered Accountants:

Similar is the case when a Chartered Accountant engages several other Chartered Accountants or other staff and set up an office, he undertakes an adventure in nature of commerce by deploying capital, engaging people taking risk of certain fixed expenses which he is to incur irrespective of the earnings from the professional activities.  In such a case the Chartered Accountant or the group of Chartered Accountants acting as partners for setting up a concern in nature of commerce and they had undertaken an adventure in nature of commerce. 

In all above cases it can be said that the concerns set up or organized by any person carrying any vocation or  profession are commercial concerns concern carrying some commercial activities and undertaking certain risk of loss of capital invested, fixed expenses, and  vocational /professional risks to be faced based on work delegated to others etc. Therefore, in all such cases there is an adventure in nature of commerce.

Capital assets can be related with business:

From the meaning of 'capital asset', as given in Section  2(14) of the Income-tax Act, 1961 we find that this is meaning and not a definition the meaning is wide and is subject to certain exceptions as laid down therein. Thus, the meaning of 'capital asset' as 'property of any kind' is wide but  exceptions are limited. Therefore, what cannot be included in meaning of 'capital asset' are restricted and not what can be included. The section is reproduced below with highlights:

2.   In this Act, unless the context otherwise requires,—

(14) "capital asset" means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include—

(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession ;

(ii) personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes—

(a) jewellery;

(b) archaeological collections;

(c) drawings;

(d) paintings;

(e) sculptures; or

(f) any work of art.

Explanation.—For the purposes of this sub-clause, "jewellery" includes—

(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;

(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;]

(iii) agricultural land in India, not being land situate—

(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year ; or

(b) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette;]

(iv) 6½ per cent Gold Bonds, 1977,or 7 per cent Gold Bonds, 1980,] or National Defence Gold Bonds, 1980,] issued by the Central Government ;

(v) Special Bearer Bonds, 1991, issued by the Central Government ;

(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government ;

From the above definition we find that any assets can be considered as capital asset unless it is specifically excluded from the meaning. The asset can be fixed or movable it can be held in relation to business or profession or even otherwise. Few example to illustrate the point of difference:

a. a motor car is held as a fixed assets and capital asset by any person carrying business or profession. On its transfer capital gains are computed. If depreciation was allowed to the assessee on the car, then capital gains are deemed to be short-term capital gains u/s 50. In case depreciation was not allowed to the assessee then the gains will be long-term capital gains if the car was held for more than thirty six months before its transfer, then the gains will be long-term capital gains.   

b. A motor car is held for personal use and as personal effect, then the gains on its transfer will not be taxable, because it is not a capital asset.

c. A dealer in motor car has used six motor cars for business requirements, these cars are his fixed assets forming part of block of assets on which depreciation is allowable. Sale of such cars shall be  subject to computation under the head capital gains and if depreciation has been allowed in past, then the gains shall be deemed as short-term capital gains, even if any car was held by him for more than thirty six months. The cars held by him as stock-in-trade shall not be capital assets and the profit or gain on sale of such stock-in-trade shall be subject to computation under the head 'business'.

Similarly in case of car manufacturer there will be two types of cars held by him -cars used for business purposes forming  fixed assets of business they are capital asset and cars used for sale to dealers/ customers- they are stock-in-trade, hence not capital asset.

From the above example we find that same or similar car may be a capital asset in one situation and not a capital asset in another situation. It depends on the assessee as to how he keeps or treats the car.

Capital asset vis a vis stock-in-trade:

The term stock-in-trade is not defined in the Income-tax Act. Therefore, this expression shall have to be understood in its general meaning as understood in trade or commerce in which a person is engaged. According to the same we have to ascertain the nature of trade, industry or business in which any person is engaged and the items required in such business  for the purpose of business of supplying goods whether manufactured by him or not.

In the exception clause (i) in section 2 (14) as reproduced above we find that the expression stock-in-trade is used, therefore the stock must have linking with the trade and other items excluded in the same context are   consumable stores or raw materials held for the purposes of  business or profession.

Therefore we can say and analyze  that  the following items are excluded from the meaning of capital assets in the context  of this article:

Description	Examples and remarks
Stock-in-trade	These items are held as a trader in item for example a sugar dealer or a book dealer,  held sugar, or books  respectively  as stock-in-trade. The people knows that he deals in sugar or books and approaches him to purchase sugar or books as the case may be.
Consumables stores  required for business or profession,	In a factory lubricants, cleaning material, oils and fuels are used as consumables. In an office stationary items are used as consumables. A doctor uses items like syringes, testing material etc. as consumables in his profession. Coal will be raw material in a power generating organization whereas coal will be consumable in case of other manufacturer.
Raw material required for business or profession	Raw material required to manufacture goods or rendering services  falls in this category. For example steel sheets in a machinery manufacturing facility, or coal in power generating organization or raw films in a doctors chamber who also take X-ray.

Common features:

The items like stock-in-trade, consumables and raw material have a common feature- they are related with a  trade or industry which supply certain products or items  which may be  manufactured by him or not. Or these items may be held to render certain services.   Thus, the holding of such items is for specific purpose of  supplying some things or rendering some services as business or profession. In view of the expressions used in the exclusion clause, it is necessary that the items to be excluded from the definition of capital asset should have connection with the business in nature or trade, or industry or the profession carried by the assessee. If there is no connection with the trade or industry or commerce in which assessee is engaged, then similar items held by assessee cannot be considered as stock-in-trade.

Whether assessee has option to treat an item as stock-in-trade or not:

It can be said that except the items like raw material, consumables, and items used for supplying to others (that is trading items) other items of assets are generally capital asset. It is at option of the assessee to treat them as stock-in-trade or as capital asset. We find the  provision in section 45 (2) which indicates existence of such an option to the assessee. The said provision reads as follows:

                "(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset."

Thus, it can be said that  except in case of items which are normally held as  stock-in-trade, consumables, or raw material in the business or profession  of the  assessee ,all other assets are  to be regarded as property of nay kind and capital assets of the assessee.

 However, the assessee has option to treat any property as stock-in-trade  from the time of acquisition or to  convert  a   'capital assets' in to    stock-in-trade by proper book entries. Unless such items are considered in books of account originally or on conversion or treatment as stock-in-trade, all such items of properties shall be 'capital asset' as known in commercial world.

Non-trade items are generally capital asset:

In view of above discussions it can be said that non-trade items are generally capital assets in case of any person who does not trade in such items or who does not require them as raw material or consumables. Investment in any article or thing is therefore  holding of such things as capital assets and cannot be assumed as stock-in-trade. Thus gold, silver,  jewellery,  land and buildings, shares , securities, units,  bonds other saving instruments etc. are to be considered as 'capital assets', unless they have been converted or treated as stock-in-trade by the assessee.

Investment activity and head of income:

From above discussion we find that in case of investment activity  a vocation or business is carried, therefore, in case of investment activity also, there can  be computations and classification of incomes  under various heads like income from house property, 'income from business or profession',' capital gains' and other sources as explained below.

A.    Income from house property:

Investment  can be made in house property. The house property will be a capital assets. Rental value of such property will be taxable under he head income form house property. If the property is sold, the gains will fall under the head capital gains.   

B.     Under head income from business or profession (including vocation):

The investor is engaged in investment activity which is a vocation as well as  an adventure or  concern in nature of commerce, hence the activity constitute carrying of a vocation or  profession as well as business. Income arising as  profit or gain or benefit or perquisites (e.g rent received form employees for allowing them use of buildings or vehicles , intra day gains in course of hedging activity), of such business or vocation which are not specifically taxable under  other heads of income  shall be taxable under this head - business or profession.

          The expenses incurred in the course of investment activity like administrative expense, repairs and maintenance of  building, furniture, office equipments , computers other  plant or  machinery  and depreciation on such fixed assets, interest on capital borrowed for business of investment  shall be allowable  under this head because:

a.   the assessee had carried investment activity as a vocation or business.

b.  The expenses have been incurred wholly and exclusively for such business, even costs and expenses for carrying investments like rent, insurance, interest, up-keep and maintenance, verification, valuation etc. are business expenses of investment activity. It makes no difference whether a property of business is held as stock-in-trade or as capital asset.

c.  The assets have been used or held for the purpose of such business activity.

d. Capital has been borrowed for such business even if it is for acquisition of capital assets which are held and/ or  used for the purpose of such business .

Therefore, even if there is no income from investment activity, such expenses shall be allowable as business expenses and  any loss from such activity shall also be allowable as business loss, unless the same specifically falls under any other head of income.

C.     Income under the head 'capital gains':

If the investor sells his capital assets like shares, units, building, furniture, plant or machinery, the income shall be computed under the head 'capital gains'.

D.    Income under head other sources:

Income which falls specifically under this head or income which does not fall under other heads of income  shall be included under this head. For example, dividend on shares or units, interest on bonds, debentures and saving certificates, rent from certain assets etc.

An example:

Suppose a doctor is working in a hospital and get salary, he also has part time practice and get professional fees. Besides he also makes investments in securities including units of mutual funds, shares of listed companies , debentures and bonds.  He  has made investment and also own certain properties which are let out and he get rental income. For the purpose of   managing investment he has engaged an accountant and also take consultancy service of portfolio advisers.  From portfolio he has earned dividend, interest and capital gains. He will have income falling under  all heads of income. The expenses for managing portfolio shall be allowable as business expenses and they should not be disallowed merely because incomes from the portfolio fall under other heads of income or is treated separately under other heads of income.

Request from readers for feedback:

Readers are requested to send their feedback so that the subject matter can  have  further brainstorming, analysis and arguments and contentions can be advanced further in another follow up article.