Characterisation of an income under the scheduler system of Indian taxation has been a constant source of litigation. The peculiar system requires a tax-payer to fit his total income in any one or all of the four specific pigeon holes provided by s. 15 of the Income-tax Act, failing which it will find its place in the fifth pigeon hole. At times, this exercise of finding the right hole acquires interesting dimensions where under the tax-payer and the tax authorities go to the ludicrous lengths in this game of musical chair.

The identification of the component looses any significance if the income though computed under several heads of income were to be taxed at the uniform or progressive rate of taxation without selective concessions. The tinkerers of the Indian system of taxation has mastered the art of pick and choose which provide a fodder stock for conflicts and litigation, much to the merriment of all the parties concerned and to the amusement of the bystanders. Expenses, deductions and allowances are granted with specific reference to the source of income or the head of income. Period of holding an asset is considered a virtue for conferment of benefits and concessions are bestowed on blue eyed sources. The entire game of unlimited amusement has become a source of a national pastime.

Fuel has been added to an existing fire by introduction of s. 10(38) followed by s. 111A, the provisions which seek to grant tax exemption or a benevolent tax concession depending upon the period of holding of a capital asset. The capital asset, selected for favour this time, is shares and securities. Such selective favours has the effect of turning the innocent tax payers to serious tax planners who at times are labelled as tax evaders by the authorities inclined and trained to frustrate any attempt of the legislature to make life easier for those who contribute taxes for meeting the expenditure of running the nation including for the remuneration of those who make life miserable for their ultimate masters.

The tinkerers of the Indian tax laws have been by and large persons with sound working knowledge of tax laws and therefore, it is difficult to believe that they are ignorant of the large whirlpools that are created by their regular pebble throws, in calm waters, in the name of conferring incentives. It was very well known to them that it is very difficult, in the aftermath of the frenzy created by introduction of the selective concessions for shares and securities, if not impossible to find a formulae, to determine whether an income is a capital gain or a business income, acceptable to both sides and the judiciary. The courts over a decades have regularly confirmed, that the characterisation of income with reference to a head of income is a question of fact which should be answered on due consideration of several variable factors without undue importance attached to any one of them. These courts have also stated that it is almost impossible to lay down a straitjacket formulae for deciding the head of income under which an income will be taxed.

In the backdrop of this stated legal position, any desire to resolve the hardship should be matched by a legislative redressal, alone. Instead, half backed and weak hearted attempts are made though issue of instructions and circulars which instead of guiding the parties, by clearing the clouds, generate more dust so as to further cloud the vision. The draft guidelines dated 16-5-2006 followed by circular dated 16-6-2007 are the examples of this ostrich like approach. In spite of being wisened by the turmoil, created by the draft instruction of 2006 which resulted in a huge set back for security markets, the Board issued the present circular of 2007 which in fact reiterate the position stated by the courts that no single principle (factor) would be decisive and the total effect of all the principles (factors) should be considered to determine whether, in a given case, the shares held by the assessee are held as in investment or stock-in-trade.

The issue, with a history of litigation, cannot be wished away by instructions and circulars. Any attempt to resolve the same will have to be backed by strong legislative intent followed by introduction of clear and unambiguous provisions in the Income-tax Act. A beginning may be made by moving away from the scheduler system of taxation which breeds pick and choose methods so as to selectively favour a class of tax-payers. In the meanwhile, the Government in consultation with tax-payers should devise an acceptable formula for identifying the head of income and scrupulously adhere to that and discourage any and all attempts to bypass such formula.