Presentation is loading. Please wait.

Presentation is loading. Please wait.

T AXATION OF S HARES AND S ECURITIES, D ERIVATIVES, F UTURES AND O PTIONS Dhinal Shah Chartered Accountant National Conference on Direct Taxes Nagpur Branch.

Similar presentations


Presentation on theme: "T AXATION OF S HARES AND S ECURITIES, D ERIVATIVES, F UTURES AND O PTIONS Dhinal Shah Chartered Accountant National Conference on Direct Taxes Nagpur Branch."— Presentation transcript:

1 T AXATION OF S HARES AND S ECURITIES, D ERIVATIVES, F UTURES AND O PTIONS Dhinal Shah Chartered Accountant National Conference on Direct Taxes Nagpur Branch of WIRC of ICAI 12 th November

2 (1) Capital Gains (2) Business Income vs Capital Gains (3) Derivative Transactions (4) Speculative Transactions (5) Issues relating to Section 14A TOPICS 2

3 CAPITAL GAINS 3

4 Sec 45 - Gains arising from transfer of capital asset are chargeable as capital gains Capital Asset Definition of capital asset refers to any property held and not owned by the assessee Asset must be a capital asset at the time of transfer Includes shares and securities Securities defined in Expl 2 to Sec 2(42A) to mean security as defined under Section 2(h) of Securities Contracts (Regulations) Act, 1956 Section 2(h) of Securities Contracts (Regulations) Act, 1956 defines security to include: Shares, bonds, debentures or other marketable securities; Derivatives; Units or other instruments issued by any collective investment scheme or mutual fund; Security receipt as per Section 2(zg) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002; Government securities; Rights or interest in securities etc. CAPITAL GAINS 4

5 Transfer Redemption of preference shares involves transfer – Anarkali Sarabhai (224 ITR 422) (SC) Reduction of share capital is transfer – Kartikeya Sarabhai (228 ITR 163) (SC) Date of transfer is date of lodging shares with the company Family arrangement is not a transfer – Kay Arr Enterprises (299 ITR 348) (Madras) Sec 45(2A) - Income arising from transfer of shares held in demat form would be taxable in the hands of beneficial owner and not in hands of depository CAPITAL GAINS 5

6 Period of holding Short term and long term – Sec 2(42A) and 2(29A) Short term if following capital assets held for a period of less than 12 months: i) Share held in a company; ii) Listed security; iii) Units in UTI or Mutual Fund For remaining assets, short term if capital assets held for a period of less than 36 months Points to be considered while computing period of holding Period of previous owner to be included for capital assets acquired through modes specified in Section 49(1) For renouncement of rights – Date when right to acquire rights shares comes into existence - Navin Jindal v ACIT (SC) (2010-TIOL-03-SC-IT) For bonus shares – Date of allotment of bonus shares For demat shares – FIFO method to be adopted (Circular No. 704 dt 28 April 1995) CAPITAL GAINS ( CONT.) 6

7 Indexation benefit available for all long term capital asset No indexation benefit available for bonds and debentures Indexation benefit available from the first year in which asset was held by the assessee Assets acquired under modes prescribed under Sec 49(1) Indexation benefit available from year of acquisition of previous owner - Manjula Shah (Mumbai ITAT SB) (2009-TIOL-698- ITAT-MUM-SB) CAPITAL GAINS ( CONT.) 7

8 Long term capital gains Section 10(38) Transfer of long term capital asset being equity shares of a company or unit of equity mutual fund Chargeable to securities transaction tax Exempt from tax Section 112 Transfer of any other long term capital asset Indexation benefit available 20% Proviso to Section 112 Transfer of long term capital asset being listed securities or unit of mutual fund / UTI or zero coupon bond Without indexation of cost, 10% Short term capital gains Section 111A Transfer of short term capital asset being equity shares of a company or unit of equity mutual fund Chargeable to securities transaction tax 15% Other short term capital gains taxable at normal rates TAXABILITY OF CAPITAL GAINS 8

9 CAPITAL GAINS – C ONVERSION OF CAPITAL ASSETS INTO STOCK – IN - TRADE Conversion of capital assets into stock in trade – Sec 45(2) Shirinbai Kookas principle Sharkeys principle Effect of conversion – Sir Kikabhai Premchand, 24 ITR 506(SC) – Dhanuka & Sons 124 ITR 24(Cal) – ALA firm, 189 ITR 285 (SC) Possibility & proofs Cost of acquisition – Keshavji Kaarsondas, 207 ITR 737(Bom), – B.K.A.V. Birla (Cal) – Kalyani Exports & Investments, 78 ITD 95 (Pune) Period of holding – S.2 (42A) – B.K.A.V. Birla 35 ITR 136 (Cal) Indexation – Kalyani Exports & Investments and other views – Explanation (iii) to s. 48 – Harmonious Construction Part shares and securities as stock in trade and remaining as investment. – Century Builder – 5694/Mum./2000/dt – Arjun Kapoor (70 ITD 161)(Del) – Circular No. 4/2007 dt

10 BUSINESS INCOME VS CAPITAL GAINS 10

11 BUSINESS INCOME VS CAPITAL GAINS Desired parameters Intention - Period of holding Frequency - Fund utilised Time devoted - Set-up Listing - PMS Occupation – Scale Owned fund v. Borrowed fund Alternative occupation - Bank account Sales/ Purchase - Utilisation Treatment in books - Statutory requirements MOA/AOA - Avg. holding period Group companies - Promoters No. of script - Genuineness Applicability of s. 45(2) 11

12 C OMPARATIVE A NALYSIS BasisBusiness IncomeCapital Gains Taxabilityu/s 28u/s 45 Computation u/s 48 TypesSpeculative or Non- speculative STCG or LTCG Deduction allowed All expenses incurred for carrying on the share trading business. Only expenses incurred in connection with the transfer. IndexationNo Indexation in any caseIndexation allowed in case of LTCG Benefit if STT paid Deduction as an expense u/s 36(1)(xv) -LTCG exempt u/s 10(36) or 10(38). -STCG chargeable at concessional rate of 15% u/s 111A. Set-offNon-Speculative loss can be set off against any head except salary -No loss as per S.14A -LTCL cannot be set-off against any head and has to be carried forward. 12

13 Principles to be adopted for distinction between shares held as stock-in-trade and investment Assessee to produce evidence for distinction between shares held as stock-in- trade and held as investment – CIT Vs Associated Industrial Development Company (P) Ltd (82 ITR 586), (SC) Relevant principles for determining capital gains vs business income as laid down by AAR in 288 ITR 641 (i) Where a company purchases and sells shares, it must be shown that they were held as stock-in-trade (ii) Substantial nature of transactions, the manner of maintaining books of accounts, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would determine the nature of transactions; (iii) Ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade; (iv) where the object of the investment in shares of a company is to derive income by way of dividend etc. then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt. Possible to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade CIRCULAR NO. 4/2007, DATED

14 BUSINESS INCOME ( CONTD.) Issues 1. Frequency of transactions Smt. Neerja Birla v. ACIT 66 ITD 148 (Mum.) and Arjun Kapoor 70 ITD 161 (Del.) Circular No.4/2007 dt Tax Audit The ICAI has in the Guidance Note on Tax Audit opined that in case of speculative transactions, total profits and losses shall be taken as turnover. 14

15 (1) Interest on borrowed capital (2) Brokerage, service tax, stamp duty (3) Penalties, bad delivery charges, auction charges (4) Demat account charges (5) Loss of shares & securities and non payment by brokers (6) Portfolio Management & advisory fees D EDUCTION FROM BUSINESS INCOME 15

16 DERIVATIVE TRANSACTIONS 16

17 ISSUES IN DERIVATIVE TRANSACTIONS Derivative Transaction Transactions in futures and options are for a fixed maturity and as per current stock market regulations are settled by cash either before or at their maturity date Accounting Treatment As per Guidance Note on Accounting for Equity Index and Equity Stock Futures and Options, derivative contracts not settled as on balance sheet date should be marked to market. Any loss arising from mark-to-market should be recognised in Profit & Loss A/c and gains, if any, should be ignored Tax Treatment As per provisions of Section 43(5), amended with effect from 1 April 2006, any income arising from derivative transaction on recognised stock exchange would not be a speculative transaction Tax Audit ICAI in its Guidance Note on Tax Audit has opined that in case of speculative transactions, total profits and losses shall be taken as turnover. The same view may be taken in respect of derivative transactions. 17

18 Issues Whether gains / losses arising in derivative transactions would be taxable as business income or capital gains Prior to All the derivative transactions are speculative business transactions as amendment in section 43(5) is not retrospective [Shree Capital Services Ltd (Kolkata ITAT) (318 ITR 1)] Post Business Income Trading in derivatives is a business High frequency of transactions Taxable as business income [Morgan Stanley and Co. 271 ITR 416 (AAR), Royal Bank of Canada (323 ITR 380) (AAR)] Capital Gains Derivatives are capital asset Settling of derivatives is transfer Income arising from transfer of derivatives is capital gains 18 TAXABILITY OF DERIVATIVE TRANSACTIONS

19 ALLOWABILITY OF MARK TO MARKET LOSS ON DERIVATIVE TRANSACTIONS Issues Whether losses arising in mark to market derivative transactions could be allowable under the Act Whether it be considered as business loss or capital loss Prior to All the derivative transactions are speculative business transactions as amendment in section 43(5) is not retrospective [Shree Capital Services Ltd (Kolkata ITAT) (318 ITR 1)] Post Business Loss Trading in derivatives is a business Mark to market loss is only notional loss There is no transfer of capital asset on balance sheet date No consideration is received for mark to market loss Capital Loss Derivatives are capital asset Mark to market loss is loss arising on balance sheet date 19

20 SPECULATIVE TRANSACTIONS 20

21 S PECULATION B USINESS Speculative transaction – S.43(5) Explanation 2 to S.28 Speculation Loss – S.73 Explanation to S.73 21

22 S PECULATIVE T RANSACTION – S 43(5) Contract for sale or purchase Any commodity including stock & shares Periodical settlement Without actual delivery or transfer Exceptions Hedging – to guard loss on price fluctuations Dealer or Investor Jobbing or arbitrage Member of a Forward market or Exchange An eligible transaction of dealing in derivatives, with effect from A.Y

23 E XPLANATION 2 TO S.28 Speculation transactions - business Distinct and separate business Separate computation for I T Act R. Chinnaswamy Chettiar, 96 ITR 353 (Mad.) 23

24 S PECULATION B USINESS L OSS Restriction on set-off Jaggannath Mahadeo Prasad, 71 ITR 296 (SC) Profit of Speculation Business only Any such business Priority of set-off–Cir. No. 23 dt (2) Application to loss as also profit Samba Trading & Invts. 58 TTJ 360(Mum) Carry forward Period of 8 succeeding years By – legal heirs 24

25 H EDGING - I Requirements Two contracts Commodities and scrips Holdings & Contract of delivery Guard against price fluctuations Purchase- Also sale Different quality-quantity and value Cir. No. 23D dt Different scrips Circular 23D Index F & O 25

26 H EDGING - II Burden of proof Joseph John, 67 ITR 74 (SC) Co-relation necessary Somasundaram Chettiar, 194 ITR 1 (SC) Independent treatment Arjan Khimji & Co., 121 ITR 421 (Bom) 26

27 D ELIVERY Relevance of intention, payment and delivery Abdul Gani Haji, Habib, 72 ITR 6 (Cal.) Actual delivery Blank transfer forms Mangal Chand Bhanwarlal, 255 ITR 329 (Raj) Delivery Notes Davenport & Co., 100 ITR 715 (SC) Recalled delivery Clayton Commercial, 67 ITD 118 (Del) Intended delivery Gandhi Bhandari & Co., 83 ITD 680 (Pune) Pending delivey Sampath & Iyengar –Ninth Edn. Judicial controversy No delivery Ramalinga Choodambigal 239 ITR 120 (Mad.) 27

28 S ETTLEMENT Settlement without delivery S.63 of Indian Contract Act Shantilal (P) Ltd., 144 ITR 57(SC) Kamani Tubes Ltd., 207 ITR 298 (Bom) F/E Forward contracts Guard against fluctuation Badridas Gauridu, 261 ITR 251 (Bom) Loss in illegal contract S.C. Kothari, 82 ITR 794 (SC) Nature of deemed profit u/s. 41(1) Rajputana Trading Co. Ltd. 72 ITR 286 (SC) 28

29 S TRAY TRANSACTIONS Concerted activity and efforts Treatment under the law Casual Income Other sources Capital Gains Plurality of transactions Indian Commercial Co., 106 ITR 465 (Bom) G.P. Birla HUF, 199 ITR 173(Cal) 29

30 D EEMING F ICTION – E XPL. TO S.73 Company assessees All companies Shares Purchase and Sale Deemed Speculation Business Exceptions GTI mainly from specified heads Banking Company Loans & Advances Company 30

31 (1) Applicability to shares held as investments Mysore Rolling Mills Pvt. Ltd. 195 ITR 404(Kar) Trade Team Pvt. Ltd. 54 ITD 36(Bom) (2) Share broking-Whether business of purchase & sale of shares? SRJ Securities Ltd. v ACIT 81 TTJ 484 (Del) DCIT v Frontline Capital Services Ltd. 96 TTJ 201 (Del) (3) Applicability to securities other than shares Apollo Tyres Ltd. 255 ITR 273 (S.C.) (4) Loss due to stock valuation is also covered by Expln to Sec 73 Prasad Agents (2009-TIOL-164-HC-MUM-IT) (Bombay HC) I SSUES RELATING TO E XPLN. TO S.73 31

32 (5) Whether the Expln. Applies to arbitrage, hedging,etc. excluded from the meaning of speculation u/s. 43(5)? Rohini Capital Services Ltd. v DCIT 92 ITD 317 (Del) (6) Settlement for breach of contract is not a speculative transaction Bhandari Rajmal Kushalraj v ITO 96 ITR 401 (7) Explanation applies to dealing in shares of more than one company Laxmi Feeds & Export Ltd (62 ITD 315) (8) Exceptional cases of section 43(5) are also covered by Expl to Sec 73 (9) Speculative loss incurred in earlier years by a company can be set off against profits deemed to speculative under Expln to Sec 73 Lokmat Newspapers Pvt. Ltd (Bom HC) I SSUES RELATING TO E XPLN. TO S.73 (C ONT.) 32

33 Lending /Banking company Exception to general rule Overriding Sec. 43(5) C.N.M.P. Inv. (P) Ltd., 78 ITD 297 (Del) GTI mainly from Criteria for determination Relevance of other years Amrutlal & Co., 212 ITR 540 (Bom) Part to include whole Arvind Investments Ltd., 192 ITR 365 (Cal) 33 I SSUES RELATING TO E XPLN. TO S.73 ( CONT.)

34 ISSUES RELATING TO SEC. 14A 34

35 B ACKGROUND Expenditure incurred for earning exempt income is not allowable as deduction under section 14A The Assessing Officer (AO) is empowered to determine the amount of expenditure in accordance with method prescribed under Rule 8D if: AO is not satisfied with the correctness of the claim made by assessee or If assessee claims that no expenditure is incurred to earn exempt income 35

36 R ULE 8D Disallowance prescribed under Rule 8D is sum of : Direct Expenditure incurred for earning exempt income A Proportionate Interest Expenditure = Interest Expense X Average Value of Investments Average Value of Total AssetsB Administrative 0.5% of Average Value of Investments C Total A+B+C 36

37 R ULING OF M UMBAI S PECIAL B ENCH – D AGA C APITAL Operation of Section 14A is automatic on earning exempt income Computational provisions of Section 14A read with Rule 8D are procedural and clarificatory in nature Rule 8D will apply retrospectively to all pending matters Rule 8D also applicable for business income 37

38 R ECENT RULING OF B OMBAY H IGH C OURT IN CASE OF – G ODREJ & B OYCE The key principles laid down by the High Court are as under: Section 14A will apply to dividend income although dividend has suffered dividend distribution tax The computation method provided by rule 8D is constitutionally valid. Rule 8D notified on 24 March 2008 will not have retrospective effect. Rule 8D cannot be applied mechanically. Only if AO is not satisfied with the claim of tax payer and has recorded reasons he can compute disallowance under section 14A. Upto AY , in absence of rule 8D, AO can compute disallowance under section 14A by reasonable method. No observation by High Court on applicability of Section 14A to business income 38

39 R ECENT RULING OF B OMBAY H IGH C OURT IN CASE OF – G ODREJ & B OYCE The facts in Godrejs case as mentioned by the High Court are as under: Major dividend from group companies 95% consisted of bonus shares Most of the shares acquired several years earlier No stage in the past except in last few years has the Department attributed any interest or expenditure towards dividend Reserves of Rs.276 Cr and Capital of Rs.6.55 Cr more than the investments In the relevant year no new investments, but disposal of some old investments 39

40 S CENARIO UP TO AY Rule 8D notified on 24 March 2008 not to have retrospective effect However, disallowance to be on reasonable basis Could be argued that basis for disallowance to remain the same as made in the past assessments 40

41 S CENARIO POST AY Rule 8D to be applied only if AO not satisfied with the disallowance made by the tax payer himself and has recorded reasons Responsibility of tax payer to satisfy the AO Justify its claim by robust documentation and sound principles of apportionment Responsibility will shift on the AO, to justify why disallowance computed by the tax payer should not be accepted Could be argued that the basis for disallowance to remain the same as computed in the past 41

42 CONCLUSION Up to AY Disallowance under section 14A to be computed on a reasonable basis Provide adequate documentation and submissions to minimize the disallowance to be computed on reasonable basis Post AY Could be argued that basis of disallowance to remain same as computed upto AY and not as per Rule 8D Responsibility will shift on the AO, to justify why disallowance computed by the tax payer should not be accepted Difficult for AO to disregard his own satisfaction with the basis of computation made upto AY

43 Thank You 43


Download ppt "T AXATION OF S HARES AND S ECURITIES, D ERIVATIVES, F UTURES AND O PTIONS Dhinal Shah Chartered Accountant National Conference on Direct Taxes Nagpur Branch."

Similar presentations


Ads by Google