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TAXATION

OF
SHARES & SECURITIES

BY
Rajesh B. Yadav
SHARES & SECURITIES

A. Shares B. Securities
 S. 2(46) of Companies Act  Securities–S. 2(h) of SCRA
 Equity & preference – Pvt.  includes shares, scrips, debenture,
stock, bonds
or public-listed or not.  Derivative
 Bonus, Rights, Split, Stock  Government securities
 Instruments declared by Cen. Govt.
 Rights or interest in securities

January 26, 2010 Rajesh


SPECIFIC ASPECTS
 Period of holding  Events related
 Cost of Acquisition  Non Resident Invsts.
 Indexation  Foreign Securities
 Taxation & Concessional rate  Derivatives
 Dematerialization  Planning & fiction
 Business - speculation
 Dividend
 Instruments related

January 26, 2010 Rajesh


PERIOD OF HOLDING
 Relevance for shares, etc.-concessional period

 Date of acquisition-Allotment unless provided

 12 months completed on-preceding date

 12 months– according to British calendar

January 26, 2010 Rajesh


DATE OF ACQUISITION

 Purchase/sale from market


 ‘Sale’ not defined-Date of Contract-Cir. No. 704
 Nature of property
 S. 82 of Companies Act-Sale of Goods Act
 Delivery with duly executed transfer form
 Pay–out date–Alternative pay in –
 Applies to shares in E-Form, demat account
 Vandha–Bad delivery

January 26, 2010 Rajesh


COST OF ACQUISITION

 Not defined
 Commercial man
 Acc. Principles
 Brokerage
 Stamp duty
 Legal charges
 Service tax
 Insurance
 Private placement funding

January 26, 2010 Rajesh


INTEREST AS A PART OF COA

 Difficulty due to
exemption u/s 10(34),
10(35)
 S. 48 COA
 One view  Other view
 Com & Acc. principle
 Revenue nature
 not defined
 Subsequent payment &
 exp. for acquisition cost

January 26, 2010 Rajesh


DEMATERIALISATION

 Concept
 Depository
 DP
 DRF
 S. 45(2A)
 Beneficial Owner only-FIFO Method
 Applicability to a dealer
 Circular No. 768
 Overrides S. 45(2A) as also Cir. No. 704

January 26, 2010 Rajesh


INDEXATION

 Bonds and Debentures


 Amalgamation and Demerger
 Annual Interest Capitalisation Difficulty

January 26, 2010 Rajesh


LTCG EXEMPTION – S. 10(38)
 New regime of STT
 Condition for compliance
Capital asset
Equity Shares
EOMF units
Held as investment
Transfer on or after 01.10.2004
Transaction of transfer liable to STT
LTCA
Sale essential

January 26, 2010 Rajesh


IMPLICATIONS- S. 10(38)
 Available to all assessees
 Other shares & securities not included
 Not restricted to BSE 500
 Regular quotation not required
 Recognized SE not required – STT required
 Mode of purchase/acquisition not relevant
 Bonus shares also
 Originally Private Company
 Originally bonds, warrants, etc,
 Inheritance, amalgamation, demerger

January 26, 2010 Rajesh


IMPLICATIONS- S. 10(38)

 Buyback, Amalgamations, Open offer exchange,


Reduction, Redemption, Rights, de listed shares
 Benefit for ESOP
 Loss on transfer whether adjustable
 Unabsorbed loss – whether set-off possible

January 26, 2010 Rajesh


IMPLICATIONS- S. 10(38)

 EOF
Investment in equity shares
Investment
50% of total proceeds – Proceeds ?
50%
Shares of domestic company
Shares
Specified u/s 10(23D)
Specified
Annual average of monthly average
Annual
Date of determination not clear
Date
Payment of STT
Payment

January 26, 2010 Rajesh


CONCESSION - STCG – S. 111A

 Capital asset
Equity Shares
Units of EOMF
 STCA
 10% of gains + SC + EC
 STT not deductible
 Other deductions possible

January 26, 2010 Rajesh


STCG- s. 111A

 Other conditions to apply


 Chapter VI-A deductions after exclusion
 Rebate under s. 88 on balance
 Rebates possible u/s 88 B,C& D
 Additional relief for Individual and HUF
 Non resident
 All Assessees

January 26, 2010 Rajesh


STCG – s. 111A

 Rebate
Exclusion from Rs. 5,00,000/- GTI
 Losses
Option not to set-off
Whether set-off of other losses possible
Cir. No. 721 dated 31.09.1995
Script wise calculation
Whether STCL can be set-off

January 26, 2010 Rajesh


SECURITIES TRANSACTION TAX (STT)
 Nature of Tax
 Effective date
 Applicability
Shares of & EOMF
Shares
‘‘Shares’ & ‘Securities’ excluded
Transaction on a recognized stock exchange
Transaction
Transactions excluded
Transactions
Delivery and Non Delivery
Delivery
Purchase and/or sales
Purchase
Persons covered
Persons

January 26, 2010 Rajesh


CREDIT / REBATE FOR STT
 88E w.e.f. A.Y. 2005-06
 Possible for ‘Business Income’
 Equivalent to STT paid
 Credit not exceeding I.Tax on STT income
 Average rate of tax & s.2 (10)
 Evidence with Return of Income
 No refund and c/f possible
 Set-off against tax on other income
 STT on purchase eligible
 Difficulties in case of common business

January 26, 2010 Rajesh


RIGHT ENTITLEMENTS

 DOA-Date of offer
 Dhun Kapadia’s case
 COA-Nil-Unless acquired from market
 Merges into right shares

RIGHT SHARES
 DOA-Allotment-Indexation also
 COA -Amount actually paid
 COA of entitlement if any

January 26, 2010 Rajesh


BONUS

 Position before amendment


 DOA-Allotment
 COA-Nil
 Genuine difficulty in some cases
 Applies to units also
 Bonus in the hands of a dealer
 Bonus stripping

January 26, 2010 Rajesh


BUY-BACK

 Concept
 Controversy settled
 S. 2(22) and S. 46A
 Proceeds are sale consideration
 Other provisions to apply
 Applicability to dealer

January 26, 2010 Rajesh


AMALGAMATION

 Whether transfer
 Exemption vide S. 47(vii) on compliance
 POH-Old period to be included
 COA-Old COA
 Substitution of FMV possible
 Indexation
 Does not apply to dealer

January 26, 2010 Rajesh


DEMERGER
 Concept of demerger
 COA-Part I & Part II
 DOA-Old date for Part I
 Substitution of FMV for Part I
 Indexation for Part I
 Part III
 COA of Part II
 DOA of Part I
 Substitution of FMV possible
 Craig Harvey’s case
 Indexation possible

January 26, 2010 Rajesh


REDEMPTION / REDUCTION

 Concept
 Transfer
 Effect of transfer

January 26, 2010 Rajesh


CONVERTIBLE DEBENTURES

 Concept
 Mrs. A Ghosh’s decision
 Exemption vide S. 47(x)
 DOA-of allotment of shares
 COA-proportionate-historical
 Indexation - from the date of allotment
 Disparity between date and cost of acquisition

January 26, 2010 Rajesh


DISCOUNT BONDS
 Concept
 Instruction No. 225 dated 12.08.1996-Interest
 Position of buyer from market
 Position of seller following accrual method
 Appropriate course of action
 Cir. No. 2/2002 dt. 15.2.2002
 Press Release dt. 20.3.2002-Prospective

January 26, 2010 Rajesh


NRI- CHAPTER XII A-I

 Special treatment for investment income and LTCG


 Inv. Income at 20% & LTCG on F/E Asset at 10%
 STCG - Specified asset -Non F/E Asset- Bonus share
 Re-investment of LTCG on F/E Asset
 No deduction for expenditure
 No allowance or Chapter VI-A benefit

January 26, 2010 Rajesh


NRI– CHAPTER XII A-II

 No benefit of indexation
 Illusionary benefit and s. 112
 Continuation of benefit on becoming a resident
 Exemption for filing Return of Income
 Option to opt out
 Possible to apply for combination
 LTCG on non-specified asset

January 26, 2010 Rajesh


FOREIGN SECURITIES
 No specific provisions – regular provisions
 Holding period – Shares, units, securities
 Special u/s 10(36) and not available
 Benefit of exemption 10(34) and 10(35) not available
 Computation of Capital Gains
 Benefit of indexation possible – proviso to s. 112
benefit not available
 Treatment of losses
 Tax Audit and DTC and s. 91

January 26, 2010 Rajesh


DIVIDEND AND INCOME FROM UNITS
10(34) AND 10(35)

 Exemption from tax


 Tax in the hands of payer u/s 115 O/R at 12.5%
 Deduction of expenses and s. 14A
 Possibility of capitalization
 Provision of s. 94(7)

January 26, 2010 Rajesh


CONCESSIONAL RATE S. 112
 LTCG at 20%
 Threshold exemption for individual and HUF
 Set-off of losses mandatory
 Special concession under proviso
 10% tax on LTCG – listed securities or units
 Computation without indexation
 Whether optional – simultaneous calculation
 Right to set-off losses on securities and units
 M. Ramanlal. 3 ITD 122 (Ahd)
 Nimesh S. Shah, 36 BCAJ 645 (Mum)

January 26, 2010 Rajesh


DERIVATIVES-I
 A Derivative is:
 an instrument whose value is derived from the value of one or more
underlying assets like commodities, currency, securities, index, etc.
 Whether an asset-Security under SCRA
 Whether independent asset-Cash settled, Rights,Warrants
 Whether a capital asset-S. 2(14), Property with value
 Head of Income-Relevant factors
 Likely concession for commodities

January 26, 2010 Rajesh


DERIVATIVES-II

 Whether Speculation Business


 Applicability of Explanation to S. 73
 Treatment of provision for losses
 Book Profit
 Effect of daily settlement
 Method of Accounting
 Transaction Cost
 Valuation at the year end
 Time of accrual of premium for writer

January 26, 2010 Rajesh


DERIVATIVES-III-CAPITAL GAINS
 Underlying Assumptions
 Right an asset
 Fictional purchase & sale
 Merges with a larger asset
 Situations
 Cash settled
 Hedging
 Delivery settled
 Short-Term Capital Asset
 Lapse of contract

January 26, 2010 Rajesh


BUSINESS OF SHARES & SECURITIES
 Difficulty in  Bank account
distinguishing  Stationery
 On going battle  Business set-up
 Adv. & disadv  Accounting treatment
 Realisation of old
 Tests investment
 Regular
 Agency related
 Systematic
 Takeover of interest
 Continuous
 Public offer
 Length of holding
 Time devoted
 Intention
 Composition of income
 Borrowed funds

January 26, 2010 Rajesh


INVESTMENT V. STOCK
 Which is beneficial
 Allowance of expenses . Concessions
 Application of s. 14A
 Set-off of losses
 Credit for STT
 C/f of losses
 Trade-off
 Ramnarain & Sons, 41 ITR 534(SC)
 N.S.S. Investments, 277 ITR 149(Mad)
 Mysore Rolling Mills, 195 ITR 404(Karn)

January 26, 2010 Rajesh


ARBITRAGE
 Nature of activity
 Objectives
 Income
 Business -Capital Gains – Other sources
 Speculative transactions
 Delivery - Hedging
 Losses
 S. 43(5) - Explanation to s. 73
 Expenses
 Credit for STT
 Tax Audit

January 26, 2010 Rajesh


DAY TRADING

 Nature of operations
 Volume , Frequency
 Delivery
 STT

January 26, 2010 Rajesh


PORTFOLIO MANAGEMENT
 Types of arrangements
 Participating
 Non participating

 Nature of fees
 Advisory & Management
 Brokerage

 Relationship & Treatment


 Proposal under consideration
 Deductibility of expenses
 Business
 Capital gains

January 26, 2010 Rajesh


SPECULATION BUSINESS-I
 S. 43(5) – Delivery essential– Intention not relevant
 Expl. 2 to S. 28
 Separate treatment S. 73 loss
 Company - Deemed speculation under Expl.
 Stray transactions of non delivery
 Investments of company
 Exception to Explanation

January 26, 2010 Rajesh


SPECULATION BUSINESS-II

 Explanation applies to losses as also profits


 Units and other securities
 Shares of one company
 Delivery-only business
 No business-only diminution in value
 IPO acquisitions
 Tax Audit

January 26, 2010 Rajesh


THANK YOU

January 26, 2010 Rajesh