3.08.2011 bcas shares & securities...taxation oftaxation of shares & securities-current...

TAXATION OFTAXATION OF SHARES & SECURITIES

-CURRENT DEVELOPMENTS

W d d 03 d A t 2011Wednesday, 03rd August, 2011

Bombay Chartered Accountants Society Walchand Hirachand Hall

IMCPradip N. Kapasi

Chartered Accountant 1

a.

DERIVATIVES Security

C ditCommodityForexForex

Pradip N. Kapasi Chartered Accountant

2

Amendment & NotificationsAmendment & Notifications

• Amendment in s 43(5) FA 2005Amendment in s. 43(5), FA, 2005 • Clause (d) from 01.04.2006

d l i• Deemed Non speculation • Notification dated 25.01.2006 for BSE & NSE• Notification dated 22.05.2009 for MCX SE• Notification dated 25 02 2011 for USENotification dated 25.02. 2011 for USE


3

DerivativesDerivatives• Commodityy

– Nirmal Trading Co., 82 ITR 382 (Cal)– Bharat R. Ruia (H.U.F), 10 Taxman.com 265(Bom)

• Delivery -“lex non congit ad imposibilia”– Bharat R. Ruia (H.U.F), 10 Taxman.com 265(Bom)

• Amendment of 05–prospective w.e.f 01.04.06– Bharat R. Ruia (H.U.F), 10 Taxman.com 265(Bom)


4

Derivatives IIDerivatives II• Effective date of Notification

– A Y 2006-07 onwards for BSE and NSEA.Y. 2006-07 onwards for BSE and NSE• Prem Associates Adv., 6947/M/09 dt. 17.09.2010• Wipra Financial Services, 4605/M/09 dt 30.09.2010

Hi h S D hi 6603/M/2009 d 15 06 2011• Hitesh S. Doshi 6603/M/2009 dt.15.06.2011• G.K. Anand Bros Buildwell, 34 SOT 439 (Delhi)• Claris Life Science 112 ITD 307 (Ahd)( )

– For MCX SE and USE – debatable

• MCX SE Forex Derivatives – S.2(h) and S.2(ac) of SCRA– S.43(5)(d) r.w. Explanation


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Derivatives IIIDerivatives III• Broker and benefit of clause (d)

– Need for ‘Eligible transaction’g– Contextual compliance

• Emerging understanding• Emerging understanding– Security derivative up to A.Y.2005-06, speculative– Other derivatives – speculative– Shares & Stock are commodities– No set-off for non security deri. & Expl. toS.73 losses

• Derivatives and Explanation to S.73– Scope, Apollo Tyres Ltd. 255 ITR 273 (SC)

I t t ff– Inter se set-off– Hedging profit and fiction of Explanation


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Derivatives IVDerivatives IV• Derivatives and hedging g g

– Applicability of clause (a) and (b)– Nifty and Sensex

Non security Derivatives– Non security Derivatives– Dinesh K. Mehta H.U.F., 976/M/2009 dt. 30.04.2010

• Derivative Contract and ‘Capital Asset’

S ff f b b d l f A Y 2005 06• Set-off of unabsorbed losses for A.Y. 2005-06– Gajendra Kumar Agarwal, 1798/Mum/2010 dt.31.05.2011– Possibility of set-off against business IncomePossibility of set off against business Income


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Derivatives VDerivatives V• Valuation of open contract at the year end p y

– Circular 3 of 2010 dt.23.03.2010– Bank of Bahrain & Kuwait 132 TTJ 505 (Mum)SB)

ONGC Ltd 322 ITR 180 (SC)– ONGC Ltd. 322 ITR 180 (SC)

• Treatment of premium and transaction costs• Treatment of premium and transaction costs

• Turnover for Audit


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Derivatives VIDerivatives VI• Forex Forward Contracts and Derivatives

– Independent Allowability

– Roadblocks• Circular 3 of 2010 dt.23.03.2010

NACAS & ICAI• NACAS & ICAI• Intergold(I) ltd., 27 SOT 239 (Mum)• Woodward Governor’s guidelines• Woodward Governor s guidelines• S.43(5)(d) and MCX SE Notification


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Business lossBusiness loss• In the course of business;

– Safeguard against fluctuation– Backed by actual transactions in trade– Trade necessityTrade necessity– Not a dealer in derivatives

• Soorajmull Nagarmull, 129 ITR 169 (Cal)Soorajmull Nagarmull, 129 ITR 169 (Cal)• Badridas Gauridu, 261 ITR 256 (Bom)

B k f B h i & K it (M )(SB)• Bank of Baharain & Kuwait (Mum)(SB)• D. Kishore Kumar & Co., 2 SOT 769 (Mum)• Intergold (I) Ltd., 27 SOT 239 (Mum)


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bb.

Character of Income

Business or InvestmentBusiness or InvestmentArbitrage

D T diDay TradingPortfolio Management


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B siness or Capital GainsBusiness or Capital Gains• A billion $ questionA billion $ question• Guidelines

I t ti 1827 dt 31 08 1989– Instruction 1827 dt. 31.08.1989– Cir. No. 4/2007 dt.15.06.2007


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Desired ParametersDesired Parameters• Intention • Period of holding• Frequency • Fund utilised• Time devoted • Set-up• Listing • PMS• Listing • PMS• Volume • Scale • Alt. occupation • Bank accountp• Sales/ Purchase • Post Utilisation• Treatment in books • Statutory requirements

MOA/AOA A h ldi i d• MOA/AOA • Avg. holding period• Group companies • Promoters• No of script • GenuinenessNo. of script Genuineness


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Significance of Circular of 2007Significance of Circular of 2007

• Up dation-supplementaryUp dation-supplementary• Stock in trade or Capital asset• Treatment in books• Possible to trade off• Volume• R ti f h t l• Ratio of purchase to sales• Motive- profit or dividend• MOA/AOA not conclusiveMOA/AOA not conclusive• Cumulative tests • Relevance of decisions


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Cases relied upon by CBDTCases relied upon by CBDT • Asso.Ind. Deve.Co, 82 ITR 586(SC)Asso.Ind. Deve.Co, 82 ITR 586(SC)

– Stock and Investment * Domain of the assessee * Evidence * ITAT authority

• Holck Larsen 160 ITR 67(SC)– Mixed question of law and facts * Courts to adjudicate – Use of borrowed funds & Use of sale proceeds

• Fidelity Northstar 288 ITR 541(AAR)y ( )– Statutory regulations * Magnitude not the only factor– books of account


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Emerging PrinciplesEmerging Principles

• No single test conclusiveNo single test conclusive– Rule of consistency

• Gopal Purohit, 334 ITR 28 (SC)(st.)Gopal Purohit, 334 ITR 28 (SC)(st.)

• Importance of circular• Period of holdingPeriod of holding• Treatment in books• Use of own funds• Use of own funds• Alternative occupation


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Guiding posts – Irritants & SoothersGuiding posts Irritants & Soothers • Volumes

– Ramesh Babu Rao, 3719/Mum/2009 dt. 13.04.2011

• Frequencyq y– Nehal V. Shah, 2733/Mum/2009 dt. 15.12.2010 – Shantilal M. Jain, 2690/Mum/2010 dt. 27.04.2011

• Split Orders– Shantilal M. Jain, 2690/Mum/2010 dt. 27.04.2011

• Trading – SMK Shares & Stock, 799/Mum/2009 dt. 24.11.2010


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Guiding posts – Irritants & SoothersGuiding posts Irritants & Soothers• Speculation & Day Trading

Gopal Purohit 122 TTJ 87 (Mum )– Gopal Purohit, 122 TTJ 87 (Mum.)– Naishadh V. Vachharajani, 6429/Mum/2009– Shantilal M. Jain, 2690/Mum/2010 dt. 27.04.2011

• Borrowed Funds – SMK Shares & Stock, 799/Mum/2009 dt. 24.11.2010S S a es & Stoc , 799/ u / 009 dt. . . 0 0

• No delivery cases N h l V Sh h 2733/M /2009 dt 15 12 2010– Nehal V. Shah, 2733/Mum/2009 dt. 15.12.2010

• Number of scrips– Nagindas P. Sheth H.U.F.No. 961/Mum/2010 dt. 05.04.2011


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Guiding posts – Irritants & SoothersGuiding posts Irritants & Soothers• Less than 30 days

– Jagadish Master H U F 3233/Mum/09 dt 18 05 2011Jagadish Master H.U.F., 3233/Mum/09 dt. 18.05.2011– Hitesh S. Doshi, 6603/Mum/2009 dt.15.06.2011

• Sales at higher value– Vinod K. Naevatia, 49 DTR 16 (Mum)

• Turnover ratio– Nehal V. Shah, 2733/Mum/2009 dt. 15.12.2010 ,

• No transaction days o s c o d ys– Nehal V. Shah, 2733/Mum/2009 dt. 15.12.2010


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Guiding posts – Irritants & SoothersGuiding posts Irritants & Soothers

• 143(1) assessement143(1) assessement– Nagindas P. Sheth H.U.F, 961/Mum/2010 dt. 05.04.2011– Gopal Purohit, 122 TTJ 87 (Mum)

Hi h S D hi 6603/M /2009 d 15 06 2011– Hitesh S. Doshi, 6603/Mum/2009 dt.15.06.2011

• IPO cases– Shantilal M. Jain, 2690/Mum/2010 dt. 27.04.2011

• LTCG accepted• LTCG accepted – Vinod K. Naevatia, 49 DTR 16 (Mum)– SMK Shares & Stock, 799/Mum/2009


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Guiding posts – Irritants & SoothersGuiding posts Irritants & Soothers• Dissenting views consideredg

– SMK Shares & stock, 799/Mum/2009 – Hitesh S. Doshi 6603/Mum/2009 dt.15.06.2011

• Intention and books of Account– Kunverji N. Kenia, 131 TTJ 87 (Mum)

• Regular Shuffling– Hitesh S. Doshi, 6603/Mum/2009 dt.15.06.2011

• Profit Motive– Hitesh S. Doshi, 6603/Mum/2009 dt.15.06.2011– Gopal Purohit 122 TTJ 87 (Mum)– Gopal Purohit, 122 TTJ 87 (Mum)


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Guiding posts - Irritants & SoothersGuiding posts Irritants & Soothers• Sale on same dayy

– Hitesh S. Doshi, 6603/Mum/2009 dt.15.06.2011

• Dissenting decisions– Deepaben A. Shah, 99 ITD 219(Ahd)– Harsha N. Mehta, 43 SOT 332(Mum)– Jayshree Pradip Shah, 51 DTR 344 (Mum)– Rakesh J. Sanghvi, 4607/Mum/08 dt.31.08.2010– Sadhana Naberia , 41 DTR 393 (Mum)– Sughamchandra Shah, 37 DTR 3 (Ahd)– Synthetic Fibers Trading, 3022/Mum/09 dt.29.09.09– Smt.Rekha Khandelwal, 785/Mum/09 dt.17.03.10– Shailesh L. Shah – H.U.F., 3991/Mum/2008 dt.13.01.10


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Arbitrage & Day TradingArbitrage & Day Trading • Arbitrage

– Nature of activity - Objectives– Char. of Income , Omega Sec. & Tdg. 39-B, BCAJ 538– Speculative transactions - Delivery - Hedgingp y g g– Losses - S. 43(5) - Explanation to s. 73– Expenses - Credit for STT - Tax Audit– Sharing - TDS DeductibilitySharing TDS Deductibility

• Day trading– Nature of operations- Business Expl.2 to s.28– Volume , Frequency– Delivery – STT - Audit


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PMS - IPMS I• Arrangements g

– Participating & Non participating– Sharing & Non sharing

• Nature of fees – Advisory & Management – Brokerage– Termination

• Relationship & Treatment– Investment or Business

Deductibility of expenses– Deductibility of expenses


24

PMS - IIPMS II• Connotation Of Investment

– No presumption of business– Smt. Radha Birju Patel, 46 SOT 23 (Mum)(URO)– ARA Trading & Investment P.Ltd 499/PN/08 dt 31.03.09g

• Expenses deductibility– Fees for unsold sharesFees for unsold shares – Return based fees– Termination fees – Maintenance feesMaintenance fees– Year of deduction– KRA Holding & Trading (P)Ltd., 46 SOT 19(Pune)– Devendra Motilal Kothari 136 TTJ 188(Mum)Devendra Motilal Kothari, 136 TTJ 188(Mum)– Alternatively, COA


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c.Best of the Rest

Conversion form stockPromoters shares & Controlling interestPromoters shares & Controlling interest

Stock Lending programmeCOA and interestCOA and interest

Explanation to s. 73Overseas InvestmentOverseas Investment

Units Swaps or SwitchesDi t T C d 2010Direct Tax Code, 2010


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Conversion from stockConversion from stock• S.45(2) inapplicable

• Whether transfer – Kikabhai Premchand, 24 ITR 506(SC)– Sharkey vs Wernher 29 ITR 962 (HL)Sharkey vs.Wernher, 29 ITR 962 (HL)– Shirinbai Kooka,46 ITR 86(SC)– Dhanuka & Sons, 124 ITR 24 (Cal)

• COA, POH and Indexation for capital asset – B.K.A.V. Birla, 36 ITD 136 (Cal)

Kalyani Exports 78 ITD 95 (Pune)– Kalyani Exports, 78 ITD 95 (Pune)– Jhanvi Invst. Ltd., 215 CTR 72 (Bom)– Brightstar, 120 TTJ 498 (Mum)DTR 246(Chennai)

Lohia Metals (P)Ltd 40– Lohia Metals (P)Ltd. 40– Splendid Construction, 122 TTJ 534 (Delhi)


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Sale of promoters sharesSale of promoters shares

• Private deal – SPAPrivate deal SPA• Difficulty for s. 10(38) exemption

– Stock exchange STT– Stock exchange – STT– Bulk window & Block deal mechanism– SEBI circular, MRD/SE-7 dt. 14.01.2004,– Guidelines– Facilitates bulk transfer– Operations & Mechanism

• Possible tax implications


28

Cost of controlling interest Cost o co t o g te est

• Part of cost of shares – Maharni Usha Devi, 131 ITR 445 (MP) – Venkatesh (Minor), 243 ITR 367 (Mad)

• Cost of controlling interest– Raghveer Narain Singh, 147 ITR 447 (Pat)

A h k B h i L l (HUF) 99 TTJ 513 (D l)– Ashok Behri Lal (HUF), 99 TTJ 513 (Del)

• Power through holding-inseparableg g p


29

Stock Lending

• Objective and utilitySLS 1997 * ALBM BLESS ‘B dl ’• SLS, 1997 * ALBM, BLESS, ‘Badla’

• SEBI’s restriction – Intermediaries• Tax Implications• Tax Implications

– Circular No. 751 dated 10th February, 1997– Section 47(xv) & 45 (2A)

A li bili b– Applicability to borrower– SLP offshoots & difficulties– Corporate Benefits taxation– STT credits– Mukesh D. Ambani, 7604/Mum/07 dt. 10.11.2010– Phoolchand & Sons,46 SOT 83(Mum)– Reliance Communications infra. 34 SOT 241(Mum.)


30

Cost Interest and s. 14A Cost te est a d s.• Interest as part of cost

S B l 120 ITD 469(P )– S. Balan, 120 ITD 469(Pune)– Hariram Hotels P. Ltd. 34 DTR 162(Karn.)– K. S. Gupta, 119 ITR 372 (AP) – 18 SOT 130 (Mum) 12 SOT 324(Mum)– 18 SOT 130 (Mum), 12 SOT 324(Mum),

• IPO borrowings• Neera Jain 42 A BCAJ 347(M m)• Neera Jain, 42-A BCAJ, 347(Mum)

• Applicability of S. 14A to cost


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Deemed Speculation -IDeemed Speculation I • Valuation loss/ No purchasep

– Nirvan , 35 BCAJ 399(Mum), Paharpur Cooling , 85 ITD 745(Kol),– Krishmalaxmi Multitraders, 42B BCAJ 493

• IPO dealsIPO deals– AMP Spg. & Wvg. Mills’s case, 101 TTJ 1113 (Ahd)(SB)

• Set-off of dividend against deemed lossesTorrent Fin 108 TTJ615(Ahd ) Excellent Comm 282 ITR 426(Del )– Torrent Fin., 108 TTJ615(Ahd.), - Excellent Comm.,282 ITR 426(Del.)

• Badla Bill discounting– Tanna Electronics, 7 SOT 121(Mum),Omega Sec, 39-B BCAJ 539(Mum)

• Loans and Advances company– Years – Funds - Income – years - discounting & badla. – Gujarat Credit,116 TTJ 619 (Ahd) (SB)

• Negative GTI/Business income– Associated Cap, 1103/M/2001,103 TTJ 180(Mum) IIT Inv. Ltd., 106 TTJ 1037(Mum), Pradip N. Kapasi


Deemed Speculation -IIDeemed Speculation II • Loss & Profit

– Samba Trading& Investment, 58 TTJ 360(Mum)• Application to a Broker

– Priyasha Mever Finance P Ltd 5 ITR 441 (Mum)(Trib )Priyasha Mever Finance P.Ltd., 5 ITR 441 (Mum)(Trib.)• Relevance of legislative intent

– AMP Spg. & Wvg. Mills (P) Ltd., 101 TTJ 1113 (Ahd.)(SB)• Excl. of speculation loss for deciding applicability

– Paramount Info. Systems P.Ltd. 42-A BCAJ 169(Mum), • Set off of Explanation loss and amendment of 2006• Set-off of Explanation loss and amendment of 2006

– Virendrakumar Jain, 42-A BCAJ, 169(Mum.)


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Overseas InvestmentsOverseas Investments• Period of holding

– Shares . Securities . UnitsShares . Securities . Units– Amalgamation . Demerger

• Cost of Acquisitionq– Restructuring

• Taxable dividend– Gross or Net

• Computation of capital gainsp p g• Taxable gains• Tax credit

– DTAA . S.90, 90A and 91Pradip N. Kapasi


Units SwapsUnits Swaps

• Switch from one scheme to anotherSwitch from one scheme to another

• One fund to another fundOne fund to another fund– Transfer or not – Period of holding and cost of newly switched unit g y– Indexation– Explanation (d) to S.2(42A)

35Pradip N. Kapasi Chartered Accountant

Direct Tax CodeDirect Tax Code

• Draft, Revised paper and codeDraft, Revised paper and code• Status quo for Capital Gains on Shares & Securities• Period of holding for 100% deduction – S 51(2)Period of holding for 100% deduction S.51(2)• Treatment for ‘LT Capital Losses’• FIFO specified for beneficial interest S 49(2)• FIFO specified for beneficial interest – S.49(2)• Preference Shares – S.314(19b)• N i i f d t i ti f i d f h ldi• No provision for determination of period of holding

36Pradip N. Kapasi Chartered Accountant

Few for the Road • Non Resident and benefit of Indexation

– Adv. Advances, 39DTR297(Mum.)

• Cost of asset acquired on liquidation– R. Srinivasan, 36 SOT 312(Chenanai)

• Forfeiture of Convertible Debenture• Forfeiture of Convertible Debenture– Chand Ratan Bagri, 36 DTR 244(Delhi)

• DOA of shares under ESOP,– Dr. Dhrujati Gupta, 33 DTR 287(Hyd.)

• Right shares and Entitlements– 320ITR708(SC), 236 CTR 160(Karn.)( ), ( )

• Sale of pledged shares – Glad Investments (P) Ltd., 8 SOT 612 (Del.)


37

Few for the RoadFew for the Road• Benefit proviso s.112 for NR

– 12 SOT 451(Mum), 112 TTJ 328 (Mum) AAR 763

• Int. on borrowings– 18 SOT 130 (Mum), 12 SOT 324(Mum), 92 TTJ 405 (Hyd).

• Consideration in kindConsideration in kind – Heinrich de Fries GMBH, 98 ITD 292(Mum)

• Delivery - s. 43(5) Broker’s pool93 TTJ 714 (K l) B k 159 T 41– 93 TTJ 714 (Kol) Broker-,159 Taxman 41

• Right of set-off of loss Montgomerry– 100 ITD 217 (SB) Cir.23 dt. 7.07.1955

• Group co. shares at cost– 22 SOT 174 (Mum)


38

Few for the RoadFew for the Road• S.43(5) not applicable to Investor,

– 20 SOT 171 (Mum)

• Transfer during LIP– Kameshwari Finance, 109 ITD 173 (Del)

• Sale of penny shares S’nath Malini– 100 TTJ 917(Chd) , KFin,102 TTJ 461(Del.)

I i ff• Investment write-off – IFCI Ltd. 101 TTJ 910(Del.)

• Year of transferYear of transfer – Rajiv A. Shah, 12 SOT 84(Mum)

• Gift with option to revokeJayakumar B Patil 290 ITR (AT) 163(Pune)– Jayakumar B. Patil, 290 ITR (AT) 163(Pune)


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THANK YOUTHANK YOU


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3.08.2011 bcas shares & securities...taxation oftaxation of shares & securities-current...

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