taxation of shares & securities -current … · -current developments (including derivatives...

Pradip N. Kapasi Chartered Accountant

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TAXATION OF SHARES & SECURITIES

-CURRENT DEVELOPMENTS(including derivatives

characterisation of income & speculation income)

Wednesday , 18th July, 2007BCAS

Walcand Hirachand hall, IMC, Mumbai


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CharacterisationHeads of Income

Business IncomeCapital gainsOther sources

Business HeadRegularSpeculationDeemed Speculation

Capital gainsShort termLong term


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Business or Capital GainsA billion $ questionGuidelines

Instruction 1827 dt. 31.08.1989Draft – F.No. 149/287/2005 –TPL dt. 16.05.2007Cir. No. 4/2007 dt.16.06.2007

FM’s observationsFICCI’s suggestionPMS proposalRecent judicial views –VCFR factor

Deepaben A. Shah, 99 ITD 219 (Ahd)Janak S. Rangwala, 11SOT 627(Mum)G.E. Pension Trust, 200 CTR 121 (AAR)Fidelity Northstar Fund, 288 ITR 641(AAR) Revashankar A. Kothari, 283 ITR 338 (Guj)


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Business or Capital Gains IIDesired parameters

Intention - Period of holdingFrequency - Fund utilisedTime devoted - Set-upListing - PMSVolume - Scale Alt. occupation - Bank accountSales/ Purchase - Post UtilisationTreatment in books - Statutory requirementsMOA/AOA - Avg. holding periodGroup companies - PromotersNo. of script - Genuineness

Applicability of s. 45(2)


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Circular No. 4 of 2007Up dation-supplementaryStock in trade or Capital assetTreatment in booksPossible to trade offVolumeRatio of purchase to salesMotive- profit or dividendMOA/AOA not conclusiveCumulative tests Relevance of decisions


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Asso.Ind. Deve.Co.Stock and InvestmentDomain of the assesseeDistinction by assesseeEvidence –failure by assesseeITAT fact finding authority82 ITR 586(SC)


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Holck LarsenMixed question of law and factsCourts to adjudicate Use of borrowed fundsUse of sale proceeds160 ITR 67(SC)


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Fidelity Northstar) Evidence to support holding Substantial nature of transactionsStatutory regulationsMagnitude not the only factorTreatment in books of accountDividend or profit288 ITR 541(AAR)


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Investment v. StockWhich is beneficial

Allowance of expenses . ConcessionsApplication of s. 14ASet-off of lossesCredit for STTC/f of losses

Trade-offRamnarain & Sons, 41 ITR 534(SC)N.S.S. Investments, 277 ITR 149(Mad)Mysore Rolling Mills, 195 ITR 404(Karn)Jindal Exports, 287 ITR (AT) 172(Del) Cir. No. 4/2007 dt. 16.06.2007

Conversion Re - last option


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Deepak Parekh CommitteeSTT and unlisted sharesDDT exemptionSPAC- genuine concerns


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S.14A Disallowance Applicability of s. 14A

Harish Bhatt, 85 TTJ 872 (Ahd.)Mafatlal Holdings Ltd., 85 TTJ 821 (Mum)

SituationsDirectly attributable - Common expensesPast borrowings - NexusNo expenses - No DividendAd hoc - Past allowance

Power to make rules – QuantificationDhanlaxmi Bank, 12 SOT 625(Coch.)

Development of case lawConsensus for disallowanceRajashthan Warehousing Corpn., 242 ITR 450(SC)Escorts Ltd., 102 TTJ 522 (Del)Maruti Udyog Ltd., 95 TTJ 778 (Del)Eicher Motors Ltd., 101 TTJ 369 (Del)Ever Plus Securities, 102 TTJ 120 (Del)Citicorp, 12 SOT 246(Mum.)Jubiliant Empro, 12 SOT 196(Del.)


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S. 14A and LossesTaxable capital assetTransfer Provision for ‘income’ exclusionS. 70 and 71

S.S.Thiyagrajan, 129 ITR 115 (Mad) Royal Turf Club Ltd., 144 ITR 709 (Cal) Navin Bharat Ind., 92 TTJ 1166 (Bom)(TM)


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Cost, Delivery & Set-off Part of cost

Mithilesh Kumari, 92 ITR 9 (Del)Maithreyi Pai, 152 ITR 247 (Karn)K. S. Gupta, 119 ITR 372 (AP)B. Subhadra, 92 TTJ 405 (Hyd)

Consideration in kindCost of sharesHeinrich de Fries GMBH, 98 ITD 292(Mum)

Delivery – s. 43(5)Broker’s pool- Smt. Jayashree Ray Choudhary, 93 TTJ 714 (Kol)Broker- Ramesh Gupta,159 Taxman 41(Chd.)

Right of set-off of lossSTCG against LTCGMontgomerry Emerging Mutual Funds, 100 ITD 217 (Mum)(SB)Cir. No.23 dated 7.07.1955


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Derivatives Speculative Transaction – S.43(5) –A.Y. 2005-06S.2(h) of SCRAShares & Stocks

S. 2(46) of Companies ActCommodity

Nirmal Trading Co. 82 ITR 382 (Cal)Compound Financials, 67 ITD 304 (Bang.)ANZ Grindlays Bank, 88 ITD 53 (Del)

Actual Delivery- Lex non cogit ad impossibiliaDifficulties in applying Exceptions Explanation to S.73

Apollo Tyres, 255 ITR 273 (SC)


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Derivatives - Recent amendmentsAmendment in s. 43(5)(d). FA, 2005Notification dated 25.01.2006Effect of amendment

On b/f lossesOn set-off during the yearOn Expl. to s. 73 for companiesOn loss of other derivatives

Effect of NotificationOn losses and profits up to the date of NotificationOn commodities derivativesRelating back


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ArbitrageNature of activityObjectivesIncome

Business -Capital Gains – Other sourcesOmega Securities & Tdg. 39-B, BCAJ 538

Speculative transactionsDelivery - Hedging

LossesS. 43(5) - Explanation to s. 73

ExpensesCredit for STTTax Audit


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Day TradingNature of operations- Business Expl.2 to s.28

Volume , FrequencyDeliverySTTAudit


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Portfolio ManagementTypes of arrangements

ParticipatingNon participating

Nature of feesAdvisory & ManagementBrokerage

Relationship & TreatmentProposal under considerationDeductibility of expenses

BusinessCapital gains


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Mutual fundsDividend Stripping

S. 94(7) -FA, 2001 – A.Y. 2002-03Securities and Units –Record dateF(No.2)A, 2004 – 9mths for UnitsRelevance for Colourable devise

Position up to A.Y. 2001-02Walfort Shares, 96 ITD 1 (SB)Not the last word

Bonus StrippingShares & Units

Units- S.94(8) – A.Y. 2005-06Bonus units - Ignore LossLoading of COA on bal. UnitsAll soldMisconceived amendment


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Deemed Speculation Relevance of legislative intent

AMP Spg. & Wvg. Mills (P) Ltd., 101 TTJ 1113 (Ahd.)(SB)

Valuation loss/ No purchaseNirvan , 35 BCAJ 399(Mum), Pioneer, 108TTJ838(Mum) Paharpur Cooling , 85 ITD 745(Kol), Yucca, 103 TTJ 180(Mum)Sun Distributors, 68 Taxman 223 (Cal), IIT Inv. 106 TTJ 1037(Mum)Jubiliant Empro,12 SOT 194(Del.)

IPO dealsAMP Spg. & Wvg. Mills’s case

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

Badla Bill discountingTanna Electronics, 7 SOT 121(Mum)Omega Securities, 39-B BCAJ 539(Mum)


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Deemed Speculation - IILoans and Advances company

Venkateshwara Inv., 92 TTJ 1129(Kol) (SB) (Years)Vakharia Fin. Ser. Ltd., 6679/M/2002 dt. 19,01.06-’J’ (Funds)Fortress Fin. Ser. Ltd. 4185/M/2001 dt. 23.09.05- ‘H’ (Income - years)Concord Commercial Co. Ltd., 94 TJ 913 (Mum)(SB)Omega Sec.&Tdg., 39-B, BCAJ 538(Bill discounting & badla)

Negative GTI/Business incomeAssociated Capital Markets, 1103/M/2001 dt. 31.3.2003 Yucca Finvest,103 TTJ 180(Mum)IIT Inv. Ltd., 106 TTJ 1037(Mum), & Kalindi,292(Pune)

Loss & ProfitSamba trading & Inv. Co., 58 ITD 360(Mum)Sucham Fin, 107 TTJ 315(Mum), Chik Mik,39-D, BCAJ 31(Del.)


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Stock BrokerBusiness Expenditures

Nesel Holdings, 200 CTR 7 (Del)Peerless, 94 ITD 89(Kol)(SB)

SEBI TO fees and s. 43BSureshchand Jain, 102 TTJ 970 (Mum)

Loss for constituent – Expl. to s. 73Parkar Securities Ltd., 102 TTJ 235 (Ahd.)

Demutualisation – s. 47(xiiia), s.55(2)(ab), s. 2(42A), Expl. (ha)

Applicability of Explanation to s. 73GDB Shares & Stock, 88 TTJ 352(Kol.)SRJ Securities Ltd. 81 TTJ 484(Del.)


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Investments AbroadPeriod of holding

Shares . Securities . UnitsAmalgamation . Demerger

Cost of AcquisitionRestructuring

Taxable dividendGross or Net

Computation of capital gainsTaxable gainsTax credit

DTAA . S.90, 90A and 91


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Few for the RoadSale of penny shares

Somnath Malini, 100 TTJ 917(Chd.)Kameshwari Finance,102 TTJ 461(Del.)

Investment write-offIFCI Ltd. 101 TTJ 910(Del.)

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

Right entitlementNavin Jindal, 202 CTR 86(P&H)

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

Sale of pledged sharesGlad Investments (P) Ltd., 8 SOT 612 (Del.)

Conversion into stock14 SOT 55(Del.)

Benefit of proviso to s. 112 for Non residentBASF Aktiengesellschaft, 12 SOT 451(Mum).


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THANK YOU

taxation of shares & securities -current … · -current developments (including derivatives...

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