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TAXATION OF SHARES AND SECURITIES CA. Nihar Jambusaria. Dividend & Interest Income Provisions to Prevent Possible Tax Avoidance Capital Gains Business Income including Speculation Income Issues Related to Stock Brokers. DIVIDEND AND INTEREST INCOME. Dividend exempt u/s. 10(34) :
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(b) such person sells or transfers –
(c) the dividend income on such securities or unit received or receivable by such person is exempt,
then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax.
S. 94(7) cannot be applied from retrospective effect.
Wallfort Shares & Stock Brokers Pvt. Ltd. v. ITO & Ors. 96 ITD 1 (Mum.) (TM).
(a) any person buys or acquires any units within a period of three months prior to the record date;
(b) such person is allotted additional units without any payment on the basis of holding of such units on such date;
(c ) such person sells or transfers all or any of the units referred to in clause (a) within a period of nine months after such date, while continuing to hold all or any of the additional units referred to in clause (b),
then, the loss, if any, arising to him on account of such purchase and sale of all or any of such units shall be ignored for the purposes of computing his income chargeable to tax and notwithstanding anything contained in any other provision of this Act, the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such additional units referred to in clause (b) as are held by him on the date of such sale or transfer.
(a) On listed securities transferred after 30.09.2004 on which S.T.T. is paid - Taxable at 10%, 15% w.e.f. A. Y. 2009-10.
(b) On any other security transferred after 30.09.2004 - Taxable at normal rate.
(a) On eligible equity shares purchased on or after 01.03.03 and before 01.03.04 exempt u/s. 10(36).
(b) On equity shares or units of an equity oriented fund arising after 30.09.04 on which S.T.T. is paid – exempt u/s. 10(38).CAPITAL GAINS
Consider the decisions –
(2) Number of transactions
(3) Relation with other activities
(4) Source of investment
(5) Resources employed
(1) Interest on borrowed capital
(2) Brokerage, service tax, stamp duty
(3) Penalties, bad delivery charges, auction charges
(4) Demat account charges
(5) Portfolio Management & advisory fees
Tax Treatment of Deep Discount Bonds:
Consider circular No. 2 of 2002 dated 15.02.2002
Shanti Chandran 241 ITR 371 (Mad.)
2. Opening stock of a new firm constituted by some partners of dissolved firm should be valued at market price.
V. S. Chandraprakasa Nadar & Co. v. CIT 244 ITR 298 (Mad.)
3. Bad investments written off would not give rise to capital loss.
R.C. Mudliar 240 ITR 552 (Mad.)
Nirvan Holding Pvt. Ltd. BCA-399 JULY 2003, SMC, MUM Sun Dist. & Mining Co. 68 Taxman 223.
Mumbai High Court held in Prasad Agents Pvt. Ltd. V. ITO [2009 TIOL-164-HC-MUM] that share valuation loss is covered by Explanation to S.73.
5. Where shares / securities are acquired by any mode u/s. 49(1), indexation shall be allowed from the P. Y. of aquisition of the previous owner.
6. Indexation is allowable on L.T.C.G. on transfer of MEP’91 and MEP’92 – refer S. 45(6).
K. B. Shah 77 TTJ 30 (Mum.)
7. Transfer of investments is not hit by Explanation to S. 73.
Mysore Rolling Mills Pvt. Ltd. 195 ITR 405 (Kar.)
A transaction which is not periodically or ultimately settled by delivery or transfer of the contracted goods is a ‘speculative transaction’ as defined by S. 43(5) of the Income-tax Act.
No exception is made in that section for shares and stocks – in fact, s. 43(5) specifically includes stocks and shares, and hence the provisions of S. 43(5) equally apply to dealing in shares and stocks. Under the normal understanding, a speculative transaction is one where there is no intention to take or give delivery.
However, under the income-tax law, the intention of the purchaser or seller to take or give delivery of the shares is immaterial for determining a speculative transaction. What is material is whether delivery or transfer has
actually taken place or not.
Explanation 2 to s.28 reads as under :
‘Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as “speculation business”) shall be deemed to be distinct and separate from any other business’.
S. 43(5) provides for certain exceptions. The following transactions concerning share and stocks are not construed as speculative transactions by virtue of the proviso to S. 43(5) :
(1) Applicability to shares held as investments-
(2) Share broking-Whether business of purchase & sale of shares?
(3) Applicability to securities other than shares
(4) Loss due to stock valuation not regarded as speculation loss
(5) Whether the Expln. Applies to arbitrage, hedging,etc. excluded from the meaning of speculation u/s.43(5)?
(6) Settlement for breach of contract is not a speculative transaction.
(a) Before the introduction of S. 14A-
(b) After introduction of S. 14A-
Direct Expenditure plus
(1) Share & Stock Broker-
Dividend Income: Rs. 12,50,000/-
Expenditure in relation to dividend income: Rs. 15,000/-
(2) Civil Contractor
(3) A co acquired investments out of its own funds in 2000- Cost Rs.5 Crores.
(4) A trader in shares has a profit of Rs. 15,00,000 from share trading and Rs. 1,50,000 from dividend.
Distinction between shares held as stock-in-trade and shares held as investment - tests for such a distinction
4. The Central Board of Direct Taxes (CBDT) through Instruction No.1827 dated August 31, 1989 had brought to the notice of the assessing officers that there is a distinction between shares held as investment (capital asset) and shares held as stock-in-trade (trading asset). In the light of a number of judicial decisions pronounced after the issue of the above instructions, it is proposed to update the above instructions for the information of assessees as well as for guidance of the assessing officers.
5. In the case of Commissioner of Income Tax (Central), Calcutta Vs Associated Industrial Development Company (P) Ltd (82 ITR 586), the Supreme Court observed that:
6. In the case of Commissioner of Income Tax, Bombay Vs H. Holck Larsen (160 ITR 67), the Supreme Court observed:
7. The principles laid down by the Supreme Court in the above two cases afford adequate guidance to the assessing officers.
8. The Authority for Advance Rulings (AAR) (288 ITR 641), referring to the decisions of the Supreme Court in several cases, has culled out the following principles :-
9. Dealing with the above three principles, the AAR has observed in the case of Fidelity group as under:-
10. CBDT also wishes to emphasise that it is possible for a tax payer 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 which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads i.e., capital gains as well as business income.
11. Assessing officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment (and therefore giving rise to capital gains) or as stock-in-trade (and therefore giving rise to business profits). The assessing officers are further advised that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade.
12. These instructions shall supplement the earlier Instruction no. 1827 dated August 31, 1989.
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