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TAXATIONOFSHARES

AND SECURITIES
ANDSECURITIES
ISSUESANDCONTROVERSIES
CA.DeepakM.Rindani
PresentationatTaxConvention,Ahmedabad
Dec.20,2013

Introduction
Securities an integral part of finance World
Stocks and Debt markets and Exchanges
Commodities markets and Exchanges
Emerging
g g Securities p
products

Features Impacting Tax Issues I


FeaturesImpactingTaxIssues
Legal
Legal&Regulatoryframework
& Regulatory framework
SEBI
Securities Contracts Regulation Act
SecuritiesContractsRegulationAct
ForwardContractsRegulationAct
RoleofExchanges
Electronictradingplatforms
Emergingsecuritiesproducts

Tax Issues II
TaxIssues
Never
Neversaydie
say dieissues
issues
CharacterofIncome(Businessvs.CapitalGains)
Transfer
Holdingperiod
CostofAcquisition
C t f A i iti

EmergingIssues
Derivatives
Markedtomarket

Tax Concept Of Securities I


TaxConceptOfSecurities
Securities not directlyy defined in Sec. 2
Indirectlyy defined in definition of shortterm capital
p
asset Sec. 2(42A) Explanation 2
Sec.43(5)definition of speculative transaction refers
to any commodity including stocks and shares
Sec. 94(8) Explanation (b) defines securities as
including stocks
stocks and shares
shares

Tax Concept Of Securities II


TaxConceptOfSecurities
Sec
Sec. 94(8) Explanation (d) defines unit
unit as in
Sec. 115AB
Sec. 115AB Explanation (b) Unit means unit
of a mutual fund
Sec. 43(5) Commodity Derivatives defined
as in Forward Markets (Regulation) Act, 1952

Sec.2(h)OfSecuritiesContracts
(R l ti ) A t 1956
(Regulation)Act,1956
Securityy shall include :
Shares, scripts, stocks, bonds, debentures, debenture
stock or other marketable securities of a like nature in
or off any incorporated
i
t d company or other
th
b d
body
corporate
Derivative
Units or any other instrument issued by any collective
investment scheme to the investors in such schemes
Security receipt
Government securities
Rights
Ri ht or interest
i t
t in
i securities
iti

Derivatives
Th
There are two broad
b d kinds
ki d off instruments
i
i financial
in
fi
i l market
k :
1. Derivatives
2 Fundamentals
2.

Fundamental instruments are stocks, bonds, etc.


Whil derivatives
While
d i i
are futures,
f
f
forwards,
d options,
i
swaps
etc.
Derivatives are financial instruments which derive their
value from underlying security
The underlying security may be shares, bonds, interest
on loans,
l
commodity
d etc.

Types of Derivative Contracts


TypesofDerivativeContracts
Future Contract

They are contracts for which the price is


determined today for the future
transaction of exchange of asset

Option Contract

The owner of the option has the option


to enter the contract at the price
determined on or before the date of
transaction

Swap Contract

Two parties agrees to exchange the cash


flows in future under a contract

Forward Contract

They are future contracts but more in a


standardised form.

Derivatives DefinedforIncometax
Act
Section43(5)

Commodities

Section43(5)(d)
( )( )

Trading inDerivatives

Section 2(ac)

SCRA, 1956

Section43(5)(d)

Eligible Transaction

Section 43(5)(e)
Section43(5)(e)

Commodity
Commodity Derivatives
Derivatives

Derivatives Defined
Derivatives
Defined
Derivatives defined :
As per Section 2(ac) of SCRA, 1956
Includes :
A security derived from a debt instrument, share, loan, risk
instrument or contract for differences or any other form of
securities;
A contract which derives its value from the prices,
prices or index
of prices, of underlying securities

Trading on Notified Exchanges


TradingonNotifiedExchanges
Notified for section 43(5) :
Notifiedforsection43(5):
StockExchange

Date

RecognizedStockExchange
i d
k
h
Sec.2(f)ofSCRA,1956
(f) f
BSE,NSE

25012006

MCXStockExchange

22052009

USE

25022011

RecognizedAssociation Sec.2ofFCRA
Multi CommoditiesExchange
Multi
Commodities Exchange

29112013
29
11 2013

NCDEX

27112013

Trading in derivatives u/s 43(5)(d)


Tradinginderivativesu/s43(5)(d)
UptoA.Y.05
Up to A. Y. 0506
06
Speculative
A.Y.0607onwards

Nonspeculative
(provided exchange is notified)
(providedexchangeisnotified)
ACITvs.ArnavAkshayMehta(2012)53SOT581
(Mum.)
CITvs.BharatR.Ruia(HUF)337ITR452(Bom.)
Exchangenotnotified
Speculative
Rules/notifications are subordinate legislation
Rules/notificationsaresubordinatelegislation
(2012)16ITR(Trib)418(Chd)

MCX SXvs.Multicommodities
Exchange
MCX Stock Exchange Ltd. is notified u/s 43(5)(d) vide
Notification No. 46 dt. 22.05.2009 (www.mcxsx.com) for
currency derivatives
d i ti
Multi Commodity Exchange of India Ltd.
Ltd (www.mcxindia.com)
(www mcxindia com)
set up in 2003 for commodity futures
Prakash Chand Jain 142 ITD 441 (2013) (Chd.) :
Treats MCX as notified for commodity trading

LossinDerivativesTradinginCommodities
OnMultiCommoditiesExchange
l
d
h
Definition of commodity derivatives inserted from 0104
2014 (A.Y. 201415) FY 201314
Exchangenotifiedon27112013
Nature of loss/profit on past transactions carried out up to
A.Y. 201314 ?

Set Off of past speculative loss


SetOffofpastspeculativeloss
Loss in commodity derivatives incurred prior
to notifications u/s 43(5) can it be set off
against profit in later years?
GajendrakumarAgarwal63DTR345(Mumbai)
(2012)
Devendraexport(P)Ltd.Vs.ACIT54SOT220
( e a)
(Chennai)

Derivatives Eligible
Derivatives
EligibleTransaction
Transaction
Conditions stipulated in definition to what
extent mandatory?
Procedural irregularities should be ignored
and
d substance
b
b seen
be
(such as absence of details in brokers bills like
stamp, time etc.)
Vibha Goel (2012) 16 ITR (Trib) 418 (Chd)

Derivative Transactions
DerivativeTransactions
Can they give rise to capital gain/loss and not
necessarily business income/loss?
Ordinarily, NO
Deputy Commissioner of Income Tax vs. Nobel
Enclave (P) Ltd. 50 SOT 05 (Kol) (2012)

NatureOfIncome ImportanceOf
Delivery
l
Delivery based transactions to be ordinarily treated as
ggivingg rise to capital
p ggains

Narendra Gehlaut vs Joint Commissioner of Income Tax


(2012) 52 SOT 255 (Delhi)

Derivatives opencontracts marked


tomarket
k
Effect of revaluation of open
p contracts
Additional liability on balance sheet date allowable?
Oil & Natural Gas Corporation Ltd. vs C.I.T. (2010) 322 ITR 180
(SC) loss on forex rate fluctuation held allowable u/s 37(1)
though liability actually not discharged
Cir. No. 3 dt 23032010 on fforex derivatives is contraryy
While AS 30 permits, draft TAS does not treat gain/loss as
chargeable allowable unless contract is closed/settled

Issue:Derivativesasnonspeculative
possiblenow?
bl
Although
Althoughassesseeentersinto
assessee enters into eligible
eligibletransaction
transaction
ofderivativesu/s43(5)(d)or(e),canheclaimitsgain
asspeculativebyhischoice?
[Impact suchgainbeusedtoadjustother
speculativelosssuchasindaytradingofshares]
Provisionof(d)or(e)ismandatoryoronlyenabling?
Canonereverttopre2006situationbychoice?

Hedging and Derivatives


HedgingandDerivatives
Can section 43(5) (b) be invoked even in
derivative transactions?
YesandNo ACITvs.DineshK.Mehta 39SOT
488(Mumbai)
someguidingfactorsgivenregardingclaimfor
hedging
Claimtobeexaminedwithevidence,totalvolume,
stock held etc
stockheldetc.

ExplanationtoSec.73 deemed
speculationbusiness
l
b
Appliestospecifiedcompanies
Applies to specified companies only
businessofpurchaseandsaleofshares
b i
f
h
d l f h

Suchpartofbusinessdeemedtobe
p
;
speculativeinnature;thusitslossescanbeset
offagainstspeculativeprofitsonly

Deemedspeculation IssuesinExpl.
toSec.73
Business
Businessofbothbrokinginsharesanddealing
of both broking in shares and dealing
Expl.appliestodealingpart81TTJ484 broking
anddealinginsharescannotbeconsideredtogether
toavoidmischiefofExpl.96TTJ201
Appliestoallkindsofsecurities? NO.Appliesto
sharesonly;nottoUnits(ApolloTyres255ITR273
SC)
Lossduetovaluationofclosingstockofcompany
d
l
f l
k f
Expl.applies 226CTR13(Bom)

SpeculativeTransaction
Sec.43(5)
Speculative transaction defined as purchase or sale of any
commodity, including stocks & shares, periodically or
ultimately
lti t l settled
ttl d otherwise
th
i than
th by
b the
th actual
t l delivery
d li
or
transfer

SpeculativeTransactions
vs.
SpeculativeBusiness
CIT vs. Bhikamchand Jankilal (1981) 131 ITR 554 (MP) :
It was held that a speculative transaction would amount to a speculation
business, if it fulfills the definition of business u/s 2(13) of the Income
Tax Act,, 1961.
CIT vs. Gangaprasad Birla (HUF) (1993) 199 ITR 173 (Cal) :
It was held that the object of explanation 2 to Section 28 is merely to
declare that speculation business is to be treated as distinct and
separate from any other business.

SpeculativeTransactions
vs.
SpeculativeBusiness

NarainSwadeshiWeavingMillsvs.Com.ofEPT(1954)26ITR765
( )
(SC):
Itwasheldthatthetermbusinessconnotessomerealsubstantial
andsystematicororganizedcourseofactivityorconductwithaset
purpose.
purpose

Sec.43(5) vsExpl.to
Sec.43(5)
vs Expl. to Section73
Section 73
Loss from dealingg can not be deemed to be from
speculation under Explanation to section 73 if company is
not engaged in business of shares dealing
CITvsOrientalInstrument(Delhi)ITA112/2000dt.20/11/2013
(Case of solitary transaction of purchase and sale of shares)
Few transactions as investor do not attract Sec. 73 Expl. as
there was no business
business
Standipack Pvt. Ltd. vs Commissioner of Income Tax & ORS,
350 ITR 251 (CAL)

Section 43(5) vs. Expl. to Section 73


Section43(5)vs.Expl.toSection73
Sec
Sec. 43(5)
3(5) app
applies
es o
onlyy to
o nondelivery
o de e y transactions
a sac o s
Expl.
p To Sec. 73 applies
pp
onlyy to business in deliverybased
y
shares
(hence both operate in different fields 92 ITD 317)
Share Derivative transactions are not excluded from
mischief of Explanation to Sec. 73
CIT vs. DLF Commercial Developers (2013) 261 CTR 127
(Delhi HC)

Section43(5)&Expl.ToSec.73
ApplytoanInvestortoo?
l
Sec.43(5) NO,asheldinDCITvs.RajeshR.Gupta20SOT171
((Mumbai)
) sharessoldbyinvestorashedidntholdhimselffor
y
wantoffunds
(decision may apply to limited cases and on peculiar facts)
(decisionmayapplytolimitedcasesandonpeculiarfacts)
Sec.73 Notattractedincaseofinvestorwithnobusiness
element , held in 195 ITR 404 (Kar)
element,heldin195ITR404(Kar)
(everyventureisnotbusiness;everytransactionisnota
speculative venture)
speculativeventure)

Speculativetransactions Turnover
(
(Non
Delivery)u/s44AB
li
) /
ICAIguidancenote2013edition:
ICAI guidance note 2013 edition:
Aggregateofpositive&negativedifference
Plus Optionspremium,ifany
B
BanwariSitaramPasari(HUF)vs.ACIT(2013)140
i Sit
P
i (HUF)
ACIT (2013) 140
ITD320(Pune)

Acco
Accountingtreatment
nting treatment asperI.C.A.I.
as per I C A I
guidancenote marktomarketrecognize
loss at year end ignore gains
lossatyearend,ignoregains

BusinessIncomeorCapitalGain
Continuing Conundrum
ContinuingConundrum
Book treatment not inclusive ; Intention important
Swarnim Multiventures (P) Ltd. Vs. DCIT (2012) 54 SOT
347 (Hyd.)
Board
d Cir.
i No. 4 dtd.
d d 1562007 acknowledges
k
l d
choice
h i off
assessee between stock and investment
Bharat Shantilal Kadakia vs.
vs ITO , 35 CCH 352 (Ahd.)
(Ahd )
Some Guidelines in:
Rewashanker
e as a e A. Kothari
ot a vs.
s C
CIT 155
55 Taxman
a a 214 (Guj
(Guj.))
Raja Bahadur Visheshwara Singh (Deceased) & Ors. vs.
CIT (1961) 41 ITR 685 (SC)

BusinessIncomevs.CapitalGain
(
(Contd.)
d)
PurchasetosalesratioorSalestoPurchaseRatio.
(preferredbyBoardCircular)
CITvs.DeveshSingh(2012)82CCH092(Guj.)VaibhavJ.Shah
Resjudicatavs.RuleofConsistency
ACITvs.PassionateInvestmentMgt.Pvt.Ltd(2013)36CCH113
(Mum )
(Mum.)

SaleOfQualificationSharesBy
Promoters
Promoters
SumeetTanejavs.ACIT(2012)(ITANo.1101/Chd/2009)(Chandi.)
H
Held,
ld transaction
t
ti nott a mere transfer
t
f off shares,
h
b t a transfer
but
t
f off
management of the company to the purchaser by the sellers
who were the Directors of the Company, hence not a capital asset
but a business gain
H
Held
ld as Capital
C it l Asset
A t in
i Kameshwari
K
h
i Finanace
Fi
& Leasing
L i (P) Ltd.
Ltd
Vs. DCIT (2007) 109 ITD 173 (Del) although there was loss on
transfer inter se promoters

GenuinenessofSaleofShares/
P
PennyShares
Sh

Bookingg of huge
g ggains/losses
/
in short p
period
Quoted/Unquoted company shares used for booking LTCG
Factors to consider whether genuine/illusory:
o Probability of sudden price rise
o Timegap
o Comparable transactions
Held sham in ACIT vs. Som Nath Maini (2006) 100 TTJ
917 (Chd)
Held genuine in 109 ITD 173 (Del)

Shareslyinginbrokersdemata/c
(bookingofprofit/loss)
/
Overalleffectofrelevantfactors
Canbetreatedasunexplainedcredit?
HowcanCir.768dt.24061998r.w.Cir.No.704dt.2804
1995beapplied?
ITOvs.ShantilalMunilal(2009)31DTR(Bang)388
NisrajRealEstate&Export(P)Ltd.vs.ACIT(2009)31DTR456
Nisraj Real Estate & Export (P) Ltd vs ACIT (2009) 31 DTR 456

ConversionOfSharesStockTo
CapitalAsset
Onsale,whetherbusinessincomeorcapitalgain
,
p g
Reverseofsec.45(2)cantbeapplied
ACITvs.BrightStarInvestment(P)Ltd.(2009)17DTR399
DCITvs.KalyaniExports&Investments.78ITD95(Pune)
(TM)
Holdingperiodof&cost
Holding period of & cost thatoforiginaldate,notdateof
that of original date not date of
conversion
CITvs.JannhaviInvestments(P)Ltd.(2008)304ITR276
( )
(
)
(Bom.)
Canincomebesplitintobusinessandcapitalgains?

Securities Swapping
SecuritiesSwapping
Usua
UsuallyinUnits
y U s
Betweenfunds
Betweenschemes
Issues Whethertransfer
(exchangecoveredu/s2(47))
Holdingperiod
Sec2(42A)Explanation(d)saysperiodtobe
reckonedfromdateofallotmentofasset

Sale of rights attached to securities


Saleofrightsattachedtosecurities
Coupons,warrants(iftradable)
Coupons warrants (if tradable)
C
Canbetaxedevenwhentransferred
b
d
h
f
d
separately
Costtobetreatedasnilu/s55(2)(aa)(iiia)
/
( )( )( )

InterestpaidOnBorrowingstoacquire
Securities
V.
V Mahesh,
Mahesh Income Tax Officer Vs.
Vs Vikram Sadanad Hoskote
18 SOT 130 (Mumbai)
120 ITD 469 (Pune)
152ITR247(Kar)
Can interest paid on refunded part of application money be
claimed as cost of shares allotted partly?

Disposal of Encumbered Securities


DisposalofEncumberedSecurities
When shares pledged by assessee with lender for a third
party:
Though a transfer, no consideration to assessee as it got
diverted at source, hence no chargeable gain (ACIT vs. Glad
Investment (P) Ltd. 8 SOT 612 Del)

When shares pledged for own debt, is it chargeable?

Crucial factor on whose behalf pledged shares are sold?

YearofChargeabilityontransferof
Shares
h
Transferofmovableproperty byendorsementanddelivery
Sec.45r.w.s48
Sec 45 r w s 48
Conditionaltransfer whendoesconsiderationaccrue?
Deliverytoescrowagentorcustodiantrusteepending
fulfillmentoftransferconditions
DeputyCommissionerofIncomeTaxvs.RajivA.Shah
(2006) 12 SOT 84 (Mum )
(2006)12SOT84(Mum.)

InvestmentinSharesWrittenOff
Lossallowable?
ll
bl

Maybecapitallossinbooksbutthereisno
transferu/s2(47)
( ) hencenotallowable
IndustrialFinanceCorporationofIndiaLtd.vs.JCIT101
TTJ91099ITD639

Intra day
Intraday
Generallyy held as business income
May impact judgment as regards nature of other activities of
same assessee, hence advisable to do it in separate entity
Conflictingviews:
Smt. Sadhana Nabera vs Assistant Commissioner of Income
Tax (2010)
(
) 41 DTR 393 against
Nidhi Dyeing & Printing Mills Pvt. Ltd. vs. I.T.O. 9 ITR (Trib)
65 (Ahd.)
(Ahd ) on facts,
f
treated
d as STCG
(Intra day income is generally taxed as business income but
it need not have effect on daily nature of other income
from sale of securities)

Tax
Rates Capital
Gains
TaxRates
CapitalGains
10%without
indexation
N STT
NoSTT
20%with
indexation

LTCG
STT

Exemptu/s
10(38)
( )

Tax Rates CapitalGains


TaxRates
Capital Gains

NoSTT

Normaltaxrates
are applicable
areapplicable

STT

Taxableat15%

STCG

Road Ahead
RoadAhead
In times to come , when financial world is so dynamic, is it
relevant to distinguish speculative and nonspeculative
t
transactions?
ti ?
Should mere notification hold back tax treatment of a
transaction which is otherwise on a notified stock platform ?
Interest
I t
t rate
t swaps
Forex Derivatives
Currency Swaps