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TAXATION
OFSHARES & SECURITIES
BYRajesh B. Yadav
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SHARES & SECURITIES
A. Shares
S. 2(46) of Companies Act
Equity & preference Pvt.
or public-listed or not. Bonus, Rights, Split, Stock
B. Securities
SecuritiesS. 2(h) of SCRA includes shares, scrips, debenture,includes shares, scrips, debenture,
stock, bondsstock, bonds
DerivativeDerivative
Government securitiesGovernment securities
Instruments declared by Cen. Govt.Instruments declared by Cen. Govt.
Rights or interest in securitiesRights or interest in securities
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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
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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
Payout dateAlternative pay in
Applies to shares in E-Form, demat account VandhaBad delivery
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COST OF ACQUISITION
Not defined Commercial man
Acc. Principles
BrokerageStamp dutyStamp duty
Legal chargesLegal charges
Service taxService tax
InsuranceInsurance
Private placement funding
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INTEREST AS A PART OF COA
Difficulty due toexemption u/s 10(34),10(35)
S. 48 COA
One viewCom & Acc. principleCom & Acc. principle
not definednot defined
exp. for acquisitionexp. for acquisition
Other viewRevenue natureRevenue nature
Subsequent payment &Subsequent payment &
costcost
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DEMATERIALISATION
ConceptDepositoryDepository
DPDP
DRFDRF
S. 45(2A)Beneficial Owner only-FIFO MethodBeneficial Owner only-FIFO Method
Applicability to a dealerApplicability to a dealer
Circular No. 768
Overrides S. 45(2A) as also Cir. No. 704Overrides S. 45(2A) as also Cir. No. 704
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INDEXATION
Bonds and Debentures
Amalgamation and Demerger
Annual Interest Capitalisation Difficulty
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LTCG EXEMPTION S. 10(38)
New regime of STT
Condition for compliance
Capital assetCapital asset
Equity SharesEquity Shares
EOMF unitsEOMF units
Held as investmentHeld as investment
Transfer on or after 01.10.2004Transfer on or after 01.10.2004
Transaction of transfer liable to STTTransaction of transfer liable to STT
LTCALTCA
Sale essentialSale essential
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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
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IMPLICATIONS- S. 10(38)
EOF
Investment in equity sharesInvestment in equity shares
50% of total proceeds Proceeds ?50% of total proceeds Proceeds ?
Shares of domestic companyShares of domestic company
Specified u/s 10(23D)Specified u/s 10(23D)
Annual average of monthly averageAnnual average of monthly average
Date of determination not clearDate of determination not clear
Payment of STTPayment of STT
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CONCESSION - STCG S. 111A
Capital assetEquity SharesEquity Shares
Units of EOMFUnits of EOMF
STCA
10% of gains + SC + EC
STT not deductible
Other deductions possible
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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 residentNon resident
All Assessees
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STCG s. 111A
Rebate
Exclusion from Rs. 5,00,000/- GTIExclusion from Rs. 5,00,000/- GTI
Losses
Option not to set-offOption not to set-off
Whether set-off of other losses possibleWhether set-off of other losses possible
Cir. No. 721 dated 31.09.1995Cir. No. 721 dated 31.09.1995
Script wise calculationScript wise calculation
Whether STCL can be set-offWhether STCL can be set-off
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SECURITIES TRANSACTION TAX (STT)
Nature of Tax Effective date
Applicability
Shares of & EOMFShares of & EOMF
Shares & Securities excludedShares & Securities excluded
Transaction on a recognized stock exchangeTransaction on a recognized stock exchange
Transactions excludedTransactions excluded
Delivery and Non DeliveryDelivery and Non Delivery
Purchase and/or salesPurchase and/or sales
Persons coveredPersons covered
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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
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RIGHT ENTITLEMENTS
DOA-Date of offer
Dhun Kapadias case
COA-Nil-Unless acquired from market
Merges into right shares
RIGHT SHARES
DOA-Allotment-Indexation also
COA -Amount actually paidCOA of entitlement if anyCOA of entitlement if any
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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
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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
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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
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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
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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
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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
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DIVIDEND AND INCOME FROM UNITS
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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)
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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)
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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
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DERIVATIVES-III-CAPITAL GAINS
Underlying Assumptions
Right an assetRight an asset
Fictional purchase & saleFictional purchase & sale
Merges with a larger assetMerges with a larger asset
Situations
Cash settledCash settled HedgingHedging
Delivery settledDelivery settled
Short-Term Capital Asset
Lapse of contract
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INVESTMENT V. STOCK
Which is beneficial
Allowance of expenses . ConcessionsAllowance of expenses . Concessions
Application of s. 14AApplication of s. 14A
Set-off of lossesSet-off of losses
Credit for STTCredit for STT
C/f of lossesC/f of losses
Trade-off
Ramnarain & Sons, 41 ITR 534(SC)Ramnarain & Sons, 41 ITR 534(SC)
N.S.S. Investments, 277 ITR 149(Mad)N.S.S. Investments, 277 ITR 149(Mad)
Mysore Rolling Mills, 195 ITR 404(Karn)Mysore Rolling Mills, 195 ITR 404(Karn)
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ARBITRAGE
Nature of activity
Objectives
Income
Business -Capital Gains Other sourcesBusiness -Capital Gains Other sources
Speculative transactions
Delivery - HedgingDelivery - Hedging
Losses
S. 43(5) - Explanation to s. 73S. 43(5) - Explanation to s. 73
Expenses Credit for STT
Tax Audit
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PORTFOLIO MANAGEMENT
Types of arrangements
ParticipatingParticipating
Non participatingNon participating
Nature of fees
Advisory & ManagementAdvisory & Management
BrokerageBrokerage
Relationship & Treatment
Proposal under considerationProposal under consideration
Deductibility of expensesDeductibility of expenses
BusinessBusiness
Capital gainsCapital gains
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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
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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
SPECULATION BUSINESS-II
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