TAXATIONOFSHARESAND SECURITIESANDSECURITIES

ISSUESANDCONTROVERSIES

CA.DeepakM.Rindani

PresentationatTaxConvention,AhmedabadDec.20,2013

Introduction

Securities an integral part of finance World

Stocks and Debt markets and Exchanges

Commodities markets and Exchanges

Emerging Securities productsg g p

Features Impacting Tax Issues IFeaturesImpactingTaxIssues I

Legal & Regulatory frameworkLegal&Regulatoryframework SEBI Securities Contracts Regulation ActSecuritiesContractsRegulationAct ForwardContractsRegulationAct

RoleofExchanges

Electronictradingplatforms

Emergingsecuritiesproducts

Tax Issues IITaxIssues II

Neversaydie issuesNever say dieissues CharacterofIncome(Businessvs.CapitalGains)Transfer Transfer

HoldingperiodC t f A i iti CostofAcquisition

EmergingIssues Derivatives Markedtomarket

Tax Concept Of Securities ITaxConceptOfSecurities I

Securities not directly defined in Sec. 2y

Indirectly defined in definition of shortterm capitaly passet Sec. 2(42A) Explanation 2

Sec.43(5)definition of speculative transaction refersto any commodity including stocks and shares

Sec. 94(8) Explanation (b) defines securities asincluding stocks and sharesincluding stocks and shares

Tax Concept Of Securities IITaxConceptOfSecurities II

Sec 94(8) Explanation (d) defines unit as inSec. 94(8) Explanation (d) defines unit as inSec. 115AB

Sec. 115AB Explanation (b) Unit means unitof a mutual fund

Sec. 43(5) Commodity Derivatives definedas in Forward Markets (Regulation) Act, 1952

Sec.2(h)OfSecuritiesContracts(R l ti ) A t 1956(Regulation)Act,1956

Security shall include :y Shares, scripts, stocks, bonds, debentures, debenture

stock or other marketable securities of a like nature inf i t d th b dor of any incorporated company or other body

corporate Derivative Units or any other instrument issued by any collective

investment scheme to the investors in such schemes Security receipt Government securities

Ri ht i t t i iti Rights or interest in securities

DerivativesDerivatives

Th b d ki d f i i fi i l k There are two broad kinds of instruments in financial market :1. Derivatives2 Fundamentals2. Fundamentals

Fundamental instruments are stocks, bonds, etc.Whil d i i f f d i While derivatives are futures, forwards, options, swapsetc.

Derivatives are financial instruments which derive theirDerivatives are financial instruments which derive theirvalue from underlying security

The underlying security may be shares, bonds, interestl don loans, commodity etc.

Types of Derivative ContractsTypesofDerivativeContractsFuture Contract They are contracts for which the price is

determined today for the futuretransaction of exchange of asset

Option Contract The owner of the option has the optionto enter the contract at the priceto enter the contract at the pricedetermined on or before the date oftransaction

Swap Contract Two parties agrees to exchange the cashSwap Contract Two parties agrees to exchange the cashflows in future under a contract

Forward Contract They are future contracts but more in astandardised form.

Derivatives DefinedforIncometaxAct

Section43(5) Commodities

( )( )Section43(5)(d) Trading inDerivatives

Section 2(ac) SCRA, 1956

Section43(5)(d) Eligible Transaction

Section 43(5)(e) Commodity DerivativesSection43(5)(e) Commodity Derivatives

Derivatives DefinedDerivatives Defined

Derivatives defined :As per Section 2(ac) of SCRA, 1956

Includes : A security derived from a debt instrument, share, loan, riskinstrument or contract for differences or any other form ofsecurities;

A contract which derives its value from the prices or indexA contract which derives its value from the prices, or indexof prices, of underlying securities

Trading on Notified ExchangesTradingonNotifiedExchanges

Notified for section 43(5) :

StockExchange Date

i d k h (f) f

Notifiedforsection43(5):

RecognizedStockExchange Sec.2(f)ofSCRA,1956

BSE,NSE 25012006MCXStockExchange 22052009

USE 25022011

RecognizedAssociation Sec.2ofFCRA

Multi Commodities Exchange 29112013Multi CommoditiesExchange 29 11 2013

NCDEX 27112013

Trading in derivatives u/s 43(5)(d)Tradinginderivativesu/s43(5)(d)

Up to A. Y. 0506 SpeculativeUptoA.Y.05 06 Speculative A.Y.0607onwards Nonspeculative

(provided exchange is notified)(providedexchangeisnotified) ACITvs.ArnavAkshayMehta(2012)53SOT581(Mum.)(Mum.) CITvs.BharatR.Ruia(HUF)337ITR452(Bom.)

Exchangenotnotified Speculative Rules/notifications are subordinate legislationRules/notificationsaresubordinatelegislation

(2012)16ITR(Trib)418(Chd)

MCX SXvs.MulticommoditiesExchange

MCX Stock Exchange Ltd. is notified u/s 43(5)(d) videNotification No. 46 dt. 22.05.2009 (www.mcxsx.com) for

d i ticurrency derivatives

Multi Commodity Exchange of India Ltd (wwwmcxindia com)Multi Commodity Exchange of India Ltd. (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

LossinDerivativesTradinginCommoditiesl d hOnMultiCommoditiesExchange

Definition of commodity derivatives inserted from 01042014 (A.Y. 201415) FY 201314

Exchangenotifiedon27112013

Nature of loss/profit on past transactions carried out up toA.Y. 201314 ?

Set Off of past speculative lossSetOffofpastspeculativeloss

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

Derivatives Eligible TransactionDerivatives EligibleTransaction

Conditions stipulated in definition to whatConditions stipulated in definition to whatextent mandatory?

Procedural irregularities should be ignoredd b band substance be seen

(such as absence of details in brokers bills likestamp, time etc.)

Vibha Goel (2012) 16 ITR (Trib) 418 (Chd)

Derivative TransactionsDerivativeTransactions

Can they give rise to capital gain/loss and notCan they give rise to capital gain/loss and notnecessarily business income/loss?

Ordinarily, NO Deputy Commissioner of Income Tax vs. NobelDeputy Commissioner of Income Tax vs. NobelEnclave (P) Ltd. 50 SOT 05 (Kol) (2012)

NatureOfIncome ImportanceOflDelivery

Delivery based transactions to be ordinarily treated asgiving rise to capital gainsg g p g

Narendra Gehlaut vs Joint Commissioner of Income Tax(2012) 52 SOT 255 (Delhi)

Derivatives opencontracts markedktomarket

Effect of revaluation of open contractsp 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 dischargedthough liability actually not discharged

Cir. No. 3 dt 23032010 on forex derivatives is contraryf y While AS 30 permits, draft TAS does not treat gain/loss as

chargeable allowable unless contract is closed/settled

Issue:Derivativesasnonspeculativeblpossiblenow?

Although assessee enters into eligible transactionAlthoughassesseeentersinto eligibletransaction ofderivativesu/s43(5)(d)or(e),canheclaimitsgainasspeculativebyhischoice?[Impact suchgainbeusedtoadjustotherspeculativelosssuchasindaytradingofshares]

Provisionof(d)or(e)ismandatoryoronlyenabling?Canonereverttopre2006situationbychoice?

Hedging and DerivativesHedgingandDerivatives

Can section 43(5) (b) be invoked even inCan section 43(5) (b) be invoked even inderivative transactions?

YesandNo ACITvs.DineshK.Mehta 39SOT488(Mumbai)

someguidingfactorsgivenregardingclaimforhedging

Claimtobeexaminedwithevidence,totalvolume,stock held etcstockheldetc.

ExplanationtoSec.73 deemedl bspeculationbusiness

Applies to specified companies onlyAppliestospecifiedcompanies only

b i f h d l f h businessofpurchaseandsaleofshares

Suchpartofbusinessdeemedtobespeculativeinnature;thusitslossescanbesetp ;offagainstspeculativeprofitsonly

Deemedspeculation IssuesinExpl.toSec.73

Business of both broking in shares and dealing BusinessofbothbrokinginsharesanddealingExpl.appliestodealingpart81TTJ484 brokinganddealinginsharescannotbeconsideredtogethertoavoidmischiefofExpl.96TTJ201

Appliestoallkindsofsecurities? NO.Appliestosharesonly;nottoUnits(ApolloTyres255ITR273SC)

d l f l k f LossduetovaluationofclosingstockofcompanyExpl.applies 226CTR13(Bom)

SpeculativeTransactionSec.43(5)

Speculative transaction defined as purchase or sale of anycommodity, including stocks & shares, periodically orlti t l ttl d th i th b th t l d liultimately settled otherwise than by the actual delivery or

transfer

SpeculativeTransactionsvs.

SpeculativeBusiness

CIT vs. Bhikamchand Jankilal (1981) 131 ITR 554 (MP) :It was held that a speculative transaction would amount to a speculationbusiness, if it fulfills the definition of business u/s 2(13) of the IncomeTax 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 todeclare that speculation business is to be treated as distinct andseparate from any other business.separate from any other business.

SpeculativeTransactionsvs.

SpeculativeBusiness

NarainSwadeshiWeavingMillsvs.Com.ofEPT(1954)26ITR765(SC):( )Itwasheldthatthetermbusinessconnotessomerealsubstantialandsystematicororganizedcourseofactivityorconductwithasetpurposepurpose.

Sec.43(5) vs Expl. to Section 73Sec.43(5)vsExpl.to Section73

Loss from dealing can not be deemed to be fromgspeculation under Explanation to section 73 if company isnot 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. asthere was no businessthere was no business

Standipack Pvt. Ltd. vs Commissioner of Income Tax & ORS,350 ITR 251 (CAL)

Section 43(5) vs. Expl. to Section 73Section43(5)vs.Expl.toSection73

Sec. 43(5) applies only to nondelivery transactionsSec 3(5) app es o y o o de e y a sac o s

Expl. To Sec. 73 applies only to business in deliverybasedp pp y yshares(hence both operate in different fields 92 ITD 317)

Share Derivative transactions are not excluded frommischief of Explanation to Sec. 73CIT vs. DLF Commercial Developers (2013) 261 CTR 127(Delhi HC)(Delhi HC)

Section43(5)&Expl.ToSec.73lApplytoanInvestortoo?

Sec.43(5) NO,asheldinDCITvs.RajeshR.Gupta20SOT171(Mumbai) sharessoldbyinvestorashedidntholdhimselffor( ) ywantoffunds

(decision may apply to limited cases and on peculiar facts)(decisionmayapplytolimitedcasesandonpeculiarfacts)

Sec.73 Notattractedincaseofinvestorwithnobusinesselement , held in 195 ITR 404 (Kar)element,heldin195ITR404(Kar)

(everyventureisnotbusiness;everytransactionisnotaspeculative venture)speculativeventure)

Speculativetransactions Turnover( li ) /(Non Delivery)u/s44AB

ICAI guidance note 2013 edition:ICAIguidancenote2013edition: Aggregateofpositive&negativedifference

Plus Optionspremium,ifanyB i Sit P i (HUF) ACIT (2013) 140BanwariSitaramPasari(HUF)vs.ACIT(2013)140ITD320(Pune)Acco nting treatment as per I C A I Accountingtreatment asperI.C.A.I.guidancenote marktomarketrecognizeloss at year end ignore gainslossatyearend,ignoregains

BusinessIncomeorCapitalGainContinuing ConundrumContinuingConundrum

Book treatment not inclusive ; Intention importantSwarnim Multiventures (P) Ltd. Vs. DCIT (2012) 54 SOT347 (Hyd.)

d i d d k l d h i f Board Cir. No. 4 dtd. 1562007 acknowledges choice ofassessee between stock and investmentBharat Shantilal Kadakia vs ITO 35 CCH 352 (Ahd )Bharat Shantilal Kadakia vs. ITO , 35 CCH 352 (Ahd.)

Some Guidelines in:Rewashanker A. Kothari vs. CIT 155 Taxman 214 (Guj.)e as a e ot a s C 55 a a (Guj )Raja Bahadur Visheshwara Singh (Deceased) & Ors. vs.CIT (1961) 41 ITR 685 (SC)

BusinessIncomevs.CapitalGain( d )(Contd.)

PurchasetosalesratioorSalestoPurchaseRatio.(preferredbyBoardCircular)CITvs.DeveshSingh(2012)82CCH092(Guj.)VaibhavJ.Shah

Resjudicatavs.RuleofConsistencyACITvs.PassionateInvestmentMgt.Pvt.Ltd(2013)36CCH113(Mum )(Mum.)

SaleOfQualificationSharesByPromotersPromoters

SumeetTanejavs.ACIT(2012)(ITANo.1101/Chd/2009)(Chandi.)

H ld t ti t t f f h b t t f f Held, transaction not a mere transfer of shares, but a transfer ofmanagement of the company to the purchaser by the sellerswho were the Directors of the Company, hence not a capital assetbut a business gain

H ld C it l A t i K h i Fi & L i (P) Ltd Held as Capital Asset in Kameshwari Finanace & Leasing (P) Ltd.Vs. DCIT (2007) 109 ITD 173 (Del) although there was loss ontransfer inter se promoters

GenuinenessofSaleofShares/P Sh PennyShares

Booking of huge gains/losses in short periodg g g / p Quoted/Unquoted company shares used for booking LTCG Factors to consider whether genuine/illusory:

oProbability of sudden price riseo Timegapo Comparable transactions Held sham in ACIT vs. Som Nath Maini (2006) 100 TTJ917 (Chd)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 Nisraj Real Estate & Export (P) Ltd vs ACIT (2009) 31 DTR 456 NisrajRealEstate&Export(P)Ltd.vs.ACIT(2009)31DTR456

ConversionOfSharesStockToCapitalAsset

Onsale,whetherbusinessincomeorcapitalgain, p g Reverseofsec.45(2)cantbeapplied

ACITvs.BrightStarInvestment(P)Ltd.(2009)17DTR399 DCITvs.KalyaniExports&Investments.78ITD95(Pune)(TM)

Holding period of & cost that of original date not date of Holdingperiodof&cost thatoforiginaldate,notdateofconversion CITvs.JannhaviInvestments(P)Ltd.(2008)304ITR276( ) ( )(Bom.)

Canincomebesplitintobusinessandcapitalgains?

Securities SwappingSecuritiesSwapping

UsuallyinUnitsUsua y U s Betweenfunds Betweenschemes

Issues Whethertransfer(exchangecoveredu/s2(47)) Holdingperiod Sec2(42A)Explanation(d)saysperiodtobereckonedfromdateofallotmentofasset

Sale of rights attached to securitiesSaleofrightsattachedtosecurities

Coupons warrants (if tradable)Coupons,warrants(iftradable)

C b d h f d Canbetaxedevenwhentransferredseparately

Costtobetreatedasnilu/s55(2)(aa)(iiia)/ ( )( )( )

InterestpaidOnBorrowingstoacquireSecurities

V Mahesh Income Tax Officer Vs Vikram Sadanad Hoskote V. Mahesh, Income Tax Officer Vs. Vikram Sadanad Hoskote

18 SOT 130 (Mumbai)

120 ITD 469 (Pune) 152ITR247(Kar)

Can interest paid on refunded part of application money beclaimed as cost of shares allotted partly?

Disposal of Encumbered SecuritiesDisposalofEncumberedSecurities

When shares pledged by assessee with lender for a third 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?

YearofChargeabilityontransferofhShares

Transferofmovableproperty byendorsementanddelivery

Sec 45 r w s 48 Sec.45r.w.s48

Conditionaltransfer whendoesconsiderationaccrue?

Deliverytoescrowagentorcustodiantrusteependingfulfillmentoftransferconditions

DeputyCommissionerofIncomeTaxvs.RajivA.Shah(2006) 12 SOT 84 (Mum )(2006)12SOT84(Mum.)

InvestmentinSharesWrittenOffll blLossallowable?

Maybecapitallossinbooksbutthereisnotransferu/s2(47) hencenotallowable( )

IndustrialFinanceCorporationofIndiaLtd.vs.JCIT101TTJ91099ITD639

Intra dayIntraday Generally held as business incomey 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 ) f d STCG65 (Ahd.) on facts, treated as STCG

(Intra day income is generally taxed as business income butit need not have effect on daily nature of other incomeit need not have effect on daily nature of other incomefrom sale of securities)

Tax Rates Capital GainsTaxRates CapitalGains

N STT

10%withoutindexation

NoSTT20%withindexationLTCG indexation

STT Exemptu/s10(38)( )

Tax Rates Capital GainsTaxRates CapitalGains

NoSTT Normaltaxratesare applicable

STCG

areapplicable

STCG

STT Taxableat15%

Road AheadRoadAhead

In times to come , when financial world is so dynamic, is itrelevant to distinguish speculative and nonspeculativet ti ?transactions?

Should mere notification hold back tax treatment of atransaction which is otherwise on a notified stock platform ?

I t t t Interest rate swaps

Forex Derivatives

Currency Swaps