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TAXATION OF SHARES & SHAREBROKERS

TAXATION OF SHARES & SHAREBROKERS. AT RAJKOT BRANCH ON 27TH MARCH, 2010. CA. Nihar Jambusaria. DIVIDEND AND INTEREST INCOME. Dividend exempt u/s. 10(34) : Income from units exempt u/s. 10(35) . MEASURES TO CHECK TAX EVASION. Bond Washing Transactions S. 94(1)

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TAXATION OF SHARES & SHAREBROKERS

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  1. TAXATION OF SHARES & SHAREBROKERS AT RAJKOT BRANCH ON 27TH MARCH, 2010. CA. Nihar Jambusaria

  2. DIVIDEND AND INTEREST INCOME • Dividend exempt u/s. 10(34) : • Income from units exempt u/s. 10(35)

  3. MEASURES TO CHECK TAX EVASION • Bond Washing Transactions S. 94(1) • Sales cum interest S. 94(2) • Dividend stripping S. 94(7) • Bonus / right stripping S. 94(8)

  4. CAPITAL GAINS • Short-term Capital Gain : (a) On listed securities transferred after 30.09.2004 on which S.T.T. is paid - Taxable at 10%. (b) On any other security transferred after 30.09.2004 - Taxable at normal rate.

  5. CAPITAL GAINS (Contd.) • Long Term Capital Gain : (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).

  6. BUSINESS INCOME • Where equity shares or units in an equity oriented fund are held as stock in trade and are sold after 30.09.04 on which S.T.T. is paid – taxable at normal rate and deduction is allowed in respect of STT paid.

  7. BUSINESS INCOME (contd.) • Issues – • Where a large number of transactions of purchase and sales of shares and securities of different companies entered into during P. Y., whether the gain can be declared as short term or long term capital gain or should it be declared under the head income from business or profession. Consider the decisions – Smt. Neerja Birla v. ACIT 66 ITD 148 (Mum.) and Arjun Kapoor 70 ITD 161 (Del.) Circular No.4/2007 dt. 15-6-2007.

  8. The following factors would be relevant in determining whether transactions for purchase & sale of shares & securities are in the nature of business or investment? • (1) Motive • (2) Number of transactions • (3) Relation with other activities • (4) Source of investment • (5) Resources employed

  9. If share transactions are treated as business, the following expenses are allowable as deduction- • (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

  10. BUSINESS INCOME(contd.) Trading in Derivatives : An eligible transaction in respect of trading in derivatives shall not be deemed to be a speculative transaction w.e.f. 01.04.06 by virtue of addition of clause (d) to S. 43(5).

  11. CAPITAL GAINS Conversion of capital assets into stock in trade – Issues – • Any care is required to be taken before converting shares / securities into stock in trade ? • Whether an assessee can hold some shares and securities as stock in trade and some shares and securities as investment. Century Builder – 5694/Mum./2000/dt. 30.07.02 Arjun Kapoor 70ITD161(Del) Circular No. 4/2007 dt. 15-6-2007

  12. CAPITAL GAINS (contd.) Tax Treatment of Deep Discount Bonds: Consider circular No. 2 of 2002 dated 15.02.2002

  13. CERTAIN JUDGEMENTS • Shares obtained in family settlement – Family settlement is analogous to partition of H.U.F. Therefore, S. 49(1)(i) shall apply for determining the cost of acquisition of shares under family settlement. Shanti Chandran 241 ITR 371 (Mad.)

  14. CERTAIN JUDGEMENTS (contd.) 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.)

  15. CERTAIN JUDGEMENTS (contd.) 4. Where business loss arises due to valuation of closing stock at cost or market price whichever is less and there was no purchase and sale of shares during the P.Y., Explanation to S. 73 does not apply. Nirvan Holding Pvt. Ltd. BCA-399 JULY 2003, SMC, MUM Sun Dist. & Mining Co. 68 Taxman 223.

  16. CERTAIN JUDGEMENTS (contd.) 5. Where shares / securities are acquired by any mode u/s. 49(1), indexation shall be allowed from the P. Y. of equisition of the previous owner. Pushpa Sophat v. ITO 81 ITD 1 (Chd.) Meera Khera February 2004 BCA Journal. Contrary- Kishor Kanoongo Mum. Trib.

  17. CERTAIN JUDGEMENTS (contd.) 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.)

  18. CERTAIN JUDGEMENTS (contd.) 7. Transfer of investments is not hit by Explanation to S. 73. Mysore Rolling Mills Pvt. Ltd. 195 ITR 405 (Kar.)

  19. Issues relating to Expln. to S.73- • (1) Applicability to shares held as investments- • Mysore Rolling Mills Pvt. Ltd. 195ITR 404(kar) • Trade Team Pvt. Ltd. 54 ITD 36(Bom) • (2) Share broking-Whether business of purchase & sale of shares? • SRJ Securities Ltd. v ACIT 81 TTJ 484 (Del) • DCIT v Frontline Capital Services Ltd. 96 TTJ 201 (Del)

  20. (3) Applicability to securities other than shares • Appollo Tyres Ltd. 255 ITR 273 (S.C.) • (4) Loss due to stock valuation not regarded as speculation loss • Nirvan Holding Pvt. Ltd. 35 BCAJ 399 (Mum) • Contrary view-Prudential Constn. Co. Pvt. Ltd. 75 ITD 338 (Hyd.) • Associated Capital Markets Pvt. Ltd. ITA No11-3-4 & 3057 Mum.2001 dt 31-3-2003

  21. (5) Whether the Expln. Applies to arbitrage, hedging,etc. excluded from the meaning of speculation u/s. 43(5)? • Rohini Capital Services Ltd. v DCIT 92 ITD 317 (Del) • (6) Settlement for breach of contract is not a speculative transaction. • Bhandari Rajmal Kushalraj v ITO 96 ITR 401

  22. Issues relating to Share Brokers • (1) Determination of Turnover • (2) Allocation of expenses to speculaive & other transactions when the assessee is a company • (3) Allocation of expenses to Dividend Income-S.14A.

  23. (4) Depreciation on Membership Card of Stock Exchange • (5) Taxability of Capital Gain on Sale of shares of Stock Exchange issued by the Stock Exchange on its corporatisation/demutualisation

  24. Thank You Nihar Jambusaria jnihar@rediffmail.com nihar_jambusaria@hotmail.com

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