STUDY CIRCLE NOTES - AUGUST, 2013 TAX IMPLICATIONS OF CAPITAL MARKET TRANSACTIONS BY : CA. SUDHIR GUPTA CONTACT :

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1 STUDY CIRCLE NOTES - AUGUST, 2013 TAX IMPLICATIONS OF CAPITAL MARKET TRANSACTIONS BY : CA. SUDHIR GUPTA CONTACT :

2 TAX IMPLICATIONS OF CAPITAL MARKET TRANSACTIONS There are two segments in capital market- 1. Cash Segment 2. Derivative Segment In cash segment sauda is ultimately settled by delivery of underlying assets. E.g. If A purchase 100 Reliance Shares in cash segment then Mr A will get the delivery of Reliance Shares as per the normal trading cycle. In derivative segment sauda is ultimately settled by cash only. E.g. If Mr A purchase 100 Reliance Shares in derivative segment then A will receive/pay cash on the expiry of the trade or earlier if sold before expiry. There will be no delivery of Reliance Shares to Mr A. DERIVATIVES which are being traded in exchanges are of two types viz. Future and Options. FUTURE are derivative of some underline like shares, indexes, commodities, currencies, interest rate, vix (volatility) or any other products to be settled in some future date or can be squared up before that expiry date. OPTION consists of Call option and Put option. Call option is Right to Buy, Put option is Right to Sell. There are different Strike Prices which depends on underline security Price. One can Sell/Buy Call/Put option in the exchanges {it works like insurance co (seller of option) and the person getting insured (buyer of option)}. In cash segment there are two types of transactions viz. daily jobbing and Delivery based. Daily jobbing vis a vis delivery based Business Income / Speculative Business/Capital Gain Income. Daily jobbing which get squared off on same day will be treated as Speculative Business Income. Delivery based transactions, the profit or loss will be Business Income or Capital Gain as per the facts and circumstances of the case. DEALING IN SHARES WHETHER CAPITAL GAIN OR BUSINESS INCOME There are many factors which determine whether it is Business Income or Capital Gain which are as follows: 1. Intention at the time of buying, whether to earn dividend or to earn profits. 2. The treatment given to the asset in the books of account, whether treated as Closing Stock or Investments - Sec 2(14). 3. Assessee can have two portfolios one for investments and other for trading CIT vs. Gopal Purohit (2011) 336 ITR 287 (Bom.) (2010) 228 CTR (bom) 582: (2010) 34 DTR (Bom) 52. (Honourable SUPEREME COURT vide its order dt. 15/11/2010 dismissed the Special Leave Petition against the abovesaid judgement) 4. Whether the assessee has used his own funds or borrowed funds. {The fact of borrowing cannot be held against the assessee if there are other predominating factors in favour. Also as the assessee has own funds, it can be presumed that the shares were bought out of those funds Mahendra C Shah vs. Addl CIT (ITAT Mumbai)} 5. Uniformity in treatment and consistency when the facts and circumstances are identical CIT vs. Gopal Purohit (2011) 336 ITR 287 (Bom.) (2010) 228 CTR (bom) 582 : (2010) 34 DTR (Bom) 52.

3 6. The frequency and volume of the transactions: Profit from sale of shares shall be regarded as income from capital gains even though the frequencies of the transactions are high. What matters to determine the nature of income is the intention of the assessee at the time of purchase and not the frequency of transactions ACIT vs. Sheela Chiniwala [2011] 9 taxmann.com 279 (Mum). 7. The time devoted to the activity and the extent to which it is the means of livelihood. (Draft Instructions dt. 16/05/2006) 8. Whether money has been paid or received or whether these are only book entries. (Draft Instructions dt. 16/05/2006) 9. Ratio of sales to purchases and holding (Draft Instructions dt. 16/05/2006). 10. In the Instruction No dated there is reference to case of CIT v. Associated Industrial Development Co. (P) Ltd. 82 ITR 586 (SC), the supreme court in this case observed that: "Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from his records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment." There are detailed discussions on Capital Gain and/or business income In the case of CIT vs. Gopal Purohit (2011) 336 ITR 287 (Bom.) (2010) 228 CTR (bom) 582 : (2010) 34 DTR (Bom) 52. Honourable SUPEREME COURT vide its order dt. 15/11/2010 dismissed the Special Leave Petition against the abovesaid judgement. The Tribunal allowed the assessee s appeal 122 TTJ (Mum) (47) transfer, in relation to a capital asset, includes, (i)the sale, exchange or relinquishment of the asset; or (ii)the extinguishment of any rights therein; or (iii) ; or (iv).or (iva)the maturity or redemption of a zero coupon bond; or [(v) ; or (vi) Following are transfer: (i) Redemption of preference shares relinquishment 90 Taxman 509 (sec.) (ii) Conversion of preference shares into equity shares exchange 102 ITR 248 (AP). CURRENCY PROFIT WHETHER SPECULATIVE OR BUSINESS INCOME? First of all let us understand 43(5) 43 (5) speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips: Provided that for the purposes of this clause (a) a contract in respect of raw materials. sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or

4 (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; or (d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; (e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognised association, shall not be deemed to be a speculative transaction. Explanation. For the purposes of this clause, the expressions (i) "eligible transaction" means any transaction, (A) carried out electronically on screen-based systems through a stock broker or subbroker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and (B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act; (ii) "recognised stock exchange" means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose;] Explanation 2. For the purposes of clause (e), the expressions (i) "commodity derivative" shall have the meaning as assigned to it in Chapter VII of the Finance Act, 2013; (ii) "eligible transaction" means any transaction, (A) carried out electronically on screen-based systems through member or an intermediary, registered under the bye-laws, rules and regulations of the recognised association for trading in commodity derivative in accordance with the provisions of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and the rules, regulations or bye-laws made or directions issued under that Act on a recognised association; and (B) which is supported by a time stamped contract note issued by such member or intermediary to every client indicating in the contract note, the unique client identity number allotted under the Act, rules, regulations or bye-laws referred to in sub-clause (A), unique trade number and permanent account number allotted under this Act; (iii) "recognised association" means a recognised association as referred to in clause (j) of section 2 of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and which

5 fulfils such conditions as may be prescribed and is notified by the Central Government for this purpose; Clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (ac) derivative includes (A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; (B) a contract which derives its value from the prices, or index of prices, of underlying securities; Securities Contracts (Regulation) Act, 1956 (42 of 1956) Sec 18A. - Contracts in derivatives Notwithstanding anything contained in any other law for the lime being in force, contracts in derivative shall be legal and valid if such contracts are-- (a) traded on a recognised stock exchange; (b) settled on the clearing house of the recognised stock exchange, in accordance with the rules and bye-laws of such stock exchange. Taxation on Currency Derivatives - Whether Speculative/Business Income The term commodity does not include currency (a) The Delhi Bench of ITAT in the case of Munjal Showa Ltd. v. DCIT, (94 TTJ 227) has held as under: Foreign currency or any currency is neither commodity nor shares. The Sale of Goods Act specifically excludes cash from the definition of goods. Besides, no person other than authorised dealers and money changers are allowed in India to trade in foreign currency, much less speculate. S. 8 of the Foreign Exchange Regulations Act, 1973, provides that except with prior general or special permission of the RBI, no person other than an authorised dealer shall purchase, acquire, borrow or sell foreign currency. In fact, prior to the LERMS, residents in India were not even permitted to cancel forward contracts. The presumption of any speculative transaction is, therefore, directly rebutted in view of the legal impossibility and in view of the fact that foreign currency was neither commodity nor shares. (b) The Special Bench of ITAT Kolkata in the case of Shree Capital Services Ltd. v. ACIT, (121 ITD 498) has held that derivatives with underlying as shares and securities should be also considered as commodities as the underlying shares and securities as specifically included within the term commodities. Accordingly transactions in security derivatives are subject to the provisions of S. 43(5). However, a currency cannot be termed as a commodity so as to attract the provisions of S. 43(5). (c) The Mumbai Bench of ITAT in the case of DCIT v. Intergold (I) Ltd., (124 TTJ 337) has held that profits from cancellation of forward exchange contracts are business profits and not speculative profits. (d) The Calcutta High Court in the case of CIT v. Soorajmull Nagarmull, (129 ITR 169) has held that where in the normal course of business of import and export of jute, the assessee entered into foreign exchange contract to cover up the losses and differences in exchange valuation, the transaction is not a speculative transaction. If Currency is Commodity In order to allow trading in currency derivatives to all resident persons, whether for hedging or otherwise, RBI issued Currency Futures (Reserve Bank) Directions, 2008 vide Notification No. FED.1/DG(SG)-2008 dated August 6, 2008 and Foreign Exchange Management (Foreign Exchange

6 Derivative Contracts) (Amendment) Regulations, 2008 facilitating the trading of currency futures. As per the above guidelines standardised currency futures shall have the following features: a. Only USD-INR contracts are allowed to be traded. b. The size of each contract shall be USD1000. c. The contracts shall be quoted and settled in Indian Rupees. d. The maturity of the contracts shall not exceed 12 months. e. The settlement price shall be the Reserve Bank's Reference Rate on the last trading day. Anomaly regarding Currency Derivatives Although amendments were made in Foreign Exchange Management Regulations, simultaneous amendments were not made in the Securities Contract (Regulation) Act, 1956 (SCRA) and the Incometax Act, 1961 which has given birth to several interesting and intriguing questions of law. But we can discuss it on the basis of following grounds: 1. It is being traded under Stock Exchanges and is being monitored by SEBI in consultation with RBI. 2. There are FAQ on Currency Derivatives which are available on SEBI site with the link 3. United Stock Exchange get notified by notification no. 12/2011 dt. 25/02/2011 which trades only in currency and not even applied for trading of equity (cash) as well as equity derivative segment? 4. MCX Stock Exchange Ltd (not MCX commodity exchange) is notified by Notification No. 46/2009, dated , when it was dealing in Currency Derivatives only. Whereas for equity derivatives it got permission from SEBI only in If intention of the legislature was not to include currency derivatives then Central Government would have not notified MCX-SX and United Stock Exchange under section 43(5). 5. As per Instruction No. 03/2010, dated of CBDT for Treatment of loss from actual transactions in forex-derivatives For determining whether loss from a transaction in respect of a forex-derivative is a speculation loss or not, the Assessing Officers may refer to Proviso (d) below sub-section (5) of Section 43 inserted by the Finance Act, 2005, with effect from It lays down that any eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956, that has been carried out in a recognized stock exchange shall not be treated as a speculative transaction. Further, an eligible transaction for this purpose would be one that fulfils the conditions laid down in Explanation to Section 43(5)(d). In such cases, the Assessing Officers should make a specific query asking the assessee to give a break up of any Marked to Market loss on a forex-derivatives included in the Profit and Loss Account and examine whether such transactions are eligible transaction in terms of Sec.43(5)(d). An adjustment to the taxable income may therefore be made, if necessary, keeping in view the provisions of law referred to above. (so as per above instruction also one can argue that the intention of the legislature was to include currency derivative in terms of section 43(5)(d) of the income tax act). 6. As per NISM Module The trading of currency derivatives is governed by the provisions contained in the SC(R)A, the SEBI Act, the rules and regulations framed thereunder and the rules and bye laws of stock exchanges. 7. As per SC(R) A- Sec 18A. - Contracts in derivatives Notwithstanding anything contained in any other law for the lime being in force, contracts in derivative shall be legal and valid if such contracts are-- (a) traded on a recognised stock exchange; (b) settled on the clearing house of the recognised stock exchange, in accordance with the rules and bye-laws of such stock exchange. (Currency

7 derivatives are being traded on recognised stock exchanges and are settled on the clearing house of the recognised stock exchange, in accordance with the rules and bye-laws of such stock exchange.) COMMODITY PROFIT - WHETHER BUSINESS OR STILL SPECULATIVE INCOME FROM 01/04/2013? As we all know that commodity trading profit/loss was Speculative Business. But by Finance Act 2013, it has become business income by insertion of sec 43(5)(e). But it will be from the date when the different commodities exchanges get notified for this purpose. As sec 43(5)(d) was inserted in Finance Act 2005 but exchanges were got notified as per details given below: 1. National Stock Exchange and Bombay Stock Exchange were notified by notification No. 2/2006, dated MCX Stock Exchange Ltd (not MCX commodity exchange) got notified by Notification No. 46/2009, dated United Stock Exchange get notified by notification no. 12/2011 dt 25/02/2011. Therefore, from above discussion it is more than clear that until exchanges get notified it can be treated as Speculative Business income/loss. FURTHER as the BSE and NSE got notified on 25/01/2006 but there was insertion of 43(5)(d) by The Finance Act 2005 it has been decided by various tribunals that although the exchanges get notified on 25/01/2006 but profit/loss even before 25/01/2006 i. e. for the accounting year be treated as business loss not speculation loss as per the cases listed below: Pradeep Kumar Harlalka vs. ACIT (2012) 143 TTJ (Mumbai) 446 Hitesh Satish Chandra Doshi vs. JCIT (2011) 140 TTJ (Mumbai) 32 ACIT vs. HIREN JASWANTRAI SHAH (2011) 141 TTJ (Ahd) 851 Shree Capital Services Ltd vs. ACIT (2009) 124 TTJ (KOL)(SB) 740; (2009) 121 ITD 498 (KOL) (SB) Brought forward Business Loss Although, the profit/loss after 01/04/2005 shall be treated as business profit/loss but the loss prior to 01/04/2005 will be treated as Speculative Loss not Business Loss as has been held that it is prospective in nature as has been held in the case of CIT vs. Bharat R. Ruia (HUF) (2011) 241 CTR (Bom) 1. It has been held that:..in the result, we hold that the exchange traded derivative transactions carried on by the assessee during AY are speculative transactions covered under Section 43(5) of the Act and the loss incurred in those transactions are liable to be treated as speculative loss and not business loss. We further hold that clause (d) inserted to the proviso to Section 43(5) with effect from 1/4/2006 is prospective in nature and the ITAT was in error in holding that clause (d) to the proviso to Section 43(5) applied retrospectively so as to apply to the transactions carried on by the assessee during AY CARRY FORWARD AND SET OFF OF BUSINESS LOSSES If there are brought forward losses from Derivatives which were speculative in nature in the relevant assessment year but subsequently those derivatives becomes business (non speculative) income then Brought forward losses can be set as has been held in a detailed discussed case of Gajendra Kumar. T. Agarwal (chartered accountant) vs. ITO (2011) 142 TTJ (Mumbai) 612. It has been held that:. despite 'inexactitude in the language used', as was the expression approved by Hon'ble Supreme Court, the provisions of carry forward and set off are to be construed in a manner so as not to defeat the plain and unambiguous intention of the legislature. In our considered view, this amendment

8 was to provide relief to the taxpayers and is to be viewed as beneficial provisions, as such, and one cannot possibly proceed on the basis that the object of making amendment in Section 43(5) was to kill the brought forward losses of dealing in derivatives or make them ineligible for being set off against the profits of the same business in subsequent years. Whatever may be characterization of income for the purpose of intra assessment year set off in the relevant assessment year, and irrespective of the fact that such a characterization has achieved finality in assessment, the losses and profits from dealing in derivatives must be characterized on a uniform basis in the assessment year in which set off is claimed. Viewed in this perspective also, the classification of business for the limited purpose of set off of past losses, into speculative and non-speculative, is to be done on a uniform basis, and, whichever way one looks at it, the losses incurred in the same business in earlier assessment years are to be treated as eligible for set off against profits of the same business, subject to fulfilment of other conditions, in the subsequent assessment years. For this reason also, the assessee deserves to be granted set off of brought forward losses from business of dealing in derivatives, incurred in assessment years prior to assessment year against profits of the same business in assessment years and subsequent assessment years. 44AB OF INCOME TAX ACT Determination of Turnover As per Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, The turnover or gross receipts in respect of transactions in shares, securities and derivatives may be determined in the following manner. In Derivatives the contract is settled by paying out the difference which may be positive or negative. As such, in such transaction the difference amount is 'turnover'. Each transaction resulting into whether a positive or negative difference is an independent transaction. The entries in the books of account are made only for the differences. Accordingly, the aggregate of both positive and negative differences is to be considered as the turnover of such transactions for determining the liability to audit vide section 44AB. In Delivery based transactions the transaction for the purchase or sale of any commodity including stocks and shares is delivery based whether intended or by default, the total value of the sales is to be considered as turnover. OFF MARKET TRANSACTIONS TAX TREATMENT IN OPEN OFFERS / STOCK SPLIT / STOCK REDUCTION / BUSINESS DISINTEGRATION REDUCTION IN CAPITAL In the case of Bennett Coleman & Co Ltd vs. ACIT (2011) 141 TTJ (Mumbai)(SB) 777 Tribunal has decided that there was thus no loss that can be said to have actually accrued to the shareholder as a result of reduction in the share capital. The Tribunal further observed that there would also no change even in the cost of acquisition of shares which the shareholder would be entitled to claim as deduction in computing the gain or loss as and when the said shares are transferred or sold in future as per section 55(v) Kartikeya V. Sarabhai v. CIT 94 Taxman 164 (SC) CIT v. G. Narsimhan (1999) 102 Taxman 66 (SC) DEMERGER (Reliance) Sec 49 (2C) In the case of a Demerger, cost of acquisition of original shares is split between the shares in demerged company and resulting company based on their Net worth values. Buy back of shares Sec 46A Where a shareholder or holder of specified securities in a company, receives any consideration from the company, during the previous year, in the process of buy back, capital gains shall be chargeable, in the hands of the shareholders, for the previous year in which such transfer takes place. But the Capital Gain tax will be taxed in normal course and not u/s 10(38) or 111A as buy back through tender root is Off MARKET Transaction and there is no STT on sale consideration received by the tenderor of the shares.

9 Open Offer (HUL) In the case of Open Offer by the acquirers as in the recent offer by Unilever there will be capital gain or business income as the case may be. But in the case of capital gain tax will be taxed in normal course and not u/s 10(38) or 111A as Open Offer is through tender root. Therefore, it is an Off Market Transaction and there is no STT involved on sale consideration received by the tenderor of the shares Equity Shares to ADR (Infosys, Satyam) In the case of conversion of equity shares to ADR there will be capital gain or business income as the case may be. But in the case of capital gain it will be taxed in normal course and not u/s 10(38) or 111A as Open Offer is through tender root. Therefore, it is an Off Market Transaction and there is no STT involved on sale consideration received by the tenderor of the shares Capital gains on redemption of 80 CCB units Sec 45(6) Gain on redemption of 80 CCB units is taxable in the year of conversion. Repurchase price shall be the sale consideration for Capital gains purposes. Capital gains can be long term or short term based on the period of holding however no indexation benefit is available on this transaction. Capital gains = Repurchase price Original purchase price Offer for sale by Promoters In the case of Uday Punj vs DCIT (2012) 145 TTJ (Del) 640 it has get decided that offer for sale by promoters or Private Equity Players the Long Term Capital Gain will be taxable as at the time of allotment to the public as there was no STT on offer for sale so it will not be exempt u/s 10 (38). This has further confirmed in Uday Punj vs. CIT (2012) 253 CTR 22. ESOP In the case of ACIT vs. Pramod H. Lele (2012) 142 TTJ it has been decided that period of calculation for computing Short term or Long Term has to be calculated from the date of allotment of shares under ESOP and not from the grant of option under ESOP. TAXATION ON MUTUAL FUND There are two types of income from Mutual fund. One is dividend, other is Capital appreciation. Dividend is exempt u/s 10 (35). Capital appreciation in the case of Equity Oriented Mutual Fund (which are subject to STT) capital appreciation is (exempt)/taxable u/s 10(38)/111A as the case may be. Whereas in the case of other than Equity Fund (Debt/money market/liquid) there will be Long term capital gain after 12 months and will be taxed after or 10% without indexation as beneficial to the assessee or short term capital gain if holding period is less than or equal to 12 months. Taxation on MIS with transfer facility on monthly basis. There are cases when some investor invests say Rs /- to some debt/liquid fund and from that fund there is SIP (Systematic Investment Plan) of Rs. 5000/- per month. Then there is transfer of some units from debt/liquid fund each month. So we have to calculate the capital gain on such transfer and show in the return accordingly. Taxation on Stock Lending and borrowing Section 47(xv) provides for a specific exemption from capital gains tax on lending of securities made under the Securities Lending Scheme of SEBI. Though the lending of shares in this case was a private / bilateral transaction and was not in accordance with the Securities Lending Scheme, 1997, the Tribunal held that lending of shares is not a taxable transfer within the meaning of section 2(47) of the Act in the hands of the lender

10 Lending of shares cannot be treated as transfer of shares within the meaning of Sec 2(47). Phulchand Sons Investments Pvt Ltd vs. ACIT (2011) 10 taxmann 22 (Mum ITAT). Otherwise also in Off Market Transactions in Dmat shares if there is off market transaction i.e. loan of shares it will not be treated as transfer as we have to mention in delivery instructions the consideration amount if it is not the Loan of Shares. DIVIDEND STRIPPING SEC. 94(7) Where (a) any person buys or acquires any securities or unit within a period of three months prior to the record date; (b) such person sells or transfers (i) such securities within a period of three months after such date; or (ii) Such unit within a period of nine months after such date; (c) the dividend or 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. Bonus stripping Sec. 94 (8) Where (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 provisions 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. Valuation of inventories AS 2 is not applicable. Closing stock can be valued at cost or market price, whichever is less. Same method has to be followed for subsequent years. CBDT Circulars No. 704 & 768 dated April 28, 1995 June 24, 1999 for identification of shares Renouncing of Right Shares. Sale on renouncing of equity shares It has been decided in the case of Miss Dhun Dadabhoy Kapadia vs. CIT [1967] 63 ITR 651 (SC) that capital gains / loss in the event of renunciation of rights shall be computed and the effect of the same has to be taken into consideration. This view has further strengthened by Honourable Supreme Court in the case of Navin Jindal vs. ACIT[2010] 320 ITR 708 (SC) that Value of reduction in share price post rights issue has to be calculated and the loss/profit if any has to be taken care of. Capital gains / loss in the event of renunciation of rights shall be computed in the following manner

11 Sale Consideration = Amount received for right renunciation (A) Cost of acquisition = Reduction in the value of share/ securities post rights issue(b) Capital gains or loss = (A-B)(Notional loss) Nature of capital gains shall be based on the period of holding of the right which will be from the date the assessee is eligible for the rights share till the date of renunciation. In general the nature of capital gains shall always be short term since the period of holding is not likely to exceed 12 months. Bonus Shares Cost of acquisition is NIL Cost of Trading Right Clearing and Trading rights of the recognised stock exchange acquired by a member in a scheme of demutualization or corporatisation a) Cost of acquisition of Trading Right is NIL 55(2)(ab) b) Where shares are received on account of demutualization/ corporatisation of a Recognised Stock Exchange cost of acquisition of such shares will be cost of membership at the time of becoming a member of the exchange prior to demutualization. Tds on brokerage 194H. (i) "commission or brokerage" includes any payment valuable article or thing, not being securities; (iii) the expression "securities" shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) ; (iv) where.. called "Suspense account"..apply accordingly SECURITIES CONTRACTS (REGULATION) ACT, 1956 SEC 2(h) securities include (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (ia) derivative; (ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes; (ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (id) units or any other such instrument issued to the investors under any mutual fund scheme; (ii) Government securities; (iia) such other instruments as may be declared by the Central Government to be securities; and (iii) rights or interest in securities;

12 So, as per provisions of Sec 194H there is TDS on brokerage or commission other than on securities. Securities do not include Commodities. So if we do not deduct TDS on Brokerage paid on Commodities then there will be disallowances under the provisions of sec 40(a)(ia) TDS on Sub Brokerage It has been decided by Delhi ITAT in the case of ITO v Mittal Investment & Co. [IT Appeal No (Delhi) of 2012] (Del ITAT) that TDS u/s 194H is not applicable on sub-brokerage on securities as the definition uses the term in relation to which clearly implies that whenever any commission or brokerage is paid in relation to securities then it would be outside the ambit of section 194H Portfolio management - Business Income / Capital Gain A PMS per se, is akin to the structure of any MF scheme where the collective funds of various clients are pooled together and invested in the market. There are two major differences An MF scheme has restrictions imposed upon it by its offer document as to the extent to which it can invest in equities and debt. The PMS is restricted by the mandate imposed upon it by the investor or by the internal policy of the PMS house. 2. Investor in MF schemes is the owner of units and his fortune depends upon the NAV. Each unit consists of a tiny portion of each and every share the scheme owns. Now, the question is whether such profits earned through a PMS are taxable as Business Income or Capital Gain. Though the tax treatment for both classes of assessee is different, the Act does not define the term investor or trader which again has to be decided as per facts and circumstances of the case. Well, does it apply to PMS? Unlike a Mutual Fund, which has a specific exemption for its income under section 10(23D), the Act has not conferred any such tax benefit on a PMS On the other hand, in the case of PMS, the individual appoints a specialist having domain knowledge of the capital markets for handling his investments, specifically to free himself to attend to his main profession or business. This is akin to appointing a lawyer for legal matters or an architect for the design of a building. Any transaction executed by the specialist will be treated as if it was transacted by the person who appointed the specialist and will be taxed accordingly. Portfolio Management Charges It has been decided in the case of Pradeep Kumar Harlalka vs. ACIT (2012) 143 TTJ (Mumbai) 446 that the Fees paid as Portfolio Management Charges as well as sharing of profit is not allowable expenditure as it has nothing to do with cost of acquisition as well as with transfer of capital asset. This view was further strengthened by ITAT Mumbai H Bench decided on 28/09/2011 in the case of Shri Homi K Bhabha vs. ITO (CA Sudhir Gupta)