15 June 2015
Dear Sir, What is the cost of acquisition of a share for computation of capital gain, when the share is cum dividend? Do we need to deduct dividend included or not? please give poper reference
15 June 2015
For income tax purpose the dividend received is income in the hands of the recipient, though it is not taxable. Hence, for capital gain cost of acquisition will be the cum-dividend price of the share. This is different from what is done in accounting.
Querist :
Anonymous
Querist :
Anonymous
(Querist)
16 June 2015
Thanks for the reply. This is what I told my client, but he asks for reference. Could you please give any reference
16 June 2015
Indirect reference is available in the form of dividend stripping [Sec. 94(7)]. An investor may purchase a share or unit of a mutual fund cum-dividend and after receiving the dividend he may sell the share or unit. The price of the share/unit generally falls after it becomes ex-dividend. This results in a notional loss to the investor as part of it is recovered in the form of dividend. This clearly indicates that the cum-dividend price is taken as cost for computing capital gain. Sec. 94(7) was introduced to prevent the following mischief: An investor would buy a share for Rs.125 cum-dividend. After receiving the dividend of Rs.5 the theoretical ex-dividend price would be Rs.120. He would sell the share immediately for Rs.120 and claim a short-term loss of Rs.5. This clearly indicates that the cum-dividend price is to be taken as cost of acquisition.
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