LIVE GST Certification Course by CA Arun Chhajer begins 21st April. Register Now!!

BUSINESS INCOME OR CAPITAL GAINS

CA CMA CS VIRAG SHAH (9773395720) (759 Points)

08 October 2010

my client do trading in shares as well as investment in shares in daily basis,only at bse & nse at cash market and not in F & O on daily basis , more than 200 invoices are made per year....

how to do accounting for that for income tax purpose ?

Reply
Follow
Share

6 Replies

Samiksha (Articles) (345 Points)
Replied 08 October 2010

It wil be considered as speculation and will go under PGBP.

1 Like

CA AYUSH AGRAWAL (Kolkata-Pune-Mumbai) (26986 Points)
Replied 08 October 2010

If he is Taking Delivery Then Better to Take as Investment and Treat as Capital Gain/Loss.

& If No Delivery & Settled on same Day Then Speculation Income /Loss.

& if This is Nominal Income Then Take it as Other Income Otherwise its a Speculation Business Income/Loss.

& Accounting to Be Done as Per Inventory Maintainance and as Per FIFO basis.

1 Like

CA CMA CS VIRAG SHAH (9773395720) (759 Points)
Replied 08 October 2010

sir but if he is done both........

means some time taking delivery & some time intraday & also both in oneday then wat 2 do ?????

CA AYUSH AGRAWAL (Kolkata-Pune-Mumbai) (26986 Points)
Replied 08 October 2010

Then Both Will Be Taken.

I Mean Speculation profit as well as Capital Gain

Hitesh Kothari (Chartered Accountant M.No. - 134239) (326 Points)
Replied 08 October 2010

Dear Virag,

There is no clarification in this regard in Income tax Act, its all depend on the intention of the assessee how he wants to traet the same in his books of accounts.

However circular has been issued by CBDT in this regard specifying that the assessee can have two portfolio one is Investment in shares and second one is of Business Stock. Enclosed herewith circular and Questionnaire given by ITAT in various case laws, which will help you. Please take action at this time and have proper documentation in this regard to avoid any difficulty at the time of assessment proceedings.

A. Principles laid down by CBDT in circular 04/2007 dated 15.06.2007

“(i) Where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction;

(ii) the substantial nature of transactions, the manner of maintaining books of accounts, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions;

(iii) ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/ adventure in the nature of trade; but where the object of the investment in shares of a company is to derive income by way of dividend etc. then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt”.

A. Details as per decision given by ITAT (Mum) in the case of Management Structure & Systems Pvt. Ltd. (ITA No. 6966/Mum/2007 – AY: 2004-05)

What is the intention of the assessee at the time of purchase of the shares (or any other item) ? This can be found out from the treatment it gives to such purchase in its books of account. Whether it is treated as stock-in-trade or investment ? Whether shown in opening/closing stock or shown separately as investment or non-trading asset ?

Whether assessee has borrowed money to purchase and paid interest thereon ? Normally, money is borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining.

What is the frequency of such purchases and disposal in that particular item ? If purchase and sale are frequent, or there are substantial transactions in that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment).

Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation in its value ? Former will indicate intention of trade and later, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares ? A commercial motive is an essential ingredient of trade.

How the value of items has been taken in the balance sheet ? If the item in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as stock-in-trade.

How the company (assessee) is authorized in memorandum of association/articles of association ? Whether for trade or for investment? If authorized only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity ? And vice versa”.

These principles of law have to be applied to the following facts (or answer to the below 8 question):

Treatment given in the Books of Accounts by the assessee, whether treated entire Investment in shares as an “investment” and not as “stock-in-trade”

Whether aseessee is share broker or registered with any stock exchange

Proportion of Long Term Capital Gain in Total Gain

Whether any derivative transaction carried out by the assessee

Whether any transaction without delivery carried out by the assessee

Whether assessee has borrowed money for making investment or used own surplus fund

Whether the disclosure made by assessee in past in filing the return has been accepted by the Income tax Dept

Has assessee received substantial amount of dividend on the investment

Regards

Hitesh

1 Like

NANDINI MASAND (learner ) (330 Points)
Replied 09 October 2010

Hi,

it simply depend that at the time of purchase its taken as what .......because income genrates only after sale..... n setteled in same day then its speculation income/loss....

if he is taking delivery on same day...n shares are held with him so its advisable to treat it as capital gain.