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If a company invest in shares or mutual fund, how the capital gain taxed?

AngelA (Strategist ) (31 Points)

16 February 2019

Hello Experts,

I have a question. If a company invests in mutual funds or buys listed company shares and keeps it for more than one year and subsequently sells those, and receives some profit, for the profit received, only LTCG at 10 percent to be paid or the entire profit to be considered as business profit and 25 percent or 30 percent to be paid?

Thanks,

AngelA

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7 Replies

Dhirajlal Rambhia (SEO Sai Gr. Hosp.) (160332 Points)
Replied 17 February 2019

Depends upon the intention of the company, whether it is main object as business or parking surplus fund as investment.

1 Like

Bharat chandan (student) (158 Points)
Replied 17 February 2019

Dear Angel A,

The question under consideration is whether such shares will be treated as Stock in Trade (if yes, it will go to business income) or it should be considered as Capital Asset (will beliable to tax under Capital Gain head). Court in their previous judgement of Gopal Purohit have clarified such matter. However after conclusion CBDT issued notification. You can refer CBDT circular no. 4 of 2007. I will give you brief idea of the same:

1. Where assessee offers such shares as stock in trade irrespective of period of holding then such shares will be treated as stock and will be chargiable under Business income.

2. If such shares are held for more than 12 month then IT authority cannot deny treating such shares as capital asset.

3. Others: depend on case to case basis (based on nature of transaction)

In conclusion IT authority will like to tax these type of transaction on higher rate hence they will not object if assessee treat it as stock in trade. However if assessee wahts to treat it as capital asset then proper documentation and explanation should be available (for proof of holding more than 12 months or other such documents).

Regards,

Bharat Chandan

AngelA (Strategist ) (31 Points)
Replied 17 February 2019

Thanks for your response. The main objective of the company is investing in stocks and mutual funds, and investments in other companies. Instead of individual capacity, the directors of the company want to register a company and invest in stocks under the company. Like if I want to build a stock portfolio under my company name like what Warren Buffet does. Do you think I still can pay only LTCG for the stocks I hold more than 1 year time period ?

AngelA (Strategist ) (31 Points)
Replied 17 February 2019

My main question is that if I invest in stocks my personal capacity I know I have to pay only 10 percent tax for the stocks I hold more than 1 year. Now, if I register a company and invest money under the name of the company ( company's sole purpose is this) can the company claim to pay only 10 percent LTCG tax for stocks it holds more than 1 year.

Bharat chandan (student) (158 Points)
Replied 18 February 2019

Hi Angel A,

Understood your question. If you refer to old case law of Gopal Purohit, it was observed that the main consideration is intention of assessee (being individual capacity or company). If the intention is to hold shares and earn dividend then it will be considered as "held as capital asset". If the intention is to trade quickly and earn return (Speculation) then it should be considered as "held as stock in trade".

However CBDT circular (as mentioned in above msg) clarify the same. It presumes (in point 2) that if assess holds any share for more than 12 month then it is presumed that his intention is to hold as capital asset.

Hence we can say that it does not depend on who is assessee (it can be company, individual etc). What all matters is intention (as explained above).

AngelA (Strategist ) (31 Points)
Replied 18 February 2019

Thank you for your reply, I have an add-on question too. I would like to register a company solely for the purpose of investments in stocks and mutual funds. I would like to know, Is it legally 100 percent ok to register a company solely for the purpose of investments? We are not taking public money, but just using the capital to put in stocks and mutual funds. Is it common such a firm solely for the purpose of investments of own money? Is there any special regulations etc or can I just register just like a private limited company? Thanks, AngelA

Bharat chandan (student) (158 Points)
Replied 18 February 2019

Hi Angel A,

As per my understanding there are no restriction on who can invest in shares. Even company can buy shares of other company. The only thing you need to consider is section 179 of companies Act, 2013. As per the provision Board of Directors can invest in shares on behalf company. However for investing the fund of company resolution need to be passed in Board Meeting.

Hence simple step would be. Pass board resolution and then start opening account in the name of company to invest funds.

Hope my answers are helpful.

Regards,

Bharat Chandan