TAX TALK- 14.09.2009-THE HITAVADA
TAX TALK
BY CA. NARESH JAKHOTIA
(Chartered Accountant)
“CALCULATION OF TURNOVER - INTRA DAY TRADING IN SHARES & DERIVATIVES TRANSACTIONS”
Query 1]
Kindly clarify how the limit of Rs. 40 Lacs for compulsory audit of accounts would be applied in case of person doing trading in derivatives? How Sales, Turnover or Gross Receipts is to be calculated in such cases? How the turnover/ sales etc will be calculated in case of intra day trading in equities? Please elaborate the accounting aspects of the transactions. [k_kumar39@hotmail.com]
Opinion:
1. TURNOVER IN CASE OF DERIVATIVES: I] Accounting Aspects: a) In the case of derivatives, transactions are not recorded at the time of purchase/sale. b) Only the initial margin and mark-to-market margins are recorded as and when paid, and the profit or loss on the futures transactions is recorded as an income/expense on squaring up of the transaction or on expiry of the contract. II] Calculation of Turnover: a) The margin paid is certainly not the turnover in the light of its accounting treatment.b) At best, only the difference (profit or loss in the derivatives transaction) can be regarded as turnover. c) The mute question then is – should one net off the profits and losses and is only the net profit or loss to be regarded as the turnover? This does not appear to be proper, as the net profit or loss would not reflect a measure of the actual volume of transactions. d) It should be the Gross differences which would constitute turnover, and not the net differences. The scrip wise gross differences for each maturity should be determined, the negative signs of the losses within a script of each maturity ignored and such losses grossed up with the gains to compute the turnover.e) For Example: If the profit is Rs. 25 Lacs and loss is Rs. 16 Lacs you will be required to get your accounts audited as total turnover for the purpose of section 44AB shall be Rs. 41 Lacs (Gross Difference) and not Rs. 9 Lacs (Net Difference)
2. TURNOVER IN CASE OF INTRA DAY TRADING OF SHARES (Speculative Profit/ Loss): a) The Institute of Chartered Accountants of India in its Guidance Note on Tax Audit under section 44AB of the Income Tax Act, 1961 (Revised 2005 edition) (Para 5.11) has expressed following views in respect of method of determining the turnover in case of intra-day transactions in shares.b) In a speculative transaction, the contract for sale or purchase which is entered into is not completed by giving or receiving delivery so as to result in the sale as per value of contract note. The contract is settled otherwise and squared up by paying out the difference which may be positive or negative figure. As such, in such transaction, the difference amount is ‘turnover’. c) In the case of an assessee doing speculative transactions there can be both positive and negative differences arising by settlement of various such contracts during the year. Each transaction resulting into whether a positive or negative difference is an independent transaction. Further, amount paid on account of negative difference paid is not related to the amount received on account of positive difference. d) 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 under section 44AB.
Query 2]
Sir, Will u please advise me on following point;-
1. I do not have a PPF A/c, but my major son has a PPF A/c.
2. Can I deposit the amount in his PPF A/c and seek Income Tax Benefit? My son is not a tax payer. [kaushikpopat@gmail.com]
Opinion:
Yes, you can claim deduction u/s 80C in respect of deposit done by you in the PPF A/c of your major son.
Query 3]
I was holding some share for a period of more than 2 years and then I sold them in the year 2007. I had earned a capital Gain of approx. Rs. 7 Lacs. Now, at the time of assessment, the I.T.O is saying that he would assess the same as business income.
I have read earlier that long term capital gains on shares are fully exempt from income tax if sold through recognized stock exchange and is covered by Securities Transactions Tax payment. I request you to kindly guide me in this matter along with legal provision. [kingloiya@yahoo.com]
Opinion:
It is true that the Long term capital gain on shares on which STT is paid is exempt from income tax U/s 10(38) of the Income Tax Act, 1961.
The key word is “Capital gain”. Capital gain arises on sale of capital assets.
Shares could either be business assets or a capital assets.
If shares are the capital assets, obviously long term capital gain would be exempt u/s 10(38). If, however, it is a business assets, it would be chargeable to tax like other regular business income.
There are no clear cut set of guidelines or principles that distinguishes business assets vis a vis capital assets. Whether shares are a business asset or a capital asset depends upon number of factors.
The prominent factors that play an important role in determining whether it is a business assets or capital assets are: a) Volume/Nature of transactions.b) Intention/Logic behind investments.c) Holding period of shares etcd) Investment of own funds or a borrowed fund.e) Other business activities of the assessee.
Holding period of 2 years is sufficiently appearing to be a longer period to be qualified as a capital asset. If you were doing delivery-based long term investment with low volume of transactions in shares, in that case, the investment in shares could be regarded as capital assets eligible for exemption u/s 10(38).
COST INFLATION INDEX FOR THE FINANCIAL YEAR 2009-10 HAS BEEN NOTIFIED AS
‘632’
[VIDE NOTIFICATION NO. 67/2009, DATED 09.09.2009]
Also available at http://nareshjakhotia.blogspot.com/
BY CA. NARESH JAKHOTIA
(Chartered Accountant)
“CALCULATION OF TURNOVER - INTRA DAY TRADING IN SHARES & DERIVATIVES TRANSACTIONS”
Query 1]
Kindly clarify how the limit of Rs. 40 Lacs for compulsory audit of accounts would be applied in case of person doing trading in derivatives? How Sales, Turnover or Gross Receipts is to be calculated in such cases? How the turnover/ sales etc will be calculated in case of intra day trading in equities? Please elaborate the accounting aspects of the transactions. [k_kumar39@hotmail.com]
Opinion:
1. TURNOVER IN CASE OF DERIVATIVES: I] Accounting Aspects: a) In the case of derivatives, transactions are not recorded at the time of purchase/sale. b) Only the initial margin and mark-to-market margins are recorded as and when paid, and the profit or loss on the futures transactions is recorded as an income/expense on squaring up of the transaction or on expiry of the contract. II] Calculation of Turnover: a) The margin paid is certainly not the turnover in the light of its accounting treatment.b) At best, only the difference (profit or loss in the derivatives transaction) can be regarded as turnover. c) The mute question then is – should one net off the profits and losses and is only the net profit or loss to be regarded as the turnover? This does not appear to be proper, as the net profit or loss would not reflect a measure of the actual volume of transactions. d) It should be the Gross differences which would constitute turnover, and not the net differences. The scrip wise gross differences for each maturity should be determined, the negative signs of the losses within a script of each maturity ignored and such losses grossed up with the gains to compute the turnover.e) For Example: If the profit is Rs. 25 Lacs and loss is Rs. 16 Lacs you will be required to get your accounts audited as total turnover for the purpose of section 44AB shall be Rs. 41 Lacs (Gross Difference) and not Rs. 9 Lacs (Net Difference)
2. TURNOVER IN CASE OF INTRA DAY TRADING OF SHARES (Speculative Profit/ Loss): a) The Institute of Chartered Accountants of India in its Guidance Note on Tax Audit under section 44AB of the Income Tax Act, 1961 (Revised 2005 edition) (Para 5.11) has expressed following views in respect of method of determining the turnover in case of intra-day transactions in shares.b) In a speculative transaction, the contract for sale or purchase which is entered into is not completed by giving or receiving delivery so as to result in the sale as per value of contract note. The contract is settled otherwise and squared up by paying out the difference which may be positive or negative figure. As such, in such transaction, the difference amount is ‘turnover’. c) In the case of an assessee doing speculative transactions there can be both positive and negative differences arising by settlement of various such contracts during the year. Each transaction resulting into whether a positive or negative difference is an independent transaction. Further, amount paid on account of negative difference paid is not related to the amount received on account of positive difference. d) 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 under section 44AB.
Query 2]
Sir, Will u please advise me on following point;-
1. I do not have a PPF A/c, but my major son has a PPF A/c.
2. Can I deposit the amount in his PPF A/c and seek Income Tax Benefit? My son is not a tax payer. [kaushikpopat@gmail.com]
Opinion:
Yes, you can claim deduction u/s 80C in respect of deposit done by you in the PPF A/c of your major son.
Query 3]
I was holding some share for a period of more than 2 years and then I sold them in the year 2007. I had earned a capital Gain of approx. Rs. 7 Lacs. Now, at the time of assessment, the I.T.O is saying that he would assess the same as business income.
I have read earlier that long term capital gains on shares are fully exempt from income tax if sold through recognized stock exchange and is covered by Securities Transactions Tax payment. I request you to kindly guide me in this matter along with legal provision. [kingloiya@yahoo.com]
Opinion:
It is true that the Long term capital gain on shares on which STT is paid is exempt from income tax U/s 10(38) of the Income Tax Act, 1961.
The key word is “Capital gain”. Capital gain arises on sale of capital assets.
Shares could either be business assets or a capital assets.
If shares are the capital assets, obviously long term capital gain would be exempt u/s 10(38). If, however, it is a business assets, it would be chargeable to tax like other regular business income.
There are no clear cut set of guidelines or principles that distinguishes business assets vis a vis capital assets. Whether shares are a business asset or a capital asset depends upon number of factors.
The prominent factors that play an important role in determining whether it is a business assets or capital assets are: a) Volume/Nature of transactions.b) Intention/Logic behind investments.c) Holding period of shares etcd) Investment of own funds or a borrowed fund.e) Other business activities of the assessee.
Holding period of 2 years is sufficiently appearing to be a longer period to be qualified as a capital asset. If you were doing delivery-based long term investment with low volume of transactions in shares, in that case, the investment in shares could be regarded as capital assets eligible for exemption u/s 10(38).
COST INFLATION INDEX FOR THE FINANCIAL YEAR 2009-10 HAS BEEN NOTIFIED AS
‘632’
[VIDE NOTIFICATION NO. 67/2009, DATED 09.09.2009]
Also available at http://nareshjakhotia.blogspot.com/
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