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Taxation of Securities - MR - Yogesh Thar11.07.18
Taxation of Securities - MR - Yogesh Thar11.07.18
Taxation of securities
Presentation by
Yogesh Thar July 11, 2018
1. Business Income v. Capital Gains
Relevant Judicial Pronouncements and Legislations
Tests laid down in:
Instruction No. 1827 dated August 31, 1989
Circular no. 4/2007 dated June 15, 2007
Circular no. 6/2016 dated February 29, 2016
CBDT Letter F. No. 225/12/2016 of May 2016
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YOGESH THAR
Tests summarised
Considering the judicial pronouncements, instructions and circulars above, the tests are
summarised as under…:
Past Assessment Records
Treatment in the books of account (i.e. whether shown as investment or as stock-in-trade)
Method of valuation
Nature and Quantum of purchase and sale
Ratio between purchase and sales
Period of Holding
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Tests summarised (contd…)
…Considering the judicial pronouncements, instructions and circulars above, the tests
are summarised as under:
Frequency, continuity and regularity of transactions
Motive or intention behind acquisition / sale of securities
Source of Acquisition – Whether from owned or borrowed funds
It is possible to have two portfolios - one for investment and the other for stock-in-trade
Any act subsequent to the purchase thereby making it more readily resalable
Any act prior to purchase making showing a design or purpose
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YOGESH THAR
Case Laws Summary
Chart demonstrating the facts in various case laws numerically and the judgement thereof
Sr. Criteria Nailesh Pargro S.K. Dhiraj Bharat Kunverji Hriday Naishadh v.
no. Dalal Investment Finance Kenia Kenia Kenia Nailesh Vachharajani
Pvt Ltd Dalal
Period of over 6
1 holding months (avg) 1 to 9 months 106 days 107 days 116 days 124 days over 6 months 2 to 5 months
No. of scripts
2 purchased 41 79 51 129 142 213 25 2,00,066 shares
No. of scripts traded
3 sold 49 79 49 105 168 173 25
Value of
purchases (Amt
4 in lakh) 250.38 368.24 79.16 153.70 272.94 2008.45 21.38 104.33
Value of sales
5 (Amt in lacs) 432.72 487.94 79.35 131.47 369.83 1059.95 23.90 117.81
No. of purchase
6 days 49 56 315 261 236 177 222 transactions
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Case Laws Summary (contd…)
Case laws referred to in the Chart:
Nailesh Dalal (ITA No. 3337/M/2009)
M/s Pargro Investments Pvt. Ltd. v. ITO (ITA No. 829/M/2010,ITA No.637/M/2010)
M/s S.K. Finance v. Dy. CIT (ITA No.6190/M/2008)
Bharat Kunverji Kenia v. ACIT (130 TTJ 86)
Kunverji Nanji Kenia v. ACIT (43 SOT 87)
ITO v. Hriday Nailesh Dalal (ITA No. 3469/M/2009)
ACIT v. Naishadh V. Vachharajani (ITA No.6429/M/2009)
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Impact of Circular No. 6/2016 dt. 29.2.2016 and F. No.
225/12/2016-ITA-II dt. 2.5.2016
Types of securities Listed Unlisted
Treatment by Assessee Stock in Capital Asset
in ROI: Trade
Holding Period - Less than 12 More than 12 Irrespective of
months months period of holding
Taxable as Business To decide based Capital Gains – Capital Gains
Income on established but consistency
tests desired
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Transfer of “Control and Management” alongwith the
shares
Ramnarain Sons (P.) Ltd. v. CIT (41 ITR 534) (SC)
If the shares were acquired for obtaining control over the managing agency of the Mills, the
fact that the acquisition of the shares was integrated with the acquisition of the managing
agency did not affect the character of the acquisition of the shares
Shares acquired formed a capital asset
The loss suffered by sale of some of those shares in the year of account is a capital loss
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Bonus Stripping
Dividend stripping is covered under specific s. 94(7). However, Bonus stripping not
covered
Intention at the time of acquisition – A vital factor in determining the nature of
investment – Whether capital asset or stock-in-trade
Acquisition of shares with a view to sell them post issue of bonus – To claim STCL
Bonus shares sold after 12 months amounts to LTCG (earlier exempt - Now subject to
10% tax)
Overall – Commercial gain
Can the Department treat the transaction of acquisition as “business” on the ground
that the intention at the time of purchase is to sell?
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Finance Act, 2018 – ICDS VIII
ICDS VIII - Securities held as stock-in-trade to be valued at lower of cost or NRV - To
determine category-wise (For other than Banks)
Held - Contrary to Accounting Standards
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S. 145A
Amendment to s. 145A
Non-obstante clause removed
Section itself provides for valuing inventory of securities category-wise
Unlisted / thinly traded securities to be valued only at actual cost (NRV not permitted)
Banks to value inventory of securities as per RBI guidelines
Affected entities:
NBFCs
Other traders in shares and securities
All holdings of unlisted / thinly traded shares / securities
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S. 145A (contd…)
Units of mutual funds held as S-I-T
Securities “not listed on BSE”
Hence, covered under the mischief of this amendment
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S. 145A (contd…)
Illustration of impact: NRV has to be done category wise not individual asset wise.
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2. Ind-AS – Impact on taxation of transaction in
securities
Investment in Units of Equity Mutual Fund
AS 13: Value long term investments at cost - Long term diminution to be recorded at
NRV
Ind AS 109:
Financial Assets measured at Amortised Cost:
• Hold FA to collect contractual cash flows
• Contractual cash flows = Principal + Return
Financial Asset measured at FVTOCI
• Hold FA to collect contractual cash flows + Sale
• Contractual cash flows = Principal + Return
Other Financial Assets – Measured at FVTPL (Exception: Equity instruments – Option to
FVTOCI)
EAC Opinion: Equity Mutual Fund Units are NOT Equity instruments. Hence, FVTPL
is mandatory
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Purpose of MAT
Hon’ble Finance Minister’s speech explaining the rationale for introducing s.
80VVA in the year 1983, vide Finance Act, 1983 -
“Hon’ble Members must be aware of the phenomenon of companies which are flourishing,
but are paying no tax at all, or only nominal tax. This is largely due to these companies
availing of the tax incentives and concessions available under the provisions of the Income-
tax Act. It has been a matter of concern to us that our tax system several highly profitable
companies are able to reduce their tax liability to zero even though they continue to pay high
dividends. It seems reasonable that profitable and prosperous companies should contribute
at least a small portion of their profits to the national exchequer at a time when other and
less better off sections of society are bearing burden. I, therefore, propose to provide that
fiscal incentives and concessions shall not absorb more than 70 per cent of the profits. This
would secure that companies pay a minimum tax, on at least 30 per cent of their profits.”
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Purpose of MAT (contd…)
Para 83 of the Explanatory Memorandum to the Finance Bill, 1983
“With a view to securing that the various deductions in respect of tax concessions admissible
under the Income-tax Act do not result in reducing the taxable income of companies to the
extent that no tax or only negligible tax is paid by profit-making companies, it is proposed to
make a provision in the Income-tax Act to the effect that where in the case of companies the
aggregate amount of deductions admissible under certain specified provisions of the Income-
tax Act exceeds 70 per cent of the amount of total income computed before making such
deductions, the amount to be deducted under those provisions will be restricted to 70 per
cent of the total income as computed before making such deductions…”
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Purpose of MAT (contd…)
Rationale of s. 115J - Surana Steel Pvt Ltd. v. CIT (104 Taxman 188)
“Section 115J was introduced in the assessment year 1988-89 to take care of the
phenomenon of prosperous zero tax companies which had continued in spite of the
enactment of section 80VVA. There were companies which were paying no income-tax
though they had profits and were declaring dividends. A minimum corporate tax was sought
to be ensured on prosperous companies.”
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Purpose of MAT (contd…)
1st Report of the MAT-Ind AS Committee (under the convenorship of M P Lohia)
dated March 18, 2016 :
“2. The provisions of section 115JB of the Act provide for levy of MAT on the basis of "book
profit" i.e. the net profit disclosed in the profit and loss account prepared in accordance with
the provisions of the Companies Act. For determining the book profit, section 115JB of the
Act provides for certain adjustments mainly for items relating to income-tax, appropriation
of profit, adjustment for brought forward loss/unabsorbed depreciation, revaluation of
assets, distribution of dividend, etc. The adjustment for brought forward loss/unabsorbed
depreciation is provided on the basis of the provisions contained in section 205 of the
Companies Act, 1956 which provides computation machinery for determining the amount
available for distribution of dividend. The adjustments indicate that the provisions of section
115JB of the Act seek to compute the realised profit before tax which is available for
appropriation/distribution. Hence, there appears to be an implicit relation between the
distributable profits which is available for payment of dividend under the Companies Act
and the tax base for levying MAT under section 115JB of the Act.”
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One-time Settlement Agreement
Co. A (facing financial difficulties) has a loan liability of Rs. 100 currently repayable
Bank B agreed to convert the loan liability to 0.01% preference shares (face value of
Rs. 100) which will be redeemed at par after 10 years
On the date of conversion, the fair value of preference shares amounts to Rs. 40
Accordingly, Co. A to pass the following entry:
Entry
Loan Liability Dr. 100
To 0.01% Preference Shares 40
To Profit or Loss 60
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Demergers
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Debentures (Profit or Loss)
Assume Co. A invested Rs. 150 in debentures (maturity = 5 years) of Co. B on April 1,
2015
Under AS, Co. A had recorded Rs. 150 as long-term investments (as per AS 13)
Under Ind AS 32 / 109, Co. A elected to measure the investment at fair value through
profit or loss
The fair value of such investments is as under:
Dates Fair Value
April 1, 2017 120
March 31, 2018 110
Co. A to pass the following entry on April 1, 2017 (transition date)
Retained Earnings 30
To Investment in Debentures (Rs. 150 – Rs. 120) 30
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Debentures (Profit or Loss) (contd…)
On March 31, 2018, Co. A to pass the following entry:
Profit or Loss 10
To Investment in Debentures (Rs. 120 – Rs. 110) 10
Under AS, if the amount of Rs. 40 were to be debited to the Statement of Profit or Loss
as provision for diminution in the value of asset, it would have to be added back as per
clause (i) of Explanation 1 to s. 115JB
Would the above position change u/s. 115JB for Ind AS compliant companies or would
Rs. 40 be deducted from the book profits?
Yes - The amount of Rs. 40 would be considered as transition amount and be deducted from
book profits over 5 years – Q. 1 r.w. Q. 6 of the CBDT Circular 24/2017 dated July 25, 2017
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2. Re-introduction of long term capital gains tax
Provisions prior to introduction of s. 112A
Exemption of LTCG arising on transfer of Equity shares; unit of equity oriented fund, unit of business
trust on transfer happening on or after October 1, 2004, subject to payment of STT
No exemption for MAT
Exemption from LTCG arising on sale of equity shares which were acquired on or after October
1, 2004 only if:
a) STT is paid on acquisition; or
b) The transaction is notified as exempt
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S. 112A – Applicability (from AY 2019-20)
Asset
• Chargeable under the transferred • Acquisition and
head capital gains transfer, in case of
• An equity share in a LTCA being an
company or equity share
• Unit of an equity
oriented fund or
• Unit of a business
trust STT has been
Income paid
Tax Computation = Long term capital gains would be taxed @ 10% in excess of Rs. 1 lakh
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Analysis
Indexation benefit and benefit of exchange fluctuation as provided in the 1st and 2nd
proviso to s. 48 not to be applicable to LTCG as computed u/s. 112A (3rd proviso to s.
48)
CBDT vide notification dated April 24, 2018 - specifies the nature of acquisitions in
respect of which STT need not have been paid to avail the provision of S. 112A.
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Start
N
Was STT paid on transfer
Y
Acquisition in Y
Was STT Was
N delisting period
paid on acquisition N
acquisition < 1.10.2004 N
112A N.A.
Section 112A applies
Apply S.112
COA- s. 55(2)(ac)
Mode A
Sr. Exceptions to Clause (a) – Acquisition through a preferential issue - Shares not frequently traded
1. Acquisition which has been approved by SC, HC, NCLT, SEBI or RBI
2. Acquisition by any non-resident in accordance with FDI guidelines issued by the Government of India
3. Acquisition by a Category I or Category II Alternate Investment Fund (AIF) or a Venture Capital Fund (VCF) or a Qualified
Institutional Buyer (QIB)
4. Acquisition through a preferential issue to which provisions of Chapter VII of the ICDR Regulations, 2009 do not apply –
• Conversion of loan or option attached to convertible debt instruments in terms of s. 81(3) and 81(4) of the Companies
Act, 1956 or s. 62(3) and 62(4) of the Companies Act, 2013;
• Scheme approved by a HC (u/s. 391 to 394 of the Companies Act, 1956) or NCLT (u/s. 230 to 234 of the Companies
Act, 2013)
• Rehabilitation scheme approved by Board of Industrial and Financial Reconstruction under the Sick Industrial
Companies (Special Provisions) Act, 1985 or NCLT under the Insolvency and Bankruptcy Code, 2016; and
• Acquisition by secured lenders pursuant to conversion of their debt into equity shares under the strategic debt
restructuring scheme in accordance with the guidelines specified by the RBI
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Mode B
Sr. Exceptions to Clause (b) – Acquisition not through a RSE
1. Acquisition through an issue of share by a company other than preferential issue of non-frequently traded shares
2. Acquisition by scheduled banks, reconstruction or securitisation companies or public financial institutions during their
ordinary course of business
3. Acquisition which has been approved by the SC, HC, NCLT, SEBI or RBI in this behalf
4. Acquisition under employees stock option scheme or employee stock purchase scheme framed under the SEBI
(Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999
5. Acquisition by any non-resident in accordance with FDI guidelines of the Government of India
6. Acquisition of shares of company under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
7. Acquisition from the Government
8. Acquisition by a Category I or II AIF or a VCF or a QIB
9. Acquisition by mode of transfer referred to in s. 47 (transactions not regarded as “transfers”) or s. 50B (slump sale) of
the Act if the acquisition by the previous owner was not an Improper Acquisition
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Determination of Cost of Acquisition u/s. 55(2)(ac)
A long-term capital asset, referred in s. 112A, acquired before the 1st day of February,
2018 shall be:
Higher of : (i) Cost of Acquisition of the long term capital asset; or
(ii) Lower of : (i) - Fair market value of the long term capital asset or
(ii)- Full value of consideration received or accrued
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Illustrations (1/3)
Particulars
Date of Transfer June 1, 2018
STT paid on acquisition No
Listed on date of transfer Yes
Date of acquisition April 2018
Mode of acquisition Gift
As per clause (b)(ix) of the Notification, if the previous owner has acquired the shares through
qualifying acquisitions, the assessee is covered by the said notification
Therefore, if the provisions of s. 112A were applicable to the previous owner, the provisions of s.
112A would apply to the donee
COA - Cost to previous owner, FMV as on 31.1.18, Grandfathering allowable
No indexation benefit
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Illustrations (2/3)
Particulars
Date of Transfer July 2018 in Offer for Sale in IPO
STT paid on acquisition No
Listed on date of transfer No, but STT payable u/s 97(13) of FA
2004
Date of acquisition April 1996
Section 112A would apply. Therefore indexation not available.
Computing COA- Since, the shares not listed on the date of transfer, grandfathering u/s 55(2)(ac) not
available (Expln (a)(iii)(A) and (B) apply only to shares listed on date of transfer.
However, substitution of FMV as on 1.4.2001 available because 55(2)(ac) is “subject to” 55(2)(b)
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Illustrations (3/3)
Co A has demerged its Real estate Undertaking to Co B, with Appointed Date being 1.4.2018,
In consideration of the demerger, Co B has issued its shares to shareholders of Co. A.
A shareholder transfers shares of both the companies, COA to be as per s.49(2C)
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Interplay between section 50CA and 56(2)(x) (contd…)
Example
Transferee/Buyer : A Ltd.
Transferor/Seller : B Ltd.
A Ltd. purchased 100 shares of a private company from B Ltd. for a price of INR 600 per share;
total consideration = INR 60,000
B Ltd. had acquired such shares at INR 500 per share; gross amount paid = INR 50,000
Say, the FMV of said shares on transfer date is INR 700
What would be the implications of provisions of section 50CA and 56(2)(x) under the
mentioned circumstances ?
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YOGESH THAR
Interplay between section 50CA and 56(2)(x) (contd…)
Prior to amendment
Impact on Transferor – B Ltd. Impact on Transferee – A Ltd.
Post amendment
Impact of Sec. 50CA Impact of Sec. 56(2)(x)
Transferor – B Ltd. Transferee – A Ltd.
When A Ltd sells the shares at (say) Rs.800 (which is also its FMV) ;
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50CA presupposes consideration
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YOGESH THAR
Rights and Bonus issue and s. 56(2)(x)
Section 56(2)(x) – Any person ‘receives’ any property without consideration or for
inadequate consideration ;
Property includes shares and securities ;
‘Receives’ presupposes the existence of the shares at the time when the person receives
Right issue and bonus shares are fresh allotments by the Company – Can such receipt of
shares be regarded as receipt of property without consideration or for inadequate
consideration?
Sudhir K Menon (HUF) v. ACIT (162 TTJ 425)(Mum)
• Issue of bonus shares – merely capitalisation of profits of a company; no receipt of property
• Proportionate allotment in case of rights issue, no receipt of property
DCIT v. Dr. Rajan Pal (180 TTJ 714) (BangT)
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YOGESH THAR
Convertible Instruments and s. 56(2)(x)
Receipt of equity shares is in ‘consideration’ of extinguishment of rights in bonds/preference
shares :-
Hence, not without consideration ;
Also not inadequate consideration – sacrifice = gain ;
Ratio of CIT v. Bai Shrinibai K. Kooka (46 ITR 86) (SC) and CIT v. Groz-Beckert Saboo
(116 ITR 125) (SC)
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Other Issues
What would be the position in case of buy-back of shares?
M/s. Vora Financial Services P. Ltd v. ACIT (ITA No. 532/Mum/2018)
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Rules – Whether fair
Empirical studies show that market value of equity shares of an investment company does not capture the full market
value of its investments in other companies. The value leakages are on account of distance of time and control of
ownership, which, thereafter results in an inevitable discount especially because of the economic concept of liquidity
preference which requires converting a future inflow to its present value by using a rate of discount. Also, erosion on
account of tax leakages normally get factored in such valuation. The rule is unrealistic and would result in notional
taxation in cases where the transaction has happened at fair value considering the above aspects.
Valuation of equity shares of a company which carries on business as a going concern cannot be made based on present
market value of its immovable property. Market value of an immovable property may be considered only in case the
valuation is for the purpose of liquidation, or when the property is in surplus and is not actively used in business.
For immovable property “the value adopted or assessed” will never exist in case of sale/transfer of shares of a company.
It will always be “the value assessable”. Indeed, value assessable as per ready reckoner/circle rate does not always reflect
the fair market value. There have to be enough safeguards like in s. 50C if Stamp Duty value is to be considered even for
share valuation.
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Issues on Rules
As per the rules, equity shares of a foreign company would be “unquoted equity share” even if it is
listed on a foreign stock exchange.
The rules shall apply irrespective of the valuation methodology agreed upon in Shareholder’s
Agreement/ J.V. Agreement;
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Issues on Rules (contd…)
The rules may apply irrespective of lock-in-period under such Shareholder’s Agreement/ J.V.
Agreement where internal transfer to Affiliates is permitted ;
Leasehold rights in land whether to be considered for computing the value of shares for the purpose of
section 56(2)(x) / 50CA r.w. Rule 11UA
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Applicability to transfer of Indian company shares
between foreign companies either by way of gift or sale
Section 56(2)(x)
Gifts shares of IC
FC 1 FC 2 Where any person receives in any previous year, from
any person
• Receipt of shares by FC 2/ FC 1
IC
Section 5
Since change of name in IC’s Share Register - the
FC 1 receipt is in India
Gifts shares of IC Falls within the scope of total income
WOS
Section 9(1)
Income accruing or arising directly or indirectly
through the transfer of a capital asset situated in India
IC
Taxability u/s 56(2)(x) is triggered on “receipt” and not
on “transfer”
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YOGESH THAR
Applicability to S.8 Companies
Questions :
Co A X Ltd
Issue of 1000 shares
at Rs. 10 per share What would be the addition under section
56(2)(x) in the hands of X Ltd.?
Co. A is registered under section 8 of the Companies Act, 2013
The Balance Sheet of Co. A as on the valuation date is as under:
Would the position differ if Co. A is
Liabilities Assets registered under section 12A/AA of the Act?
Share capital 1,00,000 Movable 20,00,000
(10000 shares of Fixed Assets Would the position differ if X Ltd. was
Rs. 10 each) registered under section 8 of the Companies
Surplus 24,00,000 Current Assets 4,00,000 Act, 2013 and not Co. A?
Cash/ Bank 1,00,000
Balance
25,00,000 25,00,000
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Applicability of Rule- Pre or Post Issue
Value as per Rule 11UA: A– L = Rs. 600/share Can addition under section 56(2)(x) exceed the
No. of shares real benefit?
Mr. A has been allotted 5000 shares of P Ltd. at face value on
preferential basis
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YOGESH THAR
Applicability of Rule- Pre or Post Issue (contd…)
Liabilities Assets
Share capital 100,000 Plant & Machinery 30,00,000
(10,000 shares of Rs. 10
each)
Loans 25,00,000 CAs 20,00,000
Surplus 29,50,000 Bank Balance 5,50,000
55,50,000 55,50,000
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Multi layered shareholdings
Mr. Z is to purchase shares of A Ltd. In case, A Ltd. holds leasehold rights in a plot of
land, would its fair market value be considered under
Rule 11UA?
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5. TAXABILITY OF ESOPS
Taxability of ESOPs
Grant of Options
Vesting of Options
Exercise of Options
Difference between fair market value and the exercise price - Taxed as perquisites
Determine FMV as per the Income-tax Rules, 1962
Tax deduction at source u/s. 192 of the Income-tax Act, 1961
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YOGESH THAR
Taxability of ESOPs (contd…)
Sale of shares
Capital gains tax liability - Difference between consideration received and cost of acquisition
Cost of acquisition = FMV taxed as perquisite
Determine period of holding from date of allotment / transfer
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Issues under DTAA
Compliance issue
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Deductibility of ESOP expenses
Allowability u/s. 37: Law getting settled in favour of allowability of the amount debited to
P&L…
Allow –
• CIT v. PVP Ventures Ltd. [TC (A) No. 1023 of 2005 (Mad HC)]
• CIT v. Lemon Tree Hotels Ltd. (ITA No. 107/2015) (Del HC)
• CIT v. People Interactive India P. Ltd. (ITA Nos. 6990, 6986, 4979/M/2015)
Quantum of deduction –
• Biocon Ltd. v. DCIT (ITA Nos 368/369/370/371/1206/Bang/2010)
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Deductibility of ESOP expenses (contd…)
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Ind AS – MAT implications
Hold Co. grants 200 share options to each of 100 employees of Sub Co., conditional upon the
completion of 2 years’ service with Sub Co
The fair value of the share options on grant date is Rs. 30 each
At grant date, Sub Co. estimates that 80% of the employees will complete 2-year service period
At the end of the vesting period, 81 employees complete 2 years’ of service
Hold Co. does not require Sub Co. to pay for the shares needed to settle the grant of share
options
Sub Co. to pass the following entries as per Ind AS 102:
Year 1
Remuneration expense 2,40,000
To Other Equity (Deemed Capital Contribution) 2,40,000
(200 options x 100 employees x Rs. 30 x 0.8/2 years)
60
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Ind AS – MAT implications (contd…)
Sub Co.
Amount debited to profit or loss as remuneration expenses – Allowable under MAT
Amount credited to Other Equity – Taxable under MAT if suggestion of Ind AS Committee Report is
accepted - Therefore, net impact on book profits will be NIL
Hold Co.
No amount is debited / credited to profit or loss. Therefore, no question of MAT
However, amount credited to ESOP O/s. Account will form part of Other Equity – Will credit be
taxable under MAT if suggestion of Ind AS Committee Report is accepted ?
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YOGESH THAR
6. GAAR applicability to transactions in securities - in
particular for FPIs?
Circular no.7 of 2017 dated 27/01/2017
Central Board of Direct Taxes (“CBDT”) has issued the said circular providing clarification on
implementation of GAAR
“Question no. 4: Will GAAR apply where the jurisdiction of FPI is based on non-tax
commercial consideration, and such foreign portfolio investor
(FPI) has issued P-notes referencing Indian securities? Will GAAR
apply to deny treaty benefits to a Special Purpose Vehicle (SPV) on
the ground that it is located in a tax friendly jurisdiction, or on the
ground that it does not have its own premises or employees?
Answer: GAAR shall not be invoked merely on the ground that the entity is
located in a tax efficient jurisdiction. If the jurisdiction of the FPI
is finalised based on non-tax commercial considerations and the
main purpose of the arrangement is not to obtain tax benefit,
GAAR will not apply.
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Draft guidelines for GAAR implementation under Direct Tax
Code Bill, 2010 (“DTC”)
A foreign investor has invested in India through a holding company situated in a low tax
jurisdiction “X”
The holding company is doing business in the country of incorporation, i.e. “X‟, has a Board
of Directors that meets in that country and carries out business with adequate manpower,
capital and infrastructure of its own and therefore, has substantial commercial substance in the
said country “X”
Would GAAR be invocable or would the arrangement be permissible ?
In view of the factual substantive commercial substance of the arrangement, Revenue would
not invoke the GAAR provisions.
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Under the Act
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Case Study
Mechanics :
It is proposed to sell the shares of “C Ltd” to another
company “D Ltd”;
A Ltd. In case the shares of C Ltd are directly sold to D Ltd, B Ltd
Country A
would be liable to tax in India.
Plausible option :
100% India B Ltd. is liquidated and A Ltd being the shareholder of B Ltd
would be liable to tax u/s 46(2) of the Act ; but A Ltd. can
B Ltd. avail the treaty benefit (assuming grandfathering) and such
liquidation proceeds would be taxable in country of residence
49% – Country A;
FACTS :
A Ltd The India-F1 tax treaty provides for non-taxation of
Y Ltd 100% capital gains in the source country and country F1
49% charges no capital gains tax in its domestic law.
Country- C1
Country- FI- LTJ A Ltd is also designated as “ permitted transferee”
India of Y Ltd. “ Permitted transferee” means that though
Z Ltd X Ltd Debt
51% shares are held by A Ltd, all rights of voting,
management, right to sell etc., are vested in Y Ltd.
Y Ltd is a company incorporated in country C1 and is a As per the joint venture agreement, 49% of X Ltd’s
non-resident in India. equity is allotted to A Ltd and 51% is allotted to Z
Z Ltd is a company resident in India. Ltd.
A Ltd. is a company incorporated in country F1 and it is a
100% subsidiary of Y Ltd. Thereafter, the shares of X Ltd held by A Ltd are
A Ltd and Z Ltd form a joint venture company X Ltd in sold to C Ltd., a company connected to Z Ltd.
India after the date of commencement of GAAR group.
provisions. There is no other activity in A Ltd;
As per the tax treaty with country F1, capital gain
Can GAAR provisions be invoked arising to A Ltd are not taxable in India.
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YOGESH THAR
Analysis
The arrangement of routing investment through country F1 results into a tax benefit. Since there is no
business purpose in incorporating company A Ltd. in country F1 which is a LTJ, it can be said that the
main purpose of the arrangement is to obtain tax benefit. The alternate course available in this case is
direct investment in X Ltd. joint venture by Y Ltd. The tax benefit would be the difference in tax
liabilities between the two alternate courses.
The next question is, does the arrangement have any tainted element? It is evident that there is no
commercial substance in incorporating A Ltd. as it does not have any effect on the business risk of Y
Ltd. or cash flow of Y Ltd. As the twin condition of main purpose being tax benefit and existence of a
tainted element are satisfied, GAAR may be invoked.
Additionally, as all rights of shareholders of X Ltd are being exercised by Y Ltd instead of A Ltd. it
again shows that A Ltd. lacks commercial substance. Hence, GAAR may be invoked.
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YOGESH THAR
7. Penny stocks
Taxability u/s.115BBE
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YOGESH THAR
Safeguards against transactions being treated as
fictitious
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YOGESH THAR
Documents required to prove genuineness
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YOGESH THAR
Judicial Analysis
In favour of the assessee:
Pr CIT vs. Prem Pal Gandhi (P&H High Court)(ITA-95-2017)
Shyam R Pawar v CIT (229 Taxman 256 (Bom HC)
CIT v Jamna Dev Agarwal (328 ITR 656) (Bom HC)
CIT v Vivek Mehta (204 Taxmann 177) (P&H HC)
CIT v Mahesh Chandra G. Vakil (220 Taxmann 166) (Guj HC)
Smt. Anjli Pandit v ACIT (188 TTJ 645) (Mumbai - Trib.)
ITO v Arvind Kumar Jain HUF (ITA No. 4862/Mum/2014)
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YOGESH THAR
8. Transfer Pricing
Transfer Pricing
Inbound Investments
Whether subscription to shares of Indian Subsidiary by Foreign Co. considered as
‘international transaction’
Vodafone India Services (P.) Ltd v. UOI (368 ITR 1) (BOM)
• TP provisions only apply if there is chargeable income resulting from the transaction
• Capital investments, which do not create chargeable income, cannot therefore be brought within
the scope of transfer pricing provisions
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YOGESH THAR
Transfer Pricing (contd…)
Outbound Investments
Whether subscription to shares of Foreign Subsidiary by Indian Holding Company
considered as ‘international transaction’
M/s PMP Auto Components v DCIT (ITA 7724/Mum/2014)
• Investments in share capital outside India were in the nature of capital investments, and such
transactions are not in the nature of "international transactions" within the meaning of s. 92B
Whether transfer pricing provisions would apply for buy-back taxable u/s 115-QA
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YOGESH THAR
Thank You