BOMBAY CHARTERED ACCOUNTANTS SOCIETY

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BOMBAY CHARTERED ACCOUNTANTS SOCIETY

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Indian Derivatives in Hongkong. Ex- RBI Governor-Mr. Bimal ... Barring Bank-Nick Leeson. Infosys-9th April, 2003. Pradip Kapasi & Co. Chartered Accountants ... – PowerPoint PPT presentation

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Title: BOMBAY CHARTERED ACCOUNTANTS SOCIETY


1

DERIVATIVES SPECULATIVE TRANSACTIONS TAX
ASPECTS
  • BOMBAY CHARTERED ACCOUNTANTS SOCIETY
  • ON
  • 8TH SEPTEMBER 2004
  • AT
  • WALCHAND HIRACHAND HALL, IMC MUMBAI

2
Happenings
  • Indian Derivatives in Hongkong
  • Ex- RBI Governor-Mr. Bimal Jalan
  • Volume on the Bourses
  • Warren Buffet-www.berkshirehathaway.com
  • Barring Bank-Nick Leeson
  • Infosys-9th April, 2003

3
Definitions
  • A Derivative is
  • an instrument whose value is derived from the
    value of one or more underlying assets like
    commodities, currency, securities, index, etc.
  • a financial product which is derived from
    another financial product or commodity.
  • a term having its origin in mathematics, which
    refers to a variable which has been derived from
    another variable.

4
Features Functions
  • Features
  • Independent Existence
  • Dynamic in nature
  • Zero value at inception
  • Promise for performance
  • Leverage
  • Cash settled
  • Functions
  • Transfer of risk
  • Price discovery
  • Market completion

5
Instruments Players
  • Financial Instruments
  • Index Futures Options
  • Stock Futures Options
  • Market Players
  • Speculators-Day and Position Players
  • Hedgers
  • Arbitrageurs

6
Legal Framework
  • History and Need
  • SCRA
  • Wagering Contracts
  • Dr. L. C. Gupta Comm.-Regulatory Framework
  • J. R. Varma Committee-Containment of Risk
  • SEBI, BSE and NSE

7
F O
  • Futures-An improvement over Forwards
  • Options
  • Option advance
  • Call Put
  • American European

8
Futures v. Options
  • Dimensions
  • Rate of Interest as a consideration
  • Pricing Process
  • Exposure
  • Initial Cost
  • Degree of Risk of the parties

9
Trading Mechanism
  • Trading commenced in June 2000
  • SEBI authorized Exchanges
  • Clearing House-Counter party
  • Derivative segment
  • Clearing and Trading Member
  • Financial guarantee
  • Deposit and Margins
  • Index and Stocks-Options Futures

10
Exchange Operations
  • S P CNX NIFTY and BSE SENSEX
  • Standardized Contracts
  • Trading Units Minimum value
  • Screen based trading
  • Three months cycle
  • Settlement Date-Last Thursday
  • Initial margin-Determination-Cash equivalent
  • Mark to Market-Daily Margins
  • Cash settlement only
  • Range of Strike Price determination
  • Transaction Costs

11
Accounting Guidelines
  • Guidance Notes of ICAI
  • Accounting for Equity Index Futures-December
    2000
  • Accounting for Equity Index Options-June 2002
  • Accounting for Equity Stock Options-June 2002
  • Accounting for Equity Index stock/stock
    Futures-Options- September 2003, ICAIJ
  • IAS 39 IAS 32
  • FAS 133
  • AS 11, AS 13 AS 16

12
TAXATION
13
General
  • Whether an asset-Security under SCRA
  • Whether ind. asset-Cash settled, Rights,
    Warrants
  • Whether a cap. asset-S. 2(14)- Property with
    value
  • Head of Income-Relevant factors
  • Likely concession for commodities

14
Business Income
  • Whether Speculation Business
  • Applicability of Explanation to S. 73
  • Treatment of provision for losses
  • Book Profit
  • Effect of daily settlement
  • Method of Accounting
  • Transaction Cost
  • Valuation at the year end
  • Time of accrual of premium for writer

15
Speculative Transaction
  • S. 43(5)- Speculative transaction means a
    transaction in which a contract for the purchase
    or sale of any commodity, including stocks and
    shares is periodically or ultimately settled
    otherwise than by the actual delivery or transfer
    of the commodity or scrips
  • Provided that for the purposes of this clause -
  • (a) A contract in respect of raw materials
    or merchandise entered into by a person in the
    course of his manufacturing or merchanting
    business to guard against loss through future
    price fluctuations in respect of his contracts
    for actual delivery of goods manufactured by him
    or merchandise sold by him or
  • (b) A contract in respect of stock and shares
    entered into by a dealer or investor therein to
    guard against loss in his holdings of stocks and
    shares through price fluctuations or
  • (c) A contract entered into by a member of a
    forward market or a stock exchange in the course
    of any transaction in the nature of jobbing or
    arbitrage to guard against loss which may in the
    ordinary course of his business as such member
  • Shall not be deemed to be a speculative
    transaction

16
Speculation Business
  • Speculative Transaction S.43(5)
  • S.2(h) of SCRA
  • Shares Stocks
  • S. 2(46) of Companies Act
  • Commodity
  • Nirmal Trading Co. 82 ITR 382 (Cal)
  • Compound Financials, 67 ITD 304 (Bang.)
  • ANZ Grindlays Bank, 88 ITD 53 (Del)
  • Actual Delivery- Lex non cogit ad impossibilia
  • Difficulties in applying Exceptions
  • Explanation to S.73
  • Apollo Tyres, 255 ITR 273 (SC)

17
Business Income
  • Allowance of Provision
  • Book Profit Provision for Losses
  • Mark to Market and accrual
  • Method of Accounting
  • Transaction Cost
  • Valuation of Stock and Fair value accounting

18
Capital Gains-General
  • Underlying Assumptions
  • Right an asset
  • Fictional purchase sale
  • Merges with a larger asset
  • Situations
  • Cash settled
  • Hedging
  • Delivery settled
  • Short-Term Capital Asset
  • Lapse of contract

19
Capital Gains-Specific
  • Future Contracts-Buyer Specific
  • Future Contracts-Seller Specific
  • Call Options-Buyer Specific
  • Call Options-Seller Specific
  • Put Options-Buyer Specific
  • Put Options-Seller Specific

20
Audit
  • No Special provisions
  • Regulatory Requirements
  • Income Tax Act
  • Value or Difference
  • Gross or Net

21
SPECULATIVE TRANSACTIONS
22
Speculation Business
  • Speculative transaction S.43(5)
  • Explanation 2 to S.48
  • Speculation Loss S.73
  • Explanation to S.73

23
Speculative Transaction s 43(5)
  • Contract for sale or purchase
  • Any commodity including stock shares
  • Periodical settlement
  • Without actual delivery or transfer
  • Exceptions
  • Hedging to guard loss on price fluctuations
  • Dealer or Investor
  • Jobbing or arbitrage
  • Member of a Forward market or Exchange

24
Explanation 2 to S.28
  • Speculation transactions - business
  • Distinct and separate business
  • Separate computation for I T Act
  • R. Chinnaswamy Chettiar, 96 ITR 353 (Mad.)

25
Speculation Business Loss
  • Restriction on set-off
  • Jaggannath Mahadeo Prasad, 71 ITR 296 (SC)
  • Profit of Speculation Business only
  • Any such business
  • Priority of set-offCir. No. 23 dt. 12.9.1960 -
    72(2)
  • Application to loss as also profit
  • Samba Trading Invts. 58 TTJ 360(Mum)
  • Carry forward
  • Period of 8 succeeding years
  • By legal heirs

26
Deeming Fiction Expl. to S.73
  • Company assessees
  • All companies
  • Shares
  • Purchase and Sale
  • Deemed Speculation Business
  • Exceptions
  • GTI mainly from specified heads
  • Banking Company
  • Loans Advances Company

27
Hedging - I
  • Requirements
  • Two contracts
  • Commodities and scrips
  • Holdings Contract of delivery
  • Guard against price fluctuations
  • Purchase- Also sale
  • Different quality-quantity and value
  • Cir. No. 23D dt. 12.9.1960
  • Different scrips
  • Circular 23D
  • Index F O

28
Hedging - II
  • Burden of proof
  • Joseph John, 67 ITR 74 (SC)
  • Co-relation necessary
  • Somasundaram Chettiar, 194 ITR 1 (SC)
  • Independent treatment
  • Arjan Khimji Co., 121 ITR 421 (Bom)

29
Delivery
  • Relevance of intention, payment and delivery
  • Abdul Gani Haji, Habib, 72 ITR 6 (Cal.)
  • Actual delivery
  • Blank transfer forms
  • Mangal Chand Bhanwarlal, 255 ITR 329 (Raj)
  • Delivery Notes
  • Davenport Co., 100 ITR 715 (SC)
  • Recalled delivery
  • Clayton Commercial, 67 ITD 118 (Del)
  • Intended delivery
  • Gandhi Bhandari Co., 83 ITD 680 (Pune)
  • Pending delivey
  • Sampath Iyengar Ninth Edn.
  • Judicial controversy
  • No delivery
  • Ramalinga Choodambigal 239 ITR 120 (Mad.)

30
Settlement
  • Settlement without delivery
  • S.63 of Indian Contract Act
  • Shantilal (P) Ltd., 144 ITR 57(SC)
  • Kamani Tubes Ltd., 207 ITR 298 (Bom)
  • F/E Forward contracts
  • Guard against fluctuation
  • Badridas Gauridu, 261 ITR 251 (Bom)
  • Loss in illegal contract
  • S.C. Kothari, 82 ITR 794 (SC)
  • Nature of deemed profit u/s. 41(1)
  • Rajputana Trading Co. Ltd. 72 ITR 286 (SC)

31
Stray transactions
  • Concerted activity and efforts
  • Treatment under the law
  • Casual Income
  • Other sources
  • Capital Gains
  • Plurality of transactions
  • Indian Commercial Co., 106 ITR 465 (Bom)
  • G.P. Birla HUF, 199 ITR 173(Cal)

32
Cum-dividend purchase and sale
  • Dividend and Loss
  • Effect of S.94(7) and (8)
  • Effect ind. of statutory provisions
  • Soma Textiles Ind., 87 ITD 326 (Ahd)

33
Arbitrage
  • Nature of Operations
  • Whether business
  • Whether speculation business

34
Tax Audit
  • Applicability
  • Growmore Exports Ltd., 78 ITD 95 (Mum)
  • Gross or Net

35
Escaping the Explanation EE Investment in
Shares EE-I
  • Business of purchase and sale
  • Relevant factors
  • Investment Income
  • Mysore Rolling Mills, 105 ITR 405 (Karn)
  • Venkateshwara Rice Oil Mills, 154 ITR 756 (AP)
  • VIP Growth Fund Ltd., 95 Taxmann 13 (Delhi)
  • Kruti Marketing P. Ltd., 118 Taxman 194 (Ahd)
  • Investment by a dealer in shares/stock broker
  • Kethankumar A.Shah 242ITR 83 (Ker.)
  • Relevance of books of account
  • Merfin (India) Ltd., 80 ITD 399 (Hyd)

36
Relevance of S.70 to S.72 EE-II
  • Overriding effect
  • RPG Industries Ltd., 85 ITD 105 (Kol)(TM)
  • Expl. Over S. 43(5)
  • C.N.M.P. Inv. (P) Ltd. 78 ITD 297(Del.)

37
Lending /Banking company EE-III
  • Exception to general rule
  • Parameters
  • Overriding . 43(5)
  • C.N.M.P. Inv. (P) Ltd., 78 ITD 297 (Del)

38
GTI mainly from EE-IV
  • Criteria for determination
  • Relevance of other years
  • Amrutlal Co., 212 ITR 540 (Bom)

39
Composition of GTI EE-V
  • Mfg () Shares(-) O/I ()
  • Associated capital markets, ITA No. 1103, 1104,
    3051/M/2001 dt.31.03.03 G Bench
  • Rajan Enterprises, 41 ITD 369(Bom.)
  • Shares (-) O/I ()
  • Eastern Aviation Ind. 208 ITR 1023 (Cal)
  • Aryasthan Corp Ltd., 253 ITR 401 (Cal)
  • Park View Properties Ltd. 261 ITR 473 (Cal.)
  • Shares (-) O/I (-)

40
Share business - only business EE -VI
  • Part to include whole
  • Arvind Investments Ltd., 192 ITR 365 (Cal)

41
In shares of 1 company EE -VII
  • Purchase sale - shares of companies
  • Plural to include singular - GCA
  • Laxmi Feeds Exports Ltd. 62 ITD 315(Mum)
  • Akrosh Inv. Lea. (P) Ltd. 90 ITD 287(Mum)
  • IPO Subscriptions
  • Sri Gopal Jalan Co. AIR 1964 SC 250

42
Losses of a stock broker EE -VIII
  • Business of purchase and sale of shares
  • Representative capacity
  • Application of exception (c)
  • Shri Shrawankumar Agarwal, 249 ITR233(All.).
  • Same business test
  • Pangal Vittal Nayak,74ITR754(SC)
  • K.L.Jhunjhunwala, 139ITR371(Cal.)
  • NirmallkumarCo. 161ITR413(Cal.)
  • Losses of clients unpaid
  • Shah Prataprai Nowpaji 139 ITR 149(AP)

43
Business Expenditure EE - IX
  • Effect on quantum of loss
  • Common expenditure
  • Maharashtra Sugar Mils, 82 ITR 452 (SC)
  • Rajasthan Warehousing Co., 242 ITR 450 (SC)
  • Associated Capital Market Tdg Inv.s case
  • Section 14A

44
Expl. and Derivatives EE - X
  • Not a share
  • Apollo Tyres, 255 ITR 273 (SC)
  • S. 43(5) does not apply

45
Loss on valuation of stock EE - XI
  • Purchase and sale of share
  • Associated Capital Markets case
  • Nirvan Holding Pvt. Ltd., ITA No. 529/M/2001
  • Prudential Const Co. P. Ltd., 75 ITD 338 (Hyd)
  • Purchase and sale in different years
  • Sun Dist. Mining, 68 Taxman 223(Cal.)

46
Units and Other Sec. EE - XII
  • Application to shares only
  • Apollo Tyres, 255 ITR 273 (SC)

47
Objective behind Expl. EE - XIII
  • Losses by dealing in shares of group companies
  • Cir. No. 204 (Para 19.2) dt. 24.07.1976, 110 ITR
    32(St)

48
  • THANK YOU
  • AND
  • GOOD LUCK