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Equity oriented Derivatives are not shares of companies trading loss cannot be deemed speculative loss by invoking Explanation to S.73- a study

Income Tax - By: - CA DEV KUMAR KOTHARI - Dated:- 22-10-2016 - Important links and references: Section 2 (84) of the Companies Act 2013 - meaning of share Section 2 (ac) and (h) of The SECURITIES CONTRACTS (REGULATION) ACT, 1956 Apollo Tyres Ltd. Vs Commissioner of Income-tax 2002 (5) TMI 5 - SUPREME Court- units of UTI are not share in company. CIT Vs DLF Commercial Developers Limited ITA 94/2013 Dated: - 11 July 2013 2013 (7) TMI 334 - DELHI HIGH COURT DLF Commercial Developers Limited, Versus .....

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n stock exchanges. Derivative: From SECURITIES CONTRACTS (REGULATION) ACT, 1956 Definitions. 2. In this Act, unless the context otherwise requires, ac) derivative includes: (A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; (B) a contract which derives its value from the prices, or index of prices, of underlying securities;] (h) securities include: shares, scrips, stocks, bonds, debe .....

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any other hybrid contract of pre-determined fixed duration, linked for the purpose of contract fulfilment to the value of a specified real or financial asset or to an index of securities. With Securities Laws (Second Amendment) Act,1999, Derivatives has been included in the definition of Securities. The term Derivative has been defined in Securities Contracts (Regulations) Act, as:- A Derivative includes: - a. a security derived from a debt instrument, share, loan, whether secured or unsecured, .....

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uity shares of companies Shares are issued by companies and a share represent proportionate share in capital of company Derivatives are not issued by companies and unit of derivatives does not represent proportionate share in any of company whose shares may be composed in the derivative. Shareholder has voting rights in company. Derivative held does not confer any voting rights in any company. Shareholder has rights for corporate benefits and privileges announced by company. Derivative does not .....

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on the last Thursday of that month. Shares held in a company continue to be share in particular company, except changes due to schemes of arrangement of companies like amalgamation, merger, demerger etc. In case of derivatives composition of equities are changed from time to time depending on policies of stock exchange / SEBI, market conditions, volume of trading in shares of any company, changes in composition of indices at stock exchange and also perception of big investment houses and advisor .....

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which are covered in particular derivative. The price does not move with market at present, but expectation of market in future and before expiry. Therefore, what is applicable in case of shares is not at all applicable in case of derivatives. Furthermore stock exchanges also changes composition of derivatives from time to time, this also causes fluctuation in price of derivatives. Price of shares can possibly be influenced to a little extent, by some factors and actions of people in control of .....

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life of company unless capital is reduced and / or shares are redeemed. As can be noted from definition of derivative a Derivative means a forward, future, option or any other hybrid contract of pre-determined fixed duration, Thus, the life of derivative is of fixed duration and has nothing to do with life of any company. Shares of a company, even a company having several companies as subsidiary and associates cannot be equated with a unit of mutual fund. Derivatives can be compared with units o .....

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ch mutual fund holds shares. Therefore, a unit holder does not become entitled to any right, benefit or privilege in respect to shares of companies held by mutual fund. For example, when a mutual fund hold shares in any company, the mutual fund receives corporate benefits announced by company in respect of shares held by mutual fund. Thus dividend declared by company, in respect of shares held by mutual fund, will be received by mutual fund and not by unit holders. The mutual fund may declare di .....

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to S.73- deemed speculation vis a vis derivatives: Explanation to S. 73 is to discourage dealing in shares of other companies with a view to reduce tax liability. That cannot be applied in any manner to derivatives. Any of companies which form basis of any derivative cannot control price of derivatives, a general investor cannot control price of derivatives. For this reason also derivative cannot be considered as shares for invoking the Explanation to s. 73. In judgment of the Supreme Court in c .....

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of stock exchanges, but the mechanism of derivatives is entirely different. Derivative cannot, by any stretch of imagination be said to be share in company. Therefore loss on sale of derivatives cannot be considered as speculative loss under any provisions of the IT Act. The business in derivatives is considered as normal business, it is not considered as speculative business in general sense as well it is excluded from meaning of speculative business also. The Explanation to S.73 cannot be inv .....

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equities cannot be called shares of any company or companies, though such derivatives may be backed by shares of such companies. Explanation to section 73 of the IT Act states that where a company carries on the business of purchase and sale of shares of other companies, such company shall for the purpose of this section be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. On a plain reading of the section, and .....

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)(d) of the IT Act. On a plain reading of section 43(5)(d) of the Income Tax Act, it is clear that the section is applicable to derivatives only. The section specifically goes on to say that trading in derivatives shall not be deemed to be a speculative transaction. If the intention of the legislator was to treat this as a speculative transaction in the case of companies trading in shares and securities, then it would be stated so in no uncertain terms, besides, since section 73 was already exis .....

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nt developments in the past decade in the capital market including the introduction of trading in financial derivatives. We have also established a transparent system of trading with adequate safeguards for audit trail. Hence, I propose to amend the Income Tax Act to provide that trading in derivatives in specified stock exchanges will not be treated as speculative transactions for the purposes of the Income Tax Act. The Finance Minister has stressed upon transparency and audit trail in his budg .....

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that intention of section 73 was to curb manipulation. Circular No. 204, dated 24-7-1976 Taxation Laws (Amendment) Act, 1975-III Treatment of losses in speculation business - Section 73 19.1 Section 73 provides that any loss computed in respect of speculation business carried on by an assessee will not be set off except against the profits and gains, if any, of another speculation business. Further, where any loss, computed in respect of a speculation business for an assessment year is not whol .....

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n business. Thus, in the case of aforesaid companies, the losses from share dealings will now be set off only against profits or gains of a speculation business. Where any such loss for an assessment year is not wholly set off against profits from a speculation business, the excess will be carried forward to the following assessment year and set off against profits, if any, from any speculation business. Taxation Laws (Amendment) Act, 1975-III 19.2 The object of this provision is to curb the dev .....

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J, IN THE ITAT, MUMBAI 'J' BENCH in the matter of Deputy Commissioner of Income tax vs. SSKI Investors Services (P) Ltd wherein it was held that derivative transactions are not Speculative transactions. 2012 (6) TMI 82 - ITAT KOLKATA IN THE ITAT KOLKATA BENCH 'A' in the matter of Deputy Commissioner of Income-tax, Circle-4, Kolkata v. Madanlal Ltd wherein it was held that derivative transactions are not Speculative transactions and are not covered under explanation to Section 73. .....

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