The Hindu Business Line : Prospering from multiplying shares

I purchased 100 shares of a company in 2000 for Rs 4,000 per share. The company has split its shares and allotted five shares for every share held. The company has also given a bonus of 12 shares for every one share held after the splitting. I now, therefore, hold 6,000 shares of the company. If I were to sell shares for Rs 15 lakh, how will the capital gain be computed? Had I gifted the original 100 shares to my brother, and if he were to sell the shares, how will the gain be computed? Avinash Gupta

It will not make a difference in respect of the computation of capital gains whether the shares are sold by you or by your brother after you have gifted them to him. The capital gains will be long term and the indexed cost of acquisition can be reduced from the consideration on sale of the shares. The cost of acquisition of the 6,000 shares will be the price paid for acquiring the 100 shares, which you had originally purchased. You may note that long-term capital gain is exempt under Section 10(38), if the sale is through a recognised stock exchange where securities transaction tax is paid at the time of sale.

I have taken an insurance policy in the names of my daughter-in-law and grandson. I paid Rs 25,000 as annual premium. Can I claim deduction under Section 80C in respect of such premium paid for a LIC policy taken in their names?

Can sums invested in infrastructure related mutual funds be claimed as deduction under Section 80C irrespective of the amount of investment subject to the overall limit of Rs 1 lakh?

Also, do deposits made under the senior citizens savings scheme in 2005-06 qualify for tax deduction under Section 80C? R. Chandra

Under Section 80C deduction in respect of life insurance premium can be claimed by an individual only where the policy is taken for the benefit of such individual or his/her spouse or child.

Since you have taken the policy in the names of your daughter-in-law and grandson, you will not be able to claim the benefit of deduction under Section 80C in respect of the premium paid by you.

As regards the investment in the units of a mutual fund that are infrastructure related, it will have to be examined whether the particular scheme has been approved by the Central Government for allowance of deduction under Section 80C. The allowability of deduction will depend on this factor and will have to be decided on a case-to-case basis.

Investment by way of deposits under the senior citizens savings scheme does not appear to be eligible for deduction under Section 80C.

My total income for the financial year 2005-06 is around Rs 4 lakh. Of this, I earned Rs 25,000 from sale of shares. I acquired the shares by applying for them at the time of the IPO. I sold them within 12 months. The sale was through a recognised stock exchange and the STT was paid at the time of sale. I have utilised borrowed funds for investment in these shares. Will the transactions be taxed at 30 per cent as business income or at 10 per cent as short-term capital gains? Will it make a difference if the investment is not out of borrowed funds but my own? Satish Punjabi

The Central Board of Direct Taxes in its instruction No.1827 dated August 31,1989 laid down certain tests to distinguish between shares held as stock-in-trade and those held as investment.

The following supplementary instructions in this regard will provide further guidelines for determining whether a person is a trader in stocks or an investor in stocks:

Whether the purchase and sale of securities was allied to his usual trade or business or was incidental to it or was an occasional independent activity.

Whether the purchase is made solely with the intention of resale at a profit or for long-term appreciation and/or for earning dividends and interest.

Whether scale of activity is substantial.

Whether transactions were entered into continuously and regularly during the assessment year.

Whether purchases are made out of own funds or borrowings

The stated objects in the Memorandum and Articles of Association in the case of a corporate assessee.

Typical holding period for securities bought and sold

Ration of sales to purchases and holding

The time devoted to the activity and the extent to which it is the means of the livelihood.

The characterisation of securities in the books of account and in the balance sheet as stock in trade or investments.

Whether the securities purchased or sold are listed or unlisted.

Whether investment is in sister/related concerns or independent companies.

Whether transaction is by promoters of the company.

Total number of stocks dealt in

Whether money has been paid or received or whether these are only book entries.

The Assessing Officers are also advised that no single criterion listed above is decisive and total effect of all these criteria should be considered to determine the nature of activity. (F.No.149/287/2005 - TPL from Central Board of Direct Taxes)

These draft instructions have been circulated for public opinion and the Board is yet to issue a final instruction in this regard on the distinction between the income taxable as business income or as capital gains. In any case, it appears that where investments are made out of borrowed funds it is more likely that the gain will be taxed as business income and not as capital gains. All the facts of the case will have to be examined before arriving at any conclusion in the matter.

This is with reference to a reply to a query that appeared in this column (August 27). According to it, Section 94(8) that deals with bonus stripping will apply to units and securities. I understand that Section 94(8) applies to units only. Please clarify. Padmavathy. V

You are right in pointing out that Section 94(8) will apply only to units and not apply to transactions in shares. I thank the reader for pointing this out.

Mail your queries to taxtalk@thehindu.co.in or by post to `Tax Talk', Business Line, Kasturi Buildings, 859, Anna Salai, Chennai-600002.

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