DRAFT INSTRUCTIONS DT. 16TH MAY, 2006
DRAFT INSTRUCTIONS DT. 16TH MAY, 2006
Sub : Circumstances to be considered by the Assessing officers in determining whether a person is a trader in stocks or an investor in stocks
16/5/2006
BUSINESS
SECTION 2(13)
The Central Board of Direct Taxes in its Instruction No. 1827 dated 31-08-1989 had laid down certain tests to distinguish between shares held as stock-in-trade and shares held as investment. CBDT proposes to issue supplementary instructions in this regard to provide further guidelines for determining whether a person is a trader is stocks or an investor in stocks. Before issuing the instructions, CBDT would like to invite comments of all stakeholders.
Comments on the draft instructions may be sent by email or post by 25th May, 2006 to Ms Monica Bhatia, Director (TPL-I), Room No.147D, North Block, New Delhi (e mail : dirtpl1@nic.in).
DRAFT INSTRUCTIONS
Sub : Distinction between shares held as stock-in-trade and shares held as investment - Tests For
The Central Board of Direct Taxes in its Instruction No. 1827 dated 31-08-1989 had laid down certain tests to distinguish between shares held as stock-in-trade and shares 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 :
(i) Whether the purchase and sale of securities was allied to his usual trade or business/was incidental to it or was an occasional independent activity.
(ii) 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.
(iii) Whether scale of activity is substantial.
(iv) Whether transactions were entered into continuously and regularly during the assessment year.
(v) Whether purchases are made out of own funds or borrowings
(vi) The stated objects in the Memorandum and Articles of Association in the case of a corporate assessee
(vii) Typical holding period for securities bought and sold
(viii) Ratio of sales to purchases and holding
(ix) The time devoted to the activity and the extent to which it is the means of livelihood.
(x) The characterization of securities in the books of account and in balance sheet as stock in trade or investments.
(xi) Whether the securities purchased or sold are listed or unlisted.
(xii) Whether investment is in sister/related concerns or independent companies.
(xiii) Whether transaction is by promoters of the company.
(xiv) Total number of stocks dealt in.
(xv) 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.
INSTRUCTION NO. 1827, DT. 31ST AUG., 1989
Subject : Distinction between shares held as stock-in-trade and shares held as investment - Tests For
The question whether a particular assessee is a trader in shares or the shares are held as capital assets sometimes gives rise to disputes and litigation. Over the years the courts have laid down the various tests or factors to be taken into account in determining this question.
2. Certain general principles in this regard were laid down by the Supreme Court in the case of G. Venkataswami Naidu & Co. vs. CIT (1959) 35 ITR 594 (SC). In this case the Supreme Court was dealing with a question whether the excess sum realised on the sale of certain plots was assessable as income from an adventure in the nature of business. The Supreme Court held that in deciding the character of such transaction, several factors were relevant. For instance :
(i) Whether the purchaser was a trader and the purchase of the commodity and its resale were allied to his usual trade or business or were incidental to it.
(ii) The nature and quantity of the commodity purchased and resold—if the
commodity purchased is in very large quantity, it could tend to eliminate the possibility of investment for personal use, possession or enjoyment.
(iii) The repetition of the transaction.
1 The Supreme court observed that the presence of all these factors may be held in the court to draw an inference that a transaction is in the nature of trade' but it is not a matter of merely counting the number of facts and circumstances pro and con what is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction.
2 The Supreme Court in this case also discussed the test of intention. It held that in cases where the purchase has been made solely and exclusively with the intention of resale at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying it or using it, the presence of such intention is a relevant factor and unless it is off-set by the presence of other factors, it would raise a strong presumption that a transaction is an adventure in the nature of trade.
3 In the case of H. Mohmed & Co. vs. CIT (1977) 107 ITR 637 (Guj) the Gujarat High Court observed that a stock-in-trade is something in which a trader or a business man deals, whereas his capital asset is something with which he deals. According to the High Court one of the indicators for deciding as to what is stock-in-trade is whether a particular assessee is buying or selling the goods or commodity or whether he has merely invested his money with a view to earning further income or with a view to carrying on his other business. It was further held by the High court that the distinction between stock-in-trade and investment is that of selling outright in the course of the business activity and deriving income from exploitation of one's own assets.
4 These general principles hold good in respect of shares also. However certain specific issues relevant for determining this question with reference to shares have also been decided by the courts. In the case of Sardar Indra Singh & Sons Ltd. vs. CIT (1953) 24 ITR 415 (SC), the Supreme Court was dealing with the case of a company which was incorporated with the object, inter alia of carrying on the business of bankers, financiers, managing agents and secretaries and was also empowered to invest and deal with the monies of the company not immediately required for its business upon such securities and in such manner as might from time to time be determined. It was held by the Supreme Court in this case that to constitute business income, it was not necessary that surplus should have resulted from such a course of dealing in securities as by itself would amount to the carrying on of business or if the realisation of securities is a normal step in carrying on the assessee's business. The Supreme Court observed that the principle applicable in all such cases was well settled and the question always was whether the sales which produced the surplus were so connected with the carrying on of the assessees business that it could fairly be said that the surplus was the profit and gains of such business. On the facts of this case it was held that the surplus resulting from sale of shares and securities constituted business income.
5 The aforesaid principles laid down by the Supreme Court was followed by Andhra Pradesh High court in the case of State Bank of Hyderabad vs. CIT (1985) 47 CTR (AP) 224 : (1985) 151 ITR 703 (AP). The main business of the SBH was to accept deposits and to advance loans and the money constituted its stock-in-trade. The banking company has to carry on its business in accordance with the provisions of the banking regulation act, 1949. Sec. 24 of the said act requires every banking company to maintain in India either in cash or in the shape of gold or in the shape of unincumbered approved securities, 20% of its total time and demand liabilities at any given point of time. It was held by the High Court that what section 24 of the said Act did was to insist on the observance of a normal prudent banking business practice. If the banking company chooses to invest the money in unincumbered approved securities it is only one mode of keeping a portion of its deposits in ready cash or readily-convertible-into-cash securities. Any income arising from the sale of such securities is, therefore closely connected with the banking business and is business income, it was concluded by the High court.
6 In the case of Karam Chand Thapar & Brothers vs. CIT (1971) 82 ITR 899 (SC) it was held by the Supreme Court that the circumstance that the assessee had shown certain shares as investment in its books as well as its balance sheet was by itself not a conclusive circumstances, though it was a relevant circumstance.
7 The decisions in the CIT vs. Associated Industrial Development Co. Ltd. 1972 CTR (SC) 239 : (1971) 82 ITR 586 (SC) and AR. N. Ramaswami Chettiar & Ors. vs. CIT (1963) 48 ITR 771 (Mad) may also be referred to for guidance.
8 Although the tests laid down by the courts may help determine the issue in particular cases the decision will ultimately turn on the facts of each case.
9 These instructions may please be brought to the notice of the Assessing officers in your region.
[F. No. 181/1/89 - IT(AI) dated 31/08/1989 from Central Board of Direct Taxes]
[F. No. 149/287/2005-TPL]
(2006) 202 CTR (St) 114
Sub : Circumstances to be considered by the Assessing officers in determining whether a person is a trader in stocks or an investor in stocks
16/5/2006
BUSINESS
SECTION 2(13)
The Central Board of Direct Taxes in its Instruction No. 1827 dated 31-08-1989 had laid down certain tests to distinguish between shares held as stock-in-trade and shares held as investment. CBDT proposes to issue supplementary instructions in this regard to provide further guidelines for determining whether a person is a trader is stocks or an investor in stocks. Before issuing the instructions, CBDT would like to invite comments of all stakeholders.
Comments on the draft instructions may be sent by email or post by 25th May, 2006 to Ms Monica Bhatia, Director (TPL-I), Room No.147D, North Block, New Delhi (e mail : dirtpl1@nic.in).
DRAFT INSTRUCTIONS
Sub : Distinction between shares held as stock-in-trade and shares held as investment - Tests For
The Central Board of Direct Taxes in its Instruction No. 1827 dated 31-08-1989 had laid down certain tests to distinguish between shares held as stock-in-trade and shares 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 :
(i) Whether the purchase and sale of securities was allied to his usual trade or business/was incidental to it or was an occasional independent activity.
(ii) 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.
(iii) Whether scale of activity is substantial.
(iv) Whether transactions were entered into continuously and regularly during the assessment year.
(v) Whether purchases are made out of own funds or borrowings
(vi) The stated objects in the Memorandum and Articles of Association in the case of a corporate assessee
(vii) Typical holding period for securities bought and sold
(viii) Ratio of sales to purchases and holding
(ix) The time devoted to the activity and the extent to which it is the means of livelihood.
(x) The characterization of securities in the books of account and in balance sheet as stock in trade or investments.
(xi) Whether the securities purchased or sold are listed or unlisted.
(xii) Whether investment is in sister/related concerns or independent companies.
(xiii) Whether transaction is by promoters of the company.
(xiv) Total number of stocks dealt in.
(xv) 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.
INSTRUCTION NO. 1827, DT. 31ST AUG., 1989
Subject : Distinction between shares held as stock-in-trade and shares held as investment - Tests For
The question whether a particular assessee is a trader in shares or the shares are held as capital assets sometimes gives rise to disputes and litigation. Over the years the courts have laid down the various tests or factors to be taken into account in determining this question.
2. Certain general principles in this regard were laid down by the Supreme Court in the case of G. Venkataswami Naidu & Co. vs. CIT (1959) 35 ITR 594 (SC). In this case the Supreme Court was dealing with a question whether the excess sum realised on the sale of certain plots was assessable as income from an adventure in the nature of business. The Supreme Court held that in deciding the character of such transaction, several factors were relevant. For instance :
(i) Whether the purchaser was a trader and the purchase of the commodity and its resale were allied to his usual trade or business or were incidental to it.
(ii) The nature and quantity of the commodity purchased and resold—if the
commodity purchased is in very large quantity, it could tend to eliminate the possibility of investment for personal use, possession or enjoyment.
(iii) The repetition of the transaction.
1 The Supreme court observed that the presence of all these factors may be held in the court to draw an inference that a transaction is in the nature of trade' but it is not a matter of merely counting the number of facts and circumstances pro and con what is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction.
2 The Supreme Court in this case also discussed the test of intention. It held that in cases where the purchase has been made solely and exclusively with the intention of resale at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying it or using it, the presence of such intention is a relevant factor and unless it is off-set by the presence of other factors, it would raise a strong presumption that a transaction is an adventure in the nature of trade.
3 In the case of H. Mohmed & Co. vs. CIT (1977) 107 ITR 637 (Guj) the Gujarat High Court observed that a stock-in-trade is something in which a trader or a business man deals, whereas his capital asset is something with which he deals. According to the High Court one of the indicators for deciding as to what is stock-in-trade is whether a particular assessee is buying or selling the goods or commodity or whether he has merely invested his money with a view to earning further income or with a view to carrying on his other business. It was further held by the High court that the distinction between stock-in-trade and investment is that of selling outright in the course of the business activity and deriving income from exploitation of one's own assets.
4 These general principles hold good in respect of shares also. However certain specific issues relevant for determining this question with reference to shares have also been decided by the courts. In the case of Sardar Indra Singh & Sons Ltd. vs. CIT (1953) 24 ITR 415 (SC), the Supreme Court was dealing with the case of a company which was incorporated with the object, inter alia of carrying on the business of bankers, financiers, managing agents and secretaries and was also empowered to invest and deal with the monies of the company not immediately required for its business upon such securities and in such manner as might from time to time be determined. It was held by the Supreme Court in this case that to constitute business income, it was not necessary that surplus should have resulted from such a course of dealing in securities as by itself would amount to the carrying on of business or if the realisation of securities is a normal step in carrying on the assessee's business. The Supreme Court observed that the principle applicable in all such cases was well settled and the question always was whether the sales which produced the surplus were so connected with the carrying on of the assessees business that it could fairly be said that the surplus was the profit and gains of such business. On the facts of this case it was held that the surplus resulting from sale of shares and securities constituted business income.
5 The aforesaid principles laid down by the Supreme Court was followed by Andhra Pradesh High court in the case of State Bank of Hyderabad vs. CIT (1985) 47 CTR (AP) 224 : (1985) 151 ITR 703 (AP). The main business of the SBH was to accept deposits and to advance loans and the money constituted its stock-in-trade. The banking company has to carry on its business in accordance with the provisions of the banking regulation act, 1949. Sec. 24 of the said act requires every banking company to maintain in India either in cash or in the shape of gold or in the shape of unincumbered approved securities, 20% of its total time and demand liabilities at any given point of time. It was held by the High Court that what section 24 of the said Act did was to insist on the observance of a normal prudent banking business practice. If the banking company chooses to invest the money in unincumbered approved securities it is only one mode of keeping a portion of its deposits in ready cash or readily-convertible-into-cash securities. Any income arising from the sale of such securities is, therefore closely connected with the banking business and is business income, it was concluded by the High court.
6 In the case of Karam Chand Thapar & Brothers vs. CIT (1971) 82 ITR 899 (SC) it was held by the Supreme Court that the circumstance that the assessee had shown certain shares as investment in its books as well as its balance sheet was by itself not a conclusive circumstances, though it was a relevant circumstance.
7 The decisions in the CIT vs. Associated Industrial Development Co. Ltd. 1972 CTR (SC) 239 : (1971) 82 ITR 586 (SC) and AR. N. Ramaswami Chettiar & Ors. vs. CIT (1963) 48 ITR 771 (Mad) may also be referred to for guidance.
8 Although the tests laid down by the courts may help determine the issue in particular cases the decision will ultimately turn on the facts of each case.
9 These instructions may please be brought to the notice of the Assessing officers in your region.
[F. No. 181/1/89 - IT(AI) dated 31/08/1989 from Central Board of Direct Taxes]
[F. No. 149/287/2005-TPL]
(2006) 202 CTR (St) 114
Accounting of Derivaties
This is the text taken from the BCA REFRENCER 05-06
ACCOUNTING
Accounting of Equity Futures and Options is based on the Guidance Note issued by the Institute. These guidelines are summarized below:
Accounting treatment of future contracts
At the time of inception of contract
Every person is required to pay initial margin determined by the Clearing Corporation/House before entering into the contract of either Stock Future or Index Future. Such initial margin payment shall be debited to the "Initial Margin – Index/S he head "Current Assets". If the initial margin is paid by way of collaterals like TDS, securities, Bank Guarantees etc. entries would be passed in memorandum Banks.
At the time of Daily Settlement
All future contracts are Marked to Market (MTM) on daily basis. This involves payment or receipts of difference in price fluctuation on daily basis. The amount of Marked to Market margin received/paid into/from such accounts should be debited or credited to "Marked to Market Margin Index/Stock Future Account" and will appear as a separate item as "Current Asset" or "Current Liabilities" as the case may be.
Open interest as on Balance Sheet date
At the year end appropriate provision shall be created by a debit to Profit and Loss account for anticipated Loss equivalent to debit balance in "Marked to Market Margin Index/Stock Futures Account." Net amount received which is anticipated profit represented by credit balance in MTM Margin account shall be ignored and no credit shall be taken to Profit and Loss account considering principle of "prudence". For this purpose the net amount paid or received on account of MTM on Open contracts should be determined index wise or scrip wise. Provision so created should be shown as deduction from MTM Margin Index/Stock Future under the head "Current Assets". Proper disclosure is required to be made for the open interest as on the Balance Sheet date in respect of different series of contract.
At the time of Final Settlement
As on date, all future contracts whether Index Future or Stock Future are cash settled on the settlement date. The difference between contract price and the settlement price shall be calculated and recognised in the Profit and Loss account after adjusting provisions created for anticipated loss, if any. Any loss arising out of settlement shall be first charged to such provision account and balance of loss if any shall be charged to Profit and Loss account. If more than one contract in respect of relevant series of equity index future/equity stock future contract to which the square up contract pertains is outstanding, the contract price of the contract so squared up should be determined using Weighted Average Method for calculating Profit or Loss on squaring up.
ACCOUNTING TREATMENT OF OPTION CONTRACT
At the inception of the Contract
In the Books of Buyer
The buyer of the option whether call or put is required to pay premium. In the books of buyer, such premium should be debited to "Index Option Premium Account" or "Stock Option Premium Account" as the case may be.
In the Books of Seller
On receiving the premium the "Index/Stock Option Premium Account" will be credited. However, the seller is also required to pay initial margin to the clearing corporation for entering into contract as in case of futures contracts. Such initial margin is debited to "Index / Stock Option Margin Account".
"Index/Stock Option Premium Account" or "Index/Stock Option Margin Account" shall be shown separately under the head "Current Assets" or "Current Liabilities" as the case may be.
At the time of continuance of Contract
In the books of buyer no entries are required to be passed. In the books of seller/writer, entries will be passed for payment or receipt of marked to market (MTM) margin difference in a similar manner as in case of future contracts.
However, if the contracts are live (open) as on the balance sheet date, appropriate provision has to be made in the books of account by giving effect into Profit and Loss Account.
Open Contracts as on Balance Sheet date
In the Books of Buyer
The maximum loss in Option Contract to the buyer is limited to the premium account. At the time of balance sheet date if the premium prevailing in the market for a contract of similar nature is lower than the premium so paid, then the provision is to be made for the difference. The provision so created shall be credited to "Provision for Loss on Index/Stock Option Account" and shall be reduced from "Index/Stock Option Premium Account" appearing under the head Current Assets.
In the Books of Seller
If the premium received is lower than what is prevailing in the market for a contract of a similar nature, then appropriate provision for loss will be made by debiting profit and loss account and crediting "Provision for Loss Index/Stock Option Account". This account shall appear under the head "Current Liabilities".
In case, if the premium prevailing in the market as compared to premium paid/received renders expected profits, the same shall be ignored considering the principle of prudence.
In case of multiple open options at the year end, the index wise /stock scrip wise provision should be made considering all open options of any strike price and any expiry date pertaining to that index/scrip taken together.
At the time of final settlement
In the Books of Buyer
As on now, the Index Options and the Stock Options both are settled in cash and the accounting entries will also be similar. On exercising the option either at the time of final settlement or at the time of squaring up, the premium will be recognised as expense, net of amount lying in provision account, if any.
In addition to this, the buyer is also entitled for a favourable difference (if any) of settlement price and strike price, and the same shall be recognised as income.
In the Books of Seller
Similar the seller will recognise the premium as income after adjusting provision made in this regards, if any. Payment of actual difference by seller at the time of squaring up will be debited to profit and loss as a loss.
For working out Profit & Loss in case of outstanding multiple options of the same scrip/index with the same strike price at the same expiry date, weighted average method should be followed on final settlement.
Accounting for forward foreign exchange contracts is covered by AS 11.
TAXATION
The Finance Act, 2005 has clarified that equity derivative transactions will not amount to speculation. Section 43 (5) defines a speculative transaction and its provisos provide exceptions to this definition. A new proviso (d) is now added to this sub section and provides that : an eligible transaction in respect of trading in derivatives referred to in Section 2 (aa) of the Securities Contract Regulation Act, 1956 carried out in a recognized stock exchange will not be treated as a ‘speculative transaction’. The transaction is required to be carried out on electronic trading systems through a recognized broker or sub broker and supported by a time stamped contract note which should contain the PAN No and the Unique Identification Number of the assessee.
The amendment as drafted in the Finance Bill does not seek to cover commodity derivatives.
The taxability of persons who are not in the business of securities but have carried out derivative transactions is not covered clearly by the Income-tax Act. It is widely believed by experts that these could be treated as Capital Gains or as Income from Other Sources.
ACCOUNTING
Accounting of Equity Futures and Options is based on the Guidance Note issued by the Institute. These guidelines are summarized below:
Accounting treatment of future contracts
At the time of inception of contract
Every person is required to pay initial margin determined by the Clearing Corporation/House before entering into the contract of either Stock Future or Index Future. Such initial margin payment shall be debited to the "Initial Margin – Index/S he head "Current Assets". If the initial margin is paid by way of collaterals like TDS, securities, Bank Guarantees etc. entries would be passed in memorandum Banks.
At the time of Daily Settlement
All future contracts are Marked to Market (MTM) on daily basis. This involves payment or receipts of difference in price fluctuation on daily basis. The amount of Marked to Market margin received/paid into/from such accounts should be debited or credited to "Marked to Market Margin Index/Stock Future Account" and will appear as a separate item as "Current Asset" or "Current Liabilities" as the case may be.
Open interest as on Balance Sheet date
At the year end appropriate provision shall be created by a debit to Profit and Loss account for anticipated Loss equivalent to debit balance in "Marked to Market Margin Index/Stock Futures Account." Net amount received which is anticipated profit represented by credit balance in MTM Margin account shall be ignored and no credit shall be taken to Profit and Loss account considering principle of "prudence". For this purpose the net amount paid or received on account of MTM on Open contracts should be determined index wise or scrip wise. Provision so created should be shown as deduction from MTM Margin Index/Stock Future under the head "Current Assets". Proper disclosure is required to be made for the open interest as on the Balance Sheet date in respect of different series of contract.
At the time of Final Settlement
As on date, all future contracts whether Index Future or Stock Future are cash settled on the settlement date. The difference between contract price and the settlement price shall be calculated and recognised in the Profit and Loss account after adjusting provisions created for anticipated loss, if any. Any loss arising out of settlement shall be first charged to such provision account and balance of loss if any shall be charged to Profit and Loss account. If more than one contract in respect of relevant series of equity index future/equity stock future contract to which the square up contract pertains is outstanding, the contract price of the contract so squared up should be determined using Weighted Average Method for calculating Profit or Loss on squaring up.
ACCOUNTING TREATMENT OF OPTION CONTRACT
At the inception of the Contract
In the Books of Buyer
The buyer of the option whether call or put is required to pay premium. In the books of buyer, such premium should be debited to "Index Option Premium Account" or "Stock Option Premium Account" as the case may be.
In the Books of Seller
On receiving the premium the "Index/Stock Option Premium Account" will be credited. However, the seller is also required to pay initial margin to the clearing corporation for entering into contract as in case of futures contracts. Such initial margin is debited to "Index / Stock Option Margin Account".
"Index/Stock Option Premium Account" or "Index/Stock Option Margin Account" shall be shown separately under the head "Current Assets" or "Current Liabilities" as the case may be.
At the time of continuance of Contract
In the books of buyer no entries are required to be passed. In the books of seller/writer, entries will be passed for payment or receipt of marked to market (MTM) margin difference in a similar manner as in case of future contracts.
However, if the contracts are live (open) as on the balance sheet date, appropriate provision has to be made in the books of account by giving effect into Profit and Loss Account.
Open Contracts as on Balance Sheet date
In the Books of Buyer
The maximum loss in Option Contract to the buyer is limited to the premium account. At the time of balance sheet date if the premium prevailing in the market for a contract of similar nature is lower than the premium so paid, then the provision is to be made for the difference. The provision so created shall be credited to "Provision for Loss on Index/Stock Option Account" and shall be reduced from "Index/Stock Option Premium Account" appearing under the head Current Assets.
In the Books of Seller
If the premium received is lower than what is prevailing in the market for a contract of a similar nature, then appropriate provision for loss will be made by debiting profit and loss account and crediting "Provision for Loss Index/Stock Option Account". This account shall appear under the head "Current Liabilities".
In case, if the premium prevailing in the market as compared to premium paid/received renders expected profits, the same shall be ignored considering the principle of prudence.
In case of multiple open options at the year end, the index wise /stock scrip wise provision should be made considering all open options of any strike price and any expiry date pertaining to that index/scrip taken together.
At the time of final settlement
In the Books of Buyer
As on now, the Index Options and the Stock Options both are settled in cash and the accounting entries will also be similar. On exercising the option either at the time of final settlement or at the time of squaring up, the premium will be recognised as expense, net of amount lying in provision account, if any.
In addition to this, the buyer is also entitled for a favourable difference (if any) of settlement price and strike price, and the same shall be recognised as income.
In the Books of Seller
Similar the seller will recognise the premium as income after adjusting provision made in this regards, if any. Payment of actual difference by seller at the time of squaring up will be debited to profit and loss as a loss.
For working out Profit & Loss in case of outstanding multiple options of the same scrip/index with the same strike price at the same expiry date, weighted average method should be followed on final settlement.
Accounting for forward foreign exchange contracts is covered by AS 11.
TAXATION
The Finance Act, 2005 has clarified that equity derivative transactions will not amount to speculation. Section 43 (5) defines a speculative transaction and its provisos provide exceptions to this definition. A new proviso (d) is now added to this sub section and provides that : an eligible transaction in respect of trading in derivatives referred to in Section 2 (aa) of the Securities Contract Regulation Act, 1956 carried out in a recognized stock exchange will not be treated as a ‘speculative transaction’. The transaction is required to be carried out on electronic trading systems through a recognized broker or sub broker and supported by a time stamped contract note which should contain the PAN No and the Unique Identification Number of the assessee.
The amendment as drafted in the Finance Bill does not seek to cover commodity derivatives.
The taxability of persons who are not in the business of securities but have carried out derivative transactions is not covered clearly by the Income-tax Act. It is widely believed by experts that these could be treated as Capital Gains or as Income from Other Sources.
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