Definition of Capital Assets being Securities for the purposes of Non Residents followed by Gist of board circular

Analysis of Definition of Capital Assets being Securities for the prospective of Non Residents including Foreign Institutional Investors as per Section 2(14) of the Income Tax Act, 1961 read with certain important circulars and letters issued by the Central Board of Direct Taxes.

1) Definition of ” Capital Assets ” includes “Securities” Held by the ” Foreign Institutional Investors” as per the Policy of Securities Exchange Board of India will always be treated as the Capital Assets for the Foreign Institutional Investors and accordingly Benefits of Section 111A, 112 and 112A will passed to them.

Question that may arise can be as follows –

Q. 1) Whether Unlisted Securities Held by Foreign Institutional Investors will also be Covered and be treated as a Capital Assets?

Ans – Held in the case of Bhagwati Developers Private Limited , the Hon’ble Supreme Court said that Unlisted Securities will also be treated as Securities under Securities Control and Regulations Act, 1965.

Therefore , we can conclude that The Unlisted Company Shares which were held by the Foreign Institutional Investors shall be their capital assets and accordingly treatment will be done.

Q. 2) Whether any Securities Held by all NRI will be capital Assets ?

Ans – No, since the Definition if Capital Assets which was amended Vide Finance Act, Only Covered Foreign Institutional Investors. No doubt Foreign Institutional Investors are non residents since they are incorporated outside India,

however for the purposes of Section 2(14) which describes the Definition of Capital Assets includes only those who are notified by Securities Exchange Board of India.

Hence to Conclude ,

The statement that every Securities Held by all Non Residents is partially correct and only to the extent of notified Foreign Institutional Investors.

Q. 3) Then How will it be decide that Securities held by other Non Residents who is not Foreign Institutional Investors is a capital assets or Stock in trade?

Ans – This will be decide vide Circular no 04/2007 read with 06/2016 , read with Letter F.No.225/12/2016/ITA.II. The crux of the above circulars will provide in the following paragraphs.

Q. 4) What is the Gist of the above mentioned circulars and letters for the purposes of Non Residents ?

Ans –
a) The Securities held by the Notified Foreign Institutional Investors as per the scheme of Securities Exchange of India will always be treated as Capital Assets without any Second thought.

b) For Other Non Residents, if they held shares of the Indian Company which is Unlisted in any stock exchange of india, will always be a treated as a Capital Assets without any Second thought.

c) For Other Non Residents held Securities in a Company whose shares are listed in Recognised Stock Exchange of India , and If the Assessee wants to treat them as their stock in trade , then such Securities will always be treat it as Stock in trade always and Can’t be irrevocable subsequently.

Possible Reason of this Point-

If Assessee himself opts that it’s income from Securities will be taxed under PGBP , then Capital Gains , then their is scope of widening the tax base of the Revenue.

Suppose, It is a Foreign Company and if it treated it’s income from sales of listed shares / other Securities  under business income , then it is liable to pay higher tax i.e. @ 40 Percent and if it this will allow to be capital assets , then Benefits of Section 111A/112/112A will be pass on to the Assessee and lowering the tax base.

This might be one of the possible Reason according to me.

d) For Other Non Residents held Securities in a Company whose shares are listed in Recognised Stock Exchange of India , and If the Period of Holding of such assets have been more than 12 months, Then Assessee have the Option to Treat the Securities as the Capital Assets and accordingly taxes the income under the head Capital Gains. However this option is also irrevocable.

The logic behind such benefits given to , they are the one, who Invest their Funds Relatively for a bigger period of time compared to them who frequently buy and sell the transactions.

Hence , it is preferable to pass on these benefits to those Assessee for the growth of the nation. Hence normally , they will treat it as a Capital Assets.

e) For Other Non Residents held Securities in a Company whose shares are listed in Recognised Stock Exchange of India , and If the Period of Holding of such assets have been Less than 12 months, Then Circular no 4/2007 comes to play.

This circular provides various guidelines to the Assessing officer upon which it will be decided that whether such income will be taxed is 28 or section 45 of the Income tax act.

Some of the points includes are the magnitude of buy and sell of the shares , nature of the transaction, portion of the Income from sales of shares that constitute total income of the Assessee,
Intention behind holding such investment whether to earn dividend then it will be capital assets otherwise business income, way to record the investments in books of accounts etc.

Hence, here is the great scope of litigation still exists.

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