Personal Finance Monday, December 18, 2006 12:16 Hrs IST

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TAXATION

Is TDS applicable on commission received from trading on NCDEX?

TDS provisions are not applicable to commission obtained from trading in securities. Securities include derivates

Is the provision relating to tax deduction at source (TDS) applicable on brokerage/commission received from trading on NCDEX?

— Dharmendra Jhawar, e-mail

As per sec 194 H of the Income-Tax Act, 1961, any person (other than individual/HUF) who is responsible for paying to a resident any income by way of commission (not being insurance commission) or brokerage is required to deduct tax at source if the total amount of commission /brokerage in a financial year exceeds Rs 2500 per payee.

Tax is to be deducted at the time of payment or credit to the account of the payee, whichever is earlier.

Individuals and HUFs who are subject to tax audit (i.e. turnover from business exceeds Rs 40 lakh or receipts from profession exceeds Rs 10 lakh) in the preceeding financial year are also required to deduct tax at source.

Commission or brokerage includes any payment received or receivable, directly or indirectly by a person acting on behalf of another person: for services rendered (not being professional services); or for any services in the course of buying or selling of goods; or in relation to any transaction relating to any asset/ valuable article, or thing, not being securities.

In other words, commission/brokerage received on trading in securities is not covered. For the meaning of the term ‘securities’, refer to the Securities Contracts (Regulation) Act, 1956. (SCRA)

As per sec 2(h) of SCRA, securities include: shares, scrips, stocks, bonds, debentures, debenture stocks or other marketable securities of a like nature in or of any incorporated company or other body corporate; derivative; units or any other instrument issued by any collective investment scheme to investors in such schemes; security receipt as defined in clause (zg) of sec 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; government securities; such other instruments as may be declared by the Central government to be securities; and rights or interests in securities.

The definition is inclusive and, therefore broad, covering a wide range of financial instruments in its purview. Shares, debentures, bonds, derivatives (which would include options and futures), and securities issued by the government fall in the definition.

Derivative is a financial product whose value is derived from the value of one or more underlying assets like commodities, currency, securities, and index. The National Commodity & Derivatives Exchange (NCDEX) is an online multi-commodity exchange. It provides a world-class commodity exchange platform to trade in a wide spectrum of commodity derivatives.

TDS provisions are not applicable to commission obtained from trading in securities. Securities include derivatives. Therefore, TDS provisions will not apply to commission received as trading in derivatives. Thus, TDS provisions shall not apply to commodity derivatives.

However, if the transaction results in actual delivery of commodity, then one may argue that commission relates to services in the course of buying or selling goods and is accordingly subject to TDS.

It is advisable to take a legal opinion on the above and keep the same on record.

The service provider will have to pay service tax on commission/brokerage received under the category Business Auxiliary Services (BAS). Hence, various service tax provisions also have to be kept in mind (for instance, registration, taking Cenvat credit, payment in TR 6 yellow colour challan, and filing half-yearly service tax return in Form No ST-3).

On disposal of a long-term capital asset (a residential house property), the gain portion needs to be reinvested in another house property in two /three years from date of sale for purchase/construction, respectively. Another option is to invest the capital gains in three-year Rural Electrification Corporation (REC) and National Highway Authority of India (NHAI) bonds within six months from date of sale. Is the date of sale the date of registry/date of payment of full consideration? Assuming the gain is Rs 10 lakh in FY 2007, can the following actions be taken: l Investment of Rs 5 lakh in sec 54 EC bonds within six months from the date of sale. l Deposit the remaining Rs 5 lakh in the Capital Gain Scheme, 1998, before furnishing the return for assessment year (AY) 2007-08, i.e., 31 July 2007 l Utilise Rs 5 lakh for purchase of new residential house property within two years from the date of transfer?

Can one utilise both sections — 54 and 54 EC —for claiming exemption?  

— Amol Kshirsagar, e-mail

Under sec 54, long-term capital gain arising on transfer of a residential house property will not be taxed if the gain is utilised to acquire a new residential house property within the prescribed time limits.

The new residential property can be purchased within two years/constructed within three years from the date of sale of the old property. The return of income is to be filed by the due date (i.e., 31 July or 31 October as applicable).

If the amount of gains is not utilised for purchase/construction of new property till the due date of submission of return of income, then the gain will have to be deposited in capital gains deposit account scheme with a nationalised bank. The proof of deposit should be submitted along with the return of income.

On the basis of the actual investment made under sec 54 and the amount deposited in the capital gains deposit scheme, the assessing officer (AO) will allow exemption under sec 54.

The amount so deposited in the Capital Gains Deposit Account Scheme should be utilised for purchase of new property within two years/construction within three years from the date of transfer of old property or else the gain so deposited shall be taxed as long-term capital gain at the end of three years.

Under sec 54EC, long-term capital gain arising on transfer of any long-term capital asset shall be exempt from tax if the gain is invested in NHAI/REC bonds within six months from the date of transfer. Under sec 54EC, the option of capital gains deposit account scheme is not available.

Assuming the gain at Rs 10 lakh (as stated by you), you may invest Rs 5 lakh in 54EC bonds and the balance Rs 5 lakh in the Capital Gains Scheme, 1998, which would be subsequently used to purchase or construct new house under sec 54. Thus, you may utilise both sec 54 and 54EC for claiming exemption.

Holding of legal title is not necessary. The date of sale is the date of transfer as per the definition of transfer given in sec. 2(47). The sale agreement may or may not be registered.

I run a furniture business and also am an online trader of shares and derivatives (options and futures). Before asking my question, I put the scenario below:

Brokers charge following expenses on trading: brokerage, service tax on brokerage, securities transaction tax, stamp duty, transaction charges

I put an entry in my accounts as follows: debting broker’s name, brokerage, service tax on brokerage, securities transaction tax (STT), stamp duty, transaction charges and crediting profit and loss on shares and derivatives. So all the expenses are shown under these heads in my account.

To obtain profit or loss, all these expenses are deducted and I reach the net amount. My question is about STT. I have already shown it as an expense. Should STT be deducted or does it have any other treatement?

— Sandeep Garg, e-mail

STT is not allowed as a deduction while computing income from shares/derivative trading. Instead, rebate is allowed under sec 88E from tax payable for STT. However, rebate cannot exceed tax calculated at the average rate of tax on business income arising from share transactions (i.e., taxable income from share transactions/net total income x tax liability on total income before rebate, surcharge or cess).

So STT claimed as an expense in your accounts will have to be added back to the profit for determining income from share trading. You have to claim rebate under sec 88E.

I am an NRI. I earned long-term capital gain of Rs 2 lakh on 15 September 2005. I have short-term capital loss carried forward from 2000 for an equal amount .The broker has deducted transaction tax. Do I need to pay any capital gain tax?

— Prakash, e-mail

As per sec 10(38), long-term capital gain arising on transfer of equity shares or units of equity-oriented mutual fund on which securities transaction tax (STT) is charged by the broker is not chargeable to tax.

Accordingly your long-term capital gain of Rs 2 lakh on which STT has been deducted by the broker is exempt from tax. You need not pay any capital gains tax. You need not set off your short-term capital loss against the long-term gain as these are tax-free. Your short-term capital loss will be further carried forward.

The replies are only in the nature of guidelines. The tax counsellors and the publication are not responsible for any decision taken by readers on the basis of the same. Readers may address their queries on direct taxation to:

T K Doctor, C/o Capital Market, 101, Swastik Chambers, Sion-Trombay Road, Chembur, Mumbai-400 071.
E-mail: tax-matters@capitalmarket.com

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