STT--Sections 88E, 40a(ib) and 145A

Dear Dhruv,

I am more inclined towards the first opinion—-all STT paid during the year, notwithstanding that some of the securities bought during the year haven't been sold and are held in stock at the end of the year, will be considered for Section 88E rebate. The later part of Section 88E reads thus:[….] a deduction […..] of an amount equal to the securities transaction tax PAID by him in respect of the taxable securities transactions entered into in the course of his business during that previous year:]From the way section 88E is worded, I think we can reasonably conclude that the whole of STT paid during the year is eligible for Section 88E rebate. The Explanation to Section 88E also says that "taxable securities transaction" is to be understood in the manner it is defined under Chapter VII of the Finance Act 2004. And Chapter VII of FA 2004 defines securities transaction to mean a transaction for purchase or sale of an equity share or a derivative on a recognised stock exchange.In such a situation, if the shares bought in a particular year haven't been sold in that year and are sold in a subsequent year, then the STT paid at the time of purchase would lapse. It can't be carried forward to the year of sale to be claimed in the shape of rebate. "Paid during the year" should be interpreted literally—there's no reason to impute any other meaning to it. I also don't agree with the accounting treatment of STT you've described. STT shouldn't be charged to the Capital account straightway just because it is a disallowable expense. It ought to be routed through the P & L account, especially in view of the fact that it is also to be considered in the valuation of stock as mandated by Section 145A. How do you answer the question in Form 3CD relating to compliance with Section 145A? You aren't complying with Section 145A if you never take STT to the P & L a/c. But one wonders how can the STT be disallowed in terms of Section 40a if it's going to form part of the purchases? We never segregated it from the purchases account, and so can't we argue that since it's also been considered in the valuation of stock, it can't be disallowed u/s 40a? The idea of 40a disallowance was to deny a twin-benefit to the assessee—claim of expense as well as a rebate. When you include an item of tax as part of your purchases and also incorporate it in the valuation of stock in hand on 31st March, it becomes profit-neutral. Claiming Section 88E rebate in that case wouldn't result in a twin-benefit. This is despite the fact that you've valued the stock at market value, which is lower than the cost as on 31st March. The three Sections---40a( ib), 88E and 145A—-do create a bit of confusion in the case of a trader in shares. I hope I haven't added to it!

Thanks,

CA Sanjeev Bedi

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ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "Dhruv Arora" wrote:>> Dear Sanjeevji> > I really appreciate your response.> > Let me explain my concern a little further.> I had discussed this issue with a couple of colleagues in town and I was> provided with the following two diverse opinions: -> > 1. *STT paid for the purpose of Sec 88E* = Sum Total of STT paid> during F.Y. 2007-08 (whether on purchase or sale), it is quite possible that> the Securities purchased during the year are held as Stock-in-trade, but STT> paid on them is to be considered.> 2. *STT paid for the purpose of Sec 88E* = Sum Total of STT paid on> Securities that are sold during F.Y. 2007-08, it is quite possible that some> of the Securities sold during F.Y. 2007-08 were purchased during F.Y.> 2006-07 but STT paid on such securities has to be considered when computing> rebate u/s 88E for A.Y. 2008-09. Going further any STT paid on Securities> purchased during F.Y. 2007-08 but being held as Stock-in-trade as on> 31.03.2008 is not to be considered.> > Further, when assessee (proprietor, in this case) purchases shares he passes> the following entry, considering Sec. 40(a)(ib):> > Share Purchase A/c Dr.> STT A/c Dr.> To Broker's A/c> > Later on, at year end, he squares up STT A/c by transferring it to> Proprietor's Capital A/c, he doesn't route it through P & L A/c considering> Sec. 40(a)(ib).> > As a result Stock as on 31-Mar-08 is exclusive of STT.> > Though, practically speaking all the traders are calculating stock at market> value as on 31.03.2008, same being lower that cost in almost all the cases I> have come across.> > You are requested to throw some light.> > Thanks & Regards> CA Dhruv Arora> Meerut> > On Thu, May 1, 2008 at 9:59 PM, Sanjeev Bedi > wrote:> > > Hi Dhruv,> > The entire STT PAID on the taxable securities transactions entered> > into during the year is eligible for rebate u/s 88E. The language> > used in Section 88E certainly does not restrict the claim of rebate> > only to the STT paid on those transactions that have been reversed—> > bought and sold—-during the year. Section 40a(ib) would disallow you> > the entire amount of STT, even that attributable to the transactions> > that haven't been squared up during the year. So when it comes to> > allowing rebate u/s 88E, the government can't argue that STT> > attributable to only those securities transactions in respect of> > which both purchase and sale have occurred during the year will be> > allowed as a rebate.> > You will also have to include the STT in the valuation of shares> > lying in stock on 31st March, as mandated by Section 145A.> > Thanks,> > CA Sanjeev Bedi> > --- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com,> > "Dhruv Arora"> > wrote:> > >> > > Repected Members of the Group> > >> > > I seek your opinion on the following issue.> > >> > > Mr. A is a trader in Shares, he wishes to avail rebate u/s 88E of> > the Income> > > Tax Act, 1961.> > >> > > Section 88E of the Income Tax Act, 1961 says -> > > That the assessee shall be entitled to a deduction, from the> > amount of> > > Income-Tax on such Income arising from such transactions, to the> > extent of> > > the minimum of the following two amounts: -> > >> > > 1. STT paid by such assessee in respect of taxable *Securities> > > Transactions entered into the course of business during that> > previous year> > > *.> > > 2. Avg, Rate of Income-Tax X Business Income from such> > taxable> > > Securities Transactions> > >> > > As we are aware, STT is payable both at the time of Purchase as> > well as Sale> > > of an Equity Share in a Company when the transaction is entered> > into in a> > > recognised Stock Exchange.> > >> > > Now, my question is while computing (1.) above do we have to> > consider the> > > sum total of *STT paid* (both on Sale or Purchase) *during the> > previous year> > > * or sum total of *STT paid on Shares* (both on Sale or Purchase)> > that were> > > actually *sold during the previous year*.> > >> > > Regards> > > CA. Dhruv Arora> > > Meerut> > >