Background and our understanding

1. The Nuvama Group (formerly, Edelweiss Wealth Management Group) is one of the leading
financial services group in India.

2. One of the entities within the Nuvama Group is proposing to issue non-convertible debentures
(NCDs’), Zero Coupon Bonds (‘ZCBs’) and Deep Discount Bonds (DDBs) (hereinafter, for the
sake of brevity, collectively referred to as ‘the bonds’) to certain categories of investors which
includes individuals, LLPs, Trusts, Portfolio Managers, Banks, financial institutions, mutual
funds and other investors eligible to invest in such NCDs/ ZCBs/ DDBs.

3. We understand that the NCDs/ ZCBs/ DDBs would possess the following typical features:

► The NCDs to be issued shall be of the following two types:

a. Issued at par and coupon/ interest to be mentioned in the debenture term-sheet

b. Issued at par with no coupon/ interest being mentioned in the debenture term-sheet
and to be redeemed at a premium upon maturity

► The DDBs shall be issued at a discount to its face value and shall be redeemed at its face
value while the ZCBs shall be issued at face value and shall be redeemed at premium
upon maturity.

► The NCDs/ ZCBs/ DDBs shall be marketable by nature i.e. they are freely transferable by
endorsement and delivery

► The NCDs/ ZCBs/ DDBs may be listed or un-listed

► The ZCBs are not notified ZCBs i.e. these are not the ZCBs as provided under section
2(48) of the Income-tax Act, 1961

► The transfer of NCDs/ ZCBs/ DDBs may take place on an exchange or otherwise

► The terms of the NCDs/ ZCBs/ DDB provide for a bullet settlement i.e. the principal
component of the NCDs/ ZCBs/ DDB and any interest accrued thereon is payable at the
time of maturity of such NCDs. However, the issuer shall accrue the interest payable on
the NCDs/ ZCBs/ DDB, if any, in its books of account, on a periodic basis (typically,
monthly or annually).

► Further, in case of the NCDs/ ZCBs/ DDBs, the returns thereto shall not be linked to any
market returns on other underlying securities or indices

1 23 February 2023
Assistance sought

4. In light of the above background, Nuvama has requested EY LLP (‘we’ or ‘us’) to provide our
comments under the Income-tax Act, 1961 (Act) on the following:

► Tax treatment on redemption of the NCDs/ ZCBs/ DDBs on maturity; and

► Tax treatment on transfer/ buy-back of the NCDs/ ZCB/ DDBs prior to maturity.

5. The tax implications are to be provided for the following category of taxpayers:

► Individuals (Residents and Non-residents), Hindu Undivided Family (HUFs);

► Association of Persons (AOPs)/ Body of Individuals (BOIs);
► Co-operative societies;
► Trusts (Charitable and non-charitable);
► Partnership firms and Limited Liability Partnerships (LLPs);
► Companies (domestic and foreign) including Insurance companies;
► Alternative Investment Funds (AIFs); and
► Foreign Portfolio Investors (FPIs).

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2 23 February 2023
Our Comments

Please note that our memorandum covers generic tax implications of NCDs/ ZCBs/ DDBs (for the
sake of brevity, hereinafter collectively referred to as ‘the bonds’) under the Act and does not
intend to opine on any particular scheme of the bonds issued by the Nuvama Group. This
Memorandum should not be relied upon as tax advice by the Investors. Investors should consult
their respective tax advisors to understand the implications of the specific instrument they intend
to invest in.

Executive summary with respect to applicable tax rates

Particulars Business Long-term Short-term Interest income

Income capital gain capital gain as Income From
other Sources
NCDs/ ZCBs/ DDBs Applicable tax 10% Applicable tax NA
transferred prior to rate (refer Note 1 & rate
maturity - Listed 2) (refer Note 5)

NCDs/ ZCBs/ DDBs Applicable tax 20% Applicable tax NA

transferred prior to rate (refer Note 2, 3 rate
maturity - Unlisted & 4) (refer Note 6)
NCDs/ ZCBs/ DDBs held Applicable tax NA NA Applicable tax
till maturity rate rate

Note 1 - Holding period more than 12 months prior to transfer

Note 2 – Indexation benefit not available

Note 3 - Holding period more than 36 months prior to transfer

Note 4 – In case of an assessee being a non-resident, the applicable rate of tax shall be 10% without
giving effect to indexation and foreign exchange fluctuation benefit.

Note 5 - Holding period less than or equal to 12 months prior to transfer

Note 6 - Holding period less than or equal to 36 months prior to transfer

3 23 February 2023
Section 50AA of the Act

The Finance Bill, 2023 proposes to insert section 50AA to the Act to provide for a special
provision for computation of capital gains in case of Market Linked Debenture (MLD). For the
purposes of the said section, MLD have been defined in the Explanation thereto to mean a
security by whatever name called, which has an underlying principal component in the form of
a debt security and where the returns are linked to the market returns on other underlying
securities or indices, and includes any security classified or regulated as a MLD by the
Securities and Exchange Board of India.

Based on the definition, MLD has the following essential features:

• It is a security in the nature of debt;

• It has an underlying principal component;
• Returns with respect to such security are linked to market returns on other underlying
securities or indices;
• And, by way of extension, it is also provided that any security classified or regulated by
SEBI as an MLD, shall for the purposes of the proposed section 50AA of the Act, be
deemed to be an MLD

The NCDs/ ZCBs/ DDBs issued/ proposed to be issued by the issuer creates a borrower-lender
relationship between the issuer and subscriber and to that extent, such NCDs/ ZCBs/ DDBs
constitute a security in the nature of debt. Further, such NCDs/ ZCBs/ DDBs, by their very
nature, have a principal component (which is the price at which the subscriber subscribes to
such NCDs/ ZCBs/ DDBs).

However, the returns with respect to such NCDs/ ZCBs/ DDBs (excess of redemption value
over the principal component) is a fixed return and is not linked to any market return or
underlying security or indices.

Given the same, the NCDs/ ZCBs/ DDBs issued by the issuer do not satisfy the first limb of the
definition of MLD as provided in the Explanation to the proposed section 50AA of the Act and
thus, such NCDs/ ZCBs/ DDBs should not constitute an MLD for the purposes of section 50AA
of the Act.

The second limb of the definition of MLD which deems any security classified or regulated by
SEBI as an MLD, to be an MLD for the purposes of section 50AA of the Act, is an independent
limb and need to be construed as such. We have been given to understand that, at present, the
NCD/ ZCB/ DDB issued/ proposed to be issued by the issuer is neither classified nor regulated
by the SEBI as an MLD and accordingly, the NCDs/ ZCBs/ DDBs issued by the issuer should not
constitute an MLD for the purposes of section 50AA of the Act. However, the said fact-pattern
would have to be re-visited in light of any amendment in the law as may be notified by SEBI in
future.
4 23 February 2023
6. Characterization of income

6.1 We understand that on redemption of the bonds, the bond holder will receive the contractually
agreed sum (redemption value in case of NCD and face value in case of ZCB/ DDB).

6.2 As per the provisions of the Act, the tax treatment of income received from securities would
depend on the characterization of the said income in the hands of the recipient(s). The Act
makes a distinction between the manner in which the income arising from the sale of Indian
securities will be taxed, depending upon whether the taxpayer holds such securities as stock-in-
trade or as capital asset. In the former case, the income received in respect of such securities
would be regarded as ‘business income’, whereas in the latter situation, the income would be
regarded as ‘capital gains’.

6.3 In this regard, the Central Board of Direct Taxes (CBDT), vide Instruction No. 1827 dated
31 August 1989 (Instruction) and Circular No. 4/2007 dated 15 June 2007 (Circular), laid
down certain tests for determining whether a person is a ‘trader’ or an ‘investor’ in shares i.e.,
whether the person is holding the shares as ‘stock-in-trade’ or as ‘capital asset’. An extract of
the Instruction and the Circular is reproduced in Annexure A.

6.4 Based on various judicial precedents mentioned in the Instruction and the Circular, following
are the guiding principles that emerge, to distinguish between shares held as stock-in-trade
and shares held as investment:

► Whether the purchaser was a trader and the purchase of the security and its resale were
allied to his usual trade or business or were incidental to it;
► The nature and quantity of the commodity purchased and resold;
► Repetition of the transaction;
► Intention of the investor for purchase of securities;
► Characterization of securities in the books of account and balance sheet of the investor.

6.5 The tests laid down in the Instruction and the Circular are indicative. Moreover, the Circular
specifically mentions that determination, as to whether an asset is stock-in-trade or capital
asset, is a fact-specific exercise.

6.6 Though the aforesaid Instruction and the Circular have been issued in the context of
characterization of income from shares, the above principles should also be applicable in the
context of other securities such the bonds. However, the Instruction and the Circular
specifically highlight that the characterization of income would ultimately depend on the facts
of each case.

6.7 The CBDT issued Circular No. 6/2016 dated 29 February 2016, which provides that in holding
whether the surplus generated from sale of listed shares or securities would be capital gain or
business income, the following shall be taken into consideration-
5 23 February 2023
 ► Where the taxpayer itself, irrespective of the period of holding the listed shares and
securities, opts to treat them as stock-in-trade, the income arising from transfer of such
shares/ securities would be treated as its business income [paragraph 3(a) of the
Circular];

► If the taxpayer desires to treat the income arising from the transfer of listed shares and
securities held for a period of more than 12 months immediately preceding the date of
transfer as ‘Capital Gains’, then the same shall not be put to dispute by the Assessing
Officer [paragraph 3(b) of the Circular];

► In other cases, the nature of transaction shall continue to be decided keeping in view the
aforesaid Circulars issued by the CBDT.

6.8 The said Circular further provides that, the stand once taken by a taxpayer in a particular
Assessment Year (AY), shall remain applicable in subsequent AYs also and the taxpayers shall
not be allowed to adopt a different/ contrary stand in this regard in subsequent years. An
extract of Circular No. 6/2016 dated 29 February 2016 is reproduced in Annexure A.

7. Tax treatment on income arising from the bonds

Redemption of the bonds on maturity

7.1 As mentioned earlier, the tax treatment of income received from securities would depend on
the characterization of income which in turn depends on whether the security was held as
stock-in-trade or as capital asset.

7.2 Typically, on redemption of the bonds, the bond holder receives the contractually agreed price.

7.3 Section 2(28A) of the Act defines the term ‘interest’ to mean interest payable in any manner in
respect of monies borrowed or debt incurred (including a deposit, claim or other similar right
or obligation) and includes any service fee or other charge in respect of the moneys borrowed
or debt incurred or in respect of any credit facility which has not been utilized.

7.4 In the instant case, we understand that the investor would receive repayment of principal on
the date of redemption. Accordingly, to this extent, the investor and the issuer of the bonds
hold a debtor-creditor relationship and the premium (premium, wherever the context requires
with respect to a ZCB/ DDB, would also include the difference between the issue price and the
redemption value in case of a ZCB/ DDB) on the bond, in our view, represents a charge in
respect of debt incurred.

6 23 February 2023
7.5 Section 2(28A) of the Act is wide enough to cover interest paid in any manner and thus, in
light of the above reasoning, in our view, typically, the income on redemption of the bonds
should be characterized as ‘interest income’ under the provisions of the Act1.

Where the bonds are held as stock-in-trade

7.6 Where the bonds are held as stock-in-trade by the investor, income (net off costs) on
redemption of the bonds on maturity (which is of the nature of ‘interest)’, will be classified
under the head ‘profits and gains from business or profession’ (business income) under the
Act2.

Where the bonds are held as capital asset

7.7 Where the bonds are held as capital asset by the investor, income (net of expenditure incurred
wholly and exclusively for earning such income) on redemption of the bonds on maturity (which
is of the nature of ‘interest)’, should likely be classified under the head ‘Income from other
sources’ (other income) under the Act.

Sale/ transfer of the bonds before maturity

Where the bonds are held as stock-in-trade

7.8 Where the bonds are held as stock-in-trade by the investor, income on sale/ buy-back/ transfer
of the bonds prior to maturity, should be treated as ‘business income’ under the Act in the
hands of the investor. The income to be taxed will be the difference in the sale value and the
cost paid towards acquisition of such bonds (including incidental expenses paid on acquisition).

Where the bonds are held as capital asset

7.9 As per section 2(14) of the Act, capital asset has been, inter-alia, defined to mean property of
any kind held by an assessee, whether or not connected with his business or profession but
does not include stock-in-trade held by an assessee for the purpose of his business or
profession.

1
One has to analyze the specific bond and its contractual terms to conclude on whether the return on the bonds could
constitute as interest based on the aforesaid reasoning.

Further, in the current note, we have dealt with characterization of interest under the provisions of the Act. The term ‘interest’
under India –Singapore tax treaty is defined to mean income from debt claims of every kind, whether or not secured by
mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government
securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or
debentures. However, various treaties may have different definitions (i.e., there may be variation in definition of interest
under various treaties). One would need to evaluate whether such payment would fall within the definition of interest under
the respective tax treaties while evaluating the tax impact.

2
Based on section 145 of the Act, the timing of charging any income to tax would depend on the method of accounting
followed by the taxpayer consistently.
7 23 February 2023
7.10 Where the bonds are held as capital asset, income on sale/ transfer of the bonds prior to
maturity, should not be characterized as interest income, since interest income would accrue
only when there is an enforceable right to receive interest and a corresponding enforceable
liability incurred by the issuer company to pay interest. Such liability is incurred by the issuer
company in favor of an investor who presents the instrument on the date of redemption and
does not arise in case of a sale/ transfer prior to redemption. Accordingly, in our view, interest
arises only on due date i.e., on maturity and not prior to that.

7.11 Based on the above, where the bonds are held as capital asset, income on sale/ transfer of the
bonds prior to maturity, should be treated ‘capital gains’ under the Act. Section 48 of the Act
prescribes the mechanism for computing capital gains. As per the provisions of section 48 of
the Act, capital gains/ losses are computed by reducing from the sale consideration:

► the cost of acquisition of the asset transferred; and

► any expenditure incurred wholly and exclusively in connection with the transfer (for e.g.,
brokerage, transaction processing fees etc.3).

7.12 As per the provisions of section 2(29AA) of the Act, a capital asset which is not a short-term
capital asset would qualify as a ‘long-term capital asset’. Section 2(42A) of the Act states that
a security (other than a unit) listed on a recognized stock exchange in India held for a period of
more than 12 months shall be considered as a long-term capital asset. A share of an unlisted
company and immoveable property will be considered as a long-term capital asset where such
asset is held for a period of more than 24 months. Any assets (other than as described above),
are considered long-term capital assets where they are held for a period of more than 36
months. Further, as per section 2(42B) of the Act, gains arising on transfer of a short-term
capital asset would qualify as ‘short-term capital gains.’ Also, as per section 2(29B) of the Act,
gains arising on transfer of a long-term capital asset would qualify as ‘long-term capital gains.’

7.13 Accordingly, as per section 2(42A) of the Act read with section 2(29AA) of the Act, where the
bonds listed on a recognized stock exchange in India are held for a period of more than 12
months immediately preceding the date of transfer, the same shall be regarded as long-term
capital asset and the gains arising from their transfer shall be considered as long-term capital
gains. Where unlisted bonds are held for a period of more than 36 months immediately
preceding the date of transfer, the same should be regarded as long-term capital asset and the
gains arising from their transfer should be considered as long-term capital gains.

7.14 As per the fourth proviso to section 48 of the Act, indexation benefit should not be available
from transfer of long-term capital asset being a bond or a debenture, other than capital

3
As regards portfolio management service (PMS) fees is concerned, reliance can be placed on decision of Homi k Bhabha v ITO
(Intl Tax) 48 SOT 165, Mateen Pyarali Dholkia (ITA 6950/Mum/2016 dated 30 May 2018) which have held that fees paid
towards PMS are not inextricably linked with particular instance of purchase/ sale of securities and thus, not allowed as a
deduction while computing taxable income.
8 23 February 2023
 indexed bonds issued by Government or Sovereign Gold Bonds issued by the RBI under the
Sovereign Gold Bond Scheme, 2015.

Tax rate on long-term capital gains – where the bonds are listed

7.15 Section 112 of the Act provides that long-term capital gains arising from transfer of listed debt
shall be taxed at the rate of 20 per cent in the hands of following category of taxpayers:

► Resident Individual/ HUF - as per section 112(1)(a)(ii) of the Act

► Domestic company - as per section 112(1)(b)(ii) of the Act
► Non-resident or a foreign company - as per section 112(1)(c)(ii) of the Act
► Any other resident - as per section 112(1)(d)(ii) of the Act

7.16 Further, proviso to section 112(1) of the Act reads as follows:

“Provided that where the tax payable in respect of any income arising from the transfer of a
long-term capital asset, being listed securities (other than a unit) or zero-coupon bond, exceeds
ten per cent of the amount of capital gains before giving effect to the provisions of the second
proviso to section 48, then, such excess shall be ignored for the purpose of computing the tax
payable by the assessee.”

7.17 Accordingly, section 112 of the Act provides an option to elect whether to be taxed at the rate
of 20 per cent with indexation benefit or at the rate of 10 per cent without indexation benefit.
However, even though the second proviso to section 48 of the Act (i.e., indexation benefit) is
not applicable to debentures (in view of third proviso to section 48 of the Act), the benefit of
proviso to section 112 of the Act should be applicable to debentures. Accordingly, the
long-term capital gains on transfer of debentures should be chargeable to tax at the rate of
10 per cent (plus applicable surcharge and health and education cess) as per section 112 of
the Act in the hands of both residents and non-residents. Reliance in this regard can be placed
on the following decisions:

► Honda Motor Co. Ltd., In Re [2018] 90 taxmann.com 180 (AAR - New Delhi);
► Finnish Fund for Industrial Cooperation Ltd., In re [2018] 91 taxmann.com 133
(AAR - New Delhi); and
► Cairn UK Holdings Ltd. v DIT [2013] 220 Taxman 230 (Del).

Tax rate on long-term capital gains – where the bonds are unlisted

7.18 Section 112 of the Act provides that long-term capital gains arising to any taxpayer other than
a non-resident and a foreign company from transfer of an unlisted debt shall be taxed at the
rate of 20 per cent. Further, as per section 112(1)(c)(iii) of the Act, long-term capital gains
arising to a non-resident or a foreign company from transfer of an unlisted debt shall be taxed
at the rate of 10 per cent (without foreign exchange fluctuation and indexation benefit).
9 23 February 2023
 Set off of capital losses (on listed as well as unlisted securities)

7.19 Section 70 of the Act deals with set-off of losses from one source against income from another
source under the same head of income. Capital gains constitute a head of income under the
Act. As per section 70 of the Act, short-term capital losses are eligible for set-off against both
short-term capital gains and long-term capital gains. However, long-term capital losses are
eligible for set-off only against long-term capital gains.

Section 74 of the Act permits a taxpayer to carry forward capital losses, if any, to be
set-off against capital gains earned in eight subsequent years. Accordingly, the capital losses
of the current year, which could not be set-off against the capital gains of the current year, are
eligible for carry forward and set-off against capital gains earned in eight assessment years
immediately succeeding the assessment year for which the first loss was computed.

Tax implications on buy-back of the bonds

Where the bonds are bought-back by issuer before maturity, the tax implications in the hands
of the investors should remain the same as arising in case of sale/ transfer of the bonds before
maturity (discussed above).

Tax rates

Individuals and HUFs

8.1 The Finance Bill, 2023 has proposed to amend section 115BAC of the Act by, inter alia,
inserting sub-section (1A) thereto to provide that the tax regime provided under section
115BAC of the Act shall be the default tax regime applicable in case of an individual, HUF, AOP
(other than a co-operative society), body of individual or artificial juridical, beginning with the
financial year 2023-24, except where the assessee specifically opts to be governed by the
erstwhile regime.

8.2 In such cases, the following shall be the rate of tax applicable:

Slab Tax rate

Total income up to INR 3,00,000 Nil
More than INR 3,00,000 but up to INR 5 per cent of excess over INR 3,00,000
6,00,000
More than INR 6,00,000 but up to 10 per cent of excess over INR 6,00,000
INR 9,00,000 + INR 15,000
More than INR 9,00,000 but up to 15 per cent of excess over INR 9,00,000
INR 12,00,000 + INR 45,000

10 23 February 2023
 Slab Tax rate
More than INR 12,00,000 but up to 20 per cent of excess over INR 12,00,000
INR 15,00,000 + INR 90,000
More than INR 15,00,000 30 per cent of excess over INR 15,00,000
+ INR 1,50,000

8.3 Where the assessee as stated above, specifically opts to be governed by the erstwhile regime,
the income earned by assessee should be liable to tax as per the applicable slab rates (plus
applicable surcharge and health and education cess) based on the taxable income of such
assessee. The slab rates applicable to such investors (other than resident individuals aged 60
years or more) are as follows:

Income Tax rate

Up to INR 2,50,000 NIL
Exceeding INR 2,50,000 up to 5 per cent of the amount by which the total income
INR 5,00,000 exceeds INR 2,50,000
Exceeding INR 5,00,000 up to 20 per cent of the amount by which the total income
INR 10,00,000 exceeds INR 5,00,000 plus INR 12,500
Exceeding INR 10,00,000 30 per cent of the amount by which the total income
exceeds INR 10,00,000 plus INR 112,500

The tax rate for the highest bracket of income for resident individuals, HUFs, AOP (other than
a co-operative society), BOI and artificial juridical person would be as follows:

Business Capital Gains Interest

Income Income Long- Long-term Short- Income4
(net of term (unlisted) term
expenses) (listed) (listed and
unlisted)
Exceeding INR 15,00,000 but up to 31.2 per 10.4 20.8 per 31.2 per 31.2 per
INR 50,00,000 cent per cent cent cent
Surcharge – Nil cent
Health and education cess- 4 per cent
Exceeding INR 50,00,000 but up to 34.32 per 11.44 22.88 per 34.32 per 34.32
INR 1,00,00,000 cent per cent cent per cent
Surcharge – 10 per cent cent
Health and education cess-4 per cent
Exceeding INR 1,00,00,000 but up to 35.88 per 11.96 23.92 per 35.88 per 35.88
INR 2,00,00,000 cent per cent cent per cent
Surcharge – 15 per cent cent
Health and education cess-4 per cent

4
Net of expenditure incurred wholly and exclusively for earning such income
11 23 February 2023
 Exceeding INR 2,00,00,000 39 per 11.96 23.92 per 39 per 39 per
Surcharge – 25 per cent cent/ per cent** cent/ cent/
Health and education cess-4 per cent 42.74 per cent** 42.74 per 42.74
cent* cent* per cent*

* Where the investor opts to be governed by the erstwhile regime. The tax rate is incl. of
surcharge of 37% and health and education cess of 4 per cent.

** As per amendment proposed by the Finance Bill, 2023, the maximum surcharge rate in case
of capital gains chargeable to tax under section 112 of the Act, in case of an assessee being an
individual, HUF, AOP (not being a co-operative society), BOI or artificial juridical person is also
proposed to be capped to 15%.

The tax rate for the highest bracket of income for non-resident (other than FPI and a company)
would be as follows:

Business Capital Gains Interest

Income Income Long-term Short-term Income5
(net of (listed and (listed and
expenses) unlisted) unlisted)
Exceeding INR 15,00,000 but up to 31.2 per cent 10.4 per cent 31.2 per 31.2 per
INR 50,00,000 cent cent
Surcharge – Nil
Health and education cess- 4 per cent
Exceeding INR 50,00,000 but up to 34.32 per cent 11.44 per 34.32 per 34.32
INR 1,00,00,000 cent cent per cent
Surcharge – 10 per cent
Health and education cess-4 per cent
Exceeding INR 1,00,00,000 but up to 35.88 per cent 11.96 per 35.88 per 35.88
INR 2,00,00,000 cent cent per cent
Surcharge – 15 per cent
Health and education cess-4 per cent
Exceeding INR 2,00,00,000 39 per cent/ 11.96 per 39 per cent/ 39 per
Surcharge – 25 per cent 42.74 per cent* cent** 42.74 per cent/
Health and education cess-4 per cent cent* 42.74
per cent*

* Where the investor opts to be governed by the erstwhile regime. The tax rate is incl. of
surcharge of 37% and health and education cess of 4 per cent.

** As per amendment proposed by the Finance Bill, 2023, the maximum surcharge rate in case
of capital gains chargeable to tax under section 112 of the Act, in case of an assessee being an

12 23 February 2023
 individual, HUF, AOP (not being a co-operative society), BOI or artificial juridical person is also
proposed to be capped to 15%.

Note: In case of an individual of HUF exercising the option to be governed by the provisions of
section 115BAC(6) of the Act, the amount of INR 15,00,000 in the tables supra shall stand
substituted by INR 10,00,000.

AOPs/ BOIs

8.4 The tax rates applicable to AOPs or BOIs (other than co-operative societies) are as under:

Section 67A of the Act - Where share of member is known

Particulars Business Capital Gains Interest

Income Income5
(net of
expenses)
Where none of the members have Tax rates applicable to individual (refer above table)
income in excess of maximum
amount not taxable
Where any of the members have Maximum Marginal Rate (MMR)5 i.e. currently 39 per
total income (before including their cent (refer Note 1 below)
share from AOP/ BOI) exceeding
maximum amount not chargeable to
tax (members assumed to be
resident)

Section 167B of the Act - Where share of member is unknown

Particulars Business Capital Gains Interest

Income Income5
(net-off
expenses)
Where the share of the members in MMR i.e. currently 39 per cent
an AOP/ BOI are unknown or
indeterminate (members assumed
to be resident)

Note 1- Where the income is subject to a special rate of tax under the Act, such as
section 111A for short-term capital gains on transfer of equity shares subject to Securities

5
As per section 2(29C) of the Act, maximum marginal rate means the rate of income-tax (including surcharge on income-tax,
if any) applicable in relation to the highest slab of income in the case of an individual, association of persons, or as the case
may be, body of individuals as specified in the Finance Act of the relevant year.
13 23 February 2023
 Transaction Tax (STT) (15 per cent)/ section 112 for long-term capital gains on transfer of
securities (i.e. 10 per cent), in our view, the special rate should be considered as the MMR.
However, this issue has been subject matter of debate and thus, litigation on this regard
cannot be ruled out.

Note 2 – As per the amendment proposed by the Finance Bill, 2023, in case of an AOP
consisting of only companies as its members and having income chargeable to tax under
section 115BAC(1A) of the Act, the surcharge on its income shall not exceed 15%.

Co-operative societies6

8.5 In case of co-operative societies, the slab rates applicable are as follows:

Income Tax rate

Up to INR 10,000 10 per cent
Exceeding INR 10,000 up to INR 20 per cent of the amount by which the total
20,000 income exceeds INR 10,000 plus INR 1,000
Exceeding INR 20,000 30 per cent of the amount by which the total
income exceeds INR 20,000 plus INR 3,000

Note: The Finance Bill, 2023 proposes to insert section 115BAE to the Act to provide for a
concessional tax rate of 15% in case of newly set-up/ registered co-operative society, engaged
in the business of production or manufacture of an article or thing, subject to satisfaction of
certain conditions prescribed therein. Such concessional tax rate is applicable to a co-operative
society which has been set-up/ registered on or after 1 April 2023 and commences
manufacturing or production of article or thing on or before 31 March 2024

The tax rate for the highest bracket of income would be as follows:

Business Capital Gains Interest

Income Income Long-term Long-term Short- Income5
(net of (listed) (unlisted) term
expenses) (listed
and
unlisted)
Exceeding INR 31.2 per cent 10.4 per 20.8 per 31.2 per 31.2 per
20,000 up to cent cent cent cent
INR
1,00,00,000
Surcharge – NIL

6
The permissibility to invest in the bonds by a co-operative society would be governed by the co-operative societies Act/
Regulations governing the respective States under which the co-operative society would be registered.
14 23 February 2023
Health and
education cess-
4 per cent

Exceeding INR 33.384 per 11.128 per 22.256 per 33.384 33.384 per
1,00,00,000 cent cent cent per cent cent
but not
exceeding INR
10,00,00,000
Surcharge – 7
per cent
Health and
education cess-
4 per cent

Exceeding INR 34.944 per 11.648 per 23.296 per 34.944 34.944 per
10,00,00,000 cent cent cent per cent cent
Surcharge – 12
per cent
Health and
education cess-
4 per cent

15 23 February 2023
 Trust

Non-charitable trust

8.6 In the case of trust7, the tax implications will depend on whether the trust is a determinate8
trust or an indeterminate trust.

Particulars Business Income Capital Gains Interest

(net of expenses) Income5
Determinate trust
As per section 161 of the Act, MMR5 i.e. currently Tax rates applicable to the
the trustees of the trust are 39 per cent (refer beneficiaries of the trust
liable to tax in their capacity Note 1 below)
as ‘representative assesses in
the like manner and to the
same extent, as the
beneficiaries (beneficiaries
assumed to be resident)

Indeterminate trust
As per section 164 (1) of the MMR5 i.e. i.e. currently 39 per cent (refer Note 2 below)
Act, taxable in the hands of
the trustees as a
representative assessee
(beneficiaries assumed to be
resident)

Note 1 - Where the total income of the trust includes any profits and gains of business or
profession, the entire income of the trust should be taxed at the MMR i.e., 39 per cent.

Note 2 - Where the income is subject to a special rate of tax under the Act, such as
short-term capital gains on transfer of equity shares (15 per cent)/ long-term capital gains on
transfer of equity shares (10 per cent), section 112 for long-term capital gains on transfer of
securities (i.e., 10 per cent), in our view, the special rate should be considered as the MMR.
However, this issue has been subject matter of debate and thus, litigation on this regard
cannot be ruled out.

7
Assumed to be irrevocable. Where trust is a revocable trust, all income arising to any person by virtue of a revocable transfer
of assets shall be chargeable to income-tax as the income of the transferor and shall be included in his total income.

8
For the trust to be considered as a determinate trust, name and share of the beneficiaries as on the date of the trust deed
should be determinable.
16 23 February 2023
 Charitable trust

8.7 Section 11(5) of the Act requires the accumulated funds of the charitable and religious trusts
to be invested or deposited in certain stipulated manner/mode only. Further, section 13 of the
Act provides for non-operation of section 11 of the Act in case of certain incomes received by
charitable and religious trusts. In terms of section 13 of the Act, income of the charitable and
religious trusts from investment in modes other than those specified under Section 11(5), will
be subject to taxation at a maximum marginal rate as per the provisions of the Act. Thus, if the
charitable and religious trusts receive any income from its investments made in contradiction
to section 11(5) of the Act such income will be subject to tax as above.

Partnership Firms/ LLPs

8.8 As per section 2(23) of the Act, ‘firm’ shall have the meaning assigned to it in the Indian
Partnership Act, 1932 (9 of 1932), and shall include a limited liability partnership as defined
in the Limited Liability Partnership Act, 2008 (6 of 2009).

8.9 Partnership firms/ LLPs will be taxed as per the rates given below:

Business Capital Gains Interest

Income Income Long-term Long-term Short-term Income5
(net of (listed) (unlisted) (listed and
expenses) unlisted)
Up to INR 31.2 per cent 10.4 per cent 20.8 per 31.2 per 31.2 per
1,00,00,000 cent cent cent
Surcharge – NIL
Health and
education cess-4
per cent

Exceeding INR 34.94 per cent 11.65 per 23.30 per 34.94 per 34.94 per
1,00,00,000 cent cent cent cent
Surcharge – 12 per
cent
Health and
education cess-4
per cent

17 23 February 2023
8.10 Alternate Minimum Tax (AMT)

Section 115JC of the Act provides that where the regular income-tax payable for a previous
year by any person (other than a company) is less than the AMT on the adjusted total income
(ATI), the ATI shall be deemed to be total income of that person for such year and such person
shall be liable to pay income-tax on such income at the rate of 18.5 per cent (plus applicable
surcharge and health and education cess).

ATI for this purpose is the total income before giving effect to the deductions claimed under
section C of chapter VI-A (other than section 80P of the Act) and deduction claimed, if any,
under section 10AA and deduction claimed, if any, under section 35AD as reduced by the
amount of depreciation allowable in accordance with the provisions of section 32 as if no
deduction under section 35AD was allowed in respect of the assets on which the deduction
under that section is claimed. The provisions of this section does not apply to an Individual,
HUF, AOP, BOI or an Artificial Juridical Person if the adjusted total income of such person does
not exceed INR 20 lakhs. Further, the credit of AMT can be carried forward to fifteen years
immediately succeeding the assessment year in which tax credit becomes allowable and can be
set off in the years(s) where regular income-tax exceeds the AMT.

Also, sub-section (5) to section 115JC (as proposed to be amended by the Finance Bill, 2023)
provides that the provisions of section 115JC shall not apply to a person who has exercised the
option referred under, inter alia, section 115BAC(1A) of the Act.

Domestic company

8.11 The effective tax rates in respect of a domestic company9 are as follows:

a) Where the total turnover or gross receipt in the previous year 2021-2210 does not exceed
INR 400 crores.

Business Capital Gains Interest

Income Income Long-term Long-term Short- Income5
(net of (listed) (unlisted) term
expenses) (listed
and
unlisted)
Up to INR 26 per cent 10.4 per 20.8 per 26 per 26 per
1,00,00,000 cent cent cent cent
Surcharge – NIL

9
The given rates are subject to provisions of MAT as contained in section 115JB of the Act.
10
As per amendment proposed by the Finance Bill, 2023
18 23 February 2023
 Health and
education cess-4
per cent
Exceeding INR 27.82 per 11.13 per 22.26 27.82 27.82
1,00,00,000 up to cent cent per cent per cent per cent
INR 10,00,00,000
Surcharge – 7 per
cent
Health and
education cess-4
per cent
Exceeding 29.12 per 11.65 per 23.30 per 29.12 29.12
INR 10,00,00,000 cent cent cent per cent per cent
Surcharge – 12
per cent
Health and
education cess-4
per cent

b) Where the total turnover or gross receipt in the previous year 2021-2210 exceeds INR 400
crores

Business Income Capital Gains Interest

Income (net of expenses) Long- Long- Short- Income5
term term term
(listed (unlisted) (listed
and
unlisted)
Up to INR 31.2 per cent 10.4 20.8 per 31.2 per 31.2 per
1,00,00,000 per cent cent cent
Surcharge – NIL cent
Health and
education cess-4
per cent

Exceeding INR 33.38 per cent 11.13 22.26 33.38 per 33.38 per
1,00,00,000 up to per per cent cent cent
INR 10,00,00,000 cent
Surcharge – 7 per
cent

19 23 February 2023
 Health and
education cess-4
per cent

Exceeding 34.94 per cent 11.65 23.30 per 34.94 per 34.94 per
INR 10,00,00,000 per cent cent cent
Surcharge – 12 cent
per cent
Health and
education cess-4
per cent

c) As per section 115BAA of the Act (applicable with effect from 1 April 2020), provides an
option to domestic companies to offer their income to tax at the rate of 22 per cent (plus
10 per cent surcharge and 4 per cent health and education cess), subject to satisfaction of
the following conditions:

a) No deduction is claimed under section 10AA of the Act;

b) No deduction is claimed under 32(1)(iia), section 32AD, section 33AB, section
33ABA, section 35(1)(ii), section 35(1)(iia), section 35(1)(iii), section 35(2AA),
section 35(2AB), section 35AD, section 35CCC or section 35CCD of the Act;
c) No deduction is claimed under Chapter VI-A of the Act except for section 80JJAA and
80M of the Act;
d) No set-off of loss arising from deductions claimed in relation to the above deductions;
e) Depreciation under section 32 of the Act shall be allowed in such manner as
prescribed except additional depreciation under section 32(1)(iia) of the Act.

Further, in case of a domestic company, opting to be governed by the provisions of section

115BAA of the Act, the provisions of section 115JB (MAT) shall not apply.

Also, once a company opts to be governed by section 115BAA of the Act, the option
cannot be subsequently withdrawn.

20 23 February 2023
 The effective tax rate for such companies is as under:

i. Total income chargeable under section 115BAA of the Act -

Business Capital Gains Interest

Income Income Short-term Long- Long-term Income4
(net of (listed and term (unlisted)
expenses) unlisted) (listed)
Any amount of income 25.17 per 25.17 per 11.44 22.88 per 25.17
Surcharge – 10 per cent cent per cent cent per cent
cent
Health and education
cess- 4 per cent

d) Section 115BAB of the Act provides that a reduced tax rate of 15 per cent (plus applicable
surcharge and health and education cess) shall be applicable to domestic companies
satisfying following conditions:

a) The Company has been set-up and registered on or after 1 October 2019 and has
commenced manufacturing on or before 31 March 2024;
b) The Company is not formed by splitting up, or the reconstruction, of a business
already in existence (certain relaxation is provided on applicability of this condition).
c) The Company does not use any machinery or plant previously used for any purpose
(certain relaxation is also provided on applicability of this condition).
d) The Company is not engaged in any business other than business of manufacture or
production of any article or thing and research in relation to, or distribution of, such
article or thing manufactured or produced by it.
e) The Company does not avail following exemptions/ incentives:
i. No deduction is claimed under section 10AA of the Act;
ii. No deduction is claimed under 32(1)(iia), section 32AD, section 33AB, section
33ABA, section 35(1)(ii), section 35(1)(iia), section 35(1)(iii), section 35(2AA),
section 35(2AB), section 35AD, section 35CCC or section 35CCD of the Act;
iii. No deduction is claimed under Chapter VI-A of the Act except for section 80JJAA
and 80M));
iv. No Set-off of loss arising from deductions claimed in relation to the above
deductions; and
v. Depreciation under section 32 of the Act shall be allowed in such manner as
prescribed except additional depreciation under section 32(1)(iia) of the Act.

The reduced tax rate shall be at the option of the taxpayer, however, once the taxpayer
opts to be governed by section 115BAB of the Act, it cannot be subsequently withdrawn.

21 23 February 2023
 Further, in case of a domestic company, opting to be governed by the provisions of section
115BAB of the Act, the provisions of section 115JB (MAT) shall not apply.

The effective tax rate for such companies is as under:

i. Total income chargeable under section 115BAB of the Act -

Business Capital Gains Interest

Income Income Short-term Long- Long-term Income4
(net of (listed and term (unlisted)
expenses) unlisted) (listed)
Any amount of income 17.16 per 17.16 per 11.44% 22.88% 17.16
Surcharge – 10 per cent cent per cent
cent
Health and education
cess- 4 per cent

8.12 Minimum Alternative Tax (MAT)

Section 115JB of the Act, provides that where the tax liability of a company (under the regular
provisions of the Act) is less than 15 per cent of its 'book profit', then the book profit shall be
deemed to be its total income and tax payable by such person on such total income shall be the
amount of income-tax at the rate of 15 per cent (plus applicable surcharge and health and
education cess). For this purpose, the book profit shall mean the profit as shown in the
statement of profit and loss for the relevant previous year and as increased and/or decreased
by specific items prescribed in section 115JB of the Act.

Further, the credit of MAT can be carried forward to fifteen years immediately succeeding the
assessment year in which tax credit becomes allowable and can be set off in the years(s) where
tax is payable in accordance with regular provisions of the Act i.e., when regular income-tax
exceeds the tax payable as per MAT provisions.

Further, Explanation 4 to section 115JB of the Act (inserted with retrospective effect from AY
2001-02) clarifies that provisions of MAT will not apply to a foreign company if:

a) It is a resident of a country with which India has a tax treaty and the company does not
have a permanent establishment in India in accordance with the provisions of such tax
treaty; or
b) it is a resident of a country with which India does not have a tax treaty and the foreign
company is not required to register under any law applicable to companies.

22 23 February 2023
 Also, sub-section 5A to section 115JB (inserted vide the Taxation Laws (Amendment)
Ordinance, 2019) provides that the provisions of section 115JB shall not apply to a person
who has exercised the option referred under section 115BAA or section 115BAB of the Act.

The CBDT vide its Circular no. 29 of 2019 dated 2 October 2019 has clarified that MAT credit
is not available to a domestic company exercising option under for section 115BAA of the Act.
The circular further clarifies that there is no time limit within which the option under section
115BAA of the Act can be exercised and accordingly, a domestic company having accumulated
MAT credit may, if it so desires, exercise the option of section 115BAA of the Act at a future
date, after utilizing the MAT credit against tax payable as per the regime existing prior to
issuance of the Ordinance.

Insurance companies11

8.13 Section 44 of the Act provides that, notwithstanding anything to the contrary contained in the
provisions of this Act relating to the computation of income chargeable under the head
‘Interest on securities’, ‘Income from house property’, ‘Capital gains’ or ‘Income from other
sources’, or in section 199 or in sections 28 to 43B, the profits and gains of any business of
insurance, including any such business carried on by a mutual insurance company or by a
co-operative society, shall be computed in accordance with the Rules contained in the First
Schedule.

General Insurance companies

a) Where the total turnover or gross receipt in the previous year 2021-2210 does not exceed
INR 400 crores

Business Capital Gains Interest

Income Income Long-term Short-term Income5
(net of (listed and (listed and
expenses) unlisted) unlisted)
Up to INR 1,00,00,000 26 per cent12
Surcharge – NIL
Health and education
cess-4 per cent

11
The investments by insurance companies are subject to Regulations prescribed by the Insurance Regulatory and
Development Authority (it prescribes limit of investment as well as credit rating of the listed security in which investment can
be made).

12
It may be noted that there are divergent views on tax rates applicable in case of capital gains earned by general insurance
companies and few market players in the insurance industry are taxing such income at prescribed special rates.

23 23 February 2023
 Exceeding INR 27.82 per cent
1,00,00,000 up to INR
10,00,00,000
Surcharge – 7 per cent
Health and education
cess-4 per cent

Exceeding 29.12 per cent

INR 10,00,00,000
Surcharge – 12 per cent
Health and education
cess-4 per cent

b) Where the total turnover or gross receipt in the previous year 2021-2210 exceeds INR 400
crores

Business Capital Gains Interest

Income Income Long- Short-term Income5
(net of term
expenses)
Up to INR 1,00,00,000 31.2 per cent12
Surcharge – NIL
Health and education cess-4 per
cent
Exceeding INR 1,00,00,000 up 33.38 per cent
to INR 10,00,00,000
Surcharge – 7 per cent
Health and education cess-4 per
cent
Exceeding INR 10,00,00,000 34.94 per cent
Surcharge – 12 per cent
Health and education cess-4 per
cent

24 23 February 2023
 c) Where companies opt for concessional tax rates as per section 115BAA of the Act

Business Capital Gains Interest

Income Income Long-term Short-term Income5
(net of (listed and (listed and
expenses) unlisted) unlisted)
Any amount of income 25.17 per cent12
Surcharge – 10 per
cent
Health and education
cess- 4 per cent

Life Insurance companies

8.14 As per section 115B of the Act, the profits and gains of only life insurance business are taxed
at the rate of 12.5 per cent. Accordingly, the effective tax rates are computed as under:

Business Capital Gains Interest

Income Income Long-term Short-term Income
(listed and (listed and
unlisted) unlisted)
Up to INR 1,00,00,000 13 per cent
Surcharge – NIL
Health and education cess-4 per
cent
Exceeding INR 1,00,00,000 up to 13.91 per cent
INR 10,00,00,000
Surcharge – 7 per cent
Health and education cess-4 per
cent
Exceeding INR 10,00,00,000 14.56 per cent
Surcharge – 12 per cent
Health and education cess-4 per
cent

25 23 February 2023
 AIFs

8.15 As per the SEBI AIF Regulations, 2012, the following are the major prescribed conditions for
investments by AIFs:

► Category I - Category I AIF can invest in investee companies or venture capital

undertaking or in special purpose vehicles or in limited liability partnerships or in units of
other AIFs as specified in these regulations.
► Category II - Category II AIF can invest primarily in unlisted investee companies or in
units of other AIFs as may be specified in the placement memorandum.
► Category III - Category III AIF can invest in securities of listed or unlisted investee
companies or derivatives or complex or structured products.

Accordingly, as per the Regulations, albeit the investment in listed bonds can be made by both
Category II or Category III AIF [subject to satisfaction of the conditions prescribed in the SEBI
(AIF) Regulations], practically, only Category III invest in listed bonds. For the purpose of this
memorandum, we have covered tax implications for Category II and Category III AIF.

Taxation of Category II AIF

8.16 As per section 10(23FBA) of the Act read with section 115UB of the Act, any income (other
than business income) earned by a Category I or Category II AIF shall be exempt in its hands
and shall be chargeable to income-tax directly in the hands of the investors in the same
manner as if it were the income accruing or arising to, or received by, such investor had the
investments been made directly by the investor.

8.17 As per section 10(23FBB) read with section 115UB of the Act, any business income, accruing
or arising to or received by the investors of the Category II AIF, shall be exempt in the hands of
the investors and taxed as under:

► where such fund is registered as company or a firm - at the rate or rates as specified in
the Finance Act of the relevant year (refer table in para 8.9/8.11 above);
► in any other case – MMR i.e. i.e. currently 39 per cent.

Taxation of Category III AIF

8.18 Category III AIFs are typically registered as either a trust or LLP under the Act. Accordingly,
the total income of a Category III AIF should be charged to tax as under:

► where such fund is registered as a trust - Refer table above in para 8.6 above;
► where such fund is registered as an LLP – Refer table above in para 8.9 above.

26 23 February 2023
 Company other than a domestic company

8.19 The effective tax rates (subject to treaty benefits) in respect of a company other than a
domestic company are as follows:

Business Capital Gains Interest

Income Income Long-term Short-term Income5
(net of (listed and (listed and
expenses) unlisted) unlisted)
Up to INR 1,00,00,000 41.6 per cent 10.4 per 41.6 per 41.6 per cent
Surcharge – NIL cent cent
Health and education
cess – 4 per cent
Exceeding INR 42.43 per cent 10.61 per 42.43 per 42.43 per cent
1,00,00,000 up to INR cent cent
10,00,00,000
Surcharge – 2 per cent
Health and education
cess – 4 per cent
Exceeding 43.68 per cent 10.92 per 43.68 per 43.68 per cent
INR 10,00,00,000 cent cent
Surcharge – 5 per cent
Health and education
cess – 4 per cent

8.20 Section 90(2) of the Act provides that where the Central Government has entered into an
agreement with the Government of any country outside India for granting relief of tax, or as
the case may be, avoidance of double taxation, then, in relation to an assessee to whom such
agreement applies, the provisions of the Act shall apply to the extent they are more beneficial
to that assessee.

Where the foreign company investor does not have any Permanent Establishment (PE) in India
(as contemplated under Article 5 of the relevant tax treaties), the business income arising
from investment in the bonds should not be taxed in India in the hands of such foreign
company investor by virtue of Article 7 of the relevant tax treaties [read with section 90(2) of
the Act].

27 23 February 2023
 FPI

8.21 As per section 2(14) of the Act, inter-alia, any security13 held by an FPI in accordance with the
SEBI Regulations is deemed to be a capital asset in the hands of such FPI.

Section 115AD of Act provides a specific tax regime for income earned by FPIs from
investment in securities.

Section 115AD(1)(a) of the Act deals with income received in respect of securities is taxable at
the rate of 20 per cent (plus applicable surcharge and health and education cess). Further,
section 115AD(2)(a) restricts an FPI from claiming any deduction under section 28 to 44C of
the Act or section 57 of the Act.

Further, section 115AD read with section 194LD of the Act, provides that income by way of
interest payable on or after 1 June 2013 but before 1 July 2023, in respect of investment
made by an FPI in government securities/ rupee denominated bond of an Indian company shall
be taxable at the rate of 5 per cent (provided that the rate of interest in respect of the bond
does not exceed the rate as may be notified by the Central Government.

As per the Notification No. 56/2013/F.No.149/81/2013-TPL dated 29 July 2013, it has been
clarified that in respect of bond(s) issued on or after 1 July 2010, for the purpose of claiming
benefits under section 194LD of the Act, the rate of interest in respect of the rupee
denominated bonds issued by an Indian company should not exceed 500 basis points over the
Base Rate of State Bank of India (SBI) on the date of issue of such bonds.

It is pertinent to note that even though the terms ‘debentures’ and ‘bonds’ have not been
defined under the Act, both the terms have been used multiple times / interchangeably under
various sections of the Act.

The Companies Act, 2013 has defined ‘debentures’ under section 2(30) as:

“(30) "debenture" includes debenture stock, bonds or any other instrument of a company
evidencing a debt, whether constituting a charge on the assets of the company or not;

Further, the Black’s Law Dictionary has defined debentures as “a bond that is backed only by
the general credit and financial reputation of the corporate issuer, not by a lien on corporate
assets”.

In light of the above and given that in general parlance, debentures and bonds are treated at
par, in our view, the benefit of provisions of section 194LD should also extend to debentures.
Additionally, it is pertinent to note that the CBDT has issued an Instruction dated 30 November

13
Section 2(h) of SCRA defines the term ‘securities’ inter-alia to include shares, scrips, stocks, bonds, debentures, debenture
stock or other marketable securities of a like nature in or of any incorporated company or other body corporate.
28 23 February 2023
2017 clarifying that in absence of any specific definition of bonds in the Act or in section
194LD of the Act, the term ‘bonds’ used in section 194LD should be considered as including
non-convertible debentures.

Accordingly, in the context of section 194LD of the Act, bonds should be construed to include
debentures.

Based on the above provisions, where the other conditions mentioned in section 194LD of the
Act are satisfied, the bonds should qualify for concessional rate under section 194LD of the
Act. However, where the return on the bonds exceed the rate notified under section 194LD of
the Act, in our view, the bonds should not qualify for concessional rate under section 194LD of
the Act.

In light of the above discussions, the effective tax rates in respect of an FPI are as under:

Where the FPI is a corporate (subject to treaty benefits):

Capital Gains Interest

Income Long-term Short-term Income
(listed and (listed and (gross basis)
unlisted) unlisted) Refer Note A
below
Up to INR 1,00,00,000 10.4 per cent 31.2 per cent 5.2 per cent/
Surcharge – NIL 20.8 per cent
Health and education cess-4
per cent
Exceeding INR 1,00,00,000 10.61 per cent 31.82 per cent 5.30 per cent/
up to INR 10,00,00,000 21.22 per cent
Surcharge – 2 per cent
Health and education cess-4
per cent
Exceeding 10.92 per cent 32.76 per cent 5.46 per cent/
INR 10,00,00,000 21.84 per cent
Surcharge – 5 per cent
Health and education cess-4
per cent

29 23 February 2023
Where the FPI is a non-corporate (except firms and co-operative societies) (subject to treaty
benefits):

Capital Gains Interest

Income Long- Short-term Income
term (listed and (gross basis)
(listed unlisted) Refer Note A below
and
unlisted)
Where total income does not exceed 10.4 per 31.2 per cent 5.2 per cent/
Rs 50 lacs cent 20.8 per cent
Surcharge – NIL
Health and education cess - 4 per cent
Where total income exceeds Rs 50 11.44 per 34.32 per cent 5.72 per cent/
lacs but does not exceed Rs 1 crore cent 22.88 per cent
Surcharge – 10 per cent
Health and education cess - 4 per cent
Where total income exceeds Rs 1 11.96 per 35.88 per cent 5.98 per cent/
crore but does not exceed Rs 2 crore cent 23.92 per cent
Surcharge – 15 per cent
Health and education cess - 4 per cent
Where total income exceeds INR 2 11.96 per 35.88 per cent 5.98 per cent/
crore cent 23.92 per cent

In case of any other non-corporate FPI (being firms, local authorities and co-operative
societies) (subject to treaty benefits):

Capital Gains Interest

Income Long-term Short-term Income (gross
(listed and (listed and basis)
unlisted) unlisted) Refer Note A below
Up to INR 1,00,00,000 10.4 per cent 31.2 per cent 5.2 per cent/
Surcharge – NIL 20.8 per cent
Health and education cess - 4
per cent

Exceeding INR 1,00,00,000 11.65 per 34.94 per cent 5.82 per cent/
Surcharge – 12 per cent cent 23.30 per cent
Health and education cess - 4
per cent

30 23 February 2023
Note A:

• Section 194LC of the Act provides for a concessional tax rate of 5% in case of interest
income payable to a non-resident with respect to any loan of borrowing made before 1
July 2023, subject to satisfaction of the condition prescribed therein.

• Section 194LD of the Act provides for a concessional tax rate of 5% in case of interest
income payable before 1 July 2023, to a non-resident being an FPI, subject to satisfaction
of the condition prescribed therein.

• The Finance Bill, 2023 has not extended the date of making a loan or borrowing (for the
purposes of section 194LC of the Act) or payment of interest (for the purposes of section
194LD of the Act) (viz. 1 July 2023).

• Given the same, in case of a loan or borrowing made on or after 1 July 2023 (for the
purposes of section 194LC of the Act) and interest payment made on or after 1 July 2023
(for the purposes of section 194LC of the Act), the tax rate of the interest shall typically
be as specified under section 115A of the Act, viz. 20%.

International Financial Services Centre (IFSC)

In case of a SEBI-registered FPI incorporated as an AIF in IFSC, income in the nature of interest on
securities shall be chargeable to tax at the rate of 10% [other than interest on securities taxable at
the rate of 5% (refer Note A above)] and income in the nature of ‘capital gains’ arising from
transfer of securities shall be exempt from tax, under the Act.

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31 23 February 2023
Other Considerations

1. Accrual of interest income in books of account by the investors

The manner of accrual of the interest paid/ payable on the bonds shall depend on the method of
accounting regularly adopted by the taxpayer seen alongwith the applicable standards on
accounting as applicable to such investor.

Where the investor maintains its books of account on ‘cash’ basis

Where aforesaid is the case, then irrespective of whether the coupon/ interest is mentioned in
the debenture term-sheet or otherwise, the investor shall be required to offer the interest to tax
only in the year of actual receipt of such interest.

Where the investor maintains its books of account on ‘accrual’ basis and no coupon/ interest is
mentioned in the debenture term-sheet

Where the investor follows accrual basis of maintaining its books of account, given that the NCD/
ZCB/DDB does not entail any coupon/ interest during its tenure and the NCD/ ZCB/ DDB shall be
redeemed at a premium on maturity, in our view, for the purposes of the Act, the investors
should not be required to accrue any interest in its books of account prior to redemption of such
NCD/ ZCB/ DDB.

Paragraph 8(1) of the Income Computation and Disclosure Standards (ICDS) IV, notified under
section 145 of the Act, dealing with ‘revenue recognition’, provides that in case of income in the
nature of interest, chargeable to tax under the head ‘profits and gains of business or profession’
or ‘income from other sources’, such intertest shall accrue on the time basis determined by the
amount outstanding and the rate applicable. Further, paragraph 8(3) provides that the discount
or premium on debt securities held should be treated as though it were accruing over the period
to maturity.

In connection with the above, it is to be noted that to the extent discussed hereinabove, ICDS IV
is in conflict with section 4 and section 5 of the Act to the extent that it suggests accrual of
income (interest/ premium) for the purposes of the Act before it is ‘due’ to the taxpayer. Legal
right to receive interest/ premium is only upon redemption of the NCD/ ZCB/ DDB. Section 145
of the Act laying down method of accounting is a machinery provision and cannot over-reach the
charging provisions of the Act. To that extent, the charging provisions of the Act viz. section 4
and section 5 of the Act shall have an over-riding effect over ICDS IV and thus, for the purposes
of the Act, the investors should not be required to accrue any interest in its books of account
prior to redemption of the NCD/ ZCB/ DDB.

Where the investor maintains its books of account on ‘accrual’ basis and coupon/ interest is
mentioned in the debenture term-sheet

Where the investor follows accrual basis of maintaining its books of account, however, given the
fact that the terms of the NCDs/ ZCBs/ DDB provide for a bullet settlement i.e. the principal
component of the NCDs/ ZCBs/ DDB and any interest accrued thereon shall be payable only at
the time of maturity of such NCDs, no right to receive interest accrues to an investor prior to
32 23 February 2023
 maturity/ redemption of the bonds and accordingly, for the purposes of the Act, the investors
should not be required to accrue any interest in its books of account prior to redemption/
maturity of the NCD/ ZCB/ DDB.

The said view is supported by the judgement of the Hon’ble SC in case of E. D. Sassoon & Co.
Ltd. reported at 26 ITR 27, relevant extracts wherefrom have been reproduced hereunder:

“Income may accrue to an assessee without actual receipt of the same. If the assessee acquires a
right to receive the income, the income can be said to have accrued to him though it may be
received later on it being ascertained. The basic conception is that he must have acquired a
right to receive the income. There must be a debt owed to him by somebody. There must be as
is otherwise expressed debitum in praesenti, solvendum in fututo. Unless and until there is
created in favour of the assessee a debt due by somebody it cannot be said that he has acquired
a right to receive the income or that income has accrued to him”.

2. Withholding obligations for the issuer

A. Where the ultimate payee is a ‘Resident’

• Section 193 of the Act deals with deduction of tax at source in respect of ‘interest on
securities’ payable to a resident and requires a person responsible for paying to a
resident any income in the nature of interest on securities, to deduct tax at source from
such interest. It is apposite to reproduce the provisions of section 193 of the Act
hereunder:

“193: The person responsible for paying to a resident any income by way of interest on
securities shall, at the time of credit of such income to the account of the payee or at
the time of payment thereof in cash or……….., whichever is earlier, deduct income-tax at
the rates in force on the amount of interest payable”.

• The Finance Bill, 2023 proposes to omit clause (ix) of the proviso to section 193 of the
Act which provides that no tax is required to be deducted under section 193 of the Act,
where the interest is payable on any security issued by a company, which is in a
dematerialized form and is listed on a recognised stock exchange in India.

• Section 193 of the Act thus, as applicable with effect from the financial year beginning
1 April 2023, creates a withholding tax obligation on the payer when, inter alia:

• the amount paid/ payable to the payee constitutes income in the payee’s hands;
• income is, inter alia, in the nature of interest; and
• such interest is either paid to the payee or credited to the account of the payee (or
any other account).

• Thus, where a payment is covered under section 193 of the Act, tax is required to be
deducted at the ‘rates in force’14

14
As defined in section 2(37A) of the Act.
33 23 February 2023
 • As stated above, the issuer shall accrue interest on the NCDs/ ZCBs/ DDB issued in the
books of account on a monthly/ annual basis, but the interest would only be payable at
the time of maturity of the said NCDs/ ZCBs/ DDB (i.e. the NCD/ ZCB/ DDB holder
would acquire a right to receive such income at the time of maturity of the NCDs/
ZCBs).

• Further, the NCDs/ ZCBs/ DDB, being freely transferable by nature, the ultimate
identity of the NCD/ ZCB/ DDB holder to whom the interest is to be paid would be
known only at the time of maturity of the NCDs/ ZCBs/ DDB (at which point in time, the
interest on such NCDs/ ZCBs/ DDB shall be payable).

• In such a scenario, there should be no obligation on the issuer to deduct tax at source
from the on the basis of the following grounds:

a. The whole scheme of deduction of tax at source proceeds on the basis that the
payer knows the identity of the payee for the following purpose:

- a certificate of tax deducted has to be furnished to the payee15;

- the prescribed return has to be furnished by the payer to the department16; and
- the department has to give credit to the payee for the tax deducted at source17.

b. In case of the NCDs/ ZCBs/ DDB, it would be impossible to satisfy these

requirements if tax is deducted before the interest accrues on the fixed date, since
the instrument is freely transferrable and may change hands before the date on
which interest accrues.

• Further, reliance can be placed on the ruling of Mumbai Bench of the Hon’ble Income
Tax Appellate Tribunal in the case of IDBI v Income-tax Officer, City III (1), Mumbai
[2007] 107 ITD 45 (Mumbai Tribunal), wherein, it was held that tax can be deducted at
source only when payee is known and identifiable. In the said case, regular return
bonds issued by the assessee were transferrable by simple endorsement and delivery
and the relevant registration date was a date subsequent to the closure of books of
account. The Mumbai Tribunal ruled that the assessee could not have ascertained the
identity of the payees at the point of time when provision for ‘interest accrued but not
due’ was made by it and therefore, no tax was required to be deducted.

• In the light of the above, the issuer may adopt a position that it is not liable to deduct
tax at source under section 193 of the Act on the ‘interest accrued but not due’.
However, the withholding tax obligations under section 193 of the Act would be
applicable in the hands of the issuer at the time of payment of interest on NCDs/ ZCBs/
DDB to the investors.

15
Section 203 of the Act
16
Section 206 of the Act
17
Section 199 of the Act
34 23 February 2023
 B. Where the ultimate payee is a ‘non-resident’

• For withholding obligation under section 195 of the Act in case of payment to a non-
resident, the arguments put forth above with respect to section 193 of the Act shall be
equally applicable.

3. Deductibility of interest in the hands of the issuer

• The issuer shall prepare its books of account on ‘mercantile’ basis and recognizes the
interest expenditure in its books of account, over the tenure of the NCDs/ ZCBs/ DDB.
Under such system of accounting, an item of income becomes taxable when a right to
receive it is finally acquired notwithstanding the fact that when such income is actually
received. Even if such income is actually received in a later year, its taxability would not be
evaded for the year in which right to receive was finally acquired. In the same manner, an
expense becomes deductible when liability to pay arises irrespective of its actual discharge.
The incurring of liability and the resultant deduction cannot be marred by mere reason of
some difficulty in proper quantification of such liability at that stage.

• Support for the above can reasonably be drawn from the observation made by the Hon’ble
Supreme Court of India (SC) in its judgement rendered in case of Bharat Earth Movers v
Commissioner of Income-tax reported at [2000 245 ITR 428] which has been reproduced
below:

“The law is settled: if a business liability has definitely arisen in the accounting year, the
deduction should be allowed although the liability may have to be quantified and discharged
at a future date. What should be certain is the incurring of the liability. It should also be
capable of being estimated with reasonable certainty though the actual quantification may
not be possible. If these requirements are satisfied, the liability is not a contingent one. The
liability is in praesenti though it will be discharged at a future date. It does not make any
difference if the future date on which the liability shall have to be discharged is not certain”.

• Similar views have been expressed by the Hon’ble SC in case of Metal Box Co. of India
Ltd. v. Their Workmen reported at [1969 73 ITR 53] and in case of Calcutta Co. Ltd. v
Commissioner of Income-tax reported at [1959 37 ITR 1].

• In light of the above, where the issuer prepares its books of account on mercantile basis and
accrues the interest payable on NCDs/ ZCBs/ DDB on a monthly/ annual basis, deduction for
such interest expenditure should be allowed to the issuer in the year of accrual.

35 23 February 2023
Scope limitations

► Please note that our scope is limited to providing our comments on key income-tax implications
as discussed above. We have currently assumed that none of the investors qualifies as an
Associated Enterprise as per the provisions of the Act and thus, we have not considered the
implications under the transfer pricing provisions under the Act.

► Our memorandum is a concept note on the taxation of the bonds as understood in the common
parlance. Where the bonds proposed to be issued by Nuvama possesses all characteristics from
the features as listed in the background and our understanding, the tax implications may
undergo a change and the same would have to be evaluated separately.

► We shall not be acting in the capacity of your management at any point in time during the course
of performing our services as described above. Further, all decision-making shall rest with you.

► In preparing our memorandum, we have worked solely on the instructions of Nuvama.

► Our advice is solely for the benefit of Nuvama and not to be relied upon by anyone other than
Nuvama. Hence, if you wish to disclose copies of our work to any other person or entity, you
must inform them that they may not rely upon any of our work for any purpose.

► This memorandum is based on an analysis of the Income-tax Act, 1961 in light of the
amendments proposed by the Finance Bill, 2023 and represents our interpretation of the said
provisions. The foregoing are subject to change and any such change could have a retroactive
effect on the conclusions presented in this memorandum.

► In providing our comments, we have not analyzed the provisions of the General Anti Avoidance
Rule introduced in Chapter X-A of the Act with effect from 1 April 2017.

► Any advice will be based on the law as it stands at the time the advice is provided. If there are
any changes in the tax regulations in India or market conditions within which you operate, or in
business practices, our opinion and recommendation may have to be re-evaluated. Unless
specifically requested to do so, we are under no obligation to keep you informed of subsequent
modifications to the law or practice.

► In our advice, we may indicate areas of risk and possible exposure to challenge by relevant IRA
and the means by which such risk may be mitigated. Inevitably, it is not possible to guarantee
that the IRA will not challenge a transaction or our interpretation of the relevant tax law nor to
guarantee the outcome of such a challenge if raised. The outcome of the proceedings is outside
the control of EY and hence, you understand and accept the responsibility for the outcome of
our recommendations under the engagement. You shall also take the responsibility for
judgments made during the course of our services and for the results produced.

36 23 February 2023
 Annexure A

SECTION 28(I) OF THE INCOME - TAX ACT, 1961 - BUSINESS INCOME - CHARGEABLE AS - TESTS
FOR DISTINCTION BETWEEN SHARES HELD AS STOCK-IN-TRADE AND SHARES HELD AS
INVESTMENT
INSTRUCTION NO. 1827, DATED 31-8-1989

1. 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.
Venkata Swami Naidu & Co. v. CIT [1959] 35 ITR 594. In this case the Supreme Court was dealing with
a question whether the excess sum realized 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.

3. 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.

4. 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.

5. In the case of H. Mohammad & Co. v. CIT [1977] 107 ITR 637 the Gujarat High Court observed that
a stock-in-trade is something in which a trader or a businessman 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.
37 23 February 2023
6. 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. v.CIT [1953] 24 ITR 415, 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
realization 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 assessee’s
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.

7. The aforesaid principles laid down by the Supreme Court was followed by Andhra Pradesh High Court
in the case of SBH v. CIT [1988] 151 ITR 703. 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. Section 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 unencumbered approved securities, 20 per cent 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 unencumbered 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.

8. In the case of Karam Chand Thapar & Brothers (P.) Ltd. v. CIT [1971] 83 ITR 899 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 circumstance, though it was a relevant
circumstance.

9. The decisions in CIT v. Associated Industrial Development Co. [1971] 82 ITR 586 (SC) and A.N.
Ramaswami Chettiar v. CIT [1963] 48 ITR 771 (Mad.) may also be referred to for guidance.

10. 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.

38 23 February 2023
 Distinction between shares held as stock-in-trade and shares held as investment - tests for such a
distinction
CIRCULAR NO. 4/2007, DATED 15-6-2007

1. The Income Tax Act, 1961 makes a distinction between a "capital asset" and a "trading asset".

2. Capital asset is defined in Section 2(14) of the Act. Long-term capital assets and gains are dealt
with under Section 2(29A) and Section 2(29B). Short-term capital assets and gains are dealt with
under Section 2(42A) and Section 2(42B).

3. Trading asset is dealt with under Section 28 of the Act.

4. The Central Board of Direct Taxes (CBDT) through Instruction No.1827 dated August 31, 1989
had brought to the notice of the assessing officers that there is a distinction between shares held as
investment (capital asset) and shares held as stock-in-trade (trading asset). In the light of a number
of judicial decisions pronounced after the issue of the above instructions, it is proposed to update
the above instructions for the information of assessees as well as for guidance of the assessing
officers.

5. In the case of Commissioner of Income Tax (Central), Calcutta Vs Associated Industrial

Development Company (P) Ltd (82 ITR 586), the Supreme Court observed that:

"Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is
a matter which is within the knowledge of the assessee who holds the shares and it should, in normal
circumstances, be in a position to produce evidence from its records as to whether it has maintained
any distinction between those shares which are its stock-in-trade and those which are held by way of
investment."

6. In the case of Commissioner of Income Tax, Bombay Vs H. Holck Larsen (160 ITR 67), the
Supreme Court observed:

"The High Court, in our opinion, made a mistake in observing whether transactions of sale and
purchase of shares were trading transactions or whether these were in the nature of investment was
a question of law. This was a mixed question of law and fact."

7. The principles laid down by the Supreme Court in the above two cases afford adequate guidance
to the assessing officers.

8. The Authority for Advance Rulings (AAR) (288 ITR 641), referring to the decisions of the
Supreme Court in several cases, has culled out the following principles:-

39 23 February 2023
"(i) Where a company purchases and sells shares, it must be shown that they were held as stock-in-
trade and that existence of the power to purchase and sell shares in the memorandum of association
is not decisive of the nature of transaction;

(ii) the substantial nature of transactions, the manner of maintaining books of accounts, the
magnitude of purchases and sales and the ratio between purchases and sales and the holding would
furnish a good guide to determine the nature of transactions;

(iii) ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the
transaction being in the nature of trade/adventure in the nature of trade; but where the object of
the investment in shares of a company is to derive income by way of dividend etc. then the profits
accruing by change in such investment (by sale of shares) will yield capital gain and not revenue
receipt".

9. Dealing with the above three principles, the AAR has observed in the case of Fidelity group as
under:-

"We shall revert to the aforementioned principles. The first principle requires us to ascertain
whether the purchase of shares by a FII in exercise of the power in the memorandum of
association/trust deed was as stock-in-trade as the mere existence of the power to purchase and sell
shares will not by itself be decisive of the nature of transaction. We have to verify as to how the
shares were valued/held in the books of account i.e. whether they were valued as stock-in-trade at
the end of the financial year for the purpose of arriving at business income or held as investment in
capital assets. The second principle furnishes a guide for determining the nature of transaction by
verifying whether there are substantial transactions, their magnitude, etc., maintenance of books of
account and finding the ratio between purchases and sales. It will not be out of place to mention that
regulation 18 of the SEBI Regulations enjoins upon every FII to keep and maintain books of account
containing true and fair accounts relating to remittance of initial corpus of buying and selling and
realizing capital gains on investments and accounts of remittance to India for investment in India
and realizing capital gains on investment from such remittances. The third principle suggests that
ordinarily purchases and sales of shares with the motive of realizing profit would lead to inference of
trade/adventure in the nature of trade; where the object of the investment in shares of companies is
to derive income by way of dividends etc., the transactions of purchases and sales of shares would
yield capital gains and not business profits."

10. CBDT also wishes to emphasize that it is possible for a taxpayer to have two portfolios, i.e., an
investment portfolio comprising of securities which are to be treated as capital assets and a trading
portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee
has two portfolios, the assessee may have income under both heads i.e., capital gains as well as
business income.

11. Assessing officers are advised that the above principles should guide them in determining
whether, in a given case, the shares are held by the assessee as investment (and therefore giving
40 23 February 2023
rise to capital gains) or as stock-in-trade (and therefore giving rise to business profits). The
assessing officers are further advised that no single principle would be decisive and the total effect
of all the principles should be considered to determine whether, in a given case, the shares are held
by the assessee as investment or stock-in-trade.

12. These instructions shall supplement the earlier Instruction no. 1827 dated August 31, 1989.

41 23 February 2023
SURPLUS ON SALE OF SHARES AND SECURITIES – CAPITAL GAINS OR BUSINESS INCOME

CIRCULAR NO. 6/2016, DATED 29-2-2016

4. Sub-section (14) of Section 2 of the Income-tax Act, 1961 (‘Act’) defines the term “capital
asset” to include property of any kind held by an assessee, whether or not connected with
his business or profession, but does not include any stock-in-trade or personal assets
subject to certain exceptions. As regards shares and other securities, the same can be held
either as capital assets or stock-in-trade/ trading assets or both. Determination of the
character of a particular investment in shares or other securities, whether the same is in the
nature of a capital asset or stock-in-trade, is essentially a fact-specific determination and
has led to a lot of uncertainty and litigation in the past.

5. Over the years, the courts have laid down different parameters to distinguish the shares
held as investments from the shares held as stock-in-trade. The Central Board of Direct
Taxes (‘CBDT) has also, through Instruction No. 1827, dated August 31, 1989 and Circular
No.4 of 2007 dated June 15, 2007, summarized the said principles for guidance of the field
formations.

6. Disputes, however, continue to exist on the application of these principles to the facts of an
individual case since the taxpayers find it difficult to prove the intention in acquiring such
shares/securities. In this background, while recognizing that no universal principal in
absolute terms can be laid down to decide the character of income from sale of shares and
securities (i.e. Whether the same is in the nature of capital gain or business income), CBDT
realizing that major part of shares/securities transactions takes place in respect of the
listed ones and with a view to reduce litigation and uncertainty in the matter, in partial
modification to the aforesaid Circulars, further instructs that the Assessing Officers in
holding whether the surplus generated from sale of listed shares or other securities would
be treated as Capital Gain or Business Income, shall take into account the following-

a. Where the assessee itself, irrespective of the period of holding the listed shares and
securities, opts to treat them as stock-in-trade, the income arising from transfer of
such shares/securities would be treated as its business income,

b. In respect of listed shares and securities held for a period of more than 12 months
immediately preceding the date of its transfer, if the assessee desires to treat the
income arising from the transfer thereof as Capital Gain, the same shall not be put to
dispute by the Assessing Officer. However, this stand, once taken by the assessee in a
particular Assessment Year, shall remain applicable in subsequent Assessment Years
also and the taxpayers shall not be allowed to adopt a different/contrary stand in this
regard in subsequent years;

c. In all other cases, the nature of transaction (i.e. whether the same is in the nature of
capital gain or business income) shall continue to be decided keeping in view the
aforesaid Circulars issued by the CBDT.

42 23 February 2023
7. It is, however, clarified that the above shall not apply in respect of such transactions in
shares/securities where the genuineness of the transaction itself is questionable, such as
bogus claims of Long-Term Capital Gain / Short-Term Capital Loss or any other sham
transactions.

8. It is reiterated that the above principles have been formulated with the sale objective of
reducing litigation and maintaining consistency in approach on the issue of treatment of
income derived from transfer of shares and securities. All the relevant provisions of the Act
shall continue to apply on the transactions involving transfer of shares and securities

<<space has been left blank intentionally>>

43 23 February 2023
 Annexure B

Taxability of interest income

1. As per the provisions of the Act, income is taxable in the year in which it accrues to the taxpayer.
Courts have held that the income accrues when the right to receive the income comes into
existence. It has been held in various judicial precedent18 that interest on securities does not accrue
on a day to day basis but accrues only on the due dates, i.e. on coupon dates on which the right to
receive the interest comes into existence. In the case of the bonds, the interest is payable only on
the date of maturity and thus, is arguable that interest on the bonds should be taxable only on its
maturity.

2. Section 145 of the Act deals with the method of accounting regularly employed by a taxpayer.
Further, the CBDT has vide notification dated 31 March 2015, notified the Income Computation
and Disclosure Standard (ICDS) 19 in respect of taxpayers following the mercantile system of
accounting, for the purposes of computation of income chargeable to income-tax under the head
‘profit and gains of business or profession’ or ‘Income from other sources’.

For instance - given that cash basis of accounting can be adopted as per section 145(1) of the
Act, where the investor is following cash basis of accounting, such investor can offer the income
at the time of receipt of sum on maturity of the security.

Mark-to-Market (MTM) loss/ gain at the end of each year end

1. As per section 145(2) of the Act, income from ‘profit and gains of business or profession’ and
‘income from other sources’ are required to be computed having regard to the ICDS notified by the
Central Government.

2. ICDS – I on ‘Accounting Policies’ provides that MTM loss or expected loss shall not be recognized
unless the recognition of such loss is in accordance with the provisions of any other ICDS. Further,
CBDT vide its Circular No. 10/2017 dated 23 March 2017 has clarified that the aforementioned
principle relating to MTM losses or expected losses shall mutatis mutandis apply to MTM gains or
expected profit.

3. Accordingly, as per ICDS - I, unless otherwise specified in any other ICDS, no deduction should be
permissible for any unrealized (i.e. MTM) losses debited to the profit and loss account and
unrealized (MTM) gain credited to the profit and loss account should not be taxable. In this regard,
please refer to the discussion in the succeeding paragraphs.

18
CIT v Canara Bank [1992] 195 ITR 66 (Kar), Vijaya Bank Ltd. v CIT [1991] 187 ITR 541 (SC), E.D. Sasoon & Company Ltd.
and Ors. v CIT [1954] 26 ITR 27 (SC), Credit Suisse First Boston (Cyprus) Ltd (23 taxmann.com 424) (Bom).

19
Revised ICDS was notified on 29 September 2016 to be applicable to all taxpayers following mercantile method of
accounting, except individuals and HUFs who are not required to get their accounts audited under section 44AB of the Act.
44 23 February 2023
4. In this regard, it would be pertinent to note that the provisions of ICDS VIII on ‘securities held as
stock-in-trade’ (read with section 145A of the Act) provides that at the end of any previous year,
securities held as stock-in-trade shall be valued at actual cost initially recognized or Net Realizable
Value (NRV) at the end of that previous year, whichever is lower. For this purpose, the
comparison of actual cost initially recognized and NRV shall be done category-wise and not for
each individual security (also known as ‘bucket approach)’

5. Based on the above, the provisions of ICDS - VIII, permits to adjust the difference between the
actual cost of the securities and its NRV (valued as per the bucket approach) in the profit and loss
account, the resultant difference on such securities i.e. the MTM gain/(loss) on such securities for
securities held as stock-in-trade.

6. As per section 36 (xviii) of the Act, MTM loss/ other expected loss as computed in accordance with
the provisions of ICDS notified under section 145(2) of the Act shall be allowed as a deduction to
the taxpayer while computing business income.

In light of the above and considering the method of accounting regularly employed by the taxpayer,
where the bonds are held as stock-in-trade by the investor, in our view, the MTM computed and
recognized at the end of each year should be allowed under ICDS - VIII read with ICDS – I.

45 23 February 2023