ICDS VIII : Securities - Income Tax - Ready Reckoner - Income Tax

ICDS VIII : SECURITIES ICDS VIII is divided into two parts. Part A deals with securities held as stock-in-trade by taxpayers, but does not apply to securities held by taxpayers engaged in the business of insurance, securities held by mutual funds, venture capital funds. Securities held by banks and public financial institutions are also excluded from the purview of Part A. Specific provisions have been incorporated in Part B of this ICDS for scheduled banks and public financial institutions. Therefore, this ICDS does not apply at all to insurance companies, mutual funds, venture capital funds, and nonscheduled banks. PART A 1. Scope:- This part of Income Computation and Disclosure Standard deals with securities held as stock-in-trade. Therefore, in respect of securities not held as stock-in-trade, the tax treatment would be governed by normal provisions of the Act. ICDS IV - Revenue Recognition, which deals with interest and dividend, applies to all securities, whether held as stock-in-trade or otherwise. Securities held by persons engaged in business of insurance, securities held by mutual funds, venture capital funds, banks and public financial institutions are specifically excluded from the scope of Part A. Securities held by foreign institutional investors are treated as capital assets under the provisions of section 2(14)(b) of the Act , including securities which could otherwise be considered to be held as stock-in-trade by such entities, and therefore this part of ICDS will also not apply to such assessees. Part A of the ICDS also does not deal with the basis of recognition of interest and dividends on securities, which is covered by ICDS IV on Revenue recognition. Securities shall have the meaning assigned to it in section 2(h) of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and shall include share of a company in which public are not substantially interested but shall not include derivatives referred to in sub-clause ( ia ) of that clause ( h ). Although derivatives are securities under the definition of securities contained in section 2(h) of the SCRA, these have been specifically excluded from the definition of securities under this Part of the ICDS. Hence, in case of derivatives held as stock in trade, the CBDT has clarified that it would be governed by the General Principles of accounting and tax as per ICDS I. 2. Recognition and initial measurement of securities:- (a) The initial recognition of security is to be at cost. Further, such cost would comprise of acquisition charges such as brokerage, fees, taxes, duty or cess. However, if, in the cost of acquisition, unpaid interest is accrued and later, interest is received, the interest prior to date of acquisition is to be reduced from the cost and portion of interest post-acquisition would be accounted for as income. (b) In case a security is acquired in exchange for other security, the fair value of security so acquired shall be its actual cost. Also, in case a security is acquired in exchange of another asset, the fair value of security so acquired shall be its actual cost. The gain or loss arising on account of transfer of security or asset would be accounted in the profit and loss account. However, if the asset exchanged belongs to a block of assets, such credit of value shall be taken to the relevant block of assets. Note: While comparining the provisions of this Part of ICDS with that of AS 13 in case of acquisition of securities in exchange of other securities or another asset, the basis of recognition of cost is different; under Part A of ICDS, the fair value of the security acquired is to be recognised as its actual cost, whereas, under AS 13, the actual cost of securities acquired is to be determined in the context of fair value of securities issued or the asset given up. Therefore, the actual cost of such asset under this Part of ICDS and AS 13 would be different. Thus, while ascertaining the actual cost and also in valuation of closing stock, the differences arising on account of these differing methods of measuring actual cost must be considered. 3. Subsequent Measurement of Securities:- (a) As per this ICDS securities held as stock-in-trade to be recognized at cost or net realisable value ( NRV ), which is similar to the provision in AS 13 , which requires securities held for sale under ordinary course of business to be disclosed as stock-in-trade and valued at cost or fair value, whichever is lower. (b) However comparison of actual cost initially recognised and NRV is to be done categorywise and not for each individual security. For this purpose, securities are to be classified into the following categories: Shares Debt Securities Convertible Securities Any other securities not covered above (c) This Part of ICDS requires that securities not listed on a recognised stock exchange; or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised even though the NRV may be lower. (d) Closing value of security at the end of preceding year is to be considered as value of security at the beginning of the year. Although, it is not specifically mentioned under AS 13 and Ind AS 109, the balance at the beginning of the period is the value of the closing stock brought forward from the previous period. Note: The difference arising on account of valuation of securities held at the end of the previous year as stock-in-trade under this Part of ICDS and AS 13/Ind AS 109 may end up in the creation of deferred tax asset/ liabilities, as the case may be. PART B 1. Scope:- Unlike Part A, Part B deals with securities held by specific entities, namely Scheduled banks or public financial institutions. Therefore, mutual funds, banks other than scheduled banks, insurance companies and nonpublic financial institutions are not covered by this ICDS. Since ICDS itself does not apply to computation of income under the head Capital Gains , Part B would not apply to investments, but only to stock-in-trade. Further, Part B of ICDS is also silent on provision regarding recognition of income on securities (interest/dividend etc) and therefore, computation of income from such source would be governed by normal provisions of the Act read with ICDS IV - Revenue Recognition. 2. Classification, Recognition and Measurement of Securities:- Securities shall be classified, recognised and measured in accordance with the extant guidelines issued by the Reserve Bank of India in this regard and any claim for deduction in excess of the said guidelines shall not be taken into account. To this extent, the provisions of Income Computation and Disclosure Standard VI on the effect of changes in foreign exchange rates relating to forward exchange contracts shall not apply. Note: This ICDS, unlike most others, does not stipulate any disclosure requirements.