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TMI BlogInvestment in shares is a business and earning of dividend is not only purpose of investment, dividend being taxable S. 14A should not be applied.X X X X Extracts X X X X X X X X Extracts X X X X ..... Investment in shares is a business and earning of dividend is not only purpose of investment, dividend being taxable S. 14A should not be applied. - By: - C.A. DEV KUMAR KOTHARI - Income Tax - Dated:- 16-1-2012 - - Investment in shares is also a business: Investing into shares is a business activity. This is adventure in nature of commerce and is business within meaning under section 2(13) and section 28 of the Income-tax Act, 1961. Capital asset: When shares are held as investment, they are capital assets of the business of investing into shares. Computation of income and related aspects: When a person carry investment activity he derives different type of incomes which can fall under one or more head of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome as provided in the Act. Dividend earned falls under the head income from other sources . It may be taxable or exempt will depend on policy of government and provision of the tax law. For example in our country we find that dividend is taxable at distribution stage and exempted in hands of shareholders. When there was no tax at distribution stage, dividend was taxable in hands of shareholders/ unit holders. On sale of such shares income falls under the head capital gains . In case of short term gain it is taxable, in case of long-term capital gains it may be taxable or exempt in some situations. Therefore, earning of taxable income is more probable than earning of exempted income. Any hedging gains in such activity will be bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness income . When such shares are also used as a tool to gain by way of intra-day trading, the gains will be business profit . Expenses incurred for acquisition will be cost of acquisition and capital cost. There cannot be any cost of improvement in case of shares, because a shareholder cannot make any addition or alteration in shares to effect improvement. Improvement in quality of shares shall depend on future prospects of company, the industry and economy, quality of management of company, profitability, profits retained, dividend paid , goodwill earned etc. Therefore, in one sense it can be said that share in a company is not a capital asset in context of section 45 read with section 48. Because these provisions contemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... late an asset which can be acquired and also improved by incurring money. Shares can be acquired, but cannot be improved by incurring money on making changes in shares. Expenses incurred to hold and carry investment should be regarded as recurring expenses for the purpose of business of investing. Various purposes of acquiring shares: Promoters of company or people in management of company acquire and hold shares to have control over the company by way of voting rights and management participation. Traders acquire shares for trading purposes. Investors acquire shares for capital appreciation and dividend earnings. Dividend earning is generally very low in priority. Only in cases where shares are purchased just before record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date for dividend and then also sold within short period from the record date, it can be said that shares in such circumstances were acquired for earning dividend. The law has made special provisions to deal with such situations vide provisions of section 94. Misconception about dividend: Unfortunately in minds of revenue authority there is wrong conception that shares are acquired to earn dividend. This wrong perception is also found when we read some of judgments of Courts and Tribunal. This need to be corrected by proper analysis. If we go by logic, of return on investment, we can conclude that earning of dividend is not main purpose in acquisition of shares. We find that a large number of companies do not declare any dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . There are few companies which pay dividend regularly. In such cases also dividend yield is very poor. In fact from a recent study and report dated 09.01.2012 by ICICI Direct.com we find that out of BSE 500 companies, companies which have given yield by way of dividend in excess of 2% per annum for last seven years are considered as high dividend paying companies. BSE 500 are good blue chip companies. Even in that lot we find number of companies in which dividend yield is 2% or more is just THIRTY ONLY. The preamble of the report reads as follows (with highlights added by author): D ividend Yield Stocks High dividend yield stocks offer a safe haven to investors where safety has greater priority compared to high returns. Hen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, even if the market remains volatile, going ahead, an investor can still get a decent return on investment, thanks to good dividend yielding stocks. The dividends are paid no matter what direction the stocks move and can provide a higher yield on investment in a weak market . We have analysed the dividend yield pattern of BSE 500 companies and have filtered companies, which have been providing a dividend yield of at least 2% or more for the last seven years. In this study dividend yield is calculated on financial year end closing price. Therefore, the yield worked out is not necessary correct but is indicative however, it can be considered as reliable since seven years closing price and dividend are considered. The report and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... list of these companies Exhibit 1: Consistently Exhibit 1: Consistently high dividend yield stocks Company Name I direct Code Div. Yield 2011 % Div. Yield 2010 % Div. Yield 2009 % Div. Yield 2008% Div. Yield 2007 % Div. Yield 2006 % Div. Yield 2005 % Alfa Laval (I) # ALFLAV 2.4 2.1 2.7 2.3 3.0 2.5 3.4 Allahabad Bank ALLBAN 2.6 3.9 6.4 4.6 4.1 5.1 3.6 Andhra Bank ANDBAN 3.6 4.6 10.0 5.4 5.0 4.3 2.8 Ashok Leyland ASHLEY 3.5 2.7 5.5 4.3 3.9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.3 4.8 Castrol India # CASIND 3.3 4.1 4.5 3.9 4.0 3.3 3.8 Chambal Fertilizers CHAFER 2.4 3.1 4.3 3.6 5.8 4.6 6.2 Clariant Chemicals # COLCHE 4.1 5.3 12.3 3.0 5.3 7.6 2.4 Deepak Fertilizers DEEFER 3.2 4.0 7.1 3.6 3.5 3.0 4.8 Electrosteel Castings ELECAS 4.0 2.4 9.2 2.9 3.3 3.4 3.0 Finolex Industries FININD 3.4 4.6 3.6 4.6 4.4 4.3 4.3 G N F C GNFC 3.4 2.9 5.4 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2 4.9 3.7 5.4 GE Shipping Co GESHIP 3.0 2.7 4.3 4.0 5.7 3.4 5.9 Graphite India CAREVE 3.8 4.0 13.7 5.8 5.8 2.0 2.3 GRUH Finance GRUFIN 3.1 3.0 5.2 2.6 2.2 2.7 4.7 Hindustan Unilever HINLEV 2.2 2.7 3.1 4.2 2.8 2.5 3.5 Indian Overseas Bank INDOVE 3.5 3.8 9.9 2.6 2.9 2.7 3.2 Karnataka Bank KARBAN 2.8 3.3 9.2 2.5 2.1 3.0 2.8 Nava Bharat Ventures NAVBHA 2.7 2.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.4 2.6 4.0 2.5 2.3 O N G C ONGC 3.0 3.0 4.1 3.3 3.5 3.4 4.5 Polyplex Corporation POLCOR 4.9 4.1 6.2 3.8 3.9 2.4 4.3 State Bank of Travancore STABTR 2.4 2.6 6.1 2.1 3.3 2.4 3.7 S C I SCI 5.1 3.2 8.5 4.3 4.9 5.0 4.7 Supreme Industries SUPIND 2.4 3.2 4.7 4.6 3.2 3.2 3.2 Syndicate Bank SYNBN 3.0 3.5 6.3 3.7 4.4 2.8 3.7 T N Newsprint TAMNEW 3.8 5.0 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .9 4.5 4.8 2.6 4.7 Tata Chemicals TATCHE 3.0 2.8 6.4 3.2 3.9 2.7 4.3 Tata Elxsi TATELX 2.8 2.2 8.5 4.4 2.4 3.3 3.0 Tata Investment Corporation TATINV 3.1 2.6 6.5 3.1 4.4 2.8 4.0 VST Industries VSTIND 7.0 5.8 13.3 6.5 6.1 2.6 5.4 Wyeth WYELED 2.6 2.8 7.8 6.6 6.6 4.0 4.9 Source: Capitaline, ICICIdirect.com Research # data for Alfa Laval, Clariant Chemicals and Castrol represents year 2010 to 2004 as these companies have a Decemb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er year ending and the latest financial year end data available is till December 2010 Note : Dividend yield is calculated on financial year end closing price In real life we find that more than 95% of listed companies do not pay any dividend even over a long period of five years. Dividend yield is about 0.5 to 1 % on overall basis on any stock exchange, if we consider total market capitalization and total dividend distributed by listed companies. Therefore, it is wrong to say that earning of dividend is main purpose of investing in shares or that shares are purchased to earn dividend when shares are held for a considerable period. Only in situations contemplated in section 94 it can be said that shares were purchased to earn dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In any other situation it cannot be said that shares were purchased to earn dividend. Dividend is taxable: Dividend is taxable. Dividend distributed by a company or mutual fund constitutes total income or chargeable income within the context of the Income-tax Act, 1961. Though it is levied as an additional tax, on companies or mutual funds, yet it is established that dividend is exempted in hands of shareholders or unit holders only when dividend has been subjected to levy of tax at distribution stage. This is a way of collecting tax in simple way. The tax levied under section 115 O and 115 R is finally collected tax it is not refundable or allowable in any hands and in any situation. Therefore, it cannot be said that di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidend is an income which does not form part of total income or chargeable income in the context of the income-tax Act, 1961. Therefore, section 14A should not be applicable in the case of earnings by way of dividend. Section 14A is attracted only in relation to income which does not form part of total income under the Income-tax Act. As dividend form part of total income in hands of company or mutual fund and it is taxed, therefore, section 14A is not at all applicable. - - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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