Treatment of sale and purchase of investments in company

If you are going to show it as a part of business of company in the memorandum of association it will be considered as income and expense of company. However, it is suggested to not do it as business in company as it will lead to considering you as NBFC which will open a huge amount of compliance.

You can claim it as investment or business depending on your disclosure.

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Regards,

- Yes it can be treated as income from business. Co. is liable to pay tax either @25% (normal tax regime) or 22% (alternative tax regime). If you treat it as capital gain income, Co. would be liable to pay tax at 12.5% (LTCG on sale of securities) or 20% (STCG on sale of securities) or normal tax rate

- Debentures can be transferred against sale consideration

For detailed discussion you may opt for phone consultation

1. Treatment of Purchases and Sales of Investments:

• If investment activities (e.g., purchasing and selling debentures, mutual funds, or shares) are listed as a main object in the company's Memorandum of Association (MoA), they can be treated as business activities.
• Purchases can be treated as inventory (stock-in-trade) if the intent is to trade. When sold, the income from such sales will be categorized as business income.
• If investments are held for long-term gains, they may be classified as capital assets, and income will be taxed under capital gains provisions instead.

2. Implications of Classifying Investments as Business Income:

• If investments are treated as inventory and income from their sale as business income:

  • The company is liable to pay tax as per the corporate tax rates (e.g., 22% under the concessional tax regime).
  • The distinction between short-term and long-term capital gains will not apply.

• If treated as capital assets, the tax implications will depend on the holding period:

  • 
    LTCG (Long-term capital gains): 10% for listed securities or 20% for unlisted securities.
  • 
    STCG (Short-term capital gains): 15% for listed securities or normal tax rates for others.

• Caution on NBFC Classification: If the investment activity becomes predominant (more than 50% of the company's assets or income), the company may be classified as a Non-Banking Financial Company (NBFC), requiring RBI registration and adherence to additional compliance norms.

3. Director Transferring Debentures to the Company:

• For Sale Consideration: A director can transfer debentures to the company against fair sale consideration, ensuring:

  • The transaction is at arm's length.
  • Proper valuation and documentation are maintained to avoid scrutiny under tax laws or company law.

• As a Gift: A director can gift debentures to the company, but:

  • The fair market value (FMV) of the gift may attract tax under Section 56(2)(x) if it exceeds Rs. 50,000, unless specifically exempt (e.g., transactions between related parties with valid reasons).

Recommendations:

1. 
   Business Classification: Decide whether investments are to be treated as stock-in-trade (business income) or capital assets (capital gains) based on the intent and the company's primary focus.
2. 
   Avoid NBFC Compliance: Ensure that investment activities do not dominate the company’s operations if you wish to avoid NBFC registration.
3. 
   Director Transactions: Maintain clear documentation for any transfers, and consult a tax professional to ensure compliance with valuation and tax provisions.

For detailed, personalized advice, consider a phone consultancy. Hope you find the information helpful. You are free to contact me for further discussion. If you could spare two minutes of your time to write a review, it would be greatly appreciated and bring immense happiness to read it. Thank you. Shubham Goyal.