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.

a) If you are doing investment activity or purchase or sale of securities which constitute more than 50% of your income and or more than 50% of your asset base than you are classified as NBFC,  you need to get your self registered with RBI and object clause will clearly mentioned it as investment company.'

Once you have legal registration as NBFC, you can treat investment as your inventory and offer income under the head business and profession.

Company can always purchase securities from their director subject to compliance requirement under related party transaction and arms length valuation under income tax

Here’s a detailed explanation of your queries regarding incorporating a private limited company with two business activities (investment and media/content creation):

1. Investment Business: Treatment of Purchase and Sale of Debentures, Mutual Funds, or Shares

Yes, if investment activities (such as purchasing and selling securities) are part of the company’s main objects clause in its Memorandum of Association (MOA), they will be considered business activities, and the related income and expenses will be treated accordingly.

Accounting Treatment

• 
  Purchases of debentures, mutual funds, or shares can be treated as inventory if the company’s intention is to trade (i.e., buy and sell them as part of its business operations).
• When these securities are sold, the resulting profit or loss will be considered business income or business loss.

Key Points to Remember:

• The company must classify these securities as inventory in its financial statements under "current assets" if the intent is to hold them for trading.
• Gains or losses will be reported under "Profit and Loss Account" as business income.
• Expenses like brokerage, transaction fees, and other costs related to the purchase/sale can be claimed as business expenses.
• Income from dividends or interest on these securities will still be treated as other income.

If the intention is to hold investments long-term, they should be classified as non-current assets, and gains would be treated as capital gains rather than business income.

2. Transfer of Debentures from Director to Company

Yes, a director can transfer debentures to the company either:

a. By Sale (for Consideration):

• The director sells the debentures to the company at a fair market price (or any mutually agreed price).
• This transaction should follow arm’s-length principles to avoid scrutiny from tax authorities.
• The company will record the purchase as part of its investment inventory, and the director will report the sale in their personal tax returns as a capital gain or loss.

b. As a Gift:

• The director can gift the debentures to the company. Under Indian tax laws:

  • Gifts received by a company from a director are exempt from tax under Section 56(2)(x), as directors are considered “relatives” for this purpose.
  • The company must record the gifted debentures in its books at fair market value.

Legal Compliance:

• The transfer of debentures, whether as a sale or a gift, must comply with the provisions of the Companies Act, 2013 and the company’s Articles of Association (AOA).
• The transaction should be approved by the Board of Directors and documented in board meeting minutes.

3. Combining Two Activities (Investment and Media) in One Company

Yes, a private limited company can carry out two different businesses as long as:

• Both activities are mentioned in the main objects clause of the MOA.
• The businesses are permitted under relevant laws.

Key Considerations for Dual Activities:

1. 
   Separate Accounting: Maintain separate books of accounts or segments for the two activities to ensure clarity in financial reporting.
2. 
   Tax Treatment:

   • Income from the media business will be treated as business income.
   • Income from the investment business (if classified as inventory) will also be treated as business income.

3. 
   Compliance: You may need to comply with sector-specific regulations, such as SEBI guidelines for investment businesses.

4. Tax Implications

• If securities are treated as inventory, income from trading them will be taxed as business income, which is subject to the regular corporate tax rate applicable to your company.
• 
  GST Applicability: GST does not apply to the purchase or sale of securities, but transaction costs (brokerage, etc.) may attract GST.

Conclusion

1. 
   Investment purchases and sales can be treated as business expenses and income if mentioned in the MOA as a primary object.
2. You can treat these purchases as inventory if intended for trading.
3. A director can transfer debentures to the company either as a sale or a gift, with proper documentation.
4. Dual business activities are permissible if properly detailed in the company’s MOA and operations are accounted for separately.