Trading - Pledged Holdings - ITR Balance Sheet

Hello,
Few years back i had sold my debt mutual fund holdings to fund trading. I reported my End of year balance in ITR3 balance sheet in “Sundry Debtors” and that makes up most of “Proprietor’s capital” along with small amount of ‘fixed assets’.

Last year i discovered that we can pledge holdings to avail margin. Accordingly i moved large part of my trading capital to some cash equivalent debt funds and pledged them.
Result is that End of year balance this year is about half of previous year even though i was profitable.

I have other mutual fund and stocks holdings as part of investment portfolio.
I have always marked my mutual funds and demat holdings as investment and want to continue with that and not mix it up. So any profit will be reported in capital gains.

For next year, i plan to continue reporting my balance with broker + fixed assets as ‘Proprietor’s capital’ excluding any pledged mutual funds. I don’t intend to sell the pledged holdings for many years and will report them in capital gains if and when i sell them.

Just wanted to confirm that this is ok.

Thanks

@Quicko
@TAXIQ.IN
@Jason_Castelino

I don’t understand how your balance sheet total became half. As long as the capital you invested to market few years back and today are equal your balance sheet total will be very much the same.

This is wrong. Your assets consists of all physical or investments you hold as well any receivables.
That means your asset total is
Cash+Cash Balance with Broker (Not Pledged Balance only Cash)+ Bank Balance+ All kinds of Share, Mutual Fund, Bonds + Fixed Assets.

You haven’t mentioned the type of trade you do. Assuming that F & O any positions at the year end should be reported as Stock in Hand and this is also part of assets.

Pledged Mutual Funds/Bonds should be shown as Investmens and not deleted from your balance sheet
If are doing fulfledged trading then the pledge instruments will be stock in hand.

1 Like

So i brought in capital to trade from debt mutual funds and then removed capital from trading back to debt. Some of that was pledged and is being used as margin. But pnl difference is managed by trading capital ( broker balance ) only.

As far as i understand, we can have both a trading portfolio which is part of business and an investment portfolio which is not part of business. ofc investment portfolio can be part of business for someone but its not compulsory and i do not want to mix them. Otherwise, you are saying anyone who does some trading now needs to declare every asset as part of business which makes no sense to me.

So far, i have not included any mutual fund or demat holding in balance sheet and business income has never been adjusted against CG or vv.
Point is i do not want to start mixing them by declaring some part of investment as business income and other as investment income - i want them to consistently be separate things. Otherwise that can be contentious, and people start adjusting losses against business in one year and declare profits as capital gains next year.

I have been an investor for long time, since about 2006-07. Trading with decent capital only for last few years. Currently trading intraday stocks only. But will diversify to other instruments. Trading will be restricted to equity intraday and index/stock Futures intraday/overnight.

I am replying here because you have tagged me. But I think its already covered by @GoutamHebbar

Just want to highlight this. If you take a housing loan do you delete it from your assets? Or lets say you take working capital loan from bank. Do you delete all current assets like stock and debtors?

I suggest you consult your Chartered Accontants and report your income and assets rightly in ITR

Hello,

To clarify I do not have any taxable income impact from this yet. Business income is same. No gains have been booked from pledged holdings. Just trying to understand impact of pledging on taxation.

Please correct me if wrong, from what i understand -

  1. Investment portfolio can be kept separate from Trading business. Just because i trade from one portion of capital, i do not need to consider all of my assets to belong to trading business and they do not have to be part of balance sheet of trading business.
    I have declared LTCG on stocks/Equity MF and STCG on debt MF for multiple years along with speculative trading income without issue.

  2. If a holding is pledged and pledged margin is used for trading, does it become mandatory to include the pledged holding as part of trading business? This is the crucial part i guess. Will that mean if i pledge NiftyBees, it becomes part of trading business and you cannot use LTCG permanently ?

  3. If i can allocate money to trading business by selling some of my investments, can i not do reverse and book some profits from business and move it back to investing. That is my long term plan, to use trading for income and keep shifting money to long term investments.

Thanks for your time …

Wrong notion. They are part of your assets and you should show them in income tax. Its just that you may charge capital gains if its investment part.

There is no connection whatsoever between showing assets in your balance sheet and making taxation on that. Taxation is done based on the class of asset and not based on whether you say its trading or its not related to trading.

There is no problem with that.

From what I understand you are confusing income disclosure with assets disclosure.

When you prepare a balance sheet and statement of profit and loss it is prepared PAN wise / assessee wise. Balance sheet is prepared as per some basic rules of book keeping. (Won’t get into the details) So the balance sheet should contain all assets and liabilities on the given date. It has got nothing to do with the Income Tax Act.

To further elaborate this, I would show even my house and car as my assets irrespective of whether I use it for business or not. My statement of Profit and loss includes all income. May be from house property, business income, capital gains, other income.
However IT Act doesn’t accept your financials. The Act requires you to classify the income under different heads. Here we start with Profit that we have arrived in PL account. We then make adjustments to this figure to arrive at business income as per the provisions of IT Act.

Profit as per PL
Add: inadmissible expenses
Less: Income declared under different head.
Add: xxxxxxxx
Less: xxxxxxxxx
Business Profit

This is what most professionals follow. I also know some of my professional colleagues not following this. Well. We do have contrary views. You won’t get same medicines for same disease from all doctors. Or your Lawyers advice also won’t remain same for your law suit. Likewise our views also may differ. So I strongly suggest you speak to your CA. Dont go by what you read on the Internet. Because if you get a notice your CA has to represent you and not the person who wrote the article on the Internet.

1 Like

I think I was typing for too long. Didnt know it was also replied. Anyways. :grin::grin:

1 Like

From your question what I understand is that you think trading is different and investment is different and you report only trading related stuff to income tax.
this is wrong

You should report all kinds of trascation in your income tax return be it trading or investing. You pay tax on basis of the asset class. Your pledged holding which you sell for long term holdings is part of investment and not trading even if its pledged.
Pledging is just a way of getting short term loan. Since its backed by strong asset and risks of default are minimal brokers offer margin free of cost without any interest as they make sufficient income from brokerage.

1 Like

Both of us didn’t know what the other is replying. But it does look similar. Hope it clears your doubt.

1 Like

Yeah. While I was writing I didn’t looked at your answer. I was just tagging his individual questions and answering them one by one. Both of our answer is right but my mine very vague so I’m not sure whether he understood my answers or not.

thank you both for your replies.

I report all income, and gains once they are booked and understand that personal balance sheet saved on my desktop may have every asset but i thought that in Schedule balance sheet in ITR3, we only report assets related to trading business. My income is not > 50L

The schedule itself says “Balance sheet as on 31st March, 2021 of the proprietary business or profession or as on date of closure of business as applicable”
So so far i have not included any other asset in this. Are you saying that Schedule part A Balance Sheet should have all assets under pan - every thing part of net worth ?
Maybe this is repetitive, i just want to be sure that i understand this - is there a distinction between these documents saved as archive vs what is filled in ITR3 and reported to IT dept?

Is there any impact if i have not declared my each and every investment in balance sheet in previous filings ? ( All taxable gains were reported in CG related schedules - there is no income evasion.)

Financials, i guess would be a document saved physically or digitally as record but not as part of ITR3 and not submitted to tax dept if not under review ?

In terms of ITR3 schedules, if we have say capital gain by selling a mutual fund, should it be reported in Schedule P&L too as part of Credits to Profit and loss account ? In addition to reporting it in CG related schedules? Then this applies to all types of assets and we have duplicate reporting ?


So far i have assumed that Schedule Balance Sheet / P&L have only trading business related data. Booked Investments i have declared as part of schedules related to CG. Assets with unrealized Profit/Loss, Bank balance - this kind of thing i have never reported in ITR3.

I don’t have any CA yet. Didn’t know how to judge whether CA is familiar with trading related stuff and i was already filing on my own with salary/CG after negative experience in my initial years with someone. Also perhaps have been a bit paranoid of disclosing personal info and esp trading info to unknown person. But i guess i will look at it this year, perhaps quicko if i cannot find locally.

Thanks

You should consult a knowledgable CA because you have been doing wrong. If Income Tax was only about P &L then there wouldn’t be need for Balance Sheet.

I’m just telling you how law works and suggesting you to go in right path. There are lakhs of traders who are not following the rules of Income Tax Act, but question yourself whether you want to be among the one who follows rules or not.

As long as you are not hiding your income you can’t be penalised from Income Tax Dept. But department can issue notice of regular assessment and they will dig something up and can penalize you based on that.

But i read it was 50L income.

Blockquote
The provision for disclosure of assets is applicable for the tax payers whose taxable income exceeds the 50 lakh rupees in a year.

Yes, sure. I am only trying to understand the rules and comply, although yes i am not CA and have limited knowledge.

Part of the problem is that rules are unnecessarily complicated - what should be simple tax on profit has been expanded to become business taxation, perhaps because CG taxation is low. And rules are vague, different people have different interpretation and one would also need to be able to find a reliable person.

Anyway, CA i will look for in this AY. But meanwhile can you clarify on below 2 questions please. Thanks

There are 3 types of people (commonly)

  1. Those who do all things in black and never file any income tax return or pay taxes.
  2. Those who show income which is taxable, pay taxes and ignore everything else.
  3. Those who show all incomes, pay taxes and also maintain their books and report the same.

Talking about the taxpayers you can do two things. Since there is no clarity from the Income Tax department on this matter currently you can follow any of these. I advise you to take caution because any mistakes you do today may backfire tommorow.

  1. Disclose all Incomes and Pay Taxes. Disclose only business (trading) related assets in Balance Sheet. You can ignore any personal investments or assets.

  2. Disclose all incomes and pay taxes. Disclose all assets including personal investments and assets.

I have seen people following both of these. If you choose the first one then you need not show the pledged part in Balance Sheet and as you have already said your balance sheet will be half. There is no problem with that. When your income crosses 50 Lakh you can start reporting all of your assets.
So to answer your original question. What you are currently doing is fine.

I guess you kept repeating but i did not understand. I have no issue in declaring all assets, just wanted to maintain difference between trading business and non-business investments.
Somehow i got the idea that balance sheet only includes trading capital and that gains on any asset disclosed here will have to be part of business income.

Hopefully ill find reliable CA in my area to deal with all of this.
Thank you …

Here’s my response:

  1. Pledging is only a charge on your asset. That means, the nature of your investments does not change with the pledge. For example, let’s say you have inveustments in mutual funds and stocks and you have pledged the same. Any sale of shares/units from that investment will attract LTCG/STCG in the usual manner (LTCG: 10% for gains above Rs 1L and STCG of 15%). Like I said, the nature of your investments (short term or long term) does not change just because you pledged your investments.

  2. If you’re preparing your balance sheet for income tax purpose, you should be showing the investment value of your pledged holdings under proprietor’s capital. Because, logically, the pledged holdings is your trading capital at the end of the day. If you don’t show it as your capital, then it could be construed as improper disclosure.

  3. Balance sheet shows the position as on a specific date. Hence, even if you made some sale from your pledging holdings during the year, you need not worry about how it shall be reported. Like I said, such sale will be treated as STCG/LTCG as usual for taxation purpose. When preparing the balance sheet, you will be showing your position as on 31/3/20xx.

  4. A lot of people may not want to classify their long term investment as trading capital, which I think is the reason why this question came up. As I said above, your investment will remain as it is. Pledging is only a way to make use of your investments for margin benefits.

Thanks, hope this gives some perspective. Comments and corrections are welcome!

yeah, this is an old thread.
I got a local ca to do this for me in last few years and all of my assets are in balance sheet.

In my case, they use purchase prices in balance sheet.