ICDS VIII - Securities | Complete Guide

ICDS VIII - SECURITIES

Income Computation and Disclosure Standards

⚠️ This resource is for educational purposes only and does not constitute legal advice.

📋 INTRODUCTION

What is ICDS VIII?

ICDS VIII - Securities deals with the treatment of securities for the purpose of computation of income chargeable under the head "Profits and Gains of Business or Profession" or "Income from Other Sources".

Objective

Standardize the accounting treatment of securities
Ensure uniformity in computation of taxable income
Provide clarity on classification and valuation of securities
Eliminate ambiguity in recognition of income from securities

Legal Basis

Authority: Notified under Section 145(2) of the Income Tax Act, 1961

Notification: Income Tax (First Amendment) Rules, 2016

Effective Date: Assessment Year 2017-18 onwards

🎯 APPLICABILITY

Who Must Follow ICDS VIII?

Category	Applicable?	Remarks
All assessees (other than individuals/HUF not liable for tax audit)	✓ YES	Following mercantile system of accounting
Companies	✓ YES	All types of companies
Firms	✓ YES	If following mercantile system
Individuals/HUF (not liable for tax audit)	✗ NO	Exempted
Cash system taxpayers	✗ NO	Following cash system of accounting

Scope of Application

Securities held as stock-in-trade (Business income)
Securities held as investment (Income from other sources)
All types of securities covered under the definition

📖 KEY DEFINITIONS

1. Securities

Definition: Securities as defined under clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956, including:

Shares - Equity shares, preference shares
Scrips - Stock certificates
Stocks - Fully paid-up shares
Bonds - Corporate bonds, government bonds
Debentures - Secured and unsecured
Derivative instruments - Futures, options, swaps
Units of mutual funds - Equity MF, debt MF
Government securities - T-bills, G-secs
Rights and interests in securities

2. Stock-in-Trade

Definition: Securities held for the purpose of business (trading)

Characteristics:

Held with intention to trade
Frequent buying and selling
Short holding period
Treated as inventory

3. Investment

Definition: Securities held for earning income by way of interest, dividend, or capital appreciation

Characteristics:

Held with intention to hold
Longer holding period
Not for regular trading
Treated as asset

Comparison Table

Parameter	Stock-in-Trade	Investment
Intention	Trading/Profit from buying-selling	Holding/Earning dividend & interest
Holding Period	Short-term (days/weeks)	Long-term (months/years)
Frequency	High frequency trading	Low frequency
Nature	Current Asset/Inventory	Fixed Asset/Investment
Income Head	Business Income	Income from Other Sources
Valuation	Lower of Cost or Net Realizable Value	Cost (market value ignored)

🏷️ CLASSIFICATION OF SECURITIES

Two Categories under ICDS VIII

Category 1: Securities as Stock-in-Trade

Key Points:

Held for trading purposes
Treated as inventory
Valued at lower of cost or NRV
Income/Loss: Business income

Category 2: Securities as Investment

Key Points:

Held for investment purposes
Treated as fixed asset
Valued at cost only
Income: Income from Other Sources
Capital gain on sale: Capital Gains

Factors for Classification

Factor	Description	Impact
Intention at acquisition	Purpose of purchase (trade vs hold)	Primary determinant
Business activity	Main line of business	High relevance
Holding period	Duration of holding	Supporting factor
Frequency of transactions	Number of buy-sell transactions	Supporting factor
Volume of transactions	Scale of trading activity	Supporting factor
Source of funds	Working capital vs surplus funds	Supporting factor

Important Note

⚠️ Classification Decision:

The classification must be made at the time of acquisition and should be consistent. Once classified, it cannot be changed arbitrarily. However, if there is a genuine change in intention, reclassification may be permitted with proper documentation.

💰 VALUATION OF SECURITIES

A. Securities as Stock-in-Trade

Valuation Method

Formula: Lower of Cost or Net Realizable Value (NRV)

Valuation = MIN (Cost, Net Realizable Value)

Components

Cost:
- Purchase price of securities
- Plus: Brokerage, commission, and other direct costs
- Plus: Transfer charges, stamp duty
Net Realizable Value (NRV):
- Estimated selling price in ordinary course of business
- Less: Estimated costs necessary to make the sale
- Less: Estimated selling expenses

Example 1: Valuation of Stock-in-Trade

Security	Cost (₹)	Market Value (₹)	Valuation (₹)	Loss Recognized (₹)
Share A	1,00,000	1,20,000	1,00,000	Nil (Gain not recognized)
Share B	80,000	65,000	65,000	15,000 (Loss recognized)
Share C	50,000	50,000	50,000	Nil
Total	2,30,000	2,35,000	2,15,000	15,000

Conclusion: Total valuation = ₹2,15,000. Loss of ₹15,000 on Share B is recognized in the year of valuation.

B. Securities as Investment

Valuation Method

Formula: Cost Only (No Market Value Consideration)

Valuation = Cost of Acquisition

Key Points

Market value ignored: Fall in market value is not recognized
No mark-to-market: Unrealized gains/losses not considered
Cost includes: Purchase price + Brokerage + Direct costs
Permanent diminution: May be recognized if value permanently impaired

Example 2: Valuation of Investment

Investment	Cost (₹)	Market Value (₹)	Valuation (₹)	Remarks
Bond X	5,00,000	5,50,000	5,00,000	Gain not recognized
Bond Y	3,00,000	2,50,000	3,00,000	Loss not recognized
Bond Z	2,00,000	2,00,000	2,00,000	No change
Total	10,00,000	10,00,000	10,00,000	Valued at cost

Conclusion: All investments valued at cost of ₹10,00,000. Market fluctuations ignored.

Valuation Comparison Summary

Aspect	Stock-in-Trade	Investment
Basis	Lower of Cost or NRV	Cost only
Market value consideration	Yes (if below cost)	No
Unrealized loss	Recognized	Not recognized
Unrealized gain	Not recognized	Not recognized
Year-end adjustment	Required	Not required

📊 RECOGNITION OF INCOME

1. Income from Stock-in-Trade

Trading Profit/Loss

Recognition: On actual sale/disposal of securities
Computation: Sale proceeds minus Cost
Nature: Business income/loss
Timing: Year of sale

Year-end Valuation Impact

If Market < Cost: Loss recognized in P&L
If Market > Cost: Gain not recognized (prudence concept)
Next year: Valuation adjustment reversed

Example 3: Trading Profit Recognition

Scenario:

XYZ Ltd purchased 1,000 shares of ABC Ltd @ ₹100 = ₹1,00,000
Year 1 End: Market value ₹90 per share = ₹90,000
Year 2: Sold all shares @ ₹110 = ₹1,10,000

Income Recognition:

Year	Event	Income/(Loss)	Remarks
Year 1	Valuation: Lower of Cost (₹1,00,000) or NRV (₹90,000)	(₹10,000)	Loss recognized
Year 2	Reversal of Year 1 provision	₹10,000	Gain on reversal
Year 2	Actual sale: ₹1,10,000 - ₹1,00,000	₹10,000	Trading profit
Net Impact (Year 1 + Year 2)		₹10,000	Total profit

2. Income from Investment Securities

Types of Income

Type	Recognition	Head of Income
Interest Income	Accrual basis (Mercantile system)	Income from Other Sources
Dividend Income	When right to receive is established	Income from Other Sources
Capital Gain on Sale	On actual sale	Capital Gains (STCG/LTCG)

Interest Recognition

Bonds/Debentures: Interest accrued recognized periodically
Timing: On accrual basis (not cash basis)
Example: 10% Bond of ₹1,00,000, interest ₹10,000 p.a.
If financial year ends 31st March: Interest for 12 months recognized

Dividend Recognition

Declaration: When dividend is declared
Right established: On record date
Not when received: Cash receipt immaterial

Example 4: Dividend Recognition

Facts:

PQR Ltd holds 10,000 equity shares of DEF Ltd (Investment)
DEF Ltd declares dividend @ ₹5 per share on 28th March 2024
Record date: 31st March 2024
Payment date: 15th April 2024

Income Recognition for PQR Ltd (FY 2023-24):

✓ Dividend Income = 10,000 × ₹5 = ₹50,000

Recognized in: FY 2023-24 (Year of declaration & record date)

Not in: FY 2024-25 (Year of actual receipt)

3. Capital Gains on Sale

Computation

Capital Gain = Sale Consideration - Cost of Acquisition - Expenses on Sale

Classification

Security Type	Short-Term	Long-Term
Listed Equity Shares	≤ 12 months	> 12 months
Unlisted Shares	≤ 24 months	> 24 months
Bonds/Debentures	≤ 36 months	> 36 months
Units of Equity MF	≤ 12 months	> 12 months

Example 5: Capital Gain Computation

Investment Securities:

ABC Ltd purchased 5,000 listed shares of XYZ Ltd @ ₹50 = ₹2,50,000
Date of purchase: 1st April 2022
Date of sale: 1st June 2024 @ ₹80 per share = ₹4,00,000
Brokerage on purchase: ₹1,000
Brokerage on sale: ₹2,000

Computation:

Holding period: 26 months (> 12 months) = Long-term
Sale consideration: ₹4,00,000
Less: Cost of acquisition: ₹2,50,000 + ₹1,000 = ₹2,51,000
Less: Sale expenses: ₹2,000
Long-Term Capital Gain: ₹4,00,000 - ₹2,51,000 - ₹2,000 = ₹1,47,000

Tax Treatment: LTCG taxable @ 10% (without indexation benefit as per current law for equity shares)

💡 COMPREHENSIVE PRACTICAL EXAMPLES

Example 6: Mixed Portfolio - Dealer

Scenario: M/s Trading Securities Ltd is a dealer in securities. Following are the details:

Security	Purchase Date	Cost (₹)	31-Mar Value (₹)	Sale Date	Sale Value (₹)
Security A	01-Jan-2024	2,00,000	1,80,000	Not sold	-
Security B	15-Feb-2024	3,00,000	3,50,000	Not sold	-
Security C	10-Mar-2024	1,50,000	1,50,000	15-Apr-2024	1,70,000

Solution:

Year ending 31st March 2024:

Security A: Valued at ₹1,80,000 (Lower of cost ₹2,00,000 or NRV ₹1,80,000) → Loss: ₹20,000
Security B: Valued at ₹3,00,000 (Lower of cost ₹3,00,000 or NRV ₹3,50,000) → No gain recognized
Security C: Valued at ₹1,50,000 (Same as cost) → No impact
Total Closing Stock: ₹1,80,000 + ₹3,00,000 + ₹1,50,000 = ₹6,30,000
Loss recognized: ₹20,000

Next Year (2024-25):

Opening Stock: ₹6,30,000
Security A provision reversal: If value increases or sold
Security C sold: Profit = ₹1,70,000 - ₹1,50,000 = ₹20,000

Example 7: Investor vs Trader - Same Person

Facts: Mr. Sharma has two portfolios:

Portfolio 1 - Trading (Stock-in-Trade):

1,000 shares of Reliance @ ₹2,500 = ₹25,00,000
Market value on 31-Mar-2024: ₹2,400 = ₹24,00,000

Portfolio 2 - Investment:

500 shares of TCS @ ₹3,500 = ₹17,50,000
Market value on 31-Mar-2024: ₹3,200 = ₹16,00,000

Treatment:

Portfolio	Cost	Market Value	Valuation	Loss Recognized
Trading	₹25,00,000	₹24,00,000	₹24,00,000	₹1,00,000 (Yes)
Investment	₹17,50,000	₹16,00,000	₹17,50,000	Nil (No)

Key Learning:

Same person can have both portfolios
Separate treatment for each portfolio
Documentation is crucial to prove classification
Consistency must be maintained

Example 8: Derivative Securities

Scenario: Future Traders Ltd deals in derivatives:

Transaction Details:

Bought Nifty Futures @ 18,000 (Lot size: 50) on 1st March 2024
Contract value: 18,000 × 50 = ₹9,00,000
Squared off @ 18,500 on 25th March 2024
Settlement value: 18,500 × 50 = ₹9,25,000

Computation:

Trading Profit: (18,500 - 18,000) × 50 = 500 × 50 = ₹25,000
Nature: Business income (Speculative)
Recognition: Year of settlement (FY 2023-24)

Note: Derivative transactions are treated as speculative transactions unless they are used for hedging purposes.

Example 9: Mutual Fund Units

Facts:

Investor purchased 10,000 units of Equity MF @ NAV ₹50 = ₹5,00,000
Purchase date: 1st April 2023
NAV on 31st March 2024: ₹45
Sold on 1st June 2024 @ NAV ₹55 = ₹5,50,000

Analysis:

Event	Amount	Treatment
Purchase Cost	₹5,00,000	Investment (held for >12 months)
Year-end valuation (31-Mar-2024)	₹4,50,000	Loss of ₹50,000 NOT recognized
Sale (1-Jun-2024)	₹5,50,000	Gain on sale
Capital Gain	₹50,000	LTCG (>12 months holding)

Conclusion: Long-term capital gain of ₹50,000 taxable in FY 2024-25.

⚖️ IMPORTANT CASE LAWS

Case Law 1: Classification - Investment vs Stock-in-Trade

CIT vs. Associated Industrial Development Co. (P) Ltd. [1971] 82 ITR 586 (SC)

Facts:

Assessee company purchased shares
Question: Whether shares were stock-in-trade or investment?
Impact on taxation and valuation

Supreme Court Held:

Classification depends on intention at the time of purchase
Intention must be judged from the nature of business and conduct
Merely holding shares for a long period does not convert stock-in-trade to investment
Subsequent conduct can be indicative but not conclusive

Key Principle: The primary test is the intention at acquisition, which must be determined from the totality of circumstances.

Case Law 2: Valuation of Stock-in-Trade

CIT vs. British Paints India Ltd. [1991] 188 ITR 44 (SC)

Facts:

Assessee valued closing stock at cost or market value, whichever is lower
Revenue contended that market value should be adopted

Supreme Court Held:

Lower of cost or market value is the accepted method
Prudent accounting practice recognizes losses but not unrealized gains
This method has been consistently accepted by tax authorities

Relevance to ICDS VIII: ICDS VIII codifies this principle for securities held as stock-in-trade.

Case Law 3: Change in Classification

CIT vs. H. Holck Larsen [1986] 160 ITR 67 (SC)

Facts:

Shares initially held as stock-in-trade
Assessee claimed they were converted to investment

Supreme Court Held:

Change in classification is permissible if there is genuine change in intention
However, such change must be supported by evidence
The burden of proof lies on the assessee
Proper documentation and board resolution required

Key Takeaway: Classification can be changed but requires clear documentary evidence and genuine business reason.

Case Law 4: Dividend Income Recognition

CIT vs. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC)

Facts:

Question of accrual of income
When does right to receive income arise?

Supreme Court Held:

Income accrues when the right to receive becomes vested
Actual receipt is not necessary for accrual
The income must be reasonably certain

Application to ICDS VIII: Dividend income accrues on declaration/record date, not on actual receipt.

Case Law 5: Unrealized Losses on Investment

CIT vs. Woodward Governor India (P) Ltd. [2009] 312 ITR 254 (SC)

Facts:

Assessee claimed diminution in value of investments
Investments were not sold

Supreme Court Held:

Mere fall in market value of investment is not deductible
Loss must be crystallized (actual sale required)
Exception: Permanent diminution in value of investment

Relevance: ICDS VIII provides that investments are valued at cost, ignoring market fluctuations, consistent with this principle.

Case Law 6: Frequency of Transactions

Gopal Purohit vs. CIT [1992] 198 ITR 02 (SC)

Facts:

Individual engaged in buying and selling of shares
Large number of transactions
Question: Business income or capital gains?

Supreme Court Held:

Where transactions are frequent and substantial, it indicates business activity
Volume and frequency are important factors
Each case must be decided on its own facts

Impact on Classification: High frequency trading suggests stock-in-trade classification.

Summary of Key Judicial Principles

Principle	Case Law	Key Holding
Intention test	Associated Industrial (SC)	Intention at acquisition is primary test
Lower of cost or NRV	British Paints (SC)	Stock-in-trade valuation method
Change in classification	H. Holck Larsen (SC)	Permissible with evidence
Accrual of income	Shoorji Vallabhdas (SC)	Right to receive test
Investment losses	Woodward Governor (SC)	Not deductible unless permanent
Frequency test	Gopal Purohit (SC)	Volume indicates business activity

📈 FLOWCHARTS

Flowchart 1: Classification of Securities

START
Securities Acquired

↓

DECISION 1
What is the intention at acquisition?

↓ Trading

Is the assessee in
business of trading securities?

↓ YES

High frequency
of transactions?

↓ YES

STOCK-IN-TRADE
✓ Valued at lower of cost or NRV
✓ Business income/loss
✓ Year-end adjustment required

↓ Holding

Intention to earn
dividend/interest?

↓ YES

Long-term
holding period?

↓ YES

INVESTMENT
✓ Valued at cost only
✓ Income from other sources
✓ Capital gains on sale

Flowchart 2: Valuation of Securities

START
Valuation Required

↓

Classification?

↓ Stock-in-Trade

STEP 1
Determine Cost

↓

STEP 2
Determine Net Realizable Value (NRV)

↓

STEP 3
Compare Cost vs NRV

↓

Is NRV < Cost?

↓ YES

Value at NRV
Recognize Loss

↓ NO

Value at Cost
No Gain Recognized

↓ Investment

STEP 1
Determine Cost of Acquisition

↓

STEP 2
Ignore Market Value

↓

Value at Cost
No adjustment for
market fluctuations

Flowchart 3: Income Recognition

START
Income from Securities

↓

Type of Income?

↓ Trading Profit

Actual sale?

↓ YES

Recognize
Sale Price - Cost
= Business Income

↓ NO

Year-end Valuation
Lower of Cost or NRV
Loss if NRV < Cost

↓ Dividend

Check declaration date
& record date

↓

Recognize on
Declaration/Record Date
Income from Other Sources

↓ Capital Gain

Calculate
Sale - Cost - Expenses

↓

Holding Period?

↓ Short

STCG

↓ Long

LTCG

🧠 MIND MAP - ICDS VIII SECURITIES

ICDS VIII
SECURITIES

APPLICABILITY

All Assessees
(Mercantile System)

Companies

Firms

Not: Individuals/HUF
(No tax audit)

DEFINITIONS

Securities
(Shares, Bonds, etc.)

Stock-in-Trade
(Trading Purpose)

Investment
(Holding Purpose)

CLASSIFICATION

Intention Test

Holding Period

Frequency

Business Activity

VALUATION

Stock-in-Trade:
Lower of Cost or NRV

Investment:
Cost Only

No MTM for
Investment

INCOME RECOGNITION

Trading Profit:
On Sale

Dividend:
On Declaration

Interest:
On Accrual

Capital Gain:
On Sale

KEY PRINCIPLES

Consistency

Prudence

No Unrealized
Gain

Accrual Basis

❓ QUESTION & ANSWER SECTION

Answer: The main objective of ICDS VIII is to standardize the accounting treatment of securities for computation of taxable income. It provides clarity on:

Classification of securities (Stock-in-trade vs Investment)
Valuation methods for different categories
Recognition of income from securities
Treatment of gains and losses

Answer:

Aspect	Stock-in-Trade	Investment
Intention	Held for trading	Held for earning income
Valuation	Lower of Cost or NRV	Cost only
Income Nature	Business Income	Income from Other Sources / Capital Gains
Unrealized Loss	Recognized	Not recognized

Answer: Securities held as stock-in-trade are valued at Lower of Cost or Net Realizable Value (NRV).

Formula: Valuation = MIN (Cost, NRV)

Impact:

If market value falls below cost: Loss is recognized
If market value rises above cost: Gain is not recognized (prudence concept)

Example: Share purchased @ ₹100, Market value ₹80 → Valued at ₹80, Loss ₹20 recognized

Answer: Investment securities are valued at Cost of Acquisition only.

Key Points:

Market value is completely ignored
No mark-to-market adjustment
Unrealized gains/losses are not recognized
Loss recognized only when there is permanent diminution in value

Example: Bond purchased @ ₹5,00,000, Market value ₹4,50,000 → Still valued at ₹5,00,000

Answer: Dividend income is recognized on the declaration date or record date, whichever establishes the right to receive.

Important Points:

Not on receipt: Actual cash receipt is immaterial
Accrual basis: Income accrues when right is established
Year of recognition: Financial year in which declared

Example: Dividend declared on 28-Mar-2024, received on 15-Apr-2024 → Recognized in FY 2023-24

Answer: Yes, reclassification is permissible but with strict conditions:

Requirements:

Genuine change in intention: Must be demonstrable
Documentary evidence: Board resolution, written policy
Business reason: Valid commercial rationale required
Consistency: Cannot be done arbitrarily or repeatedly
Proper accounting: Must be reflected in books

Case Law: CIT vs. H. Holck Larsen (SC) - Reclassification allowed with evidence

Answer: Multiple factors determine classification:

Primary Factor:

Intention at acquisition - Most important

Supporting Factors:

Nature of business: Is trading securities the main business?
Holding period: Short-term vs long-term holding
Frequency of transactions: Regular trading activity
Volume: Scale of operations
Source of funds: Working capital or surplus funds
Purpose: Trading profit vs dividend/interest income

Judicial Principle: Each case decided on its own facts and circumstances

Answer: Capital gain computation follows this formula:

Capital Gain = Sale Consideration - Cost of Acquisition - Expenses on Transfer

Classification (Holding Period):

Listed equity shares: >12 months = LTCG, ≤12 months = STCG
Unlisted shares: >24 months = LTCG, ≤24 months = STCG
Bonds/Debentures: >36 months = LTCG, ≤36 months = STCG

Example:

Purchase: 1,000 shares @ ₹100 = ₹1,00,000 (1-Apr-2023)
Sale: 1,000 shares @ ₹150 = ₹1,50,000 (1-Jun-2024)
Holding: 14 months (Long-term for equity)
LTCG: ₹1,50,000 - ₹1,00,000 = ₹50,000

Answer: Unrealized gains on stock-in-trade are NOT recognized.

Reason: Prudence/Conservatism principle in accounting

Rule:

Market Value > Cost: Valued at Cost (gain ignored)
Market Value < Cost: Valued at Market Value (loss recognized)

Example:

Share A: Cost ₹1,00,000, Market ₹1,20,000 → Valued at ₹1,00,000 (Gain ₹20,000 NOT recognized)
Gain will be recognized only when shares are actually sold

Case Law Support: CIT vs. British Paints India Ltd. (SC)

Answer: NO, ICDS VIII does not apply to individuals/HUF not liable for tax audit.

Applicability:

Assessee Type	Applicable?
Companies	✓ YES
Firms (Mercantile)	✓ YES
Individuals/HUF (liable for tax audit)	✓ YES
Individuals/HUF (not liable for tax audit)	✗ NO
Cash system taxpayers	✗ NO

Note: Following mercantile system is a prerequisite for ICDS applicability