The Hindu : Business : Capital gains on compensation for shares lost

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Monday, Oct 13, 2008
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Capital gains on compensation for shares lost

I had entrusted some shares to a share broker for sale. I did not receive the sale proceeds for a long time in spite of repeated reminders. On a complaint to the stock exchange, it was found that the shares remained unsold having been deposited by the share broker as collateral security for a loan taken by the broker. The stock exchange appointed an arbitrator, who had ordered either return of the shares or compensate me at the market price on the date of my complaint. The share broker preferred the second option and paid the amount. Since what I received is not sale proceeds, but compensation for loss of my shares, my auditor has advised me that I can stake a claim for exemption, since there has been no sale. What is received according to him is damage for the bad service done by the broker. But I am advised by another that, in substance, there has been a sale and that even as compensation I cannot avoid tax. What would be your advice?

It is true that damages in some circumstances would not be income liable to tax. But in the facts of the case, it is not a case of damages simpliciter. There was an option to the share broker either to return the share or pay the compensation, so that the compensation is for the shares, which he did not return.

The arbitrator had not ordered any amount as damage, so that the case for avoiding tax rests on slender foundations.

S. RAJARATNAM

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