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The National Spot Exchange (NSEL) fiasco will hurt investors in more than one way. While the exchange has completely paid back retail investors who invested up to Rs 2 lakh, it has partially (50 per cent) paid investors who had put in between Rs 2 and Rs 10 lakh. The rest are receiving partial payments according to the schedule and collected amounts.
The second lot of investors who have received partial payment are in for bigger pain, as they may not even be able to call this capital loss. On booking one, such investors could set it off against capital gains over eight subsequent years.
"Those who have recovered their principle money cannot be taxed as they have not made any gains on the investment. And, those who have not been able to recover the complete capital cannot book losses till the time the government declares that they will not receive any more money," says an income tax department official.
Till now, no authority - either the government or NSEL or Forward Markets Commission (FMC) - has declared the spot exchange cannot pay any further. Therefore, investors who are yet to receive a part of the invested corpus are stuck. Till the full payment is made or there is a declaration that the remaining payment will not be made, the deal between NSEL and investors will not be considered closed. Under the Income Tax (I-T) Act, a capital loss can be booked only if there has been a valid transfer of the asset. NSEL investors haven't transferred the assets hence they can't book a capital loss.
Transfer of assets, according to the I-T Act, can be done in four ways - sale, exchange, extinguishment or relinquishment of rights on the asset or the compulsory acquisition under any law. Sale or exchange means transfer of ownership of the asset, with or without monetary consideration. "Extinguishments of rights in this case will happen when an authority like a court tells the investors that they will get less than what they are liable for as the exchange does not have the money," explains Vaibhav Sankla, director at tax consultancy firm H&R Block.
In this case, none of these are applicable. To be able to book capital loss, an NSEL investor will have to relinquish his rights, by may be entering into an agreement with NSEL, and declaring that he/she does not want the remaining amount. Otherwise, even if the remaining payment comes in the next financial year, investors will have to wait to book losses this year. Experts say many of the NSEL investors were involved in trading activity. Capital loss or gain on trading is considered business income and taxed at 30 per cent. Those who traded on the exchange can show this as business loss. They can show this amount as receivables (from broker) in their books of accounts and set off the business loss against other income (like interest income), says Sankla.
