Tax treatment of Income earned on behalf of others?
Suppose i have a demat account and do some trading (mostly in Future and Options )on behalf of my friend or relative, the profit once realised will be given back to friend or relative.
Who has to pay the income tax on profits?
Profit is earned by my friends/relatives using my demat account, do i have to pay income tax or the friends/relatives who got the profit?
Lets try to understand the flow of transactions.
- You took money from friend/relative.
- Invested that money and earned profit.
- Gave the entire profit to friend/relative from whom you took the money.
Income tax is charged on the income earned by a person. Here the income is not earned by you but by your friend and you are the source of income for your friend.
In this entire cycle of transaction you dont have to pay any income tax. Any profits and gains from a speculative transaction is to be taxed under the head `profits and gains of business or profession’. In case of speculative transaction, all expenditure allowable under Sections 30 to 38 can be claimed since the charge arises under the head `profits and gains of business or profession’.
Since your transaction were in Future and Options segment, the gains will be treated under Income from Business and profession.
Also, Under section 43(5) of the Income Tax Act, 1961 an eligible transaction in respect of trading in derivatives referred to in clause [(ac)] of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange will not be treated as speculative transaction despite not been settled by actual delivery.
You can claim the profits given to friend. For relatvie read section 40A(2) also.
By doing these type of transactions you are offending Money Laundering Act. The transaction that you had violates the provisions of Money Laundering Act and punishable offence.
Let me re summarise your question Rahul.
A. Demat account is held in your name.
B. Money is borrowed or advanced from your friend.
C. The profits / lossess are borne by your friend.
D. Taxability of the profits / Losses.
To summarise, the transactions will be legally bound in your name as the demant account and the buy and sell transactions will be through your account.
On monies borrowed, interest can be claimed if any as per terms of written agreement as business expense
The profits / loss will be taxed or accounted in your name irrespective your pass on the profits or recover money from your friend if loss.
Lastly, irrespective the monies change their hand, the taxability and legal status of transaction will be in the hands of person who performs it.
The clubbing provisions as per section 64 of Income Tax Act, 1961 shall not apply. The diversion of income specified under section 60 of Income tax Act, 1961 would not apply as the diversion is not from source, but by useage of demant account, name of third party and services of third party to obtain the profits.
Hope my observations have provided clarity to your questions
CA. S Kamath
Thanks pulkit and Sundeep for valuable suggestion and solving the doubts.