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2017-02-16
As a part of ‘Additional Revenue Mobilisation (ARM) and Anti-abuse Measures’, the Finance Minister in his Speech proposed to “restrict the exemption from long term capital gains in case of transfer of listed shares by providing that the exemption, subject to notification of certain exceptions, shall be available if security transaction tax (STT) has been paid at the time of acquisition of such shares where they have been acquired after 1st October, 2004.”
Section 10(38) of Income Tax Act, 1961, introduced by the Finance (No. 2) Act , 2004 (w.e.f. April 1, 2005), provides for exemption from taxation of capital gains arising on sale of equity shares in company or units of equity oriented fund upon fulfillment of certain conditions. The scope and effect of the sec. 10 (38) have been elaborated in the departmental Circular No. 5 of 2005, dated 15-7-2005.
| Conditions u/s. 10(38) |
(i) there should be a transfer of a long-term capital asset, being an equity share in a company;
(ii) sale of such equity share should be on or after Chapter VII of the Finance (No. 2) Act , 2004, came into force, i.e., 1-10-2004;
(iii) the transaction should be chargeable to securities transaction tax under that Chapter.
|
It was noticed by the Government that the above exemption is being misused by certain persons for declaring their unaccounted income as exempt long-term capital gains by entering into sham transactions. In order to prevent the above abuse, certain additional conditions are now being proposed to be added :
| Additional conditions proposed by Finance Bill, 2017 | (i) The acquisition of equity shares is chargeable to STT (applicable only to shares acquired on or after 1st day of October, 2004) |
However, the Memorandum to the Finance Bill states that the Government proposes to carve out certain modes of acquisitions where STT could not have been paid, as exceptions to the above conditions in order to protect genuine cases:
| Exceptions |
(i) IPO, FPO, bonus issue, rights issue, acquisition by non-resident in accordance with FDI policy, ESOPs etc.
(ii) Acquisitions notified by Central Government for this purpose
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Relevant Rulings
| Shamim M Bharwani[TS-5148-ITAT-2015( |
Assessee’s claim of exemption u/s 10(38) on sale of shares of paper company denied despite the various documents filed by assessee proving genuineness of the transaction |
| Ajay G. Piramal Foundation[TS-455-HC-2014(BOM) |
‘Donation’ of shares is ‘gift’, holds sale as LTCG applying Sec 49(1); Profit on sale of donated shares is long term capital gains (LTCG), thus, exempt u/s 10(38) |
| Pratik Suryakant Shah [TS-7068-ITAT-2016( |
Claim of LTCG exemption u/s 10(38) cannot be denied to assessee solely relying on statement of assessee’s broker by completely disregarding the various documents submitted by assessee for proving genuineness of transaction. |
| Bhoruka Engineering Industries Ltd.[TS-5070-ITAT-2011( |
Substance of transaction was transfer of land purchased at a nominal price, for a high price in the form of sale of 98.73% shares of group concern holding the land; LTCG exemption u/s 10(38) denied; STCG tax on sale of land leviable. |
| Dharmayug Investments Ltd.[TS-5652-ITAT-2015(MUMBAI) |
STT amount to be allowed as deduction in the computation of book profit u/s. 115JB; Net consideration (after STT) on sale of shares to be taken into account in computation of book profit u/s 115JB and not the amount of LTCG after indexation. |
