Dalal Street Investment Journal — July 10-23, 2017

60 DALAL STREET INVESTMENT JOURNAL I JULY 10 - 23 , 2017 DSIJ.in^

Long Term Capital Gain on sale of listed equity shares – Notalways exempt

Jayesh Dadia, Chartered Accountant

BACKGROUND

At present, Long Term Capital Gain

(LTCG) on transfer of equity shares of a

company is exempt under section 10(38)

of the Income Tax Act, if the sale has been

undertaken on or after October 1, 2004

and Security Transaction Tax (STT) is paid

at the time of sale. Once these two

conditions are satisfied, the LTCG is

exempt, irrespective whether it is sham or

bogus transaction.

The memorandum explaining the Finance

Bill has provided the intent for the

amendment to the section to prevent abuse

as it has been noticed that the exemption

is being misused by certain persons for

declaring their unaccounted income as

exempt LTCG by entering into sham

transactions. More than 200 shell

companies were suspended and more than

1,300 entities banned from the market for

taking benefit of bogus LTCG. Tax evasion

is of more than Rs15,000 crore.

In order to prevent misuse of this

exemption by persons dealing in penny

stocks, Section 10(38) is amended with

effect from assessment year 2018-19.

Under the amended provisions, the

exemption shall be available only if STT is

paid not only at the time of sale, but also at

the time of acquisition of shares. Thus, to

avail exemption under section 10(38), the

assessee has to establish that both at the

time of acquisition and at the time of sale

he has paid STT.

RELEVANT AMENDED

PROVISIONS { SECTION 10(38) }

(i) Income arising from transfer of long

term capital assets being the equity

shares in a company

(ii) Transaction of sale of such equity

shares is entered into on or after

October 1, 2004 and such transaction

Tax Column

DS

is chargeable to STT.

(iii) If the shares are acquired on or after

October 1, 2004, then at the time of

purchase, STT is paid.

(iv) Such exemption will be denied only

to such classes of cases as may be

notified by the government.

Therefore, the cases in which this

exemption is not given will be liable

to tax under the head Long Term

Capital Gain.

NOTIFICATION OF CBDT

NO.43/2017 DATED 5/6/2017

The CBDT initially issued a draft

notification which mainly prescribes

negative list of transactions on which

such exemption would not be available.

After considering representations by

various stakeholders, the CBDT has

issued a final notification which is similar

to the draft notification in terms of

prescribing negative list of transactions.

However, in certain genuine cases,

relaxation has been given.

NEGATIVE LIST OF TRANSACTIONS

WHICH WILL NOT ENJOY CAPITAL GAIN

EXEMPTION UNDER SECTION 10(38)

EVEN IF AT THE TIME OF SALE STT IS

PAID

(i) Acquisition of listed equity shares

through a preferential allotment in

company whose equity shares are not

frequently traded in the stock

exchanges. This clause covered only

fresh issue of equity shares by listed

company under the preferential

issuance route. It does not include

equity shares issued under public

issue, right issue, bonus issue, ESOPs.

(ii) Acquisition of listed equity shares not

entered through a recognized stock

exchange. This clause mainly covers

secondary acquisition of listed shares.

(iii) Acquisition of equity shares of a

company during the intervening

period between delisting and relisting

of a company.

RELAXATION OF TRANSACTIONS

FROM THE NEGATIVE LIST

The CBDT has kept some genuine

transactions outside the aforesaid

negative list on which capital gain

exemption would be available, even if the

equity shares were acquired without

payment of STT

(i) Shares acquired in the scheme of

merger and acquisition duly

approved by a court, NCLT, SEBI and

RBI.

(ii) Acquisition of shares due to loan

restructuring with banks or financial

institutions who have accepted equity

shares in lieu of loan from the

borrower

(iii) Acquisition of shares by employees

under Employee Stock Option

Scheme (ESOPS)

(iv) Acquisition of shares by non-

residents which is in accordance with

FDI guidelines

(v) Acquisition by investment funds

being Category-I or Category-II

Alternate Investment Fund or a

venture capital fund or QIB.

(vi) Acquisition of shares by any mode

which is not regarded as transfer

under section 47 of the Income Tax

Act such as acquisition of shares on

amalgamation, demerger,

inheritance, gift, slump sale under

section 50B, etc.

(vii) Acquisition of shares from the

government.

(viii)Acquisition of shares of a company

under SEBI’s Take-Over Rules.

CONCLUSION

The amendment, read with notification,

is a welcome step to stop abuse of LTCG

exemption. This is a step towards the

present government’s war against black

money. The amendment mainly targets

bogus LTCG. The government has no

intention to deny exemption of LTCG in

genuine transactions. With this

amendment, investors and other persons

should not indulge in entering into sham

transactions to create a tax-free capital.

However, the shares purchased before

October 1, 2004, are still eligible for

exemption under section 10(38) of the

Income Tax Act even if the same is sold

today and on which STT is paid.