The Finance Bill, 2012, contains a plethora of proposals focused on nullifying some of the judgments and plugging some loopholes that were defeating the intended purpose: tax legislation.

It is possible to list out judgments that went topsy-turvy because of the proposals in the Finance Bill; but not every change is bad. There are some positives that have got overlooked in the Vodafone melee.

Here, we take a look at some changes that are heartening for taxpayers and moderate certain transactions.

Now, if a technocrat having land or a residential building but without liquid resources wanted to start a small or medium enterprise (SME), he has to dispose of the asset, pay capital gains tax and establish the business only on the balance of the sale proceeds.

The Bill proposes to insert Section 54GB in order to exempt capital gains from sale of land or residential building, if the sale consideration is deployed in an SME in the form of a limited company.

Conditions for exemption

The conditions for the exemption are (a) the asset transferred must be a house or plot of land; (b) the taxpayers eligible for relief are individuals and belong to a Hindu undivided family; (c) the net consideration from sale of capital asset must be used for purchase of shares in an SME before the due date for filing the return prescribed in section 139(1) and the taxpayer must hold not less than 50 per cent of share capital or voting rights in the SME; (d) the unit must be a company which qualifies to be a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006; (e) the net consideration obtained by way of share subscription must be used by the company within one year from the date of subscription, for purchase of new asset and if not used fully, it must be deposited in a deposit account for use in accordance with a scheme to be notified by the Government; (f) if the amount deposited is not used within the prescribed time, the amount of capital gain which was tax-free earlier would be chargeable to tax in the hands of the assessee and not the company; and (g) the shareholding should be retained for five years from the date of acquisition by the shareholder and the new assets acquired by the company out of shares issued must be retained for five years by the company.

Otherwise, the capital gain exempted earlier would be chargeable to tax in the hands of the individual who transferred the shares within the lock-in period or in the hands of the company if it has transferred the assets within the lock-in period.

Deemed sale consideration

A property transferred for instalment payment of consideration spread over many years might be a difficult proposition for determining the capital gains.

There is, of course, sale consideration but the realisation or receipt of the same is spread over a long period. In order to overcome such problems, the Bill proposes to insert Section 50D to the Income-Tax Act, 1961.

Hence, where the consideration received as a result of transfer of capital asset is not ascertainable or cannot be determined, for the limited purpose of computing capital gains, the fair market value of the asset on the date of transfer will be adopted as deemed sale consideration for the transfer.

At present, reference to the valuation officer is made where the transaction value is less than the fair market value.

Section 55A also prescribes the limits for making such reference. The Bill proposes to allow such reference where the apparent transaction value is at variance with the fair market value.

This would mean even where the transaction is less than fair market value nothing would debar the tax officers from making such reference.

(The author is an Erode-based chartered accountant.)

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