There is a case for streamlining taxation of capital gains arising to corporate India in more than one areas, and we hope Budget 2018 will address the issue. Take double taxation of notional gains under sections 50C/50CA, as also the notional income under section 56(2)(x), on sale of immovable property or unquoted shares. The Finance Act 2017 introduced an anti-abuse measure by inserting section 50CA of the Act to treat the Fair Market Value (FMV) to be full value of consideration in case of unquoted shares of a company. This amendment takes effect from April 1, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent assessment years.

Such measure was adopted to ensure that the full value of consideration is not understated. Similar provisions existed for deeming of full value of consideration in certain cases such as deeming of stamp duty value as full value of consideration, for transfer of immovable property in certain cases.

The Finance Act 2017 also widened the anti-abuse measure by widening the scope of ‘Income from other sources’, section 56(2)(x), to deem the receipt of cash or immovable property or moveable property by any person without consideration or for inadequate consideration in excess of ₹50,000, as chargeable to tax in the hands of the recipients. Moveable property inter alia includes shares and securities. These amendments took effect from April 1, 2017 and the said receipt of sum of money or property on or after April 1, 2017 shall be chargeable to tax in accordance with the provisions of proposed clause (x) of sub-section (2) of section 56.

Thus in case of a person (transferor) who transfers unquoted shares or immoveable property at a price less than the FMV, notional capital gain is to be computed considering the FMV as the sale consideration as per section 50CA and section 50C of the Act.

At the same time, the transferee (recipient) is also subject to tax on the notional income being the difference between the FMV and the consideration received for transfer of the immoveable property and unquoted shares as income under the head “Income from other Sources”.

This can lead to double taxation of the same income in the hands of the seller [section 50C and section 50CA] and the buyer [section 56(2)(x)] of such immovable property or unquoted shares of the company in case of transfer of the immoveable property or unquoted shares for consideration less than the FMV. However, section 56 was amended by the Finance (No. 2) Act 2004 to tax gift received in the hands of the recipient from unrelated persons with the abolition of gift tax. The objective of taxing gifts under section 56 of the Act is evident from the speech of the Finance Minister while presenting the Finance (No. 2) Bill, 2004: “... I abolished gift-tax in 1997. That decision remains, but the loophole requires to be plugged to prevent money laundering. Accordingly, purported gifts from unrelated persons, above the threshold limit of ₹25,000, will now be taxed as income.”

Section 56 of the Act was amended by the Finance (No 2) Act 2009 to include receipt of gifts in kind and to provide that the value of any property received without consideration or for inadequate consideration will also be included in the computation of total income of the recipient.

In view of the intent of sections of the Act, the transfer that is chargeable to capital gains and taxed as per section 50C or section 50CA of the Act, should not be considered for the purpose of section 56 of the Act. However, a clarification is needed on the same by way of an amendment to section 56(2)(x) of the Act to exclude receipt of immovable property and moveable property for inadequate consideration which is otherwise chargeable to tax as capital gains.

Kamdin is Partner, Deloitte India. Hakim is Senior Manager and Mathias is Manager with Deloitte Haskins and Sells

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