CHANGES IN THE PROVISIONS FOR CAPITAL GAINS IN THE FINANCE BILL, 2017

[Mr. M. GOVINDARAJAN]

Part E of Part IV of Chapter IV of Income Tax Act, 1961 (‘Act’ for short) deals with capital gains.  Section 45 to 55A are the provisions dealing with the capital gains.

Section 45(1) provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place.

Transfer under a specified agreement

Clause 22 of Finance Bill, 2017 (‘Bill’ for short) seeks to insert a new Section 45(5A) after Section 45(5) and its explanation.  The newly inserted Section 45(5A) provides that notwithstanding anything contained in Section 45(1), where the capital gain arises to an assessee, being an individual or a HUF from the transfer of a capital asset, being land or building or both, under a specified agreement, the capital gains shall be chargeable to income tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority.  For the purposes of Section 48, the stamp duty value, on the date of issue of the said certificate of his share, being land or building or both in the project, as increased by the consideration received in cash, if any, shall be deemed to be full value of the consideration received or accruing as a result of the transfer of the capital asset.

The proviso to Section 45(5A) provides that the provisions of Section 45(5A) shall not apply where the assessee transfers his share in the project on or before the date of issue of said certificate of completion and the capital gains shall be deemed to be the income of the previous year in which such transfer takes place and the provisions of this Act, other than the provisions of this sub-section, shall apply for the purpose of determination of full value of consideration received or accruing as a result of such transfer.

Explanation to this section defines the following terms-

• ‘competent authority’ means the authority empowered to approve the building plan by or under any law for the time being in force;
• ‘specified agreement’ means a registered agreement in which a person owning land or building or both, agrees to allow another person to develop a real estate project on such land or building or both, in consideration of a share, being land or building or both in such project, whether with or without payment of part of the consideration in cash.
• ‘stamp duty value’ means the value adopted or assessed or assessable by any authority of Government for the purpose of payment of stamp duty in respect of an immovable property being land or building or both.

This new section will come into effect from 01.04.2018.

Transactions not regarded as transfer

Section 47 of the Act gives the list of transactions which are not regarded as transfer for the purpose of computation of ‘capital gains’.  Clause 23(a) of the Bill seeks to insert clause (viiaa) after the clause (viia).  The new clause reads as below-

(viiaa) any transfer, made outside India, of a capital asset being rupee denominated bond of Indian company issued outside India, by a non resident to another nonresident.

Clause 23(b) of the Bill seeks to insert a new clause (xb) after clause (xa) which reads as below-

(xb) any transfer by way of conversion of preference shares of a company into equity shares of that company.

The amendment carried out in Section 47 as above will come into effect from 01.04.2018.

Indexed Cost of acquisition

Explanation (iii) to Section 47 defines the phrase ‘indexed cost of acquisition’ as an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year begin­ning on the 1st day of April, 1981, whichever is later.  Clause 24(b) of the Bill seeks to substitute the date 01.04.2001 for the date 01.04.1981.

The said change will come into effect from 01.04.2018.

Cost with reference to certain mode of acquisition

Section 49 of the Act deals with the cost with reference to certain mode of acquisition.

Section 49(1)(e) of the Act provides that where the capital asset became the property of the assessee under any such transfer as is referred to in clause (iv) or clause (v) or clause (vi) or clause (via) or clause (viaa) or clause (viab) or clause (vib) or clause (vica) or clause (vicb) or clause (vicc)] or clause (xiii) or clause (xiiib) or clause (xiv) of section 47,  the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.

Clause 25(a) of the bill seeks to insert the words ‘or clause (vic)’ after clause (vib), which will come into effect from 01.04.2018.

Clause 25(b) of the bill seeks to insert the new sub-section 2(AE) after sub section 2(AD), which will come into effect from 01.04.2018.  The new Section 49(AE) provides that where the capital asset, being equity share of a company, became the property of the assessee in consideration of a transfer referred to in clause (xb) of Section 47, the cost of acquisition of the asset shall be deemed to be that part of the cost of the preference share in relation to which such asset is acquired by the assessee.

Clause 25(c) of the bill seeks to insert a new sub-section 2(AF) after Section 2(AE).  Section 49((2AF) provides that where the capital asset, being a unit or units in a consolidated plan of a mutual fund scheme, became the property of the assessee in consideration of a transfer referred to in clause (xix) of Section 47, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the unit or units in the consolidating plan of the scheme of the mutual fund.

Section 49(4) provides that Where the capital gain arises from the transfer of a property, the value of which has been subject to income-tax under clause (vii) or clause (viia) of sub-section (2) of section 56, the cost of acquisition of such property shall be deemed to be the value which has been taken into account for the purposes of the said clause (vii) or clause (viia). 

Clause 25(d) of the Bill seeks to insert the brackets and figure ‘or clause (x)’ after the words, brackets, figures and letter ‘or clause (viia) at both the places where they occur.

Clause 25(e) of the Bill seeks to insert the sub section (6) and  (7) in Section 49 after sub clause (5), which came into effect from 01.04.2018.

The newly inserted Section 49(6) provides that where the capital gain arises from the transfer of a specified capital asset referred to in clause (c) of the Explanation to clause (37A) of Section 10, which has been transferred after the expiry of the two years from the end of the financial year in which the possession of such asset was handed over to the assessee, the cost of such acquisition of such specified capital asset shall be deemed to be its stamp duty value as on the last day of the second financial year after the end of the financial year in which the possession of the said specified capital asset was handed over to the assessee.

The explanation to this section provides that for the purpose of this sub-section, stamp duty value means the value adopted or assessed or assessable by any authority of the State Government for the purpose of payment of stamp duty in respect of an immovable property.

The newly inserted Section 49(7) provides that where the capital gain arises   from the transfer of a capital asset, being share in the project, in the form of land or building or both, referred to Section 45(5A), not being the capital asset referred to in the proviso to the said sub-section the cost of acquisition of such asset, shall be the amount which is deemed as full value of consideration in that sub section.

Clause 25(f) of the Bill proposes to insert sub-section (8) which shall be deemed to have been inserted with effect from 01.06.2016.  The newly inserted Section 49(8) provides that where the capital gain arises from the transfer of an asset, being the asset held by a trust or an institution in respect of which accreted income has been computed and the tax has been paid thereon in accordance with the provisions of Chapter XII-EB, the cost of acquisition of such asset shall be deemed to be the fair market value of the asset which has been taken into account for computation of accreted income as on the specified date referred to in sub-section (2) of Section 115TD.

Special provision for full value of consideration for transfer of share other than quoted share

Clause 26 seeks to insert Section 50CA with effect from 01.04.2018.  The newly inserted Section 50CA provides that where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being share of a company other than a quoted share, is less than the fair market value of such share determined in such manner as may be prescribed, the value so determined shall, for the purposes of section 48, be deemed to be the full value of consideration received or accruing as a result of such transfer.

The explanation to this section defines the term ‘share transfer’ as the share quoted on any recognized stock exchange with regularly from time to time, where the quotation of such share is based on current transaction made in the ordinary course of business.

Amendment of Section 54EC

Section 54EC deals with the subject ‘capital gain not to be charged on  investment in certain bonds’.  Explanation (ba) to Section 54EC(3) defines the term ‘long term specified asset’ for making any investment under this section on or after the 1st day of April, 2007 as any bond, redeemable after three years and issued on or after the 1st day of April, 2007 by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 (68 of 1988) or by the Rural Electrification Corporation Limited, a company formed and registered under the Companies Act, 1956 (1 of 1956).

Clause 27 of the Bill seeks to substitute the words and figures ‘the Companies Act, 1956; or any other bond notified by the Central Government in this behalf’ for the words and figures ‘the Companies Act, 1956’ with effect from 01.04.2018.

Amendment of Section 55

Clause 28 seeks to substitute the date ‘01^st day of April, 2001’ for the words ‘1^st day of April, 1981’ appeared in Section 55(1)(2)(b) and in Section 55 (2)(b), which come into effect from 01.04.2018.