The Finance Bill 2017 proposes to insert new section 50CA to provide that in case of transfer of shares of a company other than quoted shares, the fair market value of such shares determined in the prescribed manner shall be deemed to be the full value of consideration for the purpose of computing income chargeable to tax as capital gains.

Further, Explanation to the proposed section states that “quoted share” means the share quoted on any recognised stock exchange with regularity from time to time, where the quotation of such share is based on current transaction made in the ordinary course of business.

The Finance Bill 2017 proposes to insert new clause (x) in sub-section (2) of section 56 so as to provide that where any person receives immovable property without consideration and its stamp duty value exceeds Rs.50,000, the same would be subject to tax. Likewise, if any person receives immovable property for inadequate consideration, and the difference between the stamp duty value and actual consideration exceeds Rs.50,000, the difference would be subject to tax in the hands of the recipient under the head “Income from other sources“.

Clause (x)(c) provides that where any person receives any property other than immovable property –

> Without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property shall be chargeable to tax as `income from other sources’.

> For a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration shall be chargeable to tax as `income from other sources’.

In light of the aforesaid proposed amendment, there will be a double taxation of the same income on deeming basis as explained in the example below:

Example:

For example,’ X’ transfers his unquoted shares purchased at a cost of Rs.8 lakhs to at Rs. 10 lakhs whereas the Fair Market Value of the shares as determined in the prescribed manner is Rs. 1 crore. Then in this situation, the provisions of proposed Section 50CA would be attracted in the hands of the seller, whose full value of consideration for computation of capital gains would be Rs.1 crore. Further, who is purchaser would be liable to tax under section 56(2)(x)(c) on Rs. 90 lakhs (i.e. Rs. 1 crore less Rs. 10 lakhs) as income from other sources.

Hence, the difference of Rs.90 lakhs between the fair market value and the actual consideration will be taxable:

> under section 50CA, in the hands of seller; and

> under section 56(2)(x), in the hands of recipient.

Further, even though the recipient, at the time of sale of such shares at a later date would treat the FMV as the Cost of Acquisition, tax has been collected upfront and at times it may happen that the person may not sell shares at a later date.

Suggestions:

It is suggested that:

• Keeping in mind the consequential double taxation arising on account of the same income being subject to tax both in the hands of seller and recipient, suitable amendment may be made to prevent unjust enrichment of the revenue.
• Notwithstanding the above, if provisions of Section 5OCA are to be retained, value determined as per Rule  11 UA may be considered as the FMV of unquoted shares.
• The definition of quoted shares is very subjective and complicated. In actual practice, it may involve problems of interpretation, which would invite unending litigation. It is, therefore, suggested that this section should be made applicable to transfer of shares of a company in which the public is not substantially interested.

Source- ICAI Post-Budget Memoranda-2017

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Under the existing provisions of the Income tax Act, income chargeable under the head “Capital gains” is computed by taking into account  the amount of full value of consideration received or accrued on transfer of a capital asset. In order to ensure that the full value of consideration is not understated, the Act also contained provisions 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.

In order to rationalise the provisions relating to deeming of full value of consideration for computation of income under the head “capital gains”,  Finance Bill 2017 proposed to insert a new section 50CA to provide that where consideration for transfer of share of a company (other than quoted share) is less than the Fair Market Value (FMV) of such share determined in accordance with the prescribed manner, the FMV shall be deemed to be the full value of consideration for the purposes of computing income under the head “Capital gains”.

This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent assessment years.

[Clause 26]

Relevant Clause 26 of Finance Bill 2017

Insertion of new section 50CA.

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

26. After section 50C of the Income-tax Act, the following section shall be inserted with effect from the 1st day of April, 2018, namely:—

‘50CA. Where the consideration received or accruing as a result of the transfer by an assesseeof 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.

Explanation.—For the purposes of this section, “quoted share” means the share quoted on any recognised stock exchange with regularity from time to time, where the quotation of such share is based on current transaction made in the ordinary course of business.’. 

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