Capital gains taxation – conditions for STT on acquisition relaxed

Section 112A of the Income Tax (IT) Act 1961 provides for a 10% tax on long-term capital gains arising from the transfer of equity shares, units of equity-oriented funds or units of a business trust, provided that securities transaction tax (STT) is paid following the acquisition and transfer. To protect genuine cases where STT could not be paid following acquisition of the equity shares, the Central Board of Direct Taxes (CBDT) issued a draft notification in April 2018.(1)

The CBDT has now issued the final notification in line with its draft notification.(2) The list of permissible transactions to benefit from Section 112A of the IT Act has been expanded to include capital contribution in firms and associations of persons or distribution on dissolution thereof. This is subject to the condition that the previous owner's acquisition was not achieved by a mode specified in the negative list (ie, an impermissible transaction under Section 112A).

Interest income on rupee denominated bonds not taxable

The interest payable by an Indian company or a business trust to a non-resident in respect of rupee denominated bonds issued outside India is taxable at a 5% concessional rate. In order to maintain the current account deficit and augment the foreign exchange inflow, tax incentives have been provided to offshore rupee denominated bonds. The interest on bonds issued between 17 September 2018 and 31 March 2019 will be exempt from tax and will not be subject to withholding tax. Legislative amendments will be proposed in due course.(3)

Receipt of excess premiums not taxable absent generation of black money

Section 56(2)(viib) of the IT Act provides that considerations received by closely held companies for the issue of shares in excess of the fair market value is taxable as income from other sources.

The Chennai Tax Tribunal recently considered a case where an Indian company had issued shares to one of its shareholders at a premium of Rs23,086 per share (face value of Rs10 per share).(4) The shareholder in question was the daughter of another shareholder. The tax officer had invoked Section 56(2)(viib) of the IT Act, citing an unrealistic premium. On further appeal, the Chennai Tax Tribunal noted as follows:

  • Section 56(2)(viib) was introduced to curb the generation and use of black money. However, in this case, the source of investment was genuine and undisputed. There was no way to generate or use black money by infusing capital in the form of a share premium.
  • On reference to other provisions in the IT Act regarding tax recipients for gifts (including shares), it was noted that a gift given by a mother to her daughter is non-taxable. As such, on a harmonious interpretation, Section 56(2)(viib) was inapplicable in the case at hand.
  • The investment at an unrealistic share premium benefited the daughter only and the IT Act does not address tax transfers of assets or cash from mother to daughter. The tax tribunal thus directed the deletion of the addition made by invoking Section 56(2)(viib) of the IT Act.

For further information on this topic please contact Pranay Bhatia at BDO in India by telephone (+91 22 3332 1600) or email ([email protected]). The BDO in India website can be accessed at www.bdo.in.

Endnotes

(1) For further details, please click here.

(2) Notification SO 5054(E), F 60/2018 (F 370142/9/2017-TPL), dated 1 October 2018.

(3) Press release dated 17 September 2018.

(4) M/s Vaani Estates Pvt Ltd ITA 1352/Chny/2018, Chennai Tax Tribunal.

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