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Finance Act, 2017 amended section 10(38) of the Income-tax Act, 1961 (the Act) stating that long term capital gains from transfer of listed equity shares acquired on or after 01 October, 2004, would be exempt from tax under section 10(38) of the Act only if the Securities transaction Tax (STT) was paid at the time of acquisition of such shares.

Previously, to claim the exemption u/s 10(38) only the requirement was the transaction of sale is undertaken on or after 01 October, 2004 and is chargeable to STT under Chapter VII of the Finance (No.2) Act, 2004.

Means irrespective of manner of acquisition, the exemption u/s 10(38) was allowed with only condition that the transaction of sale is undertaken on or after 01 October, 2004 and is chargeable to STT.

However, Department noticed that exemption provided under section 10(38) is being misused by certain persons for declaring their unaccounted income as exempt long-term capital gains by entering into sham transactions. Many judgements of various court were also pronounced in favour of assessee on account of long term capital gain on penny stocks.

With a view to prevent this abuse, the Government proposed to amend section 10(38) to provide that exemption under this section for income arising on transfer of equity share acquired or on after 1st day of October, 2004 shall be available only if the acquisition of share is chargeable to STT under Chapter VII of the Finance (No 2) Act, 2004. So, the now to claim the exemption u/s 10(38), it is now also mandatory that the transaction of acquisition is carried through recognise stock exchange and STT should have been paid on such acquisition.

However, to protect the exemption for genuine cases where the STT could not have been paid like acquisition of share in IPO, FPO, bonus or right issue by a listed company acquisition by non-resident in accordance with FDI policy of the Government etc., it is also proposed to notify transfers for which the condition of chargeability to STT on acquisition shall not be applicable.

As on 05/06/2017 Government issued a notification no. 43/2017 (“said notification”). In preamble of said notification, the Government notifies all transactions (with few specific exclusion and few specific inclusion) of acquisition of equity share entered into on or after the 1st day of October, 2004 which are not chargeable to STT EXCEPT the column A transactions but including the column B transactions;

A B
Specific exclusion – STT on acquisition not paid, not eligible for 10(38) exemption Specific Inclusion – STT on acquisition not paid, still eligible for 10(38) exemption
Acquisition of existing listed equity share in a company whose equity shares are not frequently traded in a recognised stock exchange of India is made through a preferential issue Acquisition of listed equity shares in a company which has been approved by the Supreme Court, High Court, National Company Law Tribunal, Securities and Exchange Board of India or Reserve Bank of India in this behalf
Acquisition of listed equity shares in a company by any non-resident in accordance with foreign direct investment guidelines issued by the Government of India
Acquisition of listed equity shares in a company by an investment fund referred to in clause (a) of Explanation 1 to section 115UB of the Act or a venture capital fund referred to in clause (23FB) of section 10 of the Act or a Qualified Institutional Buyer
Acquisition of listed equity shares in a company through preferential issue to which the provisions of chapter VII of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 does not apply
Where transaction for acquisition of existing listed equity share in a company is not entered through a recognised stock exchange of India

following acquisition of listed equity shares in a company made in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956

– acquisition through an issue of share by a company other than the issue referred to in clause (a) i.e. preferential allotment.

– acquisition by scheduled banks, reconstruction or securitisation companies or public financial institutions during their ordinary course of business

– acquisition which has been approved by the Supreme Court, High Courts, National Company Law Tribunal, Securities and Exchange Board of India or Reserve Bank of India in this behalf

– acquisition under employee stock option scheme or employee stock purchase scheme framed under the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999

– acquisition by any non-resident in accordance with foreign direct investment guidelines of the Government of India

– where acquisition of shares of company is made under Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulation, 2011

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– acquisition from the Government

– acquisition by an investment fund referred to in clause (a) to Explanation 1 to section 115UB of the Income-tax Act or a venture capital fund referred to in clause (23FB) of section 10 of the income-tax Act or a Qualified Institutional Buyer

– acquisition by mode of transfer referred to in sections 47 or 50B of the Income-tax Act, if the previous owner of such shares has not acquired them by any mode referred to in clause (a) or clause (b) or clause (c) [other than the transactions referred to in the proviso to clause (a) or clause (b)].

acquisition of equity share of a company during the period beginning from the date on which the company is delisted from a recognised stock exchange and ending on the date immediately preceding the date on which the company is again listed on a recognised stock exchange in accordance with the Securities Contracts (Regulation) Act, 1956 read with Securities and Exchange Board of India Act, 1992 (15 of 1992) and the rules made thereunder

In view of new amended position the opinion of some frequently asked questions are given as under;

Shares purchased in IPO / FPO, are eligible for exemption u/s 10(38) at the time of sale?

Yes, specific inclusion by said notification [see clause b(i) of said notification]

Shares purchased before 01/10/2004, are eligible for exemption u/s 10(38) at the time of sale?

Yes, because the amendment in section 10(38) specifically provide the “acquisition of equity share entered into on or after the 01/10/2004”

Shares of private company / unlisted public company acquired by person / promoters without paying STT and later company become listed company, are eligible for exemption u/s 10(38) at the time of sale?

Yes, if company is listed as on 31/03/2017

No, if company become listed on or after 01/04/2017

Shares acquired as Gift from someone, are eligible for exemption u/s 10(38) at the time of sale?

Yes, but previous owner should not have acquired in condition as mentioned in clause a, b or c. [see clause b(ix) of said notification]

Shares acquired by person under ESOP scheme, are eligible for exemption u/s 10(38) at the time of sale?

Yes, specific inclusion by said notification [see clause b(iv) of said notification]

Shares acquired by person in demerger scheme (split), are eligible for exemption u/s 10(38) at the time of sale?

Yes, specific inclusion by said notification [see clause b(iv) of said notification]

What would be the cases which are pending on penny stock matter?

Shares acquired before 01/04/2017 and shares of such company are listed on stock exchange as on 01/04/2017, then the matter will be dealt in accordance with earlier law, even share are sold on or after 01/04/2017.

Author is a Chartered Accountant and can be reached at harchandanimanish@gmail.com

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor Taxguru.in and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.

Download Analysis of amendment in Section 10(38) by Finance Act, 2017 & Notification No. 43/2017
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Qualification: CA in Job / Business
Company: Surana Maloo & Co.
Location: AHMEDABAD, Gujarat, IN
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5 responses to “Analysis of amendment in Section 10(38) by Finance Act, 2017 & Notification No. 43/2017”

  1. Riddhesh Shah says:

    I wish to know the meaning of existing listed equity shares?
    Does it mean that the shares should be listed at the time of acquistion or as on the date of notification?
    As per the answer given by you for FAQ 3 of this article you seem to interpret it as on the date of applicability of this notificatio.

  2. Shashank says:

    Can you please clarify that bonus issue by company infrequently traded one will enjoy still the exemption from tax or not?

  3. Joseph Mathew says:

    Hello Manish, I was allotted Rights Issue equity shares in unlisted Ratnakar Bank. Subsequently RBL went for an IPO and the shares are locked in for a year. If I sell after that am I exempt from LTCG tax? No STT was paid at rights issue stage. Thanks!

  4. Vaidhya says:

    Hello Manish, Thanks for the detailed post. Can you please clarify on the LTCG approach for foreign company shares sold on international stock exchanges? Below is the phrase from page 8 of the LTCG document in Income tax India website

    http://www.incometaxindia.gov.in/tutorials/15-%20ltcg.pdf

    Exemption from long term capital gains under section 10(38) shall be available w.e.f
    April 1, 2017 even where STT is not paid, provided that –
    ‐ transaction is undertaken on a recognised stock exchange located in any
    International Financial Service Centre, and
    ‐ consideration is paid or payable in foreign currency

  5. SANJIV KUMAR SOOD says:

    property sale and purchaseunder capital gain scheme

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