The Finance Bill 2024 proposes an amendment to Section 55 of the Income Tax Act to address issues in computing the cost of acquisition for unlisted equity shares transferred under Offer for Sale (OFS) during Initial Public Offerings (IPOs). Previously, the Finance Act of 2018 had removed exemptions for long-term capital gains on equity shares, introducing a taxation mechanism under Section 112A. This led to ambiguities in calculating the cost of acquisition for shares acquired before February 1, 2018, and subsequently listed. The proposed amendment aims to clarify that for equity shares sold under OFS, which are unlisted at transfer but listed shortly after, the fair market value should be calculated proportionally using the Cost Inflation Index from 2017-18. This amendment, effective retroactively from April 1, 2018, will resolve discrepancies and ensure proper tax compliance for these transactions from the assessment year 2018-19 onwards.
Budget 2024: Amendment of Section 55 of the Act
Prior to Finance Act, 2018, section 10(38) of the Income Tax Act, 1961 (the Act) provided for exemption in respect of gains arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust where the transaction is subject to Securities Transaction Tax (STT). Finance Act, 2018 withdrew the exemption on long-term capital gains from the transfer of equity shares if STT is paid on both acquisition and transfer.
2. With the withdrawal of the exemption, a specific provision in the form of section 112A of the Act was inserted to tax long-term capital gains on transfer of equity shares on which STT is paid at the time of acquisition and transfer. Simultaneously, clause (ac) of sub-section (2) of section 55 of the Act was inserted to provide a special mechanism for computation of cost of acquisition in respect of assets covered under section 112A of the Act and acquired prior to 01 February 2018.
3. The cost of acquisition under clause (ac) of sub-section (2) of section 55 of the Act, for an asset referred to in section 112A is to be determined as per the following formula:
Higher of (a) and ( b), where:
(a) Actual cost of acquisition
(b) lower of:
(i) Fair Market Value (FMV) of shares as of 31st January 2018; and
(ii) Full value of Consideration received upon sale.
4. Further, sub-clause (iii) of clause (a) of the Explanation to clause (ac) of subsection (2) of section 55 of the Act provides for the ‘fair market value’ where the capital asset is an equity share in a company which is not listed on a recognised stock exchange as on the 31st day of January, 2018 but listed on such exchange on the date of transfer, or listed on a recognised stock exchange on the date of transfer and which became the property of the assessee in consideration of share which is not listed on such exchange as on the 31st day of January, 2018 by way of transaction not regarded as transfer under section 47. In such cases, “fair market value” means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the financial year 2017-18 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 first day of April, 2001, whichever is later. The Explanation thus envisages defining the Fair Market Value of shares which are listed at the time of transfer.
5. Thereafter, as provided by sub-section (4) of Section 112A of the Act, the Central Government notified some cases of acquisitions to be given the benefits of section 112A where STT could not have been paid at the time of acquisition. Due to the notification, the condition of payment of STT was relaxed for transactions of acquisition which are not chargeable to STT other than some exceptional situations defined. As a consequence, the payment of STT at the acquisition is not required for unlisted equity shares.
6. Due to this relaxation, a lacuna has arisen in computation of cost of acquisition under clause (ac) of sub-section (2) of section 55 of the Act in the case of equity shares transferred under Offer-For-Sale (OFS) as part of Initial Public Offering (IPO) process where STT is paid at the time of transfer. Since the condition of STT payment at the time of acquisition is relaxed through the aforementioned Notification, it becomes an asset referred to under section 112A. Hence, for determination of cost of acquisition under clause (ac) of sub-section (2) of section 55 of the Act, the computation of FMV as on 31 January 2018 as per the Explanation is required. However, the equity shares at the time of OFS are unlisted on the date of transfer, since the listing happens a few days after the transfer, and therefore some taxpayers are taking the plea that the computation of FMV is not covered on a literal reading of the Explanation to clause (ac) of sub-section (2) of section 55.
7. It has come to light in survey operations that, taxpayers in some cases are not paying capital gains tax on transfer of shares acquired through Offer for Sale (OFS) route citing the absence of an express provision for determination of the FMV of such equity shares since they were still unlisted on the date of transfer even though STT has been paid on transfer and thus, Cost of Acquisition is indeterminable, and Capital Gains is not chargeable.
8. It is therefore proposed to amend sub-clause (iii) of clause (a) of the Explanation to clause (ac) of sub-section (2) of section 55 of the Act, to specifically provide that in a case where the capital asset is an equity share in a company which is not listed on a recognised stock exchange as on the 31st day of January, 2018, or which became the property of the assessee in consideration of share which is not listed on such exchange as on the 31st day of January, 2018 by way of transaction not regarded as transfer under section 47, but listed on such exchange subsequent to the date of transfer, where such transfer is in respect of sale of unlisted equity shares under an offer for sale to the public included in an initial public offer, “fair market value” would mean an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the financial year 2017-18 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 first day of April, 2001, whichever is later.
9. This amendment is proposed to be deemed to have been inserted with effect from the 1st day of April, 2018 and shall accordingly apply retrospectively from assessment year 2018-19 onwards.
[Clause 22]
Extract of Clause 22 of Finance Bill 2024
Clause 22 of the Bill seeks to amend section 55 of the Income-tax Act relating to meaning of “adjusted, “cost of improvement” and “cost of acquisition”.
Sub-clause (iii) of clause (a) of the Explanation to clause (ac) of sub-section (2) of the said section, inter alia, provides that where the capital asset is an equity share in a company, the “fair market value” means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the financial year 2017-2018 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 first day of April, 2001, whichever is later.
It is proposed to insert item (AA) in the said sub-clause to provide that in a case where the capital asset is an equity share in a company which is not listed on a recognised stock exchange as on the 31st day of January, 2018, or which became the property of the assessee in consideration of share which is not listed on such exchange as on the 31st day of January, 2018 by way of transaction not regarded as transfer under section 47, as the case may be, but listed on such exchange subsequent to the date of transfer, where such transfer is in respect of sale of unlisted equity shares under an offer for sale to the public included in an initial public offer, “fair market value” would mean an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the financial year 2017-2018 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 first day of April, 2001, whichever is later.
This amendment will take effect retrospectively from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-2019 and subsequent years.
Proposed Amendment to Section 55 of Income-tax Act, 1961 vide Finance Bill 2024
In section 55 of the Income-tax Act, in sub-section (2), in clause (ac), in the Explanation, in clause (a), in sub-clause (iii), after item (A), the following item shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 2018, namely:––
“(AA) not listed on a recognised stock exchange as on the 31st day of January, 2018, or which became the property of the assessee in consideration of share which is not listed on such exchange as on the 31st day of January, 2018 by way of transaction not regarded as transfer under section 47, as the case may be, but listed on such exchange subsequent to the date of transfer (where such transfer is in respect of sale of unlisted equity shares under an offer for sale to the public included in an initial public offer);”.
