Capital gain on transfer of residential property to be taxed in certain cases Section 54GB
The Finance Act, 2012 had inserted a new section 54GB to exempt long-term capital gains on transfer of a residential property, being a house or a plot of land, owned by an individual or HUF, if the net consideration on sale of property, is invested in equity of a new start-up SME company in the manufacturing sector which is utilised by the company to purchase new plant and machinery.
Since this section was introduced with a view to incentivise investment in the Small and Medium Enterprises (SME) in the manufacturing sector as per the National Manufacturing Policy announced by the Government in 2011, the benefit of exemption under section 54GB should not be restricted to capital gains from sale of residential house and plot of land alone, but should be extended to long term capital gains derived from other capital assets also.
This exemption under section 54GB can be claimed subject to the following conditions.
(i) The investee company should qualify as a Small or Medium SME under the Micro, Small and Medium Enterprises Act, 2006.
(ii) The company should be engaged in the business of manufacture of an article or a thing.
(iii) SME company should be incorporated within the period from 1st of April of the year in which capital gain arises to the assessee and before the due date for filing the return by the assessee u/s 139 (1).
(iv) The assessee should hold more than 50% of the share capital or the voting right after the subscription in the shares of a SME company. Sometimes in case of capital intensive SME , a single coowner may not be able to fund the said SME from his own share of sale proceeds of the property sold which will prevent formation of a new SME so as to achieve the desired objects.
(v) The assessee will not be able to transfer the above shares for a period of 5 years. It may be noted that the lock-in period under section 54EC is only 3 years.
(vi) The company will have to utilize the amount invested by the assessee in the purchase of new plant and machinery within a period of one year from the date of subscription in equity shares of an eligible company. If the entire amount is not so invested before the due date of filing the return of income by the assessee u/s 139, then, the company will have to deposit the amount in the scheme as notified by the Central Government. Thereafter, Central Government issued Notification No 44/2012, Dt 25-10-2012 in this regard.
(vii) The above new plant and machinery acquired by the company cannot be sold for a period of 5 years.
(viii) The above scheme of exemption granted in respect of capital gains on sale of residential property will remain in force up to 31.3.2017.
Budget 2018 Suggestion by ICAI
It is suggested:
a) The benefit under section 54GB may be extended to long-term capital gains on sale of any capital asset which is invested in the equity of a new start-up SME company for purchase of new plant and machinery within the prescribed time.
b) Investment in existing SME company may also be considered for the purpose of such exemption.
c) Further, investment in LLP which satisfies the condition of SME enterprises may also be permitted, subject to conditions as may be necessary. Restrictive clauses may be inserted in line with the appropriate clauses of the proviso to section 47(xiiib).
d) The restricted time limit for acquiring new plant and machinery will create difficulties and, therefore, it is suggested that the SME company may be allowed to make such investment in new plant and machinery within a period of 2 years from the date on which the assessee makes the investment in its equity shares.
e) The period of 5 years for retaining the equity shares may be reduced to 3 years, in line with the requirement under section 54EC. Suitable exceptions for takeover/ merger/ amalgamations etc. may also be provided.
f) Similarly, lock-inperiod for plant and machinery acquired by the SME company may be reduced from 5 years to 3 years.
g) It may be clarified that the net consideration after deduction of tax at source @1% may be required to be invested, so that there is no cash flow mismatch.
h) In case of a Sale of joint property , the condition regarding holding of more than 50% of the share capital of the SME company by the assessee should be deemed to have been fulfilled if the coowners of the said property hold more than 50% of the Share Capital of the SME company.