1. Introduction on Double Taxation on sale of unquoted shares in India

(i) Sales consideration of unquoted shares in the hands of transferor

(a) Finance Act, 2017 has introduced new section 50CA under the Income Tax Act (ITA) 1961 for adoption of Fair Market Value (FMV) as deemed sales considerations against sale of unquoted shares where actual sales consideration is lower than the FMV.

(b) Taxpayers are required to offer the FMV as sales consideration and to pay Income tax or Capital gain tax accordingly. Hence FMV is to be treated as deemed sales consideration.

(ii) Purchase consideration of unquoted shares in the hands of transferee

(a) Old Section 56(2)(x) under the ITA, 1961 for adoption of FMV as deemed purchase considerations against actual purchase consideration of unquoted shares where actual purchase consideration is lower than the FMV.

(b) Taxpayers are required to declare the FMV as purchase consideration and to pay Income tax under the head Income from other sources on the amount of difference between purchase consideration and FMV where the purchase consideration is lower than the FMV. Hence FMV is to be treated as deemed purchase consideration.

2. Definition of Double Taxation under the Court’s Decisions 

(i) Supreme Court of India has decided the definition of double taxation in the case of Shri Krishna Das vs Town Area Committee, Chirgaon (AIR 1981 SC 463) as under:

  • Double taxation is treated where taxpayer is liable to pay tax 2 or more time on same property, same matter, same purpose, same period, same territory, same government (Govt.) or same authority.

(ii) Mumbai High Court has decided the definition of double taxation in the case of Shakti Kumar Sancheti vs State of Maharashtra, as under:

(a) Double taxation is not treated where taxpayer is liable to pay tax 2 or more time on the taxes levied by the different authorities like Octroi was levied by the Bombay Municipal Corporation (BMC) and entry tax was levied by sale tax authorities.

(b) This decision was also confirmed by the Supreme Court of India In 1995 SCC(1)

3. Definition of Double Taxation under the Section 50CA and Section 56(2)(x)

(i) (a) Double Taxation is not treated where transferor is taxed on the deemed sale consideration (FMV) which is higher than actual sale

Transferor has forgone the difference amount between FMV and actual sale consideration. Hence transferor is liable to pay Income tax under the head capital gains on the FMV.

and

(b) Also double taxation is not treated where transferee is taxed on the deemed purchase consideration (FMV) which is higher than the actual purchase consideration.

Transferee has deemed to accrue the income as difference amount between FMV and actual purchase consideration. Hence Transferee is liable to pay Income tax under the head income from other sources on the FMV.

Double Taxation on Sale of unquoted shares in India

(c) Double taxation is not treated where transferors and transferees are 2 different persons. Hence in accordance to the Supreme Court’s of India decision in the case of Shri Krishna Das vs Town Area Committee, Chirgaon (AIR 1981 SC 463) double taxation is not applicable in this situation where the transferors and transferees are not the same persons.

4. Conclusion against applicability of Section 50CA and 56(2)(x) both

(i) Constitution of India is not permitting to levy tax 2 or more time on same property, same matter, same purpose, same period, same territory, same government (Govt.) or same authority.

(ii) Constitution of India is permitting to levy tax 2 or more time where there are 2 different properties, different matter, different purpose, different period, different territory, different government (Govt.) or different authority.

(iii) It is suggested that Central Board of Direct Taxes (CBDT) should clarify through issue of necessary clarification in view of the decision of the Supreme Court of India.

(Author can be reached at email address [email protected] or on Mobile No. 9811081957)

Disclaimer :  The contents of this article are solely for informational purpose. Neither this article nor the informations as contained herein constitutes a contract or will form the basis of a contract. The material contained in this article does not constitute or substitute professional advice that may be required before acting on any matter. While every care has been taken in the preparation of this article to ensure its accuracy at the time of publication. Satish Agarwal assumes no responsibility for any error which despite all precautions may be found herein. We shall not be liable for direct, indirect or consequential damages if any arising out of or in any way connected with the use of this article or the informations as contained herein.

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