The existing provisions of the section 56(2)(x) of the Income-tax Act, inter alia, provide for chargeability of income in case of receipt of money or specified property for no or inadequate consideration. For determining the amount of income for receipt of certain shares, the fair market value of the shares is taken into account. Similarly, section 50CA provides for deeming of fair market value of unquoted shares for computing the capital gains from the transfer of such shares. For both these provisions, the fair market value is determined based on the prescribed method. Currently, the provisions of section 56(2)(x) are not applicable to certain specified transactions. However, no such exemption is available under section 50CA.
Determination of fair market value based on the prescribed rules may result into genuine hardship in certain cases where the consideration for transfer of shares is approved by certain authorities and the person transferring the share has no control over such determination. In order to provide relief to such types of transactions from the applicability of sections 56(2)(x) and 50CA, it is proposed to amend these sections to empower the Board to prescribe transactions undertaken by certain class of persons to which the provisions of section 56(2)(x) and 50CA shall not be applicable.
These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.
[Clauses 19 & 21]
Extract of Clauses 19 & 21 of Finance Bill 2019
19. Amendment of section 50CA.
In section 50CA of the Income-tax Act, before the Explanation, the following proviso shall be inserted with effect from the 1st day of April, 2020, namely:—
“Provided that the provisions of this section shall not apply to any consideration received or accruing as a result of transfer by such class of persons and subject to such conditions as may be prescribed.”.
21. Amendment of section 56.
In section 56 of the Income-tax Act, in sub-section (2),––
(i) in clause (viib), with effect from the 1st day of April, 2020,—
(a) in the proviso, in clause (i), for the words “venture capital fund”, the words “venture capital fund or a specified fund” shall be substituted;
(b) after the proviso, the following proviso shall be inserted, namely:—
“Provided further that where the provisions of this clause have not been applied to a company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the 5 first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the face value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place.”;
(c) in the Explanation, after clause (a), the following clauses shall be inserted, namely:—
‘(aa) “specified fund” means a fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012 made under the Securities and Exchange Board of India Act, 1992;
(ab) “trust” means a trust established under the Indian Trusts Act, 1882 or under any other law for the time being in force;’;
(ii) in clause (viii), for the words, brackets, letters and figures “clause (b) of section 145A”, the words, brackets, figures and letter “sub-section (1) of section 145B” shall be substituted and shall be deemed to have been substituted with effect from the 1st day of April, 2017;
(iii) in clause (x),––
(A) in sub-clause (b), in the second proviso, for the words “bank account”, the words “bank account or through such other electronic mode as may be prescribed” shall be substituted with effect from the 1st day of April, 2020;
(B) in the proviso, after clause (X), the following clause shall be inserted with effect from the 1st day of April, 2020, namely:—
“(XI) from such class of persons and subject to such conditions, as may be prescribed.”.
Note on Clauses 19 & 21 of Finance Bill 2019
Clause 19 of the Bill seeks to amend section 50CA of the Income-tax Act relating to special provision for full value of consideration for transfer of share other than quoted share.
The said section, inter alia, provides that where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being share of a company other than a quoted share, is less than the fair market value of such share determined in such manner as may be prescribed, the value so determined shall, for the purposes of computing capital gains, be deemed to be the full value of consideration received or accruing as a result of such transfer.
It is proposed to amend the said section so as to provide that the provisions of the said section shall not apply to any consideration received or accruing as a result of transfer by such class of persons and subject to such conditions as may be prescribed.
This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.
Clause 21 of the Bill seeks to amend section 56 of the Income-tax Act relating to income from other sources.
Clause (viib) of sub-section (2) of the said section provides that where a company, not being a company in which the public are substantially interested, receives in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall not be charged to tax, if the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund or by a company from a class or classes of persons as may be notified by the Central Government in this behalf.
It is proposed to amend the said clause so as to provide that where a company, not being a company in which the public are substantially interested, receives in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall not be charged to tax, if the consideration for issue of shares is received by a venture capital undertaking from a specified fund.
It is further proposed to define the expression “specified fund”.
It is also proposed to insert a second proviso to the said clause so as to provide that where the provisions of the said clause have not been applied to a company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the first proviso and the company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the face value of such shares shall be deemed to be the income of the company chargeable to income-tax for the previous year in which such failure has taken place.
These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.
Clause (viii) of sub-section (2) of the said section provides that income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A shall be chargeable to tax.
It is proposed to amend the said clause so as to substitute the reference of clause (b) of section 145A with the reference of sub-section (1) of section 145B therein.
This amendment will take effect retrospectively from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-2018 and subsequent assessment years.
The second proviso to the sub-clause (b) of clause (x) of sub-section (2) of the said section specifies that the first proviso shall apply only in a case where the amount of consideration or a part thereof has been received by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account on or before the date of agreement for transfer of the asset.
It is proposed to amend the said second proviso so as to empower the Board to make rules to provide that the first proviso shall also apply in respect of those cases where the amount of consideration or part thereof has been received by way of any other electronic mode as may be prescribed.
The proviso to the said clause (x) provides that where any person receives, in any previous year, from any person or persons any property without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property or consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, then the aggregate fair market value of such property as exceeds such consideration shall be the income of the person receiving such property.
It is proposed to insert a new clause (XI) in the proviso to the said clause (x) so as to provide that any sum of money or any property received from such class of persons and subject to such conditions, as may be provided by rules shall not be the income of such persons.
These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.
