Rationalisation of the provisions of section 49 and clause (42A) of section 2 of the Act in respect of segregated portfolios
Section 49 of the Act provides for cost of acquisition for the capital asset which became the property of the assessee under certain situations. Further, clause (42A) of section 2 of the Act provides the definition of the term ‘short-term capital asset’. It also provides for determination of period of holding of the capital asset held by the assessee.
SEBI has, vide circular SEBI/HO/IMD/DF2/CIR/P/2018/160 dated December 28, 2018, permitted creation of segregated portfolio of debt and money market instruments by Mutual Fund schemes. As per the SEBI circular, all the existing unit holders in the affected scheme as on the day of the credit event shall be allotted equal number of units in the segregated portfolio as held in the main portfolio. On segregation, the unit holders come to hold same number of units in two schemes –the main scheme and segregated scheme.
In view of the above, it is proposed to amend sub-section (42A) of section 2 of the Act to provide that in the case of a capital asset, being a unit or units in a segregated portfolio, referred to in sub-section (2AG) of section 49, there shall be included the period for which the original unit or units in the main portfolio were held by the assessee.
Further, a new sub-section (2AG) is proposed to be inserted in section 49 of the Act to provide that the cost of acquisition of a unit or units in the segregated portfolio shall be the amount which bears to the cost of acquisition of a unit or units held by the assessee in the total portfolio, the same proportion as the net asset value of the asset transferred to the segregated portfolio bears to the net asset value of the total portfolio immediately before the segregation of portfolios.
It is also proposed to insert another sub-section (2AH) in the said section to provide that the cost of the acquisition of the original units held by the unit holder in the main portfolio shall be deemed to have been reduced by the amount as so arrived at under the proposed sub-section (2AG).
The Explanation below these two new sub-sections, as proposed to be inserted, provide that for the purposes of sub-sections (2AG) and (2AH), the expressions “main portfolio”, “segregated portfolio” and “total portfolio” shall have the meaning respectively assigned to them in the said circular dated 28th December, 2018 issued by SEBI.
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 3 & 25]
Extract of Relevant Clauses of Finance Bill, 2020
Clauses 3
“Clause 3 of this Bill seeks to amend section 2 of the Income-tax Act relating to definitions.
Clause(13A) of the said section defines “business trust” to mean a trust registered as an Infrastructure Investment Trust under the Securities Exchange Board of India (Infrastructure Investment Trusts) Regulation, 2014 or a Real Estate Investment Trust under the Securities Exchange Board of India (Real Estate Investment Trusts) Regulation, 2014 made under the Securities and Exchange Board of India Act, 1992, whose units are required to be listed on a recognised stock exchange in accordance with the aforesaid regulations.
It is proposed to amend the said clause so as to omit the long line relating to the requirement of listing of the business trust from recognised stock exchange in accordance with the regulations made by the Securities Exchange Board of India.
This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.
Clause (42A) of the said section defines the expression “short term capital asset” to be capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer. Further Explanation to the said clause provides for determining the period for which the capital asset is held by the assessee.
It is proposed to amend clause (i) of the said Explanation so as to insert sub-clause (hh) to provide that in the case of a capital asset, being a unit or units in a segregated portfolio, referred to in sub-section (2AG) of section 49, there shall be included the period for which the original unit or units in the main portfolio were held by the assessee.
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.”
Clauses 25
“Clause 25 of the Bill seeks to amend section 49 of the Income-tax Act relating to cost with reference to certain modes of acquisition.
The said section, inter alia, provides for cost of acquisition for the capital asset which became the property of the assessee under certain situations.
It is proposed to amend the said section so as to insert sub-sections (2AG) and (2AH) to provide that the cost of acquisition of a unit or units in the segregated portfolio shall be the amount which bears to the cost of acquisition of a unit or units held by the assessee in the total portfolio in the same proportion as the net asset value of the asset transferred to the segregated portfolio bears to the net asset value of the total portfolio immediately before the segregation of portfolios; and further to provide that the cost of the acquisition of the original units held by the unit holder in the main portfolio shall be reduced by the amount as so arrived for the units of segregated portfolio.
It is also proposed to give reference of the definitions of the expressions “main portfolio”, “segregated portfolio” and “total portfolio” as provided in the circular in this behalf issued by the Securities and Exchange Board of India under section 11 of the Securities and Exchange Board of India Act, 1992 for the purposes of the said sub-sections.
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.”
Extract of Relevant Amendment Proposed by Finance Bill, 2020
3. Amendment of section 2.
In section 2 of the Income-tax Act,––
(i) in clause (13A), with effect from the 1st day of April, 2021,––
(a) in sub-clause (ii), the word “and”occurring at the end shall be omitted;
(b) the long line shall be omitted;
(ii) in clause (42A), in Explanation 1, in clause (i), after sub-clause (hg), the following sub-clause shall be inserted, namely:––“
“(hh) in the case of a capital asset, being a unit or units in a segregated portfolio referred to in sub-section (2AG) of section 49, there shall be included the period for which the original unit or units in the main portfolio were held by the assessee;”.
25. Amendment of section 49.
In section 49 of the Income-tax Act, after sub-section (2AF), the following shall be inserted, namely:––
‘(2AG) The cost of acquisition of a unit or units in the segregated portfolio shall be the amount which bears, to the cost of acquisition of a unit or units held by the assessee in the total portfolio, the same proportion as the net asset value of the asset transferred to the segregated portfolio bears to the net asset value of the total portfolio immediately before the segregation of portfolios.
(2AH) The cost of the acquisition of the original units held by the unit holder in the main portfolio shall be deemed to have been reduced by the amount as so arrived at under sub-section (2AG).
Explanation.––For the purposes of sub-section (2AG) and sub-section (2AH), the expressions “main portfolio”, “segregated portfolio”and “total portfolio”shall have the meanings respectively assigned to them in the circular No. SEBI/HO/IMD/DF2/CIR/P/2018/160, dated the 28th December, 2018, issued by the Securities and Exchange Board of India under section 11 of the Securities and Exchange Board of India Act, 1992.’.
