Section 50CA & 56(2)(x)(c) :Amendment needed in view of double taxation

Section 50CA and section 56(2)(x)(c) – Fair Market Value to be full value of consideration in case of transfer of unquoted shares – Amendment required in view of double taxation in the hands of seller as well as buyer

Issue/Justification

The Finance Act 2017 inserted a new section 50CA to provide that in case of transfer of shares of a company other than quoted shares, the fair market value of such shares determined in the prescribed manner shall be deemed to be the full value of consideration for the purpose of computing income chargeable to tax as capital gains.

Further, Explanation to the said section states that “quoted share” means the share quoted on any recognised stock exchange with regularity from time to time, where the quotation of such share is based on current transaction made in the ordinary course of business.

The Finance Act 2017 inserted new clause (x) in sub-section (2) of section 56 so as to provide that where any person receives immovable property without consideration and its stamp duty value exceeds Rs.50,000, the same would be subject to tax.

Likewise, if any person receives immovable property for inadequate consideration, and the difference between the stamp duty value and actual consideration exceeds Rs.50,000, the difference would be subject to tax in the hands of the recipient under the head “Income from other sources”. Clause (x)(c) provides that where any person receives any property other than immovable 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 shall be chargeable to tax as ‘income from other sources’.
• For a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration shall be chargeable to tax as ‘income from other sources’.
• In light of the aforesaid provision, there will be a double taxation of the same income on deeming basis as explained in the example below:

Example:

For example,’ X’ transfers his unquoted shares purchased at a cost of Rs.8 lakhs to ‘Y’ at Rs. 10 lakhs whereas the Fair Market Value of the shares as determined in the prescribed manner is Rs. 1 crore. Then in this situation, the provisions of Section 50CA would be attracted in the hands of the seller, whose full value of consideration for computation of capital gains would be Rs.1 crore. Further, ‘Y’ who is purchaser would be liable to tax under section 56(2)(x)(c) on Rs. 90 lakhs (i.e. Rs. 1 crore less Rs. 10 lakhs) as income from other sources.

Hence, the difference of Rs. 90 lakhs between the fair market value and the actual consideration will be taxable:

• under section 50CA, in the hands of seller; and
• under section 56(2)(x), in the hands of recipient.

Further, even though the recipient, at the time of sale of such shares at a later date would treat the FMV as the Cost of Acquisition, tax has been collected upfront and at times it may happen that the person may not sell shares at a later date.

Suggestion

It is suggested that:

• Keeping in mind the consequential double taxation arising on account of the same income being subject to tax both in the hands of seller and recipient, suitable amendment may be made to prevent unjust enrichment of the revenue.
• The definition of quoted shares is very subjective and complicated. In actual practice, it may involve problems of interpretation, which would invite unending litigation. It is, therefore, suggested that this section should be made applicable to transfer of shares of a company in which the public is not substantially interested.

Source-  ICAI Pre-Budget Memorandum–2018 (Direct Taxes and International Tax)