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
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 –
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:
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.
It is suggested that: