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1. The Finance Bill 2017 (Herein after referred to as "The Bill" or "Bill") was introduced in the Lok Sabha on 1st February 2017. Overall, there are 87 clauses in the Direct Tax Portion of the Bill. Clause 6(e) of the Bill proposes to amend Sec 10(38) to provide additional condition to claim on account of sale of specified Long Term Capital Asset (LTCA). Apparently, it seems that the Government is willing to remedy the defect in the existing Law. Amendment u/sec. 271(1) (c) by the Finance Act 2015 is another example of application of Mischief Rule.
2. The article analyzes the following aspect:-
2.1 For Income to be exempt under 10(38) under Income Tax Act 1961, following conditions should be fulfilled:-
For the above transaction and income from Transaction to qualify as exempt, the above conditions have to be satisfied cumulatively.
Table capturing various scenarios - Taxability of Income from Transfer of Specified LTCA on or after 01.10.2004.
Mischief-Law envisages to remedy. Is this a mischief at all?
2.2 In a recently decided case law involving Mridu Hari Dalmia Parivar Trust1 v. Assessing Officer, Delhi ITAT concluded that by the virtue of transferring shares, held as LTCA through off Market transactions and incurring loss, assessee has endeavored to plan his taxes rather than avoid it and, hence, such genuine loss cannot be disallowed.
Let us consider the facts of the case law to further understand the Tax Planning modus operandi.
2.2.1 Few Important observations from case law
During the year 2013-14, B makes a Long-Term capital Gain under Sec 10(38) of the Act and pays Nil Tax, since Income is exempt.
The amendment to the Bill envisages to remedy the above mischief. Whether the above transaction would be Mischief is a matter of fact and would depend upon the intentions of the party.
Market Concepts of Block Deal
2.3 Other than normal trading on the Stock Exchange, there are concepts like Block Deal which an Investor can opt for. STT is payable on Block Deal. Hence, if other conditions as mentioned under Sec 10(38) are fulfilled, transfer of shares via Block Deal are eligible for exemption under Sec 10(38).
2.3.1 It is a single transaction, of a minimum quantity of five lakh shares or a minimum value of Rs 5 crore, between two parties which are mostly institutional players. The transaction happens through a separate trading window.
2.3.2 Salient features of the Block Deal
Under the Block Deal Concept two Parties can agree upon a price subject to SEBI rules and execute a transaction wherein all conditions under section 10(38) are fulfilled.
2.4 Proposed Amendment u/Sec 10(38)
The Finance Bill 2017 proposes to amend sec.10 (38) to provide that a transfer of share otherwise exempt under Sec 10(38) would not be exempt if the acquisition of such share was executed without payment of STT.
The amendment has been brought about to remedy the mischief of transfer of shares at a loss, while the Share is trading at a lower Price.
2.4.1 Likely implications of the Amendment and expectations
22.214.171.124 The Amendment is Retrospective in nature.
The Assessees who have purchased the transaction off the market would now not be eligible to avail of the exemption under Sec 10(38).
The NDA Government had promised that it shall not introduce any retrospective amendment. The above amendment is a contradiction to above promise.
The amendment would further lower/reduce the liquidity of Stock
126.96.36.199 The shareholders who held illiquid stock could get rid of their stocks by selling the same off the market, but the new amendment would further reduce the liquidity of such stock, since the amendment would create an uncertainty as to whether the stock could have any future investor/Buyer.
The amendment is subject to acquisitions notified by the Government
188.8.131.52 There are certain genuine transactions wherein STT is attracted, for example:
It should be appreciated that the above kind of funding supports 'Make in India Campaign' and has been major source of funding for New Business/Startups.
It is expected that the Government would notify the above genuine transaction.
The amendment is a contradiction to Promise of Ease of Doing Business
Acquisitions at Fair Market Value should also be Notified
184.108.40.206 Considering the fact that transactions at fair market value are genuine in nature, the same should form part of Notified Transactions.
 68 taxmann.com 376/158 ITD 521 (Delhi - Trib.)
2. chapter VI of Income Tax Act 1961 i.e. Aggregation of Income and set off or carry forward of Loss
3. Source: - Economictimes.Indiatimes.com/definition/block-deal