Budget 2018-19: Centre must resolve double taxation issue

The Income-tax Act, 1961 (Act) contains various specific anti-abuse provisions, apart from the General Anti-Avoidance Rule, to neutralise the unintended tax leakage resulting from misuse of provisions of the Act by taxpayers. The Finance Act, 2017 expanded the list of such anti-abuse provisions by insertion of a new section 50CA as well as by replacing clauses (vii) and (viia) of section 56(2) with a broader clause (x).

As per section 50CA, if the consideration for transfer of unquoted share of a company is less than its fair market value (FMV) to be determined in the prescribed manner, the FMV shall be deemed to be the full value of consideration for the purpose of computation of capital gains in the hands of the transferor. In other words, the excess of FMV over consideration is taxed in the hands of the transferor. On the other hand, the said excess of FMV over the consideration (if more than Rs 50,000) is also taxed in the hands of purchaser under clause (x) of section 56(2) on the ground that the share is purchased for inadequate consideration, provided the receipt of share does not fall under any of the exceptions.

As is evident, in case of transfer of shares at less than FMV, the difference between the FMV and the consideration may be taxed twice - firstly in the hands of the transferor under the deeming provisions of section 50CA and secondly in the hands of purchaser under section 56(2)(x).

It may be worthwhile to note that the courts, on various occasions, have approved the principle that the deeming fiction should be taken to its logical conclusion. Relying on the said principle, it could be argued that the FMV treated as the full value of consideration as per the provisions of section 50CA, should also be treated as consideration for the purpose of section 56(2)(x) and therefore, no amount should be taxed in the hands of the purchaser under section 56(2)(x). However, section 50CA categorically states that the deeming fiction is created only for the purpose of section 48. Therefore, the said view could be litigious.

While anti-abuse provisions are certainly welcome, they should not result in double taxation which is against the basic principles of any tax law. The upcoming Budget should bring about necessary amendments to avoid such double taxation which may arise from simultaneous application of section 50CA and section 56(2)(x). Further, it would also be helpful if certain exceptions are provided for section 50CA in line with those provided for section 56(2)(x) so that, in eligible cases, the benefit is given to both, the transferor and the purchaser.

Lakshit Desai is a director and Nikhil Merchant is a deputy manager with Deloitte Haskins and Sells LLP