Sec 48 v/s sec 56(2)(viic)

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Querist : Anonymous

Querist : Anonymous (Querist)

03 March 2014 Sec 56(2)(viic)taxes an individual on the shares purchased by him if the FMV is higher then the consideration he is paying.

So my query here is,
when in future an individual sells the same shares he will be liable for Capital Gains Tax.If we assume the Asset(Shares)to be a long term asset and the computation for the same is done under Sec 48,the Cost of Acquisition would be the price he paid for purchase of such shares.

Isn't it unfair to first pay tax u/s 56(2)(viic) because the consideration paid by the individual is less than the FMV and again on selling such shares the benefit of COA will just be the purchase price paid.

For eg:
FMV Rs 50
Consideration paid Rs 10
So tax U/s 56(2)(viic)=50-10=40*30%=Rs 12
Again when the individual sells the shares-
Selling price Rs 100.
So the computation U/s 48 will be as under
Full value of Consideration:100
Less:Cost of Acquisition: (10)
Taxable Income: 90
Tax-90*20%=Rs 18
So the individual ended up paying Rs 12+18=Rs 30 as Tax.

CA Siddhartha Bhardwaj

CA Siddhartha Bhardwaj (Expert)
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03 March 2014 You are correct. In this case, there is DOUBLE TAXATION.

However, it is valid in law. This has been specifically provided to curb tax avoidance.

Querist : Anonymous

Querist : Anonymous (Querist)

04 March 2014 But the law makers would have suitably amended Sec 48. This would lead to discouragement among the genuine tax payers....!

CA Siddhartha Bhardwaj

CA Siddhartha Bhardwaj (Expert)
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04 March 2014 The provisions were brought in because people were entering into such transactions to avoid tax.

What genuine reason can be there for purchasing a share for LESS than its FMV??

Querist : Anonymous

Querist : Anonymous (Querist)

04 March 2014 I have understood why such provisions were introduced.
Regarding genuiness of such transactions -
Firstly FMV is calculated as per Rule 11U & 11UA of Income Tax Act.
Company might have done other calculations for deciding the issue price of the shares.That will obviously be different from the calculations under Rule 11U & 11UA.And it is quite possible that the issue price of the shares is lower than the FMV so derived from the prescribed rules.
So in future if the shareholder is selling the shares it will lead to Double Taxation as we have agreed above.
Hence the transaction was genuine still the taxpayer is paying more tax due to no amendments in Capital Gains Tax Laws.
&
Thank you for your help.....!

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