New section proposed by Finance Bill 2012
Finance Bill 2012 proposes to insert a new section 54GB so as to provide a relief from long term capital gains tax to an individual or an Hindu Undivided Family (HUF) on sale of a residential property (house or plot of land) in case where the assessee re-invests the sale consideration in the equity of a Small Enterprise (as per the Micro, Small and Medium Enterprises Act, 2006) which is utilized by the company for the purchase of new plant and machinery.
• The investment in the new asset shall be made by the company within one year from the date of subscription in the equity shares.
• If the amount of net consideration subscribed as equity shares in the company is not utilized by the company for the purchase of new asset before the due date of filing of return by the individual or HUF, the unutilized amount shall be deposited under a deposit scheme to be prescribed in this behalf.
• If the equity shares of the company or the new asset acquired by the company are sold within a period of five years from the date of their acquisition, the amount of capital gain exempted earlier shall be deemed to be the income of the assessee chargeable under the head "capital gains" of the previous year in which such equity shares or such new asset are sold or otherwise transferred.
This relief is proposed to be made available to any transfer of residential property made on or after 1 April 2012 but before 31 March 2017. Hence, the relief is introduced with a sunset clause in place.
For the purposes of the section, the proposed important definitions are as follows:
"Eligible company" for fresh investment – It means a company
a. incorporated in India from the beginning of the previous year relevant to the assessment year in which the capital gains arise to the due date of furnishing of return of income by the assessee;
b. engaged in the business of manufacture of an article or a thing;
c. in which the assessee has more than 50% share capital or more than 50% voting rights after the subscription in shares by the assessee; and
d. which qualifies to be a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006;
"New Asset" for investment – It means a new plant or machinery but does not include:
a. any machinery or plant which, was used either within or outside India by any other person;
b. any machinery or plant installed in any office premises or any residential accommodation(including a guest-house);
c. any office appliances (including computers or computer software);
d. any vehicle; or
e. any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any previous year.
Impact of the new section/ Our comment
This section has been introduced to incentivize investment in the Small and Medium Enterprises (SME) in the manufacturing sector. The Government had announced National Manufacturing Policy (NMP) in 2011, where one of its prime objectives is development of SME's.
As per the proposed section the investee SME has to be a newly incorporated company. Hence this provision encourages individuals having real estate assets to monetize the same and foray into SME business.
Finance Bill 2012 proposes to insert a new section 54GB so as to provide a relief from long term capital gains tax to an individual or an Hindu Undivided Family (HUF) on sale of a residential property (house or plot of land) in case where the assessee re-invests the sale consideration in the equity of a Small Enterprise (as per the Micro, Small and Medium Enterprises Act, 2006) which is utilized by the company for the purchase of new plant and machinery.
• The investment in the new asset shall be made by the company within one year from the date of subscription in the equity shares.
• If the amount of net consideration subscribed as equity shares in the company is not utilized by the company for the purchase of new asset before the due date of filing of return by the individual or HUF, the unutilized amount shall be deposited under a deposit scheme to be prescribed in this behalf.
• If the equity shares of the company or the new asset acquired by the company are sold within a period of five years from the date of their acquisition, the amount of capital gain exempted earlier shall be deemed to be the income of the assessee chargeable under the head "capital gains" of the previous year in which such equity shares or such new asset are sold or otherwise transferred.
This relief is proposed to be made available to any transfer of residential property made on or after 1 April 2012 but before 31 March 2017. Hence, the relief is introduced with a sunset clause in place.
For the purposes of the section, the proposed important definitions are as follows:
"Eligible company" for fresh investment – It means a company
a. incorporated in India from the beginning of the previous year relevant to the assessment year in which the capital gains arise to the due date of furnishing of return of income by the assessee;
b. engaged in the business of manufacture of an article or a thing;
c. in which the assessee has more than 50% share capital or more than 50% voting rights after the subscription in shares by the assessee; and
d. which qualifies to be a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006;
"New Asset" for investment – It means a new plant or machinery but does not include:
a. any machinery or plant which, was used either within or outside India by any other person;
b. any machinery or plant installed in any office premises or any residential accommodation(including a guest-house);
c. any office appliances (including computers or computer software);
d. any vehicle; or
e. any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any previous year.
Impact of the new section/ Our comment
This section has been introduced to incentivize investment in the Small and Medium Enterprises (SME) in the manufacturing sector. The Government had announced National Manufacturing Policy (NMP) in 2011, where one of its prime objectives is development of SME's.
As per the proposed section the investee SME has to be a newly incorporated company. Hence this provision encourages individuals having real estate assets to monetize the same and foray into SME business.
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