Why an amendment is proposed in Section 49 of the Income-tax Act in the Budget 2018?

1. Introduction

The Finance Bill 2018 through clause 18 proposes to amend section 49 of the Income-tax Act (the Act) so as to provide that where the capital gain arises from the transfer of a capital asset, referred to in clause (via) of section 28, the cost of acquisition of such asset shall be deemed to be the fair market value which has been taken into account for the purposes of the said clause.

The following amendments which have a bearing on the proposed amendment to section 49 are pertinent-

 (i)  clause (42A), in Explanation 1, in clause (i), after sub-clause (b), the following sub-clause shall be inserted, namely:––

"(ba) in the case of a capital asset referred to in clause (via) of section 28, the period shall be reckoned from the date of its conversion or treatment;".

(ii)  section 2(24) of the Act by way of insertion of clause (xii)(a) to include the fair market value of inventory referred to in clause (via) of section 28;"

(iii) section 28 of the Act- by way of insertion-(via) the fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the prescribed manner;"

It is to be stated that section 28 of the Act deals with income which are chargeable to income-tax under the head "Profits and gains of business or profession"

2. Why were these amendments thought of?

The Calcutta High Court in the case of Deeplok Financial Services Ltd. v. CIT [2017] 80 taxmann.com 51 (Calcutta)(decided on 4th April, 2017) after analysing the issue in the background of facts obtaining in the case, held that where assessee converts its stock-in-trade of shares into investments and sells the same at a later stage, profit arising from sale of such shares shall be deemed to be capital gains and not business income. It was held that as the shares were held as long-term capital asset, profit arising from sale of shares would be exempt from tax under section 10(38) of the Income-tax Act.

The assessee thus, by sheer tax planning, and by virtue of the provisions of Income-tax Act lucidly explained by the Calcutta High Court was able to escape from the rigours of taxation.

In order to overcome this decision the above stated amendments have been proposed in the Finance Bill 2018.

Moreover third proviso to clause 38 of section 10 is proposed to be inserted in the following words-

"Provided also that nothing contained in this clause shall apply to any income arising from the transfer of long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust, made on or after the 1st day of April, 2018."

It is to be stated that section 10 of the Act enumerates incomes which are not to be included in total income.

All these provisions shall be applicable from the assessment year 2019-20.

It is further to be noted that the Finance Minister who has presented the last Budget today before next elections while introducing the first Budget 2014 promised that there would be no retrospective amendments to the Act but no promise was given that Courts' rulings would not be nullified by way of suitable amendments through Finance Bill(s).