Loss on sale of long term equity shares – an analysis
VINAY V. KAWDIA
Introduction:
As per S. 10(38) of the Income Tax Act, any income arising from the transfer of listed long tern equity share in a company / unit of an equity oriented fund / unit of a business trust shall be exempt from tax if such sale transaction is chargeable to securities transaction tax.
Amendment by F.A. 2017- w.e.f. A.Y. 18-19:
Section 10(38) has been amended w.e.f. A.Y. 18-19 to provide that exemption under this section for income arising on transfer of long term equity shares/units etc. acquired or on after 01-10-2004 shall be available only if the transaction of acquisition of shares/units is chargeable to STT.
[Relief Notification: Class of acquisition transactions which are not chargeable to STT and to which the section applies has been notified by Not. No. 43/2017 dt. 05.06.17]
However, nothing contained in S. 10(38) shall apply to any income arising from the transfer of long-term equity share in a company / unit of an equity oriented fund / unit of a business trust, made on or after 01.04.18.
Further amendments by F.A. 2018 –w.e.f. A.Y. 19-20 [S. 55(2)(ac) r.w.s. 112A]
(a) The proposed new tax regime of S. 112A r.w.s. 55(2)(ac) shall apply to transfer made on or after 01.04.18.
(b) The COA of long term capital asset being equity shares/units of equity oriented fund/unit of business trust acquired on or before 31.01.18 will be the actual cost or fair market value of such shares as on 31.01.2018, whichever is higher.
(c) Further, if the full value of consideration on transfer is less than the fair market value, then such full value of consideration or the actual cost, whichever is higher, will be deemed to be the cost of acquisition.
(d) In case of a listed equity share or unit, the fair market value means the highest price of such share or unit quoted on a recognized stock exchange on 31st of January, 2018.
(e) Therefore, the transfer made between 1st February, 2018 and 31st March, 2018 will be eligible for exemption under existing provisions of S. 10(38).
(f) As per new S. 112A the LTCG exceeding Rs. 1 Lakh arising from transfer of these shares/units made on after 01.04.18 will be taxed at 10 per cent. However, there will be no tax on gains accrued upto 31st January, 2018 as discussed above.
Example: A listed Long Term equity share was acquired at Rs. 100 in past. It’s FMV is Rs. 200 on 31.01.18 and it is sold on or after 1st of April, 2018:
| Actual Cost | FMV on 31.01.18 | Sale consideration | COA – S. 55(2)(ac) | LTCG/LTCL |
| 100 | 200 | 150 | 150 | 0 |
| 100 | 200 | 250 | 200 | 50 |
| 100 | 200 | 75 | 100 | -25 |
S. 112A and set off – C/F of Long Term Capital Loss [LTCL] from listed equity shares-w.e.f. A.Y. 19-20:
-Whether LTCL from sale of listed equity shares/units can be set off / carried forward & setoff from other LTCG post introduction of S. 112A? If yes, to what extent?
Pre S. 112A scenario:
(1) A section 70 and 71 elaborates the mechanism for set off of capital gain. Nowhere, any exception has been carved out with regard to long-term capital gain arising on sale of listed equity shares.
(2) The whole genre of income under the head ‘capital gain’ on transfer of shares is a source, which is taxable under the Act.
(3) If the entire source is exempt or is considered as not to be included while computing the total income, then in such a case, the profit or loss resulting from such a source do not enter into the computation at all.
(4) However, if a part of the source is exempt by virtue of particular ‘provision’ of the Act (s. 10[38] in instant case) for providing benefit to the assessee, then it cannot be held that the entire source will not enter into computation of total income.
(5) The concept of income includes loss will apply only when the entire source is exempt and not in the cases where only one particular stream of income falling within a source is falling within exempt provisions.
(6) Accordingly, long-term capital loss on sale of shares would be allowed to be set off against long-term capital gain on sale of land in accordance with section 70(3).
[Ref: Raptakos Brett & Co. vs. DCIT (2015) (58 taxmann.com 115 (Mumbai) (ITA No. 357/2016 (Bombay HC) – Revenue appeal dismissed by High Court on 09.08.18)]
Therefore, even in the earlier S. 10(38) tax regime, long term loss from sale of listed equity shares/units was allowed to be set off / carry forward and set off from other long term capital gain, if any.
[Contrary judgement in Kishorbhai Virani vs. ACIT [2015] 55 taxmann.com 91 (Gujrat) was declared to be having no precedence value in Raptakos Brett & Co. case (supra)]
Conclusion
Therefore, even though as per new S. 112A the LTCG only exceeding Rs. 1 Lakh arising from transfer of eligible shares/units will be taxed at 10 per cent, long term loss from sale of such shares/units will be allowed to be set off / carry forward and set off from other taxable long term capital gain up to eight assessment years, without any threshold restriction. In other words, entire loss (and not only the loss in excess of Rs. 1 Lacs) is eligible for set off/ carry forward & set off.
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