Shares of Delisted Companies: Can I get the benefit of loss?
I am holding about 10-12 company’s shares from 7-8 years out of which some of the company’s names have disappeared from BSE and NSE platforms and some are showing delisted. Hence the trading of these shares is halted from long time and consequently I could not sell these shares. You are requested to guide me whether “Can I adjust these total losses incurred on these disappeared and delisted shares against Long-Term Capital Gain made from other shares?” Is there any guideline on such loss adjustment from the Income Tax Authority or CBDT? [firstname.lastname@example.org]
Thanks for your query. With an increasing number of investors in the share market, various other taxpayers might be having the same query since various shares got delisted in the last couple of years. There are many investors who have suffered losses on account of delisting. The question arises as to whether the amount invested in such a case can be claimed as Loss in the Income Tax Return?
One may note that the transactions in shares could either be categorized as either Business activity or Investment activity depending upon the intention, volume, nature, holding period & frequency of trading etc. If the transaction is in the nature of Business then the income would be taxable under the head “Income from Business & Profession” whereas it would be taxable as “Income from Capital Gain” if it is in the nature of investment. The computation mechanism is different for each head of income. In case of computation of income under the head Business Income, Taxpayers may opt for the mode of valuation of closing stock as lower of cost or net realizable value. As a result of this, shares which got delisted or where shares could not be sold, taxpayers can value such shares at zero amount or nominal amount thereby directly availing the benefit of loss on such shares. Majority of the investors treat income from shares transactions as capital gain income & the mode of computation as mentioned above is not there while working out income under the head “Capital Gain”. Let us know about the tax implications for delisted shares if the income is taxable as “Income from Capital Gain”:
- As per the income tax laws, one can earn capital gain income or can incur capital loss only when the capital asset is “Transferred”.
- Just because the shares got delisted or not tradable on the stock exchanges and their value has become zero, does not mean that the taxpayers can claim your losses in respect of such shares in the ITR. Unless and until there is a “Transfer” of shares, profit or loss cannot arise. “Transfer” is the primary condition for recognizing any income under the head “Capital Gain”.
- The shares may be delisted for a variety of reasons and just the incident of delisting does not result in a loss as long as the shares may be lying in the demat account (or held physically). If the shares are delisted from the stock exchanges, the event of delisting does not come within the wider definition of “Transfer” under the income tax laws. Though the shares are not traded on the stock exchanges after delisting, they may continue to be held by the taxpayers.
In short, ‘Capital Gains/Loss’ arises only when there is transfer of the capital asset. The gains are taxable and the losses incurred on transfer of capital assets can be set off against other capital gains.
- The definition of “Transfer” under the Income Tax Act is very wide and includes not only sale, exchange, relinquishment but also extinguishment of the asset. Delisting may not amount to extinguishment of the rights in the shares and so it may not be considered as “Transfer”.
However, if one of the reasons for delisting is pursuant to the resolution plan under Insolvency and Bankruptcy Code (IBC) approved by the National Company Law Tribunal (NCLT) then the first to suffer are the equity shareholders who often get nothing. If under the resolution plan, NCLT orders extinguishment of the share capital of the company partly or fully then such extinguishment amount to transfer under the Income Tax Act. In such a case, taxpayers can also claim loss due to extinguishment of capital assets.
- If there is no extinguishment of rights in shares then investors cannot claim the benefit of loss on delisting of shares. However, there may be one way to claim the losses on shares which are delisted and still lying in the demat account. Investors can transfer these shares from the demat account through off-market transactions for a very nominal price to any other person who may be a friend, associate or relative. By transferring the shares at a nominal price, investors can claim the deduction towards the investment against such nominal sale consideration. In such a case, the capital gain could be recognized as long term only if the holding period of shares sold is 24 months or more.However, the above mechanism is subject to a reservation. Section 50CA of the Income Tax Act provides that where the consideration received or accruing as a result of the transfer of unquoted share is less than its fair market value (FMV) then the capital gain income is required to be computed by taking the FMV. The mode of calculation of FMV is prescribed by the CBDT and the same may not be easily accessible to the taxpayers in majority of cases of delisting. Similar transaction is subject to tax in the hands of the buyer as well [U/s 56(2)(x)] if the shares are purchased below its FMV.To this extent, the transaction of transferring the shares at nominal price as suggested above would be subject to tax litigation & disputes. It would be better if CBDT provides specific immunity from Section 50CA [under Rule 11 UAD] for such categories of companies wherein the FMV may not be accessible to the general investor.
Above tax implication is specifically for the shares of companies which got delisted. There are other situations like non tradability of the shares in the stock exchange, Suspension of trading by BSE/NSE/SEBI due to non-payment of annual Listing Fee or various other reasons, Buy back of shares by the company before delisting, etc. We can discuss the tax implication in the next issue of The Tax Talk.
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