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Section-50CA under the Income-tax Act

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Section 50CA deals with the special provision inserted by the finance act regarding the total value of the consideration to be taken during the transfer of a share other than a quoted share.

Nature of transaction covered

Section 50CA provides that according to Section 48 of the Income Tax Act, consideration for the transfer of shares of a business organization (other than quoted shares*) shall be deemed to be the total consideration for the motive of computing income under the head of capital gains where the consideration is less than the Fair Market Value (FMV) of these shares as determined by the prescribed method. 

Note: The transaction should not be a transaction specified under section 47.

Applicability of the section

  • The section applies to all assessees, including non-resident assessees.
  • Provison inserted by finance act 2019.
  • Provided that the provisions of this section shall not apply to any consideration received/accrued due to transfer by such class of persons and subject to such conditions as may be prescribed. (Rule 11UAD explained below)
Securities involved The section applies to all shares, whether equity or preference. However, the area does not cover convertible debentures.
Nature of holding of security The section applies only if the shares are held as capital assets and not stock-in-trade.

*As per explanation added to section 50CA, “quoted share” means the share price will be quoted regularly on any recognized stock exchange from time to time. Quotes for such shares are based on current transactions that occur in the ordinary course of business. 

Rule 11UAD – prescribed class of persons for section 50CA
Section 50CA of the act does not apply to the transfer of unquoted shares of a firm and its subsidiary and the subsidiary of such subsidiary by an assessee, provided the following conditions are met:

  • Following an application made by the central government under section 241 of the companies act, 2013, the tribunal has suspended the board of directors and appointed new directors who have been nominated by the central government; and
  • In such a case, shares of the company and its subsidiaries, as well as the subsidiaries of its subsidiaries, have been transferred pursuant to a resolution plan approved by the tribunal under section 242 of the Companies Act, 2013 after the jurisdictional principal commissioner or commissioner was given a reasonable opportunity to be heard.

Problem of double taxation in this transaction
In the event that the sale consideration is less than FMV, the transferor will be taxed under section 50CA as he has not declared true consideration. Meanwhile, the transferee will be taxed under section 56(2) (x) due to understating the purchase consideration. Hence there is double taxation.

For Example, Mr A transfers to Mr B unquoted equity shares on 01.01.2022 for Rs 200,000. The FMV of these shares is Rs 500,000. Mr A had purchased these shares for Rs 150,000.

  • Now as per section 50CA, the capital gains in hands of Mr A shall be:
    Sale Price (FMV as per Section 50CA)                      Rs 500,000
    Cost of Acquisition (COA)                                          Rs 150,000
    Capital Gains                                                               Rs 350,000 (*FMV – COA)            
  • In the hands of Mr B
    Section 56(2)(x) shall be attracted, and Rs 300,000 shall be taxed as income from other sources in the hands of Mr B  according to Section 49(4), Mr B’s acquisition cost shall be Rs 500,000.
  • In case Mr B is a relative of Mr A as defined under the act
    • The section applies irrespective of who the transferee is. Thus, the provision applies to transfers between relatives. Hence, if “A” transfers shares to B, his son, then unless the transaction is at a prescribed fair market value, A would be liable to tax on it as per section 50CA.
    • At the same time, section 56(2) (x) exempts a transaction where the purchase is made from a relative. Hence, B would not be subjected to tax. Therefore, Mr B being relative, shall not be subject to section 56(2) (x) in the above case. However, Mr A shall pay capital gains tax on Rs 350,000.

Applicability of Section 112A
Section 112A does not provide that for applicability of section 112A, the shares should be regularly traded. Therefore, even if the share is not regularly changed, the capital gains are taxed per section 112A. The sale price of the shares shall be the FMV as per section 50CA, and capital gains shall be taxed under section 112A subject to fulfilment of conditions of section 112A.

At AJSH, we assist our clients in setting up their business in India and ensuring they comply with all statutory requirements like accounting, bookkeeping, tax filings & assessments  payroll, auditing, trademark registration, business structuring etc, in a timely manner. If you have any questions or wish to know about Section 50CA, kindly contact us.

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