After the introduction of sec 112A, it is important for the assessee to know the various provisions and rules attached in relation to his capital asset for the purpose of charging the same to tax. Though Income Tax from time to time had released various notifications and explanation in relation to capital asset specified u/s 112A, we will look further on a practical scenario which merits department's attention and explanation on the same.
First, let's have a short introduction to the new sec 112A. Until Finance Act 2018, long term capital asset on sale of equity share were exempted u/s 10(38). From 01.04.2018, any sale of asset specified u/s 112A will be liable to be taxed @10% subject to an exemption of Rs.1 lakh. In other words, only LTCG in excess of Rs. 1 lakhs will be subject to tax @10%.
Long term Capital asset covered under the above provisions are:
- Equity Share in a company (or)
- A unit of an equity-oriented fund (or)
- A unit of a business trust.
Securities Transaction Tax (STT) should have been paid on the acquisition and at the time of transfer of share in case of equity share and in case of a unit of an equity-oriented fund and unit of a business trust, it should have been paid at the time of transfer of such capital asset.
Grandfathering provision:
Since investors purchased the above shares prior to 31.01.2018 believing it is exempted u/s 10(38), grandfathering provision was given to all those investors to take the FMV as on 31.01.2018 or Cost of Acquisition (COA) whichever is higher as cost in computing the LTCG u/s 112A. However, the cost will be restricted to lower of sale proceeds or COA. Hence, incurring loss in the above case is not possible. The overall point in the introduction of the above provision is to not to tax the gain accrued to the investors till 31.01.2018 on such capital asset.
Computation of Capital Gains:
Section 70 and 74 which deals with set off and carry forward of loss in relation to capital gains. Sec 70(3) puts a restriction on set-off of Long Term Capital Loss (LTCL) against Short Term Capital Gains (STCG). However, there is no restriction as such for setting off Short Term Capital Loss (STCL). Sec 74 deals with carry forward and set off of loss under the head "Capital Gains". Losses under the above heads will be allowed to be carry forwarded for a period of 8 AY from the AY in which the loss was incurred.
Manner of Set off of loss:
We may have a scenario where there may be an STCL in a year and LTCG specified u/s 112A in the same year. Now the question is whether such exemption of Rs. 1 lakhs should first be applied and then set off the loss? or should losses first be set off and exemption of Rs.1 applied later?
Let’s take a simple example, Mr.A holds an investment in equity-oriented Mutual Fund (Short term and covered u/s 111A) and he also holds an Equity share in Company X. During the FY Mr.A incurred a loss of Rs. 50,000 on sale of equity-oriented MF and had a gain on sale of equity share from the sale of a share in company X amounting to Rs. 90,000. Now, Mr.A is caught up in the middle of sec 112A and sec 70 whether to use the exemption u/s 112A first or to use set-off of loss u/s 70. ..?
If we look at the above scenario, it is prudent for Mr.A to apply the exemption provision u/s 112A first and arrive at the gain and the arrived balance gain be netted off against STCL by virtue of u/s 70. However, from Mr. A's point of view, this may seem like the best option. He gets to claim the exemption and still have STCL carry forwarded for the next year. Though the Department has not come up with any explanation on the manner of set-off of loss u/s 70 and using of exemption provision u/s 112A, it would be wise to look at the situation based on the below-mentioned point.
“It is a usual practice to first arrive at the gain or loss under one source and then move on to the other source under the same head. Sec 112A deals with LTCG or LTCL (one source) and sec 111A deals with STCG or STCL on sale of specified short-term asset (another source under the same head). In the given case it is natural to arrive at the final solution u/s 112A ( Rs. 90,000 less exemption to the extent of Rs. 1,00,000) first and then move on to sec 111A. Based on the above analogy, the final solution u/s 112A would be Nil and there would be no gains available under 112A to be netted off against loss under the head STCL.”
Conclusion:
i) Based on the above analysis, exemption available u/s 112A should first be exhausted and then set off of loss under sec 112, sec 111A or any other STCL should be netted off to arrive at the final answer under the head Capital Gains.
ii) However, it is up to the department to come up with an explanation on the above issue.
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