Budget 2017- Capital gains

Budget 2017- Capital gains:

Cut-off date for option to take fair market value as on 01.04.2001 – FMV as on 01.04.2011 would be better.

Option to consider fair market value – general discussion:

The subject matter is very well known and a popular provision. A person who has sold a long-term capital asset which was acquired before cut-off date has an option to substitute fair market value of such asset as on cut-off date and then apply applicable cost inflation index applicable to year of cut-off date and year of transfer of capital asset.

When fair market value is opted, then cost of improvement incurred only after such date is allowed with benefit of indexation. 

Option in for assessee:

Option to take fair market value is obviously adopted when fair market value is higher than the actual cost and cost of improvement till the cut-off date. If fair market value is lower than actual total cost, then actual total cost is adopted for computation of allowable total indexed cost. This situation may not be applicable in case of laded properties, however, in case of many assets like shares actual cost may be higher than fair market value as on cut –off date. So one should be careful while deciding whether to opt for fair market value or not.

Furthermore, for each capital asset, acquired before cut-off date, assessee has option separately for each capital asset or lot of each capital asset, so care shuld be taken to compare actual cost of acquisition and fair market value for each capital asset according to date of acquisition cost of acquisition, indexed cost of acquisition vis a vis indexed fair market value.

Cut- off dates:

In past cut-off dates for these purpose have been 01.04.1954 ,01.04.1964, 01.04.1974 and then 01.04.1981. Now in Finance Bill 2017 it is proposed to substitute such date to 01.04.2001.

The earlier amendment was made vide Finance Act, 1992 w.e.f.01.04.1993 when cut-off date was revised from 01.04.1974 to 01.04.1981.

We find time lag between cut-off dates of 10 years for three dates and then seven years. Whereas last amendment was made to provide cut-off date (01.04.1981) which was 12 years back from the initial revised assessment year 1993-94.

Now date is proposed to be revised to 01.04.2001 that is having long twenty years gap. The first assessment year will be 2018-19 therefore the time gap in initial year and cut-off date is of eighteen years.

Though amendment is very late, but when it is being made, practical and liberal approach could have been adopted by the Finance Minister and cut-off date could have been revised to 01.04.2011 instead of 01.04.2001.

Proposed amendment in this regard are reproduced with highlights added:

Amendment of section 48.

24. In section 48 of the Income-tax Act, with effect from the 1st day of April, 2018,-

(a)xxx  

(b) in the Explanation, in clause (iii), for the figures, letters and words “1st day of April, 1981”, the figures, letters and words “1st day of April, 2001” shall be substituted.

 Notes on Clauses:

Clause 24 of the Bill seeks to amend section 48 of the Income-tax Act relating to mode of computation.

Further, under the existing provisions of the said section, 'indexed cost of acquisition' is defined to be an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later.

It is also proposed to make consequential amendments to the said section so as to replace the reference of 1st day of April, 1981 with the 1st day of April, 2001.

These amendments will take effect from 1st April, 2018 and will, accordingly, apply to the assessment year 2018- 2019 and subsequent years.

 Amendment of section 55.

28. In section 55 of the Income-tax Act, with effect from the 1st day of April, 2018,-

(A) in sub-section (1), in clause (b), in sub-clause (2), in item (i), for the figures, letters and words “1st day of April, 1981”, the figures, letters and words “1st day of April, 2001” shall be substituted;

(B) in sub-section (2), in clause (b), for the figures, letters and words “1st day of April, 1981” wherever they occur, the figures, letters and words “1st day of April, 2001” shall be substituted.

Notes on Clauses:

Clause 28 of the Bill seeks to amend section 55 of the Income-tax Act relating to meaning of 'adjusted', 'cost of improvement' and 'cost of acquisition'.

Under the existing provisions of the said section, the cost of long-term capital asset acquired before the 1st day of April, 1981 is taken to be the cost of acquisition to the assessee or the fair market value of the asset on that date, at the option of the assessee.The cost of improvement is also taken into account after the assessee has acquired the asset on or after 1st April, 1981.

It is proposed to amend the said section so as to advance the aforesaid cut-off date to 1st day of April, 2001. Where the long-term capital asset has been acquired before the 1st day of April, 2001, then, the cost of acquisition will be taken to be the value of the asset as on the 1st day of April, 2001. Similarly, in such cases the cost of improvement will be taken to be the cost of improvement after this date.

These amendments will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-2019 and subsequent years.

Request to honourable Finance Minister:

Keeping in mind past history, and high inflation we had faced, the revision of cut-off date is very much belated. It should have taken place as 01.04.1991, 01.04.2001 and now as 01.04.2011.

Author request to consider the suggestion.