Sub-clause (vi) — not of underlying assets Under Transfer in Relation to a Capital Asset

In the realm of income tax law in India, sub-clause (vi) pertaining to the exemption under section 10(38) of the Income Tax Act, 1961 has been the subject of much attention and discussion. This provision relates to the capital gains arising from the transfer of a capital asset, the income from which is treated as exempt from tax. However, the applicability and interpretation of sub-clause (vi) have been the source of various legal disputes and controversies.

Understanding Sub-clause (vi)
Sub-clause (vi) of section 10(38) provides an exemption from long-term capital gains tax on the transfer of a capital asset being equity shares of a company. The exemption is available if such transfer is chargeable to securities transaction tax (STT) under Chapter VII of the Finance (No. 2) Act, 2004. It is important to note that the sub-clause specifically mentions “chargeable to securities transaction tax,” which implies that the STT must have been paid on the acquisition and transfer of the equity shares to qualify for the exemption.

This provision was introduced to prevent the misuse of the exemption by individuals and entities engaging in sham transactions for the purpose of evading tax. By mandating the payment of STT, the government sought to ensure that only genuine transactions in the securities market would benefit from the tax exemption.

Challenges and Controversies
One of the primary challenges in the interpretation of sub-clause (vi) arises from the language of the provision itself. The requirement of the transfer being “chargeable to securities transaction tax” has been the subject of scrutiny by taxpayers and the judiciary alike. The ambiguity surrounding the scope and applicability of the provision has resulted in conflicting views and varied judicial decisions.

Several cases have brought to light the complexity of determining whether the transfer of equity shares meets the conditions set out in sub-clause (vi). The issue of non-payment or underpayment of STT has been a central point of contention, with taxpayers disputing the denial of the exemption by tax authorities on the grounds of non-compliance with the STT requirement.

Legal Precedents and Judicial Interpretation
The interpretation of sub-clause (vi) has been the subject of several judicial pronouncements, with conflicting decisions emerging from different High Courts and the Supreme Court. The divergent views on the applicability of the provision have created uncertainty and posed challenges for taxpayers and tax administrators.

In the case of CIT v. HUF of Nirmal Bhandari [2014], the Delhi High Court held that the condition of payment of STT under sub-clause (vi) must be construed strictly and that non-payment of STT would render the exemption inapplicable. The court emphasized the legislative intent behind the provision, which aimed to curb tax avoidance through the guise of exempt transactions.

Contrastingly, the Gujarat High Court in the case of Nikhil Ramesh Bhatt v. ITO [2018] took a different view, holding that the requirement of STT payment should be construed harmoniously with the purpose of the provision. The court opined that the absence of STT payment should not automatically disqualify the taxpayer from claiming the exemption if the transaction is otherwise genuine and not aimed at tax avoidance.

The conflicting decisions from various courts have underscored the need for a comprehensive and uniform interpretation of sub-clause (vi) to provide clarity and consistency in its application. The lack of a definitive stance on the issue has contributed to the uncertainty surrounding the eligibility for the exemption and has given rise to prolonged legal disputes.

Recent Developments and Legislative Amendments
In response to the legal challenges and interpretational issues surrounding sub-clause (vi), the government introduced certain amendments to the Income Tax Act to address the concerns raised by taxpayers and the judiciary. The Finance Act, 2017 made significant changes to section 10(38) with the aim of streamlining the provisions and removing ambiguities.

The amended provision now specifies that the exemption under section 10(38) would not be available in respect of income arising from the transfer of equity shares acquired on or after October 1, 2004, if the acquisition is not chargeable to STT. This amendment was aimed at closing the loophole exploited by taxpayers who claimed the exemption on the basis of shares acquired before the introduction of STT.

Furthermore, the Finance Act, 2017 also introduced an anti-abuse provision in section 10(38), which empowers the assessing officer to scrutinize transactions for the purpose of verifying their genuineness and eligibility for the exemption. The provision seeks to empower tax authorities to prevent abuse of the exemption and to ensure compliance with the stipulated conditions.

Impact on Taxpayers and Investors
The evolving landscape of the exemption under section 10(38) has significant implications for taxpayers, particularly investors in the securities market. The uncertainty and unpredictability resulting from the conflicting judicial decisions have added to the compliance burden and legal complexities faced by taxpayers seeking to avail the exemption.

The requirement of STT payment and the stringent conditions laid down in sub-clause (vi) have made it imperative for taxpayers to carefully assess the implications of the provision in their investment and transaction planning. The need to demonstrate the genuineness and legitimacy of the transactions has become a critical aspect for taxpayers to consider in order to avail the tax exemption.

The amendments introduced through the Finance Act, 2017 have reinforced the government’s commitment to curb tax avoidance and misuse of the exemption. This has prompted taxpayers and investors to exercise greater diligence and prudence in their dealings in the securities market to ensure compliance with the statutory requirements and to mitigate the risk of adverse tax implications.

Conclusion
Sub-clause (vi) related to the exemption under section 10(38) of the Income Tax Act, 1961 has been the subject of intense debate and legal scrutiny, giving rise to a multitude of challenges and controversies. The requirement of the transfer being chargeable to securities transaction tax (STT) has been a contentious issue, leading to conflicting judicial decisions and legal uncertainties.

The conflicting judicial interpretations, coupled with the legislative amendments introduced to address the concerns, have underscored the need for clarity and uniformity in the application of the provision. The evolving legal landscape and the impact of the amendments have significant implications for taxpayers and investors, necessitating a thorough understanding of the legal framework and its implications.

In light of the complexities and challenges associated with sub-clause (vi), it is imperative for taxpayers and investors to seek professional advice and guidance to navigate the legal intricacies and ensure compliance with the statutory requirements. The continued evolution of the legal framework and the judicial scrutiny of the provision emphasize the need for vigilance and prudence in tax planning and compliance to mitigate the risk of adverse tax implications.