Every time we've cut
the capital gains tax, the economy has grown. Whenever we raise the
capital gains tax, it's been damaged. It's one of those taxes that most
clearly damages economic growth and jobs.
Grover Norquist
Read more at: https://www.brainyquote.com/topics/tax
Computation of Capital Gains for FY
2017-18
(AY 2018-19)
Amendments Of Law
A STUDY
PROLOGUE
An insightful
journey through the history of related legislation, and the volumes of case law
generated, should enable anyone to get to know that the law governing taxation
of, among others, ‘capital gains’ has been, -and still continues to be with no
letup in sight, - subjected to several changes from to time; and many of those
have far reaching but unpredictable repercussions/ consequences. One such instance, among the long series of
those changes made over the decades, of a comparatively recent origin pertains
to what is known as ‘Base Year’.
BASE YEAR & COST INFLATION INDEX
2. The concepts
of Base Year and of the closely related/connected ‘Cost Inflation Index’ (CII)
came to be introduced in / with effect from the Financial Year (FY) 1981-82.
That happened with a view to meeting the criticism from eminent legal circles
that to so tax gains on transfer of a capital asset, strictly a ‘capital’- ,
not an ‘income’- , receipt, was fundamentally faulty and logically
reprehensible ; hence smacks of a ‘fraud’
enshrined in the income-tax regime.
Attention
may be drawn to such a view , shared widely, also aired in a published Article
(available in public domain) by its author in which he goes on to elaborate,
not without substance, as to “why I believe that Property Tax and Capital Gains
tax are a scam”;
A
Quote (to lend forceful support):
"The tax on capital gains directly
affects investment decisions, the mobility and flow of risk capital... the ease
or difficulty experienced by new ventures in obtaining capital, and thereby the
strength and potential for growth in the economy.”
John F. Kennedy
3. If cared to
and mindfully waded through the material in the form of inter alia write-ups displayed on professional and other websites,
none concerned could have failed to realize that the referred change in law, in order to shifting
the Base Year, has made no small contribution to further messing up the capital
gains tax regime. In that has been responsible for the surrounding controversies;
so much so one and all concerned, mainly the taxpayers have seemingly been
miffed, with obtaining confusion worse confounded. The study herein is an
attempt to consider, in detail, the causa causans of such a state of affairs.
4. Why No Clarity?
The
point of most concern is related to an asset acquired at any point in time,
before the cut-off year FY 2001-02, transfer of which is made in FY 2017-18, or
in a later year. Primarily, that appears
to be because in both the two published Tables containing the CII Data , the
indexation for FYs 2001-02 to 2016-17 are included; but with no specific
indication /clarity on the point of possible doubt namely, which of the two to apply.
To
Dilate:
4. 1.
Shift of Base Year from FY 1981-82 to
FY 2001-02-
Official
Narration of the Changes in Law is as under:
The
existing provisions of section 55 provide that for computation of capital
gains, an assessee shall be allowed deduction for cost of acquisition of the
asset and also cost of improvement, if any.
However, for computing capital gains in respect of an asset acquired
before 01.04.1981, the assessee has been allowed an option of either to take
the fair market value (FMV) of the asset as on 01.04.1981 or the Actual Cost of
the asset as Cost of Acquisition. The assessee is also
allowed to claim deduction for
cost of improvement incurred after 01.04.1981, if any.
As
the base year for computation of capital gains has become more than three
decades old, assessees are facing genuine difficulties in computing the capital
gains in respect of a capital asset, especially immovable property acquired
before 01.04.1981 due to non-availability of relevant information for
computation of fair market value of such asset as on 01.04.1981.
In
order to revise the base year for computation of capital gains, section 55 of
the Act is amended so as to provide that the COST OF ACQUISITION OF AN ASSET
ACQUIRED BEFORE 01.04.2001 SHALL BE ALLOWED TO BE TAKEN AS FMV AS ON 1ST APRIL,
2001 AND THE COST OF IMPROVEMENT SHALL INCLUDE ONLY THOSE CAPITAL EXPENSES
WHICH ARE INCURRED AFTER 01.04.2001.
Consequential
amendment is also made in section 48 so as to align the provisions relating to
cost inflation index to the proposed base year.
These amendments
are to take effect
from 1st April,
2018 and will,
accordingly, apply in
relation to the
assessment year 2018-19 and
subsequent years.
[Finance Bill 2017 – Notes On - Clauses 28
& 24]
(FONT
supplied, to focus on area of controversy)
4.2.
The CBDT has additionally issued Explanatory Notes to the Provisions of the
Finance Act, 2017 vide Circular No. 02/2018 dated 15.02.2018 clarifying section
-wise amendments which has been passed by Finance Act, 2017 and which are
applicable for the Assessment Year 2018-19 (FY 2017-18).
Albeit
the Circular, lately issued, purports to
explain the ‘substance of’ the 2017 amendments,
it has failed, miserably so, to,
at least at this late stage, make any attempt and bring about any clarity,
having regard to the controversies perpetrated and being perpetuated , in
certain circles, in construing the intent and object of the referred
amendments.
To
be precise, as regards the FY 1981-82 and onwards, it was only for the very
same stated reasons that the law was amended, in an attempt at simplification.
And, having done so, it seems to make no sense why a further amendment has now
been considered necessary or prudent and brought in. It is equally unclear as
to why that necessitated a shift of Base Year to 2001-02.
Aside: Be that as it
may, it appears that, the related points of doubt would inevitability prove a
fertile ground for a ding-dong battle – disputes and litigation, – no knowing
for how long in the future.
4.3. The controversial view, perpetrated and being perpetuated
in limited circles, though really not warranted /justified, to say the least,
deserve to be simply looked at but to be prudently ignored. To give a ready glimpse of such instances, however,
reproduced below, the view so shared (Identity of the sources has been
withheld, just for the sake of decency/ethics and good order):
Specimen 1
“…..the
cost of acquisition of an asset acquired before 01.04.2001 shall be allowed TO BE TAKEN AS
FAIR MARKET VALUE AS ON 1ST APRIL, 2001 AND THE COST OF IMPROVEMENT
SHALL INCLUDE ONLY THOSE CAPITAL EXPENSES WHICH ARE INCURRED AFTER
01.04.2001......”
Specimen 2
“Fair market value
of assets bought before 1st April 1981 was based on the valuation
report of a registered valuer. THERE HAS BEEN A CONSIDERABLE HARDSHIP IN
DETERMINING THIS FAIR VALUE since it depends on a period which is more than
three decades old. Therefore the government has decided to shift the base year
to 2001. So if an asset bought before 2001 is sold in FY 2017-18 or later, ITS
COST WILL BE ITS FMV ON 1ST APRIL 2001.”
Specimen 3
“Base year for capital gains computation
shifted
Old
rule: If the asset was acquired
after 01-04-1981, the purchase price has to be indexed with cost inflation
index computed with a base as 100 on above date.
If
the asset was acquired before 01-04-1981, we could use the fair market value as
on that date or the actual cost and claim a deduction for the cost of
improvement incurred from above date.
New
rule: If the asset was acquired after 01-04-2001, the purchase price has
to be indexed with cost inflation index computed with a base as 100 on
above date. (the current value is 426 and it is okay to use this too).
Fair
market value estimation is often guesswork and if one uses an unrealistic
value, the ITO may call for a scrutiny. “
Specimen 4
"Till 31 Mar 2017, capital gain
was calculated with 1981 as the base year. This means that the purchase price
of an asset bought before 1 April 1981 could be calculated on the basis of the
fair market value of 1981. From 1 Apr 2017, the purchase price will be
calculated based on the fair market value of 2001. Accordingly, capital gains
on assets acquired before 1 April 2001 will also be calculated using fair
market value as on 2001."
Own Observations /View
Points
5.
With a view to having own thoughts cleared, and independent viewpoints firmed
up, the propositions requiring to be addressed and gone into may be briefly
dealt with as under:
A) On the concept of 'Fair', used as a prefix in
the two contexts ("FMV' and 'FV', connoting different ideas), itself
really signifies no real thing, at best being notional, is just a fig leaf, so to say. For, that is
admittedly dubious and inherently ‘subjective’, hence may not provide a
truthful or indisputable and safe-proof guidance.
B)
On the point of fundamental doubt as to which of the two Indexation Tables to
apply (that is, for computing capital gains in respect of an asset 'acquired'
before the cut-off year- i.e. 2001-02, transfer of which is effected in FY
2017-18, or in a later year), it calls for a special mention, had transfer of
the same asset been effected in the immediately preceding FY 2016-17, no such
doubt could have arisen.
The published CII Data are to be found in two Tables On a
cursory glance, and, in comparison, one is likely to go with the impression,
but wrongly so, that there is an overlapping in the Data (CII) for Indexation.
So much so, presumably, that has given rise to the point of doubt in some
quarters; that is, - as to which of the two Tables to apply for deriving the
Indexed cost, of an asset acquired before FY 2001-02, transfer of which has been
effected in FY 2017-18.
In this context, calls for a special focus:
The
CII Data as published in the new Table, as applicable for FYs 2001-02 to
2016-17, are, in one’s firm view, indisputably, intended for use, only if the
capital asset has been acquired in any of those years and transferred in FY
2018-19.
On
an incisive comparison, the said Data in the new Table may be noted to have
been so realigned / structured as to make no difference even if the
corresponding Data included in the old Table were to be applied.
To illustrate (selectively):
Table FY Multiplying Indexed
Factor
* (%)
Old
2001-02 1125/426 264
2009-10 1125/632 178
New
2001-02 264/100 264
2009-10 264/148 178
(Figures
1125 and 264 used above, respectively denote the CII for FY 2016-17, the
cut-off year taken as the year of transfer)
6.
Scheme
Of Applicable Provisions
In an earnest personal quest for clarity, through an
independent examination, the crucial features of the underlying scheme of
things to be made a conscious note may be briefly set out thus:
1). In order to give effect to the enacted change of
"Base Year", from the erstwhile 1981-82 to 2001-02, in all the
related provisions, wherever required, in place of the term " the first
day of April 1981", the term
"the first day of April 2001" has been substituted.
2). In Sec 55, being one such section so amended, - clause
(b) of sub-section (2) thereof being of relevance herein - the alteration made
is the same as said in 1. above.
The other crucial expression /words therein, being - " the cost of acquisition...or the fair
market value of the asset..., at the option of the assessee" has been left
unchanged. Hence the above referred doubt.
3). As laid down in
sec 48 (prescribing the 'Mode of computation'), for arriving at the
chargeable gains, apart from a couple of other items, the cost of acquisition
of the asset has to be deducted. And,
in the second Proviso thereto,
later inserted by an amendment, for the
words "cost of acquisition",
the words "indexed cost of acquisition" are required to be
taken as having been substituted.
The meaning of the so substituted term “Indexed cost of acquisition”
has been specially set out in clause (iii) of the Explanation under Sec 48.
To be specially noted, these provisions of section 48, have
been left untouched. As such, wherever the words "cost of
acquisition" continue to be used, those might have to be construed same
way as before; that is, must be taken to
refer to / mean only the "Indexed
cost of acquisition".
In short, the words "cost of acquisition" which
continue to be used in Sec 55 (requiring to be read together with the other
applicable provisions), may have to be, by virtue of the overriding provisions
of Sec 48, taken to mean / construed only as the “indexed cost of
acquisition" of the asset in a given case.
According to a conjoint /harmonious reading of the
provisions, as amended, therefore, for any asset acquired at any point in time
before FY 2001-02, the controversial view, perpetrated and being perpetuated in
limited circles, to say the least, deserve to be simply looked at but to be
prudently ignored as unwarranted.
To Sum –up:
In one's
independent perspective, founded on a conjoint and harmonious reading, -based on
a mindful study and incisive understanding- of the amended (or related un-
amended) provisions, taxpayer will have a good case to take the stand /strongly
urge / seriously pursue if the AO were to hold an adverse view, hence contest,
- that, the cost of acquisition of such asset should be taken into account at
its 'indexed cost', reckoned as for FY 2016-17- also as its least 'FMV' -
arrived at by applying the CII as laid down in the old Table (in force for and
up to FY 2016-17). On that premise, the only adjustment (increase) left to be
made to the so derived Indexed Cost, for the subsequent incremental value -
say, for FY 2017/18 is that by applying the multiplying factor based on CII as
available in the New Table (i.e. 272/264). Subject to the reservation as one has,
as voiced herein later, in doing so.
In the
event the AO were to take an adverse view, and refuses to accept but rejects
taxpayer's stand as above, then, apart from merits, it could be contested also
on the ground that would be tantamount to and result in an obviously unintended
consequence of de-simplifying the extant simplified law, also be tantamount to giving
retrospective effect to the amendments specifically made wef April 1, 2018,
hence applicable only for FY 2017-18 (AY 2018-19), and onward.
The fact
that the overriding provisions of Sec 48 remain untouched should help in
construing the meaning / for a proper construction of the crucial words -"
the cost of acquisition “of the asset in a given case, as used before/continue
to be used even after, amendment- in Sec 55, besides elsewhere.
7.
FMV vs (X) COST
(& Indexed cost)-
Any such prevailing
view of a controversial nature as brought out herein before, in one’s
conviction, based on a sound reasoning, does not seem to make any legal, or
appeal to common, sense; but suffers from faulty logic.
To explain:
According to the governing scheme of
things /applicable sections, taxpayer has been given the option to, for
computing the chargeable capital gains, adopt and deduct the cost of
acquisition (as indexed) or FMV. By necessary implication, that envisages even
if the FMV, as determined by using any of the acceptable methods, is lower,
taxpayer is entitled to have the gains reckoned by deducting the higher of the
two. To be precise, it is a one-way option. In that, should the taxpayer choose
to claim a deduction, as of FMV, in a case in which the cost of acquisition is
known or ascertainable, the AO, having been duly empowered (see sec 50 C (2)),
for obvious reason, might undoubtedly not
accept, but have it independently determined by the departmental valuer
for his purpose /in the interests of the Revenue.
Simply put, the
view that in the aftermath, and in consequence of the subject amendments,
taxpayer is entitled / enabled to opt for FMV, - even if determined by any of
the known or accepted methods, - and claim a deduction, instead of the actual
cost of acquisition or as indexed, is palpably misconceived; deserves to be
simply made a mention but straightaway dismissed.
Amendment of the
Explanation (v) under section48
8. The other related amendment for
consideration, without which the study herein may not be complete, is discussed
below:
Upfront, to quote the view as given
publicity in a limited circle:
“……..The revised index will be
applicable for calculating indexed capital gains for any asset SOLD IN THE
FINANCIAL YEAR 2017-18 and subsequently. “
(FONT supplied)
Such an inference is, in one’s firm
conviction, too abrupt to be left unexplored, -rather misconceived, - for more
than one reason:
The revised Index (CII) has been
prescribed in pursuance of the amendment of the Explanation (v) under section
48.
The so amended provision, - READS:
"(v) "Cost Inflation
Index", IN RELATION TO A PREVIOUS YEAR, means such Index as the Central
Government may, HAVING REGARD TO seventy-five per cent of average rise in the
Consumer Price Index (urban) FOR THE IMMEDIATELY PRECEDING PREVIOUS YEAR TO
SUCH PREVIOUS YEAR, by notification in the Official Gazette, specify, in this
behalf."
(FONT supplied, to highlight the
confusing language)
On the first blush, the provision, in
terms, is noted to make for a clumsy reading; in that, it is confusing, not
having been made clear beyond any doubt as to whether the CII notified is to
apply (be applied) for FY 2017-18 and for what purpose. The point of grave
doubt arises because of the fact that the CII so notified has a dual purpose-
not only to apply for the FY in which the transfer of the asset takes place ,
giving rise to chargeable gains, BUT ALSO FOR USE AS THE BASIS FOR RECKONING
THE INDEXED COST OF AN ASSET ACQUIRED IN ANY FY.
For example, in case of an asset
acquired say, in 2009-10 (CII for which is 632) transfer whereof is made in FY
2016-17 (CII for which is 1,125), indexed cost will have to derived by using
the multiplying factor - 1,125 / 632.
Differently put, the point much wanting
in clarity is why the revised Index of '272' (see the new Table) for FY 2017-18
should be taken as applicable/be applied to such an asset simply because its
transfer has taken place in that year - FY 2017-18.
Incidentally, it needs to be specially
noted that, both the amendments referred to namely, the shift in 'base year'
and the published new Table (of revised CII Data) are so interconnected, as
requiring to be necessarily considered and construed conjointly, - not each in
isolation.
As regards the 'shift in base year',
that itself has , as set out supra, given rise to controversies and
inconclusive debates
More importantly, if critically viewed,
correctness of the above referred inference is highly questionable; for, that
will militate against the admitted/ irrefutable fact that both the amendments
are to take effect only from 1st April, 2018, not retrospectively.
Subject to any further study, before
firming up one's own conviction, presently but honestly feel, strongly so, that
the intended implications of both the amendments of law, - that is, in the
matter of shifting of Base Year from 1981-82 to 2001-02, so also the newly
revised CII, call for clarity and plugging in the correctives, as considered
necessary.
As regards the revised CII, perhaps, it
might have to be made clear that it has application/to be applied only to any
asset acquired in FY 2017-18, transfer of which may take place in any later FY
so as to give rise to chargeable gains in that later year. On that premise, if
convinced, the Revenue will be well advised to consider and notify afresh the
CII to apply/be applied for a transfer of asset made in FY 2017-18; and, do so,
by adopting the same norm (s) as used for prescribing the CII for immediately
preceding years for up to 2016-17; not the new basis in pursuance of the
amendment.
For, otherwise, any different view
taken by the Revenue has the inevitable potentials to give rise to a war (of
wits), disputes and inconclusive court litigation ON MORE THAN ONE LOGICALLY
SOUND /LEGITIMATELY SUSTAINABLE GROUND.
Over to eminent Experts in field
practice, to explore the stated proposition, and share any independent thoughts
/views, if were at variance!
9. Retrospective Amendments:
As
has been repeatedly emphasized by the Courts, one of the cardinal but basic and
fundamental principles/rules of interpretation of law to be strictly followed
is that, - (i) it is the ‘intention’
of the Legislature, which is the only predominant consideration to be kept in
view, and (ii) such intention shall
have to be, barring a few exceptional/extreme circumstances, clearly and
unambiguously borne out by the language of the provision expressly, or by
necessary implication. In other words, any provision of law should be
self-evident of the intention behind it. That can be achieved only if it is
ensured that the language in which the provision is couched is devoid of
deficiencies like, ambiguity, loopholes, etc. It is a sad commentary that, all
the concerned people, particularly the Government and the Legislature, have yet
to woke up to the reality of the long lasting deplorable situation, and realize
the crying need to resort to a suitable course of action.
On the topic of impropriety and impudence in making
retrospective changes in law, without an insightful consideration, of any kind
whatsoever, for a detailed discussion with reference to the plethora of
governing case law, anyone interested may look up, say, -
(2005) 3 Comp. LJ, pg. 24; (2008) 169 TAXMAN, pg. 14.
(2014) 226 TAXMAN pg. 143 @ pg.147, 148,149
As then pinpointed, in the recent past, the present holder of the FM
portfolio himself, has, on more than occasion, been reiterating his
"government's decision not to resort to retrospective tax amendments to
create a new liability". Even so, in disregard of such a commitment, in
the instance on hand, what appears to have been not fully realized that
any change in law, if not
properly construed, for whatever be the reason, may have the potential or
possibility of being applied retroactively, to some extent.
A similar situation came to be noticed in regard to one of the
amendments made in the year 2014. For a discussion thereof, one may look up the
Article cited supra (2014) 226 TAXMANN 143 (Mag.)
EPILOGUE
It
stands
to be gathered from the foregoing brief
discussion, the subject amendments of the law with a view to give effect to the
idea of change in the Base Year, even granting that was considered and
inevitable, to say the least, ought not to have been gone ahead with, without
adequate homework and deep and incisive thoughts given.
There
is no knowing what view has been/ is being taken, by taxpayers and advising
professionals, for paying Advance tax in the current year. And, so far as
known, no firm view has been taken and shared in legal circles, or no clarity
has been offered/ forthcoming from any quarters(either Revenue or the supposed
to be knowledgeably professional bodies- e.g. ICAI).
As such, in the absence of any clarity,
there is the risk of mutually contradicting views being taken in the tax
return, so also in the assessment, appeal and further proceedings, for the
current FY 2017-18 (AY 2018-19). In the result, disputes and litigation might
become inevitable; and issues would remain inconclusively resolved.
Keeping the foregoing in focus, in
order to avert the indicated unsavory consequences, it is imperative that,-
(a) the professional bodies such as,
ICAI should come out, and equip its members, with clear-cut proper guidance in
the matter, on a timely basis; and
(b) the CBDT, on its part, require to
take the initiative, even now, and do likewise; sooner the better.
To Conclude:
The scope for the prevailing confusion,
as discussed, could have been easily and prudently avoided had it been at least
made absolutely clear, at the outset, that the subject amendments were not intended
to provide any new spate of controversies; in particular, certainly not a fresh
opportunity to taxpayer to take any undue advantage by having the option to get
the FMV re-determined, should that be higher and prove to be of an advantage.
Every time we've cut
the capital gains tax, the economy has grown. Whenever we raise the
capital gains tax, it's been damaged. It's one of those taxes that most
clearly damages economic growth and jobs.
Grover Norquist
Read more at: https://www.brainyquote.com/topics/tax
