MUMBAI, June 22: The budget proposals made by Yashwant Sinha contain a few provisions that will have drastic effects on the capital market. The FM has sought to enlarge the definition of income by amending section 2(24) of the I-T Act.As a result, income will include "value of any moveable or immovable property received on or after October 1, 1998 by any person without consideration in money or money's worth." This means that value of bonus shares on the date of its issue will be treated as income of the shareholder who receives the bonus shares.
The receipt of the bonus shares is in fact without consideration in money or money's worth, so it will be hit by the proposed amendment and the shareholders will be placed in a difficult position. Getting bonus shares will lose its charm as it will entail extra payment of income tax. For example, say ITC Ltd declares a bonus and a shareholder gets 100 bonus shares.
Suppose the date of issue of bonus shares is 10.10.98 and the market price of ITC shares onthat date is Rs 500. In such circumstances the value of the 100 bonus shares @ Rs 500, or Rs 50,000, will be included in the income of such shareholder. It will be virtually taxing of notional income as the taxpayer has not got any actual income. Neither is he getting any sale consideration at that point of time.
Tax implication on sale of bonus shares: When the bonus shares will be sold, their cost of acquisition will be considered nil, according to existing section 55(2)(aa) of the I-T Act. But, following the proposed amendment, although the shareholder has paid tax on full value on receipt of bonus share, he will not be allowed to treat such amount already taxed as the cost of acquisition of the bonus shares.
Under general principles of law, a tax payment should not have to be made twice. But it will be ironical if the taxpayer is put in an adverse position by charging tax when a shareholder gets bonus shares and when he transfers it and that too on its full value on both the occasions.
Thefinance minister should not treat the bonus shares as notional income of the shareholders (as its cost is already considered nil) at the time of transfer of such shares and the government is getting capital gains tax on full consideration on transfer of bonus shares, which sufficiently protects the interest of revenue.
So logically, it is urged that the finance minister should provide exceptions in Section 2(24) (xii) proposed to be inserted in definition of income. Such exceptions should include:
bonus shares;
other incomes/receipts that are exempt under Section 10 to 13 A;
incomes specifically exempt under Section 56(2) and other provisions of the I-T Act.
It may be mentioned that the newly proposed amendment to Section 56(2) of the I-T Act exempts property received by way of will and property given away by a person in contemplation of death. But the properties received in succession by legal heirs has probably missed the attention of the finance minister -- as logically this alsocannot be considered as income.The implications of the proposed amendment to definition of income need to be properly understood in the light of the above analysis and the finance minister should made modifications before final approval of the budget in Parliament to save capital market from further fall and to make his proposals logical and judicious.
Jain is a Calcutta-based tax consultant
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
