Final Notification u/s 10(38)

The Finance Act, 2017 (“FA 2017”) brought an important amendment to section 10(38) of the Income‑tax Act, 1961 (“the Act”) to provide that exemption of Long Term Capital Gains (‘LTCG’) under this section arising on transfer of equity shares acquired or on after 1st day of October, 2004 shall be available only if apart from other existing conditions, the acquisition of share is also charged to STT.

However it was also provided that the Central Government shall notify certain cases of acquisition for which the condition of chargeability to STT shall not apply. In this regard CBDT has issued draft notification on 5Th April 2017 and invited public comments thereto.

Now CBDT has issued final notification u/s 10(38) dated 05.06.2017. This notification exempts all transactions of acquisition of equity share entered into on or after the 1.10.2004 which are not chargeable to STT other than the three specified transactions (negative list) mentioned in notification. This notification specifically excluded certain genuine cases from the negative list i.e. LTCG exemption will be available to transactions of acquisition falling under such exceptions even if no STT paid on acquisition. Some of the relevant exceptions are:

  • Shares acquired by any mode of transfer referred in section 47 or 50 B  of Act (example:-  Distribution of assets under partition of HUF, gift, will, irrevocable Trust, holding-subsidiary transfers, mergers, demergers, conversion from preference to equity,  conversion of company into LLP , conversion of proprietorship into company, Slump sale etc) so long as the previous owners has not acquired the shares through any of the mode covered by three specified categories of negative list.
  • Shares acquired through an issue of share by a company other than the issue referred to in clause (a) of notification ( negative list )
  • Shares acquisition approved by Supreme Court, High Court, NCLT, SEBI, RBI
  • Shares acquired under ESOP/ESPP scheme issued under SEBI (ESOP/ESPP) Guidelines, 1999
  • Shares acquired by non- resident  under the FDI policy
  • Shares acquired under SEBI Takeover Code Regulation 2011.

This notification is applicable from 1st April 2018 and shall accordingly apply to AY 2018-19 and subsequent years.

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