S. 111A(1) and the proviso thereto, read as under :
Tax on short-term capital gains in certain cases.
111A. (1) Where the total income of an assessee includes any income chargeable under the head ‘Capital gains’, arising from the transfer of a short-term capital asset, being an equity share in a company or a unit of an equity-oriented fund and —
(a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and
(b) such transaction is chargeable to securities transaction tax under that Chapter, the tax payable by the assessee on the total income shall be the aggregate of —
(i) the amount of income-tax calculated on such short-term capital gains at the rate of fifteen per cent; and
(ii) the amount of income-tax payable on the balance amount of the total income as if such balance amount were the total income of the assessee :
Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such short-term capital gains is below the maximum amount which is not chargeable to income-tax, then such short-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such short-term capital gains shall be computed at the rate of 15%.
Short-term capital gains arising from transfer of equity shares is taxable u/s.111A @ 15%. The proviso to S. 111A(1) gives some relief to a resident individual or HUF in case such income of the assessee forms part of the income within the basic exemption limit.
As per literal reading of the proviso to S. 111A(1), in such a case, that portion of such short-term capital gains which exceeds basic exemption limit, would be taxable @ 15%. In other words, such an assessee is entitled to claim basic exemption in respect of such short-term capital gains, but the excess of such income above the basic exemption limit is taxable @ 15%.
The Finance Act, 2009 provides for a 10% tax slab on income between `1,60,000 to `3,00,000 for individuals (other than specified individuals) and HUFs for A.Y. 2010-11. Further, the Finance Act, 2010 provides for a 10% tax slab on income between `1,60,000 to `5,00,000 for individuals (other than specified individuals) and HUFs for A.Y. 2011-12.
A literal reading of the proviso to S. 111A(1) would make such short-term capital gains arising to a resident individual/HUF falling within the income bracket of `1,60,000 to `3,00,000 (or `1,60,000 to `5,00,000, as the case may be) liable to tax @ 15%, whereas normal income (i.e., incomes other than such short-term capital gains) falling within such income brackets would be taxable @ 10%.
It would be recalled that S. 111A was inserted by the Finance (No. 2) Act, 2004, w.e.f. 1-4-2005, on restructuring of the provisions relating to taxation of capital gains on transfer of equity shares. This could never have been the intention of the law-makers to tax such short-term capital gains at a rate higher than the tax rate on other income falling within the above-mentioned slab.
Therefore, there is a clear and patent anomaly which has crept in after increase in the rate of tax u/s.111A(1) from 10% to 15% by the Finance Act, 2008, coupled with significant restructuring of the tax slabs by the Finance Act, 2009 and 2010. This anomaly is likely to give rise to litigation. This anomaly is adversely impacting small taxpayers the most. To provide clarity to the assessees and the Assessing Officers, this anomaly requires to be corrected by way of an amendment to the law.
Pending such an amendment, we would request CBDT to kindly issue a suitable Circular/Instruction granting relief to the taxpayers in such cases.
