Year: 2011

Section 115JB of the Income-tax Act, 1961 (‘the Act’) requires every assessee-company to prepare its profit and loss account in accordance with Part II and Part III of the Schedule VI for the purpose of determining net profit, for the computation of ‘book profit’. In other words, Part II and Part III of the Schedule VI are legislatively incorporated under the provisions of section 115JB of the Act.

Legislation by incorporation is a legislative device by which certain provisions of a particular Act are incorporated by reference into another Act, such that the provisions so incorporated become part and parcel of the later Act, as if they had been ‘bodily transposed into it’. In other words, the legal effect of such incorporated provisions are often held to be actually written in the later Act with the pen, or printed in it. The said observations were made by Lord Esher, M. R. while explaining the aforesaid principle in one of the earliest decisions on the subject1.

However, the aforesaid incorporated provisions in MAT, only prescribe the contents of the profit and loss account of the company and the principles for recognition, measurement, presentation, etc. of financial items are prescribed under the Accounting Standards as applied by the company in adopting the accounts at its annual general meeting.

A question which requires attention is whether the Revised Schedule VI as amended by the Central Government can be said to be legislatively incorporated under the provisions of section 115JB of the Act and accordingly net profit for the purpose of computation of book profit will be determined based on the format of profit and loss account as prescribed under the Revised Schedule VI.

The answer to this question depends upon the manner of construction and interpretation of whether Part II and Part III of the Old Schedule VI are introduced in MAT provision of the Act merely as reference/citation or have been incorporated under section 115JB. Legislation by incorporation may be undertaken by either merely citing a provision of one statute in another statute or by incorporating the said provision in another statute.

Therefore, before embarking upon answering the question under consideration, it is necessary to understand the principles of identifying the differences between the two and implications on the construction of a provision of a particular statute, which is merely referred to in another statute vis-à-vis being incorporated. In the former case, a modification, repeal or re-enactment of the statute that is referred will also have the effect in the statute in which it is referred, but in the latter case any change in the incorporated statute by way of amendment or repeal shall have no repercussion on the incorporating statute. The legal decisions have time and again tried to differentiate between the two, but the distinction is one of difference in degree and is often blurred2. There are no clear-cut guidelines which have been spelt out.

However, there are four exceptions which have been observed by the Courts3 to the implications on the construction of a provision as discussed above, wherein a repeal or amendment of an Act which incorporated in a later Act shall have effect on the later Act, irrespective of whether the said provision was merely referred or incorporated in the other statute. These exceptions are as under:

•  where the later Act and the earlier Act are supplemental to each other;

•  where the two Acts are in pari materia;

•  where the amendment of the earlier Act if not imported in the later Act would render the later Act wholly unworkable; and

•  where the amendment of the earlier Act either expressly or by necessary intendment also applies to the later Act.

On the touchstone of the aforesaid exceptions applied to the case under consideration, one may observe as under:

•  the Income-tax Act, 1961 and the Companies Act, 1956 are not supplemental to each other i.e., existence of either of the said Acts is not dependant of each other;

? the two Acts are not in pari materia i.e., both the Acts legislate in two different fields of law;

? the non-incorporation of the Revised Schedule VI under MAT provisions would not make the said provisions unworkable, since one would be able to compute net profit based on the Old Schedule VI; and

•  there is no mention by the Central Government of simultaneous amendment of MAT provisions, when Schedule VI was replaced under the Companies Act.

Considering this, one may observe that none of the four exceptions are applicable to the impugned issue.

Though it makes a case stronger to tilt the balance of construction that Part II and Part III of the Old Schedule VI are incorporated and not referred under MAT provisions, yet one may not conclude such construction without further discussion. It is necessary to understand the factors which may help in answering the aforesaid question. A matter of probe into the semantics of the provision along with the legislative intention and/ or taking an insight into the working of the enactment may help in determining which of the view is to be adopted. Part II and Part III of the Old Schedule VI are incorporated in all its phases from section 115J to section 115JB of the Act.

Reference is invited to the relevant provisions of section 115JB of the Act, which are reproduced below for ready reference:

“ ……………….. (2) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956):

Provided that while preparing the annual accounts including profit and loss account, —

(i) the accounting policies;

(ii) the accounting standards followed for preparing such accounts including profit and loss account;

(iii) the method and rates adopted for calculating the depreciation,

shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956):” (Emphasis supplied)

From the perusal of the aforesaid provisions of section 115JB(2), one would notice that the Legislature by applying the principle of legislation by incorporation introduced two provisions of the Companies Act, 1956. The differences in the language used for incorporating the said provisions highlight the mechanism of merely citing a provision vis-à-vis incorporating the provision.

One finds that similar usage of words, being ‘shall be the same’ is missing under the incorporation of Part II and Part III of Schedule VI to the Companies Act. Therefore, such similar construction and mechanism may not hold good for the purpose of interpretation of Part II and Part III of the Schedule VI to the Companies Act, which have been incorporated and not merely referred under the provisions of section 115JB(2) of the Act.

In a recent decision of the Supreme Court in the case of M/s. Dynamic Orthopedics Pvt. Ltd. v. CIT, (321 ITR 300), the Apex Court while referring the matter relating to the computation of book profit under MAT provisions to the Larger Bench, made following observations with respect to the semantics of MAT provisions under the Act. These observations on legislation by incorporation which may hold good for all the three avatars of MAT provisions viz. section 115J, section 115JA, and section 115JB are reproduced below:

“….Section 115J of the Act legislatively only incorporates provisions of Parts II and III of Schedule VI to 1956 Act. Such incorporation is by a deeming fiction. Hence, we need to read section 115J(1A) of the Act in the strict sense. If we so read, it is clear that by legislative incorporation, only Parts II and III of Schedule VI to 1956 Act have been incorporated legislatively into section 115J of the Act. Therefore, the question of applicability of Parts II and III of Schedule VI to 1956 Act does not arise….

…. It needs to be reiterated that once a company falls within the ambit of it being a MAT company, section 115J of the Act applies and, under that section, such an assessee-company was required to prepare its profit and loss account only in terms of Parts II and III of Schedule VI to 1956 Act ….. Hence, what is incorporated in section 115J is only Schedule VI and not section 205 or section 350 or section 355 ….. ” [Emphasis supplied]

The aforesaid decision reiterates the understanding that Part II and Part III of Schedule VI only are legislatively incorporated under the provisions of MAT. Therefore, any repeal, amendment or revision of Part II and Part III of Schedule VI to the Companies Act may not have effect on the operation of computation of book profit, until the Revised Schedule is incorporated under the MAT provisions of the Act.

Based on the aforesaid discussions, one may conclude that the Revised Schedule VI to the Companies Act cannot be taken into consideration, until necessary amendments are made requiring the assessee companies to determine the net profit for the purpose of computation of book profit under MAT provisions as per the Revised Schedule VI to the Companies Act.

This conclusion and article may be incomplete if the significant in-principle differences between the Old Schedule VI and the Revised Schedule VI are not highlighted. These differences are touched upon only in brief:

•     The Revised Schedule only contains Part I and Part II. It does not have Part III of the Old Schedule VI which provided for interpretation of the various expressions such as ‘provision’, ‘reserve’, ‘liability’, etc. and Part IV of the Old Schedule VI which dealt with balance sheet abstract and company’s general business profile.

•     The Revised Schedule VI prescribes the format of profit and loss account for the company, as against the Old Schedule VI, which did not provide for such format; and

•     The Old Schedule VI prescribed the principles on which the profit and loss account of the company was required to be prepared for the purpose of disclosure, which one fails to find under the Revised Schedule VI;

This issue is of importance from the perspective of the Direct Tax Code Bill, 2010 (draft) (‘DTC’) which in Clause 104 has provision analogous to section 115JB of the Act. Clause 104 of DTC provides reference to Clause 105 of DTC for the purpose of determination of net profit as shown in the profit and loss account prepared in accordance with Part II and Part III of Schedule VI to the Companies Act. Assuming Clause 104 and Clause 105 of draft DTC come into effect in their present form, one may interpret that Part II and Part III of the Revised Schedule VI are incorporated in the said clauses, considering the fact that the Revised Schedule VI to the Companies Act will be existing on the statute when draft DTC becomes an Act. However, it may be intriguing to notice that the Revised Schedule VI does not have Part III and therefore, the Legislature may have to make necessary amendments; otherwise the formula may become unworkable. Similar consequences may also be envisaged for companies subjected to MAT provisions for financial years ending on or after 1st April 2011, if we propose that Part II and Part III of the Old Schedule VI are merely referred to in section 115JB of the Act.  This subject may require further attention with the intention of the Government to introduce different set of Accounting Standards (i.e., Ind-AS and otherwise) applicable to different categories of companies and thereby leading to different tax bases of net profit as shown in the profit and loss account prepared in accordance with Part II and Part III of the Schedule VI to the Companies Act.

If the above discussion and conclusions are drawn to their logical end, then one envisages that companies subjected to MAT provisions of the Act may have to prepare two sets of their profit and loss account, wherein net profit as shown in the profit and loss account will have to be prepared in accordance with:

•     Part II and Part III of the Revised Schedule VI for the compliance of provision of Companies Act, 1956; and

•     Part II and Part III of the Old Schedule VI for the computation of book profit under the Act.

1.2 Prior to introduction of the DTC Bill, 2010, the Government had issued the DTC Bill, 2009 with a Discussion Paper for public debate on 12-8-2009. The DTC Bill, 2009, proposed to introduce several changes in the provisions relating to capital gains. There was a proposal to do away the present distinction between short-term and long-term capital gains. It was also proposed to abolish the present exemption/concession available to capital gains on sale of listed securities on which STT is paid. The concessional rate for long-term/short-term capital gains was also proposed to be abolished and there was a proposal to levy tax on capital gains at the normal rate applicable to other income.

1.3 Several representations were made to the Government objecting to these proposals. Based on the above representations, a Revised Discussion Paper was issued by the Government on 15-6-2010 and the revised DTC Bill, 2010, was introduced in the Parliament in August, 2010.

1.4 In the revised Discussion Paper of June, 2010, it was clarified that the original proposals of DTC – 2009 for taxation of capital gains have been modified as under:

(a) Income from capital gains will not be considered as income from ordinary sources.

2. Concept of capital gains

3. Computation of capital gains

3.2 It may be noted that the word ‘Transfer’ is defined in section 314(267). This definition is very elaborate as compared to section 2(47) of the Income-tax Act (ITA). The above definition provides that ‘Transfer’ in relation to a ‘Capital Asset’ includes the following:

(i) Sale, exchange or extinguishment of any asset or any rights in it;

3.3 The capital gains arising from the transfer of personal effects and agricultural land is exempt from income tax. The term ‘personal effects’ is defined in section 314(190) and the term ‘agricultural land’ is defined in section 314(12). This definition states that the land, wherever situated, if used for agricultural purposes will be treated as agricultural land.

3.4 In general, the capital gains will be equal to the full consideration from the transfer of the investment asset minus the cost of acquisition, cost of improvement thereof and transfer-related incidental expenses. However, in the case of an investment asset which is transferred anytime after one year from the end of the financial year in which it is acquired, the cost of acquisition and cost of improvement will be adjusted on the basis of cost inflation index.

3.5 Capital gains from all investment assets will be aggregated to arrive at the total amount of current income from capital gains. This will, then, be aggregated with unabsorbed capital loss at the end of the preceding financial year to arrive at the total amount of income under the head ‘Capital gains’. If the result of the aggregation is a loss, the total amount of capital gains will be treated as ‘nil’ and the loss will be treated as unabsorbed current capital loss at the end of the financial year. This unabsorbed loss will be carried forward for adjustment against capital gains in subsequent years. There is no time limit for such carry forward and set-off of losses.

4.2 Section 46 of the Code provides that the exemption granted u/s.47 of the Code in respect of certain transfers of investment assets and u/s.55 of the Code in respect of certain rollover of investment assets will become taxable in the F.Y. in which the conditions specified in section 47 or 55 are violated. This provision is on the same lines as in the existing sections 47A, 54, 54B, 54F, 54EC, etc. of ITA.

4.3 Section 48 of the Code explains about the F.Y. in which the income arising on non-compliance with the conditions laid down in section 47 will become taxable. This section also explains about the F.Y. in which enhanced additional compensation received on compulsory acquisition of property will be taxable. Further, the section also explains as to when an immovable property will be considered to have been transferred. These provisions are similar to sections 45(1), 45(4), 45(5) and 46 of ITA with some modifications.

4.4 It is significant to note that the existing sec-tion 45(4) of ITA provides that if any capital asset is transferred by way of distribution of capital as-sets to any partner or partners on dissolution of a firm or AoP or otherwise, the difference between the market value of the asset and its cost will be taxable as capital gains in the hands of the Firm or AoP. This position will continue under the Code in view of item 6(ii) of the table below section 48(1) r.w.s 50(2)(d) of the Code. However, in the case of retirement of a partner, the Courts have held that the word ‘otherwise’ in the existing section 45(4) applies when a partner retires from the Firm or AoP and takes away any asset of the Firm or AoP as part of the amount due on retirement. Now, section 48(2)(b) of the Code, read with item 7 of the table below section 48(1) and section 50(2) (f), provides that “Any money or asset received by a participant (Partner/Member) on account of his retirement from an unincorporated body (Firm, LLP, AoP, BoI) shall be deemed to be the income of the recipient of the F.Y. in which the money or asset is received”. This will mean that if the amount due to the retiring partner as per the books of the Firm, AoP or BoI is Rs.1.5 crore but the amount received and market value of the asset received on his retirement is Rs.2.5 crore, the retiring partner will have to pay tax on capital gains under the Code.

4.5 Under section 51(2) of the Code, in the case of equity shares of a company and units of equity-oriented fund of a M.F., held for more than one year, the capital gain will be exempt from tax if STT is paid. It may be noted that there is difference in the wording of section 51(2) and 51(3). U/s.51(2) the requirement is holding of shares, etc. for more than one year, whereas u/s.51(3) the period for holding other assets is at least one year after the end of the F.Y. in which the asset is acquired.

4.6 In the above case if the STT is paid and the shares/units are held for less than one year, 50% of the capital gain will be exempt and tax at normal rate will be payable on the balance of 50%.

4.7 It may be noted that under item No. 32 of Schedule 6 it is provided that the capital gain arising from transfer of the following assets will not be liable to tax under DTC:

(i)    Agricultural land in a rural area as defined in section 314(221)r.w.s 314 (284). This definition is similar to the definition in section 2(14)(iii) of ITA.

(ii)    Personal effects as defined in section 314 (190) which is similar to section 2(14)(ii) of ITA.

(iii)    Gold Deposit Bonds.

5.    Full value of consideration
5.1 The provisions relating to computation of capital gains on transfer of an investment asset and determination of the full value of the consideration are contained in sections 49 and 50 of the Code. These provisions are similar to the provisions of sections 45(2), 45(3), 45(5), 48 and 50C of ITA with certain modifications. In the case of sale of land or building, section 50(2)(h) of the Code provides that stamp duty value of the asset will be considered as full value of the consideration. The term ‘Stamp duty value’ is defined in section 314(246) on the same lines as in section 50C of ITA with the exception that there is no provision for refer-ence to valuation officer in the event such value is disputed by the assessee. Further, section 50(2) r.w.s 314(267) and 314(93) of the Code provides that in respect of conversion of investment asset into stock-in-trade, distribution of assets to partici-pants on dissolution of the unincorporated body or retirement of a participant, etc. the fair market value of the asset on the date of transfer will be determined according to the method prescribed by the CBDT.

5.2 It may be noted that u/s.45(3) of the ITA it is provided that when the partner/member of a firm, LLP, AoP or BoI in which he becomes a partner/ member and contributes a capital asset as his capital contribution in the entity, the amount credited to this account in the entity will be considered as full value of the consideration and capital gain tax will be payable by him on this basis. This benefit is not available at present when a person becomes a shareholder in a company and he is allotted shares in the company against any transfer of any asset to the company. Now, section 50(2)(c) of the Code provides that the amount recorded in the books of the company or an unincorporated body as value of the investment asset contributed by the shareholder or participant will be the full value of the consideration and the capital gain will be computed in the hands of the transferor on that basis.

6.    Cost of acquisition and indexation
6.1 As stated earlier, section 49 of the Code provides that capital gain on transfer of an investment asset is to be computed by deducting from the full value of the consideration, the cost of acquisition and the cost of improvement. The term ‘Cost of acquisition’ is defined in section 53 read with the 17th Schedule. The term ‘Cost of improvement’ is defined in section 54. These provisions are more or less on the same lines as sections 48, 49 and 55 of ITA. It may, however, be noted that when the investment asset is received by way of gift, will, inheritance, etc., it is provided that the cost will be the cost of acquisition in the hands of previous owner. However, the period during which the previous owner held the asset cannot be added in computing the total period for which the assessee has held the asset, as there is no provision for this purpose corresponding to the provision in section 2(42A) of ITA. Existing section 55(3) of ITA provides that if the cost of the asset in the hands of the previous owner cannot be ascertained, the market value on the date on which the previous owner acquired the asset will be considered as his cost. Now, section 53(7)(c) of the Code provides that if the cost of investment asset in the hands of the previous owner cannot be determined or ascer-tained, the said cost will be taken as ‘nil’. Similarly, in the case of the assessee if a self-generated asset or any other investment asset is acquired and the cost of such asset cannot be determined or ascertained for any reason, it shall be considered as ‘nil’.

6.2 Section 52 of the Code gives mode of computation of indexation of certain investment assets in specified cases. The method prescribed in this section is similar to the provision in the existing section 48 of ITA. However, some modification in the scheme under the Code is made as under:

(i)    Under section 2(29A)r.w.s 2(42 A) of ITA, a capital asset which is held for more than three years is considered as a ‘long-term asset’. U/s.51(3) of the Code, it is provided that if the investment asset is held for more than one year from the end of the financial year in which the asset is acquired, the benefit of indexation of cost will be available.

In other words, if the investment asset is acquired on 1-5-2010, it will be considered as long-term capital asset if it is sold on or after 1-4-2012 under the Code. In the following discussions such investment asset is referred to as a ‘long-term asset’.

(ii)    In the case of any investment asset, if it is a long-term asset as explained in (i) above, the assessee will be entitled to deduct indexed cost of the asset as provided in section 52 of the Code from the full value of the consideration for computation of capital gain. The method for working out indexed cost is the same as in section 48 of ITA. However, the base date for determining the indexed cost will be 1-4-2000 under DTC instead of 1-4-1981 provided in ITA.

(iii)    At present, section 55(2)(b) of ITA provides that if a capital asset is acquired before 1-4-1981, the assessee has an option to substitute the fair market value of the asset as on 1-4-1981 for its cost.

Now, section 53(1)(b) of the Code provides that if the investment asset is acquired before 1-4-2000, the assessee will have the option to substitute fair market value on 1-4-2000 for its cost.

7.    Relief on reinvestment of consideration
Section 55 of the Code provides for relief for roll-over of long-term investment asset in the case of an Individual or HUF. This provision is similar to the existing provisions for relief on reinvestment of capital gains in sections 54, 54B and 54F of ITA with the following modifications:

(i)    At present, the exemption is available if ‘capital gain’ on sale of a capital asset is reinvested in the specified assets u/s.54, 54B or 54EC of ITA. In case of section 54F of ITA, the ‘Net consideration’ on sale is required to be reinvested. Now, u/s.55 of the Code, the benefit of exemption is available on reinvestment of ‘Net consideration’ in all the cases.

(ii)    The rollover relief is available for only two categories of long-term assets viz. (a) agricultural land, and (b) any other investment asset.

(iii)    In the case of agricultural land there is no distinction between rural and urban land. The only condition is that it is assessed to land revenue or local cess and used for agricultural purposes. Further, this land should be an agricultural land during two years prior to the F.Y. in which it is transferred and was acquired by the assessee at least one year before the beginning of the F.Y. in which it is transferred. If these conditions are satisfied and the assessee invests the net consideration on sale of such agricultural land for the purchase of one or more pieces of agricultural land within a period of three years from the end of the F.Y. in which the original agricultural land was sold, he will get exemption in proportion to the amount so invested.

(iv)    In the case of any other long-term investment asset, the above rollover benefit will be available, if the net consideration is invested in the purchase or construction of a residential house within a period of three years from the end of the F.Y. in which the original asset was sold. For getting this benefit there are two conditions as under:

(a)    The assessee should not be the owner of more than one residential house (other than the residential house in which such investment is made) on the date of sale of original asset.

(b)    The residential house in which the above investment is made to get rollover benefit should not be transferred within one year from the end of the F.Y. in which such investment is made.

It is also provided in section 55 of the Code, that the above rollover benefit will be available if the investment in the new asset is made within a period of one year before the sale of the original asset.

(vi)    It is also provided in the above section that the net consideration on sale of the original asset should be reinvested for acquiring the new asset, as stated above, before the end of the F.Y. in which the original asset is sold or within six months from the date of such sale, whichever is later. If this is not done, the net consideration or balance thereof should be deposited with Capital Gains Deposit Scheme to be framed by the Government. The amount so deposited should be used within three years from the end of the F.Y. in which the original asset is sold. If it is not so used, the same will be taxable in F.Y. in which the period of three years expires.

(vii)    From the above, it will be evident that the present concession of investing the capital gain on sale of residential house for purchase of another residential house even if the assessee is owner of more than one residential house u/s.54 of the ITA will not be available. Further, the benefit of investment in approved bonds up to Rs.50 lakh u/s.54EC of ITA will also not be available.

8.    Income of FII
As stated earlier, definition of investment asset u/s.314(141) of the Code includes any shares or securities held by a Foreign Institutional Investor (FII). In view of this, FII engaged in trading of shares or securities in India will not be entitled to claim exemption under the applicable DTAA on the ground that it is carrying on business in India and has no permanent establishment in India. Under the Code, the surplus from these transactions will be considered as income from capital gains.

9.    Slump sale
The definition of investment asset also includes any undertaking or division of a business. Section 53(5) provides that if there is any slump sale of any undertaking or division of a business, the cost of acquisition of such asset will be the ‘net worth’ of such undertaking or division. If such undertaking or division is sold after the end of one year from the end of the financial year in which it was acquired or established, the benefit of indexation u/s.51 and 52 of the Code will be available. Net worth of such undertaking or division will be worked out as may be prescribed by the CBDT u/s.314(166). The term ‘Slump sale’ is defined in section 314(234) on the same lines as section 2(42C) of ITA.

10.    Aggregation of capital gains and losses
10.1 Income from capital gains (short-term or long-term) from various investment assets, whether positive or negative, shall be first aggregated and any carried forward loss under this head from earlier years shall be deducted therefrom. If the net result is loss, it shall be carried forward to next year. There is no time limit for such carry forward of losses. If the net result is positive, it shall be aggregated with income under other heads. It may be noted that there is a departure from the provisions of ITA where income from long-term capital gains is taxed at a separate lower specified rate. Under DTC long- term or short-term capital gains is taxable at the normal rate applicable to other income.

10.2 It may be noted that there is no provision for adjustment of short-term or long-term capital losses carried forward from F.Y. 2011-12 (A.Y. 2012-13)    and earlier years against capital gains for F.Y. 2012-13 and subsequent years under DTC.

11.    Treatment of losses in certain specified cases

11.1    Section 64 and 65 of DTC provide for treatment of losses in specified cases as under:

(i)    On conversion of unlisted company into LLP — It may be noted that as stated earlier, u/s.47(1) (J) exemption from capital gain is given in the case of conversion of an unlisted company into a LLP. There are certain conditions for this purpose which are similar to section 47(xiii b) of ITA. Section 64(1) provides that unabsorbed current loss from ordinary sources in the case of an unlisted company shall be available for set-off in the case of LLP against its current aggregate income from ordinary sources of subsequent years. Similarly, unabsorbed current capital loss of the company shall be set off against current capital gains in the case of LLP in the subsequent years. This section is similar to section 72A(6A) of ITA. If the conditions laid down in section in section 47(1)(J) of DTC are not complied with, the set-0ff of loss so allowed in any F.Y. can be withdrawn by rectification of the assessment order.

(ii)    On Business Reorganisation — It may be noted that as stated earlier, u/s.47(1)(n) exemption from capital gain is given in the case of conversion of sole proprietary concern into a limited company. There are certain conditions for this purpose which are similar to section 47(xiv) of ITA. U/s.64(2) it is provided that unabsorbed current loss from ordinary sources in the case of sole proprietor shall be set off against current income from ordinary sources of the company. Similarly, unabsorbed current capital loss in the case of sole proprietor will be set off against current capital gain in the subsequent year in the case of the company. If the conditions laid down in section 47 (1)(n) of DTC are not complied with, the set-off of loss so allowed in any F.Y. can be withdrawn by rectification of assessment order.

11.2    Treatment of unabsorbed losses on change in Constitution

(i)    Changes in constitution of unincorporated body — Section 65 provides that in the case of change in the constitution of an unincorporated body (i.e., Firm, LLP, AoP or BoI) on account of death/retirement of a participant, the unabsorbed loss of that entity (including capital loss) shall be reduced in proportion of the loss attributable to the deceased/retiring participant and allowed to be carried forward and set off in the subsequent years as under:

(a)    Proportionate unabsorbed loss from ordinary sources shall be carried forward and set off against current income from ordinary sources in the subsequent years.

(b)    Proportionate unabsorbed capital loss shall be carried forward and set off against current capital gain in the subsequent year.

This section is similar to section 78 of ITA with the difference that section 78 of ITA applies to a Firm or LLP, whereas section 65 of DTC applies to a Firm, LLP, AoP or BoI.

(ii)    Changes in shareholding of closely-held companies — Section 66 of DTC is similar to section 79 of ITA. It provides that in the case of a closely-held company, if the persons holding not less than 51% of voting power on the last day of the F.Y. when the loss under the ordinary sources or capital gains was incurred, are not holding this voting power on the last day of the F.Y. when the income from such sources is earned, such unabsorbed loss cannot be the set-off against the income from such sources in that F.Y. The only difference between section 79 of ITA and section 66 of DTC is that section 79 does not apply to set off of unabsorbed depreciation, whereas u/s.66 of DTC loss includes depreciation.

12.    Filing return of loss
Section 67 provides that if the return of tax bases showing loss is not filed before the due date for filing the return, the loss under the head ordinary sources, special sources, capital gains, speculation, horse races activities, etc. shall not be allowed to be carried forward or set off in the subsequent years. This section is similar to section 80 of ITA. Here also it may be noted that section 80 does not refer to unabsorbed depreciation, but u/s.67 loss will include depreciation also.

13.    Some issues
From the above discussion about provisions relating to taxation of capital gains proposed to be introduced in DTC w.e.f. 1-4-2012, it is evident that the existing provisions will stand substantially modified. Some of the following issues require consideration.

(i)    The word ‘Asset’ is defined to mean (a) a business asset or (b) an investment asset. Again, a business asset is further classified as business trading asset and business capital asset. So far as business trading asset is concerned, it will be allowed as revenue expenditure in computing business income. As regards business capital asset, only depreciation will be allowed. Thus, only investment asset will form part of the computation of capital gains.

(ii)    The existing distinction between long-term and short-term capital asset is now proposed to be modified. It an investment asset is held for more than one year after the end of the F.Y. in which it is acquired, it will be considered as a long-term capital asset.

(iii)    The existing concept of determination of indexed cost for computing long-term capital gain has been retained. The base date for this purpose will be 1-4-2000, instead of 1-4-1981.

(iv)    The existing provision for granting exemption in respect of long-term capital gain on sale of securities, where STT is paid, will continue. As regards short-term capital gain in such transactions, only 50% of such capital gain will be taxable at normal rate. Therefore, the effective tax rate shall not exceed 15%.

(v)    If net result under the head capital gain (long-term or short-term) is positive, it will be added to income under other heads and tax will be payable at normal rate of tax applicable to the total income. If the net result is capital loss, the same will be carried forward without any time limit. There is no concessional rate for taxation of long-term capital gain as provided in section 112 of ITA.

(vi)    There is, however, no provision in DTC for adjustment of short-term or long-term capital losses carried forward under ITA from F.Y. 2011-12 (A.Y. 2012-13) and earlier years against capital gains for F.Y. 2012-13 and subsequent years.

(vii)    Existing section 47(xiii) of ITA provides that conversion of a partnership firm into limited company does not attract any capital gains tax if certain conditions are complied with. There is no corresponding provision in DTC. Similarly, there is no provision in DTC for such exemption when a partnership firm is converted into an LLP.

(viii)    As discussed in para 5.1 above, there is no provision in DTC for reference to valuation officer if the assessee objects to the stamp duty valuation in respect of sale of immovable property. Therefore, stamp duty valuation will now become mandatory.

(ix)    As discussed in para 7(vii) above, there is no provision in DTC similar to section 54EC of ITA to enable an assessee to deposit up to Rs.50 lakh, out of long-term capital gains in notified Bonds. Thus, assessees selling small value investment assets will not be able to claim exemption from long-term capital gains tax to this extent.

Let us hope that some of the above anoma-lies are removed before DTC is enacted by the Parliament.