Section 10(38): Long-term Capital Gain on Transfer of Equity shares/units exempted if Covered under Securities Transaction Tax

By | April 25, 2016

As per S. 10(38), Long-term capital gains arising on transfer of equity shares or units of equity oriented mutual fund is not chargeable to tax from the A.Y. 2005-06 if such a transaction is covered by securities transaction tax.

The securities transaction tax is applicable if equity shares or units of equity oriented mutual fund transferred on or after October 1, 2004 in a recognized stock exchange in India (or units are transferred to the mutual fund). If the securities transaction tax is applicable, long-term capital gain is not chargeable to tax; short-term capital gain is taxable @ 10 per cent (plus SC and EC). If income is shown as business income, the taxpayer can claim rebate u/s 88E.

U/s 10(38) of Income Tax Act, the Capital Gain on sale of shares held for more then 12 months is exempt if the shares under consideration are listed on a  stock exchange in India. 

Section 10(38) is not applicable where no STT is charged/paid.

There is no other section where exemption is applicable to this.

If the shares sold are not listed in stock exchange of India then it will be LTCG if shares are held for more than 36 months otherwise it will be STCG (See definition of STCG)

If it is listed in Stock exchange of India then clause d of sub section (1) of Section 112 will apply and 10% rate will be applicable.

Related Cases:

S. 10(38), 70(3), 74 of IT Act, 1961—Capital gain—The right to carry forward long term capital loss u/s 74(1) of the Act is not hit by the provisions of S. 70(3) of the Act. Set off of long-term capital loss against long-term capital gains which is exempt income u/s 10(38) is contrary to law and the intention, object and purpose of the Legislature in introducing cl. 38 to S. 10 of the Act—G.K. Ramamurthy vs. JCIT [2010] 2 ITR (Trib) 139 (MUMBAI)

S. 10(38), 115JB of IT Act, 1961—Minimum Alternate Tax—S. 115JB provides for deeming the book profit of a company to be its total income where the tax payable on its total income would be less than 10 per cent of its book profits. On a foreign company which does not have any physical presence in India in the form of an office or branch or a permanent establishment, the provisions of S. 115JB of the Act are not applicable—Timken Company. In re (2010) 326 ITR 193 (AAR)

S. 2(14), 2(42A), 10(38) & 45 of IT Act, 1961—Capital gain—The word asset cannot be segregated from the word capital as capital asset itself has been defined in the Act. No doubt, the assessee has transferred the capital asset which is not in dispute but such capital asset came into existence only from 1st April, 2004 and before which it was merely a stock-in-trade and same cannot be treated as capital asset as per the definition of capital asset. The holding period prescribed in S. 2(42A) has to be reckoned with in the asset i.e., shares became capital asset w.e.f. 1st April, 2004. Since the holding period was less than 12 months therefore, exemption of long-term capital gain u/s 10(38) cannot be allowed—Lohia Metals Pvt. Ltd. vs. CIT (2010) 131 TTJ 472 (ITAT-Chennai)

S. 10(38) of IT Act, 1961—Capital gain—The assessee, whose primary business is dealing in shares, held the controlling shares in a company ICL, which it had promoted. The assessee sold the shares and claimed the income therefrom as exempt u/s 10(38) of the Act. Since the sale of shares of ICL held by the assessee is in the nature of sale of capital asset and not in the nature of stock-in-trade, the assessee is entitled for the benefit of exemption u/s 10(38) of the Act in respect of the long-term capital gains on the sale of shares of ICL—ACIT vs. Stargate Investment Pvt. Ltd. (2011) 10 ITR (Trib) 211 (ITAT-Chennai)

S. 10(38) & 45 of IT Act, 1961—Capital gain—Merely because there was substantial delay in transferring the shares into D-mat account from the date of purchase and the transactions not routed through stock exchange in question, the Assessing Officer was not justified in doubting the declared date of purchase of the shares ignoring the evidence produced by the assessee in its support and by denying exemption u/s 10(38) of the Act—ITO vs. Ajay Shantilal Lalwani (2012) 145 TTJ 511 (ITAT-Pune)

S.10(38) of IT Act, 1961—Capital gain—Surplus capital gains arising to the assessee-company should be treated as a surplus arising on account of sale of short-term capital asset in the nature of landed properties and as such the assessee is liable for short-term capital gains taxation—Bhoruka Engineering Industries Ltd. vs. DCIT (2011) 9 ITR (Trib) 75 (ITAT-Banglore)

S. 10(38), r/w S. 112 of IT Act, 1961—Capital gain—As per SEBI circular dated 19.1.2006, the depositaries have been advised to activate ISINS only on the date of commencement of trading on the stock exchange. The assessee was a promoter-director of the company, PIL, where shares were not quoted or listed on any stock exchange. The company issued shares for public subscription through Initial Public Offer (IPO) as per SEBI guidelines, which permitted existing shareholders also to sell their shares in the IPO for diluting their equity holding. The assessee offered certain shares for sale and received a certain amount as sale consideration. No Securities Transactions Tax (STT) was paid on the sale of share and he claimed that gains arising on the sale are not includible in the total income u/s 10(38) of the Act. Since the shares of PIL were not listed on any recognized stock exchange on date of sale and transaction undertaken by assessee and STT was not paid, the assessee was not entitled to exclude gains from his total income—Uday Punj vs. DCIT (2011) 133 ITD 354 (ITAT-Delhi)

S. 10(38), r/w S. 2(47), of IT Act, 1961—Capital Gain—The assessee is a promoter / director of a company ‘PLL’ which came out with the Initial Public Offering (IPO) of its share in Dec., 2005. Since the shares in question had been transferred to the applicants in the public offer by 05.01.2006, before they were actually listed on the stock exchanges on 06.01.2006, they were not ‘listed securities’ at the time of sale by the assessee and, consequently, the transaction would not be eligible for payment of capital gain tax at the lower rate of 10 per cent.—Uday Punj Vs. CIT


As Per Section 10(38), of the Income Tax Act, 1961-

Incomes not included in total income.

 In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—

(38)  any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund where—

(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 :

[Provided that the income by way of long-term capital gain of a company shall be taken into account in computing the book profit and income-tax payable under section 115JB.]

For the purposes of this clause, “equity oriented fund” means a fund—

(i)  where the investable funds are invested by way of equity shares in domestic companies to the extent of more than [sixty-five] per cent of the total proceeds of such fund; and

(ii)  which has been set up under a scheme of a Mutual Fund specified under clause (23D) :

Provided that the percentage of equity shareholding of the fund shall be computed with reference to the annual average of the monthly averages of the opening and closing figures.

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