Exemption of long-term capital gains on transfer of residential property if the sale consideration is used for subscription in equity of a new start-up manufacturing SME company to be used for purchase of new plant and machinery [Section 54GB] under Exemption of capital gains :
(1) The National Manufacturing Policy (NMP) was announced by the Government in 2011 to encourage investment in the SME segment (Small and Medium Enterprises) in the manufacturing sector.
(2) Section 54GB exempt long term capital gains on sale of a residential property (house or plot of land) owned by an individual or a HUF in case of re-investment of sale consideration in the equity shares of an eligible company being a newly incorporated SME company engaged in the manufacturing sector, which is utilized by the company for the purchase of new plant and machinery.
(3) In order to qualify as an “eligible company” under section 54GB the company should be –
(i) incorporated in the financial year in which the capital gain arises or in the following year on or before the due date of filing return of income by the individual or HUF;
(ii) engaged in the business of manufacture of an article or thing;
(iii) a company in which the individual or HUF holds more than 50% of the share capital or 50% of the voting rights, after the subscription in shares by the individual or HUF; and
(iv) a company which qualifies to be a Small or Medium Enterprise (SME) under the Micro, Small and Medium Enterprises Development Act, 2006.
(4) The following conditions should be satisfied for claim of exemption of long-term capital gains under this section –
(i) The amount of net consideration should be used by the individual or HUF before the due date of furnishing of return of income under section 139(1), for subscription in equity shares of the eligible company.
(ii) The amount of subscription as share capital is to be utilized by the eligible company for the purchase of new plant and machinery within a period of one year from the date of subscription in the equity shares.
(iii) If the amount of net consideration subscribed as equity shares in the eligible company is not utilized by the company for the purchase of plant and machinery before the due date of filing of return by the individual or HUF, the unutilized amount shall be deposited in an account with any specified bank or institution before such due date of filing return of income. The return of income furnished by the assessee, should be accompanied by the proof of such deposit.
(iv) The said amount is to be utilized in accordance with any scheme which may be notified by the Central Government in the Official Gazette.
(5) The amount of net consideration utilized by the company for purchase of new plant and machinery and the amount deposited as mentioned in (iv) above, will be deemed to be the cost of new plant and machinery for the purpose of computation of capital gains in the hands of individual or HUF.
(6) New plant and machinery does not include –
(i) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person;
(ii) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house;
(iii) any office appliances including computers or computer software;
(iv) any vehicle; or
(v) any machinery or plant, the whole of the actual cost of which is allowed as a deduction, whether by way of depreciation or otherwise, in computing the income chargeable under the head “Profits and gains of business or profession” of any previous year.
(7) Quantum of exemption under section 54GB
- If cost of new plant and machinery ≥ Net consideration of residential house, entire capital gains is exempt.
- If cost of new plant and machinery < Net consideration of residential house, only proportionate capital gains is exempt i.e.
LTCG * Amount invested in new plant and machinery / Net consideration
(8) The exemption under this section would not be available in respect of transfer of residential property made after 31st March, 2017.
(9) If the amount deposited by the company as mentioned in point (iv) above, is not utilized wholly or partly for the purchase of new plant and machinery within the period specified, then, the amount of capital gains not charged to tax under section 45 on account of such deposit by the company shall be charged to tax under section 45 as income of the assessee for the previous year in which the period of 1 year from the date of subscription in the equity shares by the assessee expires.
(10) If the equity shares of the company acquired by the individual or HUF or the new plant and machinery acquired by the company are sold or transferred within a period of five years from the date of acquisition, the amount of capital gains earlier exempt under section 54GB shall be deemed to be the income of the individual or HUF chargeable under the head “Capital Gains” of the previous year in which such equity shares or such new plant and machinery are sold or otherwise transferred. This would be in addition to the capital gains arising on transfer of shares by the individual or HUF or capital gains arising on transfer of new plant and machinery by the company, as the case may be. These are safeguards to restrict the transfer of the shares of the company and of the plant and machinery for a period of 5 years to prevent diversion of these funds.
Illustration
Mr. Akash sold his residential property on 2nd February, 2016 for Rs 90 lakh and paid brokerage@1% of sale price. He had purchased the said property in May 2000 for Rs 24,36,000. In June, 2016, he invested Rs 75 lakh in equity of A (P) Ltd., a newly incorporated SME manufacturing company, which constituted 63% of share capital of the said company. A (P) Ltd. utilized the said sum for the following purposes –
(a) Purchase of new plant and machinery during July 2016 – Rs 65 lakh
(b) Included in (a) above are RS 6 lakh for purchase of computers and Rs 8 lakh for purchase of cars.
(c) Air-conditioners purchased for Rs 1 lakh, included in the (a) above, were installed at the residence of Mr. Akash.
(d) Amount deposited in specified bank on 28.9.2016 – Rs 10 lakh
Compute the chargeable capital gain for the A.Y.2016-17. Assume that Mr. Akash is liable to file his return of income on or before 30th September, 2016 and he files his return on 29.09.2016.
Solution
Computation of taxable capital gains for A.Y.2016-17
| Particulars | Rs |
| Gross consideration | 90,00,000 |
| Less: Expenses on transfer (1% of the gross consideration) | 90,000 |
| Net consideration | 89,10,000 |
| Less: Indexed cost of acquisition (Rs 24,36,000 × 1081/406) | 64,86,000 |
| 24,24,000 | |
| Less: Exemption under section 54GB (Rs 24,24,000 × Rs 60,00,000 /Rs 89,10,000) | 16,32,323 |
| Taxable capital gains | 7,91,677 |
Deemed cost of new plant and machinery for exemption under section 54GB
| Particulars | Rs | Rs | |
| (1) | Purchase cost of new plant and machinery acquired in July, 2016 | 65,00,000 | |
| Less: Cost of office appliances, i.e., computers | 6,00,000 | ||
| Cost of vehicles, i.e., cars | 8,00,000 | ||
| Cost of air-conditioners installed at the residence of Mr. Akash | 1,00,000 | 15,00,000 | |
| 50,00,000 | |||
| (2) | Amount deposited in the specified bank before the due date of filing of return | 10,00,000 | |
| Deemed cost of new plant and machinery for exemption under section 54G | 60,00,000 |