Finance Bill 2020 - Amendment of meaning of short-term capital asset and cost of acquisition in case of segregation of portfolio and allotment of new units etc.

[CA DEV KUMAR KOTHARI]

Summary – simple understanding

In case of segregation of units from one portfolio to two (or more – added by author) portfolios , the holding period of original units shall be included in holding period of new units/ segregated unit and cost of acquisition shall be determined based on proportion of assets value for new / segregated portfolio and  balance shall be cost of original units.   

Proposal for amendment ,vide clause 3 of Finance Bill 2020 to insert new clause for computing period of holding in some cases:

3. In section 2 of the Income-tax Act,––

   (ii) in clause (42A), in Explanation 1, in clause (i), after sub-clause (hg), the following sub-clause shall be inserted, namely:––  

  “ (hh) in the case of a capital asset, being a unit or units in a segregated portfolio referred to in sub-section (2AG) of section 49, there shall be included the period for which the  original unit or units in the  main portfolio were held by the assessee;”.

Proposal for amendment, vide clause 25 of Finance Bill 2020 to provide for adjustment of cost of acquisition:

25. In section 49 of the Income-tax Act, after sub-section (2AF), the following shall be inserted, namely:–– 

 ‘(2AG) The cost of acquisition of a unit or units in the segregated portfolio shall be the amount which bears, to the cost of acquisition of a unit or units held by the assessee in the total portfolio, the same proportion as the net asset value of the asset transferred to the segregated portfolio bears to the net asset value of the total portfolio immediately before the segregation of portfolios.  

 (2AH) The cost of the acquisition of the original units held by the unit holder in the main portfolio shall be deemed to have been reduced by the amount as so arrived at under sub-section (2AG).

Explanation.––For the purposes of sub-section (2AG) and sub-section (2AH), the expressions “main portfolio”, “segregated portfolio”  and  “total portfolio” shall have the meanings respectively assigned to them in the circular No. SEBI/HO/IMD/DF2/CIR/P/2018/160, dated the 28th December, 2018, issued by the Securities and Exchange Board of India under section 11 of the Securities and Exchange Board of India Act, 1992.’.

Memorandum explaining the proposal:

Rationalisation of the provisions of section 49 and clause (42A) of section 2 of the Act in respect of segregated portfolios.

Section 49 of the Act provides for cost of acquisition for the capital asset which became the property of the assessee under certain situations. Further, clause (42A) of section 2 of the Act provides the definition of the term “short-term capital asset”. It also provides for determination of period of holding of the capital asset held by the assessee.

SEBI has, vide circular No. SEBI/HO/IMD/DF2/CIR/P/2018/160, dated the 28th December, 2018, permitted creation of segregated portfolio of debt and money market instruments by Mutual Fund schemes. As per the SEBI circular, all the existing unit holders in the affected scheme as on the day of the credit event shall be allotted equal number of units in the segregated portfolio as held in the main portfolio. On segregation, the unit holders come to hold same number of units in two schemes –the main scheme and segregated scheme  In view of the above, it is proposed to amend sub-section (42A) of section 2 of the Act to provide that in the case of a capital asset, being a unit or units in a segregated portfolio, referred to in sub-section (2AG) of section 49, there shall be included the period for which the original unit or units in the  main portfolio were held by the assessee. 

Further, a new sub-section (2AG) is proposed to be inserted in Section 49 of the Act to provide that the cost of acquisition of a unit or units in the segregated portfolio shall be the amount which bears to the cost of acquisition of a unit or units held by the assessee in the total portfolio, the same proportion as the net asset value of the asset transferred to the segregated portfolio bears to the net asset value of the total portfolio immediately before the segregation of portfolios.

It is also proposed to insert another sub-section (2AH) in the said section to provide that the cost of the acquisition of the original units held by the unit holder in the main portfolio shall be deemed to have been reduced by the amount as so arrived at under the proposed sub-section (2AG). 

The Explanation below these two new sub-sections, as proposed to be inserted, provide that for the purposes of  sub-sections (2AG) and (2AH), the expressions “main portfolio”, “segregated portfolio” and “total portfolio” shall have the meaning respectively assigned to them in the said circular dated 28th December, 2018 issued by SEBI.

These amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years. 

[Clauses 3 & 25]