A very close friend of mine passed away leaving certain shares in his demat account, which is now in the name of his widow — the only surviving member in the family. All the shares held in the demat account were acquired before one year and are to be sold now. Since long-term capital gains was tax-free before Budget 2018-19, no records were preserved with regard to their cost or exact date of purchase. Please guide me as to how to compute long-term taxable gain/loss after taking into account the ‘grandfathering’ effect.

There could be certain shares with purchase-price being higher than the fair value (highest traded price on Jan 31, 2018) in which case their sale would result In long-term capital loss or lower LTG, depending on their sale price. Is foregoing LTC loss/ lower LTC gain and taking fair value (Highest traded price) of all the shares as their purchase price for computing taxable LTC gain the only way out? If so, will such computation be accepted by the IT authorities?

K M Bhatt

Based on the limited information available, I assume that the shares held by your friend are listed on a stock exchange in India. As per the provisions of the income-tax Act 1961, listed shares held for more than 12 months qualify as long-term capital asset. As per the newly inserted Section 112A by Finance Act 2018, which is effective April 1, 2018, long-term capital gain exceeding ₹100,000 , arising from sale of equity shares held for more than one year shall be taxable @10 per cent (without making any adjustment for cost inflation index).

It is to be noted that the government, while introducing the above provision, has provided relief to the taxpayers in cases where where the long-term shares were acquired before January 31, 2018. In such cases, the cost of acquisition of the shares shall be considered as higher of the fair market value (as on January 31, 2018) or the actual cost of acquisition. Based on such cost, the long-term capital gain shall be computed.

In the instant case, since no records are available for the date and amount of purchase, I would suggest that you take the help of the broker with whom your friend has the demat account; he may help you find the date and the purchase prices of the shares held in the demat account. This may help the assesse in establishing the purchase price and whether such shares qualify as long-term capital asset in the first place.

Separately, in case you have anything to substantiate that the shares qualify as long-term capital asset, you may consider the fair market value (as on January 2018) as the cost of acquisition and offer to tax the capital gain, if any, arising on the sale of such shares and forego the long-term capital loss, if any, arising with respect to the actual cost of acquisition. As this approach would not result in any loss of tax to the income-tax authorities, it is likely that they should accept the computation prepared based on the said approach.

The writer is a practising Chartered Accountant. Send your queries to taxtalk@thehindu.co.in

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