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Capital gains on amount received under open offer

Last year in April (2005) McDowell made an open offer for Shaw Wallace and Company shares at the rate of Rs. 260 per share. McDowell accepted 60 per cent of my holding (all bonus shares) and paid Rs. 14.50 lakh which were fully invested in 54EC Bonds. Kindly clarify, whether capital gains tax is applicable or not as securities transaction tax (STT) was not deducted from sale proceeds.

The reader apparently held the shares as investment, so that the surplus is liable to tax only as capital gains. If he has sold the shares through a stock exchange without availing himself of the open offer, his long-term capital gains would have been exempt under Sec. 10(38) of the Income-tax Act. But he would have been liable to pay STT on such amount deducted from the sale proceeds. Since he has chosen the route of acceptance of open offer, there is liability for capital gains tax. Sec. 54EC spares liability to the extent of capital gains invested in bonds. The reader has invested the entire sale proceeds in them. Since he had parted with bonus shares, the cost of which is nil, the entire sale proceeds will be capital gains. Because of the relief under Sec. 54EC, if he had made an investment within six months of his acceptance of the open offer, there is no liability to tax.

S. RAJARATNAM

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