The assessing officer says my client's long-term gains on listed shares are not exempt under section 10(38) because no STT was paid when the shares were bought. Is that right, and does section 10(38) even apply to my year?
First check the year: section 10(38) does not apply at all to a transfer made on or after 1 April 2018, because the Finance Act 2018 inserted a fourth proviso switching the clause off from that date — so for AY 2019-20 onwards the question is section 112A, not section 10(38). For a transfer up to 31 March 2018, the third proviso (inserted by the Finance Act 2017) does require STT to have been paid on ACQUISITION as well, but only in the cases carved out by the Central Government's Notification No. 43/2017 (S.O. 1789(E)) dated 5 June 2017 — the notification's main part covers all acquisitions of equity shares from 1 October 2004 that were not chargeable to STT, and only its three listed clauses take an acquisition out of the exemption.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2017-06-05, reported as S.O. 1789(E), Notification No. 43/2017, F. No. 370142/09/2017-TPL, dated 5 June 2017; section 5(b)(iii) of the Finance Act, 2018. It bears on section 10(38), section 112A, section 55(2)(ac), section 47, section 50B of the Income Tax Act 1961, in Capital Gains, Capital Gains Exemptions and How Tax Law Is Read matters.
The notification is drafted the wrong way round from how officers read it. It notifies ALL acquisitions not chargeable to STT as covered, and then excepts three classes: (a) a preferential issue in a company whose shares are not frequently traded, (b) an acquisition of an EXISTING LISTED equity share not entered through a recognised stock exchange, and (c) an acquisition during a company's delisted period. Each of (a) and (b) has its own proviso restoring the exemption for specified regular acquisitions. So an off-market purchase does not by itself defeat section 10(38) — the officer must place the acquisition inside one of the three clauses, and clauses (a) to (c) all speak of listed shares, which is why they cannot reach a purchase of shares that were unlisted when acquired.
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Section 10(38) exempted income arising from the transfer of a long-term capital asset being an equity share, a unit of an equity oriented fund or a unit of a business trust where the sale was entered into on or after the date Chapter VII of the Finance (No. 2) Act 2004 came into force and was chargeable to securities transaction tax. The Finance Act 2017 added a third proviso denying the exemption where the transaction of ACQUISITION of the equity share was not chargeable to STT, other than acquisitions notified by the Central Government. The Central Government issued Notification No. 43/2017 on 5 June 2017. The Finance Act 2018 then added a fourth proviso ending the clause altogether for transfers made on or after 1 April 2018, section 112A taking its place.
For transfers up to 31 March 2018, an acquisition of equity shares entered into on or after 1 October 2004 which was not chargeable to STT is nevertheless within the exemption unless it falls in clause (a), (b) or (c) of Notification 43/2017. For transfers made on or after 1 April 2018 the clause has no application at all.
The third proviso is an enabling provision: it denies the exemption where acquisition did not suffer STT 'other than' acquisitions notified by the Central Government, so the notification defines the field that keeps the exemption. The notification's operative words notify all non-STT acquisitions of equity shares from 1 October 2004 and then carve out three classes, each expressed in terms of listed equity shares — a preferential issue in a company whose equity shares are not frequently traded on a recognised stock exchange of India; a transaction for acquisition of an existing listed equity share not entered through a recognised stock exchange of India; and an acquisition during the window between delisting and relisting. Clauses (a) and (b) each carry a proviso preserving specified regular acquisitions, including, under clause (b), acquisitions made in accordance with the Securities Contracts (Regulation) Act 1956 and, in the list under that proviso, acquisitions by a mode of transfer referred to in section 47 or section 50B where the previous owner did not acquire by an excepted mode.
Provided also that nothing contained in this clause shall apply to any income arising from the transfer of long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust, made on or after the 1st day of April, 2018.
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Handle my notice → Ask a CA on WhatsAppFirst check the year: section 10(38) does not apply at all to a transfer made on or after 1 April 2018, because the Finance Act 2018 inserted a fourth proviso switching the clause off from that date — so for AY 2019-20 onwards the question is section 112A, not section 10(38). For a transfer up to 31 March 2018, the third proviso (inserted by the Finance Act 2017) does require STT to have been paid on ACQUISITION as well, but only in the cases carved out by the Central Government's Notification No. 43/2017 (S.O. 1789(E)) dated 5 June 2017 — the notification's main part covers all acquisitions of equity shares from 1 October 2004 that were not chargeable to STT, and only its three listed clauses take an acquisition out of the exemption. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 10(38), section 112A, section 55(2)(ac), section 47, section 50B of the Income Tax Act 1961. It is reported as S.O. 1789(E), Notification No. 43/2017, F. No. 370142/09/2017-TPL, dated 5 June 2017; section 5(b)(iii) of the Finance Act, 2018. The notification is drafted the wrong way round from how officers read it. It notifies ALL acquisitions not chargeable to STT as covered, and then excepts three classes: (a) a preferential issue in a company whose shares are not frequently traded, (b) an acquisition of an EXISTING LISTED equity share not entered through a recognised stock exchange, and (c) an acquisition during a company's delisted period. Each of (a) and (b) has its own proviso restoring the exemption for specified regular acquisitions. So an off-market purchase does not by itself defeat section 10(38) — the officer must place the acquisition inside one of the three clauses, and clauses (a) to (c) all speak of listed shares, which is why they cannot reach a purchase of shares that were unlisted when acquired. If it applies to you, the first step is this: Date the transfer first. On or after 1 April 2018 there is no section 10(38) claim to defend; move the argument to section 112A and section 55(2)(ac).
Section 10(38) exempted income arising from the transfer of a long-term capital asset being an equity share, a unit of an equity oriented fund or a unit of a business trust where the sale was entered into on or after the date Chapter VII of the Finance (No. 2) Act 2004 came into force and was chargeable to securities transaction tax. The Finance Act 2017 added a third proviso denying the exemption where the transaction of ACQUISITION of the equity share was not chargeable to STT, other than acquisitions notified by the Central Government. The Central Government issued Notification No. 43/2017 on 5 June 2017. The Finance Act 2018 then added a fourth proviso ending the clause altogether for transfers made on or after 1 April 2018, section 112A taking its place. The matter was decided on 2017-06-05 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. For transfers up to 31 March 2018, an acquisition of equity shares entered into on or after 1 October 2004 which was not chargeable to STT is nevertheless within the exemption unless it falls in clause (a), (b) or (c) of Notification 43/2017. For transfers made on or after 1 April 2018 the clause has no application at all.
The third proviso is an enabling provision: it denies the exemption where acquisition did not suffer STT 'other than' acquisitions notified by the Central Government, so the notification defines the field that keeps the exemption. The notification's operative words notify all non-STT acquisitions of equity shares from 1 October 2004 and then carve out three classes, each expressed in terms of listed equity shares — a preferential issue in a company whose equity shares are not frequently traded on a recognised stock exchange of India; a transaction for acquisition of an existing listed equity share not entered through a recognised stock exchange of India; and an acquisition during the window between delisting and relisting. Clauses (a) and (b) each carry a proviso preserving specified regular acquisitions, including, under clause (b), acquisitions made in accordance with the Securities Contracts (Regulation) Act 1956 and, in the list under that proviso, acquisitions by a mode of transfer referred to in section 47 or section 50B where the previous owner did not acquire by an excepted mode. In the words reproduced by the source cited on this page: "Provided also that nothing contained in this clause shall apply to any income arising from the transfer of long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust, made on or after the 1st day of April, 2018."
It was decided by the CBDT Circulars & Instructions on 2017-06-05 and is reported as S.O. 1789(E), Notification No. 43/2017, F. No. 370142/09/2017-TPL, dated 5 June 2017; section 5(b)(iii) of the Finance Act, 2018. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 10(38), section 112A, section 55(2)(ac), section 47, section 50B, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. For transfers up to 31 March 2018, an acquisition of equity shares entered into on or after 1 October 2004 which was not chargeable to STT is nevertheless within the exemption unless it falls in clause (a), (b) or (c) of Notification 43/2017. For transfers made on or after 1 April 2018 the clause has no application at all. It arises in Capital Gains, Capital Gains Exemptions and How Tax Law Is Read matters, on section 10(38), section 112A, section 55(2)(ac), section 47, section 50B of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. For a transfer up to 31 March 2018, make the officer identify which clause — (a), (b) or (c) — of Notification 43/2017 he says the acquisition falls in, in writing. If the shares were UNLISTED when acquired, take the point that all three clauses are about listed equity shares and the acquisition therefore falls in the main part of the notification. If the acquisition was of listed shares off-market, go to the proviso under clause (b) and check whether it was one of the acquisitions made in accordance with the Securities Contracts (Regulation) Act 1956 that the proviso restores. Do not confuse this notification with the one under section 112A(4): the acquisition-STT condition in section 112A(1)(iii)(a) has its own notification and its own list.
Superseded by amendment. Section 10(38) is spent for transfers made on or after 1 April 2018; section 112A applies instead from that date. The position stated here remains the operative law for transfers up to 31 March 2018 and for the assessments and appeals still running on those years. Notification 43/2017 was read only as reproduced in a July 2024 Tribunal order; the gazette text itself was not retrieved and no check was made for a later amending notification. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The brief for this batch paired section 10(38)'s third proviso with 'Notification 60/2018'. What was actually read is Notification No. 43/2017 (S.O. 1789(E), F. No. 370142/09/2017-TPL) dated 5 June 2017, which is the notification issued under the third proviso to section 10(38) and is reproduced in the ITAT Mumbai order in Business Excellance Trust. Notification 60/2018 belongs to section 112A(4), the parallel power for the successor section; it could not be retrieved on any route available here (exact-phrase searches on indiankanoon for the notifying words returned only the two Business Excellance Trust documents), so nothing about its contents is stated. The 1 April 2018 sunset is taken verbatim from the proviso inserted by section 5 of the Finance Act, 2018. Every transfer this entry concerns falls before 23 July 2024, so the 2024 rate changes are irrelevant to it. Notification 60/2018 is named and dated at paragraph 14 of the ITAT Mumbai order in Ramesh Jaisinghani (10 October 2025) as 'CBDT Notification No. 60/2018 dated 1 October 2018'; its contents were still not retrieved on any route and nothing about them is asserted here. Section 112A(4), the power it is issued under, was read verbatim on the department's current Year-2026 section 112A page at https://incometaxindia.gov.in/w/section-112a-65. 'decided_on' records the date of Notification 43/2017, which is the date from which the notified list operated; it is not a decision date. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
For transfers up to 31 March 2018, an acquisition of equity shares entered into on or after 1 October 2004 which was not chargeable to STT is nevertheless within the exemption unless it falls in clause (a), (b) or (c) of Notification 43/2017. For transfers made on or after 1 April 2018 the clause has no application at all.
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