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Capital gains
TAX LAWS I
PROJECT REPORT ON
TOPIC: CAPITAL GAINS
JAMIA MILLIA ISLAMIA
FACULTY OF LAW
SUBMITTED IN PARTIAL FULFILMENT OF
B.A.LL.B. (HONS.) SIXTH SEMESTER
SUBMITTED TO: SUBMITTED BY:
DR. KAHKASHAN Y. DANYAL S. ABBAS HAIDER
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ACKNOWLEDGEMENT
Now that the project stands complete, I intend to place on record my gratitude towards all without
whom completing the project would have been nothing but out of question.
In the first place, I thank our Lecturer of tax laws I as she had time and again helped me, guided me
throughout, and answered all the queries that encountered while my work relating to project was afoot.
Secondly, I thank the library staff who liaised with us in searching material relating to the project.
Thirdly and finally, I thank the almighty for the monumental tacit support, which boosted my morale and
help me stay confident all through my work upon the project, placed forth by him.
SYED ABBAS HAIDER
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INTRODUCTIONWhen we buy any kind of property for a lower price and then subsequently sell it at a higher
price, we make a gain. The gain on sale of a capital asset is called capital gain. This gain is not a
regular income like salary, or house rent. It is a one-time gain; in other words the capital gain is
not recurring, i.e., not occur again and again periodically. Opposite of gain is called loss;
therefore, there can be a loss under the head capital gain. We are not using the term capital loss,
as it is incorrect. Capital Loss means the loss on account of destruction or damage of capital
asset. Thus, whenever there is a loss on sale of any capital asset it will be termed as loss
under the head capital gain.
CHARGE UNDER THE HEAD ‘CAPITAL GAINS’ [Section 45]
Capital gains are charged to tax by virtue of Section 45 of the Income Tax Act, 1961. Capital
gains mean the profits or gains arising from the transfer of a capital asset. According to Section
45, the charge of income under the head ‘Capital Gains’ arises if the following conditions are
fulfilled:
(1) There is a capital asset. [The asset must be a capital asset at the time of transfer]
(2) There is a ‘transfer’ of such capital asset.
(3) The transfer of such capital asset has been effected during the previous year.
(4) Profits or gains arise from the transfer of such capital asset affected during the previous year.
(Profit or gain includes negative profit or gain i.e. loss also)
(5) Such profits or gains are not exempt from tax u/s 54, 54B, 54D, 54EC, 54F, 54G and 54H.
CAPITAL ASSET [Section 2(14)]:
According to Section 2(14), capital asset means property of any kind held by an assessee,
whether or not connected with his business or profession, but does not include –
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(1) Any stock-in-trade, consumable stores or raw materials held for purpose of his business or
profession.
(2) Personal effects i.e. movable property (including wearing apparel and furniture but
excluding jewellery, archaeological collections, Drawings, Paintings, Sculptures and any work
of art) held for personal use by assessee or his family member dependent on him.
Jewellery is a capital asset. It includes –
(a) Ornaments made of gold, silver, platinum or any other precious metal or any alloy containing
one or more of such precious metals, whether or not containing any precious or semi-precious
stones and whether or not worked or sewn into any wearing apparel;
(b) Precious or semi-precious stones whether or not set in any furniture, utensil or other article or
worked or sewn into any wearing apparel.
(3) Rural agricultural land i.e. Agricultural land in India not being a land situated
(c) Within the jurisdiction of a municipality or a cantonment board having a population of 10,000
or more according to the last preceding census; or
(d) In any notified area within 8 kms from the local limits of any municipality or cantonment
board.
(4) Gold Bonds issued by Central Government including the Gold Deposit Bonds issued under
the Gold Deposit Scheme, 1999.
(5) Special Bearer Bonds, 1991.
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Case laws Property In Ahmed G.H Ariff v. CWT1 the term”property” is a term of the widest import and subject to
any limitation which the contextmayrequire ,it signifies every possible interest which a person
can clearly hold and enjoy
In Arun Sunny v. CIT2 Property transferred must be a capital asset on the date of transfer .It is not
necessary that it should have been capital asset also on the date of its acquisition by the assessee.
In Vodafone International Holdings B.V v. Union of India 3the Supreme Court held that
influence or pursuation of a parent company over its subsidiary could not be construed as a right
in the legal sense. To supersede this ruling an explanation is inserted by the Finance Act 2012
below section 2(14) (with retrospective effect from April 1,1962) to clarify that “property”
includes any rights in or in relation to an Indian company, including rights of management or
control or any other rights whatsoever.
Maharaja Rana Hemant singhji v. CIT4 Gold and silver coins and bars used for puja of deities as
a matter of pride or ornamentation and normally not intended for personal or household use are
not “personal effects” and therefore treated as capital assets.
CIT v. H.H. Maharani Usha Devi5A property intended for personal or household use (may be
for ceremonial occasions only) ,is always a “personal effects”. For instance cloths meant for use
at weddings or formal occasions are not used daily. Yet they are stitched for personal use of the
wearer. As such, they would form a part of his personal effects.
Jayantilal A. Shah v. K.N. Anantharama Aiyar, CIT 6Silver utensils held by an assessee which
are not in use ordinarily and normally by the assessee, but only on certain occasions are personal
effects.
1 [1970] 76 ITR 471(SC)2 [2009]184 TAXMAN 498(Ker.)
3 [2012 ] 204 Taxman 4084 [1976] 103 ITR 61 (SC)
5[1998] 98 taxman 309 (SC) 6 [1985] 23 TAXMAN 14 (BOM.)
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Agricultural landT.S.M.O. Mohamed Othuman v. CIT7 [1957] In this court held that in order to qualify for
“Agricultural land in India”, it is not necessary that land was once agricultural land. It must be
agricultural land at the time of sale.
Ranchhodbhai Bhaijibhai Patel v. CIT8 In this case court held that true test to be applied for the
purpose of determining whether a particular land is agricultural land or not is first to ascertain
what is the use to which the land is being actually put. If it is being used for agricultural purpose
or even if the agricultural use has ceased but it is apparent that the land is meant to be used for
agricultural purpose, it would be agricultural land.
G.M. Omer Khan v. CIT9 In this case the court held that if the population of the municipality
exceeds 10,000, then agricultural land is a capital asset , even if population of the village is less
than 10,000.
SHORT TERM AND LONG TERM NATURE OF CAPITAL ASSETS :
(1)Short-term Capital Asset [Section 2(41A)] : ‘Short-term Capital Asset’ means a capital asset
held by assessee for not more than 36 months immediately preceding the date of its transfer.
However, in case of -
(a) Equity or Preference Shares in a company These assets shall be treated as short term
capital assets if they are held for not more than
12 months immediately preceding the date of
transfer.
(b) Other securities listed in recognized stock
exchange in India
(c) Units of UTI or Units of mutual fund
specified u/s 10(23D)
(d) Zero Coupon Bonds
7 31 ITR 480 (Mad.)
8 [1971] 81 ITR 446 (Guj.)
9 [1992]63 Taxman 533 (SC)
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Note: An asset held exactly for 36 months or 12 months, as the case may be, will also be a short-
term capital asst. For computing the period of 36 months or 12 months, as the case may be, the
date on which the asset was acquired is to be included while the date on which the asset is
transferred is to be excluded.
(2) Long-term Capital Asset [Section 2(29A)]: Any capital asset other than a short-term capital
asset is a long-term capital asset. In other words, a capital asset held for more than 36 months (12
months in case of specified assets given in table above) shall be a long-term capital asset.
(3) Determination of Long-Term or Short-Term Nature of a Capital Asset: In determining the
short-term or long-term nature of a capital asset, the period of holding shall be determined as
follows:
Mode Determination of period of holding
1. Shares held in a company in liquidation Any period subsequent to the date on which the
company goes into liquidation shall be
excluded
2. Assets acquired under Section 49(1) modes Period for which the asset was held by the
previous owner shall be included
3.Share(s) in Indian amalgamated company,
which became property of assessee in
amalgamation
Period, for which the shares in the
amalgamating company were held by the
assessee, shall be included.
4. Bonus shares or other securities Period of holding will start from the date of
allotment thereof.
5. Right shares or other securities Period of holding will start from the date of
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allotment thereof.
6. Right entitlements renounced Period of holding taken from date of offer
made by company.
7. Equity Shares in acompany, or Trading or
clearing rights of a RSE; acquired pursuant to
demutualisation or corporatization of such
RSE
Period for which such person was member of
Recognised Stock Exchange (RSE) in India
prior to such demutualisation or
corporatization shall be included.
8. Shares of resulting company acquired in
case of demerger
Period of holding of shares in demerged
company shall be included.
9. Asset which was not Entire period of
holding from date of initial held as capital asset
initially but is a capital asset at the time of
transfer
. acquisition upto date of transfer will
beconsidered to decide nature of capital asset.
[Keshavji Karsondas v. CIT [1994] 207 ITR
737(Bom.)
10. Capital asset being a flat allotted to a
member of a co-operative housing society
Period of holding to be calculated from date of
allotment of shares in society and not from date
on which possession of the flat is obtained
because right of possession and use of flat is an
incidental right flowing from the ownership of
shares. [CIT v. Jin-Das Pan-Chand Gandhi
[2005] 279 ITR 55
Property constructed on a land purchased earlier: if land is held by the assessee for more
than 36 months and building constructed over it is held for not more than 36 months, in that case,
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the gains arising from the sale of the land would be longterm capital gains, and gains arising
from sale of building will be short term capital gains.
The Central board of direct taxes has issued Circular no. 704 dated 28.4.95 clarifying as follows:
a) If securities are transacted through stock exchanges, the date of broker’s note should be treated
as the date of transfer provided the transaction is followed up by delivery of shares and also the
transfer deeds. Similarly, in respect of the purchase of the securities, the holding period shall be
reckoned from the date of the broker’s note for purchase on behalf of the investors.
b) In case the transaction take place directly between the parties and not through stock
exchanges, the board has clarified that the date of contract of sale as declared by the parties shall
be treated as the date of transfer provided it is followed up by actual delivery of shares and the
transfer deeds.
c) In cases where the shares are purchased in several lots at different points of time and the
delivery of which are taken in one lot and subsequently sold in parts, in the absence of
correlation of the dates of purchase and sale through specific numbers of the scripts, it is difficult
to determine the period of holding of the shares which are sold in parts. In this regard, board has
clarified that first-in-first-out (FIFO) method shall be adopted to reckon the period of holding.
Therefore, the shares acquired first will always be treated as sold first and the shares acquired
last will be taken to be remaining with the assessee.
This CBDT has issued an exclusive circular no.768 dated 24-06-1998 (232 ITR 5 St.) in respect
of transactions in securities held in dematerialized form u/s.45 (2A) for determination of ‘date of
transfer’ and ‘period of holding’ as detailed below:
a) The FIFO method will be applied only in respect of the dematerialized holdings, because in
the case of sale of dematerialized securities, the securities held in physical form cannot be
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construed to have been sold as they continue to remain in the possession of the investor and are
identified separately.
b) In the depository system, the investor can open and hold multiple accounts. In such a case,
where an investor has more than one security account, the FIFO method will be applied account
wise. This is because in case where a particular account of an investor is debited for sale of
securities, the securities lying in his other account cannot be construed to have been sold as they
continue to remain in that account.
c) If in an existing account of dematerialized stock, old physical stock is dematerialized and
entered at a later date, under the FIFO method, the basis for determining the movement out of the
account is the date of entry into the account.
Notes:
(A) Modes specified in Section 49(1): Where the capital asset became the property of the
assessee -
(a) On any distribution of assets on the total or partial partition of a Hindu Undivided Family;
(b) Under a gift or will; or by succession, inheritance or devolution; or
(c) On any distribution of assets on the liquidation of a company; or
(d) Under a transfer to a revocable or an irrevocable trust, or
Under any such transfer as is referred to in clause (iv)/ (v)/ (vi)/ (via)/ (viaa) of Section 47;
“TRANSFER” [Section 2(47)]:
Transfer, in relation to capital asset, includes –
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(a) sale, exchange or relinquishment of the asset;
(b) extinguishment of any rights therein;
(c) compulsory acquisition thereof under any law;
(d) maturity or redemption of zero coupon bond;
(e) conversion or treatment of such asset by the owner into stock in trade of business carried on
by him;
(f) Any transaction involving allowing of possession of an immovable property to be taken or
retained in part performance of a contract of the nature referred u/s 53A of Transfer of Property
Act, 1882.
(g) any transaction (whether by way of acquiring shares in, or by way of becoming a member of,
a co-operative society, company or other AOP or by way of any arrangement or agreement or in
any other manner) that has the effect of transferring or enabling the enjoyment of, any
immovable property.
Case Laws :
(1) Reduction in face value of shares and consequent payment to the shareholder towards such
reduction amounts to ‘transfer’, as it results in extinguishment of right in the shares held by the
shareholder. – Kartikeya Sarabhai v. CIT 10
(2) Surrender of Preference Shares on redemption thereof amounts to‘transfer’as there is
relinquishment by the shareholder of his rights in Preference Shares.–Anarkali Sarabhai v. CIT 11
(3) Family arrangement entered into by compromising doubtful/disputed rights for preserving
family property/peace, does amount to transfer. – CIT v A.L..Ramanathan12
10 [1997] 228 ITR 163 (SC).
11 23 [1997] 224 ITR 422 (SC).12 [2000] 245 ITR 494 (Mad.)
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TRANSACTIONS THAT ARE NOT REGARDED AS “TRANSFER” [Section 47]:
(1) Distribution of assets by a company to its shareholders on its liquidation. [S. 46(1)]
(2) Distribution of capital assets on total or partial partition of HUF. [S. 47(i)]
(3) Capital asset transferred under will or gift or an irrevocable trust. [S. 47(iii)]
However, transfer under a gift or an irrevocable trust of shares, debentures or warrants allotted to
the assessee under Employee Stock Option Plan as per prescribed guidelines, shall constitute
transfer. Its fair market value on date of such gift/irrevocable trust shall be treated as full value of
consideration.
(4) Transfer of a capital asset(not held as stock in trade) by a holding company to its 100%
subsidiary company or vice-versa, provided the transferee company is Indian company.
[S.47(iv)/(v)]
(5) Transfer of capital asset by an amalgamating company to Indian amalgamated company. [S.
47(vi)]
(6) Transfer of share(s) held in an Indian company by amalgamating foreign company to
amalgamated foreign company if – (a) at least 25% of shareholders of the amalgamating foreign
company continue to remain shareholders of the amalgamated foreign company; and (b) such
transfer does not attract capital gains tax in the country in which the amalgamating company is
incorporated. [S. 47(via)]
(7) Transfer of capital asset by an amalgamating banking company to the amalgamated banking
institution, under a scheme of amalgamation sanctioned by the Central Government. [S.47(viaa)]
(8) Transfer of capital asset by a demerged company to the resulting company.[S.47(vib)]
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(9) Transfer of share(s) held in an Indian company by demerged foreign company to the resulting
company if – (a) shareholders holding 75% or more of value of shares of demerged foreign
company continue to remain shareholders of resulting foreign company; and (b) such transfer
does not attract capital gains tax in the country in which demerged foreign company is
incorporated.[S.47(vi c)]
(10) Any transfer or issue of shares by resulting company, in a scheme of demerger to the
shareholders of the demerged company in consideration of demerger. [S.47(vi d)]
(11) Transfer of share(s) held by shareholder in amalgamating company, if such transfer is in
consideration of allotment to him of share(s) in the amalgamated Indian company. (S.47(vii)
However, if besides share(s) in amalgamated company, the shareholder is allotted something
more, say bonds or debentures, in consideration of such transfer; the transfer will not be exempt.
Composite consideration is not covered by Section 47(vii). – CIT v. Gautam Sarabhai Trust 13
(12) Any transfer, in an amalgamation/demerger, of a capital asset by the predecessor co-
operative bank to the successor cooperative bank. [s.47 (vica)].
(13) Any transfer by shareholder, in an amalgamation/ demerger, of share(s) held by him in
predecessor co-operative bank if the transfer is made in consideration of the allotment to him of
any share(s) in the successor cooperative bank.[S.47(vicb)]
(14) Transfer of bonds or Global Depository Receipts [referred to in Section 115AC (1)] of a
public sector company made outside India by a non-resident to another non-resident. [S.47(viia)]
(15) Conversion of bonds referred to in sec 115 AC (1) (a) into shares or debentures of any
company; [S.47 (xa)] 14
13 [1988] 173 ITR 216 (Guj.)]
14 (inserted by the Finance act, 2008 w.r.e.f 1-4- 2008).
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(16) Transfer of any work of art, archaeological, scientific or art collection, book, manuscript,
drawing, painting, photograph or print, to Government/ University/National Museum/National
Art Gallery/National Archives or any other notified public institution/museum. [S. 47(ix)]
(17) Conversion of bonds or debentures, debenture-stock or deposit certificates in any form, of a
company into shares or debentures of that company. [S.47(x)]
(18) Transfer of land of sick industrial company (being managed by worker’s cooperative) made
under scheme prepared u/s 18 of Sick Industrial Companies Act, 1985, if such transfer is made
during the period starting from previous year in which such company has become sick and
ending with the previous year during which its entire net worth becomes equal to or exceeds
accumulated losses. [S. 47(xii)]
(19) Transfer of- (a) a capital asset or intangible asset by a predecessor firm to its successor
company;or (b) a capital asset to successor company in course of demutualisation/corporatisation
of predecessor recognized stock exchange in India (being an Association of Persons or Body of
Individuals) [S. 47(xiii)
(a) All the assets and liabilities of the firm/AOP/BOI relating to their business
immediately before the succession become the assets and liabilities of the company;
(b) In case of firm, all its partner become shareholders of the company in the same proportion in
which their capital accounts stood in the books of the firm on the date of the succession;
(c) In case of firm, the partners receive consideration only by way of allotment of shares in
company.
(d) In case of firm, the partners shareholding in the company in aggregate is 50% or more of its
total voting power and continue to be as such for 5 years from the date of succession; and
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(e) The demutualisation or corporatisation of a recognized stock exchange in India is carried out
in accordance with a scheme for demutualisation or corporatisation, which is approved by the
SEBI.
(20) Transfer of a membership right held by a member of a recognized stock exchange in India
for acquisition of shares and trading or clearing rights acquired by such member in that stock
exchange in accordance with demutualisation or corporatisation scheme approved by the SEBI.
[S.47 (xiiia)]
(21) Transfer of capital asset or intangible asset to the successor company by its predecessor
proprietary concern, if the following conditions are fulfilled – [S.47 (xiv)]
(a) All the assets and liabilities of the sole proprietary business immediately before the
succession become the assets and liabilities of the company.
(b) Sole proprietor’s shareholding in the company is 50% or more of the total voting power and
continues to be as such for 5 years from the date of succession; and
(c) The sole proprietor receives the consideration only in form of allotment of shares in the
company.
(22) Any transfer under Securities Lending Scheme, 1997 for lending of securities under an
agreement or arrangement, which is entered into by the assessee with borrower of such securities
and which is subject to guidelines issued by SEBI or RBI. [S.47 (xv)]
Note: In respect of Section 47(xiii) and 47(xiv), the exemption is available only in respect of the
firm/sole proprietor carrying on a business, not in case of profession. Further, this exemption is
available only in respect of transfer of capital assets or intangible assets, not in respect of any
stock in trade.
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(23) Any transfer of a capital asset in a transaction of reverse mortgage under a scheme made
and notified by the central government[S.47(xvi)](inserted by the Finance act, 2008 w.r.e.f 1-4-
2008).
WITHDRAWAL OF EXEMPTION:
Where the capital gain arising on the transfer of a capital asset from the holding company to the
subsidiary company or vice-versa was exempt from capital gains tax by virtue of Sec.47 and if
any other following events occur within a period of 8 years from the date of transfer, the capital
gains so exempted would be chargeable to tax in the year in which the transfer took placei) The
holding company does not continue to hold the whole of the share capital of the subsidiary
company;
ii) The transferee company converts or treats the capital asset into/as stock- intrade.
In the case of a transaction between holding company and subsidiary company, the following
additional points need to be borne in mind:
a) If the provisions of section 47 are applicable to a transfer, then the assessment shall be
reopened in respect of the assessment year relevant to the previous year in which original
transfer took place u/s.155 (7B), to amend the order so as to charge the capital gains to tax.
b) if the transferee company subsequently sells the asset without attracting the provision of
section 47A, then for computation of capital gains the cost to the transferor company shall be
adopted as cost to the transferee company- sec 49 (1).
c) if the asset is sold after attracting the provisions of section 47A, then the cost to the transferee
company shall be the actual cost incurred by that company to acquire the asset from the
transferor company-sec.49(3).
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The capital gain arising on transfer of a capital asset in the nature of membership of a recognized
stock exchange exempted by virtue of sec.47, shall be chargeable to tax if the shares allotted to
the transferor in exchange thereof are transferred before the expiry of a period of 3 years. The
capital gain shall be deemed, in such a case, as the income chargeable during the previous year in
which the shares are transferred.
If the conditions stipulated regarding the succession of a proprietary concern or a firm by a
company are not complied with, the benefits availed by the sole proprietor or the firm, as the
case may be, shall be deemed to be profit and gains of the successor company chargeable to tax
in the year in which infringement takes place.
COMPUTATION OF CAPITAL GAINS – SHORT TERM AND LONG TERM
Short term capital gains [S. 2(42B)] means capital gains arising from transfer of a short-term
capital asset. Long term capital gains [S. 2(29B)] means capital gains arising from transfer of a
long-term capital asset.
Mode of Computation of Capital Gains [Section 48]
Short Term Capital Gains Long Term Capital Gains
Full Value of Consideration
Less:Expenses incurred wholly and
exclusively for such transfer
XX
XX
Full Value of Consideration
Less : Expenses incurred wholly and
exclusively for such transfer
XX
XX
Net Consideration
Less : Cost of acquisition XX
XX Net Consideration
Less : Indexed cost of acquisition XX
XX
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Cost of improvement XX
Short term capital gain
XX Indexed cost of improvement XX
Long term capital gain
XX
XX XX
Less Exemption u/s 54B, 54D,54G,
54GA
Taxable Short Term Capital Gai
XX Less : Exemptions u/s 54, 54B, 54D,
54EC, 54F, 54G, 54GA
Taxable Long Term Capital Gain
XX
XX XX
Notes:(1) Any sum paid on account of securities transaction tax is not deductible in computing
Capital Gains.
(2) Indexed cost of acquisition or improvement shall be computed as follows :
Indexed Cost of Acquisition or Improvement = Cost of acquisition or improvement × Cost
Inflation index of the year of transfer / Cost Inflation Index (CII) for – (i) the first year in which
the asset was held by the assessee or for the year beginning on 1.4.1981, whichever is later, or
(ii) the year in which improvement took place
COST OF ACQUISITION AND COST OF IMPROVEMENT IN CERTAIN CASES
[Section 49 and 55]
(1) Cost of Acquisition (COA) and Cost of Improvement (COI) in case of a capital asset
acquired before 1.4.1981: Mode of Acquisition COA COI
Where the assessee himself acquired the capital asset before 1.4.1981 FMV on 1.4.1981 or
cost of property, whichever is higher Capital expenditure incurred by the previous owner or the
assessee in making any additions/ alterations to the capital asset on or after 1.4.1981.
Capital asset acquired by assessee under any of the modes given in Section 49(1) and the
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previous owner acquired the same before 1.4.1981 Cost to the previous owner or FMV on
1.4.1981 whichever is higher.
(2) Cost of Acquisition and Improvement in some special cases:
Mode Cost of Acquisition or Improvement
1. Shares held in a company in liquidation. Actual cost of acquisition of such shares.
2.Assets acquired under any of the modes
specified in Section 49(1)
Cost = Cost to previous owner + Cost of
improvement incurred by previous owner or
assessee
3. Share(s) in Indian amalgamated company,
which becomes the property of assessee in a
scheme of amalgamation.
Cost of acquisition of shares in amalgamated
company = Cost of acquisition of the shares in
the amalgamating company [Sec. 49(2)]
4. Conversion of bonds or debentures,
debenture-stock or deposit certificates in any
form, of a company into shares or debentures
of that company.
Cost of acquisition of new shares or debentures =
Total cost of bonds, debenture, debenture-stock
or deposit certificates × Part of such bonds,
debenture, debenture-stock or deposit certificates
so converted [Sec. 49(2A)]
5.Conversion of bonds or debentures,
debenture-stock on deposit certificates in any
form, of a company into shares or debentures
of that company (i.e. exempt transfers referred
u/s 47(x) & 47(xa))
Cost of acquisition of new shares or debentures =
total cost of bonds, debentures, debenture-stock
or deposit certificates * part of such bonds,
debenture, debenture-stock or deposit Certificates
so converted [sec.49A(2A)] [Amdt. by Finance
Act, 08 w.r.e.f 1-4-08]
6. Bonus shares or other securities If allotted before 1.4.1981,
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7. Right shares or other securities If purchased
by original shareholder :
Cost = Purchase Price If purchased by person in
whose favour right was renounced :
Cost = Purchase Price paid to company +
Amount paid for renouncement in his favour
8. Rights entitlements renounced Cost = NIL
9. Shares of resulting company acquired in
case of demerger
Cost of shares in resulting company = Cost of
shares in demerged company × Net Book Value
of assets transferred to resulting company ÷ Net
worth of the company before demerger.
Cost of shares in demerged company = Total cost
of shares – Cost of shares in resulting company
computed above.
10. Equity Shares & trading/clearing rights in
recognized stock exchange acquired on
demutualisation/ corporatisation thereof
Cost of Equity Shares = Cost of acquisition of
membership card of stock exchange.
Cost of trading or clearing rights = NIL
11. Share/stock of company acquired on –
(a) Consolidation & division of share capital
into shares of larger or smaller amount,
(b) conversion of shares in on stock or vice
versa,
(c) conversion of one kind of shares in other
Cost of acquisition of such share or stock = Cost
calculated with reference to the cost of
acquisition of the shares or stock from which
such share or stock is derived.
12.Shares Acquired under an ESOP scheme or
acquire as sweat equity shares
Cost of acquisition of such share or stock = Fair
Market Value which has been taken into account
while computing value of Fringe Benefits u/s
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Capital gains
115WC(i)(ba)
(3) Cost of acquisition and cost of improvement in case of certain intangible assets:
Capital asset being – COI and COA
Goodwill of business, right to manufacture/produce/process any article/thing, or right to carry
business then COI NIL.
Trademark/brand name associated with business or tenancy rights or stage carried permits/loom
hours then COI, Expenses incurred by assessee or previous owner after 31.3.1981, and
COA become If self-generated: Nil. If purchased from previous owner :Purchase Price
(4) Cost of Improvement in any other case : Cost of improvement means all capital
expenditure incurred in making any additions or alterations to capitalasset by the assessee after it
became his property, and where capital asset became property of the assesee by any of modes
specified u/s 49(1), by the previous owner.
Exclusions from Cost of Improvement: Cost of improvement does not include any
expenditure, which is deductible in computing the income chargeable under the head “Income
from House Property”, “Profits and Gains of Business or Profession”, or “Income from Other
Sources”.
Notes:(A) In case of HUF-assessee, by conversion of member’s individual property into HUF
property.
(B) Previous Owner: ‘Previous Owner’ means the last previous owner of the asset who acquired
it by a mode of acquisition other than that referred to under Section 49(1).
(C) When cost to previous owner not ascertainable [Sec. 55(3)] : Where the cost for which the
previous owner acquired the property cannot be ascertained, the cost of acquisition to the
21 | P a g e
Capital gains
previous owner means the fair market value on the date on which the capital asset became the
property of the previous owner.
(5) Indexed cost of acquisition v/s. indexed cost of improvement:
It needs mention that in the case of assets acquired in any of the modes specified in section 49
(1), the benefit of indexation for cost of acquisition can be claimed only from the first year in
which the asset was held by the assessee. However, in the case of indexation of cost of
improvement, the benefit of indexation can be availed from the year in which improvement to
the asset was made.
(6) Conversion of debentures into shares:
Similarly, if debentures are converted into shares, it is not regarded as transfer by virtue of
section 47(x). If these shares are sold subsequently, the cost of acquisition would be the cost
incurred to acquire the debentures on conversion of which the shares were obtained as provided
in section 49 (2A). Nevertheless, there is no provision to enable the assessee to take the period of
holding of the debentures in determination of the long-term nature of the shares and again the
possibility of claiming the indexation benefit for the period for which debentures were held is
ruled out.
(7) Conversion of investment into stock -in- trade:
In the case of conversion of capital asset in to stock-in-trade the provisions of sec.45 (2)
explicitly provide for deferring the chargeability till the year of sale of stock-in-trade. While
computing the capital gains of sale of the stock-in-trade, the assessee will have to index the cost
of acquisition only up to the year of conversion and not up to the year of chargeability since
22 | P a g e
Capital gains
indexation stops in the year of transfer and does not extend to the year in which the computation
is made and taxability arises.
(8) Compulsory acquisition:
Again, when compulsory acquisition is the instance of transfer in the assessee's case, section
45(5) provides for charging the capital gain only in the year of receipt
of the compensation and not in the year of compulsory acquisition. Nevertheless, indexation
benefit would not run up to the year of receipt of compensation but would be confirmed only up
to the year of compulsory acquisition.
Case Laws :
(1) Amount paid to clear mortgage: Where property has been mortgaged by previous owner
during his life-time and the assessee, after inheriting the same, has discharged mortgage debt,
then by discharging the mortgage debt, the assessee acquires the interest of the mortgagee in the
property. The amount so paid shall be treated as cost of acquisition. – R.M. Arunachalan v. CIT
15
However, where after acquiring a property, the assessee himself created a mortgage and cleared
off the same out of sale proceeds of property, he couldn’t be allowed deduction of payment of
mortgage debt as cost of acquisition/ improvement u/s 48 because in that case, he did not acquire
any interest in property subsequent to his acquiring the same. – VSMR Jagdishchandran v. CIT16
(2) ‘Kist’ deducted from proceeds of mortgaged property: The Government auctioned the
15[1997] 227 ITR 222 (SC).
16 [1997] 227 ITR 240 (SC)
23 | P a g e
Capital gains
mortgaged property of assessee for ‘kist’ amount due by him to the State, and paid the balance
amount (after deducting ‘kist’) to the assessee.
The assessee claimed deduction for ‘kist’ amount in computing capital gains. Held that, since the
price received in auction entirely belonged to the assessee, the amount deducted towards ‘kist’
was not diverted at source but was applied in discharge of an obligation after it was received by
the assessee. Therefore, ‘kist’ amount was not deductible in computing capital gains. – CIT v.
Attili N. Rao17
(3) No charge, when computation not possible : If, on the facts of a particular case, computation
u/s 48 is not possible, then capital gains shall not be charged to tax. Thus, if no cost can be
envisaged in acquisition of an asset, capital gains cannot be charged. – CIT v. B.C. Srinivasa
Setty18.
(4) Amount embezzled while effecting sale of property will not constitute expenditure in
connection with transfer and is, therefore, is not deductible u/s 48(1) – Mr. G.Y. Chenoy v. CIT 19
(5) In CIT v. C.V. Sounderajan20 the amount paid to the mother having right of residence in the
property, for obtaining relinquishment of such right was held deductible in computing the capital
gains.
(6) When Loan is borrowed and invested in any asset, interest expenditure incurred thereon can
be claimed as deduction from the income derived from such asset. If the assessee desires to
capitalize the interest, is it possible to treat it as part of the cost of acquisition and claim it as
deduction in the computation of capital gains is an issue which has been favourably considered 17 [2001] 252 ITR 880 (SC).
18 [1981] 128 ITR 294 (SC)19 [1999] 234 ITR 89 (AP).
20 150 ITR 80(mad)
24 | P a g e
Capital gains
by courts. So long as the loan has been exclusively borrowed and utilised for acquisition of an
asset, capitalisation of interest is possible as held in the case of CIT v. Mithlesh Kumari,21 CIT v.
K.S.Gupta,22 Similar analogy can be inferred from the decisions rendered in CIT v. Maithreyi
Pai,23 and Saharanpur Electric Supply Co. v/s CIT,24
CASES WHERE BENEFIT OF INDEXATION IS NOT AVAILABLE EVEN IN CASE
OF LONG-TERM CAPITAL ASSETS:
(1) Transfer of a bond or a debenture other than capital indexed bonds issued by the
Government.
(2) Transfer of undertaking or division in a slump sale under Section 50B.
(3) Transfer of shares/debentures of an Indian company purchased by a nonresident in foreign
currency.
(4) Transfer of units purchased in foreign currency by an assessee covered under Section 115AB
(5) Transfer of bonds or shares purchased in foreign currency by an assessee covered u/s 115AC.
(6) Transfer of global depository receipts by a resident employee of an Indian company u/s
115ACA.
(7) Transfer of securities by foreign institutional investors under Section 115AD.
(8) Transfer of a foreign exchange asset by a non-resident Indian under Section 115D.
SCOPE AND YEAR OF CHARGEABILITY OF CAPITAL GAINS [Section 45]
S.45 Transaction Full Value of Consideration Year of Chargeability
(1) Transfer of capital asset Agreed consideration (subject to Sec.50C and Sec.55A) Previous
year in which transfer took place. (1A) Damage to, or destruction of, any capital asset.[Note 1]
21 92 ITR 9 (DEL) of Addl.22 119 ITR 372 (AP).23 152 ITR 247 (Kar)24194 ITR 294(SC).
25 | P a g e
Capital gains
Insurance compensation i.e. Money + Fair market value (on date of receipt) of other assets
received Previous year in which money or other asset is received from the insurance company.
(2) Conversion of a capital asset into stock in trade Note 2] The fair market value as on the date
of conversion. Previous year in which stock in trade is sold.
(2A) Transfer of shares held in depository (FIFO basis) Agreed consideration Previous year in
which transfer took place
(3) Transfer of capital asset as capital contribution or otherwise by a partner or member to
Firm/AOP/ BOI Amount at which such asset is recorded in books of the Firm/AOP/BOI.
Previous year in which transfer took place.
(4) Distribution of capital asset on dissolution or otherwise of Firm/AOP/ Body of Individuals
Fair market value as on the date of transfer [Note 3] Previous year in which transfer took place.
(5) Compulsory acquisition under any law; or any transfer, whose consideration is deemed or
approved by Central Govt.or RBI. Compensation awarded; or amount of compensation as
determined or approved by Central Government/RBI The year in which such compensation or
part thereof is first received. [Note 4]
Notes:(1) Section 45(1A) applies only when the damage/destruction is due to –
(a) Flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
(b) Riot or civil disturbance; or
(c) Accidental fire or explosion; or
(d) Action by enemy or action taken in combating an enemy (whether with or without
declaration of war).
26 | P a g e
Capital gains
However, where damage/destruction is not attributable to any of the reasons aforesaid, there will
be no charge of capital gains, as there can be no ‘transfer’ without existence of capital asset at
the time of transfer. – Vania Silk Mills P. Ltd. v. CIT25
Computation of capital gains in respect of such assets : As per the CBDT’s circular issued in
this behalf, capital gains would be worked out in respect of assets which get destroyed, etc. as
per the provisions of Sections 48 and 50, as the case may be, by taking the insurance money or
the market value of the asset received from the insurer as the “full value of consideration”.
Further, adjustment for cost inflation index will be made for non-depreciable assets and for
depreciable assets, the written down value of such assets will be reduced from the block of assets
as provided for in Section 43(6).
(2) In this case, transfer takes place in the year of conversion. So, CII of the year of conversion is
used for computation of capital gains. Further, such fair market value will be taken as cost of
converted stock.
(3) When the partners or members transfer the capital assets, the agreed consideration will be
taken as their ‘cost of acquisition’.
(4) (a) In case of enhanced compensation : In case the compensation is enhanced or further
enhanced by the Court, Tribunal or other authority, the capital gains shall be chargeable to tax in
the year when the enhanced compensation is received. The amount of enhanced compensation
will be the full value of consideration and the cost of acquisition and cost of improvement in that
case shall be nil. If the enhanced compensation is received by any other person due to the death
of the transferor or due to any other reason, the amount will be deemed to be capital gain of the
recipient.
25 [1991] 191 ITR 647 (SC).
27 | P a g e
Capital gains
(b) Reduction in compensation : In case the initial compensation or the enhanced or further
enhanced compensation is reduced by the court or Tribunal or any other authority, such assessed
capital gain for that year shall be recomputed by taking the compensation or consideration as so
reduced by the court, tribunal or other authority to be the full value of consideration.
Some Issues :
(1) Payment, by way of cash or otherwise, to retiring partner over and above balancein his
capital account : So far as retiring partner is concerned, the amount received by such partner
from the firm in excess of capital and profits standing to his credit cannot be considered as
capital gains, as there is no ‘transfer’.
The amount received by him is not consideration for transfer of his interest to the continuing
partners; he only receives his share in partnership. – CIT v. R.Lingmallu Raghukumar 26However,
so far as the firm is concerned, it has been held in CIT v. A.N. Naik Associates27, that distribution
of asset by the firm to a partner on his retirement shall come within the expression ‘otherwise’
(as appearing in Section 45(4) and amounts to transfer of capital assets within the meaning of
Section 45(4) and therefore, is liable to capital gains tax in the hands of the firm.
(2) Distribution to partner on dissolution v. Gift of land to Partner: So far as registration is
concerned, gift of land to partner is required to be registered under Registration Act, 1908, but
the distribution of land to partner on dissolution of the firm, doesn’t require registration, as
decided in N. Khadervali Saheb v. N. Gudu Sahib28. So far as taxability is concerned, gift of
capital asset being a land, is exempt u/s 47(iii), but distribution of land on dissolution is taxable
26 [2001] 247 ITR 801 (SC).
27 [2004] 265 ITR 346 (Bom)28 [2003] 261 ITR 1 (SC)
28 | P a g e
Capital gains
u/s 45(4). Thus, decision as to gift or distribution on dissolution is to be taken after taking this
into consideration.
(3) Interest on enhanced compensation: Interest received on enhanced compensation in case of
compulsory acquisition or the transfer referred to in Section 45(5), will be taxable as ‘income
from other sources’ as per the method of accounting followed by assessee. If assessee follows
cash system, it will be taxable in the year of receipt. However, if assessee follows mercantile
system, such interest shall be spread on an annual basis over the period right from the date on
which asset was acquired to the date on which the order for enhancement is made by the Court.
Rama Bai v. CIT29
CAPITAL GAINS ON DISTRIDUTION OF ASSETS BY COMPANY IN LIQUIDATION
[SEC.46]
(1) In hands of company: distribution of assets by a company on its liquidation is not regarded
as transfer.
(2) In the hands of shareholder: Receipts of any money or other assets by the shareholder from
the company on its liquidation shall be chargeable to tax as Follows-
Cash received or market value of the assets received on liquidation - X
Less: deemed dividend u/s 2(22) (c) to the extent of accumulated - X
profit as on the date of liquidation.
Full value of consideration for the purposes of section 48. - X
Less: indexed cost of acquisition (or cost of acquisition) of the
shares held in that company - X
Long-term capital gains or short-term capital gains X
(3) Cost of Acquisition of assets received on liquidation in hands of shareholders
29 [1990] 181 ITR 480 (SC)
29 | P a g e
Capital gains
[Sec.55 (2)]:
Where any capital received by assessee on liquidation of a company, which had been assessed
u/s 46, is transferred by him, the cost of acquisition in of such asset will be the fair market value
as on the date of distribution.
CONCLUSION
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Capital gains
Capital gain should be taken to mean profit or gains arising to the assessee from
the transfer of a capital asset. Such capital gain is added to the total income of the
previous year in which the transfer of the asset took place. In other practical sense,
when we buy any kind of property for a lower price and then subsequently sell it at
a higher price, we make a gain. The gain on sale of a capital asset is called capital
gain. This gain is not a regular income like salary, or house rent. It is a one-time
gain; in other words the capital gain is not recurring, i.e., not occur again and again
periodically. Opposite of gain is called loss; therefore, there can be a loss under the
head capital gain. We are not using the term capital loss, as it is incorrect. Capital
Loss means the loss on account of destruction or damage of capital asset. Thus,
whenever there is a loss on sale of any capital asset it will be termed as loss
under the head capital gain.
After going through this lesson I am able to understand the meaning of capital
asset, types of capital asset, what is not capital asset, computation of capital gain,
types of capital gains etc. The capital gain is also an income and it is taxable too.
31 | P a g e
Capital gains
BIBLIOGRAPHY
Student Guide to Income Tax Author: V.K.Singhania & Monica Singhania
Edition: 44th
Law of Income Tax in India: Kailash Rai
Direct Taxes (Income tax, Wealth Tax and Tax Planning) Author: B.B. Lal &
N. Vashisht Edition: 29th
Income Tax Act,1961
Bharat’s notes on direct taxes
www.law.incometaxindia.gov.in
www.taxmanagementindia.com
www.itatonline.com
www.indiabudget.com
32 | P a g e
Capital gains
CAPITAL GAINS ON BUY-BACK OF SHARES OR OTHER SPECIFIED
SECURITIES [Section 46A]
Any consideration received by a holder of shares or other specified securities from any company
under a scheme of buy back shall constitute transfer and the difference between such
consideration and the cost (or indexed cost) of acquisition shall be chargeable to tax as capital
gains in the previous year in which such buyback takes place. Payment made by a company on
buy-back doesn’t constitute dividend u/s 2(22) (d).
CAPITAL GAINS IN CASE OF DEPRECIABLE ASSETS [Section 50 &50A]
(1) Capital gains in case of transfer of asset on which depreciation has been allowed under
Section 32(1)(ii) in respect of ‘block of assets’ [Section 50] : The capital gains shall be computed
as follows :
(a) Block of assets does not cease to exist but WDV of block is reduced to zero [Section 50(1)]:
Full value of consideration- XXX
Less : (1) Expenses on transfer -XXX
(2) WDV of asset on 1st day of the previous year - XXX
(3) Cost of assets acquired during the previous year and- XXX
falling within that block
Short Term Capital Gains XXX
(b) Block of assets ceases to exist due to the sale of all assets falling within that block [Section
50(2)]:
Full value of consideration -XXX
Less : (1) Expenses on transfer- XXX
(2) WDV of asset on 1st day of the previous year -XXX
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Capital gains
(3) Cost of assets acquired during the previous year and -XXX
falling within that block
Short Term Capital Gains/Loss - XXX
(2) Transfer of capital assets of Power sector units on which depreciation allowed u/s 32(1) (i)
[Section 50A]:
(a) If WDV of the asset exceeds Moneys Payable on transfer of such assets:
Terminal depreciation under Section 32(1) (iii) = WDV of such asset – Moneys Payable
(b) If Moneys Payable exceeds WDV of the asset: Then, if -
Moneys payable doesn’t exceed actual cost : Balancing charge u/s 41(2) = Money Payable
– WDV
Moneys payable exceeds Actual Cost : Balancing Charge u/s 41(2) = Actual Cost – WDV; and
Short-term/Long-term Capital Gains = Moneys Payable – Actual Cost
SLUMP SALE – MEANING AND COMPUTATION OF CAPITAL GAINS
[Section 50B]
Slump Sale [Sec. 2(42C)] : It means transfer of one or more undertakings as a result of the sale
for a lump sum consideration without values being assigned to the individual assets and
liabilities in such sales.
Charge and Nature of Capital Gains: Profits or gains arising from slump sale shall be taxable as
‘Capital Gains’ in previous year in which slump sale is effected. If the capital asset, being one or
more undertakings, was owned and held by the assessee for not more than 36 months, the capital
gains will be ‘short term capital gains’. In any other case, it shall result into long-term capital
gains.
34 | P a g e
Capital gains
Mode of computation of capital gains: The capital gains shall be computed in the following
manner –
Full value of consideration -XXX
Less : Expenses wholly and exclusively in connection with such transfer- XXX
Less : Cost of acquisition and cost of improvement being net worth** of the undertaking (no
indexation benefit even in case of long-term capital asset)-XXX
Short Term/Long Term Capital Gains XXX
** The net worth of the undertaking shall be computed in the following manner –
Aggregate value of total assets of the undertaking or division (ignoring any change in the value
of assets on account of revaluation of assets)-XXX
In case of depreciable assets, the WDV of the block as per Sec. 43(6) XXX
In case of other assets, the book value XXX
Less : Value of liabilities of such undertaking or division as appearing in its Books-XXX
Net Worth of the undertaking or division- XXX
Certificate of a Chartered Accountant: In case of slump sale, every assessee shall furnish along
with the return of income a report of an accountant in prescribed form indicating the computation
of net worth and certifying that the net worth of the undertaking or division has been correctly
arrived at.
FULL VALUE OF CONSIDERATION WHEN STAMP VALUE EXCEEDS
SALE PRICE [Section 50C]
Full Value of Consideration : Where the consideration for transfer of land or
building or both, is less than the value adopted by Stamp Valuation Authority for
payment of stamp duty, the value so adopted by stamp valuation authority shall be
35 | P a g e
Capital gains
deemed to be ‘full value of consideration’ for the purpose of Section 48.
Reference to Valuation Officer: The Assessing Officer may refer valuation
thereof to Valuation Officer if –
(a) The assessee claims before the Assessing Officer that the value adopted or assessed by the
Stamp Valuation Authority exceeds the fair market value of the property as on the date of
transfer, and
(b) The value adopted or assessed by the Stamp Valuation Authority has not been disputed in any
appeal or revision or no reference has been made before any other authority, court or the High
Court.
In case reference is made to Valuation Officer, the full value of consideration shall be lower of –
(a) Value as determined by the Valuation Officer; or
(b) Value assessed or adopted by the Stamp Valuation Authority.
CAPITAL GAINS WHEN ADVANCE OR OTHER MONEY FORFEITED
[Section 51]
Where any capital asset was on any previous occasion the subject of negotiations for its transfer,
and advance or other money received and retained by the assessee in respect of such negotiation
shall be deducted from the cost for which the asset was acquired, or the WDV of the asset or the
FMV in computing the cost of acquisition of the capital asset. [Note: Only amount forfeited by
assessee is deducted, amount forfeited by the previous owner shall not be considered. Further,
indexation applies only after such reduction from cost.] It has been held in Travancore Rubber &
Tea Co. Ltd. v. CIT30 that the phrase ‘other money’ would cover deposits made by purchaser for
30 [2000] 243 ITR 158 (SC)
36 | P a g e
Capital gains
guaranteeing due performance of contracts. Therefore, forfeiture of earnest money and the
compensation awarded to the assessee for breach by the prospective
purchaser of contract for purchase of property would go to reduce the cost of acquisition as per
Section 51.
EXEMPTIONS IN RESPECT OF CAPITAL GAINS AVAILABLE ONLY TO
INDIVIDUAL AND/OR HUF ASSESSEES [Section 54, 54B and 54F]
Provisions Section 54 Section 54B Section 54F
1. Assessee Individual/HUF Individual Individual/HUF
2. Asset transferred Residentialhouse
propertybeing
buildings or lands
appurtenant thereto.
Agricultural land used
by individual or his
parent for agricultural
purposes during
2years preceding date
of transfer
Any capital asset not
being residential
house property.
[Note :
Exemption is not
available if assessee –
(a) owns more than 1
residential house
(other than new) on
date of transfer of
original asset; or (b)
purchases a
residential house,
other than new asset,
within 1 year from
37 | P a g e
Capital gains
date of transfer of
original asset]
3. Nature of Asset Long Term Short/Long Term Long Term
4. New asset to be purchased/constructed
Residential house
property i.e. buildings
or lands appurtenant
thereto
Agricultural land
(urban or rural)
Residential house
property i.e. buildings
or lands appurtenant
thereto
5.Time-limit for
purchase/ construction
Purchase : Within 1
year before or 2 years
after the date of
transfer
Construction : Within
3 years from date of
transfer
. Purchase within 2 years from the date of transfer Purchase : Within 1 year before or 2 years
after date of transfer;and
Construction : Within 3 years from date of transfer
6. Deposit Scheme (discusse later) Applicable Applicable Applicable
7. Amount of Exemption Lower of – Capital Gains or Investment in
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Capital gains
new asset Lower of – Capital gains or cost of new asset Cost of new house × Capital Gains ÷
Net consideration being Full value of consideration less Expenses on transfer
8. Withdrawal of exemption on Transfer of the new asset within 3 years from its purchase/
Construction Transfer of the new asset within 3 years from its purchase
(a) assessee purchases within 2 years or constructs within 3 years from date of transfer of
original asset, a residential house other than new house; or
(b) Transfers new asset within 3 years from date of its purchase/construction.
9. Taxability on withdrawal Amount of exemption claimed earlier shall be reduced from the cost
of acquisition of new asset Exemption claimed earlier shall be reduced from cost of acquisition
of new asset Amount exempted earlier shall be taxable as long-term capital gains in previous
year in which –
(a) another residential house is purchased or constructed; or
(b) the new asset is transferred.
Note: Important points on exemption under Section 54 and 54F –
(1) Purchase/Construction of a Portion: Purchase or consideration of a portion of the house is
eligible for exemption – CIT v. Chandanben Maganlal [2000] 245 ITR 182 (Guj.). E.g. If an
assessee purchases 15% undivided share in a house property, exemption will be available.
However, mere construction by way of extension of old existing house is not eligible for
exemption. CIT v. Pradeep Kumar [2006] 153 Taxman 138 (Mad.)
(2) Purchase of co-owner’s interest : In case of property owned by co-owners, the payment made
by one co-owner to get the full ownership by release of theinterest of other co-owners amounts to
39 | P a g e
Capital gains
‘purchase’ by such co-owner and is eligible for exemption. CIT v. Aravinda Reddy [1979] 120
ITR 46 (SC).
(3) Registration not pre-condition: If assessee has purchased house and acquired its possession
and control, he will be eligible for exemption even if such purchase is not registered as per
Registration Act, 1908.
EXEMPTIONS IN RESPECT OF CAPITAL GAINS AVAILABLE TO ALL
ASSESSEES [Section 54D, 54EC, 54G and 54GA]:
Provisions Section 54D Section 54C Section 54G Section 54GA
1. Assessee Any person Any person Any person Any person
2. Asset transferred Compulsory acquisition of land or building which was used in the business
of industrial undertaking during 2 years prior to date of transfer. Any long term capital asset.
Transfer of plant, machinery or land or building for shifting industrial undertaking from urban
area to rural area. Transfer of plant, machinery or land or building for shifting industrial
undertaking from urban area to Special Economic Zone.
40 | P a g e
Capital gains
3. Nature of Asset Short term/ Long term
Long term Short term/
Long term
Short term/
Long term
4. New asset to be purchased/ New land or building for the Bonds,
redeemable
(a) Purchase/ Constructio
(a) Purchase/constructio
constructed industrial
undertaking
after 3 years
issued –
(a) by National
Highway
Authority of
India; or
(b) By Rural
Electrificatio
n Corp.
(Amendment by
the Finance Act,
2006)
41 | P a g e
Capital gains
n of plant,
machinery,
land or
building in
such rural
area or,
(b) Shifting original assets to that area, or
(c) Incurring notified expensesn of plant, machinery, land or building in such SEZ, or
(b) Shifting the original assets to SEZ, or
(c) Incurring notified expenses
5. Time-limit for purchase/ construction of new asset Within 3 years from date of receipt of
initial compensation Within 6 months from the date of transfer of original asset Within 1 year
before or 3 years after the date of transfer Within 1 year before or 3 years after the date of
transfer
6. Deposit
Scheme
Applicable -- Applicable Applicable
7. Amount of
exemption
Lower of –
capital gains or
investment in
new asset
42 | P a g e
Capital gains
Lower of –
Capital gains or
investment in
new asset or
Rs.50 lacs
Lower of –
Capital gains or
cost incurred for
(a) to (c) of point
4.
Lower of –
Capital gains or
cost incurred for
(a) to (c) of point
4.
8. Withdrawal of
Exemption
Transfer of new
asset within a
period of 3
years from the
date of its
acquisition or
43 | P a g e
Capital gains
construction
Transfer of new
asset,
conversion
thereof in
money or taking
loan or advance
on its security
within 3 years
from date of its
acquisition.
Transfer of new
or shifted asset
within a period
of 3 years from
the date of its
acquisition or
construction or
shifting.
Transfer of new
or shifted asset
within a period
of 3 years from
44 | P a g e
Capital gains
the date of its
acquisition or
construction or
shifting.
9. Taxability on
withdrawal of
exemption
Amount of
exemption
claimed earlier
shall be reduced
from the cost of
acquisition of
new asset.
Exempted
capital gain will
be taxable as
long-term
capital gains in
previous year in
which such
transfer/
conversion
45 | P a g e
Capital gains
takes place.
Amount of
exemption
claimed earlier
shall be reduced
from the cost of
acquisition of
new or shifted
asset.
Amount of
exemption
claimed earlier
shall be reduced
from the cost of
acquisition of
new or shifted
asset.
Note: If exemption has been claimed u/s 54EC in respect of investment in a new asset,
no deduction shall be allowed u/s 80C with reference to the amount of investment for
which exemption has been claimed.
Transfer of depreciable assets held for more than 36 months –
Exemption u/s 54EC available: Section 50 nowhere mentions that the
depreciable assets are short term capital assets but only states that capital gains
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Capital gains
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 8
arising from transfer of depreciable asset shall be deemed to be arising out of
transfer of short term capital asset. Section 54EC is independent section and
exemption therein is available if there is a transfer of long term capital asset and
consideration is invested in specified assets within time limit. Therefore,
depreciable assets held for more than 36 months are long-term capital assets and
capital gains arising therefrom will be eligible for the benefit envisaged u/s 54EC –
CIT v. Assam Petroleum Industries P. Ltd. [2003] 131 Taxman 699 (Gau.)
Extension of time in case of compulsory acquisition [Section 54H] :
Where transfer of original assets referred to in Sections 54, 54B, 54D, 54EC and
54F, is by way of compulsory acquisition under any law, the period for acquiring
new asset referred to in those sections or the period available under those sections
for depositing or investing the amount of capital gain in relation to such
compensation, which is not received on the date of the transfer, shall be reckoned
from the date of receipt of such compensation.
Capital Gains Accounts Scheme, 1988: This scheme applies to all
assessees who are eligible for exemption under Section 54, 54B, 54D, 54F and 54G.
The tax implications of this scheme are as follows –
(1) Exemption available if amount deposited: Exemptions u/s 54, 54B, 54D,
54F and 54G are available if the investment in new asset is made within time
allowed in those sections. If the amount of capital gains or net consideration
could not be fully or partly reinvested for the purposes specified in said
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Capital gains
sections before the due date of furnishing return of income, then exemption
will be available in respect of the amount deposited before the due date of
furnishing return of income in the said deposit account as if the amount so
deposited had been invested in new asset.
(2) Withdrawal out of deposit account: The amount in deposit account can be
withdrawn for purposes specified in respective Sections 54, 54B, 54D, 54F and
54G. However, if the said amount is not utilized wholly or partly for purchase
of new asset within stipulated period specified under said sections, then –
(a) In case exemption was claimed u/s 54, 54B, 54D and 54G : Amount not so
utilized shall be chargeable to tax as ‘Capital Gains’ of previous year in
which period specified under those section expires.
(b) In case exemption was claimed under Section 54F : The following amount
shall be taxable as capital gains of previous year in which the period
under Section 54F expires –
Net sale consideration in respect of transfer of original asset
Amount not so utilised Original Capital Gains (before claiming exemption)
Gains
Capital
Taxable ×
=
(3) If the individual dies before expiry of stipulated period u/s 54, 54B, 54D, 54F
and 54F, the unutilized amount cannot be taxed in the hands of the deceased,
also not in hands of legal heirs, as the unutilized portion is not income but is
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Capital gains
only a part of the estate devolving upon them. (Circular 743 dt. 06.05.1996)
Illustration 3 – Exemption u/s 54 and 54F:
Mr. A owns a self-occupied residential house and a plot of land. (He has no
other house). He sells the house on 31.1.2007 and the plot on 15.2.2007 for Rs.6,
50,000 and Rs.5, 00,000 respectively. The house was purchased on 31.1.2002 for
Rs.4, 00,000 and the plot on 30.3.2002 for Rs.2, 00,000. A has purchased a new
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 9
residential house on 25.4.2007 for Rs.5, 00,000 and claims exemption in respect of
such house. On 31.1.2008, he transfers the said residential house for Rs.7, 50,000
and purchases a new house on 31.3.2008 for Rs.10, 00,000. Compute the capital
gains for relevant years.
Solution: Computation of Capital Gains for assessment year 2007-08
Sale of residential house
(Rs.)
Sale of Plot (Rs.)
Full value of consideration
Less : Indexed cost of acquisition
6,50,000
4,87,324 (4,00,000 × 519/426)
5,00,000
2,43,662 (2,00,000 × 519/426)
Long term capital gains
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Capital gains
Less : Exemption u/s 54 & 54F
1,62,676
1,62,676
2,56,338
1,72,938 (2,56,338 × 3,37,324 ÷ 5,00,000)
Taxable Capital Gains Nil 83,400
Computation of Capital Gains on sale of residential house (amount in Rs.)
Sale price of the residential house (acquired on 25.4.2007)
Less : Cost of Acquisition (5,00,000 – Exemption claimed u/s 54 i.e. 1,62,676)
7,50,000
3,37,324
Short-term Capital Gains for assessment year 2008-09 4,12,676
Long-term Capital Gains (Exemption claimed u/s 54F shall be chargeable as
long-term capital gains of the year in which the house is transferred i.e.
assessment year 2007-08)
1,72,938
Note: No exemption will be available in respect of second new house acquired on
31.3.2008. Exemption u/s 54 or 54F cannot be claimed because the house
transferred on 31.1.2008 is a short-term capital asset.
7.14 REFERENCE TO VALUATION OFFICER [Section 55A]
With a view to ascertaining the Fair Market Value of a capital asset, the
Assessing Officer may refer the valuation of a capital asset to a Valuation Officer in
following cases –
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Capital gains
(1) In case the value of asset claimed by assessee accords with the estimate made
by Registered Valuer: If the Assessing Officer is of the opinion that the value so
claimed is less than it is Fair Market Value.
(2) In any other case : If the Assessing Officer is of the opinion that –
(a) [Fair Market Value of the asset – Value claimed by the assessee] exceeds
– (i) Rs.25,000; or (ii) 15% of the value claimed by the assessee; or
(b) Having regard to the nature of the asset and relevant circumstances, it is
necessary to make a reference to the Valuation Officer.
7.15 CAPITAL GAINS EXEMPT FROM TAX [Section 10]
Sec. Exempted Income Conditions/Remarks
10(33) Capital gains on transfer of units of
US 64
Exempt if transferred on or after
1.4.2002.
10(37) Any ‘Capital Gains’ arising to
individual or HUF from transfer of
urban agricultural land by way of
compulsory acquisition under any
Such land must have been used
by individual or his parents or
the HUF for agricultural purposes
during two years preceding the
Mensa Commerce Classes CA-Final (Income Tax)
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Capital gains
Capital Gains 10
law or transfer the consideration of
which is determined or approved by
Central Government/RBI.
date of transfer.
Compensation or consideration
for transfer (or enhanced or
further enhanced compensation)
is received by the assessee on or
after 1.4.2004.
10(38) Long-term capital gains arising from
transfer of Equity Shares in a
company or a unit of equity oriented
fund, if such transaction has been
charged to securities transaction
tax.
However, the income by way of
long-term capital gains of a
company shall be taken into
account in computing the book
profits and income-tax payable
under Section 115JB.
(Amendment by Finance Act, 2006
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Capital gains
w.e.f. 1.4.2007)
7.16 COMPUTATION OF TAX ON SHORT TERM AND LONG TERM CAPITAL GAINS
(1) Short-term Capital Gains (STCG) on transfer of an equity share of a company or
a unit of an equity-oriented fund on which securities transaction tax has been
charged[s.111A]: tax is computed on such capital gains at a flat rate of 15%
(amendment by Finance act, 2008 w.e.f 1-4-2009).
However, in case of resident individual or resident HUF, ifa)
other income (i.e. total income-such STCG) is less than' basic exemption
limit.'
b) Then, such STCG shall be reduced by such shortfalls and
c) Tax on balance of STCG shall be computed @15%.
d) Accordingly, tax on such STCG = 15%*[Such STCG – (basic exemption limitother
income)
Further, where gross total income of an assessee includes any such short-term
capital gains, the deduction under chapter VI–A shall be allowed from the gross
total income as reduced by such gains.
(2) Other short-term capital gains: they are taxed at the normal rates applicable to
the assessee.
(3) Long - term Capital gains [ sec. 112]: tax is computed thereon at a flat rate of
20%.However, in case of resident individual or resident HUF, ifa)
Other income (i.e. Total income -such LTCG) is less than' basic
exemption limit',
b) then, such, LTCG shall be reduced by such shortfall and
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Capital gains
c) Tax on balance of LPCG shall be computed@20%.
d) Accordingly, tax on such LTCG= 20% *[such LTCG-(basic exemption
limit-other income)].
Other points are:-
a) Deduction under section 80C to 80U are not available in respect of
long-term capital gains.
b) Tax payable in case of listed securities, etc. not to exceed 10%: in case of
long-term capital gains arising from transfer of listed securities, units
of UTI or mutual funds specified in sec 10(23D) or zero coupon bonds,
the tax payable of such capital gains shall be lower of the followingMensa
Commerce Classes CA-Final (Income Tax)
Capital Gains 11
(i) 10% Grass Capital Gains (without indexation and without giving
benefit of basic exemption limit);
(ii) 20% of taxable LTCG as computed above.
Illustration 4 – Capital Gains on transfer of listed securities:
Mr. X bought 10,000 Equity Shares of TT Ltd. listed in stock exchange in India
and abroad on 15th March, 2006 @ Rs.2,250 per share. He sold the shares at Rs.5,
000 per share on 31st December, 2008. The brokerage and securities transactions
tax deducted were at 0.5% and 0.1% respectively. Examine the liability of Mr. X to
income tax. Will your answer be different, if instead of selling the shares in the
market, Mr. X privately transferred the shares to his son at the same price?
Solution: Tax Liability of Mr. X for the assessment year 2009-10:
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Capital gains
(1) Sale transaction on which securities transaction tax has been charged: As per
Section 10(38) any long-term capital gains arising out of transfer of Equity
Shares in a company shall be exempt from income tax if such transaction is
chargeable to securities transaction tax. Hence, in this case, LTCG will be
exempt.
(2) When shares are privately transferred to his son: Since the shares are not
transferred through recognized stock exchange, it will not be exempt u/s
10(38). Capital gains will be computed as under :
(Amounts in Rs.)
Full value of consideration [Rs.5,000 × 10,000]
Less : Brokerage @ 0.5% (Assuming that brokerage is payable for
effecting private transfer also)
5,00,00,000
2,50,000
Net consideration
Less : Indexed cost of acquisition [2,250 × 10,000 × 519 ÷ 463]
4,97,50,000
2,52,21,382
Long Term Capital Gains 2,45,28,618
Income Tax on LTCG : [Lower of (a) or (b)]
(a) 20% of (2,45,28,618 – 1,50,000, basic exemption limit assuming
that X has no other income)
(b) 10% of (4,97,50,000 – 2,25,00,000), benefit of basic exemption
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Capital gains
limit is not available
48,75,724
27,25,000
Therefore, amount of income tax on LTCG
Add : Surcharge @ 10%
27,25,000
2,72,500
Income tax plus surcharge
Add : Education Cess @ 2%
29,97,500
59,950
Tax Liability of Mr. X 30,57,450
Provisions to curb tax avoidance by certain transactions in securities or
prevention of dividend Stripping and Bonus-Stripping Transaction [sec 94].
1) Loss on sale of securities or units to be ignored in cases of dividend stripping
[S.94 (7)]: If a personMensa
Commerce Classes CA-Final (Income Tax)
Capital Gains 12
a) buys/acquires any securities or units within a period of 3 months prior to
record date,
b) sales/transfers the same within 3 months (9 months in case of unit) after
record date, and
c) the dividend/income on such securities or unit received or receivable by
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Capital gains
him is exempt,
Then, the loss, if any arising to him on account of such purchase and sale, to the
extent of dividend or income from securities/unit, shall be ignored while computing
his income chargeable to tax.
2) Loss arising in case of bonus stripping of units to be ignored [S. 94(8)]: in case a
persona)
buys/acquires any units (' original units'), within a period of 3 months
prior to record date;
b) He is allotted bonus units on the basis of holding of such units on such
date; and
c) he sells or transfers all or any of the original units referred to in (a) within a
period of 9 months after such date, while continuing to hold all or any of the
bonus units referred to in (b),
Then-
(a)The loss, if any, arising to him on account of purchase and sale of original
units shall be ignored in computing his total income, and
(b) The loss so ignored shall be deemed to be the cost of purchase or
acquisition of such bonus units referred to in (b) as are held by him on the
date of such sale or transfer.
Record date: record date means the date fixed by a company for entitlement of
dividend, or by a mutual fund/administration/specified company for entitlement of
dividend of bonus units.
7.17 TREATMENT OF INCOME FROM DEEP DISCOUNT BONDS (DDBs) [Circular
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Capital gains
No. 2 dated 18.02.2002]
DDBs are to be valued on 31st March of each financial year. If they are held as
investments, the income therefrom shall be interest income or capital gains.
However, if they are held as trading assets, income therefrom shall be business
income. Tax treatment of income from deep discount bonds is as follows:
1. General
Treatment
Interest Income/Business Income = Difference between the market
valuations as on two successive valuation dates.
Where bond is acquired during the year by an intermediate
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 13
purchaser, Interest income/Business Income = Market Value as on
valuation date – Actual cost of acquisition
2. Transfer of
Bonds before
maturity
Short-term Capital Gains/Business Income = Sale Price – [Cost for
which bond was acquired by the transferor + Income, if any,
already offered to tax by such transferor upto the date of transfer,
as per general treatment given above]
Note: The capital gains arising to investors shall always be shortterm
capital gains.
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Capital gains
3. Redemption
on maturity
Redeemed by Original Subscriber: Interest Income/Business
Income = Redemption price – Value as on last valuation date
immediately preceding the maturity date.
Redeemed by an Intermediate Purchaser : Interest Income/
Business Income = Redemption price – [Cost at which bonds
were acquired by him + Income, if any, already offered to tax by
the person redeeming the bond]
TAXABILITY OF ZERO COUPON BONDS [ZCB’s]
(i) According to Sec. 2(48), “Zero Coupon Bonds” means a bond -
(a) issued by any infrastructure capital company or infrastructure capital
fund or public sector company on or after the 1st day of June, 2005;
(b) in respect of which, no payment and benefit is received or receivable
before maturity or redemption from infrastructure capital company or
infrastructure capital fund or public sector company; and
(c) Which the Central Government may, by notification in the Official
Gazette, specify in this behalf.
(ii) Any maturity or redemptioin of ZCBs shall be treated as transfer as per
Section 2(47) and accordingly subject to tax under the head “Capital Gains”.
However, in case such bonds are held as stock-in-trade of the business, it
shall be chargeable to tax under the head “Profits and Gains of Business or
Profession”.
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Capital gains
(iii) Any long term capital gain arising from the transfer of “ZCBs” shall be entitled
to a concessional tax rate of 10% without the benefit of indexation or at the
rate of 20% after availing the benefit of indexation.
(iv) In case ZCBs are held for less than 12 months, it shall be considered as short
term capital asset u/s 2(42A). However, concessional rate of 10% tax provided
for short-term capital gains on transfer of listed shares u/s 111A is not
applicable to ZCBs. Therefore, short term capital gains on transfer of “ZCBs”
shall be subject to tax as per normal rates of tax.
SPECIAL PROVISIONS FOR NON-RESIDENTS:
In the case of an assessee who is a non-resident, capital gains arising from
transfer of capital assets being the shares or debentures of an Indian company shall
be computed by converting cost of acquisition, expenses incurred for the transfer
and sale consideration into the same foreign currency as was utilized for the
purchase of shares or debentures as indicated below. The capital gains so
computed in such foreign currency shall be reconverted into Indian currency for the
purpose of further computation – First proviso to Section 48 and Rule 115A.
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 14Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 14
Items Converted/
Reconverted
Rate of Conversion/Reconversion
1. Cost of acquisition The average of telegraphic transfer selling rate and
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Capital gains
buying rate as on the date of acquisition
2. Expenses incurred for
transfer
The average of telegraphic transfer selling rate and
buying rate as on the date of transfer
3. Sale consideration The average of telegraphic transfer selling rate and
buying rate as on the date of transfer
4. Capital Gains
[Reconversion]
The buying rate for telegraphic transfer as on the
date of transfer
The conversion and reconversion shall be made on the basis of the rate of
exchange adopted by the State Bank of India.
The aforesaid manner of computation of capital gains shall be applicable in
respect of capital gains arising from every reinvestment thereafter in the shares or
debentures of an Indian company on the sale of such assets.
In these cases, indexation will not be available in the computation of capital gains.
Illustration:
Mr. Fedrick, a non-resident Indian, acquired in January, 2002, shares in
Indian companies for a consideration of Rs.20.50 lakhs by remitting equivalent US
Dollars. In October, 2006, he sold the entire shares for a sum of Rs.33, 00,000
after incurring Rs.66, 000 towards expenses for transfer. You are informed the
details of telegraphic transfer rates of State Bank of India herebelow:
61 | P a g e
Capital gains
Particulars Buying rate Selling rate
On the date of acquisition
On the date of transfer
40.50
43.50
41.50
44.50
Compute the taxable capital gains on the basis of the above information.
Ans:
Computation of Long Term Capital Gains for the assessment year 2007-08
Particulars Indian
Rupees
Rate of
Conversion
US $
Sale consideration
Less : Expenses for transfer
33,00,000
66,000
44.00
44.00
75,000
1,500
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Capital gains
Net consideration
Less : Cost of acquisition
20,50,000
41.00
73,500
50,000
Capital Gain Assessable 10,22,250 43.50 23,500
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