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Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 1
ChapterChapterChapterChapter 7
CAPITAL GAINS
7.1 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
(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.
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 2
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
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
allotment thereof.
6. Right entitlements renounced
Period of holding taken from date of offer made
by company.
7. Equity Shares in a company, or Trading or
clearing rights of a RSE;
acquired pursuant to
demutualisation or corporati-
sation of such RSE
Period for which such person was member of
Recognised Stock Exchange (RSE) in India prior
to such demutualisation or corporatisation
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
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 3
held as capital asset initially
but is a capital asset at the
time of transfer.
acquisition upto date of transfer will be
considered 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 552 (Guj.)]
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, the gains arising from the sale of the land would be long-
term 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 brokers 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 brokers 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 construed to have been sold as
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 4
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
(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
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 5
of right in the shares held by the shareholder. Kartikeya Sarabhai v. CIT
[1997] 228 ITR 163 (SC).
(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 [1997] 224 ITR 422 (SC).
(3) Family arrangement entered into by compromising doubtful/disputed rights for preserving family property/peace, doesnt amount to transfer. CIT v. A.L.
Ramanathan [2000] 245 ITR 494 (Mad.)
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)]
(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(vic)]
(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(vid)]
(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)
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 6
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 [1988] 173 ITR 216 (Guj.)]
(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 co-
operative 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)] (inserted by the Finance act, 2008 w.r.e.f 1-4-
2008).
(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 workers co-operative) 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
(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.
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 7
(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 proprietors 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.
(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 place-
i) 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- in-
trade.
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).
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 8
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 XX Net Consideration XX
Less : Cost of acquisition XX
Cost of improvement XX
XX
Less : Indexed cost of acquisition XX
Indexed cost of improvement XX
XX
Short term capital gain
Less : Exemption u/s 54B, 54D,
54G, 54GA
XX
XX
Long term capital gain
Less : Exemptions u/s 54, 54B, 54D,
54EC, 54F, 54G, 54GA
XX
XX
Taxable Short Term Capital Gain XX Taxable Long Term Capital Gain 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 Inflation Indices: The cost inflation indices as notified by the Central
Government are as follows:
Financial CII Financial CII Financial CII Financial CII
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 9
year year year year
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
100
109
116
125
133
140
150
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
161
172
182
199
223
244
259
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
2001-02
281
305
331
351
389
406
426
2002-03
2003-04
2004-05
2005-06
2006-07
447
463
480
497
519
7.4 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 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
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 10
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, Cost = Fair market value as on 1.4.1981, otherwise
cost = Nil.
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 into
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
115WC(i)(ba)
(3) Cost of acquisition and cost of improvement in case of certain intangible assets:
Capital asset being - COI COA
Goodwill of business, right to
manufacture/produce/process any
article/thing, or right to carry
business
NIL If self-generated: Nil.
If purchased from
previous owner :
Purchase Price
Trademark/brand name associated
with business or tenancy rights or
stage carried permits/loom hours
Expenses incurred by
assessee or previous
owner after 31.3.1981
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 11
(4) Cost of Improvement in any other case: Cost of improvement means all capital expenditure incurred in making any additions or alterations to capital
asset 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 members 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 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 indexation stops in the year of transfer
and does not extend to the year in which the computation is made and taxability
arises.
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 12
(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 [1997]
227 ITR 222 (SC).
However, where after acquiring a property, the assessee himself created a
mortgage and cleared off the same out of sale proceeds of property, he couldnt
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.
CIT [1997] 227 ITR 240 (SC)
(2) Kist deducted from proceeds of mortgaged property: The Government auctioned the 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.
Rao [2001] 252 ITR 880 (SC).
(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 Setty [1981] 128 ITR
294 (SC).
(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 [1999] 234 ITR 89 (AP).
(5) In CIT v/s C.V. Sounderajan, 150 ITR 80(mad) 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
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
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 13
of CIT v/s Mithlesh Kumari, 92 ITR 9 (DEL) of Addl. CIT v/s K.S.Gupta, 119 ITR
372 (AP). Similar analogy can be inferred from the decisions rendered in CIT v/s
Maithreyi Pai, 152 ITR 247 (Kar) and Saharanpur Electric Supply Co. v/s
CIT, 194 ITR 294(SC).
7.5 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 non-resident 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.
7.6 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]
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.
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 14
(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 compensa-
tion 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).
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. CIT [1991] 191 ITR 647 (SC).
Computation of capital gains in respect of such assets: As per the CBDTs
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.
(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.
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 15
Some Issues:
(1) Payment, by way of cash or otherwise, to retiring partner over and above balance in 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 [2001] 247 ITR 801 (SC).
However, so far as the firm is concerned, it has been held in CIT v. A.N. Naik
Associates [2004] 265 ITR 346 (Bom), 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, doesnt require registration, as decided in N. Khadervali
Saheb v. N. Gudu Sahib [2003] 261 ITR 1 (SC). 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 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. CIT [1990] 181 ITR 480 (SC)].
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
Less: deemed dividend u/s 2(22) (c) to the extent of accumulated
profit as on the date of liquidation.
Full value of consideration for the purposes of section 48.
Less: indexed cost of acquisition (or cost of acquisition) of the
shares held in that company
X
X
----
X
X
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 2
Long-term capital gains or short-term capital gains X
(3) Cost of Acquisition of assets received on liquidation in hands of shareholders
[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.
7.8 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 buy-
back takes place. Payment made by a company on buy-back doesnt constitute
dividend u/s 2(22) (d).
7.9 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
Less : (1) Expenses on transfer
(2) WDV of asset on 1st day of the previous year
(3) Cost of assets acquired during the previous year and
falling within that block
XXX
XXX
XXX
XXX
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
Less : (1) Expenses on transfer
(2) WDV of asset on 1st day of the previous year
(3) Cost of assets acquired during the previous year and
falling within that block
XXX
XXX
XXX
XXX
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
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 2
(b) If Moneys Payable exceeds WDV of the asset: Then, if -
Moneys payable doesnt 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
7.10 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.
Mode of computation of capital gains: The capital gains shall be computed
in the following manner
Full value of consideration
Less : Expenses wholly and exclusively in connection with such transfer
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
XXX
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)
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
XXX
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.
Illustration 1: Computation of Capital gains in case of slump sale
Balance Sheet of X Ltd. as on December 31, 2006 reads as under Paid up
capital: Rs.552 lakhs.
(All amounts in Rs. lakhs)
Unit A Unit B
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 3
Land
Fixed Assets (other than land)
Debtors
Liabilities
Stock-in-trade
Reserves
Share Premium
Revaluation Reserve on account of Revaluation of land
200
100
100
28
50
170
150
75
50
25
148
22
70
The company acquired Unit B on December 31, 2003. It made certain capital
additions in the form of generator set and additional building, etc. of Rs.25 lakhs
during the year 2004-05. The members of the company have authorized the Board
in their meeting held on October 28, 2006 to dispose off the Unit B. The company
decides to sell the Unit B by way of slump sale for Rs.325 lakhs as consideration.
The buyer has agreed with the vendor company to give time for putting
through the sale but not later than March 31, 2007 subject to discount of 1% on
agreed sale consideration. However, this discount is not applicable if the sale is
completed after December 31, 2006. The company now approaches you to advise
them as a measure of tax planning to determine the date of sale keeping in view of
the capital gains tax. The WDV of the Fixed Assets under Section 43(6) is Rs.120
lakhs.
Solution: The computation of capital gains shall be in accordance with Section
50B of the Income Tax Act, 1961.
Computation of net worth of Unit B: Rs. (in lakhs)
WDV of Fixed Assets under Section 43(6) being depreciable
assets
Land (170 70 i.e. book value after ignoring revaluation)
Debtors and Stock (75 + 25 i.e. at book value)
120
100
100
320
Less : Liabilities at Book Value 50
Net Worth (being cost of acquisition and improvement) 270
Case I: Where the slump sale takes place on or before December 31, 2006 In this
case, the period of holding of Unit B will be not more than 36 months. Therefore,
Unit B will be a short-term capital asset.
(Rs. in lakh)
Sale Consideration
Less : Discount @ 1%
Less : Net Worth
325.00
3.25
270.00
Short Term Capital Gains 51.75
Tax payable (30% + Surcharge 10% + EC @ 2% on Tax and Surcharge) 17.42
Case II : Where Unit B is sold after December 31, 2006 : In this case, period of
holding is for more than 36 months and therefore, it is a long-term capital asset.
Sale Consideration
Less : Net Worth
325
270
Long Term Capital Gains 55
Tax payable = 20% + Surcharge 10% + EC @ 2% on Tax and Surcharge 12.34
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 4
Conclusion: Since the tax payable is less in Case II, X Ltd. is advised to sell Unit B
by way of slump sale after December 31, 2006 so as to minimize the tax liability.
7.11 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
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.
7.12 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. CIT [2000] 243 ITR 158
(SC) that the phrase other money would cover deposits made by purchaser for
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.
Illustration 2 Right to specific performance:
R entered into an agreement with L for the purchase of a property for Rs.10
lakhs and paid Rs.10, 000 as earnest money. On L failing to execute a conveyance
in respect of the property, a suit for specific performance was filed by R. The suit
was compromised and R agreed to receive Rs.50, 000 by way of damages and gave
up his right to specific performance. What will be the position of this amount?
Solution: It was held in K.R. Srinath v. ACIT [2004] 268 ITR 436 (Mad.) that a right
to acquire a property i.e. right to specific performance is itself a capital asset. In
this case, Rs.50, 000 received by R is consideration for relinquishment of right to
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 5
specific performance and Rs.10, 000 is its cost of acquisition. R is therefore, liable
to capital gain tax on Rs.40, 000 subject to deduction of the legal expenses incurred
for enforcing this right.
7.13 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
Residential house
property being
buildings or lands
appurtenant thereto.
Agricultural land used
by individual or his
parent for agricultural
purposes during 2
years 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 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
(discussed
later)
Applicable Applicable Applicable
7. Amount of
Exemption
Lower of Capital
Gains or Investment in
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
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 6
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-owners interest : In case of property owned by co-owners, the payment made by one co-owner to get the full ownership by release of the
interest of other co-owners amounts to 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 54EC 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.
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
Mensa Commerce Classes CA-Final (Income Tax)
Capital Gains 7
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)
n of plant,
machinery,
land or
building in
such rural
area or,
(b) Shifting
original
assets to
that area, or
(c) Incurring
notified
expenses
n 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
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
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
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
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
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
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
asset original of transfer ofrespect in ion considerat saleNet
exemption) claiming (before Gains Capital Original utilised sonot Amount
Gains
CapitalTaxable
=
(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
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
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
(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)
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
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, if-
a) 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 limit-
other income)
Further, where gross total income of an assessee includes any such short-term
capital gains, the deduction under chapter VIA 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, if-
a) 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
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 following-
Mensa 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:
(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
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 person-
Mensa 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
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
person-
a) 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
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 short-
term 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 [ZCBs]
(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.
(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 14
Items Converted/ Reconverted
Rate of Conversion/Reconversion
1. Cost of acquisition The average of telegraphic transfer selling rate and 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:
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
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