CAPITAL GAINS

Presented ByDR. N.K.GUPTA

INTRODUCTION

• CAPITAL GAINS “Any profit or gains arising from

the transfer of capital assets is taxable under the head capital gains in the previous year in which the transfer has taken place.”

There are certain conditions, which are required to be satisfied for profits / gains to be charged under the head capital gains, they are:

• There should be a capital asset.• The capital asset should be transferred by the assessee.• Such transfer should take place during the previous

year.• The profits or gains should arise as a result of this

transfer.• Such profit or gain should not be exempted from tax

under sections 54, 54B, 54D, 54EC, 54F and 54G.

DEFINITION OF CAPITAL ASSETS

• Capital asset is defined to include property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible.

EXCEPTIONS TO CAPITAL ASSETS

a) Any stock-in-trade, consumable stores or raw material held for the purposes of business or profession.

b) Movable property of the assessee including wearing apparel and furniture held for his personal use or for the use of any member of his family dependent on him. The exception to this condition is jewellery, which is treated as a capital asset, even though it is meant for personal use.

CONTD…….

c) Agricultural land in India provided it is not situated in urban area.

d) 6 ½ % Gold Bonds, 7% Gold Bonds or National Defence Gold Bonds, issued by the central government.

e) Special Bearer Bonds, and

f) Gold Deposit bonds issued under Gold Deposit Scheme of 1999.

SHORT TERM AND LONG TERM CAPITAL ASSETS

“Short term capital assets” means a capital asset held by the assessee for not more than 36 months, immediately prior to its date of transfer. However, the following assets are treated as short term assets if they are held for not more than 12 months, they are:

• Equity or preference shares in a company• Securities like debentures, government securities listed in

a recognized stock exchange in India.• Units of UTI and• Units of mutual funds. • An asset other than a short-term capital asset is regarded as

a “long term capital asset”.

METHOD OF DETERMINING PERIOD

OF HOLDING• In the case of a share held in a company in liquidation, the

period subsequent to the date on which the company goes into liquidation should be excluded while calculating the time period.

• In case when the assessee acquires an asset as a gift or by a will, the period for which the previous owner holds the asset is also included.

• In the case of a share in an Indian company which becomes the property of the assessee in a scheme of amalgamation, the period for which the share is held by the assessee in the amalgamating company should be included.

TRANSFER OF CAPITAL ASSET [Sec2(47)]

•Any transaction involving the allowing of the possession of any movable property to be taken or retained in part of performance

of a contract of the nature referred to in the sec53a of the transfer of property act,1982•Any transaction (whether by way of becoming a member of, or acquiring shares in a co-operative society, company association of person or by way of agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring or enabling the enjoyment of any immovable property

WHAT IS INCLUDED IN TRANSFER

• Transfer Includes Sale of Capital Asset [Sec 2(47)(i)]

• Transfer Includes Exchange [Sec118] 1. Lending

2. Exchange Vs Sale

• Partner Brings His Capital Asset Into Partnership as Capital Contribution [Sec 45(30)]

• Transfer Includes Compulsory Acquisition of an Asset[sec(47)(iii)]

• Transfer Includes Conversion of Capital Asset Into Stock in Trade[sec(47)(iv)]

CONTD…

•Transfer Includes Giving Possession of Immmovable Property Under Part Performance of a Contract [Sec 2(47)(v)]

•Transfer Includes Any Transcation Which Has the Effect of Trasferring an Immmovable Property [Sec 2(47)(vi)]

•Other Judicial Pronouncements

1. Auction Sale

2. Sale of Business

3. Temporary Transfer

WHAT IS NOT INCLUDED IN TRANSFER

•Distribution of Assets to Its Shareholder on Its Liquidation [Sec46(1)]

•Distribution of Capital Assets in HUF to Its Member at the Time of Total or Partial Partition [Sec 47(1)]

•Transfer of a Capital Asset Under a Will or an Irrevocable Trust or a Gift [Sec 47(iii)]

• Transfer of a Capital Asset by a Company to Its Wholly Owned Indian Subsidiary Company [Sec 47(iv)]

• Transfer of a Capital Asset by a Wholly Owned Subsidiary Company to Its Indian Holding Company [Sec 47(v)]

CONTD….

•Transfer in Case of Amalgamation Sec[47(vi)]

•Transfer in Case of Demerger Sec[47(vi B)]

•Transfer of Agricultural Land in India Effected Before March 1, 1970 [Sec 47(viii)]

• Transfer of a Capital Asset , Being Any Work of Art ,Scientific or Art Collection, Book, Dreawing,painting,photograrh Etc [Sec47(ix)]

•Transfer by Way of Conversion of Bonds or Debenture of a Company Into Shares or Debenture of That Company [ Sec 47(x)]

SHORT TERM CAPITAL GAIN

1)Find full value of consideration  2)Deduct the followings. a)    Expenditure incurred wholly and exclusively in

connection with such tranfer. b)   Cost of acquisition. c) Cost of improvement  3) From resulting sum deduct exemption provided by

u/s54 B, 54 D, 54 G. 4) The balancing amount is Short Term Capital Gain. 

LONG TERM CAPITAL GAIN

1)   Find full value of consideration 2)   Deduct the followings a) Expenditure incurred wholly and exclusively in

connection with such transfer. b) Indexed Cost of acquisition. c)  Indexed Cost of improvement. 3)  From resulting sum deduct the exemption provided

by section 54, 54 B, 54 D, 54 EC, 54 ED, 54 F, 54 G. The balancing amount is Long Term Capital Gain/Loss.

FULL VALUE OF CONSIDERATION

Full value means whole price without any deduction and consideration in which transferor receives in lieu of asset he parts with.

1) ESOP

2) Unacquired Position

EXPENDITURE ON TRANSFER

Expenditure incurred wholly and exclusively in connection with transfer of capital asset is deductible from full value of consideration. This means expenditure incurred which is necessary to effect the transfer like brokerage commission, cost of stamp, registration fees and all

COST OF ACQUISITION

Cost of acquisition of an asset is the value for which it is acquired by the assessee, expenses of capital nature for acquiring the title are include in cost of acquisition.

1) Ground rent2) Interest3) Litigation expenses4) Estate duty

NOTIONAL COST OF ACQUISITION

Cost to previous owner is considered as cost of acquisition to the assessee if that capital asset become property in cases like.

a) Distribution of asset on partial or total partition of Hindu Undivided Family.

b) Acquisition of property under gift and will. c) Acquisition of property by a HUF where one of

its member has converted his self acquired property into joint family property after Dec 31- 1969.

COST OF IMPROVEMENT

-    It means all expenses of capital nature incurred in making any addition/ alteration to capital asset by assessee.

1) Expenditure after 31 mar 1981

2) Compromising of suit

3) Estate duty

INDEXED COST OF ACQUISITION OR IMPROVEMENT

Cost Inflation Index.Cost inflation Index for any year means such index as the central government may , having regard to 75% of average rise in consumer price index for urban non manual employees of the immediate preceding pervious year to such year, by notifying in official gazette

COMPUTATION OF INDEXED COST.

Case1) Capital asset acquired before 1-4-1981

FMV or AC * CII in which asset is transferred

Cost Inflation Index for yr 1981-82

2) Capital asset acquired after 1-4-1981

3) Capital asset acquired by assesse before

1-4-1981 & originally acquired by previous owner before 1-4-1981.

4) Capital asset acquired by assesse after

1-4-1981 & originally acquired by previous owner before 1-4-1981.

5) Capital asset acquired by assesse before

1-4-1981 & originally acquired by previous owner before 1-4-1981.

INTRODUCTION OF A CAPITAL ASSET AS CAPITAL

CONTRIBUTION

Section 45(3)

Taxable in the hands of the partner

Consideration: Amount recorded in the books of accounts

DISTRIBUTION OF CAPITAL ASSETS ON A FIRMS DISSOLUTION

Section 45(4)

Chargeable in the hands of the firm

Consideration : fair market value as on the date of transfer

SLUMP SALE SEC 50B

Slump sale means transfer of one or more undertakings as a result of sale for lump sum consideration without values being assigned to individual assets and liabilities in such sales –Section 2(42C).

SLUMP SALE

• Cost of acquisition : Net worth– No indexation– Short term/long term– Value of assets : Depreciable/non-depreciable– Value in the hands of purchaser.

PROVISIONS – NON RESIDENTS

Transactions relating to purchase and sale of securities

No indexation benefit

Particulars Indian Rupees

Conversion Rate

$

Consideration 10000 Avg rate=46

217.39

Expenses 100 Avg rate 2.17

Cost 5000 Avg Rate=25

200.00

Capital Gains 715.34

Buying rate=47

15.22

Capital Gains on distribution of assets

by companies in liquidation [Sec. 46] • TAX TREATMENT IN HANDS OF THE Co.: 

• assets are distributed by the company.

• The assets are distributed at the time of liquidation; and

• The assets are distributed to the shareholders.

• The liquidator sells assets and distributes the cash realized from such sale, to the shareholders, there would be capital gains.

CAPITAL GAINS ON DISTRIBUTION OF ASSETS BY COMPANIES IN LIQUIDATION

[SEC. 46]• TAX TREATMENT IN THE HANDS OF

SHAREHOLDERS : 1)  Full Consideration = { Money received & Mkt. Value of other

assets} – { Amt.Treated as dividend u/s 2(22) ( c)}.      2) Deduct Cost of Acquisition /Indexed Cost of Acquisition,

expenditure on sale, etc., to find out the capital gain.

• Any distribution by a Co. at the liquidation is treated as dividend to the extent of accumulated profit of the Co.

CAPITAL GAINS ON CONVERSION OF DEBENTURES INTO SHARES [SEC

49(2A)]:

• 1) Any transfer by way of conversion of debentures, debenture – stock, or deposit certificates in any form, of a Co. into shares or debentures of that co. is not regarded as a transfer giving rise to Capital gains.

• 2) Cost of Acquisition will be the cost of debentures, debentures – stock or deposit certificates which has been appropriated towards to shares or debentures in case there is sale of above transferred assets giving rise to capital gains.

CAPITAL GAINS ON CONVERSION OF DEBENTURES INTO SHARES

[SEC 49(2A)]:In case of conversion of debentures into Shares: 1)  Cost of Debentures will be the Cost of acquisition of

shares.2)  To find out whether or not shares are LTCA or STCA,

the period of holding shall be determined from date of allotment of shares.

3)  The indexation will start from the date of conversion of debentures into shares.

4)  Not applicable for preference shares converted into equity shares.

CAPITAL GAINS ON TRANSFER OF SECURITY BY DEPOSITORY

[ SEC 45(2A) ] 1) Any beneficial will be chargeable to Income tax, if in PY

he has had

any profits or gains by virtue of transferring of any securities through

depository or participant of such beneficial interest.

2) It shall not be income of the depository.

3) Cost of Acquisitions and the period of holding of any securities shall be determined on the basis of the First – In – First – Out (FIFO)

Sec 45(2A)(contd.)

4)FIFO shall be applied only in respect of dematerialized holdings, as physical form of shares are still in possession of the investor when there is sale of dematerialized shares.

5) FIFO shall be applied accountwise incase if there are multiple depository accounts, as sale in particular account shall not be construed as sale in other accounts.

6) Date of entry is used for the basis of FIFO.

Capital Gains in case of conversion of Capital Asset into Stock – in – Trade [ Sec

45 (2)]• Case : CIT Vs Bai Shirinbai K. Kooka

1/4/82 1/4/83 1/4/84Purchase Conversion Sale

Market Value S.P.

• Amendment in 1984 – from A.Y. 1985 - 86

1/4/67 1/4/84 1/4/84Purchase Conversion SalePrice - 70000 Market Value S.P.Fair Mkt Value on = 480000 = 7300001/4/81 – 180000

Capital GainsNo Tax

Capital Gains Business Gains

COMPUTATION OF CAPITAL GAINS IN THE CASE OF SELF GENERATED

ASSETS.Self Generated

AssetsSale

ConsiderationCost of

AcquisitionCost of

ImprovementExpenses on

transfer

1. Goodwill of a Business

Actual Nil Nil Actual

2. Tenancy Rights, Route Permits & loom Hours

Actual Nil Actual Actual

3.Rights to manufacture, Produce or Process any article

Actual Nil Nil Actual

4. Trade mark or brand name associated with a business

Actual Nil Actual Actual

CAPITAL GAINS IN CASE OF BONUS SHARES

Original Shares Bonus Shares

Acquisition Cost of Acquisition

Acquisition Cost of Acquisition

Acquired before April1, 1981

Actual Cost or Fair Market Value on 1st April 1981

whichever is more

Acquired before April1, 1981

Fair Market Value on 1st April 1981

Acquired before April1, 1981

Actual Cost or Fair Market Value on 1st April 1981

whichever is more

Acquired after April1, 1981

Nil

Acquired after April1, 1981

Actual Cost Acquired after April1, 1981

Nil

CAPITAL GAIN ON TRANSFER OF RIGHTS SHARES

• For Original Shareholder ( Renouncer )– Cost of Acquisition :

• Cost of acquiring original shares.

• Cost of aquiring Rights shares.

– Premium Received on renouncement – Short Term Capital Gain.

• For the Renouncee– Cost of Acquisition :

• Amount paid to Company

• Premium paid to the renouncer.

CAPITAL GAINS IN CASE OF COMPULSORY ACQUISITION OF

AN ASSET [SEC 45(5)]• Applicability :

– Transfer of capital asset by way of compulsory acquisition under any law.

– Capital asset is transferred (not by way of compulsory acquisition), & consideration is approved or determined by central Gov. or RBI.

• Chargeability :– Initial Compensation is full value of consideration.– Charged in the year in which Initial Compensation is

received• Enhanced Compensation.

INSURANCE CLAIM RECEIVED. [SEC 45(1A)]

• Deemed Capital Gain• Two conditions for applicability of this section :

A)    Compensation is received because of damage or destruction of capital assets.

B)     Damage or destruction is as a result of Flood, Cyclone, Earthquake, Riots, Civil Disturbance, Accidental fire explosion or action of enemy.

OTHER SPECIAL PROVISIONS

• Capital Gains in case of Depreciable Assets ( Sec 50 )

• Buy Back of Shares

• Transfer of Land & Bldg ( Sec 50 [c])

EXEMPTION U/S 54

• Transfer of Residential House Property• Individual / HUF• Long Term Capital Asset• Assessee should invest in another Residential House

Property within the specified time limit.• Exemption available to the extent of the investment in the

new house property or capital gains whichever is less.• Asset should not be transferred within 3 years of

acquisition, otherwise will be treated as a short term capital gain.

• Capital gain account scheme deposit facility available.

EXEMPTION U/S 54B

• Available if agricultural land transferred. The said land should be used by the individual or his parents for agricultural purposes during at least 2 years immediately prior to transfer.

• Available only to an individual.• Short term / Long term Capital Asset.• Investment in agricultural land (rural or urban) within 2

years.• The rules relating to exemption, transfer of asset and

facility of capital gain account scheme are the same as under Sec 54.

EXEMPTION U/S 54D

• Available if land or building forming part of an industrial undertaking is compulsorily acquired by the govt and which is used during 2 years for industrial purposes prior to acquisition.

• Available to any person.• Short term / Long term Capital Asset.• Investment in land or building for industrial purposes within

3 years.• Capital gain chargeable from the date of receipt of

compensation.• The rules relating to exemption, transfer of asset and facility

of capital gain account scheme are the same as under Sec 54.

EXEMPTION U/S 54EC

• Available if any long term capital asset is transferred after 31.3.2000.

• Available to any person.• The asset should be a Long term capital asset.• Investment within 6 months in bonds of NABARD, or

RECL(on or after 1/4/01) which are redeemable after 3 years.

• The rule relating to exemption is same as under Sec 54.• If the new asset is transferred or is converted into money or a

loan is taken on security of the new asset within 3 years of acquisition, then the capital gain will be treated as long term capital gains.

EXEMPTION U/S 54ED

• Available if any long term capital asset being units, listed shares, or securities are transferred.

• Available to any person.

• The asset should be a long term capital asset.

• Investment should be in specified equity shares within 6 months.

• The rule relating to exemption is same as u/s 54.

• If the asset is transferred within 1 year of its acquisition, then the capital gain will be treated as long term capital gain.

EXEMPTION U/S 54F

• Available if any long term capital asset(other than a residential house property) is transferred, provided on the date of transfer the taxpayer does not own more than one residential house property.

• Available to an individual / HUF.

• Investment should be made in a residential house property.

• Amount of exemption = Investment * Capital gains

Net sale consideration

EXEMPTION U/S 54F (CONTD.)

• If the asset is transferred within 3 years of its acquisition or if another residential house property is purchased within 2 years of transfer of original asset or if another residential house is constructed within 3 years of the transfer of original asset, then the capital gains exempt earlier, will be treated as long term capital gain.

• Capital gain account deposit scheme available.

EXEMPTION U/S 54G

• Available if any land, building, plant or machinery is transferred in order to shift an industrial undertaking from urban to rural area.

• Available to any person.

• Asset may be short term / long term.

• Investment should be made in land, building or plant and machinery to shift the undertaking in a rural area.

• The rules relating to exemption, transfer of asset and facility of capital gain account scheme are the same as under Sec 54.

PROVISIONS OF SEC 112

• Section 112 provides an alternative option for charging long term capital gains to tax, if the following conditions are satisfied :

The taxpayer is an individual, HUF, company or any other person(may be resident or non resident)

The asset is a long term capital asset The long term capital asset is :

- a security listed in any recognised stock exchange in India or,

- a unit of UTI or a mutual fund(whether listed or not)

Sec 112 (contd.)

• If the conditions are satisfied, then the other option is to charge the capital gains at the rate of 10% without taking the benefit of indexation in the cost of acquisition.

• The tax payable by the assessee will be lower of 20%(+ surcharge)on the capital gain calculated giving benefit of indexation or @10% without the benefit of indexation, whichever is lower.

• In the case of listed bonus shares, listed debentures and listed bonds, Option u/s 112 will be better.

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