Capital Gains - Ay0910

7/27/2019 Capital Gains - Ay0910

1/197

CAPITAL GAINS

18 September 2009 IPCC - Income Tax 1

CA. VIVEK DOSHI


2/197

7.1 CHARGE UNDER THE HEADCAPITAL 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 Section45, the charge of income under the head Capital Gains arises ifthe following conditions are fulfilled:

IPCC - Income Tax 218 September 2009

. .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 assetaffected during the previous year. (Profit or gain includesnegative 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.


3/197

CAPITAL ASSET [Section 2(14)]:

According to Section 2(14), capital asset means property ofany kind held by an assessee, whether or not connected with hisbusiness or profession, but does not include

1. Any stock-in-trade, consumable stores or raw materials held forpurpose of his business or profession.

2. Personal effects i.e. movable property (including wearing appareland furniture but excluding jewellery, archaeological collections,Drawings, Paintings, Sculptures and any work of art) held for


persona use y assessee or s am y mem er epen en onhim.Jewelleryis a capital asset. It includes

A. Ornaments made of gold, silver, platinum or any other precious metalor any alloy containing one or more of such precious metals, whether

or not containing any precious or semi-precious stones and whether ornot 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.


4/197

CAPITAL ASSET [Section 2(14)]:

3. Rural agricultural land i.e. Agricultural land in India not beinga land situated

C. Within the jurisdiction of a municipality or acantonment board having a population of 10,000 ormore according to the last preceding census; or

D. In any notified area within 8 kms from the local


m s o any mun c pa y or can onmen oar .4. Gold Bonds issued by Central Government including theGold Deposit Bonds issued under the Gold DepositScheme, 1999.

5. Special Bearer Bonds, 1991.


5/197

1) Capital gains or not :

Compute the capital gains in following independent casesfor Assessment year 2009-10 -

1) Mr. A, a jewellery dealer, sells jewellery on 1-8-2008 for Rs.15,00,000, which was acquired on 1-8-2007 for Rs.

10,00,000.2) Mr. B sells his personal furniture on 1-6-2008 for Rs. 50,000,

which was acquired on 1-4-2003 for Rs. 80,000. The


.

3) Mr. C sells his personal residential house on 1-12-2009 forRs. 10,00,000, which was acquired by him on 1-4-2003 forRs. 8,00,000. The expenses on transfer were Rs.22,000.

4) Mr. D sells gold deposit bonds on 1-7-2008 for Rs. 12 lakh.The bonds were acquired on 1-3-1999 for Rs. 8,50,000.

5) Mr. E, a painter, sells the drawings and paintings made byhim for Rs. 50 lakhs on 1-10-2008.


6/197

1) Solution :

Capital gains for Assessment year 2009-10 in respect ofabove cases shall be computed as under -

1) Jewellery sold by a jewellery dealer is stock-in-trade of thebusiness. Therefore, no capital gain is chargeable to tax.

2) Personal furniture sold by Mr. B is a personal effect, which isa not a capital asset.

3) The transfer of the house was effected on 1-12-2009, which' -


. ,

transaction is not liable to capital gains in the assessmentyear 2009-10. It will be liable to capital gains in theassessment year 2010-11.

4) Gold deposit bonds sold by Mr. D are not a capital asset.

5) In case of painter, the selling of drawings and paintings Madeby him takes place in the exercise of his profession ofpainting. Hence, such drawings and paintings are 'stock-in-trade' held for the purpose of his profession and are,therefore, not a capital asset.


7/197

2)Compute the capital gains in following independent cases for

Assessment year 2009-10.1. Mr. A, a property dealer, sells a commercial plot of land on 1-8-2008 for Rs

25,00,000, which was acquired on 1-8-2003 for Rs. 10,00,000 for selling of

office constructed therein. He had incurred land development charges of Rs.

1,00,000 on 1-4-2006. He incurred Rs 10,000 for selling the plot of land.

2. Mr. B sells his personal motorcar on 1-6-2008 for Rs. 1,00,000, which wasacquired on 1-4-2003 for Rs. 3,00,000. The expenses on transfer are 1% of

selling price.

3. Mr. C sells his personal residential house on 1-5-2009 for Rs. 20,00,000, which


was acqu re y m on - - or s. , , . e expenses on rans er

were Rs. 15,000.

4. Mr. D sells an agricultural land situated in the Village Rampur on 1-7-2008 for

Rs. 20 Lakh. The population of municipality under which the village Rampur

is covered is 9,000. The land was acquired on 1-3-1997 for Rs. 50,000.

5. Mr. E sells his gold bracelet on 1-5-2008 for Rs. 4,00,000 which was acquiredfor Rs. 20,000 on 1-3-1985. A diamond was fitted on to that bracelet on 1-7-

2004 for Rs. 10,000.

6. Mr. F, a businessmen, had acquired a paint in for Rs. 10 lakh and a drawing

for Rs. 5 lakh in the year 1988-89. He sold the painting for Rs. 20 lakh to a

university and the drawing for Rs. 1 lakh to a National Museum on 5-8-2008.


8/197

SOLUTION 2- Capital gains for the assessment year 2009-10 inrespect of above cases shall be computed as follows

1. Commercial plot of land acquired by a property dealer for hisbusiness purposes is stock-in-trade of the business.Therefore, itwas not a capital asset.

2. Personal motorcar sold by Mr. B is a personal effect, which is not


.

3. The transfer of the house was affected on 1-5-2009, whichdoesnt fall within the previous year 2008-09. Hence, thistransaction is not liable to capital gains in the assessment year2009-10. It will be liable to capital gains in the assessment year

2009-10.


9/197

SHORT TERM AND LONG TERM NATUREOF 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 betreated as short-term

(b) Other securities listed in recognized stock


are held for not morethan 12 monthsimmediately precedingthe date of transfer.

exc ange n n a

(c) Units of UTI or Units of mutual fund specifiedu/s 10(23D)

(d) Zero Coupon Bonds

Note: An asset held exactly for 36 months or 12 months, as the case may be, willalso be a short-term capital asst. For computing the period of 36 months or 12months, as the case may be, the date on which the asset was acquired is to beincluded while the date on which the asset is transferred is to be excluded.


10/197

SHORT TERM AND LONG TERM NATUREOF CAPITAL ASSETS:

(2) Long-term Capital Asset [Section 2(29A)]: Anycapital asset other than a short-term capital asset is along-term capital asset. In other words, a capital asset


specified assets given in table above) shall be a long-term capital asset.


11/197

SHORT TERM AND LONG TERM NATUREOF CAPITAL ASSETS:(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 bedetermined as follows:

Mode Determination of period of holding


in liquidation company goes into liquidation shall be excluded

2. Assets acquired underSection 49(1) modes

Period for which the asset was held by the previous

owner shall be included

3. Share(s) in Indianamalgamated 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.


12/197

4. Bonus shares or other

securities

Period of holding will start from the date of

allotment thereof.

5. Right shares or othersecurities

Period of holding will start from the date of

allotment thereof.

6. Right entitlementsrenounced

Period of holding taken from date of offer made by

company.


. qu y ares n a

company, or Trading orclearing rights of a RSE;

acquired pursuant to

demutualisation or corporati-

sation of such RSE

er o or w c suc person was mem er o

Recognised Stock Exchange (RSE) in India prior tosuch demutualisation or corporatisation shall be

included.

8. Shares of resultingcompany acquired in case of

demerger

Period of holding of shares in demerged company

shall be included. 07926401801/02


13/197

9. Asset which was not heldas capital asset initially

but is a capital asset at

the time of transfer.

Entire period of holding from date of initial

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 flatallotted to a member of a

Period of holding to be calculated from date of

allotment of shares in societ and not from


co-operative housingsociety date on which possession of the flat isobtained 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.)]


14/197

SHORT TERM AND LONG TERM NATURE OF CAPITAL ASSETS:

Property constructed on a land purchased earlier: if land is heldby the assessee for more than 36 months and building constructedover it is held for not more than 36 months, in that case, the gainsarising 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 dated28.4.95 clarifying as follows:


brokers note should be treated as the date of transfer provided thetransaction is followed up by delivery of shares and also the transferdeeds. Similarly, in respect of the purchase of the securities, theholding period shall be reckoned from the date of the brokers notefor purchase on behalf of the investors.

B. In case the transaction take place directly between the parties andnot through stock exchanges, the board has clarified that the date ofcontract of sale as declared by the parties shall be treated as thedate of transfer provided it is followed up by actual delivery of sharesand the transfer deeds.


15/197


C. In cases where the shares are purchased in several lots at differentpoints of time and the delivery of which are taken in one lot andsubsequently sold in parts, in the absence of correlation of the datesof purchase and sale through specific numbers of the scripts, it isdifficult to determine the period of holding of the shares which aresold 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 soldfirst and the shares acquired last will be taken to be remaining withthe assessee.


This CBDT has issued an exclusive circular no.768 dated 24-06-1998 (232 ITR 5 St.) in respect of transactions in securities heldin dematerialized form u/s.45 (2A) for determination of date oftransfer and period of holding as detailed below:

A. The FIFO method will be applied only in respect of thedematerialized holdings, because in the case of sale of dematerialized securities, the securities held in physical form cannotbe construed to have been sold as they continue to remain in thepossession of the investor and are identified separately.


16/197


B. In the depository system, the investor can open and hold multipleaccounts. In such a case, where an investor has more than onesecurity 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 accountcannot be construed to have been sold as they continue to remainin that account.

C. If in an existing account of dematerialized stock, old physical stock is


, ,

the basis for determining the movement out of the account is thedate of entry into the account.


17/197


Notes :-

A. Modes specified in Section 49(1): Where the capital assetbecame the property of the assessee -

a. On any distribution of assets on the total or partialpartition of a Hindu Undivided Family;

b. Under a gift or will; or by succession, inheritance ordevolution; or

c. On any distribution of assets on the liquidation of a


company; ord. Under a transfer to a revocable or an irrevocable trust,

orUnder any such transfer as is referred to in clause (iv)/ (v)/ (vi)/(via)/ (viaa) of Section 47;


18/197

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


f. Any transaction involving allowing of possession of animmovable property to be taken or retained in part performanceof 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 immovableproperty.


19/197

TRANSFER [Section 2(47)]:-:Case Laws:-

1. Reduction in face value of shares and consequent payment tothe shareholder towards such reduction amounts to transfer,as it results in extinguishment of right in the shares held by theshareholder. Kartikeya Sarabhai v. CIT [1997] 228 ITR 163(SC).


.

amounts to transfer as there is relinquishment by theshareholder of his rights in Preference Shares. AnarkaliSarabhai v. CIT [1997] 224 ITR 422 (SC).

3. Family arrangement entered into by compromisingdoubtful/disputed rights for preserving family property/peace,

doesnt amount to transfer. CIT v. A.L. Ramanathan [2000]245 ITR 494 (Mad.)


20/197

TRANSACTIONS THAT ARE NOT REGARDED

AS TRANSFER [Section 47]:

1. Distribution of assets by a company to its shareholders on itsliquidation. [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 ift or an irrevocable trust of shares,


debentures or warrants allotted to the assessee under EmployeeStock Option Plan as per prescribed guidelines, shall constitutetransfer. Its fair market value on date of such gift/irrevocable trustshall be treated as full value of consideration.

4. Transfer of a capital asset (not held as stock in trade) by a holdingcompany 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)]


21/197

6. Transfer of share(s) held in an Indian company by amalgamating

foreign company to amalgamated foreign company if (a) at least25% of shareholders of the amalgamating foreign companycontinue to remain shareholders of the amalgamated foreigncompany; and (b) such transfer does not attract capital gains tax inthe country in which the amalgamating company is incorporated.[S. 47(via)]

7. Transfer of capital asset by an amalgamating banking company tothe 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


. .

9. Transfer of share(s) held in an Indian company by demergedforeign company to the resulting company if (a) shareholdersholding 75% or more of value of shares of demerged foreigncompany continue to remain shareholders of resulting foreigncompany; 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 inconsideration of demerger. [S.47(vid)]


22/197

11.Transfer of share(s) held by shareholder in amalgamating

company, if such transfer is in consideration of allotment to him ofshare(s) in the amalgamated Indian company. (S.47(vii)However, if besides share(s) in amalgamated company, the

shareholder is allotted something more, say bonds or debentures,in consideration of such transfer; the transfer will not be exempt.Composite consideration is not covered by Section 47(vii). CIT v.

Gautam Sarabhai Trust [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 cooperativebank. [s.47 (vica)].


. , ,

share (s) held by him in predecessor co-operative bank if thetransfer is made in consideration of the allotment to him of anyshare (s) in the successor co-operative bank.[S.47(vicb)]

14.Transfer of bonds or Global Depository Receipts [referred to inSection 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 ordebentures of any company; [S.47 (xa)] (inserted by the Financeact, 2008 w.r.e.f 1-4-2008).


23/197

16. Transfer of any work of art, archaeological, scientific or art

collection, book, manuscript, drawing, painting, photograph orprint, to Government/ University/National Museum/National ArtGallery/National Archives or any other notified publicinstitution/museum. [S. 47(ix)]

17. Conversion of bonds or debentures, debenture-stock or depositcertificates 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 SickIndustrial Companies Act, 1985, if such transfer is made during the


become sick and ending with the previous year during which itsentire net worth becomes equal to or exceeds accumulated losses.[S. 47(xii)]


24/197

19. Transfer of (a) a capital asset or intangible asset by a

predecessor firm to its successor company; or(b) a capital asset tosuccessor company in course of demutualisation/corporatisation ofpredecessor recognized stock exchange in India (being anAssociation 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 theassets 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 accountsstood in the books of the firm on the date of the succession;


C. In case of firm, the partners receive consideration only by wayof 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 continueto be as such for 5 years from the date of succession; and

E. The demutualisation or corporatisation of a recognized stockexchange in India is carried out in accordance with a `schemefor demutualisation or corporatisation, which is approved by theSEBI.


25/197

20. Transfer of a membership right held by a member of a recognized

stock exchange in India for acquisition of shares and trading orclearing rights acquired by such member in that stockexchange in accordance with demutualisation or corporatisationscheme 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 andliabilities of the company.


.

of the total voting power and continues to be as such for 5years from the date of succession; and

C. The sole proprietor receives the consideration only in form ofallotment of shares in the company.

22. Any transfer under Securities Lending Scheme, 1997 for lending of

securities under an agreement or arrangement, which isentered into by the assessee with borrower of such securities andwhich is subject to guidelines issued by SEBI or RBI. [S.47 (xv)]


26/197

Note:

In respect of Section 47(xiii) and 47(xiv), the exemption is availableonly in respect of the firm/sole proprietor carrying on a business,not in case of profession. Further, this exemption is available onlyin respect of transfer of capital assets or intangible assets, not inrespect of any stock in trade.

23. Any transfer of a capital asset in a transaction of reverse mortgageunder a scheme made and notified by the centralgovernment[S.47(xvi)](inserted by the Finance act, 2008 w.r.e.f 1-4-2008).



27/197

WITHDRAWAL OF EXEMPTION:Where the capital gain arising on the transfer of a capital assetfrom 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 inthe 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 andsubsidiary company, the following additional points need to beborne in mind:

a) If the provisions of section 47 are applicable to a transfer, then theassessment shall be reopened in respect of the A.Y. relevant to theprevious year in which original transfer took place u/s.155 (7B), toamend the order so as to charge the capital gains to tax.

b) if the transferee company subsequently sells the asset withoutattracting the provision of section 47A, then for computation ofcapital gains the cost to the transferor company shall be adoptedas cost to the transferee company- sec 49 (1).


28/197

c) if the asset is sold after attracting the provisions of section 47A,

then the cost to the transferee company shall be the actual costincurred by that company to acquire the asset from the transferorcompany-sec.49(3).

The capital gain arising on transfer of a capital asset in the nature ofmembership of a recognized stock exchange exempted by virtue of

sec.47, shall be chargeable to tax if the shares allotted to the transferorin exchange thereof are transferred before the expiry of a period of 3years. The capital gain shall be deemed, in such a case, as the incomechargeable during the previous year in which the shares aretransferred.


If the conditions stipulated regarding the succession of a proprietaryconcern or a firm by a company are not complied with, the benefitsavailed by the sole proprietor or the firm, as the case may be, shall bedeemed to be profit and gains of the successor company chargeable totax in the year in which infringement takes place.


29/197

COMPUTATION OF CAPITAL GAINS

SHORT TERM AND LONG TERM

Short term capital gains [S. 2(42B)]means capital gains arising from transfer of ashort-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 XX Full Value of Consideration XX


Less : Exp incurred wholly and

exclusively for such transfer XX

Less : Expenses incurred wholly and

exclusively for such transfer

XX

Net Consideration XX Net Consideration XX

Less: *C.O.A. XX

**C.O.I. XX XX

Less: Indexed * C.O.A. XX

Indexed**C.O.I. XX

XX

Short term capital gainLess : Exemption u/s 54B, 54D,

54G, 54GA

XX

XX

Long term capital gainLess : Exemptions u/s 54, 54B, 54D,

54EC, 54F, 54G, 54GA

XX

XX

Taxable Short Term CapitalGain

XX Taxable Long Term Capital Gain XX

*Cost of Acquisition (C.O.A) ** Cost of Improvement (C.O.I)


30/197

Notes:1. Any sum paid on account of securities transaction tax is notdeductible in computing Capital Gains.

2. Indexed cost of acquisition or improvement shall be computed

as follows :

Indexed Costof Acquisition

Cost of acquisition or improvement Cost Inflationindex of the year of transfer

Cost Inflation Index CII for i the first ear in


orImprovement which the asset was held by the assessee or for theyear beginning on 1.4.1981, whichever is later, or(ii)the year in which improvement took place


31/197

-:Cost Inflation Indices:-

The cost inflation indices as notified by the Central Government are as follows:

F. Y. CII F.Y. CII F.Y. CII F. Y. CII

1981-82

1982-83

100

109

1988-89

1989-90

161

172

1995-96

1996-97

281

305

2002-03

2003-04

447

463


1983-84

1984-85

1985-86

1986-87

1987-88

116

125

133

140

150

1990-91

1991-92

1992-93

1993-94

1994-95

182

199

223

244

259

1997-98

1998-99

1999-2000

2000-01

2001-02

331

351

389

406

426

2004-05

2005-06

2006-07

2007-08

2008-09

480

497

519

551

582


32/197

C.O.A AND C.O.I. IN CERTAIN CASES[Section 49 and 55]

1. Cost of Acquisition (COA) and Cost of Improvement (COI) in case of a capitalasset acquired before 1.4.1981:

Mode of Acquisition COA COI

Where the assessee himself acquired the capital asset before

FMV on 1.4.1981 or costof property, whichever is

Capital expenditureincurred by the previous


. .

making any additions/alterations to the capitalasset on or after 1.4.1981.

Capital asset acquired byassessee under any of the modesgiven in Section 49(1) and theprevious owner acquired the

same before 1.4.1981

Cost to the previousowner or FMV on1.4.1981 whichever ishigher.


33/197

C.O.A AND C.O.I. IN CERTAIN CASES

[Section 49 and 55]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 Cost = Cost to previous owner + Cost of


specified in Section 49(1) improvement incurred by previous owner or

assessee

3. Share(s) in Indian amalgamatedcompany, which becomes the propertyof assessee in a scheme of amalgamation.

Cost of acquisition of shares inamalgamated company = Cost of acquisitionof the shares in the amalgamating company[Sec. 49(2)]


34/197


[Section 49 and 55]Mode Cost of Acquisition or Improvement

4. Conversion of bonds or debentures,

debenture-stock or deposit certificates inany 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 depositcertificates Part of such bonds,debenture, debenture-stock or depositcertificates so converted [Sec. 49(2A)]


5.Conversion of bonds or debentures,debenture-stock on deposit certificates inany form, of a company into shares or debentures of that company (i.e. exempttransfers referred u/s 47(x) & 47(xa))

Cost of acquisition of new shares or debentures = total cost of bonds,debentures, debenture-stock or depositcertificates * part of such bonds, debenture,debenture-stock or depositCertificates so converted [sec.49A(2A)][Amdt. by Finance Act, 08 w.r.e.f 1-4-08]


35/197


[Section 49 and 55]Mode Cost of Acquisition or Improvement

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 PriceIf purchased by person in whose favour


right was renounced : Cost = Purchase

Price paid to company + Amount paid forrenouncement 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 = Costof shares in demerged company NetBook Value of assets transferred toresulting company Net worth of thecompany before demerger.

Cost of shares in demerged company =Total cost of shares Cost of shares in

resulting company computed above.


36/197


[Section 49 and 55]

10. Equity Shares & trading/clearing rightsin recognized stock exchange acquiredon demutualisation/ corporatisationthereof

Cost of Equity Shares = Cost of acquisitionof membership card of stock exchange.

Cost of trading or clearing rights = NIL

11. Share/stock of company acquired on (a) Consolidation & division of share

Cost of acquisition of such share or stock =Cost calculated with reference to the


amount, (b) conversion of shares intostock or vice versa, (c) conversion ofone kind of shares in other

stock from which such share or stock isderived.

12.Shares Acquired under an ESOP

scheme or acquire as sweat equityshares

Cost of acquisition of such share or stock =

Fair Market Value which has beentaken into account while computingvalue of Fringe Benefits u/s115WC(i)(ba)


37/197


[Section 49 and 55]

Capital asset being - COI COA

Goodwill of business, right to NIL If self-generated: Nil.

3. Cost of acquisition and cost of improvement in case of certain

intangible assets


manufacture/produce/process

any article/thing, or right to carrybusiness

If purchased from

previous owner :Purchase Price

Trademark/brand name

associated with business or tenancy rights or stage carriedpermits/loom hours

Expenses incurred

by assessee or previous owner after31.3.1981


38/197


[Section 49 and 55]4. Cost of Improvement in any other case: Cost of improvement means

all capital expenditure incurred in making any additions or alterations tocapital asset by the assessee after it became his property, and where

capital asset became property of the assesee by any of modes specified u/s49(1), by the previous owner.Exclusions from Cost of Improvement: Cost of improvement does notinclude any expenditure, which is deductible in computing the incomechargeable under the head Income from House Property, Profits and


a ns o us ness or ro ess on , or ncome rom er ources .

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 thatreferred to under Section 49(1).

(C) When cost to previous owner not ascertainable [Sec. 55(3)]: Wherethe cost for which the previous owner acquired the property cannot beascertained, the cost of acquisition to the previous owner means thefair market value on the date on which the capital asset became theproperty of the previous owner.


39/197


[Section 49 and 55]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 modesspecified 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 theassessee. However, in the case of indexation of cost of improvement, thebenefit of indexation can be availed from the year in which improvement tothe asset was made.


6. Conversion of debentures into shares:

Similarly, if debentures are converted into shares, it is not regarded astransfer by virtue of section 47(x). If these shares are sold subsequently,the cost of acquisition would be the cost incurred to acquire the debentureson conversion of which the shares were obtained as provided in section 49(2A). Nevertheless, there is no provision to enable the assessee to takethe period of holding of the debentures in determination of the long-term

nature of the shares and again the possibility of claiming the indexationbenefit for the period for which debentures were held is ruled out.


40/197


[Section 49 and 55]

7. Conversion of investment into stock -in- trade:

in the case of conversion of capital asset in to stock-in-trade the provisionsof sec.45 (2) explicitly provide for deferring the chargeability till the year ofsale of stock-in-trade. While computing the capital gains of sale of thestock-in-trade, the assessee will have to index the cost of acquisition onlyup to the year of conversion and not up to the year of chargeability since


n exat on stops n t e year o trans er an oes not exten to t e year n

which the computation is made and taxability arises.

8. Compulsory acquisition:Again, when compulsory acquisition is the instance of transfer in theassessee'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 upto the year of receipt of compensation but would be confirmed only up tothe year of compulsory acquisition.


41/197


[Section 49 and 55]Case Laws:

1. Amount paid to clear mortgage: Where property has beenmortgaged 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 theinterest 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 ofproperty, 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 acquiringthe same. VSMR Jagdishchandran v. CIT [1997] 227 ITR 240 (SC)


42/197


[Section 49 and 55]

2. Kist deducted from proceeds of mortgaged property:

The Government auctioned the mortgaged property of assessee forkist amount due by him to the State, and paid the balance amount(after deducting kist) to the assessee. The assessee claimeddeduction for kist amount in computing capital gains.


Held that, since the price received in auction entirely belonged to theassessee, the amount deducted towards kist was not diverted atsource but was applied in discharge of an obligation after it wasreceived by the assessee. Therefore, kist amount was not deductiblein computing capital gains. CIT v. Attili N. Rao [2001] 252 ITR 880(SC).


43/197


[Section 49 and 55]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 beenvisaged in acquisition of an asset, capital gains cannot becharged. CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC).


.

constitute expenditure in connection with transfer and is, therefore,is not deductible u/s 48(1) Mr. G.Y. Chenoy v. CIT [1999] 234 ITR89 (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 obtainingrelinquishment of such right was held deductible in computing thecapital gains.


44/197


[Section 49 and 55]

6. When Loan is borrowed and invested in any asset, interestexpenditure incurred thereon can be claimed as deduction from the

income derived from such asset. If the assessee desires tocapitalize the interest, is it possible to treat it as part of the cost ofacquisition and claim it as deduction in the computation of capitalgains 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 of CIT v/s Mithlesh Kumari, 92 ITR 9 (DEL) of Addl. CITv/s K.S.Gupta, 119 ITR 372 (AP). Similar analogy can be inferredfrom the decisions rendered in CIT v/s Maithreyi Pai, 152 ITR 247(Kar) and Saharanpur Electric Supply Co. v/s CIT, 194 ITR294(SC).


45/197

CASES WHERE BENEFIT OF INDEXATION IS NOT

AVAILABLE EVEN IN CASE OF LONG-TERM CAPITALASSETS:

1. Transfer of a bond or a debenture other than capital indexed bondsissued by the Government.

2. Transfer of undertaking or division in a slump sale under Section50B.

3. Transfer of shares/debentures of an Indian company purchased bya 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 underSection 115AD.

8. Transfer of a foreign exchange asset by a non-resident Indianunder Section 115D.


46/197

3)Compute his capital gain.

Shri RituRaj purchases a house propertyin Jaipur for Rs. 12,00,000 on 15-10-2007.He constructed first floor on 15-12-2007


and spent Rs. 1,80,000 on suchconstruction. On 15-12-2008 he sold thishouse for Rs 22,00,000. The expenses on

transfer were Rs. 29,000.


47/197

3) Solution :Computation of capital gains of Shri RituRaj (Amount in Rs.)

Full value of consideration 2,200,000

Less: Expenses on transfer 29,000

Less: Cost of acquisition 1,200,000

Less: Cost of improvement incurred after 1-4-

1981 180,000 1,409,000

Short term Capital Gains 791,000

Note: Since the period of holding of house property does not exceed thirty-six monthshence the capital asset is a short-term capital asset.


48/197

4)Compute his capital gain.Shri Ramesh purchased a house property in

Ganganagar for Rs 6, 50,000 on 28-12-1978. Hepaid registration fees of Rs 65,000. The fair market value of the property as on 1stApril, 1981


was Rs.7,25,000. He constructed first Floor on10-12-1999 and spend Rs. 3,89,000 on the saidconstruction. On 15-12-2008 he sold this housefor Rs 72, 00,000. The expenses on transfer were Rs. 72,000.


49/197

4) Solution :Computation of Taxable Capital Gains of Shri Ramesh for A.Y. 2009-10 :

Rs.

Full value of consideration7,200,000


Less: Expenses in connection with transfer 72,000

Less: Indexed cost of acquisition (725,000 x 582 /100) 4,219,500

Less: Indexed cost of improvement (3,89,000 x 582 389) 582,000

Long term Capital Gains 2,326,500


50/197

5)Compute his capital gain.

Shri Prabhat purchased a land in Jaipurfor Rs 18,50,000 on 28-12-1998. He paidre istration fees of Rs. 1 80 000. On 15-3-


2009 he sold this house for Rs 64,50,000.The expenses on transfer were Rs 64,500.


51/197

5) Solution :

Computation of Taxable Capital Gains of ShriPrabhat for A.Y. 2009-10 (amounts in Rs.) :

Full value of consideration 6 450 000


Less: Expenses in connection with transfer 64,500

Less: Indexed cost of acquisition (20,30,000 x 582 351) 3,365,983

Long term Capital Gains

3,019,517


52/197

6) Question

Shri Megani purchased a commercial building inUdiapur for Rs 3,31,000 on 27-11-1994. Hegifted the property to his friend Chandu on 18-


- . n - - an u so s ousefor Rs. 7,80,000. The expenses on transfer wereRs 48,000. Compute capital gains in hands ofShri Chandu and state in which year it shall be

chargeable to tax.


53/197

6) Solution Computation of capital gain of Shri Chandu for the

Assessment Year 2009-10 (amounts in Rs.)


Full value of consideration 780,000Less: Expenses in connection with transfer 48,000

Less: Indexed cost of acquisition (3,31,000 x 582 331) 582,000

Long term Capital Gains 150,000


54/197

7) Question

Mr. F sells a plot of land on 1-8-2008 for Rs25,00,000. He inherited the plot from his father on 1-4-2004. His father had acquired the plot on 1-3-1981 forRS 30 000. His father had incurred land develo ment


charges Rs. 10,000 on 31-3-1981 and Rs. 20,000 on 1-5-2001. Mr. F had incurred land development chargesRs 50,000 on 1-9-2005. The sale stamp deed expenseswere 1% of the selling price. The FMV of the plot as on

1-4-1981 was Rs 29,000. Compute the capital gains forthe assessment year 2009-10.

7) S l ti


55/197

7) Solution : In case of property acquired in modes specified under section 49(1)(here, inheritance), the cost to the previous owner or FMV as on 1-4-1981

will be taken. Cost of improvement incurred after 1-4-1981 by previousowner or the assessee, is deductible.

For determining long-term or short-term nature of land, the period ofholding of Mr. F's father will be included, as a result of which, the plot of

land becomes long-term capital asset for Mr. F. For indexation purposes, CII of the year in which property was held by the

assessee i.e. year of inheritance being 2004-05 will be taken asdenominator.


Full value of consideration 2,500,000Less: Expenses on transfer being sale stamp deed expenses @ 1% of

25,00,00025,000

Net consideration 2,475,000

Less: Indexed cost of acquisition (30,000 x 582 = 480) 36,375

Less: Cost of improvement incurred after 1-4-1981

Mr. F's father (20,000 x 582 426) + Mr. F (50,000 x 582 = 480) 87,949

Long-term capital gains 2,350,676


56/197

8. Mr. I, a manufacturer of bricks since 1999,sells the following assets on 12-3-2009, -Name of asset Goodwill Trademark Tenancy rights

in respect of

businesspremises

Manufacturing

licence

Mode of acquiring Self-generated Purchased Self-generated Purchased


Purchase price &

date thereof

N.A. Rs. 1,00,000

11-3-2006

N.A. Rs. 30,000

12-3-2006

Cost of

improvement and

date thereof

Rs. 2,00,000

1-4-2007

Rs. 10,000

1-5-2007

Rs. 20,000

31-3-2008

NIL

price 15,00,000 4,00,000 5,00,000 2,00,000

Compute the capital gains for assessment year 2009-10.

8) Solution :


57/197

)

The assets transferred in this case are intangible assets, the capital gainsfor the assessment year 2009-10, on transfer of which are as follows -

Name of asset GoodwillTrademark

Tenancy

rights Mfg. licence

Full value of consideration 1,500,000 400,000 500,000 200,000Less: Cost of Acquisition 0 121,250 0 30,000

Less: Cost of Improvement 0 11,214 22,428 0


Long-term capital gains 1,500,000 267,536 477,572

Short-term capital gains 170,000

Notes: (1) Trademark is a long-term capital asset as it was held for more than 36 months before

date of

transfer. However, manufacturing licence was held for exactly 36 months (i.e. not more than 36months)

before date of transfer, hence, it is short-term capital asset. Goodwill and tenancy rights are long-

term capital

assets as they were held since 1999.

(2) In case of goodwill of a business, cost of improvement is always NIL.


58/197

9) QuestionA is a shareholder of X & Co. Ltd., holding 1,000

shares of the face value of Rs. 10 each, allotted at thetime of the company's incorporation in May, 1998. Thecompany made a right issue in the ratio of 1:1 on 15-


7-2008 at a premium of Rs. 40 per share. Instead oftaking up the right, he renounced it in favour of 'B' at aprice of Rs. 10 per share. What is the capital gainchargeable in the hands of 'A'? What will be the cost

of the shares in the hands of B?

(Nov. 1995, May 2000)


59/197

9) Solution : (1) Short-term capital gains in hands ofA

= Sale proceeds of the right entitlements -

Cost thereof = 10 x 1000 - Nil = Rs.10,000.


os o acqu s on or = mount pato A + Amount paid to X Ltd. =10 x 1000 +50 x 1000 = Rs. 60,000.


60/197

10) Question

A purchased 250 equity shares of ABC Ltd on1.4.1993 for Rs. 270 per share and incursexpenditure of Rs. 500 on brokerage and share


rans er ees. n . . e ge s onus

shares. On 1.9.2003 he gets 300 right shares forRs. 140 per shares. On 28.2.2009 he sells allthe 750 shares for Rs. 400 per share and incurs

an expenditure of Rs. 1,500 on brokerage.Compute his taxable income for AssessmentYear 2009-10. He does not have any other

source of income. (Nov. 1992)


61/197

10) Solution :

Computation of Long Term Capital Gain of

A for the Assessment Year 2009-10

Original Right Shares Bonus Shares


Shares (250) (300) (200)

Sale

Consideration 100,000 120,000 80,000

Less: Brokerage

(1500

750 = 2 per

share) 500

600400

Net

Consideration 99,500119,400 79,600


62/197

11) Question

Mr. A had acquired painting worth Rs. 10 lakhson 1-6-2005. On same date, he inherited asculpture and a rare archaeological collection


rom s a er. s a er a acqu re e

sculpture on 1-7-1996 for Rs. 5 lakhs. His fatherhad found the rare archeological collection fromthe earth underneath his house. He sells all the

three things for Rs. 20 lakhs each on 1-6-2008.Compute the amount of capital gains chargeableto tax.


63/197

11) Solution :Computation of Capital Gains of Mr. A for the

Assessment Year 2009- 10(amounts in Rs.)

Painting Sculpture

Full value of consideration 2,000,000 2,000,000


Less: Cost of acquisition (5,00,000 x 582 + 497) 1,000,000 585,513

Short-term capital gains 1,000,000

Long-term capital gains 1,414,487

Note : As the cost of rare archaeological collection is not ascertainable,there can't be any charge of capital gains on it.

SCOPE AND YEAR OF CHARGEABILITY OF


64/197


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 andSec.55A)

Previous year in which

transfer took place.

(1A) Damage to, or destruction of, any

Insurancecompensation i.e.

Previous year in whichmoney or other


capital asset.

[Note 1]

Money + Fair market

value (on date of receipt) of other assetsreceived

asset is received

from the insurancecompany.

(2) Conversion of a capitalasset into stock in

trade [Note 2]

The fair market value ason the date of

conversion.

Previous year in whichstock in trade is

sold.

(2A) Transfer of shares heldin depository (FIFObasis)

Agreed consideration Previous year in whichtransfer took place



65/197


CAPITAL GAINS [Section 45]:

(3) Transfer of capital

asset as capital

contribution or

otherwise by apartner 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 Fair market value as Previous year in


asset on dissolution

or otherwise of Firm/AOP/ Body of

Individuals

on the date of

transfer [Note 3]

which transfer took

place.

(5) Compulsory

acquisition under any

law; or any transfer,whose considerationis deemed or

approved by Central

Govt. or RBI.

Compensation

awarded; or amount

of compensa-tion asdetermined or

approved by Central

Government/RBI

The year in which

such compensation

or part thereof is firstreceived.

[Note 4]

Notes:


66/197

1. Section 45(1A) applies only when the damage/destruction is due toa. Flood, typhoon, hurricane, cyclone, earthquake or other convulsion ofnature; or

b. Riot or civil disturbance; orc. Accidental fire or explosion; ord. 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 ofthe reasons aforesaid, there will be no charge of capital gains, asthere can be no transfer without existence of ca ital 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 theCBDTs circular issued in this behalf, capital gains would be worked outin respect of assets which get destroyed, etc. as per the provisions ofSections 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 thefull value of consideration. Further, adjustment for cost inflation indexwill be made for non-depreciable assets and for depreciable assets, thewritten down value of such assets will be reduced from the block ofassets as provided for in Section 43(6).

2 In this case transfer takes place in the year of conversion So CII


67/197

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 convertedstock.

3. When the partners or members transfer the capital assets, theagreed consideration will be taken as their cost of acquisition.

4.(a)In case of enhanced compensation : In case the compensation isenhanced or further enhanced by the Court, Tribunal or otherauthority, the capital gains shall be chargeable to tax in the yearwhen the enhanced compensation is received. The amount ofenhanced com ensation 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 otherperson due to the death of the transferor or due to any otherreason, 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 gainfor that year shall be recomputed by taking the compensation orconsideration as so reduced by the court, tribunal or other authorityto be the full value of consideration.


68/197

: Some Issues :

1. Payment, by way of cash or otherwise, to retiring partner over andabove balance in his capital account: So far as retiring partner isconcerned, the amount received by such partner from the firm in

excess of capital and profits standing to his credit cannot beconsidered as capital gains, as there is no transfer. The amountreceived by him is not consideration for transfer of his interest tothe continuing partners; he only receives his share in partnership. CIT v. R. Lin mallu Ra hukumar 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 ofasset by the firm to a partner on his retirement shall come withinthe expression otherwise (as appearing in Section 45(4) andamounts to transfer of capital assets within the meaning of Section45(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


69/197

p

far as registration is concerned, gift of land to partner is required tobe registered under Registration Act, 1908, but the distribution ofland to partner on dissolution of the firm, doesnt requireregistration, as decided in N. Khadervali Saheb v. N. Gudu Sahib[2003] 261 ITR 1 (SC). So far as taxability is concerned, gift ofcapital 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 ordistribution on dissolution is to be taken after taking this intoconsideration.


3. Interest on enhanced compensation: Interest received on

enhanced compensation in case of compulsory acquisition or thetransfer referred to in Section 45(5), will be taxable as income fromother sources as per the method of accounting followed byassessee. If assessee follows cash system, it will be taxable in theyear 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 onwhich the order for enhancement is made by the Court. [Rama Baiv. CIT [1990] 181 ITR 480 (SC)].


70/197

12) QuestionMr. A is an individual carrying on business. His stock and machinery were

damaged and destroyed in a fire accident. The value of stock lost (totaldamaged) was Rs. 6,50,000. Certain portion of the machinery could besalvaged. The opening WDV of the block as on 1-4-2008 was Rs.10,80,000. During the process of safeguarding machinery and in the fire


fighting operations, Mr. A lost his gold chain and a diamond ring, which he

had purchased in April, 2005 for Rs. 1,20,000. The market value of thesetwo items as on the date of fire accident was Rs. 1,80,000.

Mr. A received the following amounts from the insurance company :

1. Towards loss of stock Rs.4,80,000

2. Towards damage of machinery Rs.6,00,000

3. Towards gold chain and diamond ring Rs.1,80,000

You are requested to briefly comment on the tax treatment of the above threeitems under the provisions of the Income-tax Act, 1961. (Nov.2006) (7 Marks)

12) Solution :


71/197

12) Solution :Assuming that both the breaking out of the fire and receipt ofinsurance compensation took place place during the previousyear 2008-09 and whole of the insurance compensation has beenreceived in cash, the taxability of the aforesaid items has beendiscussed hereinbelow -

(i) Treatment ofcompensation in respectofstock-in-trade :Stock-in-trade is not a capital asset. Loss of stock-in-trade is atrading loss. The same is allowable as deduction in computingincome under the head Profits and gains of business or


. - - = -money = 6,50,000 - 4,80,000 = Rs. 1,70,000. Alternatively, thewhole of the value of stock can be claimed as deduction; and theinsurance compensation received can be assesseed as taxablebusiness receipt.

(ii) & (iii) Treatment ofcompensation in respectof machinery,chain and ring : While the machinery has been directly destroyed

by fire; the gold chain and diamond ring has been destroyedduring fire fighting operation (the immediate cause thereof beingthe fire). Therefore, the compensation has been received undercircumstances referred to in section 45(1A). Accordingly, thecapital gains shall be computed as follows -


72/197

Machinery Gold Chain

&Diamond

Ring


Full value of consideration (being insurance

compensation received) 600,000 180,000

Less : Cost of acquisition being -WDV of the block of machinery

Indexed cost of diamond & ring (1,20,000 x 582 497)

1080,000

140,523

Short-term Capital Loss

Long-term Capital Gains

480000

39,477


73/197

13) Question

Pritish, who owns 9 acres of land near Chennai since

July 1985 purchased for Rs. 12 lakh, commenced realestate business from April 1999 and introduced this landas his ca ital. Fair market value of the land on the date


of commencement of the business was Rs. 65 lakh.However, the value of such land has been recorded atRs. 80 lakh in the books of business. The entire landafter development and conversion into housing plots was

sold for Rs. 135 lakh between September 2008 andFebruary 2009. Expenses incurred for projectdevelopment were Rs. 37 lakh. Advise him as totaxability of income and under what heads and in which

assessment years. (CS Dec. 2005)


74/197

13) SolutionThe land owned by Pritish is converted into stock-in-trade in the financial year 1999-2000,hence, the year of transfer is 1999-2000. The fair market value on the date of conversion i.e.Rs. 65 lakhs shall be the full value of consideration. However, the capital gains so computedwill be taxable in the year of sale of the asset i.e. in the financial year 2008-09 or assessmentyear 2009-10, as follows -

Computation of taxable income ofPritish for the Assessment year 2009-10 (amounts in Rs.)

Full value of consideration (Fair market value of land) 6,500,000


ess: n exe cos o acqu s on , , x , ,

Long-term capital gains2,990,226

Turnover on sale of Plots 13,500,000

Less : Cost of Land (FMV) 6,500,000

Expenses for project development 3,700,000 10,200,000

Business income 3,300,000


75/197

14) Question

Aarnav converts his plot of land purchased inJuly, 2001 for Rs. 80,000 into stock - in - tradeon 31st March, 2008. The fair market value as


on . . was s. , , . e s oc - n-

trade was sold Rs. 2,25,000 in the month ofJanuary 2009. Find out the taxable income ifany, and if so under which 'head of income' and

for which Assessment Year ? CII : F.Y. 2001-2002 426, F.Y. 2007-2008 551, F.Y. 2008-2009582. (May 2008) (5

Marks)


76/197

14) Solution : Conversion of capital asset into stock-in-trade is

transfer exigible to capital gains tax, but the

capital gains are charged to tax in the year ofsale of stock-in-trade. The tax implications are (inRs.) -


Full value of consideration (being FMV on the date of transfer)

Less: Indexed cost of acquisition (80,000 x 551/ 426)

190,000

103,474

Long-term capital gains taxable in assessment year2009-10 86,526

Sale price of stock

Less: Cost of stock being FMV as on the date of conversion

225,000

190,000

Business income taxable in assessment year2009-10 35,000

Q 15) Mr. Rishi and Manish formed a partnership firm. Justafter formation of the partnership Mr Rishi brought the


77/197

after formation of the partnership, Mr. Rishi brought thefollowing assets into the firm on 15th July 2008 as hiscapital contribution

House property

(Rs.)

Ornaments of gold

(Rs.)

Market value of the property

on the date of transfer 10 80 000 25 000


Amount recorded in the

books of firm

Actual cost

Year of acquisition

9,00,000

60,000

1984-85

36,000

15,000

2007-08

What tax consequences will Mr. Rishi have to face in respect of theabove transaction? What will be your answer if Mr. Rishi brings theabove assets otherwise than by way of his capital contribution?

15) Solution Transfer of capital asset by a partner to his firm, by way of hiscapital contribution or otherwise, is exigible to capital gains tax u/s 45(3) in thehands of the partner in the year in which transfer takes place


78/197

hands of the partner in the year in which transfer takes place.

Computation of capital gains of Mr. Rishi

Full value of consideration (amount recorded in

books of the firm)

House

property900,000

Gold

ornaments

36,000

IPCC - Income Tax78

18 September 2009

Less: Cost of acquisition (Indexed cost of house =

60,000 x 582 /125)

,

Long-term capital gains

620,640

Short-term capital gains

21,000

Note: If Mr. Rishi brings the above assets otherwise than by way ofcapital contribution, then also, he will be liable to capital gains tax asabove.

Q16) Shri Suresh and X Ltd. are members of SM Associates, anassociation of persons SM Association was dissolved on 16th August


79/197

association of persons. SM Association was dissolved on 16 August2008 and the following assets were distributed to the members (allamount in Rs.) House property

(given to

Suresh)

Listed Govt.

Securities

(given to X

Ltd.)

FMV as on 15th August 2008

8,00,000 6,00,000

IPCC - Income Tax79

18 September 2009

agreement of saleCost of acquisition

Date of acquisition

FMV of the asset as on

1-4-1981

6,00,00040,000

1-4-1977

1,00,000

7,00,0005,00,000

16-8-06

-

What are the tax implications of these transactions? Whatwill be your answer if SM Associates is a co-operativesociety?


80/197

16) Solution

House Listed Govt.

Any distribution of capital asset by a firm/ AOP/ BOI

(other than company or co-operative society) ondissolution or otherwise is exigible to capital gains in thehands of such firm/ AOP/ BOI.

IPCC - Income Tax80

18 September 2009

property

securities

Full value of consideration (FMV as on thedate of transfer) 800,000 600,000

Less: Cost of acquisition (1,00,000 x 582 100) 582,000 500,000

Long-term capital gains 218,000

Short-term capital gains 100,000

CAPITAL GAINS ON DISTRIDUTION OF ASSETS BY COMPANY INLIQUIDATION [SEC.46]


81/197

(1) In hands of company: distribution of assets by a company on itsliquidation 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 bechargeable to tax as Follows-

Cash received or market value of the assets received onliquidationLess: deemed dividend u/s 2(22) (c) to the extent of accumulatedprofit as on the date of liquidation.

XX

XX----

IPCC - Income Tax81

18 September 2009

Full value of consideration for the purposes of section 48.

Less: indexed cost of acquisition (or cost of acquisition) of the sharesheld in that company

XX

XX

Long-term capital gains or short-term capital gains XX

(3) C.O.A.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 ofdistribution.


82/197

18) QuestionShri Aniket purchased 1,00,000 shares of NaharSpinning mills Ltd. (50 % of total shares of the company)

in 1992-93 for Rs. 8,50,000. The company wasliquidated on 17-12-2008 and on liquidation he received

IPCC - Income Tax82

18 September 2009

.market value worth Rs. 17,50,000. On liquidation thecompany possessed accumulated profits of Rs. 8,00,000(after making necessary provision for corporate dividendtax). Find out the capital gains in hands of Aniket for the

assessment year 2009-10.


83/197

18) SolutionComputation of capital gains in case of Shri

Aniket for the Assessment Year 2009-10Amount received on liquidation (Rs. 15 x 1,00,000 + Rs.

3,250,000

IPCC - Income Tax83

18 September 2009

, ,

Less: Amount taxable as deemed dividend i.e. share in accumulated

profits (50% of 8,00,000) 400,000

Full value of consideration2,850,000

Less: Indexed cost of acquisition (Rs. 8,50,000 x 582 + 223) 2,218,386

Long term capital gains 631,614

Q19)Ms. Vasumathi purchased 10,000 equity shares of Rajesh Co. Pvt. Ltd. on


84/197

28.2.2004 for Rs. 1,20,000. The company was wound up on 31.7.2008. Thefollowing is the summarized financial position of the company as on 31.7.2008 :

Liabilities Rs. Assets Rs.

60,000 Equity shares 600,000 Agricultural lands4200,000

General reserve 4000,000 Cash at bank 650,000

Provisions for taxation 250,000

IPCC - Income Tax84

18 September 2009

The tax liability (towards dividend distribution tax) was ascertained at Rs.3,00,000, after considering refund due to the company. The remaining assetswere distributed to the shareholders in the proportion of their shareholding. Themarket value of 6 acres of agricultural land (in an urban area) as on 31.7.2008is Rs. 10,00,000 per acre. The agricultural land received above was sold by

Ms. Vasumathi on 29.2.2009 for Rs. 15,00,000. Discuss the tax consequencesin the hands of the company and Ms. Vasumathi. Cost inflation indices forfinancial year 2003-04 is 463 and for financial year 2008-09 is 582. (CA PCCMay 2008) (8 Marks)

,4850,000


85/197

19) Solution- (A)Tax Consequences in the hands of Company : The net tax liability towards

dividend distribution tax is ascertained at Rs. 3,00,000 which shall bededucted while computing accumulated profits deemed as dividend u/s2(22)(c). It is assumed that the liability towards dividend distribution taxincludes the amount of provision for taxation given in the balance sheet.

IPCC - Income Tax85

18 September 2009

Therefore, only the additional provision of Rs. 50,000 will be deducted and

the accumulated profits of the company shall be computed as follows -Balance in General Reserve A/c 4,000,000Less : Provision for dividend distribution tax 50,000Accumulated profits or total amount to be deemed as dividend u/s

2(22)(c) 3,950,000

The company has to pay dividend distribution tax on the aforesaid amount ofdeemed dividend, which is already given in the question i.e. Rs. 3 lakhs.Total distribution on liquidation = Market value of assets i.e. agriculturallands + Cash balance after deducting the sum requisite for taxes = 60 lakhs+ 6,50,000 - 2,50,000 (for amount of taxes given in the question) - 50,000(for additional dividend distribution tax) = Rs. 63.5 lakhs.

(B) Computation of Capital Gains ofMs.


86/197

Vasumathi for the assessment year 2009-10 - (inRs.)

Capital gains on assets received at the time of liquidation of Company Amount

Proportionate market value of the assets received on liquidation [63.5 lakhs x

10,000+

60,000] 1,058,333Less : Deemed dividend under Section 2(22)(c) [39.5 lakhs + 6] . 658,333

Full value of consideration for the purposes of section 48 400,000

IPCC - Income Tax86

18 September 2009

Less : Indexed cost of acquisition [1,20,000 x 582 + 463] 150,842

Long-term Capital Gains 249,158

Capital Gain on sale of urban agricultural land :

value of urban agricultural land 1,500,000

Less : Cost of acquisition (being market value taken for computing capital gains on

liquidation)1,000,000

Short term Capital Gains500,000

CAPITAL GAINS ON BUY-BACK OF


87/197

SHARES OR OTHER SPECIFIEDSECURITIES [Section 46A]

Any consideration received by a holder ofshares or other specified securities from anycompany under a scheme of buy back shall

IPCC - Income Tax87

18 September 2009

cons u e rans er an e erence e ween

such consideration and the cost (or indexedcost) of acquisition shall be chargeable to tax ascapital gains in the previous year in which suchbuy-back takes place. Payment made by acompany on buy-back doesnt constitutedividend u/s 2(22) (d).

CAPITAL GAINS IN CASE OF DEPRECIABLE

ASSETS [S ti 50 & 50A]


88/197

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 isreduced to zero [Section 50(1)]:


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

Short Term Capital Gains XXX

CAPITAL GAINS IN CASE OFDEPRECIABLE ASSETS [S i 0 & 0A]


89/197

DEPRECIABLE ASSETS [Section 50 & 50A]

(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

XXXXXX

XXX

Short Term Capital Gains/Loss XXX

CAPITAL GAINS IN CASE OFDEPRECIABLE ASSETS [S ti 50 & 50A]


90/197

DEPRECIABLE ASSETS [Section 50 & 50A]

Transfer of capital assets of Power sector units on whichdepreciation allowed u/s 32(1) (i) [Section 50A]:

(a) If WDV of the asset exceeds Moneys Payable ontransfer of such assets:

Terminal depreciation under Section 32(1) (iii) = WDV


(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

20) Q ti


91/197

20) QuestionThe written down value of the block of assets of Rosy

Ltd. as on 1st April, 2008 was Rs.5 lakh. An asset of thesame block was acquired on 11th May, 2008 for Rs.3lakh. There was a fire on 18th Se tember 2008 and the


assets were destroyed by fire and the assessee received

a sum of Rs.11 lakh from the insurance company.Compute the capital gain assuming

All the assets were destroyed by fire; and

1. Part of the block of assets was destroyed by fire.What will be the answer if assessee received Rs.6 lakh

from insurance company instead of Rs.11 lakh ?

(CS Dec. 2006)

20) Solution

Compensation recei ed is Rs 11 lakh


92/197

Compensation received is Rs. 11 lakh :

Computation of Capital gainsWritten down value of the block on 1/4/08 500,000

Add: Asset acquired during the year 300,000

800,000

Less: Sum received from the insurance company 1,100,000


Short term capital Gains 300,000

Note : In case (i) and (ii), both, i.e. whether the block is fully destroyed or partlydestroyed by fire, there will be STCG of Rs. 3,00,000, since the sum received ismore than the WDV of the block.If compensation received is Rs. 6 lakh :

1. If the block is fully destroyed : The difference between WDV of Rs. 8 lakhand insurance money of Rs. 6 lakh will be short-term capital loss.

2. If the block is partly destroyed : There will be no capital gains. Since theblock and WDV both exist, therefore, the balance WDV of Rs. 2 lakh will beeligible for depreciation.

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


93/197

Slump Sale [Sec. 2(42C)] : It means transfer of one or more undertakings as aresult of the sale for a lump sum consideration without values being assigned to theindividual assets and liabilities in such sales.

Charge and Nature of Capital Gains: Profits or gains arising from slumpsale 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 heldby the assessee for not more than 36 months, the capital gains will be short termcapital gains. In any other case, it shall result into long-term capital gains.

Mode of computation of capital gains: The capital gains shall be


Full value of considerationLess: 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)

XXXXXX

XXX

Short Term/Long Term Capital Gains XXX


CAPITAL GAINS [Section 50B]


94/197

CAPITAL GAINS [Section 50B]SLUMP SALE MEANING AND COMPUTATION OF CAPITAL GAINS [Section

50B]

Aggregate value of total assets of the undertaking ordivision (ignoring any change in the value of assets on

account of revaluation of assets)

In case of de reciable assets the WDV of the block as

XXX


per Sec. 43(6) XXX

In case of other assets, the book value XXXLess : Value of liabilities of such undertaking or division

as appearing in its books

XXXXXX

Net Worth of the undertaking or division XXX


CAPITAL GAINS


95/197

CAPITAL GAINS[Section 50B]

Certificate of a Chartered Accountant: In

case of slump sale, every assessee shallfurnish along with the return of income a


repor o an accoun an n prescr e orm

indicating the computation of net worthand certifying that the net worth of theundertaking or division has been correctly

arrived at.

Illustration 1:

Computation of Capital gains in case of slump sale


96/197

Computation of Capital gains in case of slump saleBalance Sheet of X Ltd. as on December 31, 2006 reads asunder

Paid up capital: Rs.552 lakhs (All amounts in Rs. lakhs)Unit A Unit B


LandFixed Assets (other than land)

Debtors

Liabilities

Stock-in-trade

ReservesShare Premium

Revaluation Reserve on account of Revaluation of

land

200100

100

28

50

170150

75

50

25

14822

70

Illustration 1:


97/197

The company acquired Unit B on December 31, 2003. It madecertain capital additions in the form of generator set and additionalbuilding, etc. of Rs.25 lakhs during the year 2004-05. The membersof the company have authorized the Board in their meeting held on

October 28, 2006 to dispose off the Unit B. The company decides tosell the Unit B by way of slump sale for Rs.325 lakhs asconsideration.

The buyer has agreed with the vendor company to give time for


putting through the sale but not later than March 31, 2007 subject todiscount of 1% on agreed sale consideration. However, thisdiscount is not applicable if the sale is completed after December31, 2006. The company now approaches you to advise them as ameasure of tax planning to determine the date of sale keeping inview of the capital gains tax. The WDV of the Fixed Assets underSection 43(6) is Rs.120 lakhs.

Solution:The computation of capital gains shall be in accordance with Section50B f th I T A t 1961


98/197

The computation of capital gains shall be in accordance with Section50B 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

120

100

100

320


gnor ng reva ua on

Debtors and Stock (75 + 25 i.e. at bookvalue)

Less: Liabilities at Book Value 50

Net Worth (being cost of acquisitionand improvement)

270

Solution:Case I: Where the slump sale takes place on or before


99/197

Case I: Where the slump sale takes place on or beforeDecember 31, 2006 In this case, the period of holding ofUnit B will be not more than 36 months. Therefore, Unit B willbe a short-term capital asset.

Sale ConsiderationLess: Discount @ 1%

325.003.25


.

Short Term Capital Gains 51.75

Tax payable (30% + Surcharge 10% + EC @

2% on Tax and Surcharge)

17.42

Solution:Case II: Where Unit B is sold after December 31, 2006: In this case,

i d f h ldi i f th 36 th d th f it i l t


100/197

, ,period of holding is for more than 36 months and therefore, it is a long-termcapital 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

Conclusion: Since the tax payable is less in Case II, X Ltd. is advised tosell Unit B by way of slump sale after December 31, 2006 so as to

minimize the tax liability.

FULL VALUE OF CONSIDERATION WHEN STAMPVALUE EXCEEDS SALE PRICE [Section 50C]

Full Value of Consideration : Where the consideration for transfer


101/197

of land or building or both, is less than the value adopted by StampValuation Authority for payment of stamp duty, the value so adoptedby stamp valuation authority shall be deemed to be full value ofconsideration for the purpose of Section 48.

Reference to Valuation Officer: The Assessing Officer mayrefer valuation thereof to Valuation Officer if

The assessee claims before the Assessing Officer that the value


fair market value of the property as on the date of transfer, and

The value adopted or assessed by the Stamp Valuation Authorityhas not been disputed in any appeal or revision or no reference hasbeen made before any other authority, court or the High Court.

In case reference is made to Valuation Officer, the full value ofconsideration shall be lower of (a) Value as determined by the

Valuation Officer; or(b) Value assessed or adopted by the StampValuation Authority.

21)Question


102/197

21)Question

Bala sold his vacant site on 31.09.2008 for

Rs. 7,00,000. It was acquired by him on01.10.1997 for Rs. 1 50 000. The State


stamp valua

Documents

Capital Gains - Ay0910