Capital Gains – Part I - SIRC of ICAI Gains – Part I June 2016 ... Cost with reference to certain modes of acquisition ... • Transfer of beneficial interest in securities by

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  • WORKSHOP ON DIRECT TAXES

    Capital Gains Part IJune 2016

    Capital Gains - Part I 1

  • Concept of Capital gainsBasic principles

    General principle of taxation Revenue receipts are

    taxable unless specifically exempt

    Capital receipts are not taxable unless specifically covered

    Capital gains covered within the scope of the term income under section 2(24)(vi)

    Capital Gains - Part I 2

  • Concept of Capital gainsArrangement of sections Section 45 - Charging section Section 46 Capital gains on distribution of assets by companies in liquidation Section 46A - Capital gains on buyback of shares Section 47 Transactions not regarded as transfer (exceptions) Section 47A - Withdrawal of exemption in certain cases Section 48 - Mode of computation Section 49 - Cost with reference to certain modes of acquisition Section 50 - Special provision for computation of capital gains in case of

    depreciable assets

    Section 50B - Slump Sale Section 50C - Defines full value of consideration in certain cases Section 51 - Advance money received Section 54 to 54GA - Exemptions of capital gains in certain cases Section 55 - Cost of Acquisition/ Cost of improvement

    Capital Gains - Part I 3

  • Concept of Capital gainsBasis of charge Section 45 Profits or gains on transfer of capital assets 45(1) Compensation for damage or destruction of asset from insurer

    45(1A) Conversion of capital asset into stock in trade 45(2) Transfer of beneficial interest in securities by depositories

    taxable in the hands of registered owner section 45(2A) Contribution of asset to a partnership firm/ AOP/ BOI as capital

    45(3) Distribution of capital assets to partners on dissolution of firm

    45(4) Compensation received for compulsory acquisition of capital

    asset 45(5) Difference between repurchase price and capital value of units

    of Mutual Funds under Equity Linked Savings Scheme 45(6)Capital Gains - Part I 4

  • Concept of Capital gainsBasis of charge Section 45(1)

    Any profits and gains arising from the transfer of a capital asset effected in the previous year, shall save as otherwise provided in sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G or 54GA be chargeable to income-tax under the head Capital Gains and shall be deemed to be the income of the previous year in which the transfer took place

    Components to constitute Capital gains Gains Transfer Capital asset Availability of exemptions

    Capital Gains - Part I 5

  • Concept of Capital gainsBasis of charge Definitions

    Section 2(14) Capital asset

    Section 2(29A) Long term capital asset

    Section 2(42A) Short term capital asset

    Section 2(47) Transfer in relation to a capital asset

    Section 47 Transactions not regarded as transfer exceptions to section 2(47)

    Capital Gains - Part I 6

  • Concept of Capital gainsBasis of charge Definition of capital asset Property* of any kind held by an assessee (whether or not connected

    with his business or profession) Securities held by Foreign Institutional Investors (FII)

    EXCLUSIONS Stock-in-trade (other than those held by FIIs), raw materials,

    consumable stores held for the purpose of business or profession Personal effects excluding jewellery, archaeological collections,

    drawings, paintings, sculpture, or any works of art Agricultural land situated in India (not within municipality or

    cantonment board or within the specified distance) Gold bonds Special bearer bonds Gold deposit bonds

    * Property includes rights in relation to Indian company including rights of management and control or any other rights

    Capital Gains - Part I 7

  • Concept of Capital gainsBasis of charge Concept of indirect transfer

    Capital Gains - Part I 8

  • Concept of Capital gainsBasis of charge Short term v. long term

    * Including unit of UTI/ equity oriented fund, zero coupon bond

    Capital Gains - Part I 9

  • Concept of Capital gainsBasis of charge Long term v. Short termInclusions Period of holding by previous owner Period of holding by amalgamating company/ de-merged

    company in the hands of amalgamated/ resulting company Bonus shares or debenture date of allotment of bonus share

    NOT the date of allotment of original share or debenture Rights shares date of allotment of shares NOT date of

    allotment of rights

    Exclusions Period subsequent to the date on which the company goes into

    liquidation

    Capital Gains - Part I 10

  • Sale, exchange or relinquishment of the asset Extinguishment of any rights in the asset Compulsory acquisition of asset under any law Conversion of the asset into stock-in-trade Maturity or redemption of a zero coupon bond Any transaction involving the allowing of the possession of any

    immovable property to be taken or retained in part performance of a contract referred to in section 53A of Transfer of Property Act, 1882

    Any transaction which has the effect of transferring or enabling the enjoyment of any immovable property

    Concept of Capital gainsBasis of charge Definition of transfer

    Transfer shall be deemed to include disposing off or parting with any asset irrespective of whether it has taken place on account of transfer of shares of a foreign company

    Capital Gains - Part I 11

  • Concept of Capital gainsComputation mechanism - Basics

    Step 1 Determine full value of consideration

    Step 2 Deduct:i) Expenditure incurred wholly and exclusively in

    connection with the transferii) Cost/ Indexed cost of acquisitioniii) Cost/ Indexed cost of improvement

    Step 3 Deduct Exemptions, if any

    Step 4 Capital gain/ loss

    Capital Gains - Part I 12

  • Concept of Capital gainsBasis of charge Section 45(2)

    Section 45(2) Overrides provisions of section 45(1) Gains arising from transfer by way of conversion by the owner of a

    capital asset into stock-in-trade - chargeable to tax as capital gains in the year in which the stock-in-trade is sold or otherwise transferred

    Consideration - Fair market value on the date of conversion

    Example [assuming section 45(2) is not in existence] Cost of acquisition INR 1,000 Fair market value as on date INR 1,000,000 The assessee can convert the capital asset into stock trade and

    record the same at fair market value as on date Net gain on transfer as per Profit & Loss account would be Nil

    Capital Gains - Part I 13

  • Concept of Capital gainsBasis of charge Section 45(3) and (4)

    Section 45(3) Profits or gains arising from transfer of capital asset By way of contribution to the firm by way of capital or otherwise Consideration Value recorded in the books Cost of acquisition in the hands of the firm amount recorded in the

    books

    Section 45(4) Profits or gains arising on distribution of assets by a firm on

    dissolution Consideration Fair value of the asset as on the date of distribution Whether dissolution includes retirement? both views are possible

    depending on the facts - prone to litigation

    Capital Gains - Part I 14

  • Concept of Capital gainsBasis of charge Section 45(5)

    Section 45(5) Overrides section 45(1) Transfer of capital asset by way of compulsory acquisition or where

    consideration is determined by Central Govt Consideration/ Additional consideration - taxable in the year of

    receipt

    Capital Gains - Part I 15

  • Concept of Capital gainsExemptions section 47

    Distribution of capital assets on the total or partial partition of a HUF

    Transfer of a capital asset under a gift, will or an irrevocable trust (excluding ESOPs)

    Transfer of a capital asset by a holding company to its wholly-owned Indian subsidiary and vice versa (subject to certain conditions)

    Transfer of capital assets, shares in a scheme of amalgamation/ demerger if the amalgamated/ resulting company is an Indian company

    Transfer of bonds or GDRs made outside India by a non-resident to another non-resident

    Capital Gains - Part I 16

  • Concept of Capital gainsExemptions section 47

    Transfer of agricultural land in India before 1 March 1970

    Transfer of capital asset, being any work of art, archaeological, scientific or art collection, etc to Government, University, etc

    Conversion of bonds/ debentures, etc into shares/ debentures

    Transfer of land of a sick industrial company under a scheme prepared and sanctioned by SICA, 1985 subject to certain conditions

    Transfer of any capital/ intangible assets by a firm to the company which succeeds the concern

    Transfer by a sole proprietary concern of any capital/ intangible assets to a company which succeeds the concern

    Capital Gains - Part I 17

  • Concept of Capital gainsExemptions section 47 Transfer by a recognized stock exchange of any capital asset to the

    company in the course of corporatization of the exchange

    Any transfer of a capital/ intangible asset by a private company/ public unlisted company to a LLP or transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into a LLP (subject to conditions)

    Transfer in a scheme for lending of any securities under a stock lending scheme which is subject to the guidelines of SEBI/ RBI

    Transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government

    Transfer of shares of SPV to a trust under scheme of REIT

    Transfer of units of mutual fund under consolidation

    Capital Gains - Part I 18

  • Computation of Capital gainsMode o