Capital Gains – Some Issues

Milin MehtaChartered Accountant

Baroda

Objective of the Session

• Primarily covered some issues on the topic of Capital Gains

• Concentrated more on the newer issues with practical utility

• Relevance to the participants has been kept in mind

• In any case, the floor is open at the end to ask questions.

Capital Gains - Ingredients

• Capital Asset • Transfer (including the date thereof)• Consideration Received• Cost of acquisition (including the cost of

improvement), etc.• Special Provisions

– Deeming Fictions – Concessional Rates of Taxation– Exemptions

Capital Asset – Section 2 (14)

• property of any kind held by the Assessee– Inclusive definition with specific exclusions

• Exclusions– Stock-in-Trade, Consumable stores, raw-materials held for

the purpose of business– Agricultural Land [Urban agricultural land not excluded]– Personal Effects, excluding

• Jewellery• Archeological Collections• Drawings• Paintings• Sculptures• Any work of Art

w.e.f. 1.4.2008

Jewellery

• Includes ornaments made of precious metals• Includes precious and semi-precious stones in all

forms

• Does not however include– Precious Metals in furniture – Precious metals in utensils, etc.

• Accordingly set of silver utensils, if can qualify as personal effects, is not a capital asset and accordingly gain thereon is not chargeable to tax

Personal Effects

• Legitimately and commonly used• However, does not mean in daily use• Items which are used only on certain ceremonies,

etc. can be covered;– H. H. Maharaja Himat Singhji – 103 ITR 61 (SC)– H. H. Maharani Usha Devi – 231 ITR 793 (SC)– Narendra Bhuva – 90 ITD 174 (Bom) – Antique Car

Agricultural Land

• The Act provides for Agricultural land, but excludes – Land situated within a municipality (including a municipal

corporation, notified area committee, town area committee or town committee) or a cantonment board having population of not less than 10,000

– Within notified area (not being more than 8 KMs) from local limits of such municipality or cantonment boards

• Agricultural Land– Gemini Pictures 220 ITR 43 (SC)– Also See, 204 ITR 631 (SC), 127 ITR 664 (Guj), 209 ITR 946 (Bom),

208 ITR 638 (Guj)• What is local limits:

– Whether includes urban agglomeration?

• How the limit of 8 Kms computed?– By Road / as the crow flies– Refer to Laukik Developers – 303 ITR 356 (Bom) (AT)– Road Distance to be seen and not as the crow flies

Stock – in - Trade

• This is one exemption a person would not like to fall in;• Gives rise to one of the most important controversies of

today’s time – Capital Gain / Business Income• General Principles – Royal Commission [1955] on taxes on

profits and income– Subject matter of realisation i.e. nature of asset. Asset

should be capable of producing income or enjoyment by merely holding / owning it;

– Length of holding it– Frequency of Similar Transactions– Supplementary work in connection with the property– Circumstances responsible for its realisation– Motive of the investment

• G. Venkataswami Naidu [1959] 35 ITR 594 (on page 609) (SC) – celebrated decision on Land transactions – One single test cannot be applied but cumulative effect of all the circumstances to be considered.

Stock-in-trade – Securities

• Genesis of the Problem– Section 10 (38) for listed securities long term gain– Section 112 for listed securities short term gain 10 %

• Present Times, the issue is of the Loss and not of Profits• Circular No. 4 / 2007 dated 15.6.2007

– Referred to Associated Industrial Development [82 ITR 586 (SC)] – The Assessee to lead the evidence

– Possible to have two portfolios, one for investment and one for trading

• Factors that can prove two different portfolios– Separate D’Mat Accounts– Accounting Entries– Broker, Bank Accounts, etc.

Securities – Interesting Issue

• Assessee holding listed shares – held as investment– Cost of Acquisition Rs. 100.00 lacs– Market Value as on 1.4.2008 Rs. 150.00 lacs– Market Value as on 29.12.2008 Rs. 40.00 lacs

• Assessee sells these securities in Stock Market as on 29.12.2008 for Rs. 40.00 lacs

• Could there be some difference in taxation had this been converted into stock in trade on 1.4.2008?

• For loss on sale of listed securities, useful reference may be made to Royal Turf Club 144 ITR 709 (Cal)

• Whether covered by Section 14 A (loss) – refer to NavinBharat Industries 270 ITR 1 (AT) (Bom)(SB)

Deep Discount Bonds

• Present redemption of SSNNL – Deep Discount Bonds• Circular No. 2 / 2002 dated 15.2.2002 provides for

treatment of DDB– On the date of redemption, difference between cost of

acquisition and redemption price to be treated as Interest –accordingly to be taxed as Income from other Sources;

– However, if the DDBs transferred prior to the date of its redemption then the difference taxable as capital gains;

• Press Release dated 20.3.2002, clarifying that this circular (like every other circular) does not have retrospective effect– Please refer Kisan Discretionary Trust 113 TTJ 918 (Ahd)– For TDS Smt. Sonal Bansal 215 CTR 65 (P & H)

• Zero Coupon Bonds – Section 2 (48) issued after 1.4.2005

Transfer – Section 2 (47)

• Transfer – Inclusive Definitioni. the sale, exchange or relinquishment of the asset; or ii. the extinguishment of any rights therein; or iii. the compulsory acquisition thereof under any law; or iv. Conversion into Stock-in-trade; iva. the maturity or redemption of a zero coupon bond; or;v. Part performance U/s. 53 A of the TP Act, 1882; or vi. any transaction which has the effect of transferring, or

enabling the enjoyment of, any immovable property.

Transfer - Conventional

• Transfer means Transfer inter vivos– Transfer between two persons– Existence of both persons at one point of time is necessary to fall

within conventional definition

• Part IX Conversion of a Firm into Company– Texspin Engineering 263 ITR 345 (Bom)

• Section 47 (xiii) – partnership to Company– All assets and liabilities relating to the business– All partners become shareholders in same proportion as to balance in

capital account– Partners of the firm do not receive any consideration or benefit other

than by way of allotment of shares– Aggregate shareholding not less than 51 % and it remains so for a

period of 5 years• Change in partnership capital prior to sale• Cost of acquisition in the hands of company – Section 49 does

not require substitution [Depreciation – Fifth proviso to 32 (1)]

Admission of Partner

• Does not involve any transfer• However, if the new partner brings asset into the

firm – Section 45 (3), considers the same as transfer– Full value of consideration is equal to the amount

credited to the capital of the said partner– Concept of market value / 50 C value, etc. does not

arise– Kartikeya Sarabhai / Sunil Siddharthbhai 156 ITR 509

(SC)

• Consider the case as under:– New partners admitted– Old partners retire later

Section 2 (47) (v) & (vi)

• Concept of transfer made far wider by the above provision

• Major issue created by way of Bombay High Court decision in the case of – Chaturbhuj Dwarkadas Kapadia 260 ITR 49 (Bom) –

Dealing with development agreements– Saving Grace in the form of :

• Gandhi & Co. 13 SOT 82 (Bom) – Proposed Scheme• Geetadevi Pasari 104 TTJ 375 (Bom) - Consideration

– Cases of part performance U/s. 53 A of the TP Act– General Glass 108 TTJ 854 (Bom) – Purchaser willing

to perform his part of the contract – unconditional willingness

Retirement from/Dissolution of Firm• Section 45 (4) provides that

– Transfer by way of distribution of capital asset– On Dissolution / otherwise– Concept of Market Value of the Asset– ALA Firm 189 ITR 285 (sc) – applies in case of stock in trade

and only when the values adjusted in books for settling accounts

• Whether also covers a case where there is no distribution of capital asset– Burlington Exports 45 ITD 424 (Bom)– J. Kimatrai [2007] 11 SOT 462 (Bom)– Concept – Definition of Transfer U/s. 2 (47) not amended– Malabar Fisheries Co. 120 ITR 49 (SC)

• Whether covers cases other than dissolution – say retirement

• A. N. Naik 136 Taxman 107 (Bom)

Section 50 – Depreciable Assets

• Concerning the depreciable asset• Section 2 (42A) given a by-pass and irrespective of

holding the asset is treated as short term capital asset– Limited for the purpose of section 48 and 49 (i.e. for

computing capital gains, indexation, etc.– Does not have application for the purpose of section

54, 54EC or 112, etc.– Ace Builders 76 ITD 389 (Bom)– Weikfield Products 71 TTJ 518 (Pune)

Section 50 C

• Substitution of Stamp Duty Valuation for actual consideration received– Consideration received / accruing is less than the value adopted or

assessed by stamp valuation authority for payment of stamp duty in respect of such transfer.

• Whether actual assessment necessary or deemed valuation on the basis of stamp duty tables (“Jantri”) is OK– Take case of Development Agreement, which has not gone for stamp

duty valuation• Applies only in case of capital asset• Interesting issue of tri-party agreements

– A agrees to sell B a property at Rs. 50.00 lacs– B further sells to C at Rs. 120 lacs– A executes sale deed in favour of C for Rs. 120 lacs, B confirms– Jantri Value is Rs. 130 lacs

• Constitutional Validity upheld –K. R. Palanisamy 2008 – TIOL 406 – HC – MAD – IT

• K. P. Verghese – 131 ITR 597 (SC) in the context of 52 (2)

Section 54 EC

• Investment of capital gains in eligible securities (NHAI / REC)

• Eligible amount of investment– Proviso to Section 54 EC (1) states “investment in LT

specified asset by an assessee during any financial year does not exceed Rs. 50.00 lacs

– Therefore, in respect of assets transferred after 30th

September, 2008, theoretically there could be investment of Rs. 100.00 lacs, provided both made prior to expiry of 6 (six) months from transfer

• Consider transfer of assets prior to the transfer by way of gift, etc.– Like children , would be wife, etc.

Questions & Answers ????

Thank you ……