FUNDAMENTALS OF CAPITAL GAINS

COVERING SECTION 2(14), 45, 47, 48, 49, 55, 55A

AND

CAPITAL GAINS ON DEVELOPMENT &

REDEVELOPMENT OF IMMOVABLE PROPERTY

CA Anil J. Sathe 1

Scope Limitation

Excludes:

Provisions relating to Shares and Securities

Special Provisions like Sec. 50B, Sec. 50C, Sec.50D

Exemption Provisions

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CA. Anil J. Sathe

Charge to Capital Gain Section 45(1)

Any Profits or Gains

arising from the transfer

of a Capital Asset

effected in the previous year

shall save as otherwise provided in exemption provisions

be chargeable to Income Tax

under the head Capital Gains &

shall be deemed to be the income of the previous year in which the transfer took place

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Conditionalities of the Charge

“Profits or Gains” should arise

“Capital Asset” should exist

There must be a “transfer” in the previous year

There must be a “consideration”

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Principles of Interpretation

Fiction created by law

No Capital Gains during period from 1st April 1948 to 31st March 1956

The charging provisions to be interpreted strictly

The exemption provisions to be interpreted liberally

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Relevant Provisions Covered

Sec 2(14) – Defining Capital Asset

Sec 2(47) r.w.s. 47 – Defining Transfer & its Exclusions

Sec 48 – Computation Provisions

Sec 49, 55 – Specific Circumstances for Cost of Acquisition

Sec 55A – Ascertaining fair market value

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Section 2(14)

“Capital Assets” means:

Property of any kind

Held by the assessee

Whether or not connected with his business or profession

Securities held by FII which has invested in prescribed securities

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Property of any kind

Corporeal

Rights in Rem

Rights in personam

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Held by the Assessee

Physical possession

Constructive possession

Symbolic possession

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“If a right does not answer to the description of Capital Asset, there will be no Capital Gains”

“If the assessee does not have or never had any dominant control over the property there will be no Capital Gains”

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Specific Exclusions Any stock-in-trade, consumable stores or raw materials held for

the purposes of his business or profession

personal effects held for personal use but excludes:

a) Jewellery

b) archaeological collections

c) Drawings

d) Paintings

e) sculptures; or

f) any work of art.

Agricultural Land in India

(Not being land situated in the specified area)

Specified Gold Bonds

Specified Bearer Bonds

Specified Gold Deposit Bonds

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Issues Stock-in-trade

Determination of whether Capital Gain or Stock-in-trade

Whether entries in the books of accounts conclusive

Personal Effects

Position post 1st April 2008

Meaning of the term ‘work of art’

Recording of rendition by a vocalist

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Issues

Jewellery

Utensils of precious metal

Is the status of the assessee relevant

Agricultural Land

To what extent is agricultural use imperative

How to measure distance (Amendment w.e.f. 01st April 2014)

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Section 2(47) “Transfer” in relation to the capital asset includes-

the sale, exchange or relinquishment of the asset

the extinguishment of any rights therein

the compulsory acquisition thereof under any law

Conversion of a capital asset into or treatment thereof as 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 of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or

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

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Issues

Import of the Explanation 2 to Sec 2(47)

Does the Explanation cover a situation of transfer of one asset i.e. shares of an Indian company enabling enjoyment of underlying property

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Section 45(1A)

Where any person receives any money or other assets

under an insurance from an insurer

on account of damage to, or destruction of, any capital asset, as a result of specified events

then, any profits or gains arising from such receipt shall be chargeable under the head "Capital gains“ in the year of such receipt

value of any money or the fair market value of other assets shall be deemed to be the full value of consideration

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Issues

Impact of section 50 in the case of depreciable assets

Cost incurred by the assessee to repair damage

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Section 45(2)

Notwithstanding anything contained in sub-section (1)

the profits or gains arising from the transfer

by way of conversion of a capital asset into, or its treatment as, stock-in-trade of a business

shall be chargeable under Capital Gains in the previous year in which such stock-in-trade is sold or otherwise transferred

FMV of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration

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Issues

Year of Indexation

Exemption Provisions

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Section 45(3) The profits or gains arising from the transfer of a capital

asset

by a person to a firm or other AOP or BOI (not being a company or a co-operative society)

in which he is or becomes a partner or member

by way of capital contribution or otherwise

shall be chargeable to tax as his income

In the previous year in which such transfer takes place

The amount recorded in the books of account of the firm, AOP or BOI as the value of the capital asset shall be deemed to be full value of the consideration

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Section 45(4)

The profits or gains arising from the transfer of a capital asset

by way of distribution of capital assets

on the dissolution of a firm or other AOP or BOI (not being a company or a co-operative society) or otherwise

Shall be chargeable to tax as the income of the firm, AOP or BOI

In the previous year in which the said transfer takes place

The fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration

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Section 45(5)

Notwithstanding anything contained in sub-section (1),

where the capital gain arises from

the transfer of a capital asset, by way of compulsory acquisition under any law, or

a transfer the consideration for which was determined or approved by the CG or RBI

and the compensation or the consideration for such transfer is enhanced or further enhanced by any authority,

the capital gain shall be dealt with in the following manner:

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A. The compensation or consideration awarded/approved by CG/RBI in the first instance:

shall be chargeable as income under the head "Capital gains”

of the previous year in which such compensation or consideration or part thereof, was first received

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B. The amount by which the compensation or consideration is enhanced or further enhanced by any authority

shall be deemed to be income chargeable under the head "Capital gains"

of the previous year in which such amount is received by the assessee

Cost of acquisition/improvement shall be taken to be Nil

Provided, any amount received in pursuance of an interim order of any authority shall be chargeable to tax in the previous year in which the final order of such authority is made

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C. Where in the assessment for any year, compensation is subsequently reduced

The assessed capital gain shall be recomputed by taking such reduced compensation or consideration to be the full value of the consideration.

Impact

Shifts chargeability from year of transfer to year of receipt of compensation

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Section 47 Transactions not regarded as Transfer

1) Distribution on the total or partial partition of HUF

2) Transfer under a gift or will or an irrevocable trust

(other than shares, debentures or warrants allotted under ESOP or any other specified scheme)

3) Transfer by a company to its wholly owned Indian subsidiary company

4) Transfer by a wholly owned subsidiary company to its Indian holding Co.

5) Transfer in a scheme of amalgamation by the amalgamating company to the Indian amalgamated company

6) Transfer by the banking company to the banking institution; in a scheme of amalgamation under section 45(7) of the Banking Regulation Act

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7) Transfer in a demerger by demerged company to Indian resulting company

8) Transfer in a business re-organization by a predecessor co-operative bank to the successor co-operative bank

9) Transfer of Gold Bonds or GDRs referred to in section 115AC(1) made outside India by a non-resident to another non-resident

10) Transfer of Govt. Securities carrying periodic payment of interest, made outside India by a non-resident to another non-resident

11) Transfer of Agricultural Land in India effected before 1st March 1970

12) Transfer of any work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting, photograph or print to the Govt. or any other specified institution

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13) Transfer of land of a sick industrial company managed by workers’ co-operative, under any scheme sanctioned under Sick Industrial Companies (Special Provision) Act

14) Transfer by a firm to a company as a result of succession or transfer to a company in course of demutualization or corporatization of a recognized stock exchange in India where AOP or BOI is succeeded by such company; subject to fulfilment of certain conditions

15) Transfer of membership rights held and trading/clearing rights acquired by a member of recognized stock exchange in India, in accordance with the scheme for demutualization or corporatization approved by SEBI

16) Transfer by a private company or unlisted public company to LLP, subject to fulfillment of certain conditions

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17) Transfer by a sole proprietary concern to a company on its succession, subject to fulfillment of certain conditions

18) Transfer in a scheme for lending of any securities under an agreement or arrangement which is subject to guidelines issued by the SEBI or the RBI

19) Transfer in a transaction of reverse mortgage under a scheme notified by the CG (w.e.f.01/04/2008)

20) Transfer of any units by the unit holder, made in consideration of allotment to him of any units, under a consolidation scheme of a mutual fund

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Issues

What is the current position in regard to monies receivable by a retiring partner

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Section 48 Computation Provisions

Full value of consideration received or accruing

as a result of transfer

of the capital asset

To be reduced by the following amounts:

Expenditure incurred wholly & exclusively in connection with the transfer and

Cost of acquisition and cost of improvement

“Indexed cost of acquisition” and “Indexed cost of Improvement" to be used in case of long term capital gain arising from transfer of long term capital asset not being bonds or debentures (other than capital indexed bonds)

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Section 49 Cost w.r.t. certain modes of acquisition

Cost of acquisition deemed to be the cost for which previous owner acquired the asset as increased by cost of improvement born by such previous owner, where capital asset is acquired by the assessee On distribution on total partition of HUF Under Gift or Will By succession, inheritance or devolution On distribution of assets on the dissolution of a firm, BOI or

other AOP (before 1st April 1987) on any distribution of assets on the liquidation of a company under a transfer to a revocable or an irrevocable trust under any such transfer as is referred to in clause (iv), (v), (vi),

(via), (viaa), (vica), (vicb), (xiii), (xiiib) or (xiv) of section 47 by the mode referred to in sub-section (2) of section 64,

where assessee is HUF

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“previous owner” to mean the last previous owner who acquired the capital asset by a mode other than the modes referred to in section 49(1)

Cost of acquisition in relation to a property, the value of which has been subjected to tax u/s 56(2)(vii) or (viia) shall be deemed to be the value taken into account for the purposes of the said section

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Issues

What will be the situation in regard to a conversion of a private company into an LLP which is not exempt by virtue of section 47(xiiib) in the hands of:

a) The Company

b) The Shareholder

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Section 55 Cost of Improvement

Capital Asset Cost of Acquisition

(1) goodwill of a business or a right to manufacture, produce or process any article or thing or right to carry on any business

Nil

(2) Any Other Capital Asset

(i) Where the capital asset is acquired before the 1st April, 1981

All expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after the said date by the previous owner or the assessee

(ii) In any other case All expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee or the previous owner as the case may be, after it became his property

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Cost of Acquisition

Cost of Acquisition in relation to goodwill of a business or a trade mark or brand name associated with a business or a right to manufacture, produce or process any article or thing or right to carry on any business, tenancy rights, stage carriage permits or loom hours shall mean:

The “amount of the purchase price” where such asset is acquired by the assessee by purchase from previous owner

“Nil” in any other case

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Cost of Acquisition in relation to any other asset:

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Acquisition of Capital Asset Cost of Acquisition

(i) Where capital asset became the property of the assessee before the 1st day of April, 1981

Cost of acquisition of the asset to the assessee or the FMV of the asset on the 1st April, 1981, at the option of the assessee

(ii) Where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, and the capital asset became the property of the previous owner before the 1st day of April, 1981

Cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of April, 1981, at the option of the assessee

(iii) where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to income-tax under the head "Capital gains" in respect of that asset under section 46

FMV of the asset on the date of distribution

CA. Anil J. Sathe

Where cost of acquisition to the previous owner cannot be ascertained, the same shall be taken to be the FMV on the date on which the capital asset became the property of the previous owner [Sec 55(3)]

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Section 55A

To ascertain FMV the AO may refer the valuation to a Valuation Officer

Where value claimed by assessee in accordance with estimate by registered valuer is in opinion of the AO in variance with its FMV

In any other case if AO is of the opinion that

(i)FMV exceeds value claimed by assessee by 15% or by Rs.25,000 Or

(ii) It is necessary having regard to the nature of asset and other

relevant circumstances

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Development & Redevelopment

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What is a Development Agreement?

• When a developer of the land, acquires the right in

respect of the property only for a limited period and for

the purpose of construction thereon he is expected to

convey the property and interest in the land to the

ultimate buyers of the property on or before completion

of the project, the instrument devised for this type of

activities is a development agreement.

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Point of Accrual of Income

• Date of execution of the Development Agreement

• Date of handing over of possession of land to developer

• Date of handing over of possession of land to developer together with a General Power of Attorney authorizing him to transfer his share of property.

• Date on which the first sale deed is executed for undivided share in land for the developer’s share.

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Issues

• If the property is a bundle rights, is it possible to transfer different parts of that bundle at different points of time?

• If the agreement of development enables the developer to obtain control of the immovable property by grant of an irrevocable authority or license, then even the date of agreement of development will constitute the date of transfer of the capital asset.

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Issues

• Is the provision of Sec 53A of Transfer of Property Act applicable to development agreements?

• What is the meaning of term “possession” in the context of Sec 2(47)(v)? Whether granting of ‘license’ to the developer to enter upon the property to carry development activity has the effect of enabling the enjoyment of property as contemplated in Sec 2 (47)(vi)?

• What is the impact of Explanation 2 to Sec 2(47) inserted by Finance Act, 2012 w.e.f. 01/04/2012?

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Issues Owner of bungalow/ building enters into an agreement with builder - bungalow is demolished and other structure erected thereon. Owner or builder or both acquire rights to dispose of some of the flats in the newly constructed premises. 4 Flats are given to Owner for own residence.

Issues-

• Sale of Land or Bungalow ?

• Accrued FSI arising from amendment in Development Rules

Implications if sold for separate consideration Building & Development rights

Is it a right or merely a relaxation in restriction ?

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What are ‘Joint Development Agreements’

What is the impact in the hands of Land Owner who receives:

a) Monetary Compensation

b) Constructed area

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Taxation in regard to redevelopment qua co-operative

societies

• Ownership of land and building of a Co-operative Society

• That of Society

OR

• That of Member 47

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Redevelopment Issues

• Concept of FSI (Floor Space Index)

• Concept of TDR (Transferable Development Right)

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Tax Issues

• Unutilized FSI at the stage of conveyance of property to society

• Increment arising thereafter

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TDR

• TDR received by society surrendering plot or part thereof

• TDR compensation received by society on whose property TDR is utilized

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Redevelopment Issues Qua Society

• Facilities by way of Community Hall/Garden etc.

• Corpus Fund

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Redevelopment Qua Member

• Exchange of old unit for new unit

• (a) Same Area

• (b) Additional Area

• (c) Lesser Area

• Rental during period and redevelopment

• Monetary compensation for inconvenience etc.

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Compensation received by Members

• For surrender of FSI

• For TDR in case of Society surrendering plot

• Incase of society permitting use of TDR

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Thank You

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