Project on capital gains

8/2/2019 Project on capital gains

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INTRODUCTION

A capital gains tax (CGT) is a tax charged on capital gains, the profit realized onthe sale of a non-inventory asset that was purchased at a lower price. The most

common capital gains are realized from the sale of stocks, bonds, precious metals

and property. Not all countries implement a capital gains tax and most have

different rates of taxation for individuals and corporations.

For equities, an example of a popular and liquid asset, national and state

legislation often has a large array of fiscal obligations that must be respected

regarding capital gains. Taxes are charged by the state over the transactions,

dividends and capital gains on the stock market. However, these fiscal obligations

may vary from jurisdiction to jurisdiction because, among other reasons, it couldbe assumed that taxation is already incorporated into the stock price through the

different taxes companies pay to the state, or that tax-free stock market

operations are useful to boost economic growth.

India

As of 2008, equities are considered long term capital if the holding period is one

year or more. Long term capital gains from equities are not taxed if shares are

sold through recognized stock exchange and STT is paid on the sale . However

short term capital gain from equities held for less than one year, is taxed at 15%

[7] (w.e.f. 1 April 2009.[8]) (plus surcharge and education cess). This is applicable

only for transactions that attract Securities Transaction Tax (STT).

Many other capital investments (house, buildings, real estate, bank deposits) areconsidered long term if the holding period is 3 or more years.[9] Short term

capital gains are taxed just as any other income and they can be negated against

short term capital loss from the same business.


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MEANING OF CAPITAL GAINS :-

Capital gains means profits or gains arising to the assesse from the transfer of a

capital asset. Such capital gain is added to the total income of the previous year

in which the transfer of the assets took place.

Capital Gains is the fourth head of income. Section 45(1) of the Income Tax Act,

1961 talks about any profits or gains arising from the transfer of a capital asset

effected in the previous year.

In C.I.T. V. H.H. Maharani Usha Devi case the Supreme Court has made it

clear that heirloom jewellery constitutes personal effects under section 2(14) and

its sale would not give rise to any taxable capital gains.

A.I.R. 1998 S.C. 2309

Thus, the essential elements of capital gains are:-

(A)Capital Asset.(B)Transfer of Capital Asset,(C)Computation of Capital gain.

Capital Asset [Sec. 2(14)]

Capital Asset means property of any kind held by an assessee, whether connected

with his business, profession or not. Capital Asset may be movable or immovable,

tangible or intangible, fixed or floating. A.I.R. 2005 S.C. 796

In C.I.T V. D.P. Sandu Brothers case it was held that the value or income

from transfer of capital asset can be taxed only under the headCapital Gain

and if it cannot be taxed under this head, then it cannot be taxed at all. Such

income cannot be taxed under the headIncome from other sources.


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WHAT ALL CAPITAL ASSET INCLUDES :-

1. Goodwill of a business.2. Partners share in a firm.3. Tenancy rights.4. Actionable claim.5. Loom hours (Hours for which a worker works in a factory).6. Patent.7. Trade-Marks.8. Lease hold right in mines.9. License for manufacturing of a commodity.

EXCEPTIONS :-

The term Capital Asset doesnt include the following :

1. Any stock in trade, consumable stores or raw materials.2. Movable Assets for personal use i.e. Apparel & furniture but excluding

jewellery held for personal use by the assesse or any member of his familydependent on him.

3. Agricultural Land in India.4. Gold bonds issued by the Central Government.5. Special bearer bonds.6. Gold Deposit bonds.

In C.I.T V. B.C Srinivasa Setty case the Supreme Court has made it

clear that the goodwill generated in a newly commenced business cannot

be described as an asset within the meaning of the terms of Section 45

and therefore its transfer is not subject to income tax under the head

capital gains. 1981 Tax L.R. 641 (S.C.)


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CLASSIFICATION OF CAPITAL ASSETS:-

It is divided into 2 categories :

A)Short-Term Capital Asset.B) Long-Term Capital Asset

SHORT-TERM CAPITAL ASSET-

It means a Capital Asset held by an assesse for not more than 36 months

immediately preceeding the date of its transfer:

Provided that in the case of a share held in a company or any other security listed

in a recognized stock exchange in India or a zero- coupon bond, the provisions of

this clause shall have effect as if for the words 36 months, the words 12

months had been substituted.

LONG-TERM CAPITAL ASSET-

According to section 2(29-A), it means an asset which is not a short-term capital

asset.

TRANSFER [Sec. 2(47)]

Any transaction whereby the ownership of an assessee in a capital asset ceases is

transfer according to Sec.2 (47).

Transfer includes:

i) Sale, exchange or relinquishment of a capital asset


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ii) Extinguishment of any rights in a capital asset

iii) Compulsory acquisition of the capital asset under any law

iv) Conversion of a capital asset into stock-in-trade

v) Part performance of a contract of sale

vi) Transfer of rights in immovable properties through the medium of co-

operative societies, companies etc.

vii) Transfer by a person to a firm or other or Body of a person to a Association ofPersons (AOP) Individuals (BOI)

viii) Distribution of capital assets on Dissolution

ix) Distribution of money or other assets by a Company on liquidation

TRANSACTIONS NOT REGARDED ASTRANSFER (Section 47).

Nothing contained in section 45 shall apply to the following transfers:

(i) Any distribution of capital assets on the total or partial partition of aHindu undivided family;

(ii) This clause has been omitted by the Finance Act, 1987 w.e.f 1-4-1988;

(iii) Any transfer of a capital asset under a gift or will or an irrevocable trust;

http://www.vakilno1.com/bareacts/incometaxact/s47.htm


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(iv) Any transfer of a capital asset by a company to its subsidiary company, if:

(a) the parent company or its nominees hold the whole of the share capital of the

subsidiary company; and

(b) The subsidiary company is an Indian company;

(v) Any transfer of a capital asset by a subsidiary company to the holding

company, if:

(a) The whole of the share capital of the subsidiary company is held by the holdingcompany, and

(b) The holding company is an Indian company :

Provided that nothing contained in clause (iii) or clause (iv) shall apply to the

transfer of a capital asset made after the 29th day of February, 1988, as stock-in-

trade; (vi) Any transfer, in a scheme of amalgamation, of a

capital asset by the amalgamating company to the amalgamated company if the

amalgamated company is an Indian company;

(via) Any transfer, in a scheme of amalgamation, of a capital asset being a share or

shares held in an Indian company, by the amalgamating foreign company to the

amalgamated foreign company, if - (a) At least twenty-five per cent of the

shareholders of the amalgamating foreign company continue to remain

shareholders of the amalgamated foreign company, and


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(b) Such transfer does not attract tax on capital gains in the country, in which the

amalgamating company is incorporated;

(vib) Any transfer, in a demerger, of a capital asset by the demerged company to

the resulting company, if the resulting company is an Indian company;

(vic) Any transfer in a demerger, of a capital asset, being a share or shares held in

an Indian company, by the demerged foreign company to the resulting foreign

company, if - (a) At least seventy-five per cent of the shareholders of the

demerged foreign company continue to remain shareholders of the resulting

foreign company; and

(b) Such transfer does not attract tax on capital gains in the country, in which the

demerged foreign company is incorporated :

Provided that the provisions of sections 391 to 394 of the Companies Act, 1956 (1

of 1956) shall not apply in case of demergers referred to in this clause;

(vid) Any transfer or issue of shares by the resulting company, in a scheme of

demerger to the shareholders of the demerged company if the transfer or issue is

made in consideration of demerger of the undertaking;

(vii) Any transfer by a shareholder, in a scheme of amalgamation, of a capital

asset being a share or shares held by him in the amalgamating company, if - (a)The transfer is made in consideration of the allotment to him of any share or

shares in the amalgamated company, and

(b) The amalgamated company is an Indian company;

(viia) Any transfer of capital asset, being bonds or shares referred to in sub-

section (1) of section 115AC, made outside India by a non-resident to another

non-resident;

(viii) Any transfer of agricultural land in India effected before the 1st day of

March, 1970;

(ix) Any transfer of a capital asset, being any work of art, archaeological, scientific

or art collection, book, manuscript, drawing, painting, photograph or print, to the

Government or a University or the National Museum, National Art Gallery,


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National Archives or any such other public museum or institution as may be

notified 753 by the Central Government in the Official Gazette to be of national

importance or to be of renown throughout any State or States.

(x) Any transfer by way of conversion of bonds or debentures, debenture-stock ordeposit certificates in any form, of a company into shares or debentures of that

company.

(xi) Any transfer made on or before the 753ca 31st day of December, 1998, 753ca

by a person (not being a company) of a capital asset being membership of a

recognised stock exchange to a company in exchange for shares allotted by that

company to the transferor.

(xii) Any transfer of a capital asset, being land of a sick industrial company, made

under a scheme prepared and sanctioned under section 18 of the Sick Industrial

Companies (Special Provisions) Act, 1985 (1 of 1986) where such sick industrial

company is being managed by its workers' co-operative :

Provided that such transfer is made during the period commencing from the

previous year in which the said company has become a sick industrial company

under sub-section (1) of section 17 of that Act and ending with the previous year

during which the entire net worth of such company becomes equal to or exceeds

the accumulated losses.

(xiii) Where a firm is succeeded by a company in the business carried on by it as a

result of which the firm sells or otherwise transfers any capital asset or intangible

asset to the company:

Provided that

(a) All the assets and liabilities of the firm relating to the business immediately

before the succession become the assets and liabilities of the company;

(b) All the partners of the firm immediately before the succession become the

shareholders of the company in the same proportion in which their capital

accounts stood in the books of the firm on the date of succession;


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(c) The partners of the firm do not receive any consideration or benefit, directly or

indirectly, in any form or manner, other than by way of allotment of shares in the

company; and

(d) The aggregate of the shareholding in the company of the partners of the firmis not less than fifty per cent of the total voting power in the company and their

share holding continues to be as such for a period of five years from the date of

the succession;

(xiv) Where a sole proprietary concern is succeeded by a company in the business

carried on by it as a result of which the sole proprietary concern sells or otherwise

transfers any capital asset or intangible asset to the company :

Provided that

(a) All the assets and liabilities of the sole proprietary concern relating to the

business immediately before the succession become the assets and liabilities of

the company;

(b) The shareholding of the sole proprietor in the company is not less than fifty

per cent of the total voting power in the company and his shareholding continues

to so remain as such for a period of five years from the date of the succession;

and

(c) The sole proprietor does not receive any consideration or benefit, directly or

indirectly, in any form or manner, other than by way of allotment of shares in the

company;

(xv) Any transfer in a scheme for lending of any securities under an agreement or

arrangement, which the assessee has entered into with the borrower of such

securities and which is subject to the guidelines issued by the Securities and

Exchange Board of India, established under section 3 of the Securities and

Exchange Board of India Act, 1992 (15 of 1992), in this regard.


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COMPUTATION OF CAPITAL GAINS (Section 48).

Transfer of a short term capital asset gives rise to "Short Term Capital Gains'

(STCG) and transfer of a long capital asset gives rise to 'Long Term Capital Gains'

LTCG). Identifying gains as STCG and LTCG is a very important step in computing

the income under the head Gains as method of computation of gains and tax on

the gains is different for STCG and LTCG.

Short Term Capital Gains (STCG)

Computation of short - term Capital Gains:

1. Find out full value of consideration2. Deduct the following :

a. expenditure incurred wholly and exclusively in connection with suchtransfer

b. cost of acquisition; andc. cost of improvement

3. From the resulting sum deduct the exemption provided by sections 54B,54D, 54G

4. 4. The balancing amount is short-term capital gain

Long Term Capital Gains (LTCG)

Computation of long - term Capital Gains:

1. Find out full value of consideration2. Deduct the following:

a. expenditure incurred wholly and exclusively in connection with suchtransfer

b. indexed cost of acquisition; andc. indexed cost of improvement

3. From the resulting sum deduct the exemption provided by sections 54, 54B,54D, 54EC, 54ED, 54F and 54G

4. The balancing amount is long-term capital gain


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Full value of consideration (Section 50-C).

This is the amount for which a capital asset is transferred. It may be in

money or money's worth or a combination of both.

Where the transfer is by way of exchange of one asset for another, fair

market value of the asset received is the full value of consideration. Where

the consideration for the transfer is partly in cash and partly in kind Fair

market value of the kind portion and cash consideration together

constitute full value of consideration.

Cost of acquisition (Section 55(2)).

Cost of acquisition of an asset is the sum total of amount spent foracquiring the asset.

Where the asset was purchased, the cost of acquisition is the price paid.

Where the asset was acquired by way of exchange for another asset, the

cost of .acquisition is the fair market value of that other asset as on the

date of exchange.

Any expenditure incurred in connection with such; purchase, exchange or other

transaction e.g. brokerage paid, registration charges and legal expenses alsoforms I part of cost of acquisition.

Sometimes advance is received against agreement to transfer a particular asset.

Later on, if the advance is retained by the tax payer or forfeited for other party's

failure to complete the transaction, such advance is to be deducted from the cost

of acquisition.


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Cost of acquisition with reference to certain modes or acquisition

(Section 49(1)).

Where the capital asset became the property of the assessee:

a) on any distribution of assets on the total or partial partition of a Hindu

undivided family;

b) under a gift or will

c) by succession, inheritance or devolution;

d) on any distribution of assets on the dissolution of a 'firm, body of individuals, or

other association of persons, where such dissolution had taken place at any time

before 01.04.1987;

e) on any distribution of assets on the liquidation of a company;

f) under a transfer to a revocable or an irrevocable trust;

g) by transfer in a scheme of amalgamation;

h) by an individual member of a Hindu Undivided Family living his separate

property to the assessee HUF any time after 31.12.1969.

The cost of acquisition of the asset shall be the cost for which the previous owner

of the property acquired it, as increased by the cost of any improvement of the

asset incurred or borne by the previous owner or the assessee, as the case may

be, till the date of acquisition of the asset by the assessee.

If the previous owner had also acquired the capital asset by any of the modes

above, then the cost to that previous owner who had acquired it by mode of

acquisition other than the above, should be taken as cost of acquisition.


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(v) The new house property purchased or constructed has not been transferred

within a period of three years from the date of purchase or construction.

Amount of Exemption. The amount of exemption under section 54 is

Equal to the amount of the capital gain if cost of new house property is morethan the capital gain, or

Equal to the cost of the new house property if the cost is less than thecapital gain.

Deposit Scheme under Section 54. Where the amount of capital gain is not so

utilized for the purchase or construction of a new residential house before the due

date of furnishing of the return of income, it shall be deposited by him on orbefore the due date in an account with a public sector bank in accordance with the

Capital Gain Account Scheme, 1988. The amount already utilized on the new house

together with the amount deposited shall be deemed to be the amount utilized for

the purchase of new house under section 54. If the amount deposited is not

utilized for the purpose of purchase or construction of new house within the

stipulated period, then the amount not so utilized will be treated as long term

capital gain of the previous year in which the period of three years expires. In such

case the assessee is entitled to withdraw the amount from the bank.

Consequences of Selling the New House Before 3-years. If the new house property

is transferred within a period of three years from the date of the purchase or

construction, the amount of capital gains arising therefrom, together with the

amount of gains exempted earlier, will be chargeable to tax in the year of sale of

the house property. To attain this, the amount of exemption under section 54 shall

be reduced from the cost of acquisition to the new house, while calculating short-

term capital gains on the transfer of the new asset.

Capital Gain on the Transfer of Agricultural Land (Section 54B)

Capital gains arising on the transfer of land used by an individual or his parents for

agricultural purposes for a period of two years immediately preceding the date of

transfer is exempt form the tax if the individual assessee has purchased another

agricultural land within a period of two years from the date of such transfer


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(subject to the requirements).

(Not covered: Amount of exemption, scheme of deposit and consequences on not

meeting the requirements).

Capital Gain on Compulsory Acquisition of Land and Building of anIndustrial Undertaking (Section 54D)

Capital gains arising on the compulsory acquisition of any land or building forming

a part of an industrial undertaking is exempt subject to the following

requirements:

Such land or building was used by the assessee for the purpose of industrialundertaking for two years preceding the date of compulsory acquisition,

The assessee has purchased any land or building or constructed a buildingwithin 3 years from the date of the receipt of the compensation, and

Newly acquired land or building should be used for the purpose of shifting orreestablishing the said undertaking or setting up another industrial

undertaking.

(Not covered: Amount of exemption, scheme of deposit and consequences on not

meeting the requirements).

Long Term Capital Gain Exemption for Investment in Certain Bonds

(Section 54EC)

This exemption is available to an individual, HUF, company or any other person

who invests the long term capital gain, within 6 months of a the transfer of the

capital asset, in any of the specified bond (issued on or after April 1, 2006)

redeemable after 3 years:

National Highway Authority of India (NHAI), or Rural Electrification Corporation Ltd. (REC)

There is a limit of Rs. 50 lakh on the investments on or after April 1, 2007.

The face value of a bond is generally Rs. 10,000 and the rate of return correctly


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Section Asset

Transferred

Who

Entitle

d

Use or

Holding

Period

Prescribed

Period for

Investment

Other

Conditio

ns/

Incidents

Sales of New

Asset

requirements).

Capital Gain on Transfer of Capital assets in Case of Shifting of

Industrial Undertaking from Urban Area to any SEZ (Section 54GA)

This exemption is available to an individual, HUF, company or any other person

who transfers the capital assets (being plant, machinery, land or building or any

right in the land or building) being used for the purpose of industrial undertaking

situated in an urban area to a special economic zone (SEZ). The assessee purchases

within one year before or 3 years after the date of transfer:

(i) Purchases plant or machinery for the purpose of business of industrial

undertaking in the area to which the said undertaking has shifted,

(ii) Acquires building or land or constructed building for the purpose of his business

in the said area,

(iii) Shifts the original asset and transferred the establishment in the said area, and

(iv) Incurs expenses on such other purpose as may be specified in a scheme framed

by Central Government for the purpose of this section.


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54 Residential

House

Individ

ual or

HUF

Exceedin

g 3 years.

Within 1 year

before, or 2

years after

the date of

transfer (ifpurchased) or

3 years after

the date of

transfer (if

constructed).

If sold within

3 years from

the date of

purchase /

construction,capital gains

claimed as

exempt

assessable to

tax together

with

additional

capital gains

in the year of

transfer of

new asset as

Short Term

Capital Gain

(STCG)

54B Agricultural

Land

Individ

ual

Use for 2

years

Within 2

years after

the date oftransfer.

Must

have

beenused by

assessee

or his

parents

for

agricultur

al

purposes

SeeNotes 1,

2 and 10

If sold within

3 years from

the date ofpurchase /

construction,

capital gains

claimed as

exempt

assessable to

tax together

with

additionalcapital gains

in the year of

transfer of

new asset as

Short Term


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Capital Gain

(STCG)

54D Land or

Building for

Industrial

undertaking

.

Any

Assess

e

Use for 2

years

Within 3

years after

the date of

transfer.

Must

have

been

compulso

rilyacquired

If sold within

3 years from

the date of

purchase /

construction,capital gains

claimed as

exempt

assessable to

tax together

with

additional

capital gains

in the year oftransfer of

new asset as

Short Term

Capital Gain

(STCG)

54EC Any Long-

term Capital

Asset (LTCA)

Any

Assess

e

Shares,

Listed

Securities, Units

of

UTI/Mut

ual Fund

covered

Within 6

months of

transfer oforiginal asset.

If sold within

3 years,

exemptedcapital gain

will be

deemed to be

income from

Long Term


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u/s.

10(23D)

:1 year

Others :

3 years

Capital Gain

(LTCG) of the

assesse in the

year of

transfer of thenew asset.

54ED LTCA being

listed

securities or

units

Any

Assess

e

Listed

Securitie

s or units

of

UTI/Mut

ual Fund

coveredu/s.

10(23D) :

1 year

Within six

months from

the date of

transfer in

acquiring

eligible issue

of capital

exemptio

n is

available

only in

respect

of the

assetstransferr

ed before

1-4-2006

If sold within

3 years,

exempted

capital gain

will be

deemed to be

income fromLong Term

Capital Gain

(LTCG) of the

assesse in the

year of

transfer of the

new asset.

54F Any Assetother than

residential

house.

Individual or

HUF

Shares,Listed,

Securitie

s, Units

of

UTI/Mut

ual Fund

covered

u/s.

10(23D) :1 year

Others :

3 years

Within 1 yearbefore, or 2

years after

the date of

transfer (if

purchased),

or 3 years

after the date

of transfer (if

constructed).

Same as forSections 54,

54B, 54D

except that

under section

54F it will be

taxed as LTCG.


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54G Plant and

Machinery

or Land and

Building

used forIndustrial

undertaking

in Urban

area.

Any

Assess

e

May be

L.T.C.A

or

S.T.C.A

Within 1 year

before, or 3

years after

the date of

transfer.

Same as for

Sections 54,

54B and 54D.

54GA Plant and

Machinery

or Land and

Building

used for

Industrial

undertaking

in Urban

area.

Any

Assess

e

May be

L.T.C.A

or

S.T.C.A

Within 1 year

before or 3

years after

the date of

transfer.

Same as for

Sections 54,

54B and 54D.

115F Foreign

Exchange

Asset.

Non-

Reside

nt

Indian

Shares,

Listed

Securitie

s, Units

of

UTI/Mut

ual Fund

covered

u/s.

10(23D) :

1 year

Others :

3 years

Within 6

months after

the date of

transfer.

Same as u/s.

54F above.


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Documents

Project on capital gains