Capital Gains

The Sale of Capital AssetSale is a transfer of ownership of a property in exchange for a price paid or promised .Ref - Transfer of Property Act 1882 ; Sale of Goods Act 1930Sale includes involuntary sale i.e. through a court decree.Sale includes Auction sale.Exchange of Capital AssetIt involves mutual transfer of ownership of one thing for the ownership of another.The title of one property is passed in consideration of the title of another title.Examples :Conversion of preference shares to ordinary shares Exchange of title in land for ownership flat

RelinquishmentIt takes place when the owner of the asset surrenders his rights in the asset in favour of another person.The property continues to exist, but interest therein of the owner is either given up or abandoned.Examples :The transfer of rights to subscribe the shares in a company under a Right issue to a third person..Surrenders ones right in a certain portion of land or surrenders ones right to build flats etc.

Extinguishment of any right in any asset..It involves all transaction which results in the destruction, annihilation, extinction, termination, cessation, or cancellation of all or any bundle of rights on a capital asset.Examples :Compensation for termination of a lease or cancellation of ones right to acquire a property.Reduction in face value of shares results in extinguishment of rights in sharesRedemption of preference shares by a company involves transfer.

Compulsory Acquisition EtcCompulsory Acquisition of any asset under any state law is a transfer for the purpose of Capital Gain. Compensation received is liable for Capital gain tax.If any person receives at any time during the F.Y. any money or asset under an insurance from an insurer due to damage & or destruction of any capital asset, as a result of any natural disaster like flood, earthquake etc. riot, arson, fire enemy action etc.When a person converts his capital asset to stock-in-trade of a business carried on by him.Transfer of a capital asset individually held by the partner to the firm/AOP by way of capital contribution or otherwise.Distribution of partnership assets to the individual partners of the firm on the dissolution & otherwise.Transaction not treated as Transfers-Sec. 47Transfer on partition/partial partition of HUF.Transfer under gift of willTransfer by a company to its subsidiary company and vice-a-versa. Subject to certain conditions.Transfer on amalgamation of an Indian company.Transfer in a case of demerger of Indian company.Transfer of shares in case of demerger / amalgamationTransfer in case of a firm/prop. concern succeeded by a company subject to conditions.Transfer by way of conversion of bonds/debenture into shares.

Year of chargeabilityCG is chargeable in the year in which the transfer of capital asset take place.The exception are provided in Sec. 45(2) , Sec. 45(5)

Computation of STCG-Section 48 Full value of consideration received or accruing Less Expenditure incurred wholly and exclusively in connection with such transferCost of acquisitionCost of improvement isGross short term capital GainLess : Exemption u/s 54B/54D/54G is Net Short Term Capital Gain which is taxable..

Computation of LTCG- Sec 48Full value of consideration received or accruing Less :Expenditure incurred wholly and exclusively in connection with such transferIndexed cost of acquisitionIndexed cost of improvement is Gross Long Term Capital GainLess:Exemption available u/s 54/54B/54D/54EA/54EB/ 54EC/54F/54G is Net Long Term Capital Gain which to be taxed.Full Value of ConsiderationIt is the entire amount or the aggregate amount for which a capital asset is transferred. In case of an exchange of an asset, it will be the market value of the asset transferred. Exceptions:Sections 45(2), 45(3) and 45(4) specifies full value of consideration in certain special cases mentioned in those section.Expenditure incurred wholly & exclusively in connection with transfer..The expenses need not necessarily to be incurred prior to passing of title or in the P.Y. in which the Capital Gain is taxed.Such expenses must not have been claimed as deduction under any provision of the Act.Some examples of expenditure allowable are Brokerage paid for arranging the deal , Advertisements, Litigation expenses Expenses on registration charges, stamp duty .

Cost of AcquisitionPrice paid by a person to acquire an asset; and Expenses connected with the acquisition of asset like,Brockerage, stamp duty, advt, legal expenses, interest on loan.Exceptions : sec. 49(1), 49(2), 49(2A),50A, 55(2), 55(3).

Cost of Acquisition to previous owner sec.49(1).Cost of acquisition & improvement to previous owner will be deemed to be cost of acquisition and improvement if the asset is acquired by the following mode of transfer:By succession, inheritance etc.By distribution of an asset by liquidationUnder a gift/willOn partial/total partition of HUF

Cost of Acquisition in the case of specified securities mentioned in 17(2)(iiia) - Section 49(2B)In such cases the cost of acquisition of shares will be deemed to be the fair market value of such shares on the date of exercise of option.

Cost of Acquisition of self generated Capital Asset - Sec.55(2)(a)The cost of acquisition of certain self generated capital assets like - Good-will of a business, Tenancy Rights, Route Permits, Loom Hours, Right of manufacture, Produce or process any article or thing is the cost at which the same is purchased.Otherwise the cost of acquisition is nil.

Cost of Acquisition of Bonus/Right Shares - Section 55(2)(aa)Cost of acquisition of bonus share is nil.Cost of Right share is cost at which it is purchased.If the Right is renounced - the cost of Right is nil.If Right share is purchased by others the cost of share is purchase price + cost of purchase of Right

Cont..Cost of Acquisition of Assets acquired prior to 01-04-1981 - Section 55(2)(b)The cost of acquisition of any property acquired prior to 01-04-1981 will be the fair market value of that property as on 01-04-1981 at the option of the assessee .

The same rule applies to capital assets acquired by any of the modes specified in Section 49(1), if the capital asset is acquired by the previous owner prior to 01-04-1981. Capital Asset received on distribution of assets of company on its liquidationThe cost of acquisition in such cases, where the assessee is taxed to Capital Gain Tax u/s 46, will be the fair market value of the assets on the date of distribution- sec. 55(2)(b)(iii).

When the cost of asset of previous owner is not ascertainable - Section 55(3)In such cases the cost of property will be deemed to be the fair market value of the property on the date of property became the property of the assessee.

Cost of Improvement - Section 55(1)(b)It is capital expenditure incurred to make addition/alteration/renovation to the capital asset, after the same was acquired by the assessee. In case a property is acquired by the previous owner is the assessee prior to 01-04-1981,it means all capital expenditure incurred to make addition / alteration to the asset after 01-04-1981.

Cont.Cont..Cost of Improvement does not include any expenditure which is deductible under Business Income, Income from House property, Income from Other Sources. This means routine expenses on repairs, maintenance etc. cannot be a part of cost of improvement.

The cost of improvement in respect of assets like goodwill of a business, a right to manufacture, produce, or process any article or thing is deemed to be nil.

Indexed Cost of Acquisition - Indexed Cost of ImprovementIndexation of Cost of Acquisition is done as below :

[Cost of Acquisition] x [CII of the year of transfer ][CII of the year of acquisition on 01-04-1981 whichever is later]

Capital Gain on transfer of depreciable asset - sec. 50The CG arising out of transfer of block of assets is to be treated as Short Term Capital Gain.Capital Gain will arise when full value of the consideration received as a result of the transfer of any part or entire block of assets exceeds the cost of acquisition of that block of depreciable assets.The cost of acquisition of block of asset will be the aggregate of the W.D.V of the block at the beginning of the year, cost of any asset falling within the same block, acquired during the year and the expenditure in connection with such transfer.

CG on Slump sale sec. 50BSlump sale is defined in sec. 2(42C).Profit & Gains arising from slump sale is taxable as LTCG.If the undertaking/division is transferred is held < 36 months then the profit is taxable as STCG.The cost of acquisition of undertaking is the net worth of the division/undertaking.The net worth is defined in sec. 3(1)(ga) of the Sick Industrial Companies (special provision) Act. 1985.The assessee has to furnish a CAs report certifying the net worth of the undertaking along with the return of income.