CAPITAL GAINS

CHARGEABILITY: [SEC.45] Any profit or gain arising from the sale or

transfer of a capital asset is chargeable to tax under the head capital gains.

It is deemed to be the income of the previous year in which the transfer of the capital asset takes place.

Capital gains arising on the transfer of immovable property are chargeable to tax in the previous year,in which the effective transfer of title is conveyed or registered.

CAPITAL ASSET 2(14) includes…..

Defined to include property of any kind, whether fixed or circulating,movable or immovable,tangible or intangible.

The following assets are,however excluded from the definition from capital asset:

Stock in trade,consumable stores or raw materials held for the purpose of business.

Personal effects of the assessee (but doesn’t include jewellary,archaeological collections,drawings,paintings,sculptures or any work of art).

Agricultural land in india provided it is not situated –o In any area within jurisdiction of a municipality or a

contonment board having a population of 10,000 or more; or

o In any notified area; 6.5%gold bonds1977 or 7% gold bonds,1980 or national

defence gold bonds issued by central govt . Special bearer bonds,1991;and Gold deposit bonds issued under the gold deposit scheme.

AGRICULTURAL LAND:

municipalityLAND

SHORT TERM AND LONG TERM CAPITAL ASSETS “Short term capital assets” means a capital

asset held by the assessee for not more than 36 months, immediately prior to its date of transfer. However, the following assets are treated as short term assets if they are held for not more than 12 months, they are: Equity or preference shares in a company. Securities like debentures, government securities

listed in a recognized stock exchange in India. Units of UTI and Units of mutual funds.

An asset other than a short-term capital asset is regarded as a “long term capital asset”.

SHORT TERM CAPITAL GAIN LONG TERM CAPITAL GAIN

1)Find full value of consideration

 2)Deduct the followings. a)    Expenditure incurred

wholly and exclusively in connection with such transfer.

b)   Cost of acquisition. c) Cost of improvement  3) From resulting sum

deduct exemption provided by u/s54 B, 54 D, 54 G, 54GA

4) The balancing amount is Short Term Capital Gain. 

1)   Find full value of consideration

2)   Deduct the followings a) Expenditure incurred

wholly and exclusively in connection with such transfer.

b) Indexed Cost of acquisition.

c)  Indexed Cost of improvement.

3)  From resulting sum deduct the exemption provided by section 54, 54 B, 54 D,

54 EC, 54 F, 54 G, 54 GA 4) The balancing amount is

Long Term Capital Gain/Loss.

Transfer 2(47) includes:

Sale; Exchange; Relinquishment of right;(sale of rights to buy

right shares); Extinguishment of asset;(buy back of shares); Compulsory acquisition; Maturity or redemption of zero coupon

bonds(w.e.f a.y2006-07) In a case where the asset is converted by the owner

thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment.

Deemed transfer:

But in case of immovable property (u/s 53A of transfer of property act,it shall be deemed to be transfer when)-

There is a contract for consideration It should be in writing It should be signed by the transferor Should pertain to transfer of immovable property Transferee should have taken possession Transferee should be ready& willing to perform the

contract Any transaction which has the effect of

transferring the enjoyment of,any immovable property(member of a co-ooperative society)

Transactions not included in transfer:[SEC 47]

Any distribution of capital assets on the total or partial partition of a HUF.

Any transfer of a capital asset under a gift or will or an irrevocable trust.(not applicable for shares,debentures or warrants by a company to its employees)

Distribution of assets in kind by a company to its shareholders on its liquidation

Any transfer of a capital asset by a company to its wholly owned Indian subsidiary company.

Any transfer of a capital asset by a wholly owned Indian subsidiary company to its Indian holding company .

Any transfer in a scheme of amalgamation of a capital asset by a amalgamating company to the amalgamated company,if the latter company is an Indian company.

Any transfer in scheme of amalgamation of a banking company with a banking institution.

Any transfer in a demerger of a capital asset by the demerged company to resulting company provided that resulting company is an Indian company.

Any transfer of shares held in an indian companyby demerged foreign company to the resulting foreign company if :

The shareholders holding not less than three-fourth in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company;and

Such transfer doesnot attract capital gains in the country,in which the demerged foreign company is incorporated.

 Any transfer, in a scheme of amalgamation of a capital asset being a share held in an Indian company, by the amalgamating foreign company to the amalgamated foreign company, if-•       At least twenty-five per cent of the

shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company, and

•       Such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated.

Any transfer in a business reorganisation, of a capital asset by the predecessor co-operative bank to the successor co-operative bank.

Any transfer by a shareholder, in a business reorganisation, of a capital asset being a share or shares held by him in the predecessor if the transfer is made in consideration of the allotment to him of any share or shares in the successor .

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.

 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—•  The transfer is made in consideration of the allotment

to him of any share or shares in the amalgamated company, and

•   The amalgamated company is an Indian company.

Any transfer of a capital asset, being bonds or  Global Depository Receipts referred to in sub-section (1) of section 115C, made outside India by a non-resident to another non-resident.

 Any transfer of agricultural land in India effected before 1/03/1970.

 Any transfer by way of conversion of  bonds or debentures, debenture-stock or deposit certificates in any form, of a company into shares or debentures of that company.

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, National Archives or any such other public museum or institution as may be notified by the C.G in the Official Gazette to be of national importance or to be of renown throughout any State or States.

Any transfer by way of conversion of bonds referred to in clause (a) of sub-section (1) of  section 115AC into shares or debentures of any company.

 Any transfer made on or before the 31/12/1998 by a person (not being a company) of a capital asset being membership of a recognised stock exchange to a company in exchange of shares allotted by that company to the transferor.

 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 Act, 1985 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  section17 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.

Any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, or any transfer of a capital asset to a company in the course of  demutualisation or corporatisation of a recognised stock exchange in India as a result of which an association of persons or body of individuals is succeeded by such company :

                Provided that—•        All the assets and liabilities of the firm or of the association

of persons or body of individuals relating to the business immediately before the succession become the assets and liabilities of the company;

•       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 the succession;

•       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

•       The aggregate of the shareholding in the company of the partners of the firm is not less than fifty per cent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession

Any transfer of a capital asset or intangible asset by a private company or unlisted public company to a limited liability partnership or any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into a limited liability partnership in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008 :

                Provided that—

•       All the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the limited liability partnership;

•       All the shareholders of the company immediately before the conversion become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in the limited liability partnership are in the same proportion as their shareholding in the company on the date of conversion;

•       The shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the limited liability partnership;

•       The aggregate of the profit sharing ratio of the shareholders of the company in the limited liability partnership shall not be less than fifty per cent at any time during the period of five years from the date of conversion;

•       The total sales, turnover or gross receipts in the business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed sixty lakh rupees; and

•        No amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of three years from the date of conversion.

 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—•       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;

•       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 remain as such for a period of five years from the date of the succession; and

•       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;

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 SEBI w.e.f a.y1999-2000 & from 2003-04 RBI.

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

PROVISIONS OF SEC 112

Section 112 provides an alternative option for charging long term capital gains to tax, if the following conditions are satisfied :• The taxpayer is an individual, HUF, company or any

other person(may be resident or non resident)• The asset is a long term capital asset• The long term capital asset is - a security listed in any recognised stock exchange in

India or, - a unit of UTI or a mutual fund(whether listed or not)

If the conditions are satisfied, then the other option is to charge the capital gains at the rate of 10% without taking the benefit of indexation in the cost of acquisition.

The tax payable by the assessee will be lower of 20%(+ surcharge)on the capital gain calculated giving benefit of indexation or @10% without the benefit of indexation, whichever is lower.

In the case of listed bonus shares, listed debentures and listed bonds, Option u/s 112 will be better.

Long term capital gains can avail the unavailed basic exemption limit.

Insurance claim:

Capital asset destroyed in fire Insurance claim received against the

destruction of the said asset Whether insurance claim liable to tax

as capital gains ? Vania Silk Mills (1991) 191 ITR 647

(SC) Section 45(1A) inserted wef 1-4-2000

Section 45(1A)

Profit or gains arising from receipt of money or other asset from an insurer on account of damage or destruction of Capital Asset shall be deemed to be income & chargeable to tax under the head Capital Gains.

Money received or Fair Market Value of the asset received shall be treated as the Full Value of consideration in the year of receipt.

Conversion of capital asset into stock in trade [Section 45(2)]: Fair Market Value of the asset on the

date of conversion to be deemed to be full value of consideration.

Capital Gains deemed to be income of the year in which such stock in trade is sold.

In such a case both capital gains and business income arises.

Transfer of security in demat form sec 45(2A) It is applicable when shares are

transferred in demat form. Beneficial owner of shares/securities

is chargeable to tax. For computing capital gain,cost of

acquisition and period of holding of any security shall be determined on the basis of first-in-first-out method(FIFO).

Transfer by Partner to the Firm [Section 45(3)]:Transfer of capital assets by partner to

the firm as capital contribution or otherwise.

Amount recorded in the books of accounts of the firm to be treated as full value of the consideration.

Capital Gains taxable accordingly.

Transfer by Firm to the Partner [Section 45(4)]:

Transfer by firm to the partner by way of distribution of capital asset on dissolution of firm or otherwise shall be chargeable to tax in the hands of the firm.

Fair Market Value of the asset to be deemed to be the full value of consideration.

Compulsory acquisition 45(5):Transfer of asset is by way of compulsory

acquisition under any law. Consideration is approved or determined

by central govt or RBI.Year of chargeability: year in which

compensation is received.Indexation facility is available till the year

of acquisition.

Enhanced compensation

It is taxable in the year of receipt.Cost of acquisition is taken as nil.Litigation expenses incurred for

getting the enhanced compensation are deductible as expenses on transfer.