Capital Gains By R.

Devarajan Additional Director, ICAI

Charging section

Section 45 Any profits or gains arising from the transfer of a capital asset Save as otherwise exempted Chargeable as capital gains Deemed as income of the previous year in which the transfer takes place

Capital asset
Section 2(14) Property of any kind held by an assessee Whether or not connected with his business or profession Excludes
Stock-in-trade, consumable stores or raw materials held for the purposes of the business

 Personal effects i.e. movable property including wearing apparel and furniture held for personal use by the assessee or any members of his family dependent on him but excludes (a) Jewellery (b) Archaeological collection (c) Drawings (d) Paintings (e) Sculptures (f) Any work of art

 Explanation defines jewellery Mrs. X, a lady of affluent means ordered stitching of a costly dress wherein diamonds were sewn in. The dress cost her Rs.1 lakh. Subsequently a friend of her took a fancy for the dress and gave Rs.2 lakhs for the dress. Mrs. X contends that the surplus of Rs.1 lakh arises out of disposal of personal effect.

 Excludes rural agricultural land i.e. land not situate

In a municipality or a cantonment board and which has a population of not less than 10,000 In any area within a distance of not more than 8 km. from the local limits of any municipality or cantonment board

Short-term capital asset

Capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer For company shares, securities listed in a recognised stock exchange, units of Unit Trust of India, 10(23D) units of mutual fund, zero coupon bonds the period will be 12 months

Determination of the holding period

Explanation 1 gives 10 specific instances for determining holding period A long-term capital asset is a capital asset which is not a short-term capital asset

Relevance of long-term and short-term capital assets Short-term capital gains Short-term capital loss Long-term capital gains Long-term capital loss

Transfer
Section 2(47) Transfer in relation to a capital asset, includes (i) 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) 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; (iva) the maturity or redemption of a zero coupon bond; or

(v) 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

(vi) Any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enable the enjoyment of, any immovable property.

Insurance monies or other assets received section 45(1A)

Notwithstanding anything contained in sub-section (1) Money or other asset received under an insurance from an insurer On account of damage to or destruction of any capital asset As a result of the natural calamity mentioned

 Any profits or gains arising from the receipt of such money or other asset Shall be chargeable in the year of receipt The money or the market value of the asset receive would be the consideration

Case study
A purchased a house for Rs.5 lakhs in 1998. In 2006 the house was destroyed by fire. A received insurance compensation of Rs.25 lakhs. The insurance company took away the salvage valued at Rs.1 lakh. What are the tax implications?

Case study
A newspaper company distributes its newspaper in a plane to different places. The plane is destroyed and the insurance company replaces the plane. There is no other plane with the company. Discuss the tax implications. The plane is a depreciable asset.

Case study
A newspaper company has 10 planes whose WDV is Rs.20 crores. One plane is destroyed and Rs.15 lakhs is received from the insurance company. What is the tax treatment?

Case study
In April 2000 A acquired a flat in Delhi in 1999 from the Delhi Development Authority under self financing scheme for Rs.2,75,000. In December, 2006 A sold this flat to B for Rs.20 lakhs under power of attorney. The Assessing Officer wants to bring the capital gains to charge in the hands of A. A contends that a transfer of immovable property is complete only on registration of the conveyance deed and hence he cannot be charged to capital gains.

Case study
Z is a coparcener in a HUF along with his father and two brothers. The HUF has an ancestral house costing Rs.4 lakhs (Fair market value on 1.4.81 being Rs.8 lakhs). Z relinquished his right in the house on 1st June 2006, fair market value of the house on that date being Rs.24 lakhs. The Assessing Officer wants to tax 1/4th of Rs.20 lakhs being the difference between the value on the date of relinquishment and cost of acquisition in the hands of Z. Advise.

Case study Section 45(2)

A converts his plot of land purchased in the year 2000-01 for Rs.50,000/- into stock in trade on 31st March, 2004. The fair market value on 31st March 2004 was Rs.1,80,000/- The stock in trade was sold for Rs.3,00,000/- in the month of January' 2006. Discuss the tax implications with particular reference to indexation and the year of chargeability of capital gain.

Case study Section 45(3)

A purchased a building on April 3, 2003 for Rs.1 lakh. On January 1, 2006 he introduced the above building in a partnership firm, in which he is becoming a partner, as his share of capital. The market value of the building as on January 2005 is Rs.10 lakhs, whereas in the books of the firm the amount credited to his capital is only Rs. 7 lakhs. The Assessing Officer wants to charge the capital gains on Rs.9 lakhs being the difference between the market value and the cost of acquisition. Can he do so?

Case study Section 45(3)

X, carrying on business on sole proprietary basis withdraws goods costing Rs.50,000/from the business and introduces the same by way of his capital as partner in a firm . The firm credited X's account with Rs.75,000/-. Will there be any capital gain? What will happen if such goods are sold by the business for Rs.1 lakh.

Case study Section 45(4)

ABC & Co., is dissolved . The building belonging to the firm which stood at Rs. 2 lakhs in the books of the firm was taken over by partner A at the same value. The market value of the building was Rs.10 lakhs. Discuss the tax effect. Will your answer be different if stock is trade is taken over by the partner?

Case study Section 45(4)

A firm distributes capital asset to a partner on his retirement. Discuss whether the provisions of section 45(4) will be attracted. If the retirement does not result in dissolution whether the principle of ejusdem generis would be applicable?

Case study Section 45(5)

A's house was compulsorily acquired by the Government for defence purposes in January, 2005. The compensation of Rs.3 lakhs was paid in April 2006. The original cost of the house is Rs.1 lakh acquired in June 2000. Discuss the question of indexing the cost. Will it be the year of acquisition or the year in which the compensation is received?

Case study Section 45(5)Explanation (i)

A's building was acquired for Rs.2 lakhs by the Government by way of compulsory acquisition in January, 2004. A was aggrieved with the amount of compensation and he went to the court of law which awarded an enhancement of Rs.1 lakh. This compensation was received in January 2006. For this purpose A spent Rs.5,000/- as legal expenses. Will you allow the legal expenses as a deduction?

Case study Section 45(5) Explanation (iii)

A piece of land, owned by Mr. Y, was acquired by the Government under a law. The government paid Rs.50,000 as compensation for the land but Mr. Y was not satisfied with it. Hence, he filed a suit for the payment of compensation at the market rate. During the pendency of the suit Mr. Y expired and later on his son Z received Rs.40,000 as further compensation. Mr. Z claims that he is not liable to pay tax on the amount of compensation received by him as successor. Is the claim tenable?

Case study Section 46(2)

From the following information compute the amount of capital gains under section 46(2): (i) The share holder holds 20% of the total shares in the company under liquidation. (ii) Indexed cost of acquisition of shares Rs.2,00,000. (iii) Received assets worth Rs.4,00,000 on its liquidation. (iv) Accumulated profits of the company before distribution Rs.5,00,000.

Case study Section 47

On 1.4.2005 Mr. A an individual transferred his self acquired land (long term capital asset) to B company Pvt. Ltd. for a consideration of Rs.15 lakhs. The cost of such land to him was Rs.3 lakhs. B Co., Pvt. Ltd. has 100 % holding in C Co., Pvt Ltd. On 1.9.2005 B Co., Pvt. Ltd., transferred such land for a consideration of Rs.40 lakhs to C Co., Pvt. Ltd. On 31.3.2006 B Co. Pvt. Ltd., and C Co., Pvt., Ltd., go for amalgamation and a new company called D Co., Pvt. Ltd. comes into existence. The directors of BC&D Co., Ltd. are of the same family. On 1.7.2006 D Co. Pvt. Ltd. sold such lands for Rs.45 lakhs to an outsider. What will be the tax liability in the hands of A, B Co., D Co., Pvt. Ltd.

Case study Section 47

A is the holder of 10,000 shares in a company of the face value of Rs.10 each, their cost of acquisition in June, 2003 being Rs.60,000/- only. The company was amalgamated with another Indian company in October, 2005 and A was allotted 5 equity shares of Rs.10 each fully and one 14% debenture of Rs.100 fully paid in the amalgamated company in respect of every 10 shares held by him in the amalgamating company.

Case study Section 47(a)

B Co. Ltd. is a 100% subsidiary of A Co. Ltd. On 1.4.2003 A Co. Ltd. transferred a building to B Co. Ltd. for a consideration of Rs.4 lakhs. The cost of acquisition of such building to A Co. Ltd. was Rs.1 lakh. In April 2005 C Co. Ltd. acquired 40% stake in B Co. Ltd. Discuss the tax implications.

Case study Self generated goodwill, purchase and improvement of goodwill

A started a provision store in 2003. The business picked up very well. In 2006 A sold the business for Rs.10 lakhs, Rs.5 lakhs of which was payable towards goodwill. Discuss the tax effect. A purchased a business for Rs.10 lakhs out of which Rs.5 lakhs was for goodwill. After running the business for 5 years he sold the business for Rs.50 lakhs out of which 10 lakhs was for goodwill. Discuss the tax effect.

Section 49
Cost of acquisition (COA) Cost to previous owner is COA in the case of acquisition of asset by
gift, will, inheritance, partition of HUF amalgamation of companies/banking companies

Cost incurred for acquisition will be COA in any other case.

Section 49
In case of acquisition of asset by the assessee or previous owner before 1.4.81, FMV of the asset on 1.4.81can be taken as COA, at the option of the assessee. In case shares of amalgamated co. are issued in lieu of shares of amalgamating company, cost of acquisition of shares held in the amalgamating company will be the COA of shares of amalgamated co. In case of conversion of bonds, debenture stock, deposit certificates into shares/ debentures of a co., cost of acquisition of bonds etc. will be the COA of shares or debentures.

Section 50B
Profits and gains from slump sale chargeable to tax as capital gains deemed to be income of the previous year in which the transfer took place. Net worth of the undertaking deemed to be the COA and COI Indexation provisions are not applicable. Net worth = aggregate value of total assets of the undertaking value of liabilities as appearing in the books.

Section 50B
Change in value of assets on account of revaluation not to be considered. Aggregate value of total assets = WDV of depreciable assets + Book value of other assets. Report of an accountant indicating the correctness of net worth to be filed along with ROI.

Section 50C
If consideration received on transfer of capital asset ( land or building or both) < value adopted or assessed by Stamp Valuation Authority, such value adopted is deemed as full value of consideration. If assessee claims that Stamp value > FMV and he has not gone for appeal, revision etc. before any court, then, the A.O. may refer the valuation to the valuation officer. If the value determined by the valuation officer > stamp value, then stamp value will be the consideration.

Section 51
Advance money received earlier on any previous occasion by the assessee and forfeited will be reduced from COA. However, advance money received and forfeited by the previous owner should not be reduced from COA.

Collaboration Contracts
Transfer to take place in the year when sale agreement is executed. Sale consideration in the hands of the owner is cash received + price of flat/ flats allotted. This would be available from the brochure/ allotment letter given by the builder to other buyers. Benefit under Section 54F should be available in respect of price of flat allotted.

Gift / Inheritance
Cost to previous owner is taken to be the cost of acquisition. Period of holding of previous owner is considered. Indexation benefit will be available only from the year in which the assessee first held the asset [for cost of acquisition]. In case of improvement, indexation benefit will be available from the year of improvement.

Sale of Agricultural Land

Rural agricultural land is not a capital asset. So, there would be no capital gains on sale of such land. Urban agricultural land is a capital asset. So, there would be capital gains on sale of the land. However, deduction under section 45B would be available if the assessee purchases another agricultural land within a period of 2 years. Capital gains on compulsory acquisition of urban agricultural land used for agricultural purposes by an individual or HUF assessee or his parents for atleast 2 years prior to such acquisition is exempt under section 10(37).

Set-Off of LTCL ( on which STT is paid)

As per the rules of set-off and carry forward, LTCL can be set-off against LTCG only. However, loss from an exempt source cannot be set-off against profit from a taxable source. Therefore, since LTCG on sale of shares subject to STT is exempt u/s 10(38), the LTCL on sale of such shares cannot be set-off against any other LTCG.