Capital GainsCapital Gains

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Tax on Capital GainsEssential conditions

• Existence of a capital asset• Transfer of such asset during the Previous Year.• Profit and Gain must arise from such transfer

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What is a Capital Asset ?

• Capital Asset means property of every description. It may be ;– movable or immovable– tangible or intangible

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What is not a Capital Asset?Section 2(14)

• Any stock-in-trade, consumable stores or raw materials held for the purpose of business or profession.

• Personal effects (except jewellery and immovable property) held for personal use of the tax payer or any member of his family.

• Agricultural land in India subject to exception.

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Types of Capital Asset

• Short term Capital AssetSection 2(42A)• Long term Capital Asset Section 2(29A)

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Transfer of Capital AssetsSec.45(1)- r/w Sec.2(47)

• Transfer includes:– the sale, exchange or relinquishment of the asset– the extinguishment of any right therein– the compulsory acquisition thereof under any law – 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;

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Jewellery

Jewellery is a capital asset for the purpose of capital gains and includes ornaments made of Gold, Silver, Platinum or other such precious metals, precious or semi precious stones.

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When Agricultural Land is an Asset for the purpose of Capital Gain

• If the land is situated in any area within the jurisdiction of a Municipality , Corporation etc. which has a population of not less than 10000.

• If the land is situated in any area upto a distance of 8 Kms from the local bodies of metros or within such distance from any urban body as notified by the Central Govt.

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Short Term Capital Asset • Any capital asset held by the assessee for not more than

36 months immediately preceding the date of transfer.• The following assets held by the assessee for not more

than 12 months are to be treated as Short term Capital Asset :– Equity or preference shares held in a company

– Securities listed in a recognised Stock Exchange

– Units of the UTI or units of Mutual Funds specified u/s 10(23D)

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The Sale of Capital Asset

• Sale 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 1930

• Sale includes involuntary sale i.e. through a court decree.

• Sale includes Auction sale [161 ITR 209(SC)]Slide 6.1Slide 6.1

Exchange of Capital Asset

• It 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

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•

Relinquishment• It 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 one’s right in a certain portion of land or surrenders one’s right to build flats etc.

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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.

• No Capital Gain on any transaction which results in cessation etc. of capital asset itself (Vania Silk M.D P.Ltd 191 ITR 647 SC).

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Cont..

Continued...

• Examples :– Compensation for termination of a lease or

cancellation of one’s right to acquire a property.– Reduction in face value of shares results in

extinguishment of rights in shares (Anarkali Sarabhai P.Ltd 224 ITR 422 SC).

– Redemption of preference shares by a company involves transfer.

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Compulsory Acquisition of Capital Asset

• Compulsory 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.

• Examples :– Acquisition of land under Land Ceiling Act and

Other Acts of the State.– Pre-emptive purchase by the I.T. department.

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Section 45(1A)With effect from 01-04-2000

• 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, the profits or gain arising from such transaction will be taxed under the head ‘Capital Gains’.

• The Capital Gains will be charged in the year in which the money or other asset is received.

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Section 45(2) r/w sec.2(47)(iv)

• When a person converts his capital asset to stock-in-trade of a business carried on by him, such transaction is treated as transfer for the purpose of Capital Gain Tax.

• In such cases Capital Gain will arise in the year in which the converted asset is sold or transferred.

• For the purpose of computation of Capital Gain, the fair market value of the asset, as on the date of such conversion shall be deemed to be full value of consideration of the asset.

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Section 45(2A)Transfer of Demat Shares

• C.G to be taxed in the hands of beneficial owner• FIFO method to be adopted for the purpose of cost

of acquisition• FIFO to ascertain type of asset-whether long term

or short term• Circular No 768 dt 24.6.88

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Section 45 (3)

• CG will arise from a transfer of a capital asset individually held by the partner to the firm/AOP by way of capital contribution or otherwise.

• CG is chargeable in the previous year in which such transfer takes place.

• Full value of consideration received will be the amount recorded in the books of A/c of the firm.

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cont. 45(3)-Illustration.• ‘A’ purchased a flat in the P..Y. 91-92 for Rs.2,00,000/-

and became a partner of the firm ABC in the P.Y.98-99 and introduced his flat as his capital contribution to the firm.

The market value of the flat in the P.Y. 98-99 was Rs.10,000/- but the value of the flat recorded in the books of A/c is recorded at Rs.8,00,000/-.

In the case the capital Gain will be Rs.8,00,000/- as reduced by indexed cost of the flat and the capital gain is chargeable to tax in the A.Y. 99-2000 relevant to the P.Y.98-99

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Section 45(4)• CG will arise from distribution of partnership

assets to the individual partners of the firm on the dissolution & otherwise

• The Capital Gain tax is chargeable to the firm/AOP.

• The Capital Gain tax will be chargeable to the P.Y. in which such transfer took place

• The market value of the asset on the date of such transfer will be deemed to be full value of the consideration.

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Section 45(5) CG on any asset compulsorily acquired under any law

of the land.

• CG assessable in the P.Y.in which the initial compensation is first received and not in the year in which the transfer of asset took place

• Indexation for the purpose of calculation of cost of asset will be done till P.Y. of compulsory acquisition.

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Cont..45(5)• The enhanced compensation received will be chargeable as

Capital Gain in the P.Y. in which the same is received by the assessee. The cost of the acquisition will be deemed to be nil

• If the person whose property was acquired dies before the receipt of enhanced compensation and the same is received by his legal heir or some other person, the enhanced compensation will taxable as CG gain in the hands of that person in the year of receipt.

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Transaction not treated as Transfers-Sec. 47

• Transfer on partition/partial partition of HUF.• Transfer under gift of will• Transfer by a company to its’ subsidiary

company and vice-a-versa. Subject to certain conditions.

• Transfer on amalgamation of an Indian company.

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Transaction not treated as Transfers-Sec. 47-cont

• Transfer in a case of demerger of Indian company.

• Transfer of shares in case of demerger / amalgamation

• Transfer in case of a firm/prop. concern succeeded by a company subject to conditions.

• Transfer by way of conversion of bonds/debenture into shares.

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Year of chargeability

• CG 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)

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Computation of STCG-Section 48

• Full value of consideration received or accruing • Less

– Expenditure incurred wholly and exclusively in connection with such transfer

– Cost of acquisition

– Cost of improvement is

• Gross short term capital Gain• Less : Exemption u/s 54B/54D/54G is Net Short

Term Capital Gain which is taxable..Slide 6.1Slide 6.1

Computation of LTCG- Sec48.

• Full value of consideration received or accruing • Less :

– Expenditure incurred wholly and exclusively in connection with such transfer

– Indexed cost of acquisition– Indexed cost of improvement is

• Gross Long Term Capital Gain• Less: Exemption available u/s

54/54B/54D/54EA/54EB/ 54EC/54F/54G is Net Long Term Capital Gain which to be taxed.

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Full Value of Consideration

• It 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.

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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 .

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Cost of Acquisition

• Price 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).

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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 liquidation

– Under a gift/will

– On partial/total partition of HUFSlide 6.1Slide 6.1

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.

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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.

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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

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Cont..

Illustration..cont.

• Mr. X holds 100 shares in M/s ABC Ltd. The Company offers him to buy 100 shares at the rate of Rs. 50 per share :

• If Mr. X buys the shares the cost of 100 shares will be Rs. 5000/-.

• If Mr. X renounces his rights in favour of Mr.Y and gets Rs. 1000/- for renouncement , the Capital Gain will be Rs. 1000/-., the cost of “Right” being nil.

• If Mr. Y subscribes to the Right Issues the cost of 100 shares to him will be Rs.5000/- + Rs.1000/-=Rs. 6000/-

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• .

Capital Gain on transfer of depreciable asset - sec. 50

• The 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.

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Cont...

Cont..

• 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.

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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.

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Capital Asset received on distribution of assets of company on its liquidation

• The 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).

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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.

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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 assesse

• 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.

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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.

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Indexed Cost of Acquisition - Indexed Cost of Improvement

• Indexation 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]

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CG on Slump sale sec. 50B

• Slump 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.Slide 6.1Slide 6.1

Cont.

Cont.

• 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 CA’s report certifying the net worth of the undertaking along with the return of income.

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