By: Ankit BansalSunir Parikh

Nayan BhatiaDeekshant Kumar

Conditions for Tax LiabilityCondition-

1There should be a Capital Asset.

Condition-2

The Capital Asset is Transferred by the assessee.

Condition-3

Such Transfer takes place during the previous year.

Condition-4

Any Profit or gain arises as a result of transfer

Condition-5

Such Profit or gain is not exempt from tax.

Meaning of Capital AssetCapital Asset means Any property held by assessee whether or not connected with his business or profession.

Types of Capital Assets

Period Of HoldingSituations How to Calculate Period of

holding

Capital Asset Acquired by way of gift, will, inheritance, etc.

The period of holding of previous owner should be included

Right Shares It should be counted from the date of allotment of right shares

Allotment of shares of amalgamated Indian Company against shares of amalgamating company

It should be counted from the date of acquisition of shares in the amalgamating company

Purchase of shares and security through broker

It should be counted from date of purchase by broker on behalf of investor

Shares purchased in several lots at different point of time

FIFO method should be adopted

Some Judicial PronouncementsShares in a company entitling right of occupancy in a

flat – Period of holding of 36 months or more should be considered for Long term capital asset – ITO v. Nayana K. Shah (2000) (Mumbai)

Transfer of land after construction of building - Separate sales consideration for land and building should be identified – CIT v. Vimal Chand Golecha (1993) (Rajasthan)

Sale of depreciable asset - Always treat as short termConversion of Stock-in-trade into capital asset –

Holding period would commence from the date when such stock was purchased and not when it is converted – Kalyani exports & Investments (p) ltd. v CIT (2001) (pune)

Transfer of Capital assetTransfer includes:SaleExchangeRelinquishment (e.g. Renouncement of Right

shares)Extinguishment

Insurance claim received –Vania Silk mills (p) ltd. v. CIT (1991) (SC) – Not taxable as there is no transfer

Reduction of share capital – Kartikeya V. Sarabhai v. CIT (1997) (SC) – Taxable in the hands of shareholder.

Transfer of immovable property.

Some Judicial PronouncementsTenancy rights – It is treated as transfer – A.

Gasper v. CIT (1979) (Calcutta)Forward contract - Not treated as transfer –

CIT v. Anglo India Jute mills co. ltd. (1981) (Calcutta)

Temporary transfer - Taxable – Rajendra Mining v. CIT (1961) (AP)

Cancellation of Agreement - Compensation received by buyer is for relinquishment of his right on property and hence taxable – K.R. Srinath v. CIT(2002)(Madras)

Revaluation of Asset – not a transfer –Well Packaging v. CIT (2003) (Madras)

Transactions not treated as transfer u/s 47

Transfer of capital asset under gift or will or irrevocable trust(except ESOPs).

Transfer of capital asset by holding company to its 100% subsidiary Indian Company and vice versa.

Distribution of capital asset in total or partial partition of Hindu undivided family (HUF)

Allotment of shares in amalgamated shares in lieu of shares held in amalgamating company

Transfer when Completed and Effective

Immovable property when documents are registered.

When documents are not registered following conditions should be satisfied There should contract in writing.Transferee has paid or is willing to pay

consideration.Transferee should have taken possession of

property.Movable Property –When property is

delivered

Computation of capital gainsShort-term capital gain

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

a. Expenditure incurred wholly and exclusively in connection with such transfer.

b. Cost of acquisitionc. Cost of improvement

3. From the following deduct the exemptions4. The balance amount is the short-term capital

gains.5. It will be taxable at normal slab rate.(except for

shares and securities u/s 111A)

Long-term capital gains1. Find out the full value of consideration2. Deduct the following

a. Expenditure incurred wholly and exclusively in connection with such transfer

b. Indexed cost of acquisitionc. Indexed cost of improvement

3. From the resulting deduct the exemptions4. Balancing amount is long-term capital gains5. It is taxable at flat rate of 20% (exempt for

shares and securities u/s 10(36))

Computation of capital gains

Full value of considerationIn general terms consideration means value

received or receivable by the transferor in lieu of assets, which he has transferred.

Following are some exceptional situations.Situations Full value of considerations

Money or assets received from insurance company.

Value of money or FMV of Assets

Conversion of capital asset into stock in trade

Fair market value of capital asset on date of transfer

Transfer of capital asset by partner in his firm

Amount recorded in the books of accounts of firm

Transfer of capital asset by firm to his partners on dissolution

FMV on the date of transfer

Expenditure on TransferSuch expenditure should be incurred wholly and

exclusively in connection with such transfer- Sita Nanda v. CIT (2001) (Delhi ).

Expenses after passing of title can be deductible CIT v. P. rajendran (1981) )(Karnataka)

Payment to co – operative society to get NOC- Damodar nagalia v. CIT (2007) (Mumbai)

Payment to tenantNot deductible -CIT v. T Srinivas Rao (1987) (AP)Deductible - CIT v. A venkataraman (1982)

(Madras)Expenditure for enhancement of compensation –

CIT v. P.rajendran (1981) (Karnataka).Repayment of loan or discharge of Mortgage.

Cost of acquisitionGround rent – CIT v. Mithlesh Kumari (1973)

(Delhi)Interest on money borrowedLitigation expenses for registration of sharesEstate duty – S. Valliammai v. CIT (1981)

(Madras)Mortgage - CIT v. RoshanBabu Mohammed

Hussein merchant (2005) (Mumbai)Conversion of agricultural land into non

agricultural land. Meccanne Industries Ltd. V. CIT (2002) (Madras)

Cost of improvementExpenditure incurred before 1st April, 1981

not considered.Double deduction not permitted.In case of gift received and later on sold the

for cost of acquisition the year for indexation would be the one when seller becomes buyer (sec 48),however for cost of improvement year for indexation would be the year of improvement (sec 49)