Capital_Gains_Theory.pdf

www.badlanionline.com CA - IPCC

Income Tax AY 14-15 Chapter : Capital Gains

Pag

e1

Section 45(1) Charging Section Any profits or gains arising from the transfer of a capital

asset effected in the previous year shall be deemed to be

the income of the previous year in which the transfer

took place.

Section 2(14) Capital Assets Capital asset means property of any kind held by an assessee, whether or not connected with his business or

profession,but does not include:

1. Stock in trade Any stock-in-trade, consumable stores

or raw materials held for the purposes of his business or

profession shall not be considered to be capital asset.

2. Personal movable effects

Personal effects, that is to say, movable property

(including wearing apparel and furniture) held for

personal use by the assessee or any member of his family

dependent on him, but excludes (a) jewellery;

(b) archaeological collections;

(c) drawings;

(d) paintings;

(e) sculptures; or

(f) any work of art.

Jewellery includes (a) ornaments made of gold, silver, platinum or any

other precious metal or any alloy containing one or more

of such precious metals, whether or not containing any

precious or semi-precious stone, and whether or not

worked or sewn into any wearing apparel;

(b) precious or semi-precious stones, whether or not set

in any furniture, utensil or other article or worked or

sewn into any wearing apparel.

Accordingly, items of personal use like household

furniture, utensils, TV, fridge, sofa, personal motor

car etc. shall not be considered to be Capital Assets, and any amount received on their sale shall be

considered to be a capital receipt not chargeable to tax

under any head.

3. Agricultural land

Agricultural land in India in rural area shall not be

considered to be capital asset. If the land is in the urban

area, it will be considered to be capital asset.

4. Gold Deposit Bonds

Gold Deposit Bonds issued under the Gold Deposit

Scheme, 1999 notified by the Central Government.



Pag

e2

5. Special Bearer Bonds, 1991

Special Bearer Bonds, 1991, issued by the Central

Government.

Example:If a dealer of Maruti cars has sold ten motor cars and there is a gain of `1,00,000, it will be considered to be income under the head business/profession and not under the head

Capital Gains.

Example: Mr. Neeraj Kumar purchased one motor car for his personal use and subsequently

it was sold by him, in this case it will not be considered to be capital asset.

Example :Mr. Abhishek Bhasin purchased one fridge for his personal use but subsequently it

was sold by him, it will not be considered to be capital asset.

Example: Mr. Aman Sehgal purchased silver utensils for his personal use and subsequently

these utensils were sold by him, it will not be considered to be capital asset because silver

utensils can not be considered to be jewellery and further they are the items of personal use,

as per the decision in CIT v. Benarshilal Katarika

Whether capital gain arise on the sale of silver utensils.

In CIT v. Benarshilal Katarika, during the previous year relevant year to assessment year

1977-78, the assessee sold 49.521 kgs. of silver utensils which were in the form of thalis,

katoris, tumblers, etc. The assessee contended that the silver utensils were for personal use

and they were not capital assets within the meaning of section 2(14) of the Income Tax Act,

1961 and thus the profit on sale of these utensils was not liable to capital gains tax. The ITO

rejected the assessees claim that the silver utensils were personal effects

The high court held that silver utensils, consisted of thalis, katoris, tumblers, etc. which are

meant for personal use although they may not be used daily. Whether silver utensils

constitute personal effects depend not merely on the financial status of the assessee. The main

factor in deciding whether an article constitute personal effect is the nature of the article.

Therefore, in the present case, silver utensils constitute personal affects and no capital gains

will arise on the sale of silver utensils.

Whether capital gain arise on the sale of gold/silver coins.

H.H. Maharaja Rana Hemant Singh Ji

In this case the assessee sold 4825 gold sovereigns, 7,90,440 old silver rupee coins and silver

bars weighing 2,54,174 tolas and claimed that no capital gains arose as the aforesaid items

fell outside the definition of capital assets. The assessee claimed that these articles formed

personal effects as they were used by the assessee and his family for personal use as it was

evident that they were used for the purpose of Mahalaxmi Puja and other religious festivals in

the family. His contention was rejected by the appellate authorities and the High Court. The

Supreme Court also decided the case against the assessee as according to it, these articles did

not constitute personal effects. The Court held that only those effects can be legitimately be said to be personal which pertain to the assessees person. In other words, an intimate connection between the effect and the person of the assessee must be shown to exist to render

them personal effects. The Court said that the silver bars or bullion can by no stretch of imagination be deemed to be effects meant for personal use. According to the Supreme Court, the gold sovereigns, silver coins and silver bar have been used for puja of the deities as

a matter of pride or ornamentation but it is difficult to understand how such use can be

characterized as personal use. Therefore, the capital gains are taxable in the present case.

H.H. Maharani Usha Devi v CIT (1982) 133 ITR 43 (MP)



Pag

e3

Even if personal effects were occasionally used as and when dinners were arranged for the

family and guests, it will still be a personal effect and occasional use shall not be taken into

consideration.

Example: If any person has movable items in his business or profession, these items shall be

considered to be capital assets

Example: Mr. Mukesh has one motor car in the use of his business and subsequently this

motor car was sold by him, it will be considered to be capital asset and capital gains shall be

computed.

Example: If personal effects are immovable, they will be considered to be capital assets. e.g.

A house meant for assessees own residence shall be considered to be capital asset. Example: Rohit has agricultural land in the rural area which was purchased by him for Rs 5,00,000 and it was sold by him for Rs 11,00,000, in this case capital gain shall not be computed, but if the land is in Delhi, in this case capital gains shall be computed.

Example: If the agricultural land is in rural area outside India, it will be considered to be

capital asset or in other words agricultural land situated outside India is capital asset in all

cases.

Example:Mr. Vipul has agricultural land in the rural area in India which was sold by him, in

this case there are no capital gains.

Example:Mr. Mukesh has one agricultural land in urban area in India which was

sold by him, in this case capital gains shall be computed.

Example: Mr. Yogesh has agricultural land in rural area which is six kms away from

Delhi municipality and the Government has notified it to be urban area, in this case it will be

considered to be capital asset.

Example: Mr. Sunny who is resident and ordinarily resident has sold one agricultural

land in rural area in Nepal, in this case it will be considered to be capital asset because the

land is not situated in India. Section 2(47) Transfer Transfer includes:

a) The sale exchange or relinquishment of the assets, or b) Extinguishment of any right therein, or c) Compulsory acquisition under any law, or d) Conversion of capital asset into SIT, or e) Maturity of ZCB, or f) Any transaction involving the allowing the possession of any

immovable property to be taken or retained in part performance

of the contract referred u/s 53A of TPA, 1882, or

g) Any transaction(whether by way of becoming a member or acquiring shares in a co operative society, company etc) which

has the effect of transferring or enabling the enjoyment of any

immovable property.

Case Law: Redemption of preference shares by a company is a transfer

in the hands of shareholders. (ANARKALI SARABHAI VS CIT)

Section 47 Transactions

not regarded

as transfer

The following transactions will not be considered as transfer

and therefore, no capital gains will arise:-

(1) Any distribution of capital assets on the total or partial

partition of a Hindu Undivided Family.

(2) Any transfer of a capital asset under a gift or will or an

irrevocable trust.



Pag

e4

However, this clause shall not include transfer under a gift

or an irrevocable trust of a capital asset being shares,

debentures, or warrants allotted by a company directly or

indirectly to its employees under ESOP to its employees.

(3) Any transfer of a capital asset by a company to its

subsidiary company, if (a) the holding company or its nominees hold the

whole of the share capital of the subsidiary

company, and

(b) the subsidiary company is an Indian company.

The above exemption will not apply if a capital asset is

transferred as SIT after 29-2-88.

(4) Any transfer of a capital asset by a subsidiary company

to the holding company, if (a) the whole of the share capital of the subsidiary

company is held by the holding company, and

(b) the holding company is an Indian company.

>The above exemption will not apply if a capital asset is

transferred as SIT after 29-2-88.

(5) Any transfer, in a scheme of amalgamation, of a capital

asset by the amalgamating company to the

amalgamated company if the amalgamated company

is an Indian company.

(6) Any transfer, in a demerger, of a capital asset by the

demerged company to the resulting company, if the

resulting company is an Indian company.

(7) Any transfer of shares in the amalgamating company

by a shareholder, in a scheme of amalgamation, if (a) the transfer is made in consideration of the

allotment to him of shares in the amalgamated

company, except where the shareholder itself is

the amalgamated company and

(b) the amalgamated company is an Indian company.

(8) Any transfer or issue of shares by the resulting company

, in a scheme of demerger to the shareholders of

demerged company if the transfer or issue is made in

consideration of demerger of the undertaking.

(9) Any transfer in a scheme of amalgamation of shares held

in an Indian company by the amalgamating foreign

company to the amalgamated foreign company:

a) At least 25% shareholders of the amalgamating

foreign company must continue to remain shareholders of



Pag

e5

foreign amalgamated company.

b) Such transfer should not attract capital gains in the

country in which foreign amalgamating company is

incorporated.

(10) Any transfer in a scheme of amalgamation of shares

held in an Indian company by the demerged foreign

company to the resulting foreign company:

a) Shareholders holding not less than 75% value of

shares of the demerged foreign company must continue to

remain shareholders of foreign resulting company.

b) Such transfer should not attract capital gains in the

country in which foreign amalgamating company is

incorporated.

(11) Any transfer in a scheme of amalgamation of a

banking company with a banking institution.

(12) 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 Central Government.

(13) Any transfer by way of conversion of bonds or

debentures, debenture-stock or deposit certificates etc. of a company into shares or debentures of that

company.

(14) Any transfer of securities referred u/s 115AC by a Non

Resident to Non Resident. The transaction must be

made outside India.

(15) Any transfer of urban agricultural land in India before

01-03-70.

(16) Capital gain arising from the transfer of land under Sec

18 of SICA,1985 by a sick industrial company during its

SICK period.

Such transfer is made in the period commencing from

the PY in which the said company has become sick and

ending with the PY in which the entire net worth of such

company becomes equal to or exceeds the accumulated

losses.

(17) Any transfer of a capital asset by a firm to a company

as a result of succession of the firm by a company.

Provided that



Pag

e6

(a) all the assets and liabilities of the firm or of the

association of persons or body of individuals become the

assets and liabilities of the company.

(b) 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.

(c) the partners of the firm do not receive any consideration

other than by way of allotment of shares in the company.

(d) 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.

(18) If 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 (a) all the assets and liabilities of the sole proprietary

concern should become the assets and liabilities of the

company.

(b) the shareholding of the sole proprietor in the company is

not less than fifty per cent of the total voting power and

it should be maintained for a minimum period of five

years from the date of the succession and

(c) the sole proprietor does not receive any consideration or

benefit, in any manner, other than by way of allotment

of shares in the company.

(19) Any transfer of a capital asset or intangible asset by a

private company or unlisted public company to a

limited liability partnership as a result of conversion

of the company into a limited liability partnership. or,

Any transfer of shares held in the company by a

shareholder as a result of conversion of company

into LLP as per LLP Act, 2008

Provided that (a) All the assets and liabilities of the company immediately

before the conversion become the assets and liabilities

of the limited liability partnership;

(b) 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;

(c) The shareholders of the company do not receive any



Pag

e7

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;

(d) 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;

(e) The total sales, turnover or gross receipts in 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

(f) 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.

(20) Any transfer of a capital asset in a transaction of

reverse mortgage under a scheme made and notified

by the Central Government



Pag

e8

Section 2(42A) Short-term capital

asset

Short-term capital asset means a capital asset held by an assessee for not more than thirty-six months.

Provided that in the following cases the period shall be twelve months instead

of thirty-six months.

(i) A share held in a company (whether listed or not);

(ii) A unit of the Unit Trust of India or a unit of a Mutual Fund specified under

section 10(23D) (whether listed or not).

(iii) A zero coupon bond.

(iv) Any other security listed in a recognised stock exchange in India.

Section 2(29A) Long-term capital

asset

Long-term capital asset means a capital asset which is not a short-term capital asset.

Sec 48 Computation of

Capital Gain

Full Value of Consideration xxx

Less: Cost of Acquisition xxx

- Cost of Improvement xxx

- Exp wholly or exclusive in connection

With such transfer xxx

Capital Gain xxx

1st Proviso to Sec

48

Discussed in Classroom in Detail

2nd Proviso to

Sec 48

Indexation In case of long term capital gains, instead of cost of acquisition and cost of

improvement, indexed cost of acquisition and indexed cost of improvement

shall be taken into consideration.

Indexed cost of acquisition means the cost adjusted as per cost inflation index i.e.

ICOA =

ICOI =

Asset purchased before 01.04.1981

If any capital asset has been purchased or constructed before 01.04.1981, in that

case cost shall be considered to be the cost incurred or fair market value of the

asset as on 01.04.1981 whichever is higher and further indexed of 1981-82 shall

be used instead of the index of the earlier year.

3rd Proviso to

Sec 48

Indexation is not applicable in case of bonds or debentures except capital

indexed bonds.

5th Proviso to

Sec 48

No deduction of STT.

Section 45(1A) Capital Gains in

case of Insurance

Claims

If any person receives any money under an insurance claim on account of

damage or destruction of, any capital asset, because of (i) flood, typhoon, hurricane, cyclone, earthquake or other conclusion of nature

or

(ii) riot or civil disturbance or

(iii) accidental fire or explosion or

(iv) action by an enemy or action taken in combating an enemy (whether with or

without a declaration of war),

then, any profits arising from receipt of such money shall be chargeable to

income-tax under the head Capital gains and shall be deemed to be the income of such person of the previous year in which such money or other asset was

received and the amount so received shall be deemed to be the full value of the



Pag

e9

consideration.

Section 45(2) Capital Gains in

case of conversion

of capital assets

into Stock-In-

Trade

The profits or gains arising from the transfer by way of conversion by the owner

of a capital asset into stock-in-trade of a business carried on by him shall be

chargeable to income-tax as his income of the previous year in which such

stock-in-trade is sold or otherwise transferred by him and, for the purposes of

section 48, the fair market value of the asset on the date of such conversion or

treatment shall be deemed to be the full value of the consideration.

Section 45(2) is applicable only if the asset has been converted into stock-in-

trade w.e.f. 01.04.1984 onwards. If the conversion is prior to 01.04.1984, no

capital gains shall be computed as per Supreme Court decision in Bai Shirinbai

K. Kooka v. CIT (1962)(SC).

Section 2(22B) Fair Market Value, in relation to a capital asset, meansthe price that the capital asset would ordinarily fetch on sale in the open market on

the relevant date.

Section 45(2A) Capital gains in

case of transfer of

capital asset by a

depository

Where any person has had at any time during previous year any beneficial

interest in any securities, then, any profits or gains arising from transfer made by

the depository or participant of such beneficial interest in respect of securities

shall be chargeable to income-tax as the income of the beneficial owner of the

previous year in which such transfer took place and shall not be regarded as

income of the depository who is deemed to be the registered owner of securities

by virtue of section 10(1) of the Depositories Act, 1996, and the cost of

acquisition and the period of holding of any securities shall be determined on

the basis of the first-in-first-out method.

Section 45(3) Capital gains in

case of transfer of

a capital asset by a

person to a Firm,

Association of

Person or Body of

Individual

The profits or gains arising from the transfer of a capital asset by a person to a

firm or other association of persons or body of individuals in which he is or

becomes a partner or member, by way of capital contribution or otherwise, shall

be chargeable to tax as his income of the previous year in which such transfer

takes place and the amount recorded in the books of account of the firm,

association or body as the value of the capital asset shall be deemed to be the

full value of the consideration received or accruing as a result of the transfer of

the capital asset.

Section 45(4) Capital gains in

case of transfer of

a capital asset by

way of distribution

on the dissolution

of a firm etc.

The profits or gains arising from the transfer of a capital asset by way of

distribution of capital assets on the dissolution of a firm or other association of

persons or body of individuals or otherwise, shall be chargeable to tax as the

income of the firm, association or body, of the previous year in which the said

transfer takes place and the fair market value of the asset on the date of such

transfer shall be deemed to be the full value of the consideration received as a

result of the transfer.

Section 45(5) Computation of

capital gains on

compulsory

acquisition of a

capital asset

If any capital asset has been acquired compulsorily by the Government or other

similar agency, capital gains shall be computed in the year in which the asset

was acquired but capital gains so computed shall be taxable in the year in which

the compensation or the part of compensation is first received.

Enhanced Compensation

If the compensation is enhanced by the Court, Tribunal etc., such enhanced

compensation shall be the capital gains of the year in which the enhanced

compensation is received. The cost of acquisition and the cost of improvement

shall be taken to be nil.

Reduced Compensation

If the compensation is reduced subsequently by any Court etc., in such cases

capital gains shall be re-computed taking into consideration such reduced

compensation.

Death of the Transferor

It is possible that the transferor may die before he receives the enhanced

compensation. In that case, the enhanced compensation or consideration will be

chargeable to tax in the hands of the person who receives the same.



Pag

e10

Section 49 Ascertainment of

Cost in Specified

Circumstances

A person becomes the owner of a capital asset not only by purchase but also by

several other methods. Section 49 given guidelines as to how to compute the

cost under different circumstances.

(1) In the following cases, the cost of acquisition of the asset shall be deemed to

be cost for which the previous owner of the property acquired it. To this cost,

the cost of improvement to the asset incurred by the previous owner or the

assessee must be added:

(i) on any distribution of assets on the total or partition of a HUF;

(ii) under a gift will;

(iii) by succession, inheritance or devaluation;

(iv) on any distribution of assets on the liquidation of a company;

(v) under a transfer to revocable or an irrevocable trust;

(vi) under any transfer by a holding company to its 100% subsidiary company or

vice versa;

(vii) under any scheme of amalgamation by the amalgamating company to the

amalgamated Indian company;

(viii) by transfer of shares held in an Indian company in a scheme of

amalgamation by the amalgamating foreign company to the amalgamated

foreign company;

(ix) by transfer of capital asset by a banking company to a banking institution in

a scheme of amalgamation of the banking company with the banking institution;

(x) Under any such transfer of a capital asset in a business reorganization by the

predecessor co-operative bank to the successor co-operative bank;

(xi) under any such transfer by a shareholder in a business reorganization, of a

capital asset being a share or share held by him in the predecessor co-

operative bank if the transfer is made in consideration of the allotment to him of

any share or share in the successor co-operative bank;

(xii) on conversion of a company into an LLP;

(xiii) on succession of a firm or sole proprietorship concern by a company in a

business carried on by it, fulfilling the condition mentioned in section 47 (xiii)

and section 47 (xiv), respectively;

(xiv) by conversion by an individual of his separate property into a HUF

property, by the mode referred to in section 64(2).

The cost of acquisition of the asset is the cost for which the previous owner

acquired the asset as increased by the cost of any improvement of the assets

incurred or borne by the previous owner or the assessee, as the case may be.

Accordingly. section 2 (42A) provides that in all such cases, for determining the

period for which the capital asset is held by the transferee, the period of holding

of the asset by the previous owner shall also be considered.

Section 50B Capital gains in

respect of slump

sales

Any profits or gains arising from the stump sale effected in the previous year

shall be chargeable to income-tax as capital gains arising from the transfer of

long-term capital assets and shall be deemed to be the income of the previous

year in which the transfer took place. Short term capital gains-Any profits and

gains arising from such transfer of one or more undertaking held by the assessee

for not more than thirty-six months shall be deemed to be short-term capital

gains [Sub-section (1)].

(ii) The net worth f the undertaking or the division, as the case may be, shall be

deemed to be the cost of acquisition and the cost of improvement for the

purposes of sections 48 and 49 in relation to capital assets of such undertaking

or division transferred by way of such sale and the provisions contained in the

second proviso to section 48 shall be ignored [Sub-section(2)].

(iii) Every assessee in the case of slump sale shall furnish in the prescribed form

along with the return of income, a report of a chartered accountant indicating the

computation of net worth of the undertaking or division, as the case may be, and

certifying that the net worth of the undertaking or division has been correctly

arrived at in accordance with the provisions of this [Sub-section (3)].



Pag

e11

Explanation I to the section defines the expression "net worth" as the aggregate

value of total assets of the undertaking or division as reduced by the value of

liabilities of such undertaking or division as appearing in the books of account.

However, any change in the value of assets on account of revaluation of assets

shall not be considered for this purpose.

Explanation 2 provides that the aggregate value of total assets of such

undertaking or division shall be as follows :

(i) In the case of depreciable assets : the written down value of block of assets

determined in accordance with the provisions contained in sub-item of item

(i) of section 43 (6) ;

(ii) In case of capital assets in respect of which the whole of the expenditure has

been allowed or is allowable as a deduction undr section 35AD : Nil ;

(ii) For all other assets : Book value.

Section 50C Special Provision

for Full Value of

Consideration in

Certain Cases

(i) Where the consideration received or accruing as a result of transfer of a capital

asset, being land or building or both, is less than the value adopted or assessed

or assessable by any authority of a State Government (Stamp Valuation

Authority) for the purpose of payment of stamp duty in respect of such asset,

such value adopted or assessed or assessable shall be deemed to be the full value

of the consideration received or accruing as a result of such transfer [Sub-

section (1)].

(ii) Where the assessee claims before an Assessing Officer that the value so adopted

or assessed or assessable by the authority for payment of stamp duty exceeds

the fair market value of the property as on the date of transfer and the value so

adopted or assessed of assessable by such authority has not been disputed in any

appeal or revision or no reference has been made before any other authority,

court or High Court, theAssessing Officer amy refer the valuation of the capital

asset to a valuation officer as defined in section 2 (r) of the Wealth-tax SAct,

1957. Where any reference has been made before any other authority, Court or

the High Court, the provisions of section 16A (relating to reference to Valuation

Officer), section 23A (dealing with appealable orders before Commissioner

(Appeals), section 24 (order of Appellate Tribunal), section 34AA (appearance

by registered valuer), section 35 (rectification of mistakes) and section 37

(power to take evidence on oath) of the Wealth-tax Act, 1957, shall, with

necessary modifications, apply in relation to such reference as they apply in

relation to a reference made by the Assessing Officer under sub-section (1) of

section 16A of that Act [Sub-section (2)].

(iii) Where the value ascertained by such valuation officer exceeds the value

adopted or assessed or assessable by the Stamp authority the value adopted or

assessed or assessable shall be taken as the full value of the consideration

received or accruing as a accruing as a result of the transfer [Sub-section (3)].

(iv) The term "assessable" has been added to cover transfers executed through power

of attorney. The term 'assessable' has been defined to mean the price which the

stamp valuation authority would have, notwithstanding anything to the contrary

contained in any law for the time being in force, adopted or assessed, if it were

referred to such authority for the purposes of the payment of stamp duty.



Pag

e12



Pag

e13

Sec. 10 (37) EXEMPTOION IN

RESPECT OF

CAPITAL GAINS

IN CASE OF

AGRICULTURAL

LAND

In case of an assessee-

-being an individual or a Hindu Undivided family,

-any income chargeable under the head "Capital gains"

-arising land the transfer of agricultural land, where-

(i) such land is situated in any area referred to in item (a) or item (b) of

sub-clause (iii) of clause (14) of section 2; and

(ii) such land, during the period of two years immediatediately preceding

the date of transfer, was being used for agricultural purposes by such

Hindu undivided family or individual or a parent of his; and

(iii) such transfer is by way of compulsory acquisition under any law, or a

transfer the consideration for which is determined or approved by the

Central Government or Reserve Bank of India; and

(iv) such income has arisen from the compensation or consideration for

such transfer received by such assessee on or after the 1st day of April,

2004.

Explanation-For the purposes of this clause, the expression "compensation

or consideration" includes the compensation or consideration enhanced or

further enhanced by any court, tribunal or other authority.

Explanation; "Population" to mean population according to the last

preceding census of which the relevant figures have been published before

the first day of the previous year.

Agricultural Land situated in rural area is not a capital asset and no

capital gains shall arise on transfer of agricultural land situated in rural

area. In case the agricultural land situated in rural area is transferred by

way of compulsory acquisition under any or under a transfer the

consideration for which is determined or approved by Central

Government or Reserve Bank of India, no capital gains shall arise.

Agricultural land situated in urban area is a capital asset. Section 10

(37) exempt the capital gains arising from transfer of agricultural land

situated in urban area if the following conditions are cumulatively

satisfied:

o Assessee is an individual or Hindu Undivided Family.

o Assessee transfers the agricultural land situated in urban area.

o Such land is held as capital asset and is not held as stock-in-trade.

o Such land was being used for agricultural purposes by such HUF or

individual or a parent of the individual during the period of two years

immediately preceding the date of transfer.

o The transfer takes place by way of compulsory acquisition under any

law or the transfer is the one for which the consideration is determined

or approved by the Central Government or the RBI.

o The compensation or consideration for the transfer is received by

the assessee on or after 1.04.2004.

o Capital gains whether long term or short-term are exempt.

o Capital gains computed with reference to the original

compensation as well as the capital gains computed with reference

to enhanced compensation are exempt.

Sec. 10(38) EXEMPTION IN

RESPECT OF

LONG TERM

CAPITAL GAINS

IN CASE OF

SPECIFIED

SECURITIES

The following income shall be exempt from tax from Assessment Year 2005-06:

Any income arising from

- the transfer of a long-term capital asset

- being an equity share in a Company or

- a unit an equity oriented fund where-

(a) the transaction of sale of such equity share or unit is entered into

on or after 1.10.2004 and



Pag

e14

(b) such transaction is chargeable to securities transaction tax.

Explanation-For the purpose of this clause, "equity oriented fund" means a

fund-

(i) Where the investible funds are invested by way of equity shares in domestic

companies to the extent of more than 65% of the total proceeds of such fund;

and

(ii) which has been set up under a scheme of a Matual Fund specified under

section 10)23D).

Provided that the percentage of equity shareholding of the fund shall be

computed with reference to the annual average of the monthly averages of the

opening and closing figures.

"Equity oriented fund" means a fund-

(i) where the investible funds are invested by way of equity shares in

domestic companies to the extent of more than 65% of the total proceeds of

such fund; and

(ii) which has been set up under a scheme of a Mutual Fund specified

under section 10(23D).

the asset is a long term capital asset;

the gains arise from sale of the capital asset;

the transaction of sale is entered into on or after 1.10.2004.

such transaction is chargeable to Securities Transaction Tax (STT);

POINT TO BE NOTED:

The exemption is available to all assesses including Foreign

institution Investors and non-residents.

The exemption is available to an investor who holds the equity

shares/units of Equity Oriented Fund as capital assets and not as

stock-in-trade. Hence, assesses claiming exemption will have to

establish that they were holding the equity share/unit of Equity

Oriented Fund as capital asset and not stock-in-trade.

The exemption is not available to securities other than equity shares

and units of equity oriented funds. Thus, it does not cover other types

of securities such as preference shares, debentures, deep discount

bonds, units of debt Mutual Fund, etc.

The exemption is available if the sale transaction is chargeable to

securities transaction tax. Securities transaction tax applies to the

following :

(i) sale of Equity shares in a company where the transaction of such

sale is entered into in a recognized stock exchange.

(ii) sale of unit of an equity oriented fund where the transaction of

such sale is entered into in a recognized stock exchange.

(iii) Sale of unlisted equity shares by any holder of such shares under

an offer for sale to the public included in an initial Public offer and

where such shares are subsequently listed on recognized stock

exchange.

(Amendment by Finance Act, 2012).

Sale of unit of an equity oriented fund to the Mutual Fund.

The exemption is available only if the sale transaction is chargeable to STT. In

respect of equity shares, STT is payable only in respect of transactions on a

recognized stock exchange in India. Also as per Finance Act 2012, STT is also

payable on sale of unlisted equity shares under an offer for sale to public

included in public offer. Hence, the exemption shall not be available to capital

gains arising pursuant to buyback, sale of rights entitlement, delisted shares,

negotiated deals, etc.



Pag

e15

The acquisition need not be through a recognized stock exchange.

Loss from sale of securities-The section exempts any income arising from the

transfer of a specified security. If income from a particular source is altogether

exempt from tax, then loss from that source cannot be set off against income

from a different source or income under a different head, Hence, a loss arising

on sale of specified securities satisfying the conditions of section 10 (38) is not

eligible for set off against taxable gains under section 70 or carry forward and

set off under section 74. Such loss shall have no tax treatment.

SECURITIES TRANSACTION TAX (STT)

AMENDMENT BY FINANCE ACT, 2012

Securities transaction Tax shall be levied on the sale of unlisted equity shares by any holder of such shares under an offer for

sale to the public included in an initial Public offer and where such shares are subsequently listed on a recognized stock

exchange.

Balance Sheet of Tulip Ltd.

(Rs. In crores)

Liabilities Amount (Rs.) Assets Amount (Rs)

50 Crores Equity shares of Rs 10 500 net Assts 2,500

2000

Reserve & Surplus

TOTAL 2,500 TOTAL 2,500

Company Tulip Ltd. comes out with a public issue of 30 crores shares at an issue price of Rs 50 (Rs. 10 plus Rs. 40

premium). The terms of issue are:

(a) Fresh issue of 20 crore share @ Rs. 50 each

(b) Promoters will offer 10 crore shares to the public @ Rs. 50 each. In other words, in the public offer, promoters will offer

their 10 crore shares to the public at aprice of Rs. 50 each and these 10 crore shares will form part of the public issue.

After the public issue all 70 crore shares will be listed on the stock exchange.

As per Finance Act, 2012 the seller i.e. promoters shall pay STT @ 0.20% of sale price i.e. @ 20% on 500 crores (10 crores

shares @ Rs. 50 each)

As per Finance Act, 2012, the Lead Merchant Banker appointed by the Company shall collect STT from seller i.e. promoters

and deposit with the Government.

Point to be noted :

1. As per section 10(38), the Long Term capital Gains on above sale shall be exempt.

2. As per section 111A, the Short Term Capital Gains on the above sale shall be taxable @ 15%.



Pag

e16

Sec 111A Tax on STCG Where the total income of an assessee includes any income chargeable under the

head "Capital gains", arising from the transfer of a short-term capital asset, being

an equity share in a company or a unit of an equity oriented fund and the

following conditions are fulfilled-

(a) the transaction of sale of such equity share or unit is entered into on or after

1.10.2004;

(b) such transaction is chargeable to securities transaction tax;

(c) such equity shares are transferred through a recognized stock exchange or such

units are transferred through a the tax payable by the assessee on the total

income shall be computed as under-

(i) on such short-term capital gains-15%; and

(ii) on the balance amount of the total income-special rates or normal as

applicable.

However, in the case of an individual or a Hindu undivided family being a

resident, where the total income as reduced by such short-term capital gains is

below the maximum amount which is not chargeable to income-tax, then, such

short-term capital gains shall be reduced by the amount by which the total income

as so reduced falls short of the maximum amount which is not chargeable to

income-tax and the tax on the balance of such short-term capital gains shall be

computed at the rate of 15%.

No deduction under chapter VIA : Further, where the gross total income of an

assessee includes any short-term capital gains referred to above, the deduction

under Chapter VIA shall be allowed from the gross total income as reduced by

such capital gains.

Sec 112 Tax on LTCG 20%

Tax on LTCG in case

of NR or Foreign

Company

10% of LTCG on UNLISTED SECURITIES without giving effect to the first

proviso & second proviso to Sec 48.

First Proviso to Sec

112

10% on the following without indexation:

-Listed Securities

-Units

-ZCB

Note: Assessee shall go with lower of the following on LTCG:

1- LTCG : 20% with indexation

2- LTCG : 10% without indexation on abovementioned capital assets.

Sec 47 Reverse Mortgage Reverse Mortgage shall not be considered to be transfer for the purpose of capital

gain.

Under reverse mortgage, an individual can mortgage his house property to the

bank and the bank shall grant a loan against the security of house property and

such loan shall be given in monthly installments and the amount so received shall

not be considered to be income of the mortgagor under section 10(43).

After the death of the mortgagor the bank shall have right to sell off the property

and shall adjust loan and interest and shall compute capital gains for the deceased

person and shall pay tax to the government.

The purpose of the scheme is to make available regular amount to the persons

who do not have regular income but are the owners of the house property.

In general, the mortgagor repay the loan in installments but in this case mortgagee

i.e. bank is paying installment to the mortgagor and hence it is called reverse

mortgage.

Date post:	07-Oct-2015
Category:	Documents
Upload:	azharnadvi
View:	4 times
Download:	0 times

Capital_Gains_Theory.pdf

Documents