Chargeability Capital assets its types Exemptions Capital

Chargeability Capital assets & its types Exemptions Capital Gains Computation of capital gain Transfer includes and excludes

CAPITAL GAIN 1. CHARGEABILITY Conditions 1. 2. 3. 4. 5. There should be a capital asset The capital asset is transferred by the assessee Such transfer takes place during the Previous year Any profit or gain arises as a result of transfer Such profit or gain is not exempt from tax under sec. 54, 54 B, 54 D, 54 EC, 54 F, 54 G and 54 GA

2. Capital Asset Means Property of any kind held by an assessee, whether or not connected with his business or profession. But it excludes 1. 2. 3. 4. 5. 6. Any stock – in – trade Personal effects Agricultural land in India 6 ½ % God Bonds, 1977 or 7% Gold Bonds, 1980 or National Defense Gold Bonds, 1980 issued by the CG. Special Bearer Bonds, 1991 Gold Deposit Bonds issued under Gold Deposit Scheme, 1999

Ø Arun Sunny V. CIT(2009) - Property transferred must be a capital asset on the date of transfer. It is not necessary that it should have been capital asset also on the date of its acquisition by the assessee. Ø Stock in trade is not a capital assets - This is because of the fact that any surplus arising on sale or transfer of stock in trade etc. , is chargeable to tax as business income under sec. 28 Ø Personal effects does not include jewellery, archaeological collections, drawings, paintings, sculptures, or any work of art.

Ø Rana Hemant Singhji V. CIT – Personal effects must be intended for personal and household use. If not those are treated as capital assets. Ø Agricultural land is a capital asset if it situated in any area within the jurisdiction of a municipality or a cantonment board having a population of 10000 or more OR in any notified area

3. Types of capital assets Capital assets Short Term Capital asset Long Term Capital Asset Capital assets held by Assessee for not more Than 36 months prior to Its date of transfer Capital assets held by Assessee for more Than 36 months prior to Its date of transfer For certain Capital assets 36 months Is replaced with 12 months

Those assets are Equity or preference shares in a company Shares may or may not be quoted Securities (Debentures, Govt. Securities) Should be quoted in a recognized stock exchange in India Units in UTI May or May not be quoted Units of Mutual Funds May or May not be quoted Zero Coupon Bonds May or May not be quoted Ø IF those assets are held for more than 12 months immediately prior to its transfer then it is a long term capital asset

Ø Perod of Holding : - Normally Period of holding is calculated from the date of acquisition of capital asset to the date of transfer. However, in certain cases period of holding is When capital asset is acquired by way of gift, will, inheritance etc. , The period for which asset was held by Previous owner should be included Right Shares From the date of Allotment of Right shares Bonus shares From the date of Allotment of Bonus shares Flat in co operative society From the date of allotment of shares in the society Sweat equity shares From the date of allotment of shares to employees

CIT Vs. Sri Sekhar Gupta : - Calcutta bench of the tribunal held that the land is an independent and identifiable capital asset and it continues to remain as an identifiable capital asset even after construction of the building. Capital gain can be separately calculated for land building after splitting up the sale consideration for the land building. Transfer of Depreciable Asset : - In the case of , capital gain (if any) is taken as short term capital gain, irrespective of period of holding.

4. Transfer, in relation to a capital asset, includes Ø Includes Sale of Capital asset : - Essentials of a sale are 1. Mutual agreement 2. Competent parties 3. a money consideration 4. Transfer of absolute or general property If aforesaid conditions are not satisfied there is no sale. Ø Includes Exchange : - CIT V. Rasiklal Maneklal(HUF)(1989) It was held that there must be a mutual transfer of ownership of one thing for ownership of another.

Ø Ø Ø Include Compulsory acquisition of asset : Taxable when the compensation is received for the first time not on the date of transfer. Include Conversion of capital asset into stock in trade Include Redemption of zero coupon bonds Transfer includes giving possession of immovable properties under part performance of a contract Transfer includes any transaction which has the effect of transferring an immovable property : Conditions 1. The transferor is a member of co operative society/member/AOP 2. By virtue of membership he has been allotted an immovable property or he will be allotted an immovable property. 3. The membership right is transferred

Sec Transactions not treated as transfer What is the cost in the (Subject to certain conditions) hands of transferee If the transferee subsequently transfer the asset, whether period of holding by the previous owner should be included 46(1) Distribution of assets in kind by company to its shareholders at the time of liquidation Market value of he asset on the date of distribution Yes 47(i) Distribution of capital asset on total or partial partition of HUF Cost to previous owner Yes 47(ii) Transfer of Capital asset under a gift or will Cost to previous owner Yes 47(v) Transfer of CA by a 100% subsidiary company to its Holding company Cost to previous owner Yes 47(vi) Transfer of CA in the scheme of amalgamation Cost to previous owner Yes 47(vib) Transfer in a demerger of a CA by the demerged company to resulting company Cost to previous owner Yes 47(vii) Allotment of shares in amalgamated company in lieu of shares held in amalgamating company Cost of shares in the amalgamating company Yes

No 47(viia) Transfer of a capital asset (being foreign currency convertible bonds or GDR) by a non – resident to another Non – resident 47(x) Transfer by way of conversion of bonds or debentures into shares Cost of shares would be cost of bonds/debentures No 47(xa) Transfer by way of conversion of bonds into shares or debentures of any company Cost of shares/debentures would be cost of original bonds No 47(xii) Transfer of land by a sick industrial company which is managed by its workers co operative No 47(xiii) Transfer of a capital asset by a firm to a company in the case of conversion of firm into company No 47(xiv) Transfer of a capital asset to a company in the case of conversion of Proprietary concern into company No 47(xv) Transfer involved in a scheme of lending of securities No 47(xvi) Transfer of capital asset in a transaction of reverse mortgage made under a scheme notified by the Government. Ø

Ø The aforesaid transactions are not recognized as transfer for the purpose of Sec. 45. Therefore any profit or gain arising there from cannot be recognized as income or any loss arising there from cannot be set off against the other income of assessee. 5. Computation of Capital Gain Computation of CG depends upon the nature of capital asset transferred. If short term capital Asset is transferred Short term capital gain will arise. If Long term asset is transferred Long term capital gain will arise

Computation of Short term CG Computation of Long term CG 1. Find out full value of consideration 2. Deduct the following A. Expenditure incurred in respect of that transfer B. Cost of acquisition C. Cost of Improvement 2. Deduct the following A. Expenditure incurred in respect of that transfer B. Indexed Cost of acquisition C. Indexed Cost of Improvement 3. From the result sum deduct the exemption provided U/s 54 B, 54 D, 54 G and 54 GA 3. From the result sum deduct the exemption provided U/s 54, 54 B, 54 D, 54 EC, 54 F, 54 G and 54 GA The Balance is Short term Capital Gain The Balance is Long term Capital Gain

Ø Capital Gains exempt from tax under Sec. 10 A. CG on compulsory acquisition of urban agriculture land : - For individuals and HUF s and if it used by the assessee for agriculture purpose for at least 2 years immediately prior to date of transfer. B. Long term CG on Transfer of securities not chargeable to tax in cases covered by Transaction Tax. : a. For all taxpayers, only long term capital asset b. At the time of transfer, the transaction is chargeable to. securities transaction tax

ØCost of acquisition : - Cost of acquisition is the value for which it was acquired by the assessee. Expenses of capital nature of completing or acquiring the title to the property are includible in the cost of acquisition. Meccane Industries Ltd. V. CIT : - Conversion of agriculture land into non-agriculture land : - Where when land was acquired for agriculture purpose but later it was converted into non agriculture purpose. The cost of acquisition is to be taken as cost of acquisition of the agricultural land not the notional cost as on the date the land is put to Non agricultural use. ØNotional Cost of acquisition : - In the cases below cost of acquisition is taken at a notional figure

Different situations Notional cost of acquisition 1. Asset received by a member on liquidation of the company FMV of such asset on the date of distribution 2. Allotment of shares in an amalgamated Indian company to the Shareholders of amalgamating company In a scheme of amalgamation of the two companies Cost of acquisition of shares in the amalgamating company 3. Depreciable assets covered by Sec. 50 OB of the block of assets on the first of the previous year + actual cost of the assets acquired during the year which fall within the same block 4. Undertaking/division acquired by way of slump sale as covered under sec. 50 B Net worth of such undertaking 5. New asset acquired for claiming Actual cost of acquisition (-) Exemption exemption U/S 54, 54 B, 54 D, 54 G or claimed under these sections 54 GA if it is transferred within 3 Years

Different situations Notional cost of acquisition 6. Right shares Amount actually paid by assessee 7. Right Entitlement Nil 8. Bonus shares If allotted before April 1 1981 : FMV Otherwise : Nil 9. Any other Capital Asset A. If it became the property of the assessee before Apr 1 st 1981 by gift, will, etc. , B. A. If it became the property of the assessee before Apr 1 st 1981 C. If it became the property of the assessee after Apr 1 st 1981 by gift, will, etc D. If it became the property of the assessee after Apr 1 st 1981 Cost of acquisition to the previous owner or FMV as on Apr 1 1981, whichever is more Cost of acquisition to the previous owner Cost of acquisition

6. Computation of CG in certain special cases Ø Conversion of Capital asset in to stock in trade Sec. 45(2). 1. The notional profit arising from transfer by way of conversion of capital asset into sock in trade is chargeable to tax in the year in which stock in trade is sold. Ø CIT V. Crest Hotels Ltd. (2001)(mum. ) : - If stock in trade is sold in parts in different years, tax on conversion of capital asset into stock in trade as per sec. 45(2), can be said to arise in parts in different years and not in one year in which last of stock in trade is sold. ØFor the purpose of computing the CG in such cases, the FMV of the Capital asset on the date on which it was converted or treated as stock in trade shall be deemed to be the full value of the consideration received.

Ø Transfer of capital asset by a partner to a firm : Conditions : 1. A person is a partner in a firm or he becomes a partner in a firm 2. He transfers a capital asset 3. The transfer may be by way of his capital contribution or. otherwise If above conditions are satisfied then ØChargeable to tax in the previous year in which such transfer takes place. ØFull consideration is the amount recorded in the books as value of capital asset.

Ø Transfer of capital asset on compulsory acquisition of an asset : What is the sale consideration : Initial compensation is taken as full value of sale consideration In which year it is chargeable to tax : In the previous year in which initial compensation or part thereof is received. Ø CG when insurance Claim is received : - Vania Sild Mills(p. ) Ltd. V. CIT(1991) SC held that insurance claim received on account of destruction of asset is not chargeable to tax as “destruction” does not amount to transfer. However, judgment has been nullified to some extent by inserting Sec. 45(1 A) SEC 45(1 A) : - Conditions 1. Compensation is received because of destruction of any Capital asset. 2. The damage or destruction is a result of four categories of circumstances a. Flood etc. , b. Riot or civil disturbances. (iii) Accidental fire explosion (iv) Action by an enemy.

Ø Then Any profit or gain araised from such receipt then it is chargeable to CG. Ø In the Previous year in which such money or asset is received Ø Capital Gain in the case of Land Building Sec. 50 C. Conditions A. There is a transfer of land building B. The sale consideration is less than the value adopted by any authority of state government for the purpose of payment of stamp duty. Navneet Kumar Thakkar V. ITO(2008) The Jodhpur Bench of the ITAT held that unless property transferred has been registered by a sale deed and for that purpose value has been assessed and stamp duty has been paid by parties, sec. 50 C can not come into operation. If a property is transferred under a power of attorney transaction and value has not been assessed for the purpose of stamp duty, Sec. 50 C has no application.

Ø If above conditions are satisfied then Different situation Full value of consideration for the purpose of CG Where the assessee accepts the value adopted by stamp duty authority Value adopted by stamp duty authority is taken as full value of consideration Where the assessee has disputed value adopted by stamp duty authority under the stamp Act. Where the assessee claims that value adopted by stamp duty authority is more than the fair market value The Stamp duty valuation as finally accepted for stamp duty purpose is taken as full value of consideration FMV determined by the department VO (if it is less than the stamp duty valuation) is taken as full value of consideration Stamp duty valuation (If the FMV determined by the department VO. Is more then the stamp duty valuation) is taken as Full value of consideration.

Ø Reference to Valuation officer : - Sec. 55 A With a view to ascertain FMV of the CA, AO may refer the mater to VO, in the following grounds : 1. Where the value of the asset as claimed by the assessee is in accordance with the estimate made by a registered valuer, but the AO is of the opinion that the value so claimed is less than its FMV 2. Where the AO is of the opinion that FMV of the asset exceeds the value of the asset by more than 25000 or 15% of value claimed by assessee, which ever is more. 3. Where AO is of the opinion that, having regard to nature of an asset, it is necessary to make a reference to the VO.

Different Questions Sec 54 B Sec 54 D Who can claim exemption Individual/HUF Individual Any persons Which Capital Asset Long Term Short term/ Long Term Which specific asset is eligible for Exemption A Residential house property Agricultural land if it was used by the individual or his parents for agricultural purpose for at lease 2 years immediately prior to transfer Land or Building forming part of an industrial undertaking which is compulsory acquired by the Govt. Which asset the tax Payer should acquire To get the benefit of Exemption Residential house property Agricultural Land or building for Industrial purpose Time Limit From the date of transfer/ in case of Compulsory acquisition from the date of receipt of compensation From the date of transfer of agricultural land From the date of receipt of compensation Time limit for acquiring Purchasing 1 year backward or 2 years forward. Construction : 3 years forward 2 years forward 3 years forward How much is exempt Investment in the new asset OR CG Which ever is lower Investment in the new asset OR CG Whether the scheme of deposit is available Yes Yes

Different Questions Sec 54 EC Sec 54 F Who can claim exemption Any person Individual/ HUF Which Capital Asset Long Term Which specific asset is eligible for Exemption Any Long term Capital Asset Any LTCA (other than a residential house Property) provided on the date of transfer the taxpayer does not own more than one residential house property Which asset the tax Payer should acquire to get the benefit of Exemption Bonds of NHAI or REC A Residential house property Time Limit From the date of transfer of LTCA but in the case of Compulsory acquisition from the date of receipt of compensation From the date of transfer of CA but in the case of Compulsory acquisition from the date of receipt of compensation Time limit for acquiring 6 Months forward Purchasing 1 year backward or 2 years forward. Construction : 3 years forward How much is exempt Investment in the new asset OR CG Which ever is lower Investment in the new asset/net SC*CG Whether the scheme of deposit is available No Yes

Different Questions 54 G Sec 54 GA Who can claim exemption Any person Which Capital Asset Short term/ Long Term Which specific asset is eligible for Exemption Land, Building, Plant or Machinery in order to shift an industrial undertaking from urban area to rural area Land, Building, Plant or Machinery in order to shift an industrial undertaking from urban area to any SEZ Which asset the tax Payer should acquire To get the benefit of Exemption Land, Building, plant or machinery in order to shift an undertaking to rural area Land, Building, plant or machinery in order to shift an undertaking to SEZ Time Limit From the date of transfer From the date of Transfer Time limit for acquiring 1 Year backward or 3 years forward How much is exempt Investment in the new asset OR CG Which ever is lower Whether the scheme of deposit is available Yes

Ø INCOME TAX RATES Capital asset If transaction is covered If it is not covered by STT at the time of by STT transfer Long term ST Without With Long Short Indexa Tion tion Term - Term US – 64 0% 0% Units( Equity Oriented) 0% 15% 10% 20% Normal Units(others) NA NA 10% 20% 0% Normal

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