CHAPTER
VI
CAPITAL
GAINS
Sec 45 provides that any
profits or gains arising from the transfer of a capital asset affected in the
previous year will be chargeable to income tax under the head capital gains.
Such capital gains will be deemed to be the income of the previous year in
which the transfer took place.
CAPITAL ASSET
Capital asset means property of any
kind held by an assessee whether or not connected with his business or
profession but does not include-
·
Stock in trade, consumable stores or raw
materials held for the purpose of business or profession of the assessee.
·
Personal effects i.e. , movable property
including wearing apparel and furniture but excluding jewellery held for personal
use by the assessee or any member of his family.
·
Rural
agricultural land in india
·
6 1/2 % Gold Bonds 1977,7% Gold Bonds 1980, National
Defence Gold Bonds 1980 issued by central government.
·
Special Bearer Bonds 1991, issued by Central
Government.
·
Gold Deposit bonds issued under Gold deposit
scheme 1999
Rural Agricultural Lands
We can note from above definition that only rural agricultural land in
India is excluded from the purview of the term capital asset. Hence urban
agricultural lands constitute capital asset. Accordingly, agricultural land
situated within the limit of any municipality or cantonment board having a
population of 10,000 or more according to the latest census will be considered as capital asset. Further,
agricultural land situated in areas lying with in a distance of 8 kilometers
from the local limits of such municipality or cantonment board will also be
considered as capital asset.
The following items are examples of capital assets
> Share of partner in
a firm
> A business or
undertaking which is a going concern
> Good will
> Lease hold rights
in mines
> Route permits for
buses
> Right to subscribe
for shares
> Trees standing on
agricultural land
> Right to subscribe right share or any other
security.
> Trade mark or brand name associated with
business.
Short term and long
term capital assets
There are two types’ capital assets
namely long term and short term capital assets. A short term capital asset
means asset held by an assessee for not more than three years immediately
prior to its date of transfer. In case of shares held in a company, the period
will be 12 months instead of 36 months. Capital gain arising from the transfer
of long term capital asset is called long term capital gain and that arising
from transfer of short term capital asset is called short term capital gain.
The following assets are deemed to be long term capital asset if they are not
held for exceeding 12 months.
a) Shares in a company
b) Any other security
listed in a recognized stock exchange in India.
c) A unit of UTI
d) A unit of Mutual
fund specified in Sec 10(23D)
Transfer - Sec 2
(47)
The Act contains an inclusive definition
of the term transfer. Accordingly, transfer in relation to capital asset
includes the following types of transaction-
1. The sale, exchange, relinquishment
of the asset or
2. The extinguishment
of any rights there in or
3. The compulsory
acquisition of capital asset under any law. or
4. Owner of a capital
asset may convert the same in to the stock in trade of a business carried on by
him.( treated as transfer)
5. Part performance of a contract — Some, possession of
an immoveable property is given in consideration of part performance of a
contract. For example Mr. X enters into an agreement for the sale of the house.
The purchaser gives entire sale consideration to X. X hands over complete
rights of possession to the purchaser. Under IT Act, the above transaction is considered
as transfer
6. Lastly, there are certain types of transaction which have the effect
of transferring or
enabling the enjoyment of an immovable property. For example a person may become a member of co-operative society, company or AOP which may be building houses. When he pays an agreed amount, the society etc hands over possession of the house to the person concerned. (for purpose of IT, the above transaction is treated as transfer)
enabling the enjoyment of an immovable property. For example a person may become a member of co-operative society, company or AOP which may be building houses. When he pays an agreed amount, the society etc hands over possession of the house to the person concerned. (for purpose of IT, the above transaction is treated as transfer)
Conversion or treatment of Capital asset as stock in trade Sec 45(2)
A person who is the owner of a capital asset may converted same or treat
it as stock in trade of the business carried on by him. As noted above, the
above transaction is a transfer. As per Sec 45(2), the profit or gains arising
from the above conversion will be changeable to tax as his income of the
previous year in which such stock in trade is sold or transferred by him. In
order to compute the capital gain, the fair market value of the asset on the
date of such conversion shall be deemed to be the full value consideration.
Introduction of Capital asset as capital contribution Sec 45(3)
Where
a person transfers a capital asset to a firm, AOP or BOI (not being a company
or a co-operative society) in which he is already a partner or it’s become a
partner by way of capital contribution or otherwise, the profit or gains
arising from such transfer will be chargeable to tax as income of the P. Y in
which such transfer take place. For this purpose, the value of consideration
will be the amount recorded in the books of account of the firm, AOP or BOI as
the value of capital asset.
Distribution of capital asset on firm's dissolution 45 (4)
The
profit or gains arising from transfer of capital asset by way of distribution
on the dissolution of the firm or AOP of BOI shall be chargeable to tax as the
income of the firm etc of the previous year in which such transfer takes place.
For this purpose, the fair market value of the asset on the date of such transfer
shall be the consideration.
Compensation of compulsory acquisition 45 (5)
Sometimes, a building or other capital
asset belonging to a person is taken over by the central government by way of
compulsory acquisition. In that case, the consideration for the transfer is
determined by the central government. When the central government pays above
compensation, capital gain may arise. Such capital gains are chargeable as
income of the previous year in which such compensation was first received.
Enhanced
compensation
Many times person whose capital assets have been taken over by central
government and who get compensation from the government go to the court of law
for enhancement of compensation. If the court awards a compensation which is
higher than the original compensation, the difference there off will be
charged to capital gain in the year in which the same is received from the
government. For this purpose, cost of acquisition and cost of improvement
shall be taken to be nil
Reduction of
Enhanced compensation
Where
capital gain has been charged on the compensation received by the assessee for
the compulsory acquisition of any capital asset or enhanced compensation
received by the assessee and subsequently such compensation is reduced by any
court, authority, the assessed capital gain of that year shall be recomputed by
taking into consideration the reduced amount.
Death of a transferor
It
is possible that the transferor may die before he receives me enhanced Compensation.
In that case, the enhanced compensation will be changeable to tax in the hands
of who received the same.
Capital gain on Buy back etc of shares Sec
46A
Any
consideration received by a share holder or a holder of other specified
securities held by such share holder or holder of other specified securities
shall be charged to tax on the difference between the cost of acquisition and
the value of consideration received by the holder of securities or by the share
holder, as the case may be, as capital gain.
TRANSACTIONS NOT REGARDED AS TRANSFER SEC 47
Sec
47 specifies certain transaction which will not be regarded as transfer for the
purpose of capital gain tax.
1) Any distribution of
capital asset on the total or partial partition of HUF
2) Any transfer of
capital asset under gift or will or an irrevocable trust.
3) Any transfer of
capital asset by a company to its subsidiary company
Conditions:-
1.The parent company
must hold the whole of the shares of subsidiary company
2.The subsidiary
company must be an Indian company.
4)Any transfer of
capital asset by a subsidiary company to holding company.
Conditions:-
1.The whole shares of
subsidiary company must be held by the holding company.
2.The holding company
must be an Indian company.
Exception -The exemption
mentioned in 3 and 4 above will not apply if a capital asset transferred
after 29-02-1988 as stock in trade.
5) Any transfer in scheme of amalgamation of a
capital asset by the amalgamating company to amalgamated company if amalgamated
company is an Indian company.
6) Any transfer in a scheme of amalgamation of
shares held in a Indian company by the amalgamating foreign company to the
amalgamated foreign company
Conditions: -
1. At least 25% of share holders
of the amalgamating foreign company must continue
to remain share holders of the amalgamated foreign company.
to remain share holders of the amalgamated foreign company.
2. Such transfer should not attract capital gain
in the country in which the amalgamating company is incorporated.
7) Any transfer by a share holder
in a scheme of amalgamation of shares held by him in the amalgamating company.
Conditions:-
1. The transferor is
made in consideration of the allotment of any shares in the amalgamated company
to him.
2. The amalgamated company is an Indian company.
8) 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.
9) Any transfer of demerger, of a capital asset,
being a share or shares held in a Indian company, by the demerger foreign
company to the resulting foreign company.
10) Any transfer or issue of shares by the
resulting company, in a scheme of demerger to the shareholders of a demerged
company, if the transfer or issue is made in consideration of demerger of the
undertaking.
11) Any transfer of bonds or shares referred to in
section 115 AC (1)
Conditions:-
1. The transfer must be
made outside India
2. The transfer must be
made by the nonresident to another nonresident.
12) Any transfer of
agricultural land effected before 1-03-1970
13) Any transfer of any
following capital asset to government or to the university, or National Museum,
National art gallery, National Archives or any other public museum notified by
the central government National eminence)
Work of Art, Archaeological,
scientific or art collection, book, a manuscript, drawings, paintings,
photographs, printings etc.
14.Any transfer by way of
conversion of bonds or debentures, debenture stock or deposit certificate any
form, of a company into shares of debentures of that company.
15.Transfer by way of
exchange of capital asset being membership of recognized stock exchange or
shares of company to which such membership is transferred.
Conditions:-
1. Such exchange is
effected on or before 31-12-1998
2. Such shares are
retained by the transfer of for a period of not less than 3 years from the date
of transfer.
Mode of computation of Capital Gain Sec 48
1. Computation of
Short Term Capital Gain (STCG)
1. Find out full value consideration.
2. Deduct the following:
a) Expenditure
incurred wholly and exclusively in connection with transfer
b) Cost of acquisition
c) Cost of
improvement
3. From
the resulting figure deduct the various exemptions available U/S 54
4. The balancing figure is short
term capital gain
2.
Computation of Long Term Capital Gain (LTCG)
1. Find out full value consideration.
2. Deduct the
following-
a) Expenditure incurred
wholly and exclusively in connection with transfer
b) Indexed cost of acquisition
c) Indexed cost of
improvement
3. From the resulting
figure deduct the various exemptions available U/S 54
4. The balancing figure
is long term capital gain.
Note: - The
provision relating to indexed cost of acquisition and indexed cost of improvement
will not apply LTCG arising from the transfer of long term capital asset being
bonds or debentures
Full value
consideration
Full value means the whole price
without any deduction. In the case of exchange, the fair market value of
property granted in the exchange on the date of exchange will have to be ascertaining
in order to arrive at the full value consideration.
Cost of acquisition
Cost of acquisition of an asset is the value for which it was acquired by the assessee. Such price may include
the price to the vendor, buying expenses transportation charges, and cost of
installation of the asset if any. If any loan has been taken for the
acquisition of capital asset the interest paid or payable on such loan shall be
included in the cost of acquisition.
Cost of previous Owner Sec 49(1)
Cost of previous Owner is deemed to be
the cost of acquisition to the assessee in the case where capital asset become
the property of the assessee under any mode of transfer
described
below
1 On any distribution of asset on the total or partial partition of HUF.
2. under gift or
will
3 Succession, Inheritance, devolution
4. On any distribution
of asset on the dissolution of firm, BOI, AOP, where such dissolution had taken
place at any time before 1/4/1987.
5. On any distribution
of any asset on the liquidation of a company.
6. Under a transfer to a
revocable or irrevocable trust.
7.
on the transfer by a parent company to its Indian
100% subsidiary company or vice versa
8. under any scheme of
amalgamation by the amalgamating company to amalgamated company.
9.
On throwing individual property into joint family hotchpots after 31- 12 1969
Cost of acquisition
of self generated assets
In the
case of self generated assets like Good will, stage right, the cost of
acquisition will be taken to be
nil. On the other hand if assesse
has purchased them from a previous owner, the cost of acquisition means the amount of the amount of
purchase person.
Cost of improvement
Sec 55
Cost of
improvement in relation to good will of a
business »taken to be rot. Cost of
improvement in relation to any other asset.
1. Where the capital asset
become the property of the assessee before 1 -4-1981, means
expenditure of capital nature incurred making any addition or alteration to the capital
expenditure of capital nature incurred making any addition or alteration to the capital
asset on or after April 1st 1981 by the assessee
2. In other cases, means all the expenses of capital
nature incurred in making any addition to the capital asset by the assessee
Cost of improvement includes all expenditure of capital nature incurred
after 31-3-1981 by an assessee in making any additions to capital asset after
the date of acquisition (ignore improvement before 1-4-1981.)
Indexed cost of acquisition
Indexed cost of acquisition means an amount which
bears to the cost of acquisition, the same proportion
as cost inflation index for the year in which the asset is transferred bears the cost inflation index for the first year in which
asset was held by assesse or for the year beginning on April 1st
1981,
whichever is earlier
Indexed cost of acquisition = Cost X C II for the
year in which the asset is sold
C II for the first year in which asset was held or
C I I on l-4-198l, whichever is later
Indexed cost of Improvement
Indexed
cost of improvement= cost of improvement X C I I for the year which the
asset is sold
C11 for the year in which improvement took place
Cost Inflation Index (CII)
It means
index as the central government may, having regard to 75% the consumer price
index for urban, non urban employees for the immediate preceding previous year,
notify in this behalf.
Financial year CII Financial Year CII
1981-82 100 1992-93 223
1982-83 109 1994-95
259
1983-84
116 1995-96 281
1984-85
125 1996-97
305
1985-86 133 1997-98 331
1986-87 140 1998-99 351
1987-88 150 1999-2000 389
1988-89 161 2000-01 406
1989-90 172 2001-02 426
1990-91 182 2002-03 447
1991-92 199 2003-04 463
1993-94 244 2004-05 480
2006-06 497 2006-07 519
2007-08 551 2008-09 582
2009-10 632
2010-11 711
Financial Assets
Many times person who own shares or other
securities become entitled to subscribe to any additional shares or
securities. Further, they are also allotted additional shares or securities without
any payment Such shares or securities are referred to as financial asset in IT
Act Sec. 55 provides the basis
for ascertain cost of acquisition of such financial asset.
Cost of Bonus shares
The cost of bonus shares or security which
is received by the assessee without any payment on the basis of his holding any
financial asset will be as under:-
a) Where bonus shares
or securities were received prior 1 -4-1981, the cost of acquisition will be
taken as fair market value on 1-4-1981.
b) In any other case
Nil
Taxation of right shares
l. Cost of right entitlement in the hands of
original share holder will be deemed to be nil.
2. The cost of right
shares acquired by the original share holder is the price actually paid by him
for acquiring the right shares.
3. Where right shares
purchased by a person in whose favor the rights entitlement has been renounced.
The cost of acquisition will be purchase price paid to the renouncer of rights entitlement
plus amount paid to the company which was allotted to the right shares.
Computation of
capital gain in case of depreciable asset (WDV) Sec 5O
The capital gain on depreciable asset
shall be computed as under:
1. Find out the WDV on
the first day of the P. Y of all those depreciable assets on which the depreciation
is allowed at the same rate. All such assets are known as 'block of assets'
2. If any new asset of
the same block is purchased during the year the cost of such asset should be
included in (1)
3. IF any assets are
sold out such block during the P.Y, the consideration should be de from the
balance under (2)
4. On the balance under
(3) compute the depreciation at the prescribed rate and deducted from the
balance under (3)
5. The balance under
(4) shall be the WDV of the block of asset for the next year.
It
means if the net consideration of an asset out of the block is less than
balance under (2), there would be no capital gain. IF the not consideration of
an asset is more than the balance under (2), the excess shall be deemed to be
STCG. If all the assets of the block are sold during the P.Y and the net
consideration is less than the balance (2),
the
loss shall be deemed to be short term capital loss.
CAPITAL GAIN EXEMPT FROM TAX
1. Capital gain
arising from transfer of property used for residence sec 54.
Capital gain arising from the transfer of
long term capital asset being building or land appurtenant there to owned by an
individual or HUF and being residential house shall be exempted if the assessee
has invested the amount of capital gain by purchasing a residential house
within a period of one year before or within a period of 2 years after the date
of transfer, or has constructed a residential house within a period of 3 years
after the date of transfer. If the amount of capital gain is greater than the
cost of new house property the excess capital gain is chargeable to tax. If the
new house is transferred within three years, the amount of capital gain arising
there from together with the amount of capital gain exempted earlier will be
chargeable to tax in the year of sale of new house property as STCG. Where the
amount of capital is not appropriated or utilized by the assessee for purchase
or construction of new house before the date of furnishing the return of
income, it shall be deposited by him in the deposit account in any branch
except rural branch of public sector bank in accordance with capital gain accounts scheme 1988 the amount already utilized
for purchase or construction of the new house together with amounts of
deposited shall be deemed to be the amount utilized for the purchase of new
house, if the amount deposited is not utilized fully for purchase or
construction of new house within the stipulated period, the amount not utilized
shall be treated as LTCG of the P.Y in which the period of 3 years from the
date of transfer original assset expires. In such case the assessee shall be
entitled to withdraw such amount in accordance with aforesaid scheme.
2.Capital gain arising from transfer of land
used for agricultual purposes Sec 54 B
Capital gains arising from the transfer of
land used by the assessee or his parents for agricultural purposes for a period
of two years are exempt from tax if the assessee has purchased another land for
agricultural purposes within a period of two years from the date of such
transfer/ The exemption is available to the extent of capital gains used for
purchasing further agricultural lands. If the new agricultural land is transferred
within a period of 3 years from the date of its purchase the amount of capital
gain arising there from together with the amount of capital gain exempted
earlier will be chargeable to tax as STCG in the year of sale. The capital gain
deposit scheme 1988 is also applicable in this case. If the deposit amount is
not utilized fully for the purchase of agricultural land within the stipulated
period of 2 years, the unutilized amount is capital gain taxable in the P.Y in
which the period is expired.
W.e.f A.Y 2005-06, Capital gain on
transfer of agricultural land situated in urban area shall be exempted if the
following conditions are satisfied
(i) The
owner of Agricultural land is an individual or a HUF
(ii) It was, in the two years immediately preceding
the date of transfer, being
used by the HUF or individual or his parent.
used by the HUF or individual or his parent.
(iii) Transfer of land by way of compulsory
acquisition under any law or a transfer the consideration for which determined
by the central government or RBI
3. Capital gain on compulsory
acquisition of land and buildings. Sec 54D
Capital gains
arising from the compulsory acquisition of land and building forming part of
industrial undertaking is exempt provided the following conditions.
(i) The land and building was used by the assessee
for the purpose of industrial undertaking
for a period of at least 2 years preceding the date of compulsory acquisition.
for a period of at least 2 years preceding the date of compulsory acquisition.
(ii) Assessee has purchased any other land or
building within a period of 3 years or constructed
building within such period.
(iii)The newly acquired L & B should be used for the purpose of
shifting or reestablishing all the industrial undertaking or setting up of
another industrial undertaking,
(iv) Exemption is
available to the extent of capital gain invested for the above purpose.
If the new L & B are sold within 3
years from date of acquisition the gain arising there from together with exemption
availed earlier is taxable as STCG in the year of sale. Capital gain deposit
scheme 1988 is applicable in this case also.
4. Capital gain not
to be charged on investment in certain bonds Sec. 54EC
This section provides that the capital
gain arising from transfer of a long-term capital asset shall be exempt from
tax is such capital gain is invested in a long-tem specified asset within 6
months after the date of such transfer. If part of the capital gain is so
invested, proportionate exemption will be available, such that so much of the
capital gain as bears to the whole capital gain the same proportion as the cost
of the long-tem specified asset bears to the whole of the capital gains, shall not
be charged under section 45 for this purpose, " long term specified assets" means any bond
redeemable after Three years and
(i) Issued on or after 1st April 2007
(ii) The
National Highways Authority of India (NHA1) or
(Hi) issued on or after 1st April, 2007 by the Rural Electrification Corporation
Limited
Note: - The
Investment made in the long term specified asset by an assessee during any
financial year shall not exceed 50 lakhs
5. Capital gates on transfer of long term capital asset other than house
property Sec 54F
The above exemption
is available subjected to the following conditions.
(i) Assessee
is an individual or HUF
(ii) Assets transferred should
be long
term
asset other than residential house.
(iii) Assessee has
purchased within one year before or two years after the date of transfer or
constructed within three years from the date of transfer, a residential house.
(iv)The assessee
shoud not sell the new house within three years from the date of acquisition,
(v) The assessee should not own a residential
house other than the new house. He should not ith in a period of two years or construct
within a period of three years a residen-her than the new house.
If the cost of newly acquired house is
not less than the net consideration ( full value consideration expenses of
transfer) in respect of asset transferred the entire capital gain is exempt. If
the cost of acquisition of new house is less than net consideration exemption
is available proportionately on the basis of investment of net consideration in
the new house.
If the new house is sold within a
period of 3 years or purchased another house within a period of two years or
construct within a period of three years, the capital gains arising from the
transfer of original asset which was not chargeable to tax will be deemed to be
income by way of long term capital gain of the year in which the new
house is sold or another house is purchased or constructed.
The capital gain
deposit scheme 1988 is applicable in this case also.
Exempted amount = Capital gain X cost of new
house
Net
consideration
6. Capital gains for
shifting of industrial undertaking from urban areas Sec 54G
Sec 54G exempts capital
gains arising on transfer of long term capital assets in the nature of
machinery, plant, building, land used for the purposes of business of the industrial
undertaking situated in an urban area to a non-urban area. Accordingly, capital
gains arising in such cases will be exempt to the extent they are utilized
within a period of 1 year before or 3 years after the date of transfer, for the
purchase of new machinery or plant or acquiring land and building etc for the
purpose of the business in the area to which the undertaking is shifted or incurs
expenses on shifting the original asset and transferring the establishment of the undertaking to such area and incurs expenses as may be
specified.
Sub sec 2 of Sec 54G provides for
investment in Capital Gains Account scheme 1988, pending utilization
of the amount for the specified purpose.
7. Excemption of
Capital gains on shifting industrial undertaking from urban area to
any special economic
zone 54GA
8. Tax on Short term
Capital gains on transfer of Equity shares in a company or units of an equity
oriented fund. (Sec 111A)
Where the total income of an assessee includes
short term capital gain arising the transfer of equity shares in a company or units
of an equity oriented fund, on such short term capital gain tax will be charged
@ 15%
+
surcharge, if any + education cess @ 3% on the amount of the
Income Tax and surcharge if the following conditions are satisfied.
(i) The equity shares in
a company or units of an equity oriented fund are short term capital asset
(ii) Transaction of sale
of such asset is entered into on or after the date on which security transaction
tax come into force.
(iii) Such transaction is
chargeable to Securities Transaction Tax
In respect of Income
other than aforesaid short term capital gains, income tax shall be charged as
per normal provisions of the Act, assuming the other income only to be the
total income.
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