IV-E: INCOME CHARGEABLE UNDER HEAD CAPITAL GAIN

Essential conditions for taxing capital gains:

1) there must be a capital asset
2) the capital must have been transferred
3) the transfer takes place during the previous year
4) profits or gains arises on such transfer.

Sec 2(14) Capital Asset:

Capital asset means property of any kind held by the assessee whether or
not connected with his business or profession but does not include:
(i) stock in trade, consumables or raw materials held for purpose of
business or profession
(ii) personal effects that is movable property held by the assessee or
any member of his family including wearing apparel and furniture
but excluding jewellery
(iii) agricultural land in Indian not being land situated in specified area
(iv) gold deposit bonds under Gold deposit scheme 1999
- The asset should be a capital asset on the date of transfer.
Future operations cannot change the nature of asset as on date of
transfer. Gordhanbhai kahandas dalwadi v CIT (1981) 127 ITR 664
Guj, CIT v Mannilal somanath (1977) 106 ITR 917 Guj
- Property of any kind includes intangible rights
- Jewellery includes ornaments made of gold, silver, platinum or
any other precious metal, precious or semi precious stones whether or
not set in any furniture, utensils, or other article or worked or sewn
into any wearing apparel.

Sec 2(42A) Short term capital asset: A capital asset held by an assessee
for not more than 36 months immediately preceding the date of transfer is
short term capital asset. However in respect of equity or preference shares
or securities listed in RSE or units of UTI or mutual funds specified
u/s10(23D), Zero coupon bonds, shall be regarded as short term capital
asset if held for not more than 12 months.

Zero Coupon Bonds means a bond

issued by any infrastructure capital company or infrastructure capital fund or
public sector company on or after 1st June 2005;
in respect of which no payment and benefit is received or receivable before
maturity or redemption from infrastructure capital company or infrastructure
capital fund or public sector company; and
which the central government by notification in the official gazette specify in
this behalf - 2(48)

Sec 2(29A) Long term capital asset: A capital asset which is not a short
term capital asset. In other words if the asset is held by the assessee for
more than 36 months (12 months in respect of shares, securities or units)
such asset will be long term capital asset
Considerations for determination of holding period: Expl 1 – 2(42A)
Case Exclusion/inclusion of period
Shares held in a company in The period subsequent to date of
liquidation liquidation shall be excluded
Property acquired in any of modes Period of holding of asset by previous
specified u/s 49(1), like gift, will etc., owner shall be included
Shares in Indian amalgamated Co. Period of holding shares in
acquired in scheme of amalgamation amalgamating Co. shall be included
Shares in Indian resulting company in Period of holding shares in demerged
case of demerger company shall be included
Right to subscribe shares or any The period shall be reckoned from
other securities the date of allotment of such financial
asset
Period of holding of right by a person The period shall be reckoned from
who has renounced the right the date of offer to date of
renouncement
Financial asset allotted without any Period from the date of allotment of
payment on the basis of holding of such financial asset shall be
any other financial asset(bonus reckoned.
shares)

Other notes:
1. If the securities are transacted through stock exchanges, the date of
broker’s note would be treated as date of transfer provided the transaction is
completed by delivery.
2. In case transactions take place directly between the parties and not
through stock exchange, the date of contract of sale as declared by the
parties shall be date of transfer.
3. If the shares are purchased in several lots at different points of time and
in the absence of correlation of dates FIFO method shall be adopted.
4. If physical stock is converted into dematerialized from the date for
consideration would be the date of entry into the account, for FIFO basis.
5. In case of conversion of debentures, debenture stock or deposit certificate
the period holding of such debenture, debenture stock or certificate shall not
be considered.
6. If two capital assets one short-term and one long-term sold at one time
at a consolidated price assessee is allowed to bifurcate the same and benefit
of long term capital gain cannot be denied. CIT v Vimal chand golecha 1993
201 ITR 442 Raj. CIT v D.L.Ramachandra rao (1999) 236 ITR 51 Mad.
7. In case of an asset given to partners of a firm, the period of holding of
asset by the firm can be included in the hands of partner. CIT v S
Vijaylakshmi (2002) 122 Tx 949 Mad
8. For calculating period of holding of capital asset, the date on which the
asset is transferred should be excluded.

Sec 2(42B) Short term capital gain: Gain arising on transfer of short term
capital asset

Sec 2(29B) Long term capital gain: Gain arising on transfer of long term
capital asset.
Sec 2(47) Transfer includes:
i) sale, exchange or relinquishment of the asset
ii) extinguishments of any rights therein
iii) compulsory acquisition of capital asset under any law
iv) conversion or treatment of capital asset into to stock in trade
v) maturity or redemption of zero coupon bonds
vi) any transaction involving allowing of the possession of an
immovable property to be taken or retained in part performance of
contract of the nature referred in Sec 53A of TOPA 1882
vii) any transaction whether by way of acquiring shares in or by way of
becoming a member of co-op society company or other association
of person or by way of any arrangement or agreement or in any
other manner which has the effect of transferring, or enabling the
enjoyment of, any immovable property.

The expression ‘extinguishment’ includes the extinguishments of rights in a

capital asset independent of and otherwise than on account of transfer. CIT v
Grace Collis & others 2001 248 ITR 323 SC
Reduction of share capital of company and payment to shareholder results in
extinguishment of right. Kartikeya V Sarabhai vs CIT 224 ITR 422 SC
Realignment of interest, by way of effecting family arrangements among the
family members would not amount to transfer. CIT v A.L.Ramanathan 2000
245 ITR 494 Mad
Bona-fide realignment of interest, by way of effecting family arrangements
among the family members would not amount to transfer. CIT Vs
A.L.Ramanathan (2000) 245 ITR 494 (Mad)

Sec 47 - Transaction not regarded as transfer:

1. Transfer of capital asset in total or partial partition of HUF
2. Transfer of capital asset by way of gift will or irrevocable trust.
Exception: Where employee transfer Shares, debentures, or warrants
allotted to him under ESOP in accordance with guidelines issued by the
Central Government
3. Transfer of capital asset by holding company to its wholly owned
subsidiary or vice versa provided the transferee company is Indian company
4. Transfer of asset in scheme of amalgamation, if the amalgamated
company is Indian company.
5. Transfer of shares held in Indian company, in a scheme of amalgamation
by amalgamating foreign company to amalgamated foreign company if
following two conditions are satisfied
i) At least 25% of shareholders of amalgamating foreign company
continue to be shareholders of the amalgamated foreign company; and
ii) such transfer does not attract tax on capital gains in the country in
which the amalgamating company is incorporated
6. Transfer of capital asset, in a demerger, by the demerged company to the
resulting company, if the resulting company is an Indian company.
7. Transfer of shares by the shareholder of a demerged company in a
scheme of demereger in consideration of the shares transferred or issued in
the resulting company
8. Transfer of capital asset, being shares held in Indian company by the
demerged foreign company to resulting foreign company if
a) shareholders holding not less than three-fourths in value of the shares
of the demerged foreign company continue to remain shareholders of
the resulting foreign company
b) such transfer does not attract tax on capital gain in the country in
which the demerged foreign company is incorporated
9. Transfer of capital asset being shares held by the shareholder of the
amalgamating company in lieu of shares issued by the amalgamated
company if -
a) transfer is made in consideration of allotment to him of any shares in
the amalgamated company; and
b) the amalgamated company is an Indian company.
10. Transfer of capital asset, being bonds and global depository receipts
referred to in Sec. 115AC made outside India by a non resident to another
non-resident.
11. Transfer of capital asset being any work of art, archeological or scientific
or art collection, any book manuscript, painting, drawing, etc., to the
government or university or notified museums, art gallery or approved
institutions.
12. Conversion of debentures, debenture stock, deposit certificate of
company into shares or debentures of that company
13. Transfer of a capital asset being membership of a recognized stock
exchange by a person on or before 31-12-98 to a company in exchange of
shares allotted.
14. Transfer of land of a sick industrial company under a scheme sanctioned
where such industrial company is managed by workers co-operative..
15. Transfer of capital asset or intangible assets by a firm to a company as a
result of succession or transfer of capital asset to a company in the course of
corporation or demutualisation of R.S.E. as a result of which an BOI/AOP is
succeeded by company subject to the following conditions:
a) all the assets and liabilities of the firm/AOP/BOI relating to the
business immediately before the succession shall be the assets and
liabilities of the company.
b) All the partners of the fimr immediately before the succession become
the shareholders of the company in the same proportion in which their
capital accounts stood in the books of the firm on the date of
succession
c) The partners of the firm do not receive any consideration or benefit,
directly or indirectly, in any form or manner, 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 50% of the total voting power in the company
and the shareholding continues to be as such for a period of five years
from the date of succession
e) The succession of AOP/BOI should be in the course of corporatisation
of recognized stock exchange in accordance with scheme approved by
SEBI
16. Transfer of capital asset where the proprietary concern is succeeded by
a company subject to specified conditions:
a) all the assets and liabilities of the firm/AOP/BOI relating to the
business immediately before the succession shall be the assets and
liabilities of the company.
 b) The sole proprietor do not receive any consideration or benefit, directly
or indirectly, in any form or manner, other than by way of allotment of
shares in the company.
c) The shareholding in the company of the sole proprietor is not less than
50% of the total voting power in the company and the shareholding
continues to be as such for a period of five years from the date of
succession

Scope and year of chargeability- Sec 45

S.S Transaction Year of Consideration
chargeability
(1) Transfer of capital Previous yr. in Consideration for
asset which transfer transfer
takes place
(1A) Damage to or Previous yr in Money or FMV of other
destruction of any which assets on the date of
capital asset money/asset such receipt
received from
insurance Co.
(2) Conversion of capital Previous yr in FMV as on date of
asset in to stock in which stock in conversion
trade trade is sold
(2A) Transfer of securities Previous year in Consideration for
by depository who is which transfer transfer chargeable in
deemed to be takes place on the hands of beneficiary.
registered owner FIFO basis
(3) Transfer of capital Previous year in Value recorded in the
asset by a partner/ which transfer books of the
member to the firm/ takes place firm/AOP/BOI
AOP/BOI
(4) Transfer of capital Previous year in Fair market value as on
asset by way of which transfer date of transfer
distribution on takes place
dissolution or
otherwise of a firm or
AOP/BOI
(5) Transfer of capital Previous year in The initial or enhanced
asset by way of which compensation recieved
compulsory compensation is
acquisition under any received
law
(6) Repurchase of mutual Previous year in Repurchase price
fund units referred in which repurchase
Sec.80CCB takes place or
scheme terminates
The damage or destruction u/s 45(1A) should as a result of
- flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature
- riot or civil disturbance
- accidental fire or explosion
- action by an enemy or action taken in combating enemy
Exempted capital gains :
a) Sec 10(33) Income arising from transfer of capital asset(long term or
short term) of capital asset being a unit of US 64
b) Sec 10(36) Long term capital gain on transfer of BSE-500 Equity
shares acquired between 1st March 2003 & 29th Feb 2004
c) Sec 10(38) Long term capital gain on transfer of equity shares or
units of equity oriented mutual fund on or after 1st October 2004 which
is chargeable to securities transaction tax
d) Sec 10(37) Capital gain(short term or long term) in case of assessee
being Individual or HUF on transfer of urban agricultural land by way
of compulsory acquisition
e) Sec 10(41) Capital gain on transfer of asset of an undertaking
engaged in business of generation, tansmission or distribution of
power, where such transfer is effected before 31.03.2006

Sec 48 – Computation of Capital gain:

Full value consideration A
Less: Expenses in connection with transfer B
Net consideration( A-B) C
Less: Cost/Indexed cost of acquisition D
Gross capital gains E
Less Exemption u/s 54B, 54D, 54G & 54GA for short term capital gain
U/s 54, 54B, 54D, 54EC, 54ED, 54F, 54G & 54GA for long term gain F
Net capital gain G
The security transaction tax paid on sale or purchase of equity shares or
units of equity oriented funds shall neither form part of cost of acquisition
nor allowed as deduction as expenses of transfer. (fifth proviso to sec 48)

Special provision for value of consideration – Sec 50C :

In a case where the consideration received or accruing as a result of the
transfer of land or building or both, is less than the value adopted or
assessed for the purpose of payment of stamp duty, the value so adopted for
the purpose of stamp duty purpose shall be the value of consideration.
However
i) where the assesssee claims that the value adopted or assessed for stamp
duty purpose exceeds the fair market value as on date of transfer ; and
ii) he has not disputed the value so adopted or assessed, in any appeal or
revision or reference before any authority or court,
the assessing officer may refer the valuation of the relevant asset to the
valuation officer in accordance with section 55A of the act & the
consideration would be determined as below:
Situation Consideration
Assesee accepts the stamp duty Stamp duty valuation
valuation.
Assessee disputes the stamp duty The valuation as finally accepted for
valuation under the Stamp Act, stamp duty purpose
Assessee claims that the stamp duty If value determined by valuation
valuation exceeds the FMV officer is less than stamp valuation,
then such value.
If the value determined by valuation
officer is more than stamp duty
valuation, then value adopted for
stamp duty valuation.
Determination of cost of acquisition : Sec 49 & Sec 55
Nature of transaction Cost of acquisition
Asset acquired by the assessee Actual cost incurred by the assessee
Assessee acquired an asset specified Cost to the previous owner - 49(1)
modes such as gift, will, inheritance,
amalgamation etc
Shares issued by amalgamated Cost of shares held in amalgamating
company in lieu of shares in company. 49(2)
amalgamating company
Conversion of bonds, deposit Cost of such bonds, deposit
certificate, debentures, debenture certificate, debentures, debenture
stock into shares or debentures stock shall be actual cost – 49(2A)
Shares debentures or warrants The value of perquisite taxed u/s
allotted under other than ESOP 17(2) or the amt actually paid by the
scheme employee. – 49(2AA)
Shares allotted in resulting company (Cost of shares in demerged Co., x
as a result of demerger Net book value of assets transferred
in demerger)/Net worth of demerged
company.
Cost of original shares held in Actual cost of acquisition – cost of
demerged company acquisition in resulting company –
49(2D)
Cost of acquisition to transferee The cost for which the asset was
company where 47A is applicable acquired by the transferee company
– 49(3)
Goodwill of business, trade mark , If purchased – Purchase price;
brand name, right to mfr, produce or (FMV on 1-4-81 not allowed even if
process, right to carry or business, acquired before 1-4-81)
tenancy rights, stage carriage In other cases – NIL - 55(2)(a)
permits or loom hours
Allotment of additional financial asset Amount actually paid – 55(2)(aa)
Financial asset allotted without NIL – 55(2)(aa) . (if allotted prior to
payment - Bonus shares 1.4.81 FMV on 1.4.81 may be taken)
Shares allotted on corporatisation of Cost of original membership – 55(2)
stock exchange (ab)
Asset acquired prior to 1-4-81 FMV as on 1-4-81 (optional) - 55(2)
(b)
Capital asset becoming the property FMV of asset on date of liquidation –
of assessee on distribution on 55(2)(b)
liquidation
Cost of the asset in the hands of FMV on the date on which the capital
previous owner cannot be asset became the property of
ascertained previous owner (3)
Sale of depreciable asset Opening WDV + Cost of asset
acquired during the year – 50
Sale of depreciable asset by assessee Actual cost of the asset – 50A
engaged in generation etc of power
1. Mortgage created by previous owner and discharged by successor is
deductible as cost of acquisition. V.S.M.R. Jagadish Chandran v CIT (1997)
93 Tax 389 – SC
2. If the asset was the subject matter of negotiation on any previous
occasion in respect of which advance money was received but later on
forfeited and retained, shall be reduced from
a) cost of acquisition
b) Fair market value
c) WDV as the case may be.

If the advance money forfeited is more than the cost of acquisition, such
excess shall be capital receipt not taxable. Tranvancore Rubber & Tea Co.,
Ltd V CIT(2000) 243 ITR 158 SC

Forfeiture of earnest money by the vendor, due the fault of vendee will not
be allowed as capital loss in the hands of Vendee; CIT v Sterling & Invt
Corp’n 1980 123 ITR 441 Bom

X acquired 1000 shares in G Ltd.@ 30 per share. G Ltd was demerged on

19-5-2009 when its net worth was 75 Lakhs and the net book value of the
assets transferred to R Ltd.,( resulting company) was Rs.25 lakhs. Compute
the cost of acquisition of shares of X in demerged company as well as
resulting company assuming the paid up capital and general reserves of G
Ltd before demerger were Rs.1 crore.

Cost of Improvement : Sec - 55(1)

1. Any capital expenditure incurred towards the improvement of capital
asset and not allowed as deduction under any other head of income can be
claimed as cost of improvement.
2. In relation to capital asset being goodwill of business, right to
manufacture, produce or process any article or thing, or right to carry on any
business cost of improvement shall be taken to be nil
3. Cost of improvement incurred prior to 1-4-81 is not considered.
Compensation paid for eviction of hutment dewellers for vacating the land
constitutes cost of improvement. CIT v Piroja C Patel 2000 242 ITR 582 –
Bom

Indexed Cost of acquisition/Improvement:

In computing capital gain arising from transfer of long term capital asset
deduction can be claimed for the cost of acquisition and cost of improvement
after indexing them.
Notes:
1. Indexation not available
a) on bonds and debentures other than capital indexed bonds issued by
Government of India.
b) in case of transfer of undertaking in slump sale.
c) on shares or debentures acquired by non-resident in foreign currency in an
Indian company
d) on depreciable assets.
2. In case of debentures converted into shares and subsequently sold,
indexation benefit is not available in respect of period of holding of debenture
3. In the case of conversion of capital asset into stock in trade, indexation
available only up to year of conversion of capital asset into stock in trade
4. In case of compulsory acquisition, indexation confined only up to year of
acquisition
 EXEMPTIONS FROM CAPITAL GAINS:
Sec Applicability Asset Conditions Exemption
54 Individual Residential Within 1 year before or Capital gains
HUF house 2 years after residential or amount
house is purchased, or invested
(LT) within 3 years whichever is
residential house is less
constructed
54B Individual Agricultural used by him or his Capital gains
land parent in 2 years or amount
(LT/ST) immediately the date of invested
transfer for agricultural whichever is
purpose less
Within 2 years for
transfer purchase
agricultural land
54D Any L&B for - there must be Capital gains
assessee industrial compulsory acquisition or amount
undertakin - used for 2 years for invested
(LT/ST) purpose of business whichever is
- within 3 years any less
other land or building is
purchased or
constructed
54EC Any Any asset Investment within 6 Capital gains
Assessee months in bonds of or amount
(LT) NABARD, NHAI, Rural invested
electrification Corp Ltd., whichever is
NHB or SIDBI less
54ED Any units of UTI Within 6 months in Capital gains
assessee or M.Fund equity shares forming or amount
and listed part of eligible issue of invested
securities capital made by public whichever is
(LT) company and offered to less
public
54F Individual, Any asset - should not own more Capital gains
HUF other than than one house of x
residential transfer date Net
house - within 1 year before consideration
(LT) or 2 years after
residential house is Amount
purchased, or within 3 invested
years residential house
is constructed
54G Any P/M or L/B - transfer due to Capital gain or
assessee of industrial shifting to rural area amou
undertaking - within 1 year before nt
situated in or 3 year invest
urban area after P/M or L/B ed
purchased or completed which
building ever
is less
54GA Any P/M or L/B - Transfer due to Capital gain or
assessee of industrial shifting to any SEZ amou
undertaking - within 1 year before nt
situated in or 3 year after P/M invest
urban area or L/B purchased or ed
building completed which
(including specified ever
expenses) is less

1. Under sec 54 54B, 54D, 54G, where the new asset acquired, is
transferred within a period of 3 years from the date of its acquisition, the
cost of such asset shall be reduced by the amount of capital gain exempted
earlier and the short term capital gains shall be computed after deducting
such reduced cost of acquisition
2. Under sec 54F if the specified asset or the new asset is transferred within
a period of three years then the capital gain exempted earlier shall be taxed
in the previous year in which such asset is transferred.
3. Expenditure incurred for construction before the date of transfer of the
asset becomes eligible for exemption u/s 54 or 54F so long as the
construction is completed within the stipulated period. CIT v J.R.Subramanya
Bhat, 165 ITR 571 Kar.
4. Registration of ownership not necessary for the purpose of Sec 54, as it
speaks of purchase and not necessary to be the owner. Balraj v CIT (2002)
123 Tx 290 Del
5. Exemption from capital gain cannot be denied on the ground that the
funds invested are borrowed. Bombay housing corporation v ACIT Mum Tri
2002.
6. In case of compulsory acquisition the period of one/two/three years shall
commence from date of receipt of compensation. Sec – 54H

Capital gains accounts scheme:

The amount of capital gain u/s 54, 54B, 54D, 54F, 54G which is not
utilized by the assessee for the purchase of new assets within the time
allowed for the purpose, can be deposited in an account under Capital Gains
Accounts Scheme.
i) the deposit shall be made before furnishing the return of income or
within the due date for furnishing the return of income u/s139(1),
whichever is earlier
ii) the deposit shall be made in an account with a bank or institution
approved for the purpose
iii) the return of income shall be accompanied by proof of such deposit
iv) the amount deposited can be withdrawn for utilization in
accordance with the scheme for specified purpose
v) if the amount not utilized for acquiring the new asset within the
period stipulated under respective sections, to the unutilized
amount shall be treated as the capital gain of the previous year in
which the period specified in the above provisions expires. However
for Sec 54F only proportionate gain will be taxable.
vi) in case of an individual who dies before the expiry of stipulated
period, any unutilized amount of deposit made under capital gains
accounts scheme shall not be chargeable in the hands of legal
heirs.
P) Kumar acquired a residential house on 1-9-79 for Rs.1,00,000. He spent
Rs.10,000 on 1/7/80 for improvement of house property. A further sum of
Rs.50,000 was spent by him on 15-11-84 on improvement of the house.
Kumar gifted the said property to his son Lokesh on 12-10-93. Lokesh also
spent Rs.50,000 on 15-7-94 and Rs.40,000 on 15-6-2004 for improvement
of said property. Kumar sold the house on 30-11-2005 for a sum of
Rs.12,00,000. Expenses on transfer were 2% of sale consideration.
Compute the capital gain for assessment year 2006-07 assuming the fair
market value of the house on 1/4/81 to be 90,000.

P) Anand sells 10,000 equity shares of AB Ltd on 31st May 2009 at Rs.450
per share and paid brokerage of 2%. The said shares were acquired by him
in the following manner:
Lot 1 – 5,000 shares received as gift from his father on June 1 1980, the
market value on April 1 1981 was Rs.50 per share
Lot 2 – 2,000 shares received as bonus shares from AB Ltd on 21.07.85
Lot 3 – 3,000 shares purchased on 1st Feb 1996 at 125 per share
Anand purchases a residential house for Rs.25 lakhs, on July 1 2010 from the
sale proceeds of shares. He owns a residential house, even before the
purchase of above house.

P) During the previous year 2005-06 Singh sells the following:

Shares Rural Urban Debentures Personal

(unlisted Agricultura agricultur (unlisted) car
l Land al land
Date of sale 10.4.09 25.5.09 10.6.09 10.4.09 1.7.09
Sale proceeds 8,00,000 17,00,000 15,50,000 2,90,000 1,25,000
Cost of Acq’n 1,70,000 2,30,000 2,50,000 1,70,000 70,000
Year of Acq’n 1989-90 1973-74 1979-80 1990-91 1991-92
FMV(1.4.81) 1,80,000 3,40,000 2,00,000 1,80,000 NA
On july 31 2010(being due date for filing return of income), Singh deposits
1,00,000 under section 54B for claiming exemption in future by purchasing
agricultural land. He also spent Rs. 8,50,000 on construction of a house
property on a plot which was bought by him in 2007 for Rs. 4,00,000. By
withdrawing from the deposit account, he purchases agricultural land for
Rs.40,000 till June 9 2011. Assuming that the income of singh from other
sources for the previous years 2009-10 and 2011-12 is Rs.1,86,000 and
1,92,000, respectively find out the taxable income of Singh for assessment
year 2010-11 & 2012-13

P) A is engaged in agriculture on a land situated in specified area for several

years which he acquired from his father by way of will in 1984-85. His father
had purchased that land in 1978 for Rs.50000. The said land was acquired
by government on 5-4-2007 and compensation was fixed at Rs.16,00,000,
which was received by A on 27-2-2010. A purchased an rural agricultural
land(not in specified area) on 15-5-2010 for Rs.5,00,000 and deposited
Rs.5,00,000 under the capital gains scheme on 31-7-2010 in order to
purchase a residential property at a later date as he did not own any such
property.
As he was not satisfied with the compensation money fixed by the
government, he filed a suit in court of law. The court enhanced the
compensation by an additional amount of Rs.5,00,000 which was received by
him on 3rd Aug 2010. He incurred 50,000 as expenses for filing the suit. Out
of money received by A on account of enhanced compensation, he invested
Rs.3,00,000 on the purchase of another agricultural land on 11-8-2010.
Compute the capital gain for various assessment years, assuming
i) market value of agricultural land sold on 1-4-81 was Rs.1,00,000.
and
ii) the rural agricultural land purchased on 15-5-2010 was sold for
Rs.7,00,000 on 1/3/2011.

P) Mr Maran of Chennai is running an industrial unit. He was ordered by the

corporation to shift the industrial unit from an urban area to non-urban area.
He shifted his concern during the financial year 2009-10 and in the process
sold some of the assets whose details are given below:
Asset P&M Furniture Land Building
Acquired in 1987 1991 1989 1989
Sale proceeds (Rs.) 10,00,00 3,00,000 7,00,000 12,00,000
W.D.V. as on 1-4-2002 4,40,000 2,00,000 7,32,500
Cost of acquisition 6,00,000 40,000 10,00,000
Amount invested during 2009-
10 due to shifting 5,00,000 2,00,000 2,00,000 5,00,000
Compute taxable capital gain for assessment year 2010-11.
Sec 47A – Withdrawal of exemption in certain cases:
(1)Where at any time before the expiry of a period of 8 years from the date
of transfer of capital asset by a holding company to its wholly owned
subsidiary company or vice versa
i) the capital asset transferred is treated as stock in trade by
transferee company
ii) the holding company ceases to hold the whole of share capital .
In the above two circumstances the profits or gains arising form the transfer
of such capital asset, which was exempt, shall be deemed to be the income
of transferor company and chargeable under head capital gains of the
previous year in which transfer of such asset to the transferee company had
taken place.

P) S ltd. is a wholly owned subsidiary company of H Ltd. Both H Ltd and S

ltd are Indian companies. S Ltd transferred a plot of land to H Ltd on 21-10-
85 for Rs.2,00,000. S Ltd had acquired this land on 1-1-80 for RS.80,000.
The market value as on 1-4-81 was Rs.1,20,000. What would be the capital
gains if, any chargeable in the hands of H ltd and S ltd in the following
situations.
i) H Ltd sells the land on 2-9-2002 for RS.5,00,000. H Ltd continues
to hold 100% shares of S Ltd.
ii) H Ltd converted the land as stock in trade on 16-11-88 and then
sold it on 2-9-2002 for RS.5,00,000. The market value of the asset
as on 16-11-88 was Rs.3,00,00.
iii) H Ltd., transferred 25% of shares of S Ltd to the public on 15-12-
88. It sold the land on 2-9-2002 for the Rs.5,00,00.

(2) Transfer of shares received in exchange of membership of Recognised

stock exchange within 3 years from the date of transfer of membership.

(3) Where a firm or proprietary concern is succeeded by company, and the

aggregate of shareholding of the sole proprietor, as the case may be, does
not continue to remain 50% of the total voting power for a period of 5 years
from the date of succession, the capital gains exempted earlier at the time of
succession shall be chargeable to tax in the hands of successor company in
the previous year in which such requirement is not complied with.

Special provision for Non residents:

Computation of capital gain on transfer of shares or debentures of

Indian company - Proviso 1 to Sec 148 and rule 115A

In the case of a assessee who is a non-resident capital gains arising from

transfer of capital assets being shares or debentures of an Indian company
shall be computed by converting cost of acquisition, expenses incurred for
the transfer and sale consideration into the same foreign currency as was
utilized for the purchase of shares or debentures as indicated below. The
capital gains so computed in such foreign currency shall be reconverted into
Indian currency for the purpose of further computation.
 Conversion / Re- Rate of conversion / re-conversion
conversion
Cost of acquisition Average of TT. selling and buying rate on
acquisition date
Expenses on transfer Average of T.T. selling and buying rate on date of
transfer
Sale consideration Average of T.T. selling and buying rate on date of
transfer
Capital gains(re- Buying rate for telegraphic transfer as on date of
conversion) transfer
The conversion and reconversion shall be made on the basis of the rate of
exchange adopted by the S.B.I.
Mr. Fedrick a non-resident Indian acquired in January 2006 shares in Indian
companies for a consideration of Rs.15 lacs by remitting equivalent AUS
dollars. In October 2009 he sold the entire shares for a sum of Rs.30,50,000
after incurring Rs.61,000 towards expenses for transfer. You are informed
the details of TT rates of SBI here below:
Particulars Buying rate Selling rate
On the date of 14.50 15.50
acquisition 30.00 31.00
On the date of transfer
Compute the taxable capital gains on the basis of the above information
assuming that the shares have not been transferred through RSE.

Special provision for Non-resident Indian: - Sec 115F

Where an assessee, who is a non-resident Indian, transfers any long term
‘foreign exchange asset’ exemption of the capital gains on such transfer can
be availed if the net consideration realized is invested within a period of Six
months in the following assets:
a) Shares of Indian company Foreign Exchange
b) Debentures issued by Indian public company Asset
c) Deposits with an Indian public company
d) Securities of central government
e) Such other assets as may be notified by central government.
However exemption granted u/s 115F will be withdrawn where :
the new asset is transferred or converted into money within a period of three
years from the date of its acquisition and the exemption granted earlier will
be taxed as capital gain in the year of transfer.
A non-resident has option claim the application of general provision of the act
by furnishing return of income u/s 139(1).

P) in the above problem assume Mr.Fedrick is NRI and he deposited 20 lacs

with a Indian public company and compute the taxable capital gain.

Sec – 50B Slump Sale:

Slump sale means the transfer of one or more undertakings as a result of the
sale for a lump sum consideration without values being assigned to the
individual assets and liabilities in such sale. Sec – 2(42C)

Any profits or gains arising from the slump sale of an undertaking shall be
treated as long term capital gain if the undertaking is held for more than 36
months.
The Net worth of the undertaking or division so transferred shall be deemed
to be cost of acquisition and the cost of improvement.
‘Net worth’ shall be 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 its books of account.
Any change in the value of assets on account of revaluation of assets shall be
ignored for the purpose of computing net worth.
P) SRK Ltd has two divisions namely the paints division and tyre division and
the balance sheet of the company as on 31-3-2010 is as under
Lacs Lacs
Paid up capital 60.00 Paints division:
Fixed assets(WDV after depr.)
Reserves & surplus 84.00 a) Building 15.00
Creditors b) Plant & machinery 25.00
Paints division 30.00 Debtors 20.00
Tyre division 60.00 Stock in trade 15.00
Other current assets 5.00
Tyre Division:
Fixed assets(WDV after depr.) 60.00
Investments 20.00
Debtors 30.00
Stock in trade 40.00
Other current assets 4.00

234.00 234.00
The company decides to sell the paint division which was established in 1996
to another company Aryan Ltd. for a lump sum of Rs. 90 lacs. The fixed
assets of the company includes land and building whose WDV as on 1-4-2009
is Rs.15 lacs but it has been valued at Rs.50 lacs for the purpose of stamp
duty. Compute the capital gain taxable in the case assuming the market
value of the stock transferred is Rs.20 lacs

Sec – 55A :Reference to Valuation officer:

With a view to ascertaining the FMV of a capital asset for the purpose of
capital gains and other relevant purposes, the assessing officer may refer the
valuation of capital asset to the valuation officer under the following
circumstances:
a) In case where the value of the assets as claimed by the assessee is in
accordance with the estimate by a registered valuer, and if the assessing
officer is of the opinion that the value so claimed is less than the FMV
b) In any other case, if the AO is of opinion:-
(i) that the FMV of the assets exceeds the value of the asset as claimed by
the assessee by more than 15% of the value claimed or by more than
Rs.25,000
(ii) that having regard to the nature of the asset and other relevant
circumstances it is necessary to make the reference.
The valuation report of the valuation officer shall be binding on the AO

Sec 46 – Distribution of assets by companies in liquidation

Where assets are transferred by way of distribution to the shareholders of a
company on account of liquidation, such distribution shall not be regarded as
transfer in the case of company.
In the case of shareholders of the company, capital gains shall be chargeable
to tax on distribution. For purpose of computation of Capital gains, the
consideration shall be
a) distribution in cash: Amount received less deemed dividend u/s2(22)
(c.
b) Distribution in kind : FMV of asset on date of distribution less dividend
2(22)(c)

Sec 46A – Capital gain on purchase by company of its own shares or

securities
Where a company purchases its own shares and other specified securities,
the difference between the cost of acquisition and the value of consideration
received by the shareholder or the holder of such other specified securities
shall be deemed to be the capital gains arising to such shareholder or the
holder of such other specified securities.

Tax on term capital gains:

a) Tax Rate on long term capital in hands of all assessee is at 20%.- Sec
112
b) Long term capital gain arising from listed securities (not covered in
under exemptions) is chargeable at the rate of 10% computed without
indexation. – 112
c) Short term capital gain arising from transfer of Securities or units on
which transaction tax is paid is chargeable at 10% - Sec 111A
d) Deduction under section 80C to 80U are not available from long term
capital gain. The deduction is also not available from short term capital
gain on which security transaction tax is paid.
e) In case of total income of Individual or HUF being a resident as
reduced by long term capital gains, or short term capital gain covered
under section 111A is below the maximum amount not chargeable to tax,
then such long term capital gains shall be reduced by the amount by
which such total income falls short of the exemption limit and tax shall be
computed on balance capital gain.

P) The Income of Mrs X who is suffering from disability for the previous year
2009-10 is as under
i) Income from house property 1,92,000
ii) Income from interest on loan 17,000
iii) Income from interest on bank deposits 10,000
iv) Long term capital gain 1,20,000
She is eligible for deduction of Rs.10,000 u/s 80C on account of PPF &
Rs.50,000 under section 80U. Compute his tax liability

P) During previous year 2009-10 Vivek sells the following shares :

A Ltd B Ltd C Ltd
Listed Listed unlisted
Sale consideration 5,00,000 4,00,000 6,89,000
Cost of acquisition 26,000 1,10,000 20,000
Date of acquisition 10-5-91 6-6-92 6-4-90
Date of transfer 01.11.09 30.5.09 10.01.10
Income from other sources 30,000 85,000 20,000
Advice Mr. Vivek in respect of his tax liability for the A.Y-2010-11.
 CHAP IV F – INCOME FROM OTHER SOURCES

Sec 56 – Chargeability
The following income shall be charged to tax under head “income from other
sources”
a) Dividends
b) Income by way of winning from lotteries, cross word puzzles, races
including horse race, gambling, betting etc.
c) Incomes like interest on securities; letting of machinery, plant or
furniture together with or without building; employees contribution to
welfare funds etc if not charged under head business or profession
d) Sum received under keyman insurance policy if not charged under
head ‘salaries’ or under ‘business or profession’
e) A sum of money exceeding Rs.25,000 received without consideration
by an individual and HUF on or after 1st September 2004.
Exception : The sum is not taxable if received
a) from any relative
b) on occasion of the marriage of individual
c) under a will or by way of inheritance
d) in contemplation of death of payer
Relative means:
a) Spouse of individual
b) Brother or sister of individual
c) Brother or sister of spouse of individual
d) Brother or sister of either of the parents of individual
e) Any lineal ascendant or descendant of the individual
f) Any lineal ascendant or descendant of the spouse of individual
g) Spouse of the person referred in b – f

f) All other incomes chargeable, but not falling under any other specific head.

DIVIDEND:
Sec 2(22) – Dividend: The following payments or distributions by a company
to its shareholders are deemed to be dividend to the extent of accumulated
profits of the company:
a) any distribution entailing the release of company’s assets
b) any distribution of debenture, debenture-stock, deposit certificate; and
bonus shares to the preference shareholders
c) distribution on liquidation of company
d) distribution on reduction of capital
e) any payment by way of loan or advance by a closely held company
(other than loan made in the ordinary course of business and money
lending is substantial part of company’s business) to
i) shareholder holding beneficial ownership of equity shares
carrying not less than 10% voting power
ii) any concern in which such shareholder holds substantial
interest
iii) any person on behalf or of the individual benefit of
shareholder
Exceptions:
1) Any payment made by a company on purchase of its own shares
2) Distribution of shares pursuant to a demerger(whether or not there is
reduction in capital of demerged company)
3) Distribution on liquidation or reduction in respect of preference shares
issued for full cash consideration.
4) Dividend paid by company which is set off against the whole or any part
of any sum previously paid as loan and treated and dividend.

Notes:
1) Where liquidation is consequent on the compulsory acquisition of the
company’s undertaking by the government or a Government company,
accumulated profits do not include the profits of the company prior to the
three successive years immediately preceding the previous year in which
acquisition took place. Expl - 2
2) When distribution is made by liquidator, the distribution is deemed to
take place in the same proportion in which share capital and accumulated
profits stood immediately before distribution. CIT v Girdhardas & Co.,(P)
Ltd., 63 ITR 300 SC
3) The shareholder should have 10% voting power on the date the advance
or loan is given to him.
4) For the purpose of Sec 2(22) accumulated profits gets reduced by the
amount deemed as dividend u/s 2(22) even if no adjustment is made in the
books of account. CIT v G.Narasimhan (1999) 102 Tx 66 SC
5) Sec 2(22)(e) is applicable even if loan is repaid before the end of
previous year. Tarulatha shyam v CIT (1977) 108 ITR 345 SC
6) For purpose of sec 2(22)(e) accumulated profits does not include
capitalized profits
7) Loan or advance given to a concern is treated as dividend in the hands of
the concern

Sec 8 – Charge of dividend income:

Dividend is includible in the total income of the assessee on the following
basis:
Type of Dividend Year of chargeability
Final Dividend PY in which dividend is declared by the company
Interim dividend PY in which dividend is unconditionally made
available
Deemed dividend 2(22) PY in which such dividend is paid or distributed
Note : Dividend received from a domestic company is exempt u/s 10(34)

Deep Discount bonds: Circular No.2/2002

1) Every person holding deed discount bond will make market valuation of
the bond as on March 31 of each financial year.
2) The difference between market valuation as on two successive valuation
dates will represent the accretion to the value of the bond during the
relevant financial year and will be taxable as interest income where the
bonds are held as investment and business income where the bonds are held
as trading assets
3) Where the bond is transferred before maturity date, the difference
between the sale consideration and cost of bond will be taxable as short term
capital gain. Cost of acquisition would be aggregate of cost for which the
bond was acquired and the income if any offered to tax by the transferor up
to the date of transfer
4) Where the bond is redeemed by the original subscriber, the difference
between the redemption price and the value as on last valuation date
immediately preceding the maturity date will be taxed as interest income or
business income as the case may be
5) Investors holding deep discount bonds up to an aggregate face value of
Rs.1,00,000 may at their option, continue to offer income for tax in
accordance with the earlier clarification issued by the board

Sec 57 – Deductions:
a) In respect of dividend income and interest income any reasonable
expenditure incurred by way of commission or remuneration for
realization of such income.
b) In respect of family pension a sum equal to 33.33% of the pension or
Rs.15,000 whichever is less.
c) In case of lease rental on letting of machinery, plant and furniture with
or without building, the following shall be deducted; a) Repairs b)
Insurance c) depreciation
d) Any other expenditure not being capital expenditure, wholly and
exclusively for purpose of earning income.

Sec 58 – Inadmissible expenses

a) personal expenses
b) wealth tax
c) expenses of the nature specified in 40A
d) any interest or salary chargeable under this act and paid outside India
without TDS
e) No deduction shall be allowed in respect of winnings from lotteries,
cross word puzzles, card games, races include horse race, gambling
betting etc
Interest paid on amount borrowed for meeting tax liability is not deductible.
Padmavathi Jayakrishna v Addl CIT (1987) 166 ITR 176 SC

Sec 59 – Deemed income

Any amount received or benefit derived in respect of expenditure incurred or
loss or trading liability allowed as deduction, shall be deemed to be income in
the year in which the amount is received or benefit is accrued.