“INCOME TAX PLANNIG IN INDIA WITH

RESPECTRED TO INDIVIDUAL ASSESSEE”

Submitted In partial fulfillment of the Requirements

For
M.COM-II (Accountancy) Semester-III

By
Mr. Nilesh Vasant Chavan
(Roll No: 68)
Under The Guidance of Prof. Mahesh Vaishya.

Chembur Trombay Education Society's,

N.G Acharya And D.K.Marathe College
Of Arts, Science & Commerce,
N.G. Acharya Marg,
Chembur, Mumbai 400 071.

1
 “INCOME TAX PLANNIG IN INDIA WITH
RESPECTRED TO INDIVIDUAL ASSESSEE”

Submitted In partial fulfillment of the Requirements

For
M.COM-II (Accountancy) Semester-III

By
Mr. Nilesh Vasant Chavan
(Roll No: 68)
Under The Guidance of Prof. Mahesh Vaishya.

Chembur Trombay Education Society's,

N.G Acharya And D.K.Marathe College
Of Arts, Science & Commerce,
N.G. Acharya Marg,
Chembur, Mumbai 400 071.

2
 DECLARATION

I,Mr. NILESH VASANT CHAVANof N.G. ACHARYA AND D.K.

MARATHE COLLEGE OF ARTS, SCIENCE AND COMMERCE OF

MCOM(PARTII)(Rollno.68)

(SemesterIII)herebydeclarethatIhavecompletedthisprojectonINCOME

FROMCAPITAL GAINSinacademic

Year 2018-

19.Theinformationsubmittedistrueandorigin

alinthebestofmyknowledge.

3
(Signatureofstudent)

4
 ACKNOWLEDGEMENT

Tolistwhoallhelpedmeisdifficultbecausetheyaresonumerousandthedepthissoenormous.

Iwouldliketoacknowledgethefollowingasbeingidealisticchannelsandfreshdimensionsinthecom
pletionofthisproject.

IwouldfirstlythanktheUniversityofMumbaiforgivingmechancetodothisproject.

Iwouldliketothankmyprincipal,Dr. VIDYA GAURI

LELEforprovidingthenecessaryfacilitiesrequiredforcompletion ofthisproject.

Ievenwillliketothankourcoordinator Prof. Akila Maheshwari

forthemoralsupportthatwereceived.

Iwouldliketothankourcollegelibrary,forprovidingvariousbooksandmagazinesrelatedtomyproj
ect.

Finally,Iproudlythankmyparentsandfriendsfortheirsupportthroughouttheproject.

5
 TABLEOFCONTENTS

SRNO. CONTENTS PAGENO.

1 TAX–INTRODUCTION

2 DIRECTTAX

3 CAPITALGAINS–INTRODUCTION

4 TYPEOFCAPITALASSETS

5 PERIODOFHOLDING

6 COMPUTATIONOFCAPITALGAINS

7 ILLUSTRATIONS

8 CONCLUSION

9 BIBLIOGRAPHY

SEC.’STOBEREMEMBERED

SEC.48 COMPUTATION OFC.G.-

NONDEPRECIABLECAPITALASSETS.
SEC.49(1) CONCEPTOF PREVIOUSOWNER.

SEC.51 FORFEITUREOFADVANCE.

SEC.45(2) CONVERSION CAPITALASSETINTOSIT

6
SEC.45(5) COMPULSORYACQUISITION.

SEC.111A TAXATION OFSTCG

SEC.112 TAXATION OF LTCG

SEC.50 COMPUTATION OFC.G. -

DEPRECIABLECAPITALASSETS.
SEC.50A COMPUTATION OFC.G. - DEPRECIABLEC.A/’S(SLM)

SEC.50B SLUMPSALE

SEC.50C COMPUTATION OFC.G’SIN CASEOFLAND &BUILDINGS

SEC.55A REFERENCETOVALUATIONER.

SEC.54SE EXEMPTION FROM CAPITALGAINS

RIES

7
 TAX

Atax(fromtheLatintaxo)isafinancialchargeorotherlevyimposeduponataxpayer(anindividual
orlegalentity)by astateorthefunctionalequivalent ofastateto fundvariouspublic expenditures. Afailure
topay,orevasionoforresistanceto taxation, isusuallypunishable by
law.Taxesconsistofdirectorindirecttaxesandmaybepaidinmoneyorasitslabourequivalent.Somecountriesimp
osealmostnotaxationatall,oraverylowtaxrateforacertainareaoftaxation.

Everyoneofus,haveheardaboutthetax,itisa compulsoryfinancial obligation, payabletothe government.

Butthisdefinitionisnotsufficient tounderstandthecompletetaxsystem.Ithas been
mainlydividedintotwobroadcategoriesDirectTaxandIndirectTax,comprisingofthedifferent
natureoftaxes.Let’sunderstandthemeaningandthedifference betweenDirectTax andIndirectTax.

8
DefinitionofDirectTax

Adirecttaxisreferredtoasataxleviedonperson’sincomeandwealthandispaiddirectlytothegovernment,
theburdenofsuchtaxcannotbeshifted. Thetaxisprogressiveinnaturei.e.it increaseswithan
increaseintheincomeorwealthandviceversa.Itleviesaccordingtothepayingcapacityoftheperson,i.e.thetaxiscol
lectedmorefromtherichandlessfromthepoorpeople.ThetaxisleviedandcollectedeitherbytheCentralgovern
ment orStategovernment or thelocalbodies.

Theplansandpolicies
oftheDirectTaxesarebeingrecommendedbytheCentralBoardofDirectTaxes(CBDT)whichisundertheM
inistryofFinance,GovernmentofIndia.

ThereareseveraltypesofDirectTaxes,suchas:

● IncomeTax
● WealthTax
● PropertyTax
● CorporateTax
● ImportandExportDuties

DefinitionofIndirectTax

IndirectTaxisreferredtoasataxchargedona
personwhoconsumesthegoodsandservicesandispaidindirectlyto thegovernment.
Theburdenoftaxcanbe easilyshiftedto theanother
person.Thetaxisregressiveinnature,i.e.astheamountoftaxincreasesthedemandforthegoodsandservicesde
creasesandviceversa.Itleviesoneverypersonequallywhetherheisrichorpoor.Theadministrationoftaxisdo
neeitherbytheCentralGovernment ortheStategovernment.

9
 ThereareseveraltypesofIndirectTaxes,suchas:

● CentralSalesTax
● VAT(ValueAddedTax)
● ServiceTax
● STT(SecurityTransactionTax)
● ExciseDuty
● CustomDuty
● AgriculturalIncomeTax

10
 Co
mparisonChart

BASISFORC DIRECTTAX INDIRECTTAX

OMPARISN
Meaning IndirectTaxisreferredtoasthetax,leviedona

personwhoconsumesthegoodsandservicesa
Directtaxisreferredtoasthetax,leviedon
ndispaidindirectlyto thegovernment.
person'sincomeandwealthandispaiddir

ectlytothegovernment.

Burden Theburdenoftaxcanbeshiftedtoanotherpers

on.
Thepersononwhomitisleviedbear

sitsburden.

Types ies.

WealthTax,IncomeTax,PropertyTax

,CorporateTax,ImportandExportDut
11
CentralSalestax,VAT(ValueAddedTax),ServiceTax,STT

(SecurityTransactionTax),ExciseDuty,CustomDuty.

Evasion Taxevasionispossible. Taxevasionishardlypossiblebecauseit

isincludedinthepriceofthegoodsandservice

s.

Inflation Directtaxhelpsinreducingthe Indirecttaxespromotetheinflation.

Inflation.

Leviedon Persons,i.e.Individual,HUF(Hindu Consumersofgoodsandservices.

UndividedFamily),Company,Firm

etc.

12
 Key DifferencesbetweenDirectandIndirectTaxes

1. Thetax,whichispaidbythepersononwhomitislevied,isknownastheDirecttaxwhilethetax,whichispaidbyt
hetaxpayerindirectly,isknownastheIndirecttax.Thedirecttaxisleviedonperson’sincomeandwealthwhere
astheindirecttaxisleviedonapersonwhoconsumesthegoodsandservices.
2. Themaindifference betweenthedirectandindirect taxisthattheburdenofdirecttaxcannotbe
shiftedwhereastheburdenofindirecttaxcanbeshifted.
3. Theevasionoftaxispossibleincaseofadirecttaxiftheproperadministrationofthecollection
isnotdone,butinthecaseofindirecttax,theevasionoftaxisnotpossiblesincetheamountof
taxischargedonthegoodsandservices.
4. ThedirecttaxisleviedonPersons,i.e.Individual, HUF(HinduUndivided Family), Company,
Firm,etc.Ontheotherhand,theindirecttaxisleviedontheconsumer ofgoodsandservices.
5. Thenatureofadirecttaxisprogressive,butthenatureoftheindirecttaxisregressive.

6. Directtaxhelpsinreducingtheinflation, buttheindirect taxsometimes helpsinpromotingthe

inflation.

Similarities

● Payableto thegovernment.
● Penaltyforthenon-payment.
● InterestonDelayedPayment.
● Improperadministrationcanleadtotaxavoidanceortaxevasion.

Conclusion

Boththedirectandindirecttaxhasitsownmeritsanddemerits.Ifwetalkaboutthedirecttaxestheyareequitable
becausetheyarechargedonperson,accordingtotheirpayingability.Thedirecttaxiseconomicalbecauseitsc
ostofcollectionislessbuthowever,itdoesn’tcoverevery sectionofthesociety.

13
Ontheotherhand,ifwetalkabouttheindirecttax,theyare
easytorealizeastheyareincludedinthepriceoftheproductandservices,andalongwiththat,ithasan
excellentcoverageof
everysectionofthesociety.Oneofthebestadvantagesoftheindirecttaxis,therateoftaxishighforharmfulprod
uctsascomparedtotheothergoodswhicharenecessaryforlife.

14
 DIRECTTAX

INCOMETAX

Anincometaxisataxthatgovernments imposeonfinancial incomegeneratedbyallentities

withintheirjurisdiction. Bylaw,businesses andindividuals mustfileanincome taxreturnevery
yearto determine whethertheyoweanytaxesorareeligibleforataxrefund.Incometaxisakey

sourceoffundsthatthegovernmentusestofunditsactivitiesandservethepublic.

HEADSOFINCOME

Underchapter4 ofIncomeTaxAct,1961 (Section14),incomeofa

personiscalculatedundervariousdefinedheadsofincome.Thetotalincomeisfirstassessedunderheadsofinco

15
meandthenitischargedforIncomeTaxasunderrulesofIncomeTaxAct.AccordingtoSection14
ofIncomeTaxAct,1961 therearefollowingheadsofincomeunderwhichtotalincomeofa
personiscalculated:

»HeadsofIncome:Salary

» HeadsofIncome:HouseProperty

»HeadsofIncome:ProfitinBusiness/Profession

»HeadsofIncome:CapitalGains

»HeadsofIncome:OtherSources

16
CAPITALGAINS

Acapitalgainisaprofitthatresultsfromasaleofacapitalasset,suchasstock,bondorrealestate,wherethesale
priceexceedsthepurchaseprice.Thegainisthedifferencebetweenahighersellingpriceandalowerpurchasep
rice.Conversely,a
capitallossarisesiftheproceedsfromthesaleofacapitalassetarelessthanthepurchaseprice.

Capitalgainsmayreferto"investmentincome"thatarisesinrelationtorealassets,suchasproperty;fin
ancialassets,suchasshares/stocksorbonds;andintangible assets.

Whenwebuyanykindofpropertyforalowerpriceandthensubsequentlysellitatahigherprice,wemakeagain.
Thegainonsaleofacapitalassetiscalledcapitalgain.Thisgainisnotaregularincomelikesalary,orhouserent.Iti
saone-timegain;inotherwordsthecapitalgainisnotrecurring,i.e.,notoccuragainandagainperiodically.
Oppositeofgainiscalledloss;therefore,therecanbealossundertheheadcapitalgain.Wearenotusingtheterm
capitalloss,asitisincorrect.CapitalLossmeansthelossonaccountofdestructionordamageofcapitalasset.T
hus,wheneverthereisalossonsaleofanycapitalassetitwillbetermedaslossundertheheadcapitalgain.

10
OBJECTIVE

Aftergoingthroughthislessonyouwillbeabletounderstandthemeaningofcapitalasset,typesof
capitalasset,whatisnotcapitalasset,computationofcapitalgain,typesofcapitalgainsetc.Youwillalsobelear
ninghowtocalculatethecapitalgainofsimpleproblems.Thecapitalgainisalsoanincomeanditistaxabletoo,at
theendofthechapteryouwillalsolearnthetaxtreatmentofthecapitalgain.

BASISOFCHARGE
Thecapitalgainischargeabletoincometaxifthefollowingconditions aresatisfied:

1. Thereisacapitalasset.

2. Assesseeshouldtransferthecapitalasset.

3. Transferofcapitalassetsshouldtakeplaceduringthepreviousyear.

4. Thereshouldbegainorlossonaccountof suchtransferofcapitalasset.

DEFINITIONOF‘CAPITALASSET’

AsperS.2 (14)oftheIncomeTaxAct,1961,
unlessthecontextotherwiserequires,theterm“capitalasset”means:
(a) Propertyofanykindheldbyanassessee,whetherornotconnectedwithhisbusinessorprofession;

(b) AnysecuritiesheldbyaForeignInstitutionalInvestorwhichhasinvestedinsuchsecuritiesin
accordancewiththeregulationsmadeundertheSecuritiesandExchangeBoardofIndiaAct,1992;butdoe
snotinclude:

(i) Anystock-in-trade,otherthanthesecuritiesreferredtoinsub-clause(b),consumablestoresor
rawmaterials heldforthepurposesofhisbusinessorprofession;

(a) jewellery;
13
(b) archaeologicalcollections;

(c) drawings;

(d) paintings;

(e) sculptures;or

(f) anyworkofart.E
xplanations:
1. Forthepurposesofthissub-clause,“jewelery” includes:

(a) ornamentsmadeofgold,silver,
platinumoranyotherpreciousmetaloranyalloycontainingoneormoreofsuchpreciousmetals,whether
ornotcontaininganypreciousorsemi-
preciousstone,andwhetherornotworkedorsewnintoanywearingapparel;

(b) preciousorsemi-
preciousstones,whetherornotsetinanyfurniture,utensilorotherarticleorworkedorsewnintoanywearin
gapparel.

2. Forthepurposesofthisclause:

(a)theexpression“Foreign InstitutionalInvestor”shallhavethemeaningassignedtoitinclause

(a) oftheExplanationto section115AD;

(b) the expression“securities” shallhavethemeaning assignedtoitin

14
clause(h)ofsection2oftheSecurities Contracts(Regulation) Act,1956;

(ii) agriculturallandinIndia,notbeinglandsituate:

(a) in any areawhichiscomprisedwithinthejurisdictionofamunicipality(whetherknown

asamunicipality,municipalcorporation, notifiedareacommittee,townareacommittee,
towncommittee,orbyanyothername)oracantonmentboardandwhich
hasapopulationofnotlessthantenthousand;or

(b) inanyareawithinthedistance,measuredaerially:

(I) notbeingmorethan
twokilometres,fromthelocallimitsofanymunicipalityorcantonmentboardreferredtoinitem(a)andwhi
chhasapopulationofmorethantenthousandbutnotexceedingonelakh;or

(II) notbeingmorethansixkilometres,fromthelocallimitsofanymunicipalityorcantonmentboardrefe
rredtoinitem(a)andwhichhasapopulationofmorethanonelakhbutnotexceedingtenlakh;or

(III) notbeingmorethaneightkilometres,fromthelocallimitsofanymunicipalityorcantonmentboardre
ferredtoinitem(a)andwhichhasapopulationofmorethantenlakh.
Explanation:Forthepurposesofthissub-clause,“population”meansthepopulationaccording to
thelastprecedingcensusofwhichtherelevantfigureshavebeenpublishedbeforethefirstdayoftheprevio
usyear.

(iii) 6½percentGoldBonds,1977,or7percentGoldBonds,1980,orNationalDefenceGoldBonds,1980,
issuedbytheCentralGovernment;

(iv)SpecialBearerBonds,1991, issuedbytheCentralGovernment;

(v) GoldDepositBondsissuedundertheGoldDepositScheme,1999notifiedbytheCentralGovernment
.
Explanation:
15
“Property”includesandshallbedeemedtohavealwaysincludedany
rightsinorinrelationtoanIndiancompany,includingrights ofmanagement
orcontroloranyotherrightswhatsoever.

Definitionsofcapitalassetmainlydistinguishthebusinessassetsfromotherassetsforthepurposeoftaxati
onundertheheadCapitalGains.

16
TRANSFER

Capitalgainarisesontransferofcapitalasset;soitbecomesimportanttounderstandwhatisthemeaningofword
transfer.Thewordtransferoccupyaveryimportantplaceincapitalgain,becauseifthetransactioninvolvingmo
vementofcapitalassetfromonepersontoanotherpersonisnotcoveredunderthedefinition
oftransfertherewillbenocapitalgainchargeableto income
tax.Evenifthereisacapitalassetandthereisacapitalgain.
Thewordtransferunderincometaxactisdefinedundersection2(47).Aspersection2
(47)Transfer,inrelationto
acapitalasset,includessale,exchangeorrelinquishmentoftheassetorextinguishments ofanyright
thereinorthecompulsoryacquisitionthereofunderanylaw.
InsimplewordsTransferincludes:

a) Sale,exchangeorrelinquishmentofasset

b) Extinguishmentofrightoverasset

c) Compulsoryacquisitionunderanylaw

d) PersonaleffectsconvertedintoStock-in-trade
e) Maturityofzerocouponbonds

f) Allowingpossessionundertransferofpropertyact, 1882

g) Allowingenjoymentofimmovableproperty

Transferincludes:

i) Sale,exchangeorrelinquishmentofa capitalasset

Asaletakesplacewhentideinthepropertyistransferredforaprice.Thesaleneednotbevoluntary.Aninvolunta
rysaleofapropertyofa debtorbyacourtattheinstanceofa decreeholderisalsotransferofacapitalasset.
Anexchangeofcapitalassettakesplacewhenthetitleinonepropertyispassedinconsiderationofthetitleinanot
herproperty.
Relinquishmentofacapitalassetariseswhentheownersurrendershisrightsinpropertyinfavourofanotherper
son.Forexample,thetransferofrightstosubscribethesharesinacompanyundera‘RightsIssue’to
athirdperson.
ii)

Extinguishmentofanyrightsina capitalasset

Thiscoverseverypossibletransactionwhichresultsindestruction, annihilation, extinction,

termination, cessationorcancellationofalloranybundleof rightsina capitalasset.For
example,terminationofaleaseorofamortgageeinterestinaproperty.

iii) Compulsoryacquisitionofa capitalassetunderanylaw

Acquisitionofimmovable propertiesundertheLandAcquisitionAct,acquisitionofindustrial
undertakingundertheIndustries (Development andRegulation) Actetc..,aresomeofthe
examplesofcompulsoryacquisitionofacapitalasset.
iv) Conversionofa capitalassetintostock-in-trade

Normally,therecanbenotransferiftheownershipinan
assetremainswiththesameperson.However,theIncometaxActprovidesan
exceptionforthepurposeofcapitalgains.Whenapersonconvertsanycapitalassetownedbyhimintostock-
in-tradeofabusinesscarriedonbyhim,itisregardedasatransfer.Forexample,wherean
investorinsharesstartsabusinessofdealinginsharesandtreatshisexistinginvestments asthestock-in-
tradeofthenewbusiness,
suchconversionarisesandisregardedasatransfer.TheFairMarketValueoftheassetonthedateof
suchconversionshallbetheFullValueofConsiderationforthetransfer.

v) Partperformanceofa contractofsale

Normallytransferofanimmovable propertyworthRs.100/-ormoreisnotcompletewithout
executionandregistrationofaconveyancedeed.However,section53AoftheTransferofPropertyActenvis
ages situations whereunderacontractfortransferofanimmovable property,
thepurchaserhaspaidthepriceandhastakenpossessionoftheproperty,buttheconveyanceiseithernotexecut
edorifexecutedisnotregistered.Insuchcasesthetransfererisdebarredfromagitatinghistitletothepropertyag
ainstthepurchaser.
vi) Transferofrightsinimmovablepropertiesthroughthemediumofco-
operativesocieties,companiesetc.
Usuallyflatsinmulti-storeyedbuildingandotherdwellingunitsingrouphousingschemesare
registeredinthenameofaco-operativesocietyformedbytheindividualallottees.
Sometimescompaniesarefloatedforthispurposeandallotteestakesharesinsuchcompanies.Insuchcasestran
sferofrighttouseandenjoytheflatiseffectedbychangingthemembershipofco-
operativesocietyorbytransferringthesharesinthecompany.Possessionandenjoymentofimmovable
propertyisalsomadebywhatiscommonlyknownas‘PowerofAttorney’transfers.
Allthesetransactionsareregardedastransfer.

vii) Transferbya personto a firmorother AssociationofPersons[AOP]orBody

ofIndividuals[BOI]
Normally,firm/AOP/BOIisnotconsideredadistinctlegalentityfromitspartnersormembersandsotransfero
facapitalassetfromthepartnerstothefirm/AOP/BOIisnotconsidered‘Transfer’.However,undertheCapit
alGains,itisspecificallyprovidedthatifanycapitalassetistransferredbyapartnertoafirm/AOP/BOIbyway
ofcapitalcontributionorotherwise,thesamewouldbeconstruedastransfer.

viii) DistributionofcapitalassetsonDissolution

Normally, distributionofcapitalassetsondissolutionofafirm/AOP/BOI isalsonotconsidered

astransferforthesamereasonsasmentionedin(vii)above.However,underthecapitalgains,thisisconsidered
astransferbythefirm/AOP/BOlandthereforegivesrisetocapitalgainsforthefirm/AOP/BOI.

ix) Distributionofmoneyor otherassetsbytheCompanyonliquidation

IfashareholderreceivesanymoneyorotherassetsfromaCompanyinliquidation,
theshareholderisliabletopay capitalgainsasthesamewouldhavebeen
receivedinlieuofthesharesheldbyhiminthecompany.However,iftheassetsofacompanyaredistributedtoth
eshareholders onitsliquidationsuchdistributionshallnotberegardedastransferbythecompany.
x) Thematurityorredemptionofa zerocouponbond

Here,azerocouponbondmeansabondissuedbyanyinfrastructurecapitalcompanyorinfrastructurefirmorp
ublicsectorcompanyonorafter1stJune,2005
inrespectofwhichnopaymentorbenefitisreceivedorreceivablebeforematurityorredemptionandwhichhasb
eenspecificallynotifiedbytheCentralGovt.

TYPEOFCAPITALASSETS

A. ShortTermCapitalAsset

Capitalassetheldfornotmorethan36monthsimmediatelypriortothedateoftransfershallbedeemedas
short-termcapitalasset.However,followingassetsheldfornotmorethan12 monthsshallbetreatedas
short-termcapitalassets:
a) Equityor preferencesharesinacompanywhicharelistedinanyrecognizedstockexchangeinIndia;
b) Otherlistedsecurities;

c) UnitsofUTI;

d) Unitsofequityorientedfunds;or

e) ZeroCouponBonds.

Note:Unlistedsharesheldfornotmorethan24
monthsimmediatelypriortothedateoftransfershallbetreatedas short-termcapitalasset.
B. LongTermCapitalAsset

CapitalAssetthatheldformorethan36 monthsor12
months,asthecasemaybe,immediatelyprecedingthedateoftransferistreatedaslong-termcapitalasset.
COMPUTATIONOFCAPITALGAIN:

Computationofcapitalgaindependsuponthenatureofthecapitalassettransferredduringthepreviousyear,vi
s-à-vis,short-termcapitalasset,long-
termcapitalassetordepreciableasset.Capitalgainarisingontransferofshort-termcapitalassetor
depreciableassetisconsideredasshort-termcapitalgain,whereastransferoflong-
termcapitalassetgivesrisetolong-termcapitalgain.

* Short-termcapitalgainorlossfromsaleof depreciableassetwillariseonlyinthefollowingtwosituations:
a) Whenonlastday ofthepreviousyear,WDVoftheblockofassetisnil;or

b) Whenonlastday ofthepreviousyear,blockceasestoexist.

21
Note1:IndexedCostofAcquisitionandImprovement[SecondProvisotoSection48]

a) Incaseoftransferoflong-termcapitalassets,indexedcostofacquisitionandindexedcostof
improvement shallbedeductedfromthefullvalueofconsideration;
b) IndexedcostofacquisitionandIndexedcostofimprovement shallbe computedwith
referenceto CostInflationIndex(‘CII’)inthefollowingmanner:

CIIinrelationto apreviousyearmeanssuchindex,asCentralGovernment notifies onyearto yearbasis.

TheCentralGovernment hasnotified thefollowingCostInflationIndexes:

FinancialYear CII FinancialYear CII FinancialYear CII

1982-83 109 1994-95 259 2006-07 519

1983-84 116 1995-96 281 2007-08 551
1984-85 125 1996-97 305 2008-09 582
1985-86 133 1997-98 331 2009-10 632
1986-87 140 1998-99 351 2010-11 711
1987-88 150 1999-00 389 2011-12 785
1988-89 161 2000-01 406 2012-13 852
1989-90 172 2001-02 426 2013-14 939
1990-91 182 2002-03 447 2014-15 1024
1991-92 199 2003-04 463 2015-16 1081
1992-93 223 2004-05 480 2016-17 1125
1993-94 244 2005-06 497 2017-18 1235
Computation
ofcapitalgainincaseofsaleofsharesordebenturesofanIndiancompanypurchasedbya non-
residentinforeigncurrency[firstprovisiontosection48]
Insucha case,capitalgainshallbedeterminedasunder:-

* Averageexchangeratemeanstheaverageofthetelegraphictransferbuyingrateandtelegraphictransfersellin
grateoftheforeigncurrencyinitiallyutilizedinthepurchaseofcapitalasset.
** Buyingrateisthetelegraphictransferbuyingrateof suchcurrency.
FullValueofConsideration

Fullvalueofconsiderationistheconsiderationreceivedorreceivable
bythetransferorinlieuofassets,whichhehastransferred.Suchconsiderationmaybereceivedincashorinkind
.Ifitisreceivedinkind,thenfairmarketvalue(‘FMV’)of
suchassetsshalbetakenasfullvalueofconsideration.
However,inthefollowingcases“fullvalueoftheconsideration”shalbedetermined
onnotionalbasisaspertherelevantprovisionsoftheIncome-taxAct,1961:
CosttothePreviousOwner[sec.49(1)]

Cost totheprevious ownershallbedeemedto bethecostofacquisitioninthehandsofthe

taxpayerincaseswhereacapitalassetbecomesthepropertyoftheassesseeunderanyofthemodesgivenbelo
w:
a) Onanydistributionofassetsonthetotalor partialpartitionofaHUF

b) UnderaGiftorWill;

c) BySuccession,Inheritance orDevolution;

d) Onanydistributionofassetsondissolutionofafirm, BOIorAOP(wheresuchdissolution
hadtakenplaceatanytimebeforethe01-04-1987);
e) Onanydistributionofassetsonliquidationofa company;

f) Underatransferto arevocableoran irrevocabletrust;

g) OnanytransferbyaholdingcompanytoitswhollyownedIndiansubsidiarycompany;

h) OnanytransferbyawhollyownedsubsidiarycompanytoitsIndianholdingcompany;

i) OnanytransferbytheamalgamatingcompanytotheIndianamalgamatedcompany;

j) Inaschemeofamalgamation, anytransferofsharesheldinaIndiancompanybya
amalgamatingforeigncompanyto theamalgamated Foreigncompany;
k) Consequentto transferofshare(inaschemeofamalgamationasreferredtoinSection
47(viab)ofaforeigncompanywhichderives,directlyorindirectly,itsvaluesubstantiallyfromtheshareorsh
aresofan Indiancompanyheldbyamalgamatingforeigncompanytotheamalgamated foreigncompany.
l) ConsequenttotransferofcapitalassetbythedemergedcompanytotheresultingIndiancompany.
(incaseofdemerger)
m) Consequenttotransferof share(incase
ofdemergerasreferredtoinSection47(vic)ofaforeigncompanywhichderives,directlyorindirectly,itsvalue
substantiallyfromtheshareorsharesofan
Indiancompanyheldbyademergedforeigncompanytoresultingforeigncompany.
n) Anytransfer,inaschemeofamalgamationofabankingcompanywithabankinginstitution;

o) Onanytransferinaschemeofbusinessreorganizationofacooperativebank;

p) Onanytransferinaschemeofconversionof privatecompanyorunlistedcompanyintoLLP;

q) OnanytransferincaseofconversionofFirmor SoleproprietaryconcernintoCompany;

r) ByHUFwhereoneofitsmembershasconvertedhisself-acquiredpropertyintojointfamilyproperty.
Note:

Wherepreviousownerhasalsoacquiredthepropertyintheaforesaidmannerthe‘previousowner’ofthepro
pertyshalbeconstruedasthelastpreviousownerwhoacquiredthepropertybymeansotherthanthosestated
above.
CostofImprovement[Sec.55(1)(b)]

Costofimprovement, inrelationtothecapitalassetsshallinclude allcapitalexpenditure

incurredinmakingadditionoralterationtothecapitalassetsbytheassesseeortheprevious
owner.However,costofimprovement doesnotinclude anyexpenditure incurredpriorto01-04- 1981.
Costofimprovement shallbe computedinthefollowingmanner:

S Particula CostofImprovement
No
1 Inrelationtogoodwillofabusiness,rightto NIL

manufacture,produceanyarticleorthingorrighttocarryon
businessor profession
2 Inrelationtocapitalassetwhichbecomespropertyofthe Anyexpenditureofcapital

assesseeorpreviousownerbefore01-04-1981 natureincurredonorafter01-04-
1981
3 Inrelationtocapitalassetwhichbecomespropertyoftheassesse Anyexpenditureofcapitalnaturei
eorpreviousownerbefore01.04.1981 ncurredonorafter01-04-
bywayofanymodespecifiedunderSection49(1) 1981bytheassesseeortheprevio
usowner

4 Inrelationtocapitalassetwhichbecomespropertyoftheassesse Anyexpenditureofcapitalnaturei
eorpreviousowneronorafter01.04.1981 ncurredbytheassesseeortheprevi
ousowner

5 Inrelationtocapitalassetwhichbecomespropertyoftheassesse Anyexpenditureofcapitalnaturei
eorpreviousowneronorafter01-04-1981bywayof ncurredbytheassesseeortheprevi
anymodespecifiedunderSection49(1) ousowner
RATESOFTAXONCAPITALGAINS:
1. ShortTermCapitalGains

a) Short-
termcapitalgainsshallbeincludedinthegrosstotalincomeofthetaxpayerandwillbetaxedatthenormalrates;
b) Short-
termcapitalgainsarisingfromtransferofEquityShares,UnitsofanEquityOrientedFundsoraunitofabusiness
trustwhichischargeabletosecuritiestransactiontaxshallbetaxedat15%underSection111A;
Note:-

Nowbenefit of reducedrateoftax(i.e.,15%)shallbe available w.e.f.1-4-2016eveninrespect

ofincomearisingfromtransferofunitsofabusinesstrustwhichwereacquiredbyassesseeinlieuofsharesofsp
ecialpurposevehicleasreferredtoinsection47(xvii).
2. LongTermCapitalGains

a) Long-termcapitalgainsaresubjecttotax at20%;

b) Long-
termcapitalgainsarisingfromtransferoflistedsecurities,unitsorazerocouponbondsshallbetaxableat
loweroffollowing:
i. 20%aftertakingbenefit ofindexation; or

ii. 0%without takingbenefit ofindexation.

c) Long-termcapitalgainsarisingto anon-residentsorforeigncompanyfromtransferofunlisted
securities shallbetaxedatwithout givingbenefitforindexation;
d) Long-
termcapitalgainsarisingfromtransferoflistedsecurities,unitsofequityorientedoraunitofbusinesstrustwhich
ischargeabletoSTTshallbeexemptfromtaxunderSection10(38).Note:
1. NowexemptionfromcapitalgainsunderSection10(38)shallbe available w.e.f.1-4-2016
eveninrespectof long-
termcapitalgainsarisingfromtransferofunitsofabusinesstrustwhichwereacquiredinlieuofsharesofspecial
purposevehicle asreferredto insection47(xvii) andon whichsecuritiestransactiontaxhasbeen paid.
2. Nowexemptionfromlongtermcapitalgainsundersection10(38)shallbe available
w.e.fApril1, 2017 evenwhereSTTisnotpaid,providedthat–
– transactionisundertakenonarecognisedstockexchangelocatedinanyInternational
Illustration(Shorttermcapitalgains)

Mr.Punitpurchasedaresidentialflaton02-05-2014forRs.1000000.
HepaidonthesamedaythestampdutyandregistrationchargesofRs. 48750
onpurchaseofflat.Hesoldthesaidflaton17-03-2016forRs.1200000.
ThecostinflationindexforF.Y.2013-14is939 andforF.Y. 2015- 16 is1081.
Computehiscapitalgainchargeabletotaxforassessmentyear2016-17.

Solution:

NAMEOFASSESSEE:MR.PUNIT

STATUS:INDIVIDUALPREVIOUSYEAR:2015-16 ASSESSMENTYEAR:2016-
17RESIDENTIALSTATUS:R&OR

Particulars Rs. Rs.

INCOMEFROMCAPITALGAINS

Fullvalueofflatsold 1200000

Less:purchasepriceofflat 1000000

Stampduty&registration 48750 1048750

SHORTTERMCAPITALGAINS 151250

NOTE:

Sincethecapitalassetisheldforlessthan36
months,itisshorttermcapitalassethencecostinflationindexisnotapplicable.
Illustration(longtermcapitalgains)

KrishnapurchasedavacantsiteforRs.300000 inApril1990.
Heconstructedaresidentialbuildingduringtheyear2004-05inthesaidsiteforRs.1500000.
Hecarriedoutsomefurtherextensionofaconstructionintheyear2007-08forRs.
500000.KrishnasoldtheresidentialbuildingforRs.6500000 inJanuary2016.
Computehislongtermcapitalgain,fortheassessmentyear2016-17based ontheaboveinformation.
Thecostinflationindexareasfollows:

FinancialYear CostInflationIndex
1990-91 182
2002-03 447
2004-05 480
2007-08 551
2015-16 1081

Solution:

NAME:KRISHNA STATUS:INDIVIDUAL-R&OR

PREVIOUSYEAR:2015-16 ASSESSMENTYEAR:2016-17
Particulars Rs. Rs.

Fullvalueofconsideration 6500000
Less:indexedcostof 1781868
acquisition(300000/indexof90-
91*indexof15-16)(300000/182*1081)
Less:indexedcostofimprovement 3378125

(1500000/indexof04-05*indexof15-16)
(1500000/480*1081)
Less:indexedcostofimprovement 980944 6140937

(500000/indexof07-08*indexof15-16)
(500000/551*1081)
Longtermcapitalgain 359063
CONCLUSION:

Thegeneralmisconceptionisthatthereisnoadvantageinearningshort-
termgain,sinceitistaxedatthenormalrates.However,whatmaybelostsightofisthattheadvantageflowsfromt
hefactthatalargeportionofwithdrawals iscapitaland,simultaneously, anequalamountfrom
theincomegetsconvertedintocapital.Inotherwords,youareconsumingcapitalandinvestingincome.
Obviously, thisprinciple wouldworkonlyforthelong-terminvestor. Ifyouhaveashort-
termviewandweretosellyourentireholdingsatonego,thisinvestingstrategywillnotwork.
Lookatitanywhichway,theonlywaytomakethedividendtrulytax-
freeistoavoiditaltogether.Theruleissimple -nodividend,notax.
Acapitalgainisthedifference betweenwhatanindividualpurchasesanitemforand
whattheyselltheitemfor.Forinstance,ifyoubuyastockfor45
dollarsashare,butsellthatsamestockafewyearslaterfor60
dollarsashare,thenyourcapitalgainonthatstockis15dollars.
Capitalgainsdo notapplytoallitemsthatan
individualpurchases.Forinstance,disposablegoodsorfooddo notaccumulate
capitalgains,evenifyouareableto sellthemfor
morethanyouoriginallypaidforthem.Rather,capitalgainsarelimitedtocapitalassets,whichareitemsthatan
individualbuysforpersonalorinvestment purposes.Althoughstocksarethe
mostcommonexample,thiscanalsoincluderealestate,jewelry,art,orfinegoods.
Whenan individualinherits
acapitalasset,orisgivenacapitalassetasagift,thisisalsosubjecttocapitalgains,eventhoughthetransactionisn
otpreciselyoneofbuyer-seller.Insuchinstances, thecapitalgainisthedifference
betweenthevaluesoftheitemwhenpurchasedbythe gift-giverandwhenreceivedbythegift-receiver.
BIBLIOGRAPHY:

- http://www.investopedia.com/terms/c/capitalgain.asp

- https://en.wikipedia.org/wiki/Capital_gain

- file:///C:/Documents%20and%20Settings/Savarmal/Desktop/Capital%20Gain%20

%E2%80%93%20All%20you%20want%20to%20know.html

- https://www.bankbazaar.com/tax/capital-gains-tax.html

- http://www.charteredclub.com/capital-gain-tax/

- http://taxguru.in/income-tax/taxation-capital-gains-india-frequently-asked-questions-
faqs.html
 CHARGINGSEC.45(1)

AnyprofitsarisingontheTransferofanyCapitalAsset shallbechargeabletotaxundertheheadCapitalGainsin
theyear oftransfer.

CAPITALASSET:It meanspropertyof movableorimmovable,tangibleor

anykindintangiblebutdoesnotinclude thefollowing:

a. StockinTrade.(E.g.:Xisadealerinhouseproperty.Forhim,housepropertyisstock-in-
trade.Anyprofitearnedbyhimonsaleofstock-in-trade(i.e.,houseproperty)would
betaxableasBusinessincome).

b. PersonalEffects:ItmeansanyArticle,CommodityorPropertyusedintheday-to-
daylifeoftheindividualwhichisamovableproperty(i.e.Notcapitalasset).ButpersonaleffectexcludesJewelle
ry(i.e.Jewelleryisacapitalasset),Archaeologicalcollections,Drawings,Paintings,Sculptures,Anyworkofart
.E.g.:Zpurchasesacomputerforhispersonaluse.Itistreatedas“personaleffects” thereforenot
acapitalasset.Anysurplusarisingon transferofitcan’t betaxedunderthehead “CG”.

c. Agricultural Landnotsituatedinthe“SpecifiedArea”
(i.e.agriculturallandsituatedinspecifiedareaiscalledcapitalasset).Specifiedarea-
anyarealocatedwithinthelimitsofaMunicipalitywhichhasapopulationof≥10,000accordingtothelastcensusa
ndincludesanyareawithin thedistanceof 8Kms.fromthelimitsofsuchMunicipality.

d. SpecialBearerBonds,1991(Nomoreinexistence).

e. GoldBondsissued underGoldDeposit Scheme,1999.

Issues:

 Silverutensilsconsistingofthalisetc.meantfor
personaluseconstitutepersonaleffectsandthegainsarisingonsaleofsuchutensilscannotbetaxedascapitalgain
s.Thelegislatureintendedarticleswhich
areintimatelyandcommonlyusedbytheassesseetobeincludedwithintheexpression
“Personaleffects”.CIT.Vs.BenarashilalKataruka.

 Gold,silvercoinsandbarsusedforpoojaare“Capitalassets”.MaharajaRanaHemantSinghijiVs.CIT(1976).
 A propertyintended forpersonalor householduse(mayfor ceremonialoccasion only),isalwaysa”
personaleffects”.

 Inordertoqualifyfor“agriculturallandinIndia”,itisnotnecessarythatlandwasonceagriculturalland.Itmustbea
griculturallandatthetimeofsale-T.S.M.O.MohamedOthumanv.CIT.

WHATISATRANSFER?{Sec.2(47)}:It includes:
a. Sale.

b. Exchange(Must beoftwocapitalassets).

c. Relinquishment ofanAsset.

d. Extinguishmentofan Asset.

e. Compulsoryacquisition byGovernment.

f. Conversionofan asset intoStock-in-trade.

g. AnytransfercoveredbySec.53 A of thetransfer ofPropertyAct.

h. Thematurityor redemption ofzerocouponbonds.

 Issues:

 Incaseofrelinquishment,theinterestofapersoninapropertyisabandoned,orsurrendered;butthepropertyinwh
ichinterestisrelinquishedcontinuestoexistandthepropertycontinuestobeownedbysomeperson.Extinguish
mentrefersnottoextinguishment ofassetitself buttoextinguishmentofholder’sright totheassets.

 Whenanamalgamationtakesplace,therightsoftheassesseeinthesharesheldintheamalgamatingcompanysto
odextinguishedandthereforethereisa“transfer”CITVs.GraceCollis(2001).

 Whenthereisareductioninthefacevalueofthesharesandconsequentpaymentbythecompanytotheshareholde
rtowardssuchreduction,thetransactionresultsinextinguishmentofright
inthesharesheldbytheshareholder.Consequently,thereductionofthesharecapitalwouldbesubjecttocapitalg
ainstax.KartikeyaV.SarabhaiVs.CIT,
(1997).Inthiscase,theSupremeCourtcomparedthedecisioninthecaseofAnarkaliSarabhaireferredtoabovean
dheldthat in that
casethepreferenceshareswereredeemedinentiretywhereasinthepresentcaseitwaspartlyredeemedbyreducti
on ofsharecapital.Therefore,theanalogyisthesame.

 Whenapartnerofafirmretiresandtheamountofhisshareinthepartnershipassets,afterdeductionofliabilitiesan
dpriorchargesisdeterminedontakingaccountsasperthepartnershiplaw,thereisnoelementoftransferofinteres
tinthepartnershipassetsbytheretiredpartnertothecontinuingpartners.Theamountreceivedbytheretiringpart
nertowardssettlementofhisshareisnotliabletotaxas“CapitalGain”.CITVs.R.LingmalluRaghukumar(1997
).

 Amountreceivedbyaretiringpartnerinrespectofhisshareinthepartnershipincludinggoodwillisnotassessabl
eascapitalgains.Addl.CITVs.MohanbhaiPamabhai,(1987)

TRANSFERWHEN COMPLETED:

a. Immovablepropertywhendocumentsareregistered:Ownershipofimmovableassetswillnot
passtillthetitledeedsareregisteredinthenameofpurchaser.

b. Immovablepropertywhendocumentsarenotregistered:Evenifthedocumentsarenotregisteredbutwhenthe
conditionsofSec.53AoftheTransferofPropertyActaresatisfied,ownershipis“transferred”.
 TYPESOFCAPITALGAINS

STCG: Capitalgainsarisingontransferofa shortterm capitalasset arecalled STCG.

MannerofComputation -Sec.48(ForNondepreciableassets)

FullvalueofConsiderationLESS:TransferExpensesNet Consideration
XXXXXXXXX
LESS:
CostofAcquisitionCostofImprovement
GrossCapitalGains/LossLESS:ExemptionU/s.54etc.Net STCG/L
XXXXXXXXXXXX
XXXXXX
 LTCG:Capitalgainsarisingontr
ansferofaLongtermcapitalasset arecalled LTCG.

Mannerof computation:ReplaceIndexedCost of acquisitionandIndexedCost ofImprovement for

CostofAcquisition andCostofImprovement.

Note:

a. Capitalgainsarechargeableon accrualbasis:It is notnecessarythattheconsideration should

bereceivedintheyearoftransferitself.

b. Receiptof considerationininstallments:Evenin thatcase also theentireconsideration hastobetaken

intoaccount forcomputingthecapitalgains.

c. Transferexpensesare:Salescommissionpaidforbroker,costofstamp,registrationfeesbornebytheseller,
travelingexpensesincurredin connection with transfer.

LONGTERMCAPITALASSET{Sec.2(29B)}

Itistobedecidedbased ontheperiodofholdingbytheassessee.

a. Ordinaryasset:Acapitalassetheldbyanassessee,beforethedateofitstransfer,for
>36monthsisaLongtermCapitalAsset.

b. Sharesetc.:Incaseofsharesheldinacompany,Securities(listed),UnitsofUTI&Unitsofamutualfundsspecifie
 dU/s.10(23D),ZerocouponbondswillbetreatedasLongTermAsset
iftheperiodofholdingis>12months,beforethedateofitstransfer.

SHORTTERMCAPITALASSET{Sec.2(42B)}

Itisacapitalasset otherthan thelongtermcapitalasset.

Issues:

 Iflandisheldformorethan36monthsbutthebuildingconstructedthereonislessthan36monthsoldasonthedateo
ftransfer,landbecomeslongtermwhereasthebuildingisshort term.

 Inthecaseoftransferofadepreciableasset,capitalgainistakenasshort-termcapitalgain,irrespectiveof
periodofholding.

SPECIALCASESINCOMPUTATIONOFPERIODOFHOLDING:

a. Sec.49(1)-Previousowner:If thecapitalasset isacquiredbytheassesseethrough

anyoftheways/modesspecifiedU/S.49(1)thentheperiodforwhichthepreviousowner
heldtheassetshouldalsobe included forcomputingtheperiodofholdingofthe
assessee/person whosoldit.
(i.e.thewordheldbyassesseemeansheldbytheassesseeandbythepreviousowner).

b. Primarymarket:Incasetheassesseepurchasedanysharesetc.inprimarymarket,theperiodofholdingshallbec
alculatedfromthedateofallotmentofsuchsharesetc.andnot fromthedateofapplication
forsharesetc.wasmade.

c. Amalgamation:Inthecaseofashareholderwhoreceivedthesharesintheamalgamatedcompanyinexchangeof
sharesheldinamalgamatingcompany,incomputingtheperiodofholdingofsharesofamalgamatedcompany,t
 heperiodofholdingof theamalgamatingsharesshallalsobeincluded

d. Demerger:Inthecaseofashareholderwhoreceivedthesharesintheresultingcompanyinexchangeoftheshares
heldinthedemergedcompany,incomputingtheperiodofholdingofsharesinresultingcompany,theperiodofho
ldingofthedemerged
e. RightRenouncement:Iftherighttosubscribetosharesisrenouncedtoanyotherper
sontheperiodofholdingoftheasset(RightRenouncement)shallbecalculatedfrom
thedateoftheofferofsuch rightbythecompanyuptothedateofrenouncement.

f. Liquidation:Incasethecompanyinwhichsharesareheldbytheassesseegetsliquid
ated,whilecomputingtheperiodofholdingofsuchshares,theperiodofholdingsubs
equent tothedateofliquidationshallnotbetaken intoaccount(i.e.excluded).

g. SpecifiedSecurity/Sweatequityshares:Theperiod
ofholdingforanyspecifiedsecurityorsweatequitysharesallottedortransferred,by
theemployerfreeofcostoratconcessionalratetohisemployeesshallbereckonedfr
omthedateofallotmentortransfer ofsuch specified securityor sweat
equityshares.

h. Exchangeofstockexchangemembershipcardwith sharesissued
bystockexchangeintheprocessofcorporatisationofstockexchange-
theperiodofholdingofsuchsharesshallbecalculated from thedateof
acquisitionofmembershipcard.

i. Whentheassesseeisownerofanassetreceivedunderamodespecifiedundersection
49(1)andthereaftertheassetisconvertedbytheassesseeintoanewasset,theperiod
ofholdingwouldcommenceformthedateof conversion.

Problem1: Determinewhethertheassetheldwasshort term orlongtermcapitalasset.

a. Rholds1000sharesinGltd.,whichgoesintoliquidationon31-10-
2008.Rpurchasedtheseshareson31-1-2008.Thecompanymadethepayment
toRon31-3-2009.

b. R gotadiamondringbywayofgift from hisuncleon 1-1-

2007Thisringwaspurchasedbyhisuncleon 29-12-2005.Rsoldthisringon 31-12-
2008
 COSTOFACQUISITION

DIRECTOWNERSHIP:Thecostincurredtopurchaseacapitalassetshallbethecost
ofacquisition ofthat asset.

INDIRECTOWNERSHIP-
PREVIOUSOWNER:Incasethepropertyisacquiredinanyofthemodesmentioned
in Sec.49 (1)thecost ofacquisition isthecosttothepreviousowner.

SEC.49(1):

a. Propertyacquired bywayofGift orinheritance.

b. Propertyacquired onpartition ofH.U.F.

c. Propertyacquired bytheamalgamatedCompanyof theamalgamatingcompany.

d. Propertyacquired bytheresultingcompanyfromthedemergedcompanyindemerger.

e. Propertyacquired bytheamalg.bankinginstitutionoftheamalgamatingbankingco.

f. Transferfroma holdingCo.toits100 % subsidiaryCo.,&vice-

Versa.BoththeCompaniesmust beIndian/domesticcompanies.

g. Liquidationofacompany&distributionof assetstoitsshareholders.

h. AcquisitionofapropertybyHUFwhereoneofitsmembersconvertedhisselfacquir
edpropertyintojoint familyproperty.

i. Onatransferinabusinessreorganization,ofacapitalassetbythepredecessorco-
operativebanktothesuccessorco-operativebank.
WHOISAPREVIOUSOWNER?:A person whoacquiredthepropertyotherthanbyanyofthemodesgivenin
Sec.49 (1).

FMV:Wherethecostforwhichthepreviousowneracquiredthepropertycannotbeascertained,theFMV
asonthedateoftransfershallbetakenascost.

COSTOFACQUISITION- SOMESPECIALCASES

AMALGAMATION-
SEC.49(2):Whenanassesseeacquiresanysharesintheamalgamatedcompanyinexchangeofsharesheld
intheamalgamatingcompany,inaschemeofamalgamation,thenthecost
ofacquisitionofsharesreceivedfromtheamalgamatedcompanyshallbethecost at which
thesharesintheamalgamatingcompanywasacquired.

CONVERSIONOFDEBENTURES-
SEC.49(2A):Inthecaseofconversionofdebenturesetc.ofacompanyintosharesofthatcompany,thecostofacquisi
tionofsuchdebenturesetc.shallbetakenasthecostofacquisitionofthesharesobtainedonconversion.Further,itpro
videsthatcostofacquisitionofFCEBswillbedeemedtobethecostofacquisitionoftheshares,debenturesissuedpurs
uanttotheconversionofFCEBs.Thisisnotapplicableforconversionofpreferencesharesintoshares.Tofindoutwhe
therornotsharesarelong-termcapitalassetorshort-
termcapitalasset,theperiodofholdingshallbedeterminedformthedateofallotmentofshares.Theindexationwillst
artfromthedateofconversionofdebenturesintoshares.

ESOP/SWEATEQUITYSHARES-
SEC.49(2AB):Aspertheamendedprovisions,issueofsharesunderESOP/SweatequitysharesisnowtaxedasFring
ebenefittax.Forthepurposeofcomputingcapitalgainonthetransferofsuchsecuritiesinfuture,thecostofacquisitio
nshallbethefairmarketvaluewhichhasbeentakenintoaccountwhilecomputingthevalueoffringebenefit.

DEMERGER- SEC.49(2C)&(2D):

a. Cost ofacquisition of thesharesinthe resultingcompany:

Costofacquisitionofsharesheldbyt Net Worth

heassesseeinthe transferredinademerg
er
Demergedcompany X
Net worth
ofthedemergedCo.immediatelybeforedemerger
b. Net Worth- Paid up sharecapital+GeneralReserves.

c. Costofacquisitionofthesharesindemergedco.
(Postdemerger):Costofacquisitionoftheoriginalshares(indemergedco.)minuscostofsharesasobtainedin‘a’
above(resultingco.).

Problem2:Racquired1000sharesinGLtd.@Rs.30pershare.GLtd.Wasdemergedon19-11-
2008andthenetbookvalueoftheassetstransferredtoXLtd.,
(theresultingcompany)wasRs.25lakhs.ComputethecostofacquisitionofsharesofRindemergedcompanyaswell
asresultingcompanyassumingthepaidupcapital&generalreservesofGLtd beforedemergerwereRs.1crore.

REORGANISATIONOFCO-OPERATIVEBANK-SEC.49(2E):Sec.49(2),49(2C),49(2D)
arealsoapplicableinrelationtobusinessreorganizationofaco-operativebank.
(i.e.thecostofthesharesofthesuccessorco-operativebankreceivedbytheshareholdersofapredecessorco-
operativebankshallbecomputedinthesamemannerasitiscomputedincaseofamalgamation
ordemergerofacompanyundertheaforesaidsections).
SHARES(ORIGINAL &RIGHTS)(i.e.FINANCIAL ASSETS):

a. Thecostof acquisition(C.O.A.)of original shares-Amount actuallypaid.

b. TheC.O.A.of therightshares-Amount actuallypaid.

c. RightRenouncements-WhilecomputingcapitalgainsC.O.A.tobetakenasNI L.

d. Costtothepurchaserofrightshares:Amountpaidtothecompanyfor acquiringtheshares+ theamount

paidtotheownertowardsrightsrenouncement.

Problem3:Xholds1,000equitysharesinALtd.Since1978(costofacquisition:Rs.10,000fairmarketvalueonApril
1,1981Rs.16,000).ALtd.Offers2,000rightssharesofRs.10eachtoXonMay1,2008atapremiumofRs.50.Xsubscr
ibesfor800rightssharesandrenounces1,200sharesinfavourofCbytransferringtherightentitlementforaconsidera
tion ofRs.4,800.Xsells1,800sharesinALtd.OnMarch
30,2009@Rs.90pershare.Calsotransfershis1,200shares@Rs.91pershareonMarch31,2009.ComputeCapitalg
ains.

BONUSSHARES(i.e.FINANCIAL ASSETS)–COST OFACQUISITION:

BONUS SHARES

IfOriginalShares(O.S.) IfO.S. areacquired before1-4- IfO.S.&Bonussharesareac

&Bonussharesareallotte 81&Bonussharesareallottedo quired onor after1-4-81
d before1-4-81 norafter (3)
1. IncaseofOriginalShares - FMV ason1-4-1981or
C.O.A,(whicheverishigher).IncaseofBonusShares- FMV ason01-04-1981.

2. IncaseofOriginalShares - FMV ason1-4-1981or

C.O.A,.IncaseofBonusShares - NIL.

3. IncaseofOriginalShares - Cost
incurred.IncaseofBonusShares - NIL.
 FAIRMARKETVALUE
DIRECTOWNERSHIP:IftheAssesseeacquiredtheassetbefore01-04-1981thenthe
F.M.V.i.e.,fairmarket valueason01-04-1981 maybeadoptedasthecost ofacquisition.

INDIRECTOWNERSHIP:Ifthepreviousowneracquiredtheassetbefore01-04-
1981thentheF.M.V.i.e.,fairmarketvalueason01-04-1981maybeadoptedasthecostofacquisition.(E.g.:X
purchasedahousepropertyon 1.1.75for30,000andthepropertywaspassedontohissonYondeathofXon
15.6.86,theFMV ofitason 1.4.81being1,20,000.Y mayopt 1,20,000asthecost of acquisition).

Note:

a. Thisfacilityisnot availableincaseofdepreciablecapitalassets.

b. Thisfacilityisnot availableincaseofSec.55assets.

c. Wheretheassesseehadacquiredcertainpiecesofdiamondwithcracksandspotsduringtheassessmentyear
1975-76,andduringtheassessmentyear1998-
99theygotprocessedandafterprocessingfinisheddiamondsweresold,costoforiginalasset,viz,rawanduncutd
iamondshallbesubstitutedbyfairmarketvalueofthesameason
 April1,1981andnotfairmarketvalueofpolishedandfinisheddiamonds–HiralalLockchandaniv.ITO[2007].

COSTOFACQUISITIONINCASEOFSPECIALCATEGORYASSETS-SEC.55

SupremeCourtheldthatonlyifanassetcostsomethingtotheassesseeintermsofmoneytheprovisionsrelatingtolevy
ofcapitalgainstaxareapplicable.Toovercome/nullifythisdecision anamendment toSec.55hasbeenbrought.

GOODWILL:

a. SelfGeneratedGoodwill:TakeCostofAcquisition asNIL &ComputeCapitalgains.

b. PurchasedGoodwill: CostincurredtopurchasebecomescostofAcquisition.

C.B.D.T.Circular:

a. Transfer ofGoodwillbyprofessionalfirmswillnot attract CapitalGains.

b. Notionaltransferofgoodwillisnot chargeabletoCapitalGains.

CERTAINOTHERASSETS:TenancyRights,Permits,Righttomanufacture.
(E.g.Patents,Copyrights),Righttocarryon business, Loomhours.

Butincaseanypriceispaidforacquiringanyoftheseassetsthecostofacquisitionshallbetaken assuch.

Note:Inthecaseofthesetypesofassetscostofimprovement shallbetakenasnil.

FORFEITUREOFADVANCE-SEC.51

a. Duringthepast,theassetnowtransferred,wasproposedtobesoldandonsuchproposaltheassessehastaken
 someadvance&

b. Theadvancesotakenwasretained(Forfeited)bytheassesseasthebuyerfailedtoremainingmoney.

c. Anysuchadvanceamountreceivedandretainedbytheassesseshallbereducedfromthecostofacquisitionorthe
FMVortheWDVasthecasemaybeforthepurposeofcomputation ofcapitalgainswhen such
assetistransferred.

Note:Ifadvancemoneyforfeitedismorethanthecostofacquisition,theexcessoftheadvancemoneyforfeitedoverth
ecostofacquisitionofsuchassetshallnotbetaxableinthepreviousyearin
whichadvancemoneyisforfeitedasthereisnotransfer.

Problem4:Mr.RajareceivedahouseinMay,2002bywayofGiftfromMr.GuruwhohadpurchasedthesameinApril,
1978forRs.12,00,000.ThecostofimprovementsincurredbyGuruwereRs.2,55,000inMarch,1979andRs.3,40,00

0inNovember,1994.Thefairmarketvalueofthehouseason1stApril,1981wasRs.9,14,000.Beforethishousewasg
iftedtoRaja,Guruhad receivedan advanceofRs.3,00,000inMarch, 2002
towardssaleofthishousefromLaxmanbutthesaledidnotmaterializeandtheadvancewasforfeitedbyGuru.Thehou
sewassoldbyRajainMarch,2009forRs.60,00,000.Ascertainthecapitalgainschargeabletotax.

COSTOFIMPROVEMENT

a. ItistheCapitalExpenditureincurred for theimprovement ofCapitalAsset.

Anycostofimprovementincurredbytheassesseeor bythepreviousowner,before1-4-81,shallbeignored.
b. In relation toSec.55 assets,itshallbetakenasNil.

INDEXATION

StartingfromA.Y.93-94thecostofacquisitionandcostofimprovementofalongtermcapitalasset
canbeindexed.

Cost InflationIndex:

Financial Year CII FinancialYear CII FinancialYear CII

1981-82 100 1990-91 182 1999-00 389
1982-83 109 1991-92 199 2000-01 406
1983-84 116 1992-93 223 2001-02 426
1984-85 125 1993-94 244 2002-03 447
1985-86 133 1994-95 259 2003-04 463
1986-87 140 1995-96 281 2004-05 480
1987-88 150 1996-97 305 2005-06 497
1988-89 161 1997-98 331 2006-07 519
1989-90 172 1998-99 351 2007-08 551

ThisbenefitisavailableeitherfromtheyearofacquisitionoftheassetbytheAssesseeorfrom
thebaseyear1981-82whichever islater.
 INDEXEDCOSTOF ACQUISITION=1 X3,

1. CostofAcquisition [or]FMV ason1/4/81asthecasemaybe.

2. Indexedfactorforthebaseyear81-
82orforthefirstyearinwhichtheassetwasheldbytheassessee,whicheverislater.

3. Indexation factorfortheyear oftransfer.

Issue:BinheritedapropertyfromAon1-7-2004.ThepropertywasacquiredbyAon 1-7-
86.ThiswassoldinthecurrentyearbyB.IsitaLongTermAssetorShortTermAsset?Fromwhich
yearBcangetthebenefitofindexation?

1. CostofImprovement incurred after1/4/81.

2. Indexationfactor intheyearsuchcostof Improvement wasincurred.

3. Indexation factorfortheyear oftransfer.

Note:Bonussharesallottedpriorto1-4-81-Indexationcanbetakenfromtheyear1981-82 uptotheyearofsale.
 PROVISO’STOS
EC.48:
a. Proviso2:IndexationfacilityisavailableincomputationofLTCG.ItisnotavailabletoNon resident.

b. Proviso3:Indexationisnotavailabletobondsordebentures.Butitisavailabletocapitalindexed
bondsissuedbytheGovernment.

c. Proviso5:Nodeduction(Eitherastransferexpensesorascostofacquisition)shallbeallowed in respect
ofanysumpaidonaccountofSecuritiesTransaction Tax.

SEC.112-TAXONLONGTERMCAPITALGAINS

1. Taxrates:

a. IncaseofSpecifiedSecurities:Indexation+20%flat rateOrWithoutIndexation
+10%flatrate,WhicheverismorebeneficialtotheAssesseecanbeoptedi.e.thealternativewhichresultsinle
sstaxliabilitycanbeadopted (*).

SpecifiedSecuritiesare– ListedShares,ListedDebentures/Bonds&ListedGovernment
Securities,Zerocouponbonds.(Includesbonussharesalso)

b. Incaseof any othercapital asset:At 20%flatrate.

*Ifseveraltransactionshavetakenplacebywayofsaleofshares,etc.,theassesseecanavailthebenefitofindexati
on inafewtransactionsandavailthe10per cent taxrateontheremainingtransactions-
DevinderPrakashKalraVs.CIT[2005].

2. Unexhaustedlimit:Inthecaseofindividuals&HUF (OtherthanNon
resident’s),ifthebasicexemptionisnotexhaustedbyanyotherincomethentheLongtermcapitalgainshallbered
ucedbytheunexhaustedorunavailedbasicexemptionlimitandonlythebalanceshallbetaxedat20%.

3. DeductionsunderChapterVIAarenot availablein computationofTaxableLTCG.

4. Surchargeisalsopayableon taxpayableonLongTerm CapitalgainsafterclaimingtheeligiblerebateU/s88E.
(Inaddition itissubjecttoEducation Cessof2%)

5. Set Off Of Losses:TheCBDTin circularNo.721dated13.9.95hasclarifiedthat ifthereislossfrom

anyothersourceorunderanyotherheadofincomewhichiseligibleforsetoff,such losscanbesetoffagainst
longtermcapitalgainandonlythebalanceistaxed.
 CAPITALGAINSEXEMPTFROMTAX

U/S54:Wewilldiscusslatter.(Page18)

U/S10:

EXEMPTIONOFC.G’SONTRANSFEROFUNITSOFUS-64-SEC.10(33):Itprovides
thatanyincomearisingfromthetransferofacapitalassetbeingaunitofUS64,ifsuchtransfer takesplaceonor after
1.4.02,shallbeexemptfrom tax.Thisisapplicablewhetherthecapitalasset (US-64)islong-
termcapitalassetorshort-term capitalasset.

EXEMPTIONOFC.G.ONCOMPULSORYACQ.OF URBANAGR.LAND - SEC.10(37):

Capitalgainswillbeexempted ifthefollowingconditionsaresatisfied:

a. Theassesseisan individualoraHUF.
b. Heorit ownsanagriculturelandsituatedinspecifiedarea.

c. Thereisatransferoftheagriculturelandbywayofcompulsoryacquisition.

d. Theagriculturelandwasusedbytheassessee(and/orhisparentsifthelandwasownedbyanIndividual)foragricu
lturalpurposesduring2yearsimmediatelypriortothedateoftransfer.

e. Theassetsmaybelongtermcapitalasset orshort termcapitalasset.

f. Capitalgainarisesfromcompensationwhichisreceivedonorafter1.4.04(thedateofcompulsoryacquisition
maybebefore1.4.04).(*)

g. Evenenhancedcompensationwhichisreceivedonorafter1.4.04iseligibleforsuchexemption.

(*)Ifpartofthecompensationisreceivedbefore1.4.04,thenexemptionshallnotbeavailableeven though
balancecompensationisreceived onorafter1.4.04.

Problem5:RacquiredagriculturallandinDelhi,on15.5.94forRs.4,00,000.Thelandiscompulsorilyacquiredbyth
eDelhigovernmenton15.4.03andthecompensation
fixedwasRs.25,00,000.Rs.10,00,000wasreceivedbyRon15.1.2004andthebalanceon6.4.2005.Rwasnotsatisfie
dwiththecompensationandfiledasuitinthecourt.ThecompensationwasenhancedbyRs.5,00,000whichwasrecei
vedon25.3.09.ComputethecapitalgainstaxableinthehandsofRforthevariousassessment years.

EXEMPTIONOFLTCGONTRANSFEROFSECURITIESSUBJECTTOSTT -SEC.10(38):

Capitalgainswillbeexempted ifthefollowingconditionsaresatisfied:

a. Everyassesseiseligiblefortheexemption.

b. Thetransferredasset must beLTCA.

c. Theasset transferred isequitysharesinaCo.or unitsofequityorientedmutualfund.

d. Transfer takenplaceonorafterOctober1st,2004.

e. ThetransactionshouldbechargeabletoSecuritiesTransactionTax/STT(i.e. thetransfershould
takeplacethrougharecognisedStockExchange).
Note:

a. "Equityorientedfund"-
afundwheretheinvestiblefundsareinvestedbywayofequitysharesindomesticcompaniestotheextentofmoret
han65%ofthetotalproceeds.

b. IfitisaSTCG,satisfyingtheaboveconditionsitistaxable@ 10%-Sec.111A.

Problem6:Rbought500Listedsharesin1978forRs.15pershare.Themarketvalueoftheseshareson1.4.81
wasRs.25 per share.

1. ComputethetaxpayablebyRiftheabovesharesweresoldon15.11.2008totherelativeswithout
routingthroughthestockexchange,for:a.Rs.90,000b.Rs.70,000.

2. Whatshallbeyouransweriftheseshareshavebeensoldthrougharecognisedstockexchangeanditissubject
toSecuritiestransaction tax?

SEC.111A-TAXONSHORTTERMCAPITALGAINS

1. Ingeneral cases:Taxableattheratesatwhichtheotherincomeischargeabletotax.
2. Incaseof Sec.111A:

a. Itwillbetaxableataflat rateof15%.

b. Inthecaseofindividuals&HUF(OtherthanNonresident’s),ifthebasicexemptionisnotexhaustedbyanyot
herincomethentheShorttermcapitalgainshallbereducedbytheunexhaustedorunavailedbasicexemption
limitandonlythebalanceshallbetaxedat15%.

c. DeductionsunderChapterVIAarenot availablein computationofTaxableSTCG.

d. SurchargeisalsopayableontaxpayableonSTCG’safterclaimingeligiblerebateU/s88E(Inaddition
itissubject toEducationCessof 2%).

e. WhenSec.111 Aget’s attracted?:

 Theassettransferredisequityshareinacompanyorunitsofequityorientedmutualfund.

 Thetransaction ofsaleisentered intoonorafter01.10.04.

 Such transaction ischargeabletosecuritiestransaction tax.

 Thisisapplicabletoalltheassesse’s.

Problem7: Xaged66 years,submitsthefollowingfor thepreviousyear2008-09.

Incomefromsalary 61,000
Interest on Fixed depositswith banks 13,000
Longtermcapitalgains(H.P.) 1,10,000
Short term 10,000
capitalgainsonthesaleofequitysharesonwhichSTThasbeenpaid(On
30.12.08)

Hepays5,000aslifeinsurancepremiumanddepositsRs.22,000inpublicprovidentfundaccount.Computethetaxli
ability.
 SEC.45SERIES

SEC.45(1):Refer tofirst page

SEC.45(1A):

1. Background:TonullifythejudgmentgiveninVanniaSilksLtd.whichsaysthatthedestruction ofcapitalasset
doesnotamount totransfer,45(1A)hasbeenintroduced.

2. Event:Damageor Destruction of anyCapitalAsset asaresult of:

a. Typhoon,Hurricane,Cyclone,Earth Quakeetc.

b. Riot,Civildisturbances.

c. AccidentalFireor Explosion.

d. Actionbyan enemy(or)Actiontakenincombatingan enemy(with/withoutdeclaration ofwar).

3. YearofChargeability:Previousyearinwhichcompensationortheassetisreceivedfrom
theInsuranceCompany. (Thisisagainsttochargingsec.)

4. Consideration: ValueofmoneyreceivedorFMVoftheassetreceivedonthedateofthereceipt.

5. IndexationFacility:Itisavailableonlyuptotheyearofdestruction etc.
Note:

a. Itisagainsttothechargingsec.astherewillbecapitalgain even without transfer.

b. A ship, being overweight,issunkandassetsarelost.Thereceipt of insurancecompensation

in suchcircumstancesisnot chargeabletotaxunderSec.45(1A)

c. Insurancecompensationfortheftofstock-in-
tradeisnottaxableunderSec.45(1A)butitwillbetaxableasbusinessincomeundersection 28.

d. InthecaseofDepreciablecapitalassets,Sec.50isapplicable.

Problem8:XLtd.isamanufacturingcompany.OnApril1,2008,itownsPlantAandPlantB(Dep.-
15%;depreciatedvalueofblockbeingRs.2,40,000).PlantC(depreciationrate15percent)ispurcha
sedbythecompanyonJune10,2008forRs.60,000.Itisputtouseonthesameday. Find out
thetaxconsequencesinthefollowingdifferent situations:

a. PlantBisdestroyedbyfireonJanuary25,2009.Rs.10,000beingthecompensationispaidbythei
nsurancecompanyonFebruary10,2009.

b. Supposeinsurancecompensationinsituation(1)isRs.3,70,000.

c. PlantsA,BandCaredestroyedbyfireonJanuary25,2009.Compensationpaidbyinsurancecom
panyon February10,2009 isRs.20,000.

Problem9:Whenafireaccidenttakesplaceinafactoryandthefollowingeventsoccur.What
arethetaximplications?

a. Machinerydestroyed andcompensation isreceivedfromInsuranceCo.

b. Machinerydamagedisreplaced byInsuranceCo.with anewmachinery.

c. WouldtherebeanyimpactontheWDVoftheblock of machinery?

d. Rawmaterialsdestroyedand compensationisreceived.
 SEC.45(2) - CONVERSIONOFACAPITALASSETINTOSTOCK IN TRADE:

a. Background:TheSupremeCourtinCITv.BaiShirinbaiK.Kooka[1962]hadheldthatnotransf
erwasinvolvedwheretheassessee,holdingbywayofinvestmentsharesincompanies,commen
cedabusinessinsharesconvertingthesharesintostock-in-tradeofthebusiness.

b. Event:Conversion ofacapitalassetintostockintrade.

c. Yearof Chargeability:Theyearin which such stock-in-tradewassold.

d. Consideration:FMV asonthedateofconversion.

e. IndexationFacilityisavailableonlyuptotheyear ofconversion.

f. Intheyearin which suchSITissoldboth Capitalgainsand businessprofitswillresult.

Note:Ifstock-in-
tradeissoldinpartsindifferentyears,taxoncapitalgainonconversionofcapitalassetintostock-in-
tradeasper Sec.45(2),canbesaidtoariseinpartsindifferentyearsandnotin oneyearin which last
ofSITissold-CITv.Crest HotelsLtd. [2001]

Problem10:XinvestedRs.10,000toacquire1000sharesofABCLtd.on4-1-
1992.Heholdsthesharesasinvestments.On12-1-
2005hestartedabusinessofdealinginsharesandconvertshisholdingintohisstock-in-
trade.ThemarketvalueofthesharesasonthedateofconversionwasRs.25pershareandtherefore,Xc
reditedhiscapitalaccountbyRs.25,000anddebitedhisstock account
byRs.25,000.ThesharesarenowreflectedinthebusinessofXasSIT.Thesharesweresoldintheprevi
ousyear2008-2009forasumofRs.30,000.Comment.

What isyouransweriftheshareswereheld asSITtill31.3.09?

SEC.45(3) - TRANSFEROFACAPITALASSETINTOCAPITAL CONTRIBUTION:

a. Event:TransferofaCapitalAssetbyapartnertothefirmorbyamembertotheAOPbywayofcapitalcontribution.

b. Yearof Chargeability:Previousyearinwhich transfertakesplace.

c. Consideration:Thevalueof theAsset recordedinthebooksof thefirmor AOP.

d. Assesseechargeabletotax:Thepartner ormember.

Note:

a. Theserulesarenot applicablewhen amembertransfersacapitalasset toacompanyoraco-operativesociety.

b. AsperSec.45(3)thereisnorequirementthatinthecaseoftransferofanassetbyapartnertothefirm
inwhichheisapartner,theamountofsaleconsiderationhasgottobecreditedtohiscapitalaccount;creditingofpu
rchaseconsiderationtocurrentaccount of thepartnersissufficient- MafatlalHoldingLtd.V.CIT[2004].

Problem11:R acquiredapropertybywayof giftfrom hisfather inthepreviousyear1994-

95.Thefatherhadacquiredthepropertyinthepreviousyear1986-
87for2,00,000.ThispropertywasintroducedascapitalcontributiontoafirminwhichRbecameapartnerintheprevi
ousyear2008-09.Themarketvalueoftheassetin2008-09wasRs.10,00,000,butitwasrecorded
inthebooksofaccount ofthefirmat Rs.7,00,000.Comment.

WhatisyouranswerifthepropertyintroducedascapitalcontributionisapersonalcarusedbyR?

SEC.45(4) - DISTRIBUTION ON DISSOLUTION:

a. Event:TransferofaCapitalAssetbywayofdistributionondissolutionofafirmorotherwise.

b. Assesseechargeabletotax:PartnershipFirm.

c. YearofChargeability:Previousyearinwhichtransfertakesplacefromfirmtothepartners.

d. Consideration:FMV asondateoftransfer.

e. Cost ofacquisitionof thefirmisthevalueoftheAsset recorded inthebooks.

Note:

a. Theserulesarenotapplicablewhenanassetistransferredbyacompanyoraco-operativesociety.

b. Ifafirmdistributesadepreciableasset,thecapitalgain/lossshallalwaysbeshort-termcapitalgain/loss.

c. Sec.45(4)isnotapplicablewheresomepartnersretireandthefirmcontinuestocarryonthebusinesswithremaini
ngpartnersandwithnewpartnersorwithoutnewpartners-
CITv.G.K.Enterprises[2003].However,theBombayHigh Court
inCITv.A.N.NaikAssociates[2004]hasheldthattheword“otherwise”appearinginSec.45(4)notonlyinclude
scasesofdissolutionbutalsoincludedthecasesofretirementofpartnerseven though
thereisnodissolutionandthebusinessisacontinuingone.
 d. Amount creditedin capitalaccount ofretired partner uponrevaluationofasset offirmisnot
taxableascapitalgianasther isnotransfer-ITOv.Ramesh M.Shah [2004].

Problem12:A firmconsistsof3partnersnamelyR,GandS.S retiresfrom thefirm on15-10-

2008.HiscapitalbalanceandtheprofitstillthedateofretirementstoodatRs.15,00,000.Thefirmtransferreditslandto
Sinsettlementofhisaccount.ThemarketvalueofthelandasonthatdatewasRs.25,00,000.Thelandwasacquiredbyt
hefirmon1-5-1996for Rs.5,00,000.Computecapitalgain inthehandsofthefirm.

SEC.45(5) -COMPULSORYACQUISITION:

a. Event:TransferofaCapitalAssetbywayofCompulsoryAcquisition,underanylaworWhenacapitalassetistra
nsferred(notbywayofcompulsoryacquisition)andtheconsiderationisapprovedordeterminedbytheCentralG
overnment(notbyaStateGovernment)or theReserveBank ofIndia.

b. YearofChargeability:Inthepreviousyearinwhichcompensationisreceived(Full/Part).

c. Consideration:Compensation.

d. Indexationisavailableonlyuptotheyearoftransfer.

Note:

a. IftheCompensationisreceivedbythelegalrepresentativeofthedeceasedpersonfromwhomtheAsset
wasacquired,therecipient shallbechargeabletotax.

b. Enhancedcompensation/consideration:Sometimes,theassesseeisnot
satisfiedwiththecompensationdeterminedandmaygoinforanappealagainsttheamountdetermined.Ifonappe
althecompensationisenhanced,theadditionalcompensationiscalledenhancedcompensation.Suchenhanced
compensationshallbefullytaxableascapitalgainintheyearinwhichitisreceived.Thecostofacquisitionandim
provementtheretowillbetakenasnil,sinceithasalreadybeendeductedatthetimeofcomputation
ofcapitalgainfor initialcompensation.

c. Capitalgainsoriginallycomputedinrespectofthecompensationortheenhancedcompensation
receivedshallberevisedifsuch compensation or enhancedcompensationisreducedbyanycourt etc.
d. InterestonenhancedcompensationischargeableunderIncomefromothersources.Intereston

enhancedcompensationcannotbetaxedallinlumpsum.Theinteresthastobespreadoveronanannualbasistillth
edateoftheorderoftheCourtonatimebasis-K.S.KrishnaRaov.CIT[1990].

e. Expensesincurredforgettingtheenhancedcompensation isallowableasexpenditure.

Problem13:TheCentralGovernmentacquiresahousepropertyownedbyXonOctober17,1995.Thispropertywas
purchasedonApril10,1976forRs.76,000(costofimprovementincurredduring1986-
87Rs.40,000andfairmarketvalueofthepropertyonApril1,1981wasRs.1,42,000).TheGovernmentawardsRs.5,7
7,000ascompensationwhichisreceivedpartly(Rs.77,000)onMay13,2008andpartly(Rs.5,00,000)onApril1,200
9.Beingaggrievedagainsttheaward,Xfilesanappeal.TheCourt,asperorderdatedAugust12,2009,enhancedtheco
mpensationfromRs.5,77,000toRs.9,50,000(legalexpensesincurredbyX:Rs.20,000)Xreceivestheadditionalco
mpensation ofRs.
3,73,000onApril15,2010.ComputetheincomeofXunderthehead“Capitalgains”.Doesitmakeanydifferenceifth
eadditionalcompensationisreceivedbyhissonsA andB(shareofeachbeing50%)onApril15,2010afterthedeath
ofX?
 TRANSFEROFSECURITY INDEMATFORM[SEC.45(2A)]

1. Section 45(2A)isapplicableif shares/securitiesaretransferredin“demat” form.

2. Ifshares/securitiesaretransferredin“demat”form,beneficialownerofshares/securitiesischargeabletotax
.

3. Forcomputingcapitalgainchargeabletotax,thecostofacquisitionandperiodofholdingofanysecurityshall
bedeterminedonthebasisoffirst-in-first-out(FIFO)method.

TheBoardhasissued thefollowingclarificationvideCircularNo.768,June24,1998:

1. FIFOmethodwillbeappliedonlyin respectofthedematerialised holdings.

2. Inthedepositorysystem,theinvestorcanopenandholdmultipleaccounts.Insuchacase,whereaninvestorh
asmorethanonesecurityaccount,FIFOmethodwillbeappliedaccount wise.

3. Ifinanexistingaccountofdematerializedstock,oldphysicalstockisdematerializedandenteredatalaterdat
e,undertheFIFOmethod,thebasisfordeterminingthemovementoutoftheaccountisthedateofentryintothe
account.Thisisillustratedbythefollowingexample:

Dateof credit Particulars Qty

June1,1997 Purchaseddirectlyin dematerialized formonMay25,1997 2,000
June5,1997 Dematerialized share(originallypurchased inNov,1985) 5,000
June10, 1997 Purchaseddirectlyin dematerialized formonJune10 1997 4,000
June15, 1997 Dematerialized sharesoriginallypurchased in May,1962 3,000

Ifsay,2,500sharesweresoldfromoutofthisaccount,thentheperiodofholdingandthecostofacquisit
ionofthefirst2,000sharesshouldbeasfromMay25,1997andthecostthereof,whereasthebalance50
0shareswillbetreatedashavingbeenacquiredinNovember1985attherelevant
cost.ThisistheeffectoftheFIFOmethod.
 DISTRIBUTIONOFASSETSBYCO’S INLIQUIDATION– SEC.46

1. Whenassetsaretransferredbywayofdistributiontotheshareholdersofaco.onaccountofliquidation
,suchdistributionshallnotberegardedastransferinthecaseofthecompany.

2. Inthecaseofshareholdersofthecompany,capitalgainsshallbechargeabletotaxonsuchdistribution.
ForthepurposeofcomputationofCapitalgains,theconsiderationshallbedetermined asfollows:

a. Distributionincash: Amount receivedlessdeemeddividend u/s.2(22)(c)

b. Distributioninkind:Fairmarketvalueoftheassetonthedateofdistributionlessdeemeddivi
dend u/s.2(22)(c).

Problem14:Mr.Ramhadpurchased5,000equitysharesinJune1986ofM/s.Kamat&Co,.Ltd.attherateofR
s.2pershare.M/s.Kamat&Co.,Ltd.goesintoliquidationonJune30,08.TheB/softhecompanyasonthedateo
fliquidation stoodasunder:

Liabilities Rs. Assets Rs.

10,000debenturesinPatel&Co.Ltd
50,000 equityshares 5,00,000 30,00,000
.
Accumulatedprofits 30,00,000 (Cost Rs.10,000)
Provision for dividend 3,00,000 Cashinhand 8,00,000

tax
38,00,000 38,00,000
AfterretainingRs.3,00,000forpayingdividendtax,theremainingassetsaredistributedtotheshareh

olders.Intheprocess,on30thJune,2008Mr.Ramgets1,000debentures(marketvalueRs.3,00,000)

andRs.50,000incash.Hetransferstheentiredebentureson10thMarch,2009 forRs.3, 20,000.

,
SEC.46A-BUYBACK OFSHARES &CAPITALGAINS
a. Mannerofcomputation:Whereacompanypurchasesitsownsharesthedifferencebetweenthe
costofacquisition&considerationreceivedbytheshareholdershallbetakenasC.G.’s.

b. Indexation: If thesharesarelongtermcapitalasset indexation facilityisavailable.

c. Yearof chargeability:Intheyear inwhichsuch sharesarepurchased bytheCo.

SEC.50-COMPUTATIONOFC.G’SINCASEOF DEPRECIABLEASSET’S

C.G.

OnSaleofNonDepreciableAsset OnSaleofDepreciableAsset

Sec.48 Sec.50

Conditionsforclaimingdepreciation:DepreciationU/s.32canbeclaimedprovidedasonthelastd
ayof thePreviousYear,thefollowingtworequirementsarefulfilled:

a. Theremust beat least oneasset intheblock &

b. Theremust besomevaluefortheblockonwhich prescribedpercentagecanbeapplied.

Sec.50 comesintopicture:

1. Whereanyoneorbothoftheabovementionedrequirementsarenotsatisfied,Sec.32willnotappl
yandautomaticallytheprovisionsofSec.50becomeapplicableresultingintheSTCGor STCL.

2. Sec.50thusgetsattractedunderthefollowingcircumstances:

a. Whenoneorsomeoftheassetsintheblockweresoldforaconsiderationwhichismorethan
thevalueof theblock.(STCG).
 b. When alltheassetsaretransferredfor aconsideration which ismorethan
(STCG)orlessthan thevalueoftheblock(STCL).

Problem15:KishoreIndustriesownedsixmachineswhichwereinuseinitsbusinessinMarch,2008
.Depreciationonthesemachineswasavailableas“plant”.Thewrittendownvalueofthesemachines
attheendofpreviousyearrelevanttoassessmentyear2008-
09wasRs.6,50,000.AnewplantwasboughtforRs.6,50,000on30thNovember2008.Threeoftheol
dmachinesweresold on10thJune,2008forRs.9,00,000.Required:(Dep@15%)

A. Computetheclaimof depreciation forassessmentyear 2009-10.

B. Capitalgainsliabletotaxfor thesameassessment year.

C. IfKishoreIndustrieshadsoldthethreemachinesinJune,2008forRs.14,00,000willtherebeanydifferenceinyou
raboveworking?Explain.

SEC.50B-SLUMPSALE
a. Def.:Slumpsalemeansthetransferofwholebusinessforalumpsumconsiderationwithout
valuesbeingassigned totheindividualassets&liabilities.

b. Anyprofitsarisingfromsuch saleshallbechargeableascapitalgains.

c. >36Months:Ifthebusinessthatwastransferredundertheslumpsaleisowned&heldformorethan
36months,thecapitalgainsshallbetreatedasLTCG.

d. CostofAcquisition+CostofImprovement=Networthoftheundertaking/businesssotransferred(NoIndexatio
n available).

e. Net
worthmeansthetotalvalueoftotalassetsofthebusinessasreducedbythevalueofoutsideliabilitiesofsuchbusin
essasappearinginthebooksofaccounts.Revaluedfigures(inc./dec.)shallbeignoredfor thepurposesof
computingthenet worth.

f. Thetotalvalueoftotalassets,for thispurpose,shallbe:

 Inthecaseofdepreciableassets-thewrittendown valueof assetsasperI.Taxact.

 Inthecaseofotherassets-thebook value(Otherthan revalued figures).

g. A C.A.reportcertifyingthecomputationof Net worth tobeenclosed.

Advantages:

a. 20%tax, in casetheundertakingtransferred isheldformorethan36months.

b. Evenifsomeoftheassetstransferredwasheldforlessthan36monthstheywillbecharged asLTCG.
Problem16:ThefollowingistheBalanceSheetofSSLtd.ason31-8-
2008onwhichdatedivisionIIIhasbeentransferredbywayofslumpsaleforaconsiderationofRs.1060lakhs.Divisio
n IIIisin existencesinceApril2003.

Liabilities Lakhs Assets Lakhs

PaidupcapitalRe 2,000 Fixedassets:D
serves 800 ivision – 180
IDivision – 270
IIDivision – 600
Liabilities:Di IIIOther
vision – assets:Divisio

AdditionalInformation:

a. FixedassetsofdivisionIIIincludeslandwhichwaspurchasedatRs.40lakhsin2003andrevaluedatRs.80
lakhsason31-3-2008.

b. FixedassetsofdivisionIIIreflectedatRs.520lakhs(Rs.600lakhslesslandvalueRs.80lakhs)iswrittendownval
ueofdepreciableassetsasperbooks.However,thewrittendownvalueundertheIncomeTaxAct isRs.480
lakhs.

c. Otherassetsreflected at Rs.570 lakhsrepresent bookvalueofnondepreciableassets.

SEC.50C-SPECIALPROVISIONSFORCOMPUTATIONOFCONSIDERATION

1. Whatitsays:Wheretheconsiderationforthetransferoflandorbuildingorboth(LTCA/STCA/Dep./Non-
Dep.),is<thevalueadoptedbystampdutyauthoritiesforthepurposeofpaymentofstampduty(Calledstampdut
yvalue),thevaluesoadoptedshallbetaken asconsideration.(i.e. Stamp duty value=Consideration)

2. Refertovaluationofficer:Wheretheassesseclaimsthatthestampdutyvalue>FMVoftheproperty,
theassessingofficermayreferthecasetoaValuationOfficer.

3. Suchreferenceshallnotbemade,ifthestampdutyvaluehasbeendisputedinanyappealbeforeanyauthorityor
courtor thehigh court.

4. Actioncanbetakenon report:

a. If
thevaluedeterminedbytheValuationOfficer>thestampdutyvalue,theAssessingOfficershalltakestampd
utyvalue=Consideration.

b. If
thevaluedeterminedbytheValuationOfficer<thestampdutyvalue,theAssessingOfficermaytakesuchdet
erminedvalue=Consideration.

c. If
thevaluedeterminedbytheValuationOfficer<thesaleconsideration,theAssessingOfficershalltakeActua
lconsideration =Consideration.

5. C.G.’s=Consideration asper ‘4th’point- Cost/IndexedCost.

6. Subsequenttothemakingofassessment(Wherethestampdutyvaluewasadoptedasconsideration),ifsuch
valueisrevisedin anyappeal,theassessingofficershallamendtheassessment
ordertorecomputethecapitalgain.

Note:Unlesspropertytransferredhasbeenregisteredbyasaledeedandforthatpurposevaluehasbeenassessedandst
ampdutyhasbeenpaidbyparties,section50Ccannotcomeintooperation.Ifapropertyistransferredunderapowerof
attorneytransactionandvaluehasnot been assessedforthepurposeofstamp duty,section 50Chasnoapplication-
Navneet KumarThakkarv.ITO[2007]
Problem17:Xpurchasedon18.6.1984,housepropertyforRs.2.25,000which
wassoldtoAon18.10.2008forRs.8,75,000.Sub-
registraratthetimeofregistrationofsaledeedchargedstampdutyonRs.12,50,000whichwaspaidbythebuyer.The
A.O.whileassessingforcapitalgainreferredthemattertovaluationofficerwhodeterminedthevalueofpropertyat
Rs.15,00,000onthedateoftransfer.Xseeksyouradviceonthefollowing:

a. IstheA.O.correct tochargecapitalgain onthevalueofRs.15,00,000asdeterminedbyvaluationofficer?

b. Theamount ofcapitalgain onwhich Xisrequiredtopaycapitalgain tax.

 EXCEPTIONSTOTRANSFER-SEC.47

a. Gift orwill:Transfer ofacapitalassetbywayofgiftor underawill.

b. Partition:Transfer ofacapitalasset ina partitionofaH.U.F.

c. HtoS/StoH:Transfer ofacapitalassetbyholdingcompanytoitssubsidiarycompanyor viceversaif

thefollowingtwoconditionsarefulfilled:

Theholdingcompany&itsnomineeshouldholdthewholeofthesharecapitalofthesubsidiarycompany.

 Thetransfereecompanyshould beanIndianCompany.
d. Amalg.-Assets:Transferofacapitalassetinaschemeofamalgamation,iftheamalgamated companyisan
Indian Company.

e. Demerger-Assets:Transfer ofacapitalasset
bythedemergedcompanyinaschemeofdemergertotheresultingcompany,iftheresultingcompanyisanIndian
company.

f. Amalg.-
Shares:Exchangeofsharesheldbytheshareholderoftheamalgamatingcompanyinlieuofthesharesissuedbyt
heamalgamatedcompanyiftheamalgamatedcompanyisan IndianCompany.

g. Demerger-Shares:Transferofsharesbytheshareholderofademergedcompanyinaschemeofdemerger
inconsiderationofthesharesissued bytheresultingcompany.

h. Transferofcapitalassetbeinganyworkofart,archeologicalorscientificorartcollection,anybookmanuscript
,painting,drawing,etc.,totheGovernmentorUniversityornotifiedMuseums,Art
Galleryorapprovedinstitutions.

i. Conversionofdebenturesand deposit certificatesintoshares.

j. ConversionofFCEBsintosharesordebenturesofanycompany.

k. Conversion/Graduationoffirmintocompany:Transferofcapitalassetsmadetothecompanybythepartnershi
pfirmwhereafirmisconvertedintocompanyisnottakenastransfer,if thefollowingconditionsaresatisfied:

 Alltheassets&liabilitiesofthefirmshallbetakenover.

Allthepartnersshallbecometheshareholdersoftheco.inthesameproportioninwhich
theircapitala/c’sstood inthefirm’sbooksonthedateofsuccession.

 Theconsideration tothepartnersshallbepaidonlyintheformofshares.

Thetotalshareholdingofthepartnersinthecompanyshallnotbelessthan50%ofthetotalvotingpowerin
thecompanyandtheirshareholdingcontinuestobeassuch foraperiodof
5yearsfromthedateofthesuccession.

l. Conversion/Graduation of proprietary concernintoCo.:Similartopointj.

m. Amalgamationofbankingcompanywithabankinginstitution:Anytransferofacapital assetbyabanking
company toabanking institutioninascheme of
amalgamationofsuchbankingcompanywithsuchbankinginstitutionsanctionedbythecentralgovernmentshall
notbe regardedas transferforthe purposesof capital gains.
n. Anytransfer,inabusinessreorganization,ofacapitalassetbythepredecessorco-operativebank
tothesuccessorco-operativebank.

o. Anytransferbyashareholder,inabusinessreorganization,ofacapitalassetbeingashareor sharesheldbyhim
inthepredecessorco-operativebankifthetransfer
ismadeinconsiderationoftheallotmenttohimofanyshareorsharesinthesuccessorco-operativebank.

p. Anytransferinvolvedinaschemeforlendingofanysecuritiesunderanagreementorarrangementsubjecttotheg
uidelinesissuedbytheSEBIorRBIinthisregard,whichtheassesseehasenteredintowith theborrower ofsuch
securities.

q. Transferofacapitalasset,beingbondsandGlobalDepositoryReceiptsreferredtoinSec.115AC,madeoutsideI
ndiabyanon-resident toanothernon-resident.

r. AnytransferofacapitalassetbeingamembershiprightheldbyamemberofarecognizedstockexchangeinIndiaf
oracquisitionofsharesandtradingrightsacquiredbysuchmemberinthatrecognizedstockexchangeinaccorda
ncewithaschemefordemutualizationor corporatisationwhich isapproved bySEBI.

s. Transferoflandofasickindustrialcompanyunderaschemesanctionedu/s18oftheSickIndustrialCompanies(S
pecialProvisions)Act,1985,wheresuchsickindustrialcompanyisbeingmanaged byitsworkers’co-
operative.
 WITHDRAWALOFEXEMPTION-SEC47A
1. Wherethecapitalgainarisingonthetransferofacapitalassetfromtheholdingcompanytothesubsidiarycompan
yorvice-
versawasexemptfromcapitalgainstaxbyvirtueofSec.47andanyofthefollowingeventsoccurwithinaperiodof
8yearsfromthedateoftransfer,thecapitalgainssoexemptedwouldbechargeabletotaxintheyear inwhich
thetransfertook place:

a. Theholdingcompanydoesnotcontinuetoholdthewholeofthesharecapitalofthesubsidiarycompany;or

b. Thetransfereecompanyconvertsor treatsthecapitalassetinto/asstock-in-trade.

2. Inthecaseofatransactionbetweenholdingcompanyandsubsidiarycompany,thefollowingadditionalpointsne
edtobebornein mind:

a. Iftheprovisionsofsection47Aareapplicabletoatransfer,thentheassessmentshallbereopenedinrespectoft
heassessmentyearrelevanttothepreviousyearinwhichoriginaltransfertookplaceu/s.155(7B),toamendth
eordersoastochargethecapitalgainstotax.

b. Ifthetransfereecompanysubsequentlysellstheassetwithoutattractingtheprovisionsofsection47Athenfo
rcomputationofcapitalgainsthecosttothetransferorcompanyshallbeadoptedascosttothetransfereecomp
any- Sec.49(1)

c. IftheassetissoldafterattractingtheprovisionsofSec.47A,thenthecosttothetransfereecompanyshallbethe
actualcostincurredbythatcompanytoacquiretheassetfromthetransferorcompany- Sec.49(3).

3. Thecapitalgainarisingontransferofacapitalassetinthenatureofmembershipofarecognizedstockexchangeex
emptedbyvirtueofsec.47,shallbechargeabletotaxifthesharesallottedtothetransferorinexchangethereofaretr
ansferredbeforetheexpiryofaperiodof3years.Thecapitalgainshallbedeemed,insuchacase,astheincomechar
geableduringthepreviousyear inwhichthesharesaretransferred.
4. Iftheconditionsstipulatedregardingthesuccessionofaproprietaryconcernorafirmbyacompanyarenotcompl
iedwith,thebenefitsavailedbythesoleproprietororthefirm,asthecasemaybe,shallbedeemedtobeprofitandga
insofthesuccessorcompanychargeabletotaxintheyearinwhich infringement takesplace.

Problem18:HLtd.Isan Indian company.SLtd.Isit’swhollyownedsubsidiaryIndian

Co.DuringthemonthofJuly2002HLtd.PurchasedlandforRs.2.4crores.SLtd.wantedtotakeoverthislandtolaunc
hahotelproject.HLtd.transferredthislandtoSLtd.DuringthemonthofApril2005foraconsiderationofRs.3.2crore
s.Duetochangeingovernmentpolicyapprovalforahotelprojectwasnotgrantedonsuch
land.SLtd.HastransferredthelandtoathirdpartyinAugust2007foraconsiderationofRs.4crores.Computethetaxi
mplicationinthecaseofHLtd.AndSLtd.Inrespectoftheabovetransactions.Intheabovecase,whatwouldbetheimp
actif,HLtd.DisinvestsinFeb2008sharesheldinSLtd.Tothetuneof 40%ofthesharecapital.

Problem19:A,anindividual,wasthesoleproprietorofabusiness.Hisnetinvestmentinthebusiness,on31stMarch,
2008wasRs.20lakhsrepresented by:

Particulars Rs Rs
Fixedassets 18,00,000
Current assets 10,00,000
Total 28,00,000
Current liabilities 5,00,000
Loans 3,00,000 8,00,000
Net Investment 20,00,000
Findinghimselfunabletocarry onbusiness
byhimselfandalsotoattractadditionalcapital,heformedaprivatelimitedcompanyinApril,2008withanauthorizedc
apitalofRs.1crore.Atthetimeofformationofthecompany,A
andhiswifehadsubscribedto100equityshareseach,fully paidincash.

On10thJune2008,Atransfershisindividualbusinessinentirety,asagoingconcern,totheprivatelimited
companyfor Rs.40 lakhsforissueofsharesinthefollowingmanner:

PreferenceShares: WhollytoMrs.A
1,50,000 shares
andhersisterMrs.G(injoint names)

Equity shares:Mr. A 1,30,000 shares

Equity shares:Mr.C,major sonofA 20,000 shares
Equity shares:Mr.D,a friendofA 30,000 shares
Equity shares:Mrs.E,marriedsister ofA 20,000 shares
Equity shares:Mr.F,husbandofMrs.E 50,000 shares

ThesharesofthefacevalueofRs.10each aretobeissuedfullypaidup.Nootherpurchaseconsideration
forthetransferofthebusinesstothecompanywasdue.Required:
a. AscertainwhetherinA’shandsanytaxliabilitywillbedue;ifso,alsoindicatetheassessment yearrelevant
forthis.
b. Ifon30th,March,2010,Ahadsold10,000equitysharesallottedtohimatRs.50pershare,toafriend,what
willbetheconsequences?

SPECIALPROVISIONSFORNON-RESIDENTS

Inthecaseofanassesseewhoisanon-
residentcapitalgainsarisingfromtransferofcapitalassetsbeingthesharesordebenturesofanIndiancompanyshall
becomputedbyconvertingcostofacquisition,expensesincurredforthetransferandsaleconsiderationintothesame
foreigncurrencyaswasutilizedforthepurchaseofsharesordebenturesasindicatedbelow.Thecapitalgainssocomp
utedinsuchforeigncurrencyshallbereconvertedintoIndiancurrencyforthepurposeoffurthercomputation-
FirstprovisotoSec.48andRule115A.
 ItemsConverted
Rateof Conversion/re-conversion
/reconverted
Theaverageoftelegraphictransfersellingrateandbuyingrate
Costofacquisition
asonthedateofacquisition

Theaverageoftelegraphictransfersellingrateandbuyingrate
Expensesincurredfor transfer
asonthedateoftransfer.

Theaverageoftelegraphictransfersellingrateandbuyingrate
Saleconsideration
asonthedateoftransfer.

Capitalgains(Re-conversion) Thebuyingratefor telegraphictransferasonthedate

Theconversionandre-conversionshallbemadeonthebasisoftherateofexchangeadopted bytheStateBank
ofIndia.

Theaforesaidmannerofcomputationofcapitalgainsshallbeapplicableinrespectofcapitalgainsarisingfromevery
reinvestmentthereafterinthesharesordebenturesofanIndiancompanyonthesaleofsuchassets.

In thesecasesindexation willnotbeavailableinthecomputation ofcapitalgains.

Problem20:Mr.Fredrick,anon-residentIndian,acquiredinJanuary2002,sharesin
IndiancompaniesforaconsiderationofRs.20.50lakhsbyremittingequivalentUSdollars.InOctob
er2007hesoldtheentiresharesforasumofRs.33,00,000afterincurringRs.66,000towardsexpense
sfortransfer.YouareinformedthedetailsoftelegraphictransferratesofStateBankof
Indiaherebelow:

Particulars Buyingrate Sellingrate

Onthedateofacquisition 40.50 41.50
Onthedateoftransfer 43.50 44.50

Computethetaxablecapitalgainsonthebasisof theaboveinformation.
SPECIALPROVISIONSINTHECASE OFANON-RESIDENTINDIAN[SEC.115F]

Ifthefollowingconditionsaresatisfied,onecantakethebenefit ofSec.115F:

1. Thetaxpayerisanon-
residentIndian(i.e.,anindividualbeingacitizenofIndiaorapersonofIndianoriginwhoisnon-
resident.ApersonshallbedeemedtobeofIndianoriginifhe,oreitherofhisparentsoranyofhisgr
and-parents,wasborninundividedIndia)atthetimeofsaleofcapitalasset.

2. Hehastransferredaspecifiedasset[i.e.,sharesinanIndiancompany,debenturesofanIndian
publiclimitedcompany,depositswithanIndianpubliclimitedcompanyorCentralGovernment
securities[hereinafterreferredtoas“originalasset”]]whichhasbeenacquiredorpurchasedwit
h or subscribedtoin,convertibleforeign exchange.

3. Such assetisalong-termcapital asset.

4. Within6 monthsoftransfer oforiginalasset,thetaxpayer hasinvestedthewhole/partofnet

consideration inanyofthefollowing(hereinafterreferred as“ newasset”):

a. SharesinanIndiacompany;

b. Deposit ofan Indianpubliclimited company;

c. Deposit with anIndianpubliclimited company;

d. CentralGovernment securitiesor

e. NationalSavingCertificatesVIand VII issue.

5. Ifalltheaboveconditionsaresatisfied,exemptionisavailableasfollows:
 SEC.55A-REFERENCETOVALUATIONER
ForthepurposeofascertainingtheFMV,theAssessingOfficermayreferthevaluationofaCapitalA
sset toavaluation officerunderthefollowingcircumstances:

a. Alreadyvalued:Wheretheassessealreadyreferredthemattertoaregisteredvaluerandthevalue
asclaimedbyhim isasperthatvaluationreport-iftheAssessingOfficerisof theopinion that
thevaluesoclaimedislessthan itsFMV.
b. Ifnot so,if theAssessingOfficer isof theopinion:

ThattheFMVoftheassetexceedsthevalueoftheassetasclaimedbytheAssesseebymorethan
15%ofthevalueclaimed Orbymorethan25,000 Or

ThathavingregardtothenatureoftheAsset&relevantcircumstancesitisnecessarytomakethereference.

Thevaluation report oftheValuation OfficershallbebindingontheAssessingOfficer.

 ZEROCOUPONBONDS

1. Meaning of zero couponbonds: “Zerocoupon bond” meansabond:

a. Issuedbyanyinfrastructurecapitalcompanyorinfrastructurecapitalfundorpublicsectorcompanyonoraft
er1.6.2005,

b. In respect ofwhich nopayment isreceived beforematurityand

c. Which thecentralgovernmentbynotification,specifyinthisbehalf.

2. Redemptionofzerocouponbondstoberegardedastransfer:Thepaymentofzerocouponbondsshallbereceiv
edfromtheissuingcompany/fundonlyatthetimeofmaturityorredemption.Consequently,Sec.2(47)isamende
dtotakeredemptionofzerocouponasatransfer.

3. Transferofzero couponbondstaxableascapital gains:

a. Theprofitsarisingonthetransferofsuchzerocouponbondsshallbechargeableunderthehead
“capitalgains”.

b. Ifzerocouponbondsarenotheldformorethan12months,suchcapitalassetshallbetreatedasshorttermcapit
alassetandhenceshallsubjecttoshort-termcapitalgain.On theotherhand,wherethesebondsareheldfor
morethan 12months,suchcapitalgain shallbetreatedaslong-termcapitalgain.

4. Taxabilityoflong-
termcapitalgain:DefinitionofspecifiedsecurityasgiveninSec.112isamended.Thereforetheoptionschemei
salsoavailable(i.e.20%taxwithindexation or10%tax without indexation).

5. Taxtreatmentinthehandsofcompanyissuingsuchbonds:Discountonissueofzerocouponbondstobeallowe
dasdeductiononproratabasis,havingregardtothematurityperiodofthebonds,underSec.36
whilecomputingbusinessincome.
 SEC.54SERIES

*Capitalgainwhichwasexemptu/s54Fshallbedeemedtobeincomebywayoflong-
termcapitalgainoftheyearinwhichanotherresidentialhouseispurchasedorconstructed.

**Exemptionu/s54ECinrespectofdepreciableasset:IfconditionsnecessaryunderSection54ECarecomplied
withbytheasseseeonthetransferofadepreciableasset,ifconditionsnecessaryu/s54ECarecompliedwithbytheasse
sseeiseligibleforthebenefitu/s54EC{CITv.AssamPetroleumIndustries(P.)Ltd.[2003]}.

SOMECLARIFICATIONSONSEC.54SERIES

a. ForthepurposeofSec.54and54F,costoflandacquiredbytheassesseewillalsobeeligibleforexemptionalongwi
ththecost ofconstructionoracquisition.(CircularNo.667,datedOctober18,1993).

b. ForSec.54/54F, thewordhousepropertymeansbuildingorland appurtenant thereto.

c. Conversionofjointownershipintosingleownershipbypaymentbeingmadetootherjoint
ownersamountstopurchase.

d. Housepropertydoesnotmeananindependenthousepropertyonly,itincludesflatsinapartment &joint
ownershipaswell.

e. Purchaseofthehousepropertywhichisalreadyinoccupationoftheassesseeinthecapacityofthetenant
istakenasan eligiblepurchase.

f. Saleof>1 houseproperty&purchase/constructionofasinglepropertyispermissible.

g. Saleof 1houseproperty&purchase/constructionof>1 propertyispermissible.

h. Constructionof2ndfloor onexistingpropertyisvalid.

i. ForthepurposeSec.54B&54Dusageasatenantisalsotobeconsidered.

j. IncaseofSec.54D&54G/GA,theassetstobesoldaredepreciableassets,theresulting
C.G.canonlybeeitherSTCGor STCL.

k. Expensesincurredfor registrationof propertywillbeconsideredasinvestment.

• Expenditureincurredforconstructionbeforethedateoftransferoftheassetbecomeseligibleforexempt
ion u/s.54 or 54F.

l. Theconstructionofthenewhousemaystartbeforethedateoftransfer,butitshouldbecompleted
afterthedateoftransferoftheoriginalhouse.

m. Construction neednotbecompleted in full.

n. Whereapersonwhosoldthehousepropertyhasdied,evenifhislegalrepresentativesfulfilsthec
onditionastopurchaseor constructionofanewresidentialhousewithin thestipulated
period,thebenefitofSec.54canbetakenbysuch representatives.

o. If theassesseecomplieswiththeconditionsgiveninSec.53Aof thetransferof
propertyactwithingiventime,heiseligibleforexemptionevenifthesaledeedwasnotregistered.

p. Thewords"assesseeoraparentofhis"occurringinSec.54BoftheAct,wouldclearlyindicatetha
t onlyan"individualassessee" iseligible.

q. Expensesincurredfor shiftingwillbeconsideredasinvestment u/s54G,54GA.

r. ThecostofthebondspurchasedundereligibleissueofcapitalforwhichexemptionunderSec.54
ECisclaimed,willnotqualifyfordeduction underSec.80C.

s. Newlyacquiredor constructedpropertymaybeinIndiaor outsideIndia.

t. Forclaimingexemptionu/s54(1),constructionofhouseneednotbemadebytheassessehimself,
asitcanbeconstructedbyathirdpartyfortheassesseCITVs.UmaBudhia[2004].

u. Thereisnothinginprovisionofsection54towarrant establishingadirect nexusor live-

linkbetween theamount ofcapitalgainandthecostofnewassetAjitVaswanitVs. CIT.

v. Forpurposeofclaimingexemptionu/s54,investmentinresidentialhousewouldnotonlyinclud
ecostofpurchaseofhousebutalsocostincurredformakinghousehabitable-
SaleemFazelbhoyVs.CIT[2006].
Capitalgainsaccountsscheme:UnderSec.54,54B,54D,54F,54G,54GA(54ECnotcovered)thec
apitalgainsisexemptifsuchgainsorconsideration,asthecasemaybe,areinvestedinnewassetswith
inthetimeallowedintherespectivesections.Ifsuchinvestmentisnotmadebeforethedateoffurnishi
ngtheincometaxreturnthentheamountofcapitalgainorthenetconsideration,asthecasemaybeisre
quiredtobedeposited inan account undercapitalgainsaccountsscheme.Therelevant pointsare:

a. Datefordeposit:Thedepositshallbemadeonorbeforefurnishingthereturnofincomeorwithinthe
duedateforfurnishingthereturnunderSec.139(1),whicheverisearlier.

b. Thedepositcanbemadeinanypublicsectorbankorapprovedinstitution.

c. Proof: Thereturnofincomeshallbeaccompanied byproofofsuch deposit.

d. Withdrawn:Theamountdepositedcanbewithdrawnformakingtheinvestmentsasspecifiedin
therelevant section’s.

e. Unutilised:Iftheamountdepositedisnotutilisedforacquiringthenewassetwithinthegivenper
iod,thecapitalgainrelatedtotheunutilisedamountshallbetreatedastheC.G.ofthepreviousyea
r inwhich theperiod specified in relevant sectionsexpired.

f. TheunutiliseddepositamountintheCapitalGainsAccountsScheme,inthecaseofanindividual
,whodiesbeforetheexpiryofthetwo/threeyearsstipulatedperiodundersection54,54B,54D,5
4Fand54G,cannotbetaxedinthehandsofthedeceased(CircularNo.743 dt.06.05.1996).
 Whathappensifthenewly acquiredassetissold?:
a. Saleofnewasset:UnderSec.54,54B,54D,54Gand54GAifthenewlypurchasedassetistransferredwithin
aperiodof3yearsfrom
thedateofitsacquisition,thecostofsuchnewlypurchasedassetshallbereducedbytheamountofcapitalgainspre
viouslyexemptedandtheshorttermcapitalgainsarisingonthetransferofnewlypurchasedasset
shallbecomputedbyusingsuchreducedcost of acquisition.

b. Ifthenewlypurchasedasset underSec.54Bisnot aC.A.then “a” willnotarise.

c. Saleofnewasset:UnderSec.54F,ifthenewassetistransferredwithinaperiodofthreeyearsthenthecapitalgaine
xemptedearliershallbetaxedasthecapitalgaininthepreviousyearinwhichsuchassetistransferred.
(InadditionweshallcalculateC.G’son saleofnewasset).

d. SaleofInvestments:IfthespecifiedbondsU/s54ECsoinvestedaretransferredorconvertedwithinaperiodof3y
earsfromthedateofacquisition,theamountofcapitalgainpreviouslyexemptedshallbedeemedtobelong-
termcapitalgainsofthepreviousyearin whichsuchtransfer orconversiontakesplace.
(Iftheassesseetakesanyloanoradvanceonthesecurityofsuchspecifiedbondsordebentures,heshallbedeemed
tohaveeffected conversion).(InadditionweshallcalculateC.G’son saleofnewasset).

Sec.54H:Extension of
timeforacquiringnewassetordepositingamount:Wherethetransferoftheoriginalassetisbywayofcompulsorya
cquisitionandtheamountofcompensationisnotreceivedbytheassesseeonthedateofsuchtransfer,theperiodavaila
bleforacquiringnewassetor investmentbytheassesseeasreferredtoin
Sec.54,54B,54D,54ECand54Finrelationtosuchcompensation,shallbecalculatedfromthedateofreceiptofsuchc
ompensationandnotfromdateoftransferoftheoriginalasset.Theextensionof
timeaspersection54Hisnotavailableforsection54G/GA.

Exemptionundermorethanoneprovision:Itispossibletoavailexemptionunderthemorethanonesectioninrespec
tofcapitalgainsarisingontransferofacapitalasset.For
e.g.anassesseemaysellaresidentialhouse,jewellery,land,sharesetc.,andinvestthecapitalgainsor net
consideration asthecasemaybein anotherresidentialhousewherebyexemptioncanbeclaimed bothu/s. 54 and
sec.54F.
Problem21:Rownsaresidentialhousewhichwaspurchasedbyhimin1977forRs.60,000.Thefairmarketvalueofth
ehouseason1-4-1981wasRs.1,80,000.Thishouseissoldbyhimon16-7-
2008foraconsiderationofRs.11,00,000.ThebrokerageandotherexpensesonthetransferwereRs.12,000.Thedue
dateoffurnishingthereturnofincomeis31stJuly,2009. Computethecapitalgainfor theassessment year2009-10,
if:

a. HeinvestsRs. 3,00,000forpurchaseofanewhouseon 14-5-2009.

b. Hepurchasedapieceoflandforconstructionofahouseon21-10-
2007for2,00,000anddepositedRs.1,00,000intheCapitalGainsAccountsSchemeon15-7-
2009andafurthersum ofRs.1,50,000on 31-7-2010.

c. HeinvestedRs.3,15,000onconstructionofanadditionalfloorataresidentialhousealreadyowned
byhim.Theinvestment ismadeduringtheperiod1-10 to31-12-2008.

d. HeinvestedRs.4,00,000inCapitalGainsAccountsSchemeon29-7-2009and1,00,000on1-8-
2009.Hepurchasedahousepropertyon5-8-2009forRs.2,50,000bywithdrawingthisamount
fromtheScheme.Nofurtherinvestmentsweremadebyhim.

Problem22:Gsoldaresidentialhouseon28-6-2008forRs.10,00,000.Hehadpurchasedthishouseon1-10-
1988forRs.1,20,000andhespendRs.70,000onimprovementofthehouseduringtheyear1989-
90.Hepurchasedanewhouseon21-10-2008forRs.3,00,000.Thishousewasalsosoldbyhimon16-7-
2009forRs.6,00,000.Hepurchasedanotherhouseon21-11-2009 for Rs.8L.ComputetheC.G.’sfortheA.Y.09-
10and 10-11.
Problem23:R owned5acresofagriculturallandwithin
thecitylimitsofGunturwhichhehadpurchasedonOctober1,1988forRs.5,00,000.OnOctober1,2008hesoldthela
ndforRs.50,00,000.OnJanuary1,2009,hepurchasedacoffeeestateforRs.20,00,000.Thisestateissituatedinarem
otevillageandthenearest town isabout20 kilometersawayfromtheestate.On
February28,2010,hesoldtheestatefor Rs.35,00,000.ComputetheCapitalGainsfor theassessment years2009-
10 and2010-11.

Problem24:ABCLtd.purchasedabuildingforanindustrialundertakingon1-1-
2007forRs.4,00,000.Priortothisthecompanyhadtakenthisbuildingonrentforthelasttwoyearsandwasusingitfori
tsindustrialactivities.Thereisnootherbuildingintheblock.ThispropertywascompulsorilyacquiredbytheStateGo
vernmenton14-8-2008andacompensationofRs.5,00,000wasgiventothecompanyon21-3-
2009.Thecompanypurchasedanotherbuildingforshiftingitsindustrialundertakingfor3,00,000on15-10-
2009.ComputethecapitalgainsfortheA.Y.2009-10.(Assumedep.Rate-15%).

Problem25:RacquiredsharesofGLtd.,on15-12-2001forRs.5,00,000whichweresoldon15-5-
2008forRs.13,00,000.ExpensesoftransferwereRs.20,000.HeinvestsRs.6,00,000inthebondsofNHAIon16-10-
2008.

a. Computethecapitalgain fortheassessmentyear2009-10.

b. Statetheperiodforwhichthebondsshouldbeheldbytheassessee.Whatwillbetheconsequencesifsuch
bondsaresoldwithinthespecifiedperiod.

c. What willbetheconsequencesifR takesaloan against thesecurityofsuchbonds.

Problem26:Msoldgoldornamentson16-7-
08forasumof10L.Thisgoldwaspurchasedin1980forRs.60,000byhisfather.TheFMVofthegoldason1-4-
81wasRs.1,00,000.HisfathergiftedthegoldtoMon14-7-08.HespentRs.2,00,000till31-7-
08(theduedateforfilingofthereturn)onconstructionofahousepropertyanddepositedRs.5,00,000before31-7-
09undercapitalgainschemeandafurthersumofRs.1,50,000on31-8-
09.HewithdrewasumofRs.4,00,000forconstructionofthehousepropertytillthestipulated
time.ComputetheC.G. forvariousrelevant assessment years.

Problem27:XLtd.ownsanindustrialundertakinginacongestedlocalityofIndoreurbanarea.FollowingaCourtdir
ection,thecompanyshiftedtheundertakingtoaruralareainAugust
2008.Inthecourseofrelocation,thecompanydisposesof thefollowingassets:

Buildings Machinery
Saleprice 50,00,000 18,00,000
WDV ason1.4.2008 30,00,000 15,00,000
Year 1997 1995
ofacquisitionPurchas 5,00,000 15,00,000
eofassets

Determinetheexemption U/s54G,assumingexpenseson shiftingamount to1,20,000.

Problem28:Ashwin ownsaresidentialhousewhich isself-occupied

andalsoahouseplot.Hesellsthehouseon31.1.2009andthehouseploton15.2.2009forRs.7,50,000andRs.5,00,000
respectively.Thehousewaspurchasedon15.1.2003forRs.4,00,000andtheploton30.3.2003forRs.2,00,000.Ash
winhaspurchasedanewresidentialhouseon25.4.2009forRs.10,00,000.Computetheincomeunder“C.G.”.

Problem29:On 5thNovember2008,Xsold hisentireholdingofgoldfor

Rs.12,50,000.HehadacquiredthegoldinJuly1994forRs.3,64,000.On21.5.08&31.12.08,hepurchasedaresidenti
alhouseforRs.7,00,000andbondsoftheNHAIforRs.1,00,000.Determinetaxablecapitalgainsinhiscaseifontheda
teofsaleofgold,healreadyowned(a)tworesidentialhouses,includingtheonepurchasedwithinayearbeforetransfe
rofgold;(b)threeresidentialhouses,includingtheonepurchasedwithin ayearbeforesaleofgold.
Problem30:MukundisashareholderinC.C.Ltd.Heacquired300sharesofthecompanyofthefacevalue
ofRs.50persharein

1977.Themarketvalueofthesharesason1stApril,1981wasRs.100pershare.Hemadeafurtherpurchas
eof200sharesattherateofRs.150/-persharein1992-93.C.C.Ltd.issuedbonussharesin1994-
95intheproportionof1:4.InDecember
2008T.T.Ltd.,anothercompany,inaschemeofamalgamationmadeaproposaltoacquirethesharesofC
.C.Ltd.andmadethefollowingoffertotheshareholdersofC.C.Ltd.Rs.100persharein cash
plus1shareinT.T.Ltdfor every2sharesofC.C.Ltd.Themarket valueof
thesharesofT.T.Ltdonthedateoftheoffer isRs.600per share.Whatisthecapitalgain,ifany,
arisingtoMukund,ifheacceptstheoffer?

Problem31:BLtd.AndW.Ltd.Aretwopubliclimitedcompanies,whosesharesarewidelyheldandaree
ngagedinfast foodbusinessBasamanufacturerandWasadealer.Neitherofthecompanyisinter-
connectedeitherbywayofbusinessdealingsorshareholdings.Boththecompaniesmakereasonablepro
fitstoenablethemtopaytheirshareholdersaminimumdividendof30%eachyear.Thecompaniesengag
edafirmofconsultantstolookintothequestion
ofexpansionandoneoftherecommendationsoftheconsultantswasthatcombinationofmanufacturing
anddistributingtheproductsunderonemanagementcouldyieldlargerprofitsthanpresent times.

Theboardsofthetwocompaniesaretomeetshortlytodecideonthisthevariousalternativesposedbefore
themare:

a. For BtoacquireWbypurchasingmajorityholding;

b. For Bor W toacquirethebusinessof theother;

c. For boththecompaniestomergeoramalgamateand formathird company.

 SOMEGENERALISSUES
1. WhereapersonobtainsacapitalassetfromaCo-
operativehousingsocietybyvirtueofhismembership,thedateofacquisition ofsuchcapitalasset
shallbereckonedfrom thedateofallotment ofshareinthesocietyandnot
thedateofdeliveryofpossession offlat.CITv.sJindasPanchandGandhi.

2. Wherelandandbuildingaresoldandlandislongtermbutthebuildingisashorttermcapitalasset,eith
erbecauseitisnewlyconstructedoritissotreatedbyvirtueofSec.50,thesaleconsiderationcanbespli
tupsoastocomputelongtermcapitalgainswithreferencetolandseparatelyandtoavailinsuchcomp
utationthebenefitofindexation.Inrespectofbuilding,shorttermcapitalgain/losscanbecomputed
separatelyCITvs.Citibank.

3. Anypaymentmadebyan assesseetoobtain
vacantpossessionoftheproperty,asapreconditionforeffectingthesaleshallbeconsideredtobeexp
ensesinconnectionwithtransfer.Accordingly,suchpaymentsareeligiblefordeductionfromsalec
onsideration.Butforincurringsuchexpenditure,thetransfercannotbecompletedandtherefore,the
expenditureisallowableu/s48(1)oftheIncome-taxAct.CITvA.Venkataraman (1982).

4. Anyamountpaidtomother/fatherhavingrightofresidenceinthepropertyisentitledtodeduction
astransferexpenses.

5. Anylegalexpensesincurredinconnectionwithtransferofpropertyareallowedasdeduction.Foreg.
Legalexpensesincurredforobtainingthecompensation.

6. Whereapropertyinheritedbytheassesseewasplacedundermortgagebypreviousownerandwhere
suchmortgageisdischargedbytheassessee,thesumpaid
byassesseefordischargeistobetreatedascostofacquisition.Itisdeductibleinthecomputation
ofcapitalgains–ArunachalamVs.CIT(1997).

7. Anyamountmisappropriatedbythepowerofattorneyholderoutofthesaleconsiderationisnoteligi
blefor deductionwhilecomputingthecapitalgainoftheowner
 QUESTIONNAIRE

Q.1 What incomes are charged to tax under the head “Capital Gains”?
Q.2 What is the meaning of capital asset?
Q.3 What is the meaning of the term ‘long-term capital asset’?
Q.4 What is long-term capital gain and short-term capital gain?
Q.5 Why capital gains are classified as short-term and long-term?
Q.6 How to compute long-term capital gain?
Q.7 How to compute short-term capital gain?
Q.8 Is the benefit of indexation available while computing capital gain arising on transfer of
short-term capital asset?
Q.9 In respect of capital asset acquired before 1st April, 2001 is there any special method to
compute cost of acquisition?
Q.10 If any undisclosed income [in the form of investment in capital asset] is declared under
Income Declaration Scheme, 2016, then what should be the cost of acquisition of such capital
asset?
Q.11 As per the Income-tax Law, gain arising on transfer of capital asset is charged to tax
under the head “Capital gains”. What constitutes ‘transfer’ as per Income-tax Law?
Q.12 What are the provisions relating to computation of capital gain in case of transfer of asset
by way of gift, will, etc.?
Q.13 I have sold a house which had been purchased by me 5 years ago. Am I required to pay
any tax on the profit earned by me on account of such sale?
Q.14 Are any capital gains exempt under section 10?
Q.15 At what rates capital gains are charged to tax?
Q.16 Is there any benefit available in respect of re-investment of capital gain in any other
capital asset?
Q.17 Are there any bonds in which I can invest my capital gains to claim tax relief?
Q.18 What is the meaning of stamp duty value and what is its relevance while computing
capital gain in case of transfer of capital asset, being land or building or both?
Q.19 Is profits/gain earned from sale of land or building or both chargeable to capital gain
tax?| Is value determined by stamp duty authorities considered as full value of consideration in
case of sale of land or building or both?|What mode of computation cos
Q.20 Which Form is to be filed for withdrawal from Capital Gain Account?
Q.21 I want to close my capital gain account. The capital gain amount is already disbursed and
only interest is lying in account. The branch manager asked for Form G with AO’s endorsement
on it. How to get it? Please advise procedure?
Q.1 What incomes are charged to tax under the head “Capital Gains”?

Ans: Any profit or gain arising from transfer of a capital asset during the year is charged to tax
under the head “Capital Gains”.

Q.2 What is the meaning of capital asset?

Ans: Capital asset is defined to include:

a) Any kind of property held by an assesse, whether or not connected with business or profession
of the assesse.

b) Any securities held by a FII which has invested in such securities in accordance with the
regulations made under the SEBI Act, 1992.

However, the following items are excluded from the definition of “capital asset”:

Any stock-in-trade, consumable stores, or raw materials held by a person for the purpose of his
business or profession.

E.g., Motor car for a motor car dealer or gold for a jewellery merchant, are their stock-in-trade
and, hence, they are not capital assets for them.

Personal effects of a person, that is to say, movable property including wearing apparels (*) and
furniture held for personal use, by a person or for use by any member of his family dependent on
him.

(*) However, jewellery, archeological collections, drawings, paintings, sculptures, or any work
of art are not treated as personal effects and, hence, are included in the definition of capital
assets.

Agricultural Land in India, not being a land situated:

* Within jurisdiction of municipality, notified area committee, town area committee, cantonment
board and which has a population of not less than 10,000;

* Within range of following distance measured aerially from the local limits of any municipality
or cantonment board:

* not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1
lakh;

* not being more than 6 KMs , if population of such area is more than 1 lakh but not exceeding
10 lakhs; or

* not being more than 8 KMs , if population of such area is more than 10 lakhs.

Population is to be considered according to the figures of last preceding census of which relevant
figures have been published before the first day of the year.

 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Gold Bonds, 1980
issued by the Central Government.
 Special Bearer Bonds, 1991, issued by the Central Government
 Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.
 Deposit certificates issued under the Gold Monetisation Scheme, 2015.

Following points should be kept in mind :

 The property being capital asset may or may not be connected with the business or
profession of the taxpayer. E.g. Bus used to carry passenger by a person engaged in the
business of passenger transport will be his  Capital asset.
 Any securities held by a Foreign Institutional Investor which has invested in such
securities in accordance with the regulations made under the Securities and Exchange
Board of India Act, 1992 will always be treated as capital asset, hence, such securities
cannot be treated as stock-in-trade. 
Q.3 What is the meaning of the term ‘long-term capital asset’?

Ans: Any capital asset held by a person for a period of more than 36 months immediately
preceding the date of its transfer will be treated as long-term capital asset.

However, in respect of certain assets like shares (equity or preference) which are listed in a
recognised stock exchange in India, units of equity oriented mutual funds, listed securities like
debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of
holding to be considered is 12 months instead of 36 months.

In case of unlisted shares in a company, the period of holding to be considered is 24 months

instead of 36 months.

With effect from Assessment Year 2018-19, the period of holding of immovable property (being
land or building or both), shall be considered to be 24 months instead of 36 months.

Q.4 What is long-term capital gain and short-term capital gain?

Ans: Gain arising on transfer of long-term capital asset is termed as long-term capital gain and
gain arising on transfer of short-term capital asset is termed as short-term capital gain.
However, there are a few exceptions to this rule, like gain on depreciable asset is always taxed as
short-term capital gain.

Q.5 Why capital gains are classified as short-term and long-term?

Ans: The taxability of capital gain depends on the nature of gain, i.e. whether short-term or long-
term. Hence to determine the taxability, capital gains are classified into short-term capital gain
and long-term capital gain. In other words, the tax rates for long-term capital gain and short-term
capital gain are different. Similarly, computation provisions are different for long-term capital
gains and short-term capital gains.
Q.6  How to compute long-term capital gain?

Ans: Long term capital gain arising on account of transfer of long-term capital asset will be
computed as follows:

Particulars Rs.
Full value of consideration (i.e., Sales consideration of
XXXXX
asset)
Less: Expenditure incurred wholly and exclusively in  
connection with transfer of capital asset (E.g.,
brokerage, commission,  etc.) (XXXXX)
Net sale consideration XXXXX
Less: Indexed cost of acquisition (*) (XXXXX)
Less: Indexed cost of improvement, if any (*) (XXXXX)
Long-Term Capital Gain XXXXX

Indexed cost of acquisition is computed with the help of following formula :

Cost of acquisition × Cost inflation index of the year of transfer of capital asset
Cost inflation index of the year of acquisition

Indexed cost of improvement is computed with the help of following formula :

Cost of improvement × Cost inflation index of the year of transfer of capital asset
Cost inflation index of the year of improvement

Q.7 How to compute short-term capital gain?

Ans: Short-term capital gain arising on account of transfer of short-term capital asset is
computed as follows:

Particulars Rs.
Full value of consideration (i.e., Sales value of the asset) XXXXX
Less: Expenditure incurred wholly and exclusively in  
connection with transfer of capital asset (E.g.,
brokerage, commission, etc.) (XXXXX)
Net Sale Consideration XXXXX
Less: Cost of acquisition (i.e., the purchase price of the
(XXXXX)
capital asset)
Less: Cost of improvement (i.e., post purchase capital  
expenses incurred  on  addition/improvement to the
capital asset) (XXXXX)
Short-Term Capital Gain XXXXX

Q.8 Is the benefit of indexation available while computing capital gain arising on
transfer of short-term capital asset?

Ans: Indexation is a process by which the cost of acquisition/improvement of a capital asset is

adjusted against inflationary rise in the value of asset. The benefit of indexation is available only
in case of long-term capital assets and is not available in case of short-term capital assets.

Q.9 In respect of capital asset acquired before 1st April, 2001 is there any special
method to compute cost of acquisition?

Ans: Generally, cost of acquisition of a capital asset is the cost incurred in acquiring the capital
asset. It includes the purchase consideration plus any expenditure incurred exclusively for
acquiring the capital asset. However, in respect of capital asset acquired before 1st April, 2001,
the cost of acquisition will be higher of the actual cost of acquisition of the asset or fair market
value of the asset as on 1st April, 2001. This option is not available in the case of a depreciable
asset.
Q.10 If any undisclosed income [in the form of investment in capital asset] is
declared under Income Declaration Scheme, 2016, then what should be the cost of
acquisition of such capital asset?

Ans: The fair market value of the asset as on 1st June, 2016 [which has been taken into account
for the purpose of said declaration Scheme, 2016] shall be deemed as cost of acquisition of the
asset. [This provision is applicable w.e.f. 1-4-2017]

Q.11 As per the Income-tax Law, gain arising on transfer of capital asset is charged to
tax under the head “Capital gains”. What constitutes ‘transfer’ as per Income-tax
Law?

Ans: Generally, transfer means sale, however, for the purpose of Income-tax Law “Transfer”, in
relation to a capital asset, includes:

i. Sale, exchange or relinquishment of the asset;

ii. Extinguishment of any rights in relation to a capital asset;

iii. Compulsory acquisition of an asset;

iv. Conversion of capital asset into stock-in-trade;

v. Maturity or redemption of a zero coupon bond;

vi. Allowing possession of immovable properties to the buyer in part performance of the
contract;

vii. Any transaction which has the effect of transferring an (or enabling the enjoyment of)
immovable property; or

viii. Disposing of or parting with an asset or any interest therein or creating any interest in any
asset in any manner whatsoever.
Q.12 What are the provisions relating to computation of capital gain in case of
transfer of asset by way of gift, will, etc.?

Ans: Capital gain arises if a person transfers a capital asset. section 47 excludes various
transactions from the definition of ‘transfer’. Thus, transactions covered under section 47 are not
deemed as ‘transfer’ and, hence, these transactions will not give rise to any capital gain. 
Transfer of capital asset by way of gift, will, etc., are few major transactions covered in section
47. Thus, if a person gifts his capital asset to any other person, then no capital gain will arise in
the hands of the person making the gift (*).

If the person receiving the capital asset by way of gift, will, etc. subsequently transfers such
asset, capital gain will arise in his hands. Special provisions are designed to compute capital
gains in the hands of the person receiving the asset by way of gift, will, etc. In such a case, the
cost of acquisition of the capital asset will be the cost of acquisition to the previous owner and
the period of holding of the capital asset will be computed from the date of acquisition of the
capital asset by the previous owner.

(*) As regards the taxability of gift in the hands of person receiving the gift, separate provisions
are designed under section 56. 

Q.13 I have sold a house which had been purchased by me 5 years ago. Am I required
to pay any tax on the profit earned by me on account of such sale?

Ans: House sold by you is a long-term capital asset. Any gain arising on transfer of capital asset
is charged to tax under the head “Capital Gains”. Income-tax Law has prescribed the method of
computing capital gain arising on account of sale of capital assets. Thus, to check the taxability
in your case, you have to compute capital gain by following the rules laid down in this regard,
and if the result is gain, then the same will be liable to tax.

Q.14 Are any capital gains exempt under section 10?

Ans: Section 10 provides list of incomes which are exempt from tax amongst those the major
exemptions relating to capital gain are as follows:
Section 10(33): Long-term or short-term capital gain arising on transfer of units of Unit Scheme,
1964 (US 64) referred to in Schedule I to the Unit Trust of India (Transfer of Undertaking and
Repeal) Act, 2002 (58 of 2002) and where the transfer of such asset takes place on or after 1-4-
2002.

Section 10(37) : An individual or Hindu Undivided Family (HUF) can claim exemption in
respect of capital gain arising from the transfer of agricultural land situated in an urban area by
way of compulsory acquisition under any law or a consideration for such transfer is determined
or approved by the Central Government or the Reserve Bank of India. This exemption is
available if the land was used by the taxpayer (or by his parents in the case of an individual) for
agricultural purposes for a period of 2 years immediately preceding the date of its transfer. Such
income has arisen from the compensation or consideration for such transfer received by an
assessee on or after the 1st day of April, 2004.

Section 10(37A): An individual or Hindu Undivided Family (HUF) can claim exemption in
respect of capital gain arising from the transfer of land or building or both under Land Pooling
Scheme under the Andhra Pradesh Capital City Land Pooling Scheme (Formulation and
Implementation) Rules, 2015 made under the provisions of the Andhra Pradesh Capital Region
Development Authority Act, 2014 (Andhra Pradesh Act 11 of 2014) and the rules, regulations
and Schemes made under the said Act. This exemption is available if an individual or HUF was
owner of such land or building as on 02-06-2014.

Section 10(38): Long-term capital gain arising from the transfer of equity shares or units of an
equity oriented mutual fund or units of a business trust other than a unit allotted by the trust in
exchange of shares of a special purpose vehicle as referred to in section 47(xvii), will be exempt
from tax, if the following conditions are satisfied (not applicable from A.Y 2019-20):

 The asset transferred should be equity shares of a company or units of an equity

oriented mutual fund or units of a business trust other than a units allotted by the trust
in exchange of shares of a special purpose vehicle as referred to in section 47(xvii).
 Securities transaction tax (STT) is paid at the time of transfer.
 Such asset should be a long-term capital asset.
  Transfer should take place on or after the date on which Chapter VII of the Finance (No.
2) Act, 2004 comes into force.

Note: Any long-term capital gain arising from a transaction undertaken in recognized stock
exchange located in an International Financial Services Center shall be exempt from tax and such
exemption is available if consideration for such transaction is paid or payable in foreign
currency, even if no STT is paid on such transaction.

Long term capital gain arising on the transfer of equity shares of a company is exempt from tax if
the transaction of acquisition, other than the acquisition notified by the Central Government in
this behalf, of such equity share is entered into on or after the 1st day of October, 2004 and such
transaction is not chargeable to securities transaction tax under Chapter VII of the Finance (No.
2) Act, 2004 (23 of 2004) [Inserted by Finance Act 2017]

From A.Y 2019-20, Long term capital gain arising from transfer of equity shares/units of an
equity oriented mutual fund/ units of a business trust on or after April 1, 2018 will not be exempt
under section 10(38) as this section has been withdrawn by Finance Act, 2018. Tax on such long
term capital gain will be computed in accordance with the provisions of Section 112A.

Q.15 At what rates capital gains are charged to tax?

Ans: For provisions in this regard check tutorials on “Tax on Short-Term Capital Gains and Tax
on Long-Term Capital Gains”.

Q.16 Is there any benefit available in respect of re-investment of capital gain in any
other capital asset?

Ans: A taxpayer can claim exemption from certain capital gains by re-investing the amount of
capital gain into specified asset. The following table highlights the assets in respect of which the
benefit of re-investment is available:

Section Eligible Gain eligible for claiming Asset in which the

under Assessee exemption capital gain is to be re-
which
invested to claim
bene fit is
exemption
available
Gain to be re-invested in
Long-term capital gain arising
purchase or construction
section 54 Individual/HUF on transfer of residential
of one residential house
house property.
property in India.
Long-term or short-term
capital gain arising on
transfer of agricultural land Gain to be re-invested in
which was used by individual purchase of agricultural
section 54B Individual/HUF
or his parents or HUF for land (may be in rural
agriculture purposes for arear or urban area).
atleast 2 years immediately
prior to transfer.
Long-term capital gain arising
on transfer of any long term
capital asset (upto A.Y 2018- Gain to be re-invested in
section 19). purchase of bonds
Any person
54EC specified under section
Long term capital gain arising 54EC.
on transfer of land or building
or both (Form A.Y 2019-20).
Gain to be re-invested in
Long-term capital gain arising long-term specified
Section
Any person on transfer of any capital assets to be notified by
54EE
asset. the Central Government
to finance start-ups.
section 54F Individual/HUF Long-term capital gain arising Net sale consideration to
on transfer of any capital be re-invested in
asset other than residential purchase or construction
 house property, provided on
the date of transfer the
taxpayer does not more than
of only one residential
one residential house
house property in India.
property from the
assessment year 2001-02
(except new house property)
Long-term or Short-term
capital gain arising on
transfer of land or building
forming part of an industrial
Gain to be re-invested to
section undertaking which is
Any person acquire land or building
54D compulsorily acquired by
for industrial purposes.
Government and was used
for industrial purpose for a
period of 2 years prior to its
acquisition.
Long term or Short term
Gain to be re-invested to
capital gain arising on
acquire land, building,
transfer of land, building,
section plant or machinery in
Any person plant or machinery in order
54G order to shift an
to shift an industrial
industrial undertaking to
undertaking from urban area
a rural area.
to rural area.
section Any person Long term or short term Gain to be re-invested to
54GA capital gain arising on acquire land, building,
transfer of land, building, plant or machinery in
plant or machinery in order order to shift an
to shift an industrial industrial undertaking to
undertaking from urban area any Special Economic
 to any Special Economic
Zone.
Zone.
Long-term capital gain arising
on transfer of residential The net sale
property (a house or a plot of consideration should be
land). The transfer should utilised for subscription
take place during 1st April, in equity shares of an
section
Individual/HUF 2012 and 31st March 2017. “eligible company”.  
54GB
However, in case of W.e.f. April 1, 2017,
investment in “eligible start- eligible start-up is also
up”, the residential property included in definition of
can be transferred upto 31st “eligible company” .
march 2019.

In order to claim the exemption on account of re-investment in various situations as discussed

above, other conditions specified in the respective sections should also be satisfied and the re-
investment should be made within the period specified in the respective sections.

Q.17 Are there any bonds in which I can invest my capital gains to claim tax relief?

Ans: As per section 54EC –  An assesseecan claim tax relief by investing the amount of long-
term capital gain arising from:

a) any long term capital asset  (upto A.Y 2018-19)

b) long term capital asset being land or building or both  (From A.Y 2019-20) in the specified
bonds as follows:

a) Bond redeemable after 5 years from A.Y 2019-20 (3 years upto A.Y 2018-19) issued by
National Highways Authority of India (NHAI) or

b) Bond redeemable after 5 years from A.Y 2019-20 (3 years upto A.Y 2018-19) issued by Rural
Electrification Corporation Limited (REC) or
c) Bond redeemable after 5 years from A.Y 2019-20 (3 years upto A.Y 2018-19) issued on or
after 15th June 2017 by Power Finance Corporation Limited or

d) Bond redeemable after 5 years from A.Y 2019-20 (3 years upto A.Y 2018-19) issued on or
after 08th August 2017 by Indian Railway Finance Corporation Limited or

e) Bond redeemable after 5 years from A.Y 2019-20 (3 years for A.Y 2018-19) issued by any
other authority but notified by Central Government [Applicable from A.Y 2018-2019]

within a period of 6 months from the date of transfer of capital asset and such bonds should not
be redeemed before 5 years from A.Y 2019-20 (3 years upto A.Y 2018-19) from the date of their
acquisition.

This benefit cannot be availed in respect of short-term capital gain.

Maximum amount of investment in specified bonds cannot exceeds Rs. 50,00,000. Thus,
deduction under section 54EC cannot be claimed for more than Rs. 50,00,000.

Q.18 What is the meaning of stamp duty value and what is its relevance while
computing capital gain in case of transfer of capital asset, being land or building or
both?

Ans: “Stamp duty value means the value adopted or assessed or assessable by any authority of a
State Government for the purpose of payment of stamp duty. As per section 50C, while
computing capital gain arising on transfer of land or building or both, if the actual sale
consideration on transfer of such land and/or building is less than the stamp duty value, then the
stamp duty value will be taken as full value of consideration, i.e., as deemed selling price and
capital gain will be computed accordingly.”  (not applicable from A.Y 2019-20)

From assessment year 2019-20 actual sales consideration will be treated as full value
consideration if stamp duty value does not exceeds 105% of actual sales consideration. In case
where stamp duty value exceeds 105%of actual sales consideration, then stamp duty value will
be considered as full value of consideration for computing capital gain.
Q.19 Is profits/gain earned from sale of land or building or both chargeable to
capital gain tax?| Is value determined by stamp duty authorities considered as full
value of consideration in case of sale of land or building or both?|What mode of
computation cos

Ans:

 Profits and gains earned from sale of land or building or both are chargeable to tax
under the head “Capital Gain”
 In the case of sale of land or building or both, the value determined by stamp duty
authorities will be considered as full value of consideration if the following conditions
are satisfied –

a) The asset transferred is land or building or both.

b) Sale Consideration is less than the value as determined by the stamp duty authority for the
payment of stamp duty.

c) Stamp Duty value exceeds 105% of the consideration received or receivable on account of
transfer. [Applicable from A.Y 2019-20].

 For the purpose of valuation, stamp duty valuation shall be considered on the date of
registration of the property.

Exception – Where the date of agreement fixing the consideration and date of registration are not
same, then the stamp duty value will be considered on the date of agreement for such transfer.

The above exception will be applicable if –

a) Full consideration or part there-of is received by an account payee cheque/draft or by use of

electronic clearing system through a bank account.

b) Such amount is received before the date of agreement.

c) It is applicable from the A.Y 2017-2018.

Q.20 Which Form is to be filed for withdrawal from Capital Gain Account?

Ans: As per Rule 9 of Capital Gain Accounts Scheme, 1988, the procedure of withdrawal from
Capital Gain Account Scheme is as follows:

Withdrawal from Account-A

Amount can be withdrawn from Account-A at any time after making initial subscription by
depositing Form C along with the pass book in the deposit office.

For any withdrawal from Account-A, other than initial withdrawal, a depositor needs to apply in
Form D in duplicate. The details regarding the manner and extent of utilization of the amount of
immediately preceeding withdrawal are as follows:-

Withdrawal from Account -B

A depositor intending to withdraw the amount from Account-B, shall first transfer the amount in
his Account-B to Account-A and withdraw the amount in the same manner as is specified for
Account-A.  Manner of transfer and conversion of deposit account are prescribed under the Rule
7 of Capital Gain Accounts Scheme,1988.

Depositor having the deposit account B may apply in Form-B along with deposit receipts and
details of deposit account A for transfer of the amount standing to credit in deposit account B. In
case depositor has not opened deposit account A, depositor has also to request for opening
deposit account A along with Form B.

Q.21 I want to close my capital gain account. The capital gain amount is already
disbursed and only interest is lying in account. The branch manager asked for Form
G with AO’s endorsement on it. How to get it? Please advise procedure?

Ans: 1. As per Rule 13 of Capital Gain Account Scheme 1988, in case of closure of capital gain
account, a depositor (other than an eligible company as referred to in section 54GB applicable
w.e.f 25-10-2012) is required to file an application in Form-G along with the passbook of
account-A or deposit receipt of account-B, as the case may be, to the deposit office with the prior
approval of the Assessing Officer who has jurisdiction over the depositor.

If a depositor is an eligible company as referred to in section 54GB, then for closure of capital
gain account, it shall be required to make a joint application in Form G along with the passbook
of account-A or deposit receipt of account-B, as the case may be, to the deposit office signed by
the eligible assessee as referred to in section 54GB with the prior approval of the Assessing
Officer having jurisdiction over the eligible assessee as referred to in section 54GB.

Deposit office shall make the payment of the amount in the account of depositor including the
amount of interest accrued by crediting such amount to any bank account of the depositor.

2. In case of deceased depositor where nomination is made, a nominee may file an application
for the closure of account in Form-H along with the passbook of account-A or deposit receipt of
account-B, as the case may be, to the deposit office with the prior approval of jurisdictional
Assessing Officer of the deceased depositor. Deposit office shall make the payment of the
amount in the account of the deceased depositor, including the amount of interest accrued by
crediting such amount to any bank account of the nominee.

3. In case of deceased depositor where nomination is not made, a legal heir may file an
application for the closure of account in Form-H along with the passbook of account-A or
deposit receipt of account-B, as the case may be, to the deposit office with the prior approval of
jurisdictional Assessing Officer of the deceased depositor.

If there are more than one legal heir of the deceased depositor, the legal heir making the claim
individually can do so by providing the letter of authorization from other legal heirs in his
favour.

The Assessing Officer before granting the approval for the closure of account shall obtain from
the legal heir a succession certificate issued under Part V of the Indian Succession Act, 1925, or
a probate of the will of the deceased depositor, or letter of administration to the estate of the
deceased, in case there is no will in order to verify the claim of such legal heir to the account of
the deceased depositor.

Deposit office shall make the payment of the amount in the account of the deceased depositor,
including the amount of interest accrued by crediting such amount to any bank account of the
nominee.
 CONCLUSION

While capital gains are generally associated with stocks and funds due to their inherent price
volatility, a capital gain can occur on any security that is sold for a price higher than the purchase
price that was paid for it. Realized capital gains and losses occur when an asset is sold,
which triggers a taxable event. Unrealized gains and losses, sometimes referred to as paper gains
and losses, reflect an increase or decrease in an investment's value but have not yet triggered a
taxable event.

Tax-conscious mutual fund investors should determine a mutual fund's unrealized accumulated
capital gains, which are expressed as a percentage of its net assets, before investing in a fund
with a significant unrealized capital gain component. This circumstance is referred to as a fund's
capital gains exposure. When distributed by a fund, capital gains are a taxable obligation for the
fund's investors.

Tax policies affect the cost of capital directly as well as through their indirect effect on the cost
of funds. The board believes that tax changes provide one of the most important direct means to
alter the cost of capital. We recommend two approaches to reform: a broad direction for policy
change and a more limited transitional tax change. 18

As a longer term goal, the board supports the adoption of a progressive, consumption-based tax
system for three reasons. First, a consumption tax system will encourage saving and investment.
Second, it will help to restore investment incentives for the broad class of investments for which
part of the return is to society and not just the investing corporation. For example, the benefits of
job creation and growth to communities and for federal, state, and local budgets go well beyond
the private return to the firm. Third, by eliminating all investor-level taxation of capital income, a
consumption-based tax could eliminate not only double taxation of corporate income flows but
also the biases in favor of or against various categories of investment and investors. The
difficulty of designing effective, nondistorting incentives for investment would vanish. The
consumption tax should be made progressive, and there are several ways this could be achieved.