Capital Gains by R. Devarajan Additional Director, ICAI
Capital Gains by R. Devarajan Additional Director, ICAI
Charging section
Section 45 Any profits or gains arising from the transfer of a capital asset Save as otherwise exempted Chargeable as capital gains Deemed as income of the previous year in which the transfer takes place
Capital asset
Section 2(14) Property of any kind held by an assessee Whether or not connected with his business or profession Excludes
Stock-in-trade, consumable stores or raw materials held for the purposes of the business
Personal effects i.e. movable property including wearing apparel and furniture held for personal use by the assessee or any members of his family dependent on him but excludes (a) Jewellery (b) Archaeological collection (c) Drawings (d) Paintings (e) Sculptures (f) Any work of art
Explanation defines jewellery Mrs. X, a lady of affluent means ordered stitching of a costly dress wherein diamonds were sewn in. The dress cost her Rs.1 lakh. Subsequently a friend of her took a fancy for the dress and gave Rs.2 lakhs for the dress. Mrs. X contends that the surplus of Rs.1 lakh arises out of disposal of personal effect.
Relevance of long-term and short-term capital assets Short-term capital gains Short-term capital loss Long-term capital gains Long-term capital loss
Transfer
Section 2(47) Transfer in relation to a capital asset, includes (i) The sale, exchange or relinquishment of the asset or (ii) The extinguishment of any rights therein; or (iii) The compulsory acquisition thereof under any law; or
(iv) In a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; (iva) the maturity or redemption of a zero coupon bond; or
(v) Any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or
(vi) Any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enable the enjoyment of, any immovable property.
Any profits or gains arising from the receipt of such money or other asset Shall be chargeable in the year of receipt The money or the market value of the asset receive would be the consideration
Case study
A purchased a house for Rs.5 lakhs in 1998. In 2006 the house was destroyed by fire. A received insurance compensation of Rs.25 lakhs. The insurance company took away the salvage valued at Rs.1 lakh. What are the tax implications?
Case study
A newspaper company distributes its newspaper in a plane to different places. The plane is destroyed and the insurance company replaces the plane. There is no other plane with the company. Discuss the tax implications. The plane is a depreciable asset.
Case study
A newspaper company has 10 planes whose WDV is Rs.20 crores. One plane is destroyed and Rs.15 lakhs is received from the insurance company. What is the tax treatment?
Case study
In April 2000 A acquired a flat in Delhi in 1999 from the Delhi Development Authority under self financing scheme for Rs.2,75,000. In December, 2006 A sold this flat to B for Rs.20 lakhs under power of attorney. The Assessing Officer wants to bring the capital gains to charge in the hands of A. A contends that a transfer of immovable property is complete only on registration of the conveyance deed and hence he cannot be charged to capital gains.
Case study
Z is a coparcener in a HUF along with his father and two brothers. The HUF has an ancestral house costing Rs.4 lakhs (Fair market value on 1.4.81 being Rs.8 lakhs). Z relinquished his right in the house on 1st June 2006, fair market value of the house on that date being Rs.24 lakhs. The Assessing Officer wants to tax 1/4th of Rs.20 lakhs being the difference between the value on the date of relinquishment and cost of acquisition in the hands of Z. Advise.
Section 49
Cost of acquisition (COA) Cost to previous owner is COA in the case of acquisition of asset by
gift, will, inheritance, partition of HUF amalgamation of companies/banking companies
Section 49
In case of acquisition of asset by the assessee or previous owner before 1.4.81, FMV of the asset on 1.4.81can be taken as COA, at the option of the assessee. In case shares of amalgamated co. are issued in lieu of shares of amalgamating company, cost of acquisition of shares held in the amalgamating company will be the COA of shares of amalgamated co. In case of conversion of bonds, debenture stock, deposit certificates into shares/ debentures of a co., cost of acquisition of bonds etc. will be the COA of shares or debentures.
Section 50B
Profits and gains from slump sale chargeable to tax as capital gains deemed to be income of the previous year in which the transfer took place. Net worth of the undertaking deemed to be the COA and COI Indexation provisions are not applicable. Net worth = aggregate value of total assets of the undertaking value of liabilities as appearing in the books.
Section 50B
Change in value of assets on account of revaluation not to be considered. Aggregate value of total assets = WDV of depreciable assets + Book value of other assets. Report of an accountant indicating the correctness of net worth to be filed along with ROI.
Section 50C
If consideration received on transfer of capital asset ( land or building or both) < value adopted or assessed by Stamp Valuation Authority, such value adopted is deemed as full value of consideration. If assessee claims that Stamp value > FMV and he has not gone for appeal, revision etc. before any court, then, the A.O. may refer the valuation to the valuation officer. If the value determined by the valuation officer > stamp value, then stamp value will be the consideration.
Section 51
Advance money received earlier on any previous occasion by the assessee and forfeited will be reduced from COA. However, advance money received and forfeited by the previous owner should not be reduced from COA.
Collaboration Contracts
Transfer to take place in the year when sale agreement is executed. Sale consideration in the hands of the owner is cash received + price of flat/ flats allotted. This would be available from the brochure/ allotment letter given by the builder to other buyers. Benefit under Section 54F should be available in respect of price of flat allotted.
Gift / Inheritance
Cost to previous owner is taken to be the cost of acquisition. Period of holding of previous owner is considered. Indexation benefit will be available only from the year in which the assessee first held the asset [for cost of acquisition]. In case of improvement, indexation benefit will be available from the year of improvement.