98880-84999                 Prof. Rohit Kumar Jindal                            Page No. 197790-84999                B.Com...
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4 income tax part 2
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4 income tax part 2

  1. 1. 98880-84999 Prof. Rohit Kumar Jindal Page No. 197790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance)B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  2. 2. 98880-84999 Prof. Rohit Kumar Jindal Page No. 2 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance) INTRODUCTION Capital Gain is the forth head of income. Section 45 to 55A of the Income Tax Act, 1961 deals withcapital gains.BASIS OF CHARGE :- Any profits or gains arising from the transfer of a capital asset affected in theprevious year shall be chargeable to income tax under the head ‘Capital Gains’. The Following are theessential condition for taking capital gains :-A. There must be a capital asset.B. The capital asset must have been transferred by the assessee.C. There must be profits or gains on such transfer, which will be known as capital gain.D. Such capital should not be exempted under section 54,54B, 54D, 54EC, 54ED, 54F, 54G, and 54H. If the above conditions are satisfied. The capital gain shall assess and taxed in the previous year inwhich the asset is transferred.However the following points should be considered :-1. In some cases capital gain is taxable in a year other than the year in which the capital asset is transferred. (In case of Stock in Trade)2. In some cases capital gains arises even if there is no “transfer” of capital asset.(In the case when exemption is withdrawn due to non-compliance with income tax rules)A. There must be capital asset :- Capital asset means a property of any kind held by an assessee, whether connected with the businessor not, capital asset may be moveable or immovable, tangible or intangible, fixed or floating. Capital assetincludes goodwill, leasehold rights, and jewelry, shares and manufacturing licenses etc. Gains on transfer ofbusiness undertaking are assessable as Capital Gains. HOWEVER THE TERM CAPITAL ASSET DOES NOT INCLUDES THE FOLLOWING1. Any stock-in-trade :- Consumable stores or raw material held for the purposes of his business or profession as there will be taxed under the head Business or Profession.2. Personal effects :- That is to say moveable property including wearing apparels and furniture but excluding jewellry and any immovable property held for personal use by the assessee. Jewellry and any immovable property shall, therefore, be capital asset for capital gains. An intimate connection between the effect and the person of the assessee must be shown to exist to render such effect as personal effects. Silver bars or bullion or even sovereigns and silver coins brought out of safe custody on special occasions for Pooja could not be described as personal effect. However silver utensils meant for personal use even if used only occasionally are personal effects. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  3. 3. 98880-84999 Prof. Rohit Kumar Jindal Page No. 3 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance) Example :- A is the Managing Director of Soft Steels Pvt. Ltd. The company sold him a car at confessional price of Rs. 20,000. After a year, A resold the car of Rs. 80,000. Is he liable to capital gains tax on the surplus of Rs. 60,000. Answer :- It has been judicially held that car is a personal effect. Hence any surplus arising from the sale of car cannot be brought to capital gains tax. SPECIAL NOTE :- The house property, in which the assessee lives, used by him for personal purposes, but it will not a personal effect as it is as immovable property.3. Agricultural land in India, which is not an urban agricultural land i.e. it is not situated. Within the limits of any municipality or a cantonment board having a population of 10,000 or more, or In any areas which is lying within a distance not exceeding 8 KM from the limit of such municipality or cantonment board.4. 61/2 % Gold Bonds 1977 or 7% Gold Bonds, 1980 or National Defense Gold Bonds 1980 issued by the central government.5. Special Bearer Bonds 1991.6. Gold Deposits bonds issued under Gold Deposit Scheme, 1999 notified by the Central Government. TYPES OF CAPITAL ASSETS Capital assets have been divided in two categories for the purposes of computation of capital gains.These are short-term capital asset and long-term capital assets.A. Short Term Capital Asset :- Means a capital asset held by the assessee for not more than 36 months immediately preceding the date of its transfer. Capital gain arising on the transfer of such capital asset is called as short-term capital gain.However in the following cases an asset held for not more than 12 months is treated as short – termcapital asset :-i) Equity or Preference shares in a company (whether quoted or not).ii) Securities (like Debentures, government securities) listed in a recognized Stock Exchange in India.iii) Units of UTI (whether quoted or not).iv) Units of Mutual Fund specified under section 10(23D) (whether quoted or not).v) Zero Coupon Bonds (From assessment year 2006-07) (whether quoted or not).B. Long – term capital asset :- Means asset held by the assessee for more than 36 months and in case of shares, securities, units (mentioned above), if held for more than 12 months. Any capital gain arising on transfer of such assets shall be treated as Long – Term capital gains. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  4. 4. 98880-84999 Prof. Rohit Kumar Jindal Page No. 4 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance) Time to be considered In case of securities as stated above In case of any other asset and Debentures & Govt. Securities) which are not listed SPECIAL POINT TO BE REMEMBERED 1. The tax incidence under the head “Capital Gains” depends upon whether the capital gain is short- term or long-term. Long term capital gain is generally taxable at a lower rate. If the asset is transferred is a short-term capital asset, capital gain will be short-term capital gain.. conversely, long term capital gain arises on transfer of a long-term capital asset. 2. In the case of depreciable asset (other than an asset used by a power generating unit eligible for depreciation on straight line basis), capital gain is taken as short term capital gain irrespective of period of holding. HOW TO DETERMINE THE PERIOD OF HOLDINGIn determining the period of holding the following shall be considered :-a) In case shares held in company in liquidation, the period subsequent to the date on which company goes in liquidation should be excluded.b) In case of capital asset which become the property of the assessee in the circumstances mentioned in section 49(1) [i.e. when asset is acquired by gift or will etc.] the period for which asset was held by the previous owner should be included.c) Holding period for the purposes of capital gains transaction in shares/securities will be determined as under :- Different situation Relevant date 1. Date of purchase (through stock 1. Date of purchase by broker on behalf of investor. exchange) of shares /securities. 2. Date of transfer (through stock exchange) 2. Date of broker’s note provided such transactions are of share and securities. followed by delivery of such shares and securities. 3. Date of purchase/transfer of 3. Date of contract of sale as declared by parties shares/securities (transaction taken place provided it is followed up by actual delivery of directly between parties and not through shares and transfer deed. stock exchange) 4. Date of purchase/sale of shares/securities 4. The FIFO method shall be adapted to reckoned the purchased in several lots at different period of holding of securities, in case the dates of points of time but delivery taken of in sale and purchase cannot be correlated through one lot and subsequently sold in parts. specific number of scrip. In other words, the assets acquired last will be taken to be remained with the assessee while assets acquired first will be treated B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  5. 5. 98880-84999 Prof. Rohit Kumar Jindal Page No. 5 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance) as sold. 5. Allotment of shares in amalgamated 5. The period of holding shall be counted from the Indian company in lieu of shares in date of acquisition of shares in the amalgamating amalgamating company. company. 6. Right shares. 6. The period of holding shall be counted from the date of allotment. 7. Right entitlement. 7. The period of holding will be considered from the date of offer to subscribe to shares to the date when such right entitlement is renounced by the person. 8. Bonus shares. 8. The period of holding shall be counted from the date of allotment of bonus shares. 9. Issue of shares by the resulting company 9. The period of holding shall be counted from the in a scheme of demerger to the date acquisition of shares in the demerged shareholders of the demerged company. company. (Example 1) 10. Transfer of a security by a depository (i.e. 10. The period of holding shall be determined on the Demat Account) basis of First In First Out method. 11. Membership right held by a member of The period of holding shall be calculated as per Recognised Stock Exchange. Example No. 2 given below. Example 1 :- X holds 1,000 shares in A Ltd. (Date of purchase being June 10,1996). A Ltd. has two undertakings. One of the undertakings is transferred to B Ltd. In a scheme of demerger. Under the scheme of demerger, on May 6 ,2004, B Ltd. Issues shares to the shareholders of A Ltd. Consequently, on May 6, 2004 X gets 400 shares in B Ltd. In this case, if X transfers shares in B Ltd., then the period of holding shall be counted from June 10, 1996. Example 2 :- X is a member of DEL Stock Exchange. The membership ticket was purchased by him on March 2, 1956. The Stock Exchange is converted into a company on November 1,2004. Consequently, on November 1, 2004, X is allotted 1,000 shares in DEL Stock Exchange Ltd. and a ticket to trade in DEL Stock Exchange Ltd. If X transfers shares in (or ticket to trade in) DEL Stock Exchange Ltd., then SPECIAL NOTE :- For calculating period of holding of Capital Asset the date on which the asset is transferred should be excluded, e.g. if the date of sale of asset is 01-12-2008, the period of holding shall be calculated till 30-11-2008.B. Transfer of capital asset [section 2(47)] :- Transfer of capital asset is an essential requirement for the incidence of tax on capital gains. Theterm transfer has been defined under section 2(47) of the act and includes the following:1. The sale, exchange or relinquishment of the assets; or2. The extinguishments of any right therein; or3. The compulsory acquisition of therein under any law; or4. In case asset converted by the owner thereof into or treated by him as stock-in-trade of a business carried on by him, such conversion; or5. Any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of nature referred to in section 53A of the transfer of property act, 1882. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  6. 6. 98880-84999 Prof. Rohit Kumar Jindal Page No. 6 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance)6. Any transaction (whether by way of becoming a member of, or acquiring shares in a co-operative society, company or other association of person or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of any immovable property. MEANINGS OF SOME OF THESE ARE AS BELOW1) Exchange :- E.G. a person transfers his building to a company in consideration of allotment of shares in the company is example of exchange.2) Relinquishment :- It is a voluntary surrender of an asset in favour of another person, e.g. X and Y jointly own a property. Y relinquishes his share in the property in favour of X. It is case of relinquishment.3) Extinguishments :- When right of one person in an asset comes to an end, it is called extinguishments of rights in an asset, e.g. Ashok gives advance money to Vinod to purchase a property but subsequently Vinod gave him double of the advance money and cancelled the deed. This is extinguishment of Ashok’s right to purchase the asset.4) Part performance of contract :- Sometimes, possession of an immovable property is given in consideration of part performance of a contract. For Example, A enters into an agreement for the sale of his house. The purchaser gives the entire sale consideration to A. a hands over complete rights of possession to the purchaser since he has realised the entire sale consideration. Under Income – Tax Act, the above transaction is considered as transfer.5) Lastly, there are certain types of transactions, which have the effect of transferring or enabling the enjoyment of an immovable property. For example, a person may become a member of a co-operative society, company or other association of persons, which may be building houses/flats. When he pays an agreed amount., the society etc. hands over possession of the house to the person concerned. No conveyance is registered. For the purpose of Income – Tax the above transaction is a transfer. Even power of attorney transactions are covered. Examples of transfer Redemption of preference shares by a company is a transfer in the hands of shareholders and they will be liable to capital gain for the same. Conversion of preference shares into ordinary shares amounts to transfer in the hands of the shareholders. Distribution of capital assets in case of liquidation of a company is not a transfer in the hands of the company but a transfer in the hands of the shareholders. Proprietary business taken over by a firm. Slump sale of an undertaking of a business, effective from the assessment year 2000-2001. Grant of mining lease at a premium. Salami or premium received from lease of plots for 99 years. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  7. 7. 98880-84999 Prof. Rohit Kumar Jindal Page No. 7 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance) TRANSACTION NOT RECORDED AS TRANSFER [SECTION 46 AND 47]1) Any distribution of capital asset or the total or partial partition of HUF.2) Any transfer of asset under a gift or a will or an irrevocable trust. This rule is not applicable if; a) Taxpayer is an employee; b) He has been allotted (directly or indirectly) shares/debentures by the employer company under notified Employees Stock Option Scheme in accordance with the guideline issued by the central government, and; c) The aforesaid shares/debentures are gifted by the concerned employee to any person.3) Transfer of capital assets at the time of liquidation by a company to its shareholders.4) Any transfer of a capital asset by a company to its subsidiary company, if, a) The parent company holds the whole of shares of subsidiary company; b) The subsidiary company is an Indian company.5) Any transfer of a capital asset by subsidiary company to the holding company, if, a) The whole of share capital of the subsidiary company is held by the holding company; b) The holding company is an Indian company. SPECIAL NOTE :- Any transfer of a capital asset as per clause (iv or v) above shall be treated as transfer if6)the transfer is made after 1ST April, 1984 as Stock – In – Trade.6) Any transfer is in a scheme amalgamation of a capital asset by the amalgamating company (transferor) to the amalgamated (transferee), if the amalgamating company is an India company.7) Any transfer by a shareholder in a scheme of amalgamation, of capital asset being a share or shares held by him in the amalgamating company, if, a) The transfer is made in consideration of the allotment to him of any share or shares in the amalgamating company; b) The amalgamating company is an Indian company.8) Any transfer of capital asset, being any work of art, book, manuscript, drawing, photograph, etc. to the government, university, national museum or institute notified by the central government in the official gazette.9) Any transfer by way of conversion of debenture, debenture-stock or deposit certificate in any form of a company into shares or debentures of that company. SPECIAL NOTE :- It may be noted that conversion of Preference shares in to equity shares is treated as transfer, as it is not covered by the aforesaid condition.10) Any transfer of foreign currency Bonds or GDR or shares specified in section 115AC held by non- resident to another non-resident where a transfer is made outside India.11) Where a sole proprietary concern or firm is succeeded by a company in the business carried own by it as a result of which of sole proprietary concern sells or otherwise transfers any capital assets or intangible assets to the company provided the following conditions are satisfied; B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  8. 8. 98880-84999 Prof. Rohit Kumar Jindal Page No. 8 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance) a) All the assets and liabilities of sole proprietary or firm become the assets and liabilities of company b) The share holding of the sole proprietor in the company is not less than 50% of total voting power in the company his share holding continuous to remain as such for a period of 5 years from the date of succession, and c) The sole proprietor or partners of the firm does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by of allotment of shares of a company.13) In case of demerger, if shares are issued by the resulting company to the shareholder of demerged company and shares are issued in consideration of such demerger.14) Transfer of agricultural land in India before March 1, 197015) Transfer of capital asset in the case of conversion of proprietary concern into a company [Sec 47(xiv)] :- on has to satisfy the following conditions. a) A sole proprietary concern is converted into a company. b) All the business assets and liabilities of the sole proprietary concern immediately before conversion is taken over by the company. c) The sole proprietary does not receive any consideration or benefit directly or indirectly, in any form or manner other than by way of allotment of shares in the company. d) The shareholding of the sole proprietor in the company is not less then 50 percent of the total voting power in the company and shareholding shall continue to so remain for a period of five years from the date of the succession. If all of the above conditions are satisfied, then the transaction is not treated as “transfer”. SPECIAL NOTE :- The aforesaid transactions are not recognized as transfer for the purposes of section of 45. Therefore, any profits or gains arising on the above noted transactions are not chargeable to tax under section 45; conversely, any loss arising there from is not liable to set off against other incomes of the assessee. TRANSFER WHEN COMPLETE AND EFFECTIVE Generally capital gain is taxable in the year in which capital asset is transferred. Different rules areapplicable in case of moveable/immovable assets to find out when a capital asset is transferred.1. Immovable property when document are registered :- Title to immovable asset not passed till the conveyance deed is executed or registered.2. Immovable property when documents are not registered :- Even if the documents are not registered but the following conditions of section 53A of Transfer of Property Act are satisfied, ownership in an immovable property is “transferred” :- a) There should be a contract in writing; b) The transferee has paid consideration or willing to perform his part of the contract; and c) The transferee should have taken possession of the property.3. Moveable property :- Title to moveable property passes at the time when the property is delivered pursuant to a contract to sell. Entries in the books of account are not relevant for the determination of the date of transfer. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  9. 9. 98880-84999 Prof. Rohit Kumar Jindal Page No. 9 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance) COMPUTATION OF CAPITAL GAIN [SECTION 48] 1. Computation of short-term capital gains Full value of consideration xxxxx Less :- Expenditure incurred in connection with such transfer xxxxx Net consideration xxxxx Cost of acquisition xxxxx Cost of improvement xxxxx xxxxx Gross short-term capital gains xxxxx Less :- Exemptions, if available under section 54B/54D/54G/54GA xxxxx Taxable Short-term capital gains xxxxx 2. Computation of long-term capital gains Full value of consideration xxxxx Less :- Expenditure incurred in connection with such transfer xxxxx Net consideration xxxxx Indexed cost of acquisition xxxxx Indexed cost of improvement xxxxx xxxxx Gross long-term capital gains xxxxx Less :- Exemption u/s 54/54B/54D/54EC//54F/54G/54GA xxxxx Taxable long-term capital-gain xxxxx SPECIAL NOTE :- No deduction will be allowed in computing the income chargeable under the head “Capital Gain” in respect of any sum paid on account of Securities Transaction Tax. (W.E.F from A.Y. 2005-2006) FULL VALUE OF CONSIDERATION [SECTION 48] The dictionary meaning of the word “full” is whole or entire, or complete. The word “full” has beenused in contrast to “a part of the price”. The expression “full value” means the whole price without anydeduction whatsoever. The following points should be noted :- Full value of consideration is the consideration received or receivable by the transferor in lieu of assets, which he has transferred. Such consideration may be received in cash or kind. If it is in kind, then fair market value of such asset is taken as full value of consideration. The full value of consideration does not mean market value of that asset which is transferred. Adequacy or inadequacy of consideration is not relevant factor for the purpose of determining of full value of consideration. It makes no difference whether (or not) “full value of consideration” is received during the previous year. Even if the full value of consideration is received in installments in different years, the entire value of consideration has to taken into account for computing the capital gains, which become chargeable in the year of transfer. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  10. 10. 98880-84999 Prof. Rohit Kumar Jindal Page No. 10 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance) SPECIAL NOTE :- Where consideration declared to be received or accruing as result of such transfer of land or building or both, is less than the value adopted for the purposes of payment of stamp duty of such transfer, the value so adopted or assessed shall deemed to be the full value of consideration and capital gains accordingly shall be computed. CASES WHEN “FULL CONSIDERATION” IS DETERMINED ON NOTIONAL BASIS In some cases, instead of actual consideration, the full value of consideration shall be the deemedvalue. Such cases have been summarised in the table given below :- Sr. Mode of Transfer Deemed Full Value of Consideration Sec No. 1. Money or asset received from an Value of money and or F.M.V. of asset on the 45 insurer on account of damage or date of receipt. (1A) destruction of any Capital Asset. 2. Conversion into or treatment of F.M.V. of the asset as on the date of its 45 (2) Capital Asset as Stock in Trade. conversion or treatment. 3. Introduction of Capital in kind into Amount recorded in the books of account of the 45 (3) Firm or AOP / BOI by partner / Form of AOP / BOI as the value of the Capital member. Asset. 4. Distribution of Asset in Kind on F.M.V. as on the date of distribution. 45 (4) dissolution of Firm or AOP or BOI. 5. Shareholders receiving assets from the Market value of the assets on the date of 46 (2) liquidator on the liquidation of the distribution minus amount assessed as deemed company. dividend. 6. Gift, etc. of shares or debentures Market value on the date of gift etc. 48 allotted under ESOP 7. Transfer of land or building or both Not less than value adopted by or assessed by 50C “stamp valuation authority” if consideration declared by assessee is less. EXPENSES ON TRANSFER Expenditure incurred wholly and exclusively in connection with transfer of capital asset is deductiblefrom full value of consideration. Example of such expenses are: Brokerage or commission, cost of stamps,registration fees borne by the vendor, traveling expenses, litigation expenses for claiming enhancement ofcompensation awarded in the case compulsory acquisition of asset.One should keep in view the following propositions :-1. Vague claim of expenses is not allowable.2. Expenditures in connection with transfer need not necessarily have been incurred prior to passing the title.3. If a sum has already been subject matter of deduction under other heads, the same cannot be allowed as deduction under section 48. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  11. 11. 98880-84999 Prof. Rohit Kumar Jindal Page No. 11 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance)4. Proceeding in a civil court for enhancement of compensation is an integral part of proceeding for the transfer of a property in case of compulsory acquisition. Expenditure incurred in such proceeding wholly and exclusively in connection with such transfer. COST OF ACQUISITION [SECTION 55(2)] Cost of acquisition is the price, which the assessee has paid, or the amount, which the assessee hasincurred for the acquisition of such asset. The meaning of cost of acquisition is same in case of cost forclaiming depreciation. Following points should be considered for the purpose of cost of acquisition :-1. Cost of acquisition includes expenses incurred in acquiring the asset or completing the title :- Litigation expenses incurred by the assessee who holds shares of a company, to acquire better voting rights in respect of the shares, by filing suit to get article of association amended and the expenses incurred for compelling the company to register the shares in the name of the assessee would form part of cost of acquisition of shares.2. Interest on money borrowed for acquiring capital asset will form part of cost of asset :- Interest on loan taken for acquiring capital asset will become part of the cost of acquisition.3. Sum paid for discharge of mortgage :- Where the property has been mortgaged by the previous owner during the lifetime and the assessee, after inheriting the same, has discharged the mortgaged debt, the amount paid by him for the purpose of clearing off the mortgage shall be regarded as cost of acquisition. The position is however, different where the mortgage is created by the owner after he has acquired the property. The clearing off of the mortgage debt by him prior to transfer of the property would not entitle him to claim deduction because in such a case he did not acquire any interest in the property subsequent to his acquiring the same.4. Cost of acquisition has to be referred to be ascertained with reference to the date of acquisition and not with reference to the date on which it became a taxable capital asset.5. Ground rent cannot be said to be an expenditure incurred by the assessee for the acquisition of the capital asset and it cannot, therefore, be included in computing the actual cost to the assessee of the capital asset.6. Estate duty paid in respect of inherited property can neither be treated as part of cost of acquisition of property nor as cost of improvement. COST OF ACQUISITION IN SOME CERTAIN CASES1. Cost to the previous owner deemed to be the cost of acquisition [Sec 49(1)] :- If the asset is acquired by an assessee in the following circumstances the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it. It will be increased by the cost of any improvement of the assets incurred by the previous owner or the assessee.Circumstances when the cost of previous owner is taken :- On any distribution of assets on the total or partial partition of Hindu Undivided Family. Under Gift or Will. By succession, inheritance or devolution etc.. On any distribution of assets on the liquidation of a company. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  12. 12. 98880-84999 Prof. Rohit Kumar Jindal Page No. 12 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance) Under a transfer to a revocable or an irrevocable trust. When any of the members of a Hindu Undivided Family converts his self-acquired property into H.U.F.property after December 31,1969. (The cost of the property to the H.U.F. will be taken as the cost of theproperty to the individual converting the property.) SPECIAL POINTS TO BE REMEMBERED The previous owner of the asset means the last previous owner who acquired the asset by any means other than those stated above. In order to find out whether the capital asset is short term or long term in the above cases, the period of holding of the previous owner shall be taken into consideration. The benefit of the indexation will be available from the year in which the asset was first held by the current owner. By virtue of Section, 53(3), where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the fair market value on the date on which the capital asset became the property of the previous owner.2. Cost of shares of securities :- Where shares or securities was acquired before 1st April, 1981, the cost of acquisition will be taken the actual cost or market value on 1st April, 1981, whichever is beneficial to the assessee. If it is acquired after 31st March 1981, the actual cost will be cost of acquisition.3. Cost of Bonus Shares :- The cost of bonus shares or securities which is received by the assessee without any payment on the basis of his holding any financial asset will be as under :- Where bonus share or security was received prior to 1st April, 1981, the fair market value on 1st April, 1981. In any other case :- Nil.4. Cost of acquisition u/s 49(3) :- In a case where the capital gain arising from the transfer of a capital asset belonging to a holding company to a subsidiary company to its holding company under some circumstances , it is deemed to be income chargeable under the head “Capital Gain” u/s 47A. The cost of acquisition of such asset to the transferee company shall be the cost for which such asset was acquired by the transferor company.5. Cost of acquisition of Goodwill :- The cost of acquisition in relation to (a) goodwill of business, a trademark or brand name associated with a business (b) a right to manufacture, produce or process any article or thing, right to carry on any business, (c) tenancy rights, (d) stage carriage permits or (e) loom hours shall be determined as under :- If the asset is purchased from a previous owner :- The amount of purchase price. In any other case :- Nil. However this will not cover the case specified in Section 49(1). Case covered under section 49(1) :- Cost to the previous owner.6. Cost of acquisition of Right Issue :- In the case where an assessee by holding a share or any other security become entitled to subscribe addition shares or securities (known as financial asset) on the basis of right issue, the cost of acquisition shall be :- On the basis of entitlement if the assessee subscribed to the right issue :- Amount actual paid to acquire it. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  13. 13. 98880-84999 Prof. Rohit Kumar Jindal Page No. 13 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance) If the assessee renounced the right in favour of any other person :- Nil If the assessee has purchased the right to subscribe for the additional shares / securities (financial asset) :- Purchase price paid to purchase the right plus the amount paid to the company for acquiring the rights shares / securities.7. Cost of acquisition of a capital asset acquired before 1st April, 1981 :- In the following cases, the assessee may take at his option, either actual cost or the fair market value of the asset (other than a depreciable asset), as on 1st April, 1981 as cost of acquisition :- Where the capital asset became the property of the assessee before 1st April, 1981. Where the capital asset became the property of the assessee by any mode referred to in section 49(1) and the capital asset became the property of the previous owner before 1st April, 1981.8. Cost of acquisition of shares or debentures :- The cost of acquisition of shares or debentures of a company acquired in consideration of conversion of debenture, debenture-stock or deposit certificate, shall be deemed to be the cost of original debentures, debenture-stocks or deposit certificates converted.9. Cost of stock option to the employee :- Where capital gain arise from the transfer of shares, debentures or warrants, the value of which has been taken into account while computing the value of perquisite u/s 17(2), the cost of acquisition of these shall be the value u/s 17(2).10. Cost of acquisition of an asset acquired on distribution of capital asset of a company on its liquidation :- Where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to income tax under the head capital gain in respect of the asset u/s 46, the cost of acquisition to him shall be the fair market value of the asset on the date of distribution.11. Cost of equity shares allotted in lieu of membership of stock exchange :- The cost of equity share or shares allotted to a shareholder of a recognised stock exchange in India under a scheme for corporatisation or demutualisation approved by the SEBI shall be cost of acquisition of his original membership of the exchange. However, the cost of a capital asset, being trading or clearing rights of the recognised stock exchangeacquired by a shareholder who has been equity shares under the scheme of demutualisation orcorporatisation shall be deemed to be nil.12. Cost of acquisition on consolidation or conversion of shares :- Where the capital asset, being a share or a stock of a company became the property of the assessee on the consolidation and division of shares into shares of larger amount than its existing shares, or on the conversion or reconversion of any shares into stock or vice-versa, or on the sub-division of any shares into shares of smaller amount or on the conversion of one kind of shares into another kind, the cost of acquisition shall be taken to be the cost to the assessee of the original shares or stock held by him.13. Cost of acquisition in case of advance money received as a result of previous negotiation for transfer with someone else :- Under Sec. 51, where any capital asset was on any previous occasion the subject of negotiation for its transfer, any advance or other money received and retained by the assessee in respect of such negotiation shall be deducted from the cost for which the asset was acquired or the written-down value, or the fair market value, as the case may be, in computing the cost of acquisition. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  14. 14. 98880-84999 Prof. Rohit Kumar Jindal Page No. 14 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance) SPECIAL POINTS TO BE REMEMBERED It may be observed that only when the advance or other money has been received or retained or forfeited by the assessee, then only it has to be deducted from the cost of the asset. If such an advance was received and retained or forfeited by any previous owner, the same shall not be deducted from the cost of the asset. If the advance money received and forfeited by the assessee before 1st April, 1981 and the assessee has assumed the Fair Market Value of the asset as on 1st April, 1981 as the cost of acquisition, such advance money received (though 1st April, 1981) shall also be deducted as in the section it is written that is will be deducted from the Fair Market Value. A situation may arise where advance money forfeited is more than the cost of acquisition. In such a case, the excess of the advance money forfeited over the cost of acquisition of such asset shall be a capital receipt not taxable. For purpose of sec. 51, no distinction is made between moneys received and retained by way of advance and other moony. The phrase other money would cover, for example, deposits made by the purchaser for guaranteeing due performance of the contracts and not forming part of consideration. The monies received on the previous occasions and retained by the vendor / assessee cannot, therefore, be treated as a revenue receipt. In this case cost of acquisition will be first reduced by the amount of advance money received and thereafter it will be indexed. Forfeiture of earnest money by the vendor, if due to the default on the part of the vendee, will not amount to relinquishment of a right in that asset. Therefore the amount forfeited will not be allowed as a capital loss under the head of capital gain. On the other hand if the vendor commits a default and the vendee receives some compensation besides the refund of the earnest money paid by him, such compensation shall be subject to capital gains as it will amount to relinquishment of a right by the vendee.14. Cost of acquisition in case of devaluation of rupee :- Under section 43A, for the purpose of computing the capital gains arising to the assessee on the sale of transferor of a capital asset acquired by him from abroad on deferred payment terms or against a foreign loan, the additional rupee liability incurred by him in repaying the installments of the cost or the foreign loan (along with interest if any), as the case may be, after devaluation of the rupee, will be added to the original cost of the asset and the resultant amount will be taken as the cost of acquisition of the capital asset. SPECIAL POINTS TO BE REMEMBERED If instead of devaluation there is appreciation in the value of rupee in terms of foreign currency the above rule will be reversed. The actual cost of the asset shall be adjusted on actual payment towards the cost of the asset or repayment of loan instead of on accrual basis. If an adjustment has already been made upto A.Y. 2002-03 on accrual basis, no adjustment can be made at the time of actual payment to the extent of adjustment already made.15. Cost of securities held with depository :- The cost of the acquisition and the period of holding of any securities with the Depository shall be determined on the basis of the First In First Out method. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  15. 15. 98880-84999 Prof. Rohit Kumar Jindal Page No. 15 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance)16. Cost of shares in Resulting company :- The cost of acquisition of shares in the resulting company shall be the amount which bears to the cost of acquisition of shares held by the assessee in the demerged company the same proportion s the net book value of the asset transferred in a demerged bears to the net worth of the demerged company immediately before such demerger. Or we can say that Cost of acquisition of shares held by the Net book value of the assets transferred assessee in the de-merged Company Net worth of demerged company before demergerNet Worth means the aggregate of the paid up shares capital and general reserves as appearing in the booksof account of demerged company immediately before such demerger.17. Cost of shares in demerged company :- The cost of acquisition of the original shares held by the shareholder in the demerged company shall be deemed to have been reduced by the amount as so arrived at under the previous point. COST OF IMPROVEMENT [SECTION 55(1)(B)] Cost of improvement is capital expenditure incurred by an assessee in making anyadditional/improvement to the capital asset. It also includes any capital expenditure incurred to protect orcomplete the title of the asset or to cure such title. To put is different, any expenditure incurred to increasethe value of the capital asset is treated as cost of improvement.In terms of section 55(1)(b), cost of improvement means as follows :- Cost of improvement in relation to capital asset, in relation to a capital asset being goodwill of abusiness or a right to manufacture, produce or process any article or thing or right to carry on any businessshall be taken as Nil. But in case of tenancy rights, route permits, loom hours, trademark, brand namesassociated with business the actual expenses incurred are the cost of improvement. (It makes no differencewhether goodwill or such right was self generated or acquired for a price.)i) Where the capital asset became the property of the assessee (or the previous owner in a case specified by section 49(i)) before April 1, 1981, means all expenditure of capital nature incurred in making any addition or alteration to the capital asset on or after April 1, 1981 by the assessee [or the previous owner in case specified by section 49(1)]. In other words we can say that expenditures incurred by the assessee or the previous owner before 1stApril 1981 is to be ignored completely, whether the assessee opts for the market value as on 1st April 1981or not.ii) In the other cases, means all expenses of capital nature incurred in making any addition/ alteration to the capital asset by the assessee [or the previous owner in a case specified by section 49(1)] SPECIAL POINTS TO BE REMEMBERED Any expenditure, which are deductible in computing the income chargeable under the heads “interest on securities”, “income from house property”, “profits and gains from business or profession”, “income from other sources” Only capital expenditure is considered as a cost of improvement. Routine expenses on repairs and maintenance do not form part of cost of improvement. Expenditure incurred prior to April 1, 1981. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  16. 16. 98880-84999 Prof. Rohit Kumar Jindal Page No. 16 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance) INDEXATION OF COST OF ACQUISITION As already mentioned, in the case of short term capital gain, cost of acquisition and cost ofimprovement are deducted from the full value of consideration for computation of capital gain. On the otherhand, in the case of long term capital gain, indexed cost of acquisition and indexed cost of improvement arededucted instead of cost of acquisition and cost of improvement. Indexed cost of acquisition means and amount which bears to the cost of acquisition the sameproportion as cost inflation index for the year in which the asset is transferred bears to the cost of inflationindex for the first year in which the asset was held by the assessee or for the year beginning on 1st April1981 whichever is later. INDEXED COST OF ACQUISITION AND COST IMPROVEMENT MAY BE COMPUTED AS FOLLOWS1. Capital asset acquired by the assessee [other than in circumstances referred in section 49(1)], before April 1, 1981. In this case indexed of acquisition is determined as under :- Cost of acquisition or fair market value C.I.I of the year of Transfer (519) as on 1-4-1981 which ever is more X C.I.I of the year of acquisition i.e. 1002. Capital asset acquired by the assessee [not being in circumstances specified in section 49(1)], on or after April 1, 1981. In this case indexed of acquisition is determined as under :- Cost of acquisition C.I.I of the year of Transfer (519) X C.I.I of the year of acquisition3. Capital asset acquired on or after 1-4-1981, in one of the circumstances specified in section 49(1) and originally acquired by the previous owner before April 1, 1981. Indexed cost of acquisition will be determined as under :- Cost of acquisition to the previous owner or fair X C.I.I of the year of Transfer (519) market value as on 1-4-1981 which ever is more X C.I.I of the year in which asset was first held by the present assessee4. Capital asset acquired by the assessee on or after April 1, 1981 in one of the mode referred in section 49(1) and originally acquired by the previous owner on or after April 1, 1981. Indexed cost of acquisition will be determined as under :- Cost of acquisition to the previous owner C.I.I of the year of Transfer (519) X C.I.I of the year in which asset wasINDEXATION OF COST OF IMPROVEMENT first held by the present assessee As already discussed under cost of improvement, any expenses on improvement before 1-4-1981 areto be completely ignored. Therefore cost of improvement only after 1-4-1981, by the assessee should beindexed. However, if the asset is acquired by the assessee from the previous owner in any mode given u/s B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  17. 17. 98880-84999 Prof. Rohit Kumar Jindal Page No. 17 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance)49(1), the expenses on improvement incurred by the previous owner after 1-4-1981 will also have to beindexed. Indexed cost of improvement is to be calculated as follows :- Capital expenditure on improvement C.I.I of the year of Transfer (519) X after 1-4-1981OF COST NOT ALLOWEDyear in which the improvement was C.I.I of the IN CERTAIN CASES INDEXATION made by the present assessee or previous ownerIn the following cases, index of cost shall not be allowed for the assets specified therein :-1. Transfer of bonds and debentures other than capital indexed bonds issued by the government.2. Transfer of shares or debentures acquired by a non-resident in foreign currency in an Indian company.3. Transfer of undertaking or division in a slump sale.4. Transfer of units of UTI or mutual fund covered u/s 10(23D) purchased in foreign currency by overseas financial organization, also known as offshore funds.5. Transfer of Global Depositary Receipt (GDR) purchased in foreign currency by an individual resident in India and employee of Indian company.6. Transfer of foreign exchange asset by a non-resident Indian.7. In case of depreciable assets, there is no question any indexation as capital gain arising from the transfer of depreciable asset shall always be short-term capital gain.8. Transfer of securities by Foreign Institutional Investors (F I I’s) [Section 115AD] SPECIAL NOTE :- In case of depreciable assets, there is no question of any indexation as capital gain arising from the transfer of depreciable asset shall always be short term capital gain. RATES OF INDEXATION YEARS C.I.I. YEARS C.I.I. YEARS C.I.I.1981 – 1982 100 1991 – 1992 199 2000 – 2001 4061982 – 1983 109 1992 – 1993 223 2001 – 2002 4261983 – 1984 116 1993 – 1994 244 2002 – 2003 4471984 – 1985 125 1994 – 1995 259 2003 – 2004 4631985 – 1986 133 1995 – 1996 281 2004 – 2005 4801986 – 1987 140 1996 – 1997 305 2005 – 2006 4971987 – 1988 150 1997 – 1998 331 2006 – 2008 5191988 – 1989 161 1998 – 1999 351 2008 – 2009 5511989 – 1990 172 1991 – 1992 199 2009 – 2009 5821990 – 1991 182 1999 – 2000 389 2009 – 2011 632 CAPITAL GAINS IN CERTAIN SPECIFIED CASES1. Computation of capital gains in case of conversion of capital asset in to stock-in-trade [section 45(2)] :- For the purposes of computing the capital gain in such cases, the fair market value of the capital asset on the date on which it was converted or treated as stock-in-trade shall be deemed to be full value of consideration received or accruing as the result of transfer of the capital asset. The notional capital gain arising from the transfer by way of conversion of capital asset in to stock-in-trade will be chargeable to tax in the year in which stock in trade is sold and not in the year in which assetconverted. Indexation of cost of acquisition and improvement if required, will be done till the previous B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  18. 18. 98880-84999 Prof. Rohit Kumar Jindal Page No. 18 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance)year in which such conversion took place and not upto the date of sale of that asset. Further the fairmarket value of the asset, as on the date of such conversion shall be deemed to be full value of theconsideration of the asset. The sale price minus ‘market value as on the date of conversion’ shall be treatedas business income and will be taxed under the head “Profits and gains of business or profession”.2. Computation of capital gains on transfer of firm’s assets to partners and vice versa :- a) Transfer of capital asset by a partner to a firm [section 45(3)] :- The profits or gain arising from the transfer of capital asset held by a person, to a firm or other association of person or body of individual (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year, in which such a transfer takes place and, for the purposes of computation of capital gain, the amount recorded in the books of the firm, association or body of individuals for such capital asset shall be deemed to be the full value of the consideration. It may be observed that the sale consideration in this case shall be the amount as recorded inthe books of the Firm / A.O.P. etc. and not the market value of the asset as on the date of the transfer. b) Capital gain on transfer of capital asset by way of distribution on the dissolution of firm, AOP / BOI [Section 45(4)] :- The profits or gains arising from the transfer of a capital asset is specie to the partners/members thereof by way of distribution on the dissolution of a firm or other association of persons or body of individuals (not being accompany of a cooperative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place. In such a case, there will be a capital gain, the fair market value of the asset on the date of such transfer shall be deemed to the full value of the consideration received or accruing as a result of transfer, instead of the value at which it is given to the partner/member. Although, for the purposes of computation of capital gains in the hand of firm/AOP, the saleconsideration shall be the market value of the asset as on the date of its distribution but the cost ofacquisition of this asset to the partner/member shall be the value of at which it was transferred topartner/member.3. Distribution of stock in trade amongst partners at the time of dissolution :- Section 45(4) deals with distribution of capital assets at the time of dissolution. Stock in trade in not a capital asset and as such if stock in trade is distributed amongst the partners, and for this purpose the stock is valued at the market value and once the stock is valued at market price, the surplus, if any, has to be taxed as business income and not as capital gain income. SPECIAL NOTE :- Amount received by retiring partner in respect of his share in the partnership including goodwill is not assessable as capital gains. In the hands of partners cost shall be the agreed consideration.4. Computation of capital gains on transfer by way of compulsory acquisition [section 45(5)] :- In any of the following cases, section 45(5) is applicable: - 1. When the transfer of capital asset is by way of compulsory acquisition under any law. 2. When a capital asset is transferred (not by way of compulsory acquisition) and the consideration is approved or determined by the central government (not by state government) or by the RBI. SPECIAL NOTE :- However the compensation is taxable in the year in which the compensation is received. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  19. 19. 98880-84999 Prof. Rohit Kumar Jindal Page No. 19 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance) a) When initial compensation is received or receivable :- In any of the two cases, the initial compensation is taken as consideration and accordingly capital gain is computed. It is chargeable to tax in the previous year in which such compensation (or part thereof) is first received. It may be noted that capital gain is not taxable in the year, which the capital asset is transferred but it is taxable in the first year in which the initial compensation (or part thereof) is received. b) When enhanced compensation received :- In any of the two cases, if any compensation is enhanced by a court, tribunal or any authority, then it will be taxable as follow: - It shall be taxable in the previous in which enhanced compensation is received by the assessee. It will be taxable in the year of receipt even if the appeal is pending in any court or tribunal. In this case, cost of acquisition and the cost of improvement shall be taken as NIL. Litigation expenses of getting the compensation enhanced are deductible as expenses on transfer. If the enhanced compensation is received by any other person (because of the death transferor or for any other person), it is taxable as income of the recipient. Where such amount of the compensation is subsequently reduced by the court, Tribunal or other authority, the capital gain of that year, in which the additional compensation was taxed, shall be recomputed accordingly. SPECIAL NOTE :- The aforesaid rules are applicable whether the compensation is enhanced by the Court / Tribunal / Authority on an appeal of the taxpayer or because of any other reason.5. Computation of capital gains in the case of transfer of shares/debentures by non-resident [section 48] :- As already discussed, in the case of long-term capital gains, the cost of acquisition and cost of improvement there to be both indexed. However in the case of an assessee who is a non-resident, any capital gain, whether short-term, or long-term, arising from the transfer of a capital asset, being shares/debentures of an Indian company, bought in foreign currency, shall be computed in the following manner and no indexation of cost will be done, even if it is a long-term capital gain. Cost of acquisition shall be converted into the foreign currency, which was initially utilized in the purchase of such shares/debentures. For the purpose of conversion average rate of TT (telegraphic transfer) buying and TT selling, on the date of acquisition of such shares/debentures shall be taken; Expenses of transfer will also be converted into the same foreign currency, which was initially utilized for acquisition of such shares/debentures. For the purpose of conversion average rate of TT buying and TT selling, on the date of transfer, shall be taken. Full value of consideration shall also be converted into the same foreign currency, which was initially utilized for purchase of such shares/debentures. Here also the average rate of TT buying and TT selling of the foreign currency on the date of transfer, shall be taken; B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  20. 20. 98880-84999 Prof. Rohit Kumar Jindal Page No. 20 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance) Compute the capital gain in such converted foreign currency in the same manner as already discussed. The capital gain so computed in foreign currency, which may be long-term or short-term shall be converted into Indian Rupees at the TT buying rate only (not the average rate) on the date of transfer of the capital asset. SPECIAL POINTS TO BE REMEMBERED The aforesaid manner of computation of gain shall be applicable in respect of capital gain accruing or arising from every re-investment thereafter in, and sale of, shares in, or debentures of, an Indian company. The shares / debentures in this case may be listed or non-listed. Telegraphic transfer buying / selling rates in relation to a foreign currency is the rate of exchange adopted by the State Bank of India for purchasing or selling such currency, where such currency is made available by that bank through telegraphic transfer. The transferor should be a non-resident at the time of transferor. Non-resident also includes foreign companies. This provision is not applicable to units of UTI and Mutual Funds. The shares of debentures (Whether listed or non-listed) of India companies only are covered under this provision. Indian companies shall include Government companies, however, bonds of Central Government / State Government and RBI are not covered for this purpose. The first provision to section 48 is mandatory. Hence the non-resident covered by this provision is not allowed to opt for indexation of cost. If the shares and debentures are acquired by the non-resident in India currency, the second provision to section 48 relating to indexation will apply only the shares as debentures are not eligible for indexation. It may be noted that long-term capital gain on equity shares sold through a recognised stock exchange on or after 01-10-2004 shall be exempt.6. Exemption of long-term capital gain arising to non-resident Indian on transfer of “Foreign Exchange Asset” [Section 115F] :- Where an assessee, who is non-resident India, transfer any long- term foreign exchange asset (Original Asset), he can claim an exemption in respect of the long-term capital gain from such asset if the following conditions are satisfied He has invested within a period of six months after the date of such transfer, the whole or any part ofthe Net Consideration in any of the foreign exchange assets (New Asset) Foreign Exchange Asset means any of the following assets, namely Shares of an Indian Company, Debentures issued by an Indian Company which is not a Private Company, Deposit with an Indian Public Limited Company, Central Government Securities, National Saving Certificates VI and VII issue.Quantum of deduction :- If the cost of the new asset is not less than the net consideration is respect of original asset, the whole capital gain shall be exempt. If the cost of the new asset is less than the net consideration in respect of the original asset, then the proportionate capital gain shall be exempted in the following manner :- B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  21. 21. 98880-84999 Prof. Rohit Kumar Jindal Page No. 21 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance) Amount of Exemption :- Long Term Capital Gain Amount Invested X Net ConsiderationWithdrawal of exemption :- The exemption granted U/S 115F will be withdrawn under the followingcircumstances :- Where the new asset is transferred or converted into money within a period of 3 years fromthe date of its acquisition, the exemption granted, on the basis of cost of the new, asset, shall be deemed tobe income chargeable under the head “Capital Gain” of the previous year in which the new asset istransferred or converted into money and shall be taxed as long-term capital gain.7. Capital gains on transfer of bonus shares :- The cost of acquisition of any additional financial asset as bonus shares (or securities or other wise) which is received without any payment by the assessee on the basis of his holding any financial asset shall taken to be NIL. Moreover, in the case of capital asset being a share, security or unit which is allotted without any payment on the basis of holding any other financial asset, the period of treating such share, security or unit as short-term capital asset/long-term capital assets shall be calculated from the date of allotment of such share etc.But the cost of bonus shares allotted before 1-4-1981 shall be taken as fair market value as on 1-4-1981. SPECIAL NOTE :- The above rules are also applicable in respect of shares, securities, debentures, bonds, units allotted without any payment on the basis of holding of any other financial asset.8. Capital gains on transfer of right shares :- The cost of transfer shall be considered as follows :- a) In case sale of right only :- The cost of rights entitlement in the hands of the original shareholder will be deemed to be NIL. The amount realized by the original shareholder by selling his rights entitlement will be short-term capital gain in his hands (as the cost is taken as NIL). The period of holding of the rights entitlement will be reckoned from the date of offer made by the company to the date of renouncement. b) In case of sale of right shares :- The cost of right shares acquired by the original share- holder is the price actually paid to the company for acquiring the right shares. Where however, the right renounce acquires the right shares, the cost of the rights shares is equal to the cost incurred by him for purchasing the rights entitlement + the price paid by him to the company for acquiring the right shares.8. Capital gains on distribution of assets by a company in liquidation [section 46] :- a) Tax treatment in the hands of the company [section 46(1)] :- Section 46(1) is applicable when a company distribute assets to the shareholders at the time liquidation then there is no “transfer” in such distribution and capital gain is not chargeable in the hands of the company. b) Tax treatment in the hands of the shareholders [42(2)] :- When a shareholder receives money or other assets at the time of liquidation of the company (in which he is a shareholder), section 46(2) shall be determined as follow :- Find out the money received and the market value of other assets on the date of distribution. Find out the amount treated as dividend under section 2(22) (c) [any distribution by a company at the time of liquidation is treated as dividend to the extent of accumulated profit of the company]. The excess of (1) over (2) is treated as full value of consideration received on transfer of shares. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  22. 22. 98880-84999 Prof. Rohit Kumar Jindal Page No. 22 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance) From the consideration, deduct cost of acquisition/indexed cost of acquisition, expenditure on sale, etc., to find out capital gain. SPECIAL NOTE :- In determining whether the capital gain in the above case is short term or long term, the period subsequent to the date on which the company goes into liquidation shall not be considered.9. Sale of asset received on liquidation :- Where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to income tax under the head capital gain in respect of the asset u/s 46, the cost of acquisition to him shall be the fair market value of the asset on the date of distribution.10. Computation of capital gain on transfer of self-generated assets :- Self-generated assets are those assets, which do not cost any thing to the assessee in the terms of money in its creation or acquisition. In this case, at the time of transfer the cost of acquisition of such asset shall be taken as NIL. Like inthe case of goodwill or creation of any patent right to manufacturer etc. SPECIAL POINTS TO BE REMEMBERED In this case the option to take fair market value as on 01-04-1981 is not available whether such assets are purchased or self generated. Cost of improvement in the case of Goodwill, Right to Manufacture is taken as NIL. Whereas the cost of improvement regarding Tenancy Rights, Route Permits, Loom Hours, Trade Mark, Brand Name is taken as actual expenditure.11. Conversion of debentures into shares [section 49(2A)] :- Any transfer by way of conversion of debentures, debentures stock, or deposit certificate in any form, of a company in to shares or debentures of that company will not be regarded as transfer. But at the time of sale of such shares the cost of acquisition shall be taken as the original cost of debentures/debentures stock/deposit certificate as the case may be. SPECIAL POINTS TO BE REMEMBERED To find out whether or not shares in amalgamated company are long term capital asset or not, the period of holding shall be determined from date of acquisition of shares in the amalgamating company. The indexation will start from the date of allotment of shares in the amalgamated company.12. Capital gain on transfer of shares in amalgamated company [section 49(2)] :- If a person holds shares in a company which is must be an Indian company, in lieu of shares in the amalgamating company, he will get shares in the amalgamated company. In such a case, the cost of shares of the amalgamating company will become the cost of shares in amalgamated company and capital gain will be computed at the time of transfer of shares of amalgamated company. SPECIAL NOTE :- Same As Above.13. Capital gains on transfer of shares in resulting company [section 49(2C)] :- Section 49(2C) provides that the cost of acquisition of the shares in the resulting company shall be computed as follows :- B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  23. 23. 98880-84999 Prof. Rohit Kumar Jindal Page No. 23 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance) Cost of acquisition of shares held by the Net book value of the assets transferred assessee in the de-merged Company X Net worth of demerged company before demergerNet Worth means the aggregate of the paid up shares capital and general reserves as appearing in the booksof account of demerged company immediately before such demerger. SPECIAL NOTE :- Same As Above.14. Capital gain on transfer of shares/securities held by an assessee received as stock option scheme [section 49(2AA)] :- when the shares/securities is offered to an employee by employer, the difference between the market value and the rate which it is offer to the employee is taxable as perquisites. At the time of transfer such shares/securities the cost of acquisition shall be its fair market value on the date of exercise of option.15. Taxation on gain on slump sale [with effect from 1-4-2000 i.e. assessment year 2000-01 :- The term slum sale has been defined u/s 2(42C) and it means “Transfer of one or more undertaking as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.” In other words, it is a sale where the assessee transfers one or more undertaking as a whole including all the assets and liabilities as a going concern. The consideration is fixed for the whole undertaking. The assessee may also transfer a division instead of the undertaking as a whole by way of such sale. Thus it ma be noted that the undertaking as a whole or the division transferred shall be a capital asset. SPECIAL NOTE :- If values are assigned to sum assets only for the purpose of stamp duty and registration, it shall not be regarded assignment of values to each asset. For computing capital gains in case of ‘slump sale’ the term W.D.V. has been defined under section 43(1)(6) (c)(i)(C). The W.D.V. of any block of assets shall be decreased by the amount of actual cost as reduce by the amount of depreciation actually allowed.Profit/Loss on ‘slump sale’ [Section 50B]1. Any profits and gains arising from ‘slump sale’ effected in the previous year shall be chargeable to tax as capital gains and shall be deemed as income of the previous year in which transfer takes place. In case undertaking was held for a period not exceeding 36 months it shall be a short-term capital asset and if held for a period exceeding 36 months it shall be long-term capital asset.2. “Net worth” shall be the aggregate of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of accounts but any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth.For computing the net worth, the aggregate value of total assets shall be :- a) In the case of depreciation assets, the written down value of the block of assets determined in accordance with the provisions contained in sub-item (C) of item (I) sub-clause (c) of clause (6) of section 43; and B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  24. 24. 98880-84999 Prof. Rohit Kumar Jindal Page No. 24 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance) b) In the case of other assets, the book value of such assets.3. Every assessee having ‘slump sale’ shall furnish a report along with its return of income, from achartered accountant certifying the net worth has been correctly calculated.16. Insurance claim received for damage or destruction of a capital asset to be treated as capital gain [Section 45(1A)] :- Insurance claim received on account of destruction of asset is not chargeable to tax as “destruction” does not amount to transfer. The effect of the judgment has been nullified to some extent by inserting sub-section 45(1A) in section 45 with effect from the assessment year 2001-01. When section 45(1A) is to be applied :- If the below conditions are satisfied then this sec isapplicable.1. Firstly the compensation is received because of “damage to” or “destruction of” any capital asset.2. Secondly damage or destruction is a result of four categories of circumstances, Flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature. Riot or civil disturbance. Accidental fire explosion. Action by an enemy or action taken in combating an enemy. Any profits or gains arising from receipt of such money or other assets shall be chargeable to income tax under the head capital gain. It shall be deemed to be the income of such person for the previous year in which such money or other asset is received. For this purpose, the value of any money or the fair market value of other asset (on the date of receipt) shall be deemed to be the full value of the consideration received or accruing as a result of transfer of such asset.When section 45(1A) is not applicable :-If the above two conditions are not satisfied, then this sec is not applicable. SPECIAL POINTS TO BE REMEMBERED A road accident takes place in which vehicles and machinery or furniture being carried are destroyed. A ship, being overweight, is suck and assets are lost. The receipt of insurance compensation in such circumstances is not chargeable to tax under this section. The reasons for destruction being other then those mentioned in the above conditions. Insurance compensation for theft of stock in trade is not taxable under this sec but it will be taxable as business income. Where asset is destroyed and there is no insurance or insurance compensation is not received, neither sec 45(1A) or sec 45 shall be attracted. Since destruction of asset shall not be treated as transfer, the cost of the asset destroyed shall be treated as dead loss. But if any insurance claim in received, it will amount to transfer as per section 45(1A). B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  25. 25. 98880-84999 Prof. Rohit Kumar Jindal Page No. 25 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance)17. Capital gain on purchase by company of its own shares or other specified securities :- Where a company purchases its own shares from a shareholder or other specified securities from its shareholders, then the capital gains shall be chargeable to tax in the hands of transferor. The capital gains shall be computed as provided in sec 48 in the year in which such shares or securities are purchased by the company.18. Capital gain on Depreciable asset (Section 50) :-. Where entire block of depreciable assets is transferred i.e. the block ceases to exist :- If the value of the consideration exceeds the aggregate of cost of acquisition and the expenses of transfer, there will be short term capital gain. On the other hand, if the value of the consideration of entire block transferred is less than the aggregate of cost of acquisition and expenses of transfer, there will be short- term capital loss. Where part of block of depreciable assets is transferred i.e. the block does not cease to exist :- If the value of consideration exceeds the aggregate of cost of acquisition and expenses of transfer, there will be short-term capital gain. On the other hand, if the value of the consideration of the part transferred is less than the cost of acquisition, then the balance left is WDV of the block at the end of the year on which depreciation will be charged. Block (Written Down Value) Block exist Block doesn’t exist +ve balance -ve balance +ve balance -ve balance Balance S.T.C.G S.T.C.L S.T.C.G REFERENCE THE VALUATION OFFICER (SECTION 55A) With a view to ascertaining the fair market value of a capital asset for the purpose of computation ofcapital gain, the Assessing Officer may refer the valuation of capital assets to a Valuation Officer of theIncome Tax Department under the following circumstances :-1. In case where the value of the asset, as claimed by the assessee, is in accordance with the estimate made by a registered valuer, an the Assessing Officer is of opinion that the value so claimed is less than the market value.2. In case, the Assessing Officer is of the opinion that the fair market value of the asset exceeds the value of the asset so claimed by the assessee by more than 15% of the value of the asset or by more than 25000 of the value claimed by the assessee.3. Where the Assessing Officer, having regard to the nature of the asset and other relevant circumstances, feels it is necessary to do so. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  26. 26. 98880-84999 Prof. Rohit Kumar Jindal Page No. 26 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance) EXEMPTION AVAILABLE IN COMPUTATION OF CAPITAL GAIN (A) Exemption of capital gains under various sub clause of section 10 (B) Exemption of capital gains under section 54 (A) EXEMPTION OF CAPITAL GAINS UNDER VARIOUS SUB CLAUSE OF SECTION 101. Capital gain on transfer of U64 [Sec 10(33)] :- Any income arising on the transfer of capital asset being a unit of U64 is not chargeable to tax where the transfer of such asset take place on or after 1 April 2002. This rule is applicable whether the capital asset U64 is long-term capital asset or short-term capital asset. SPECIAL NOTE :- If income from a particular source is exempt from tax, loss from such source cannot be set off against income from another source under the same head of income. Consequently, loss arising on transfer of units of U64 cannot be set off against any income in the same year in which it is incurred and the same cannot be carried forward.2. Long-term capital gains on transfer of listed equity shares [Sec 10(36)] :- Capital gains is not chargeable to tax if the following conditions are fulfilled: The asset, which is transferred is a long-term capital asset being an eligible equity share in a company. Such shares are purchased on or after 1st March, 2003 but before March 1, 2004. Such shares are held by the taxpayer for the period of 12 months or more.3. Exemption of capital gain on compensation received on compulsory acquisition of agricultural land situated within specified urban limits [Sec 10(37)] [W.r.e.f 01-04-2004] :- Any capital gain (whether short term or long term) arising to an individual or a HUF from transfer of agricultural land by way of compulsory acquisition shall be exempt provided the compensation or the enhanced compensation or consideration, as the case may be, received on or after 01-04-2004. The exemption is available only when such land has been used for agricultural purpose during the period of two years immediately preceding the date of compulsory acquisition by such individual or a parent of his or by such HUF. SPECIAL POINTS TO BE REMEMBERED Where the compulsory acquisition has taken place before 01-04-2004 but the compensation is received after 31-03-2004, it shall be exempt. But if part of the original compensation in the above case has already received before 01-04-2004, then exemption shall not be available even though balances original compensation is received after 01-04-2004. However, enhanced compensation received on or after 01-04-2004 against agricultural land compulsory acquired before 01-04-2004 shall be exempt.4. Exemption of long – term Capital gain arising from sale of shares and units [Sec 10(38)] [W.r.e.f 01- 04-2004] :- Any income arising on or after 01-04-2004 from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund shall be exempt provided :- Such equity shares are sold through recognised stock exchange, whereas units of equity orientedfund may either be sold though the recognised stock exchanged or may be sold to the mutual fund.Such transaction is chargeable to securities transaction tax. B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”
  27. 27. 98880-84999 Prof. Rohit Kumar Jindal Page No. 27 97790-84999 B.Com (H), M.Com, M.Phil, (Commerce Dept. in K.L.S.D. College) C.A.(Inter), C.S.(Inter), M.B.A. (Finance) (B) EXEMPTION OF CAPITAL GAINS UNDER SECTION 541. Capital gains arising from the transfer of residential house property [section 54] :- Capital gains arising from the house property is exempt from tax, if the following condition are fulfilled :-a) The house property should be a residential house (building or land appurtenant thereto) whose income is assessed under the head “Income from House Property”b) Such house property is transferred by individual or HUFc) The house property (may be self occupied or let out) is a long-term capital asset, i.e. there is a long terms capital gain.d) The assessee has purchased the residential house with in a period of one year before or two year after the date of transfer OR has constructed a residential house property with a period of three year after the date of transfer. SOME SPECIAL CASES House property does not mean a complete independent house. It includes independent residential units also, like flats in a multi-storied complex. The emphasis is not on the type of the property, but, on the head under which the rental income is assessed. Where a property is owned by more than one person and the other co-owner or co-owners release his or their shares or interest in the property in favour of one of the co-owners, it can be said that the property has been purchased by the releasee. Such release also fulfils the condition of Section 54 as to purchase so far as releasee assessee is concerned. The assessee sold his residential property and invested the capital gain within the stipulated time in the construction of a new floor on another house owned by him by demolishing the existing floor, it was held that he was entitled to exemption under section 54. If the land alone is sold, the provisions of section 54 will have no application in as much as the income from land is not chargeable under the head income from house property. In case of assessee’s death during the stipulated period, benefit of exemption under section 54 is available to legal representative if the required conditions are satisfied by the legal representative. Exemption available for transfer of a part of house if the same is an independent unit. An assessee gifted some land to his wife. He, thereafter constructed a building on the said land. The government acquired the land and building and paid compensation for land to wife and for the building to the assessee (husband). It was held that capital gain on land was assessable in the hands of the husband by virtue of section 64 but he was not entitled to exemption under section 54 in respect of capital gain on the acquisition of the land of the wife as the capital gain to the wife did not arise on transfer of a residential house. SOME SPECIAL POINTS TO BE REMEMBERED Construction of the house should be completed with in three years from the date of transfer. Date of commencement of construction is irrelevant. If the taxpayer pays full consideration and obtains possession of the house, it is qualified for the exemption u/s 54, even sale deed is not registered B Xi 558, Ahata Sher Jung, Near Division No. 3, Opp. Ram Sharnam Ashram, Ludhiana. Jindal’s Gurukul “A Complete Range of Subjects under a Single Roof.”

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