1. Capital Gains – Some Issues
Milin Mehta
Chartered Accountant
Baroda
2. Objective of the Session
• Primarily covered some issues on the topic of Capital
Gains
• Concentrated more on the newer issues with
practical utility
• Relevance to the participants has been kept in mind
• In any case, the floor is open at the end to ask
questions.
3. Capital Gains - Ingredients
• Capital Asset
• Transfer (including the date thereof)
• Consideration Received
• Cost of acquisition (including the cost of
improvement), etc.
• Special Provisions
– Deeming Fictions
– Concessional Rates of Taxation
– Exemptions
4. Capital Asset – Section 2 (14)
• property of any kind held by the Assessee
– Inclusive definition with specific exclusions
• Exclusions
– Stock-in-Trade, Consumable stores, raw-materials held for
the purpose of business
– Agricultural Land [Urban agricultural land not excluded]
– Personal Effects, excluding
• Jewellery
• Archeological Collections
• Drawings
• Paintings w.e.f. 1.4.2008
• Sculptures
• Any work of Art
5. Jewellery
• Includes ornaments made of precious metals
• Includes precious and semi-precious stones in all
forms
• Does not however include
– Precious Metals in furniture
– Precious metals in utensils, etc.
• Accordingly set of silver utensils, if can qualify as
personal effects, is not a capital asset and
accordingly gain thereon is not chargeable to tax
6. Personal Effects
• Legitimately and commonly used
• However, does not mean in daily use
• Items which are used only on certain ceremonies,
etc. can be covered;
– H. H. Maharaja Himat Singhji – 103 ITR 61 (SC)
– H. H. Maharani Usha Devi – 231 ITR 793 (SC)
– Narendra Bhuva – 90 ITD 174 (Bom) – Antique Car
7. Agricultural Land
• The Act provides for Agricultural land, but excludes
– Land situated within a municipality (including a municipal
corporation, notified area committee, town area committee or town
committee) or a cantonment board having population of not less than
10,000
– Within notified area (not being more than 8 KMs) from local limits of
such municipality or cantonment boards
• Agricultural Land
– Gemini Pictures 220 ITR 43 (SC)
– Also See, 204 ITR 631 (SC), 127 ITR 664 (Guj), 209 ITR 946 (Bom),
208 ITR 638 (Guj)
• What is local limits:
– Whether includes urban agglomeration?
• How the limit of 8 Kms computed?
– By Road / as the crow flies
– Refer to Laukik Developers – 303 ITR 356 (Bom) (AT)
– Road Distance to be seen and not as the crow flies
8. Stock – in - Trade
• This is one exemption a person would not like to fall in;
• Gives rise to one of the most important controversies of
today’s time – Capital Gain / Business Income
• General Principles – Royal Commission [1955] on taxes on
profits and income
– Subject matter of realisation i.e. nature of asset. Asset
should be capable of producing income or enjoyment by
merely holding / owning it;
– Length of holding it
– Frequency of Similar Transactions
– Supplementary work in connection with the property
– Circumstances responsible for its realisation
– Motive of the investment
• G. Venkataswami Naidu [1959] 35 ITR 594 (on page 609)
(SC) – celebrated decision on Land transactions – One
single test cannot be applied but cumulative effect of all
the circumstances to be considered.
9. Stock-in-trade – Securities
• Genesis of the Problem
– Section 10 (38) for listed securities long term gain
– Section 112 for listed securities short term gain 10 %
• Present Times, the issue is of the Loss and not of Profits
• Circular No. 4 / 2007 dated 15.6.2007
– Referred to Associated Industrial Development [82 ITR 586
(SC)] – The Assessee to lead the evidence
– Possible to have two portfolios, one for investment and one
for trading
• Factors that can prove two different portfolios
– Separate D’Mat Accounts
– Accounting Entries
– Broker, Bank Accounts, etc.
10. Securities – Interesting Issue
• Assessee holding listed shares – held as investment
– Cost of Acquisition Rs. 100.00 lacs
– Market Value as on 1.4.2008 Rs. 150.00 lacs
– Market Value as on 29.12.2008 Rs. 40.00 lacs
• Assessee sells these securities in Stock Market as on
29.12.2008 for Rs. 40.00 lacs
• Could there be some difference in taxation had this been
converted into stock in trade on 1.4.2008?
• For loss on sale of listed securities, useful reference may
be made to Royal Turf Club 144 ITR 709 (Cal)
• Whether covered by Section 14 A (loss) – refer to Navin
Bharat Industries 270 ITR 1 (AT) (Bom)(SB)
11. Deep Discount Bonds
• Present redemption of SSNNL – Deep Discount Bonds
• Circular No. 2 / 2002 dated 15.2.2002 provides for
treatment of DDB
– On the date of redemption, difference between cost of
acquisition and redemption price to be treated as Interest –
accordingly to be taxed as Income from other Sources;
– However, if the DDBs transferred prior to the date of its
redemption then the difference taxable as capital gains;
• Press Release dated 20.3.2002, clarifying that this circular
(like every other circular) does not have retrospective
effect
– Please refer Kisan Discretionary Trust 113 TTJ 918 (Ahd)
– For TDS Smt. Sonal Bansal 215 CTR 65 (P & H)
• Zero Coupon Bonds – Section 2 (48) issued after 1.4.2005
12. Transfer – Section 2 (47)
• Transfer – Inclusive Definition
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. Conversion into Stock-in-trade;
iva. the maturity or redemption of a zero coupon bond; or;
v. Part performance U/s. 53 A of the TP Act, 1882; or
vi. any transaction which has the effect of transferring, or
enabling the enjoyment of, any immovable property.
13. Transfer - Conventional
• Transfer means Transfer inter vivos
– Transfer between two persons
– Existence of both persons at one point of time is necessary to fall
within conventional definition
• Part IX Conversion of a Firm into Company
– Texspin Engineering 263 ITR 345 (Bom)
• Section 47 (xiii) – partnership to Company
– All assets and liabilities relating to the business
– All partners become shareholders in same proportion as to balance in
capital account
– Partners of the firm do not receive any consideration or benefit other
than by way of allotment of shares
– Aggregate shareholding not less than 51 % and it remains so for a
period of 5 years
• Change in partnership capital prior to sale
• Cost of acquisition in the hands of company – Section 49 does
not require substitution [Depreciation – Fifth proviso to 32 (1)]
14. Admission of Partner
• Does not involve any transfer
• However, if the new partner brings asset into the
firm – Section 45 (3), considers the same as transfer
– Full value of consideration is equal to the amount
credited to the capital of the said partner
– Concept of market value / 50 C value, etc. does not
arise
– Kartikeya Sarabhai / Sunil Siddharthbhai 156 ITR 509
(SC)
• Consider the case as under:
– New partners admitted
– Old partners retire later
15. Section 2 (47) (v) & (vi)
• Concept of transfer made far wider by the above
provision
• Major issue created by way of Bombay High Court
decision in the case of
– Chaturbhuj Dwarkadas Kapadia 260 ITR 49 (Bom) –
Dealing with development agreements
– Saving Grace in the form of :
• Gandhi & Co. 13 SOT 82 (Bom) – Proposed Scheme
• Geetadevi Pasari 104 TTJ 375 (Bom) - Consideration
– Cases of part performance U/s. 53 A of the TP Act
– General Glass 108 TTJ 854 (Bom) – Purchaser willing
to perform his part of the contract – unconditional
willingness
16. Retirement from/Dissolution of
Firm
• Section 45 (4) provides that
– Transfer by way of distribution of capital asset
– On Dissolution / otherwise
– Concept of Market Value of the Asset
– ALA Firm 189 ITR 285 (sc) – applies in case of stock in trade
and only when the values adjusted in books for settling
accounts
• Whether also covers a case where there is no distribution
of capital asset
– Burlington Exports 45 ITD 424 (Bom)
– J. Kimatrai [2007] 11 SOT 462 (Bom)
– Concept – Definition of Transfer U/s. 2 (47) not amended
– Malabar Fisheries Co. 120 ITR 49 (SC)
• Whether covers cases other than dissolution – say
retirement
• A. N. Naik 136 Taxman 107 (Bom)
17. Section 50 – Depreciable Assets
• Concerning the depreciable asset
• Section 2 (42A) given a by-pass and irrespective of
holding the asset is treated as short term capital
asset
– Limited for the purpose of section 48 and 49 (i.e. for
computing capital gains, indexation, etc.
– Does not have application for the purpose of section
54, 54EC or 112, etc.
– Ace Builders 76 ITD 389 (Bom)
– Weikfield Products 71 TTJ 518 (Pune)
18. Section 50 C
• Substitution of Stamp Duty Valuation for actual consideration
received
– Consideration received / accruing is less than the value adopted or
assessed by stamp valuation authority for payment of stamp duty in
respect of such transfer.
• Whether actual assessment necessary or deemed valuation on
the basis of stamp duty tables (“Jantri”) is OK
– Take case of Development Agreement, which has not gone for stamp
duty valuation
• Applies only in case of capital asset
• Interesting issue of tri-party agreements
– A agrees to sell B a property at Rs. 50.00 lacs
– B further sells to C at Rs. 120 lacs
– A executes sale deed in favour of C for Rs. 120 lacs, B confirms
– Jantri Value is Rs. 130 lacs
• Constitutional Validity upheld –K. R. Palanisamy 2008 – TIOL 406
– HC – MAD – IT
• K. P. Verghese – 131 ITR 597 (SC) in the context of 52 (2)
19. Section 54 EC
• Investment of capital gains in eligible securities
(NHAI / REC)
• Eligible amount of investment
– Proviso to Section 54 EC (1) states “investment in LT
specified asset by an assessee during any financial
year does not exceed Rs. 50.00 lacs
– Therefore, in respect of assets transferred after 30th
September, 2008, theoretically there could be
investment of Rs. 100.00 lacs, provided both made
prior to expiry of 6 (six) months from transfer
• Consider transfer of assets prior to the transfer by
way of gift, etc.
– Like children , would be wife, etc.
