capital gains

 

Chargeability [SEC.45 (1)]

Any profit or gain arising from the transfer of capital asset during a previous year is chargeable to the tax under head “Capital Gains” in the immediately following assessment year, if it is not eligible for exemption under sections 54, 54B, 54D,54EC, 54F, 54G and 54GA. In other words, capital gains tax liability arises only when the following conditions are satisfied:

Condition 1

There should be a capital asset.

See Para 167

Condition 2

The capital asset is transferred by the assessee.

For meaning of transfer

Condition 3

Such transfer takes places during the previous year.

 

Condition 4

Any profit or gain arises as a result of transfer.

For computation of capital gain

Condition 5

Such profit or gain is not exempt from tax under sections 54, 54B, 54D,54E, 54F, 54G, and 54GA.

 

 

Meaning of capital asset [Sec 2(14)]

The expression “capital asset” means property of any kind held by an assessee, whether or not connected with his business or profession. However, the following assets are excluded from the definition of “Capital assets”.

 

 Assets not treated as “Capital Asset”

Exception1

Any stock-in-trade, consumable stores or raw material held for the purpose of business or profession.

Exemption2

Personal effects of the assessee, that is to say, movable property including wearing apparel and furniture held for his personal use or for the use of any member of his family dependent upon him.

Exception3

Agricultural land in India provided it is not situated-

a.       In any area within the territorial jurisdiction of a municipality or a cantonment board, having a population of 10,000 or more; or

b.      In any area notified by the Government outside the local limits of above municipality (but within 8 kilometers.)

Exception 4

6 ½ per cent Gold Bonds, 1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government.

Exception 5

Special Bearer Bonds, 1991.

Exception 6

Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.

 

JUDICIAL RULINGS-

One should also keep in view the following judicial pronouncements:

§  Must be intended for personal and household use- Gold and silver coins and bars used for puja of deities as a matter of pride or ornamentation and normally not intended for personal or household use are not “personal effects”.

§  Furniture- Furniture can be said to be movable held for personal use.

§  Stamp- A foreign stamp collection is not a personal effect.

§  Car, scooter- Personal effects include car, cycle, scooter, motor-cycle owned and used by the taxpayer.

§  Securities- Securities are not personal effects.

Agricultural land situated in a rural area is not a capital asset-

 Agricultural land in India is not a capital asset provided it is situated in a rural area.

§  Rural area- Rural area for the above purpose is as follows-

                   Up to the assessment year 2013-14- Any area which is outside the jurisdiction of a municipality or cantonment board having a population of 10,000 or more and also which does not fall within such notified distance from the local limits of such municipality or cantonment board.

2 kilometers from the local limits of municipality/cantonment board

If the population of the municipality/ cantonment board is more than 10,000 but not more than 1 lakh

6 kilometers from the local limits of municipality/cantonment board

If the population of the municipality/ cantonment board is more than 10 lakh

8 kilometers from the local limits of municipality/ cantonment board

If the population of the    municipality/ cantonment board is more than 10 lakh

 

WHAT IS AGRICULTURAL LAND-

In order to qualify for “agricultural land in India”, it is not necessary that land was once agricultural land. It must be agricultural land at the time of sale. True test to be applied for the purpose of determining whether a particular land is agricultural land or not is first to ascertain what the use to which is the land is being actually put. If it is being used for agricultural purpose or even if the agricultural use has ceased but it is apparent that the land is meant to be used for the agricultural purpose, it would be agricultural land.

TYPES OF CAPITAL ASSETS-

There are two types of capital assets,

1)      Long-term capital asset

2)      Short-term capital asset

Short-term/ long-term capital assets-

“Short-term capital asset” means a capital asset held by an assessee for not more than 36months, immediately prior to its date of transfer. In other words, if a capital asset is held by an assessee for more than 36 months, then it is known as “long term capital asset”.

When such period is taken as 12 months-

If the following cases an asset held for not more than 12 months, is treated as short-term capital asset-

Case 1

Equity or preference shares in a company

Shares may or may not be quoted.

Case 2

Securities (like debentures, Government securities)

Should be quoted in a recognized stock exchange in India.

Case 3

Units of India

Units may or may not be quoted.

Case 4

Units of a mutual fund specified under section 10(23D)

Units may or may not be quoted.

Case 5

Zero coupon bonds.

Bonds may or may not be quoted.

 

HOW TO DETERMINE PERIOD OF HOLDING: The period of holding shall be determined as follows:

         Different situations

How to calculate the period of holding

§  Shares held in a company in a liquidation

The period subsequent to the date on which the company goes into liquidation shall be excluded.

§  Capital asset which becomes the property of the assessee in the circumstances mentioned in the section 49(1) read with section 2(42A)/47.

The period for which the asset was held by the previous owner should be included

§  Allotment of shares in amalgamated Indian company in lieu of share held in amalgamating company

The period of holding shall be counted from the date of acquisition of shares in the amalgamating company.

§  Right shares

The period of holding shall be counted from the date of allotment of right shares.

§  Right entitlement

       

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.

§  Bonus shares

The period of holding shall be counted from the date of allotment of bonus shares.

§  Issue of shares by the resulting company in a scheme of demerger to the shareholder of the demerged company.

The period of holding shall be counted from the date of acquisition of shares in the demerged company.

§  Membership right held by a member of recognized stock exchange.

 

§  Flat in a co-operative society

The period of holding shall be counted from the date of allotment of shares in the society.

§  Sweat equity shares allotted by the employer  

The period of holding shall be reckoned from the date of allotment or transfer of such equity shares.

§  Transactions in shares and securities not given above –

1. Date of purchase of shares/ securities

2. Date of transfer of shares/ securities

 

 

3. Date of purchase /transfer of shares/ securities

 

 

4. Date of purchase / sale of shares /securities purchased in a several lot at different point of time but delivery taken subsequently and sold in parts

 

5. Transfer of a security by a depository(i.e., Demat account)

 

 

Date of purchase by broker on behalf of investor.

Date of broker’s note provided such transactions are followed up by delivery of shares and also the transfer deed.

Date of purchased of sale as declared by parties provided it is followed up by actual delivery of shares and the transfer deed.

The FIFO method shall be adopted to reckon to the period of the holding of the security, in case where the date of purchase and sale cannot be correlated through specific number of the scrips.

The period of holding shall be determined on the basis of the FIFO method.

 
 

 

 
 

TRANSFER OF CAPITAL ASSET [Sec.2 (47)]-

Transfer in relation to a capital asset, includes sales, exchange or relinquishment if the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law.

1)      What is included in transfer

2)      Definition is applicable only in the case of capital asset

3)      Transfer includes sales of capital asset[sec2(4)(i)]

4)      Transfer includes exchange

5)      Transfer includes relinquishment

6)      Amount received from insurance on account of destruction of asset- whether amount be treated as extinguishment of right

7)      Whether redemption of preference shares amount to “transfer” within section 2(47)

8)      Whether reduction of share capital amounts to “transfer” within section 2(47)

9)      Distribution of capital assets on dissolution of a firm

10)   When partner brings his capital asset into partnership as capital contribution

11)   Supreme court’s ruling in Vodafone and subsequent amendment by finance act,2012- the Supreme Court in the case of Vodafone international Holdings B.V. vs. Union of India[2012]204 Taxman 408 gave the following ruling-

a)      The transfer of shares in the foreign holding company does not result in an extinguishment of the foreign company’s control of Indian company.

b)      It does not constitute an extinguishment and transfer of an asset situated in India.

12)   Transfer includes compulsory acquisition of an asset [sec.2(47)(iii)]

13)   Transfer include conversion of capital asset into stock-in-trade

14)   Transfer include redemption of zero coupon bonds

15)   Transfer includes giving possession of immovable properties under part performance of a contract[sec.2(47)(v)]

16)   Transfer include any transaction which has the effect of transferring an immovable property [sec. 2(47)(vi)]

Condition 1

The transferor is a member of co-operative society/company/AOP

Condition 2

By virtue of his membership, he has been allotted  an immovable property or he will be allotted an immovable property

Condition 3

The membership right is transferred which has the effect of transferring, or enabling the enjoyment, of the aforesaid immovable property.

 

 

 Transactions which do not constitute transfer- for the purpose of section 45, the following transactions are not regarded as transfer:

 

Section

Transaction not treated as “transfer”

What is the cost in the hands of transferee

If the transferee subsequently transfers the asset, whether period of holding by the previous owner should be included

46(1)

Distribution of asset in kind by a company to its shareholders at the time of liquidation

Market value of the asset on the date of distribution

                  Yes

47(i)

Distribution of capital asset on total or partial partition of HUF

Cost to the previous owner

                  Yes

47(iii)

Transfer of capital asset under a gift or will or an irrevocable trust

Cost to the previous owner

                  Yes

47(iv)

Transfer of capital asset by accompany to its 100% subsidiary company

Cost to the previous owner

                  Yes

47(v)

Transfer of capital asset by a 100% subsidiary company to its holding company

Cost to the previous owner

                  Yes

47(vi)

Transfer of capital asset in scheme of amalgamation

Cost to the previous owner

                  Yes

47(via)

Transfer of shares in an Indian company held by a foreign company to another foreign company under a scheme of amalgamation of two foreign companies

Cost to the previous owner

                  Yes 

47(viaa)

Transfer of capital assets in a scheme of amalgamation of a banking company with a banking institution

Cost to the previous owner

                  Yes

47(viaa)

Transfer of capital assets in a scheme of amalgamation of a banking company with a banking institution

Cost to the previous owner

                  Yes

47(vib)

Transfer in a demerger of a capital asset by the demerged company to resulting company

Cost to the previous owner

                  No

47(vic)

Transfer of shares held in an Indian company by a demerged foreign company to the resulting foreign company

 

                  No

47(vica)

Any transfer in a business reorganization, of a capital asset by the predecessor co-operative bank to the successor co-operative bank

Cost to the previous owner

                  No

47(vicb)

Any transfer by a shareholder, in a business reorganization, of a capital asset being a share

Cost to the previous owner

                  No

47(vid)

Transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company

Proportionate cost of acquisition of shares in demerged company

                  Yes

47(vii)

Allotment of shares in amalgamated company in lieu of shares held in amalgamating company

Cost of shares in the amalgamating company

                  Yes

47(viia)

Transfer of a capital asset by a non-resident to another non-resident

 

                  NO

47(viii)

Transfer of agricultural land in India before March1,1970

---

-

47(ix)

Transfer of a capital asset to government/university/national museum, etc.

 

 

47(x)

Transfer by way of conversion of bonds or debentures into shares

Cost of shares would be cost of bonds/ debenture

                  No

47(xa)

Transfer by way of conversion of bonds into shares or debentures of any company

Cost of shares/ debentures would be cost of original bonds

                  No

47(xi)

Transfer by way of exchange of a capital asset being membership of a recognized stock exchange company

 

                  No

47(xii)

Transfer of land by a sick industrial company which is managed by its workers co-operative

 

                  No

47(xiii)

Transfer of a capital asset by a firm to a company in the case of conversion of firm into company

Cost to the previous owner

                 Yes

47(xiiia)

Transfer of a capital asset, being a membership right held by a member of a recognized stock exchange in India

In case of shares, the cost of acquisition would be cost of acquisition of original membership of the exchange. Cost of trading and clearing right would be nil

In case of shares as well as  trading/ clearing rights, the period for which the person was a member of the stock exchange immediately prior to such demutualization/ corporation

47(xiiib)

Transfer of a capital asset by a private company/ unlisted public company to a limited liability partnership, or any transfer of shares held in the company by a shareholder, in the case of conversion of company into LLP

Cost to the previous owner

                  Yes

47(xiv)

Transfer of a capital asset to a company in the case of conversions of company into LLP

Cost to the previous owner

                 Yes

47(xv)

Transfer involved in a scheme of lending of securities

 

                  No

47(xvi)

Transfer of a capital asset in a transaction of reverse mortgage made under a scheme notified by the Government

 

 

 

 

Transfer of capital asset by subsidiary company to holding company [SEC.47 (v)]

One has to satisfy the following conditions-

Condition 1

The whole of the share capital of a subsidiary company held by the holding company.

Condition 2

Capital asset is transferred by the aforesaid subsidiary company to its holding company.

Condition 3

The holding company is an Indian company.

 

Transfer of capital asset in a scheme of Amalgamation [SEC.47 (vi)]

One has to satisfy the following conditions-

Condition 1

Capital asset is transferred in a scheme of amalgamation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

Condition 2

It is transferred by the amalgamating company.

Condition 3

It is transferred to the amalgamated company.

Condition 4

The amalgamated company is an Indian company.

 

Transfer of capital asset in a scheme of Amalgamation of two foreign companies [SEC.47 (via)]-

One has to satisfy the following conditions-

Condition 1

The capital asset is shares in an Indian company.

Condition 2

Such shares are held by a foreign company.

Condition 3

Such shares are transferred in a scheme of amalgamation.

Condition 4

Such shares are transferred to another foreign company.

Condition 5

Person holding at least 25% shares in the amalgamating foreign company should become shareholders in the amalgamated foreign company.

Condition 6

The above transaction does not attract tax on capital gains in the country in which the amalgamating company is incorporated.

 

Transfer in a scheme of amalgamation of banking company [SEC. 47(viaa)]-

Section 47 has been amended with effect from the assessment year 2005-06 to insert a new clause (viaa). It provides that any transfer of capital asset by a banking company to a banking institution in a scheme of amalgamation of such banking company with such banking institution is not treated as “transfer”

 

Transfer of capital asset in a scheme of demerger [SEC. 47(vib)]

One has to satisfy the following conditions-

Condition 1

Capital asset is transferred by the demerged company.

Condition 2

It is transferred to the resulting company.

Condition 3

The resulting company is an Indian company.

 

Transfer of shares in Indian company in a scheme of demerger of foreign company [SEC. 47(vic)]

One has to satisfy the following conditions-

Condition 1

A foreign company holds share in an Indian company.

Condition 2

Such shares are transferred in a scheme of demerger by the aforesaid demerged company to the resulting foreign company.

Condition 3

Person holding at least 75% shares in the demerged foreign company should become shareholders in the resulting foreign company.

Condition 4

The above transaction does not attract tax on capital gains in the country in which the demerged company is incorporated.

                                                                                 

Issue of shares by the resulting company to the shareholders of the demerged company [SEC. 47(vid)]

One has to satisfy the following conditions-

Condition 1

Shares are issued in a scheme of demerger.

Condition 2

Shares are issued by the resulting company.

Condition 3

Shares are issued to the share holders of the demerged company.

Condition 4

Shares are issued in consideration of demerger of undertaking.

 

Allotment of shares in amalgamated company in lieu of shares held in amalgamating company [SEC.47(vii)]-

One has to satisfy the following conditions-

Condition 1

There is an amalgamation of 2 companies.

Condition 2

The amalgamated company is an Indian company.

Condition 3

To the shareholders of the company, shares are allotted in the amalgamated company.

Condition 4

Such shares are allotted in consideration of surrender of shares in the amalgamating company.

 

Computation of Capital Gain [SEC.48]-

Computation of capital gain depends upon the nature of capital asset transferred, viz., short-term capital asset or long-term capital asset. Capital gain arising on transfer of a short-term capital asset is short-term capital gain, whereas transfer of long-term capital asset generates long-term capital gain.th tax incidence is generally higher in the case of short-term capital gain.

The method of computation of short-term and long-term capital gain s as follows:

Computation of short-term capital gain

Computation of long-term capital gain

1. Find out full value of consideration.

2. Deduct the following:

 a) expenditure incurred wholly and exclusively in                           connection with such transfer;

 b) cost of acquisition; and

 c) cost of improvement

3. from the resulting sum deduct the exemption provided by sections 54B, 54D, 54G and 54GA

4. the balancing amount is short-term capital gain

1. Find out full value of consideration

2. Deduct the following:

 a) expenditure incurred wholly and exclusively in connection with such transfer

 b) include cost of acquisition; and

c) indexed cost of improvement

3. From the resulting sum deduct the exemption provided by section 54,54B, 54D, 54EC, 54F, 54G

And  54GA

4. The balancing amount is long-term capital gain.

 

Full Value of Consideration [SEC. 48]-

The dictionary meaning of the word “full” is whole or entire, or complete. The word “full” has been used in this section in contrast to”a part of the price”. The expression “full value” means the whole price without any deduction whatsoever. The following points should be noted-

1.       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 in kind. If it is received in kind, then fair market value of such asset is taken as full value of consideration.

2.       The full value of consideration does not mean market value of the asset which is transferred.

3.       Adequacy or inadequacy of consideration is not a relevant factor for the purpose of determining of full value of consideration

4.       Where in the case of a transfer, consideration for the transfer of a capital asset(s) is not determinable, and then the purpose of computing capital gains under section 45, the fair market value of the asset shall be taken to be the full market value of consideration.

5.        It makes no difference whether “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 be taken into account for computing the capital gains, which become chargeable in the year of transfer.

6.       Where by acquiring a portion of a larger plot, the value of the unacquired portion Is injuriously affected, compensation received for injurious affection of unacquired potion is also part of full value of consideration.

Expenditure on transfer-

Expenditure incurred wholly and exclusively in connection with transfer of capital asset is deductable from full value of consideration. The expression “expenditure incurred wholly and exclusively in connection with such transfer” means expenditure incurred which is necessary to effect the transfer. Even if an expenditure has some nexus with the transfer- Sita Nanda vs.CIT [2001] 119 Taxman 227(Delhi).

The expression used in section 48, viz,”expenditure incurred wholly and exclusively in connection with such transfer” has wider connotation than the expression “for the transfer”—CIT vs. Bradford Trading Co. (P.)Ltd. [2002]125 Taxman 632(Mad.). Any amount, the payment of which is absolutely necessary to affect the transfer will be an “expenditure in connection with transfer”. In other words, if without removing any encumbrances, sale or transfer cannot be affected, the amount paid for removing that encumbrance will fall under the aforesaid provision- Gopee Nath Paul & Sons vs. CIT[2005] 147 Taxman 629(Cal).

One should also keep in view the following propositions:

·         Expenses after passing of title- expenditure in connection with transfer need not necessarily have been incurred prior to passing of title- CIT vs. P. Rajendran [1981] 127 ITR 810(Kar.)

·         Double deduction not possible- if a sum has already been the subject matter of deduction under other heads, the same cannot be allowed as deduction under section 48- CIT vs. Maithreyi Pai [1985]152 ITR 247(Kar.)

·         Tenant – payment made to a protected tenant of a land out of compensation received for a acquisition of land is not deductable-CIT v. T. Srinivasan Rao[1987] 166 ITR 593(AP). However amount paid to tenant to get property vacated is deductable from gains arising from sale of property.

·         Legal expenses- legal expenses incurred by the assessee for obtaining compensation for compulsory acquisition of his land can be properly considered as an expenditure incurred wholly and exclusively in connection with such transfer under section 48(1) and it is immaterial whether the expenditure is incurred subsequent to or prior to the award- CIT vs. Ranga Setty [1985] 22 Taxman 192(Kar.).

·         Expenditure for enhancement of compensation- proceeding in a civil court for enhancement of compensation is integral part of proceeding for transfer of a property in the case of compulsory acquisition.

·         Repayment of loan- where the assessee- company had taken a loan on security of immovable property and the liquidator sold this property in liquidation proceeding against the assessee, the repayment of the aforesaid loan cannot be said to be an expenditure incurred in connection with transfer of property so as to be allowed as deduction in computation of capital gain- CIT vs S.R.V. Press & Publication (P.) Ltd.[1999]107 Taxman 458(Ker.).

·         Discharge of mortgage- where a property has been mortgaged by the vendor, the amounts spent for discharging that burden of the vendor, whether prior to sale, or the time of sale, by payment to such creditors including the mortgagees directly by the vendee, cannot be regarded as expenditure wholly and exclusively I connection with the transfer so as to be deductible from capital gains arising on sale of such property on hands o f vendor- CIT vs. Attili N. Rao[2001] 119 Taxman 1030(SC).

·         Brokerage-where assessee had agreed to sell her flat but could not sell it because it was acquired by appropriate authority but brokerage had become due and was paid by assessee, payment made to brokers was an expenditure incurred wholly and exclusively in connection with transfer of asset and, hence same was deductible while working out capital gain- CIT vs. Leela P. Nanda [2006] 102 ITD281 (Mum.).

·         Portfolio management fees- fees for “portfolio management services” is not an eligible deduction on computing gains- Devendra Motilal Kothari vs. CIT [2001]14 taxman.com42 (Mum- Trib.).

Cost of Acquisition-

Cost of acquisition of an asset is the value for which it was acquired by the assessee. Expenses of capital nature for completing or acquiring the title to the property are includible in the cost of acquisition.

One should also keep in view the following propositions taken from judicial rulings:

·         Ground rent- ground rent cannot be said to be 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- CIT vs. Mithilesh Kumari [1973] 92 ITR 9(Delhi).

·         Interest on money borrowed- interest on money borrowed to purchase an asset is a part of actual cost of asset. Interest on borrowed capital is part of actual cost of asset, even if loan was taken from directors- CIT vs. Sri Hariram Hotels (P.)Ltd.[2010] 188 Taxman 170(Kar.).

·         Amendment of articles-               expenses for suits for amending articles of association are of capital nature and are part of cost of shares- CIT vs. Bengal Assam Investors Ltd.[1969] 72 ITR319 (Delhi).

·         Litigation expenses for registration  of shares- litigation expenses incurred for compelling the company to register the shares in the name of the assessee would be of capital nature, forming part of cost of acquisition of shares- Bengal Assam Investors Ltd.(Supra).

·         Estate duty- 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- S. Vallimmai vs. CIT[1981] 127 ITR 713, R.M. Arunachalam vs. CIT[1997] Taxman 423 (SC).

·         Mortgage- on June1, 2007, X took a loan of Rs. 5 lakh by mortgaging his house property. X could not repay the loan during his lifetime and after his death on July 2,2009, the property (with mortgage) is transferred to Mrs. X. Mrs. X transfers the property on May 2,2012 and before transfer a sum of Rs.7.2 lakh is paid to clear of the mortgage. Rs. 7.2 lakh will be deductible as part of cost of acquisition of the property while calculating capital gains in the hands of Mrs. X. if however, loan is taken by Mrs. X, then repayment of loan will not be deductible as part of cost of acquisition of the property while calculating capital gains in the hands of Mrs. X- CIT vs. Roshanbabu Mohammed Hussein Merchant [2005] 144 Taxman 720 (Bom.).

·         Conversion of agriculture land into non-agriculture land- where when land was acquired, it was agricultural and later it is sold after being converted into a non-agricultural land, the cost of the acquisition is to be taken as cost of acquisition of the agricultural land and not the notional cost as on the date the land is put to non-agricultural use- Meccane Industries Ltd. vs. Cit[2002] 254 ITR 175 (Mad.)

·         Waiver of loan- loan is taken from an associate company of the employer to finance allotment to stock option shares. Later on the loan is waived by the associate company. The amount of loan is waived by the associate company. The amount of loan so waived shall be reduced from cost of acquisition- Ravi Kumar Sinha vs.CIT [2007] 15 SOT555(Delhi).

·         Advocate fees and brokerage- expenses relating to advocate fees and brokerage in relation to purchase of property shall be included in cost of acquisition- S.Sudha vs. CIT[2011] 48 SOT 335 (Chennai).

Cost of Improvement-

The provisions regarding cost of improvement are given below-

·         General  meaning-  cost of improvement is capital expenditure incurred by an assessee in making any addition/ improvement to the capital asset. It also includes any expenditure incurred to protect or complete the title to the capital asset or to cure such title. To put it differently, any expenditure incurred to increase the value of the capital asset is treated as cost of improvement.

·         Special provisions under the Income-tax Act- the following special provisions given under section 55 in respect of cost of improvement should be noted-

1.       Expenditure incurred before April 1,1981 not considered- Any cost of improvement incurred before April1981 is not taken into consideration for calculating capital gain chargeable to tax.  This rule does not have any exception. In other words, cost of improvement include only expenditure on improvement incurred on or after April1,1981. Expenditure incurred on improvement of a capital asset before April1, 1981 is always taken as equal to zero.

2.       Double deduction not permitted- cost of improvement does not include any expenditure which is deductible in computing the income chargeable under the heads “Interest on securities”, ‘’Income from house property”’ “profits and gains of business and profession” and “Income from other sources”.

 

·         Cost of improvement in different situations- Keeping in view the above provisions, cost of improvement shall be determined in the different situations as follows-

Different situations

What the capital asset was acquired by gift, will, etc. under the provisions of section 49(1)

In any other case

§  Cost of improvement in relation to goodwill of a business or a right to manufacture, produce or process any article/ thing or right to carry on any business-

a. When these assets are self-generated

b.When these assets are purchased and later on transferred

§  Cost of improvement in relation to any other asset acquired-

a. Before April1,1981

 

 

b.On or After April1,1981

 

 

 

 

 

 

 

 

Nil

 

 

Nil

 

 

 

Cost of improvement incurred by the assessee and/or the previous owner

Cost of improvement incurred by the assessee and/or the previous owner.

 

 

 

 

 

 

 

 

Nil

 

 

Nil

 

 

 

Cost of improvement incurred by the assessee

 

 

Cost of improvement incurred by the assessee

 

 

The following points should also be kept in view:

·         Only expenses incurred by assessee - only expenses incurred by the assessee are to be taken into account. Where the assessee was a partner in a firm and expenses on the improvement of herself occupied property were debited to the firm and thus only the assessee’s share of the expenses came to be debited to her account in the firm, it was held that the expenses actually borne by her were to be considered and the share debited to the other partner’s account was not to be taken into consideration- Parmanand Bhai Patel and Jyotsna Devi Patel vs. CIT [1984] 149 ITR 80(MP).

·         Capital expenditure- to bring an expenditure within the meaning of “cost of improvement”, the expenditure in making the addition and alteration to the capital asset has to be an expenditure of capital nature- Industrial Credits & Development Syndicate Ltd. vs. CIT[2001]251 ITR 720/118 Taxman  705(Kar.)

·         Intangible asset- there can be cost of improvement even in the case of an intangible asset- S. Valliammai vs. CIT [1981] 127 ITR 713 (Mad.)

·         Comprising of a suit- where the assessee had paid an amount to improve his title by comprising a suit filed by a disputant claiming title to the property, it was held that this was not cost of improvement to the asset and could not be deducted for computation of capital gains- CIT vs. Indira [1979] 119 ITR 837(Mad.)

·         Betterment charges- expenditure in the shape of betterment charges paid under the town planning scheme for acquiring an enduring benefit are in the nature of capital expenditure and go  to improve the value of the land; hence, they would fall under section 48- Mathuradas Mangaldas Parekh vs. CIT [1980] 126 ITR 669(Guj.)

·         Forgoing of dividend- where the assessee sold shares held by it in other companies and claimed that, in computing capital gains, “negative cost” incurred by the way of forgoing of dividends due to appropriation of profits to reserves by said companies should be treated as “cost of improvement to the assets under section 48, it was held that assessee’s claim was rightly rejected- Investment Corporation of India Ltd. vs. ITO[1982] 1 ITD 880(Bom.) (SB)

·         Estate duty- estate duty paid in respect of inherited property cannot be a part of cost of acquisition/ improvement.

·         Amount paid to tenant- amount paid to a tenant to obtain vacant possession is “cost of improvement”- Nita A. Patel vs. ITO[2010] 128 ITD 24(Mum).

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
50C. Special provision for full value of consideration in certain cases.- (1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government (hereafter in this section referred to as the “stamp valuation authority”) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer.

(2) Without prejudice to the provisions of sub-section (1), where—

(a) the assessee claims before any Assessing Officer that the value adopted or assessed or assessable by the stamp valuation authority under sub-section

(1) exceeds the fair market value of the property as on the date of transfer;

(b) the value so adopted or assessed or assessable by the stamp valuation authority under sub-section (1) has not been disputed in any appeal or revision or no reference has been made before any other authority, court or the High Court,
the Assessing Officer may refer the valuation of the capital asset to a Valuation Officer and where any such reference is made, the provisions of sub-sections (2), (3), (4), (5) and (6) of section 16A, clause (i) of sub-section (1) and sub-sections (6) and (7) of section 23A, sub-section (5) of section 24, section 34AA, section 35 and section 37 of the Wealth-tax Act, 1957 (27 of 1957), shall, with necessary modi-fications, apply in relation to such reference as they apply in relation to a reference made by the Assessing Officer under sub-section (1) of section 16A of that Act.

Explanation 1.—For the purposes of this section, “Valuation Officer” shall have the same meaning as in clause (r) of section 2 of the Wealth-tax Act, 1957 (27 of 1957).

Explanation 2.—For the purposes of this section, the expression “assessable” means the price which the stamp valuation authority would have, notwithstanding anything to the contrary contained in any other law for the time being in force, adopted or assessed, if it were referred to such authority for the purposes of the payment of stamp duty.

(3) Subject to the provisions contained in sub-section (2), where the value ascertained under sub-section (2) exceeds the value adopted or assessed or assessable by the stamp valuation authority referred to in sub-section (1), the value so adopted or assessed or assessable by such authority shall be taken as the full value of the consideration received or accruing as a result of the transfer.

 Understanding Sec 54 & Sec 54F for Capital gains

Sec 54 provides relief from the tax on long term capital gains earned from residential property while Sec 54F covers assets other than this. However, there are certain rules which the assesse has to remember to claim benefits under these sections.Take the case of Rajeev who has invested in a land three years ago. He was amazed to see the appreciation of his investment. Without wasting time he sold the asset fetching handsome returns and bought another land which he expects to deliver him similar, if not more. But the rude shock came to him when he was denied the tax benefit on his gains and has to pay a hefty amount to income tax. The reason was misunderstanding of Sec 54F under which he was claiming the tax exemption.

Here I have discussed some of the rules under the two sections – 54 & 54F where an investor gaining from selling of property or other assets can claim tax exemption.

Sec 54

This is the section for availing tax benefit on long term capital gains arising from a residential property.  Under this section if a residential house is sold after three year of purchase then one can avail tax exemptions on the gains by investing them in following options-

1.      A new residential property either bought within two years or constructed within three years from date of transfer of existing property. In case of buying a new property, the exemption is available even if it is bought within one year before the date of transfer.

2.     There might be  a situation when you would not have decided on a new property but do not want to lock in the money in the bonds. In such instances, the money has to be deposited in a Capital Gains Account Scheme. This is a fixed deposit scheme specifically for long term capital gains earned from properties. The money can be kept there till three years, which is the threshold period for availing tax exemption. Till then you will be required to include the proof of deposit every year while filing your income tax return then only the tax exemption is available.

3.     The entire capital gains will be exempted where the amount of investment in new property or bonds is equal or greater than the capital gains earned.

One of the larger benefit of Section 54 is that one can hold n number of properties  as on the date of transfer and still claim exemption on the gains.

Sec 54F

This section is available to all those assets other than residential houses. So for claiming long term capital gains arising from selling of land, this section is utilized.  Here one can claim relief on the tax liability on capital gains but with following conditions:

·         The options for claiming exemption are the same as under sec 54 .

·         The amount of exemption available is derived as 

    Amount of investment*Capital Gains/Net Consideration

·         One of the primary conditions which differentiate this section from sec 54 is that the assesse can hold only one property other than the new residential property on the date of transfer. Even after three years of purchase of the new property, no new property can be bought else the capital gains become taxable.

·         Thus, if one has made gains form a land then the exemption can be availed under Section 54Fprovided the conditions laid in the section are fulfilled.

·         Unlike Sec 54, here the entire capital gains are exempted when the amount of investment is equal or greater than the net consideration else the proportionate exemption is allowed.

In both Sec 54 & Sec 54F, the exempted property cannot be sold within three years of acquisition else the taxability on gains will arise with respective section clauses. Both these sections are available to property investors for claiming long term capital gains tax exemptions. Apart from these, Capital Gains bonds under Sec 54EC are also available for claiming exemption of tax on long term capital gains earned from long term assets.  But it’s wiser to take the help of an appropriate professional  to utilize any of the sections illustrated here so that you do not face any disappointment later.

 

 HERE are many similarities as well as differences between Section 54 and Section 54 F of the Income Tax Act 1956. This is why a comparison between the two sections is useful. In the earlier issues, we had seen the comparison by way of examples.

Now, we will look at it in a tabular format :

No. Particulars Section 54 Section 54F
1. Asset transferred Residential House

property

 Transfer of a long term capital Asset not being a residential house
2. Type of Capital gain to claim exemption Long term
3. In what asset should the investment be made Residential House Property
4. How to invest Purchase or construction
5. Time limit for construction 3 years from the date of transfer
6. Time limit for purchase 1 year before transfer or 2 years after transfer
7. Amount of exemption Amount of investment. Amount of investment * Capital gains

Net consideration

8. Under which situation there will be no tax on capital gain When the invesment is equal or great than the amount of capital gain When the investment is equal or greater than the amount of Net consideration
9. If the amount is not invested before the date

of filing return, what should be done?

 Deposit in a Capital Gain Deposit Scheme in any specified Bank and enclose the proof of such

deposit with the return of income. (See Note 1)

10. What is the consequence if the full deposit is not utilised? The amount will be taxable in the year of default. (Either if there is withdrawal and the amount is not utilized or at the end of three years of transfer and there is no purchase or construction)
11. Can the person hold any other house property on the date of transfer other than the

exempted asset (due to purchase one year before the date of transfer)?

 Yes. The person can hold any number of house property on the date of transfer. No. The person can hold only one house property other than the new exempted asset, otherwise he cannot claim exemption u/s 54F
12. Can the person purchase a new house property within 1 year from the date of transfer or constructs a new house property from 3 years from date of transfer other than the exempted asset? Yes No. If he does so, he will lose the exemption and he will be taxed in the year in which new asset is purchased

or constructed for the exempted amount as long term capital gain.

13. What is the consequence if the exempted house property is transferred within

three years of acquisition?

 The amount of capital gain exempted from tax on the original asset will be reduced from the cost of acquisition of the new asset The amount of capital gain which is claimed exempted will be taxed as such

in the year in which transfer takes place.

14. Nature of capital gain in case of the above default. Short term Capital gain Long term Capital gain.

Note: The unutilised deposit amount under the Capital Gains Account Scheme, 1988, in the case of an individual who dies before the expiry of the stipulated period cannot be taxed in the hands of the deceased. This amount is not taxable in the hands of legal heirs also, as the unutilised portion of the deposit does not partake the character of income in their hands but is only a part of the estate devolving upon them — Circular No. 743, dated 6-5-1996.

This issue along with the discussions on Section 54 & 54F in the last two issues, will give a comprehensive understanding of these two sections, their similarities and differences.

 Case Study 4 :

Mr. Smart and Mrs. Wise, husband and wife, are regularly assessed to income-tax. They had jointly inherited ancestral land, held by the family for more than forty years, in their native place, on which they have constructed a new house in 1999. Both of them are holding undivided equal shares in the land and building. Mr. Smart intends to sell his half share in the house to Mrs. Wise for a sum of Rs.5 lakhs.

Mr. Smart and Mrs. Wise have sold substantial part of their investments in shares and securities and have earned long-term capital gains of Rs.15 lakhs and Rs.5 lakhs respectively, on the said sale.

Mr. Smart intends to buy a flat for a total sum of Rs.15 lakhs, which is expected to be ready within a period of eighteen months.

They have approached a housing finance company who have agreed to finance Rs.4 lakhs to Mrs. Wise towards her purchase of half share in house at native place and Rs.12 lakhs to Mr. Smart towards purchase of flat in Mumbai.

Mr. Smart and Mrs. Wise have decided to avail of housing finance to the maximum extent available and finance the balance amount for the house out of amount received on sale of shares. The amount left after investment in house would be invested in shares and units of mutual funds.

They seek opinion on the following :

1. Would Mrs. Wise be entitled to benefit of exemption u/s.54F in view of the fact that she is purchasing only half undivided share in a house and also that she is already owning half share in the said house.

2. Would Mr. Smart be entitled to exemption u/s.54 in respect of gain on sale of his share in house at native place though the building was constructed less than three years ago.

3. Would Mr. Smart be entitled to benefit of both S. 54 and S. 54F though the investment of capital gains on sale of two different assets is in a single asset,i.e., flat at Mumbai.

4. Would both of them be entitled to exemption u/s.54 and u/s.54F on whole of the investment in purchase of house, whether out of own funds or borrowed funds.

 

5. Would they be entitled to deduction of interest on housing loan u/s.22 and rebate u/s.88 in respect of repayment of loan even though they have availed of exemption u/s.54 and u/s.54F in respect of the same investment.

Answers to Case Study 4 :

1. S. 54F provides for exemption from taxation of a long-term capital gain arising on transfer of an asset other than residential house, if the assessee has purchased or constructed a residential house within the specified period. A share in a residential house is also a residential house and the assessee would be entitled to benefit of exemption u/s.54F even if a share in the residential house is purchased. The Gujarat High Court was considering a similar situation in CIT v. Chandanben Maganlal, (2000) 245 ITR 182 (Guj.) and it was held that purchase of a share in residential house is equivalent to purchase of a residential house for the purpose of S. 54. In arriving at the said decision, the Court relied on the earlier decision in CIT v. Tikyomal Jasanmal, (1971) 82 ITR 95 (Guj.).

Therefore, Mrs. Wise would be entitled to exemption u/s.54F even though only fifty percent in a residential house has been purchased by her. Further, after amendment by Finance Act, 2000, w.e.f. 1-4-2001, a person is entitled to exemption u/s.54F even if such person holds one residential house at the time of reinvestment.

2. Mr. Smart was owning fifty percent share in land and building which is now being transferred. The period of holding of land would be forty years, as the same has been inherited by him. Though the building is held after construction for less than three years, as the land is held for more than three years, part of capital gains relating to land would be long-term capital gains and only gain in respect of building would be short-term capital gains. Mr. Smart can apportion the capital gain arising on transfer of his fifty per cent share on a scientific basis between land and building and gain relating to land would be long-term capital gains in respect of which he can claim benefit of S. 54/S. 54F. Such bifurcation and treatment is supported by the decision in CIT v. C. R. Subramanian, (2000) 242 ITR 342 (Kar.).

3. S. 54 provides for exemption of long-term capital gain arising on transfer of residential house if the assessee has purchased or constructed a residential house within a specified period. Similarly, S. 54F provides for exemption in respect of long-term capital gain arising on transfer of asset other than a residential house. It is possible to claim exemption u/s.54 and u/s.54F in respect of investment in one residential house, however the amount of deduction cannot exceed total amount invested in purchase of new house.

4. Neither S. 54 nor S. 54F require that the sale consideration or capital gain itself should be reinvested in purchase of new residential house. It is not necessary that the same amount need to be reinvested. It only provides that there has to be purchase of a new house. The source of investment is not necessarily to be the same amount as is realised on sale of the earlier asset. Unlike erst-while S. 80C, which required that investment had to be made out of income, no such requirement has been prescribed in S. 54/S. 54F. Rather the very fact that investment can be prior to sale clearly establishes that the source of investment is not necessarily to be out of income which is exempted. The issue has been considered by the Kerala High Court in ITO v. K. C. Gopalan,(1999) 107 Taxmann 591 (Ker.) and it has been held that it is not necessary that sale consideration itself should be utilised in purchase of a new house.

However, care should be taken that provisions of Ss.(2) of S. 54 and Ss.(4) of S. 54F do not apply, i.e. investment in new asset is made prior to the specified time so that one may not be called upon to deposit the amount in specified account and invest further amounts out of the said account.

5. S. 24(3) allows deduction of interest paid on amount borrowed for purchase of a residential house. S. 88(2)(xv) provides for rebate from tax payable, in respect of repayment of amount borrowed for purchase from a specified financial institution. As both Mr. Smart and Mrs. Wise have borrowed money for purchase of a residential house, they would be entitled to the said deduction and rebate, subject to other conditions being satisfied.


Determination of exemption u/s.54F in case where S. 50C is applicable


Subject : Income Tax Law
Month-Year : Oct 2003
Topic : Determination of exemption u/s.54F in case where S. 50C is applicable
Article Details :

Facts :

1. The querist is an individual. The querist had inherited ancestral land at Panvel, which has been sold during the financial year 2002-03 for a consideration of Rs.43,75,000/-. The purchaser has paid stamp duty on the conveyance and for that purpose land had been valued at Rs.57,50,000/-. The querist has reinvested a sum of Rs.20,00,000/- in purchase of a residential house and the querist would be entitled to exemption u/s.54F on the same.

2. The querist has computed capital gains arising on sale of land as follows :

Amount                                                   Amount

Rs.                                                             Rs.

Total sale consideration                             43,75,000

Less : Indexed cost of acquisition                10,50,450

Value as on 1-4-1981 being

higher than cost is adopted                        2,35,000

Cost inflation index for 2002-03                         447

Capital gains                                            33,24,550

Less : Exemption u/s.54F                          15,19,794

33,24,550 * 20,00,000                             43,75,000

Capital gains chargeable to tax                  18,04,756

3. The querist has been advised that new provisions of S. 50C would be applicable to its case and accordingly its sale value would be adopted at Rs.57,50,000/- instead of Rs.43,75,000/- and capital gains would be calculated as follows :

Amount                                                                     Amount

Rs.                                                                                Rs.

Deemed sale consideration                                         57,50,000

Less : Indexed cost of acquisition                                10,50,450

Value as on 1-4-1981 being

higher than cost is adopted                                         2,35,000

Cost inflation index for 2002-03                                           447

Capital gains                                                              46,99,550

Less : Exemption u/s.54F                                            16,34,626

46,99,550 * 20,00,000                                                57,50,000

Capital gains chargeable to tax                                    30,64,924

Queries :

On the above facts, the querist has raised following queries for opinion :

1. Whether the querist is bound to accept the above computation and whether it can dispute the same ? If so, what is the procedure ?

2. Whether the above computation is correct even if sale consideration has to be substituted as per S. 50C ?

Opinion :

1. S. 50C introduced by the Finance Act, 2002 is an effort to revive the spirit of old S. 52(2), which had become redundant after the Apex Court’s landmark decision in the case of K. P. Varghese v. ITO, 131 ITR 597 (SC) and then withdrawn from the statute book. An effort was made again to bring a similar provision w.e.f. 1st April 1998 but due to vehement opposition, the same was withdrawn before it could be passed.

2. In a nutshell, S. 50C provides that where as a result of transfer of land or building or both, the consideration declared to be received or accruing as a result of such transfer is less than the value adopted or assessed by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall be deemed to be the full value of the consideration and capital gains shall be computed accordingly u/s.48. However, if the value adopted or assessed for stamp duty purposes is revised in any appeal, revision or reference, the assessment made shall be amended to re-compute the capital gains by taking the revised value as the full value of the consideration.

3. Coming to the facts of the case of the querist, it has transferred land after 1-4-2002 and therefore provisions of S. 50C would be applicable to its case. Accordingly, in computation of capital gains u/s.48, stamp duty valuation of Rs.57,50,000/- will have to be adopted as full value of sale consideration instead of agreement value of Rs.43,75,000/-.

4. It is not clear from the facts as to whether the purchaser has disputed stamp duty valuation under the relevant law, but if he has disputed the same, then the value ultimately determined in such proceedings would be adopted as sale consideration.

5. If the above computation is not acceptable to the querist, it can take recourse to procedure prescribed u/s.50C(2). It provides that where the assessee claims before the Assessing Officer that :

(i) The value adopted or assessed for stamp duty exceeds the fair market value of the property as on the date of its transfer, and

(ii) The value so adopted or assessed for the purpose of stamp duty has not been disputed in any appeal or revision or no reference has been made before any other authority, Court or a High Court,

the Assessing Officer may refer the valuation of the capital asset to a Department Valuation Officer.

To such reference to the Department Valuation Officer, relevant provisions of the Wealth-tax Act shall, with the necessary modifications, apply. If the fair market value determined by the Valuation Officer is less than the value adopted for stamp duty purposes, the Assessing Officer may take such fair market value to be the full value of the consideration. However, if the fair market value as determined by the Valuation Officer is more than the value adopted or assessed for stamp duty purposes, the Assessing Officer shall adopt the value adopted or assessed for stamp duty purposes as full value of consideration.

6. Though wordings of Ss.(2) of S. 50C seem to suggest that such reference can be made only if valuation has not been disputed under relevant law, the querist can contend that stamp duty has been borne by the purchaser and therefore it has no recourse under stamp duty law to dispute the valuation and therefore it has a right to contest the same in his own income-tax proceedings. The querist may along with his return of income, make a claim for reference to Valuation Officer.

7. As regards the working of capital gain, even if sale consideration is to be substituted by Rs.57,50,000/- for the purposes of S. 48, in determination of amount of deduction u/s.54F, such substitution is not required to be made. S. 50C requires substitution of stamp duty valuation only for the purposes of S. 48 and in the absence of it being made applicable to all other provisions, it would not apply to S. 54F. S. 54F provides for exemption from capital gains in case of investment in residential house and the investment has to be in proportion to net consideration. The term net consideration has been defined by Explanation to Ss.(1) of S. 54F as follows :

"Explanation : For the purposes of this Section :

‘net consideration’, in relation to the transfer of a capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer."

8. In view of the specific definition u/s.54F and in absence of specific provision making S. 50C applicable to S. 54F, in determination of proportionate deduction available u/s.54F, actual net consideration has to be considered. Therefore even if S. 50C valuation is correct, the querist would be entitled to deduction of Rs.21,48,365/- u/s.54F and not Rs.16,34,626/- as computed in second table above.

Opinion :

In view of the above discussion, opinion on queries raised is as follows :

1. The querist can dispute the computation by following the procedure prescribed in Ss.(2) of S. 50C.

2. The querist would be entitled to deduction u/s.54F of Rs.21,48,365/-.

 

 

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