Income Under the Head Capital Gains Notes, Income Tax Law and Practice Notes, B.Com 3rd Sem CBCS Pattern

Q.3. What do you mean by “Transfer” of capital asset? State the transactions which are not regarded as transfer.

Ans: Transfer basically means the act by which a person conveys property to one or more persons. Transfer means effective conveyance of the capital asset to the transferee. As per Section 2(47), ‘transfer’ includes:

(i) Sale or exchange of the asset: A sale takes place when title in the property is transferred for a price. While an exchange takes place when title in one property is passed in consideration of the title in another property. A sale can be said to have taken place on the date of execution of the sale deed and not on the date of the agreement to sell.

(ii) Relinquishment of the asset: Relinquishment of a capital asset arises when the owner surrenders his rights in a property in favour of another person. For example, the renunciation of right to subscribe to shares in a company under a ‘Rights Issue’ to a third person.

(iii) Extinguishment of any right in the asset: This covers ever possible transaction which results in destruction, annihilation, extinction, termination, cessation, or cancellation of all or any bundle of rights in a capital asset.

(iv) Compulsory acquisition of the asset under any law;

(v) Conversion of the asset into stock-in-trade of a business carried on by the owner of the asset;

(vi) Maturity or redemption of a zero coupon bond issued by an infrastructure capital company/fund or a public sector company on or after 1.6.2005 and notified by the Central Government, in respect of which no payment or benefit is received or receivable before maturity/redemption;

(vii) Handing over the possession of an immovable property in part performance of a contract for the transfer of that property;

(viii) Transactions involving transfer of membership of a group housing society, company, etc., which have the effect of transferring or enabling enjoyment of any immovable property or any rights therein;

(ix) Distribution of assets on the dissolution of a firm, body of individuals or association of persons;

(x) Transfer of a capital asset by a partner or member to the firm or AOP, whether by way of capital contribution or otherwise; and

(xi) Transfer, under a gift or an irrevocable trust, of shares, debentures or warrants allotted by a company directly or indirectly to its employees under the Employee’s Stock Option Plan or Scheme of the company as per Central Govt. guidelines.

Transactions not regarded as transfer

In the following transactions although there is a transfer, but these are not considered to be transfer for purposes of capital gains:

(i) where the assets of a company are distributed to its shareholders on liquidation of a company

(ii) any distribution of capital assets on the total or partial partition of HUF

(iii) any transfer of a capital asset under a gift or will or an irrevocable trust

(iv) any transfer of a capital asset

a)  by a company to its 100% subsidiary company or

b)  by a wholly owned subsidiary to its holding company

c)  provided the transferee company is an Indian company

(v) any transfer in a scheme of amalgamation if the amalgamated company is an Indian company

(vi) any transfer in a scheme of amalgamation of shares held in an Indian company by the amalgamating foreign company to the amalgamated foreign company

(vii) any transfer, in a demerger, of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company

(viii)  any transfer in a business reorganisation, of a capital asset by the predecessor co-operative bank to the successor co-operative bank

(ix) any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is made in consideration of demerger of the undertaking

(x) any transfer by a shareholder, in a scheme of amalgamation, of 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 amalgamated company, and

(b)   the amalgamated company is an Indian company

(xi)     any transfer of bonds or GDR of a public sector company purchased in foreign currency, made outside India by a non-resident to another non-resident

(xii)    any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificates in any form, of a company into shares or debentures of that company or any transfer by way of conversion of foreign currency exchangeable bonds into shares or debentures of any company.

(xiii)  any transfer of a capital asset being land of a sick industrial company made under a scheme prepared and sanctioned under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 where such sick industrial company is being managed by its workers' co-operative.

(xiv)  any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, provided the following conditions are satisfied:

(a)   all the assets and liabilities of the firm or AOP/BOI become the assets and liabilities of the company;

(b)   all the partners of the firm become the shareholders of the company in the same proportion of their capital ratio

(c)    the partners of the firm receive only shares in the company as consideration

(d)   partners have at least 50% shareholding/ voting power in the company at least for a period of 5 years from the date of the succession

(xv)   transfer of capital assets from a sole proprietary concern to the company in case of conversion provided conditions stated in above point are satisfied.

It may be observed that the above transactions are not treated as transfer for purposes of capital gains.

Q.4. What is cost of acquisition and cost of improvement? How cost of acquisition is computed?

Ans: Cost of acquisition is the amount for which the capital asset was originally purchased by the assessee. Expenditure incurred in connection with such purchase, exchange or other transaction e.g. brokerage paid, registration charges and legal expense, is added to price or value of consideration for the acquisition of the asset. Interest paid on moneys borrowed for purchasing the asset is also part of its cost of acquisition. In case of depreciable asset of an undertaking engaged in generation or generation and distribution of power, its written down value shall be taken as its cost of acquisition.

Cost of improvement: Cost of improvement means all capital expenditure incurred in making additions or alternations to the capital asset, by the assessee (or the previous owner). Betterment charges levied by municipal authorities also constitute cost of improvement. Compensation paid to tenants for getting vacant possession amounts to cost of improvement. However, only the capital expenditure incurred by the assessee on or after 1.4.2001, is to be considered and that incurred before 1.4.2001 is to be ignored. Improvement should be to the capital asset; expenditure incurred on improving the owner’s title to the asset is not being included in ‘cost of improvement’. In case of in tangible assets like goodwill, right to manufacture, etc. cost of improvement shall be nil.

Computation of cost of acquisition

In case of a transfer of a capital asset the cost of acquisition is taken as below:

1)      Cost of acquisition in relation to goodwill of a business, tenancy rights, route permits, loom hours, right to carry on business, patents, copyright or trademark will be the amount of purchase price, if purchased and in any other case cost of acquisition will be nil.

2)      If a capital asset is a share or shares in an amalgamated company which is an Indian company, the cost of acquisition of the shares shall be deemed to be the cost of acquisition to the buyer of the share or shares in the amalgamating company.

3)      The cost of acquisition of the shares in a resulting company (i.e. after a demerger) shall be the amount same as the cost to old shareholders in the demerged company in the same proportion as the net book value of the assets transferred in a demerger bears to the net worth of the demerged company.

4)      In case of gift, will, inheritance of an asset by an individual the cost to the previous owner would be the cost of acquisition for the current owner.

5)      In case of assets received by a member on liquidation of the company, the cost of acquisition is the fair market value of such asset on the date of distribution

6)      In case of conversion of shares into debentures, the cost of acquisition is that part of the cost of debentures in relation to which such shares are acquired by the individual.

7)      In case of purchase of depreciable assets, the cost of acquisition is the opening written down value as on the first day of the financial year in which the asset is purchased.

8)      In case of right shares, the cost of acquisition is the cost to purchase the right to own the shares.

9)      In case of bonus shares, the cost of acquisition is NIL.

10)   Cost of acquisition of assets acquired before 1-4-1981 will be either the actual cost of acquisition or  the fair market value of the asset as on 1-4-1981  which is completely at the option of the assessee.

11)   Where the capital asset becomes the property of the assessee under the mode specified u/s 49(1) and the previous owner acquired the asset before 1-4-1981, then cost of acquisition shall be deemed to be the higher of the cost to the previous owner, or the fair market value of the asset as on 1-4-1981

Q.5. Write a brief note on exempted capital gain.

Ans: Certain Capital gains arising on transfer of capital assets has been exempted from tax. These specific exemptions can broadly be classified into the following two categories:

a)    Capital Gain exempted u/s 10.

b)   Capital Gain exempted u/s 54.

a) Capital gains exempted u/s 10: The following capital gains are exempted from tax:

1.    Capital gains arise from transfer of equity shares held for more than 12 months.

2.    Capital gains arise on compulsory acquisition of urban agricultural land.

3.    Capital gains arise on transfer of assets by an undertaking engaged in the business of generation, transmission or distribution of power.

b) Capital Gains Exempted from tax

1. Capital Gains from Transfer of a Residential House: [Sec.54]: Any long-term capital gains arising on the transfer of a residential house (including self-occupied house), to an individual or HUF, will be exempt from tax if the assessee has within a period of one year before or two years after the date of such transfer purchased, or within a period of three years constructed, two residential house in India. This exemption is allowed only once in the lifetime of the assessee provided amount of capital gains does not exceed Rs. 2 crores.

Amount of exemption: The amount of exemption available is equal to the amount so utilised or the amount of capital gain, whichever is less. If the whole or any part of the capital gain cannot be so utilised for acquisition of a residential house before filing the return, the same should be deposited in Capital Gains Account Scheme, 1988 in order to claim exemption, before the due date for furnishing the return.

For availing this exemption, the assessee must not transfer the new house, within a period of three years from the date of its purchase or construction, as the case may be. Otherwise the exemption allowed under this section shall be reduced from the cost of the new house, in computing the capital gains arising there from.

2. Capital Gains from Transfer of Urban Agricultural Land: [Sec.54B]: Any capital gain (both short-term and long-term) arising to an individual or H.U.F. from transfer of any urban land, which was used by the assessee or his parent (in case of individual assessee) for agricultural purpose in the immediately preceding two years, shall be exempt from tax, if the assessee purchases within 2 years from the date of such transfer, any other land (to be used for agricultural purposes). Other-wise, the amount can be deposited under Capital Gains Account Scheme, 1988 before the due date for furnishing the return.

Amount of exemption: The amount of exemption allowable is equal to the amount of capital gain or the cost of new agricultural land purchased (including the amount deposited in Capital Gains, Account Scheme), whichever is less. The new land is not to be transferred for a period of 3 (three) years from the date of its purchase; otherwise the amount of exemption allowed earlier shall be withdrawn, by reducing this amount from the case of the new land, in computing the capital gains arising from its transfer.

3. Capital Gains from Compulsory Acquisition of land and building of Industrial Undertaking: [Sec. 54D]: Any capital gain arising from the transfer by way of compulsory acquisition of land or building of an industrial undertaking, shall be exempt, if the assessee purchases/ constructs within three years from the date of compulsory acquisition, any land or building forming part of industrial undertaking. Otherwise, the amount can be deposited under the ‘Capital Gains Accounts Scheme, 1988’ before the due date for furnishing the return.

Amount of exemption : The amount of capital gain exempt shall be equal to the capital gain or the cost of new land or building purchased or constructed (including the amount deposited under the CGA scheme), whichever is less. The new land or building purchased or constructed, as the case may be, is not to be transferred for a period of three years from its purchase or construction, otherwise the exemption allowed shall be withdrawn, by reducing it from the cost of the new land or building, in computing the capital gains arising from their transfer.

4. Capital Gains invested in Certain Bonds: [Sec.54EC]: Any long-term capital gain arising from transfer [of land or building or both] that takes place on or after 1.4.2000, shall be exempt if the whole of the amount of such capital gain is invested in long-term specified assets i.e. bonds issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation Ltd., or any other notified bonds within a period of six months from the date of transfer. The amount of investment in long-term specified assets by an assessee during a financial year shall not exceed Rs.50 lakhs.

5. Capital Gains invested in Units of a Notified Fund for Financing Start-Ups: [Sec.54EE]: Any long-term capital gain shall be exempt if the whole of the amount of such capital gain is invested, within a period of six months from the date of transfer, in long-term specified assets i.e. units issued up to 31.3.2019 by a notified fund set up for financing startups. The amount of investment in long-term specified assets by an assessee during a financial year shall not exceed Rs.50 lakhs.

6. Capital Gains from an Asset other than Residential House: [Sec. 54F]: Any long-term capital gain arising to an individual or HUF, from the transfer of any asset, other than a residential house, shall be exempt if the whole of the net consideration is utilised within a period of one year before or two years after the date of transferor for purchase, or within 3 years in construction, of one residential house in India.

Amount of exemption : If, however, only a part of net consideration is so utilised, the amount of exemption shall be equal to: (Capital Gains × New Residential House)/ Amount of Net Consideration

Further, if the amount cannot be so utilised before filing the return, then in order to avail of the exemption, it may be deposited under the Capital Gains Accounts Scheme, 1988 before the due date for filing the return u/s 139.

7. Capital Gains from Shifting of an Industrial Undertaking from Urban Area to Rural Area [Sec.54G] : Any capital gains arising from transfer of machinery, plant, land or building or any rights therein, in the course of shifting of an industrial undertaking in urban area, shall be exempt, if the assessee has, within a period of 1 year before or 3 years after the date of transfer, purchased new plant or machinery, acquired or constructed land or building, shifted the original asset and transferred the establishment, to a rural area.

Amount of exemption : The amount of exemption shall be equal to the amount so utilised or the amount of capital gain, whichever is less.

8. Capital Gains from Shifting of an Industrial Undertaking from Urban Area to SEZ: [Sec.54GA]: Any capital gains arising from transfer of machinery, plant, land or building or any rights therein, in the course of shifting of an industrial undertaking in an urban area, to any Special Economic Zone, shall be exempt, if the assessee has, within a period of 1 year before or 3 years after the date of transfer, purchased new plant or machinery, acquired or constructed land or building, shifted the original asset and transferred the establishment, to the SEZ, or incurred expenses on purposes specified in a scheme framed by the Government in this regard.

Amount exemption : The amount exempt shall be equal to the amount so utilised or the amount of capital gain, whichever is less. If the capital gain cannot be so utilised, then it should be deposited under Capital Gains Accounts Scheme, to avail the benefit, before the due date of filing the return.

9. Capital Gain from Transfer of a Residential Property invested in a manufacturing small or medium enterprise: [Sec. 54GB]: Any long-term capital gain arising to an individual or HUF, from the transfer of a residential property (house or plot of land) effected upto 31.3.2017 (up to 31.3.2019 in case investment is made in an eligible start-up), shall be exempt if the net consideration is invested in the equity of a new start-up SME company or in an eligible start-up in the manufacturing sector or in an eligible business, which is in turn utilised by such company for the purchase of new plant and machinery.

10. Capital Gain on Compulsory Acquisition of Agricultural Land: [Sec. 10(37)]: Any capital gain arising to an individual/HUF on compulsory acquisition of an agricultural land situate in urban areas, where the compensation/consideration is received by the assessee on or after 1.4.2004, provided, the land was being used for agricultural purposes by the HUF/individual or his parent(s), during the period of two years immediately before acquisition. The exemption would be allowed even if agricultural land was not cultivated by the assessee himself but by hired labourer or through his family member.

Q.6. Write short notes on:
a) Full value of consideration and Transfer expenses

Ans: The total amount, received by the assessee from the asset transferred by him, is known as full value of consideration. This consideration can be in cash or in kind. If it is received in kind, then the fair market value of such asset is taken as full value of consideration. Even if the full consideration is received is the same, the entire value of consideration is considered for computing the capital gain.

Expenditure, which is necessary for the purpose of transfer, is considered as expenditure incurred wholly and exclusively in connection with transfer of capital asset. Expenditure, which is wholly and exclusively in connection with transfer of a capital asset, is deductible from the full value of consideration. Transfer expenses include brokerage paid for arranging the deal, legal expenses incurred for preparing conveyance deed and other documents, cost of inserting advertisement in newspapers for sale of the asset and commission paid to auctioneer. However, it is necessary that the expenditure should have been incurred wholly and exclusively in connection with the transfer. An expenditure incurred primarily for some other purpose but which has helped in effecting the transfer does not qualify for deduction. For instance, salary of an employee who helps in maintenance of capital assets, carries out works in connection with transfer, maintains accounts for the capital assets and capital gains, etc., is not deductible.

b) Indexed cost of acquisition and improvement

Ans: For computing long-term capital gains, ‘Indexed Cost of Acquisition’ and ‘Indexed Cost of Improvement’ are required to be deducted from the full value of consideration of the capital asset. Both these costs are thus required to be indexed with respect to the Cost Inflation Index pertaining to the year of transfer. Accordingly, ‘Indexed Cost of Acquisition’ and ‘Indexed Cost of Improvement’ shall be computed as under:

Indexed Cost of Acquisition = (Cost of Acquisition x Cost Inflation Index for the year of transfer)/ Cost Inflation Index for the year of acquisition or 2001-02, whichever is later

Cost Inflation Index: = (Cost of Acquisition x Cost Inflation Index for the year of transfer)/ Cost Inflation Index for the year of acquisition or 2001-02, whichever is later

Index w.e.f. 1.4.2021 (i.e. A.Y. 2021-22):

Cost of acquisition and cost of improvement shall not be indexed, in case of:

(a) Shares in, or debentures of, an Indian company acquired by a non-resident in foreign currency.

(b) Equity shares or units of an equity –oriented mutual fund/a business trust,

(c) Bonds and debentures, except (i) capital indexed bonds issued by the Govt. and

(ii) Sovereign Gold Bonds issued under the Sovereign Gold Bonds Scheme, 2015.

c) Taxability of Capital gains

Ans: Short-Term Capital gain: Short-term Capital Gains are included in the gross total income of the assessee and after allowing permissible deductions under Chapter VI-A, the total income is subject to tax at the rates in force. However, short-term capital gains from transfer of equity shares/units of equity –oriented mutual fund or units of a business trust, subjected to Securities Transaction Tax, shall be taxable at a flat rate of 15%.

Long term Capital gain: Long-term Capital Gains are subject to a flat rate of tax @ 20%. However in respect of long-term capital gains arising from transfer of listed securities, (other than equity shares and units of equity-oriented mutual fund) or zero coupon bonds, tax shall be payable @ 20% of the capital gain computed after allowing indexation benefit or @ 10% of the capital gain computed without giving the benefit of indexation, whichever is less.

Besides, long-term capital gains arising to non-residents/foreign companies from transfer of unlisted securities or shares of a closely held company, computed without giving the benefit of indexation and conversion of currency u/s 48 First and Second Provisos, shall be taxable @ 10%.

d) Set off and carry forward of capital gains

Ans: 

a) As per section 70, LTCL can be adjusted only against LTCG. While STCL can be adjusted either against STCG or LTCG.

b) As per section 71, the net capital loss, if any, cannot be adjusted against other heads of income.

c) As per section 74, the capital loss can be carried forward for next 8 assessment years. STCL can be adjusted either against STCG OR LTCG, but LTCL can be adjusted only against LTCG. 

d) Return of income (loss) must be submitted in time limits.

e) Capital Gains on transfer of depreciable asset (Sec. 50)

f) Capital Gains in case of Slump Sale

Ans: A ‘slump sale’ means the transfer of an undertaking for a lump sum consideration without assigning values to the individual assets and liabilities. [Sec. 2(42C)] Capital gain arising in case of slump sale shall be taxable as ‘long-term capital gain’ in the previous year in which the transfer took place. However, where the undertaking was held by the assessee for not more than 36 months, the capital gain will be taxable as short-term.