Tuesday, May 05, 2015

Income under the Head Capital Gains

Q.1. What is capital gain? How it is computed? What are the basis of chargeability of capital gain under Income Tax Act. 1961?
Ans: Capital Gain: Capital gain is the gain which arises from the transfer of a capital asset. Any profit or gain, which arises during a previous year, is chargeable under the head "capital gains" under Section 45. For a gain to be charged under the head "capital gain," it should arise due to a transfer of a capital asset. Such a profit or gain should not be exempt from tax under sections 54, 54B, 54D, 54EC, 54ED, 54FD, and 54G of Income Tax Act.

TYPE OF CAPITAL GAINS
a)      Long term capital gains:  When a capital asset is transferred by an assessee after having held it for at least 36 months, the capital gains arising from   this transfer is known as Long Term Capital Gains. In case of shares of a company or unit of UTI or a unit of a Mutual   Fund, the minimum period of holding for long term capital gains to arise is 12 months.
b)      Short term capital gain: If the period of holding of capital asset before transfer is less than 36 months, the capital gains arising from such transfer are known as Short Term Capital Gains.

Mode of Computation of Capital Gain [Sec. 48]

Computation of Short-term Capital Gains
A. Full value of consideration
Less:(a) Expenditure incurred in such a transfer
( b)Cost of acquisition
(c) Cost of improvement
B. Gross short-term capital gains (A – (a) – (b) – (c))
C. Less: Exemption, if available, u/s 54B/54D/54G/54GA
D. Taxable Short-term capital gains (B – C)
Computation of Long-term Capital Gains
A. Full value of consideration
Less:(a) Expenditure incurred in such a transfer
( b)Indexed Cost of acquisition
(c) Indexed Cost of improvement
B. Gross short-term capital gains (A – (a) – (b) – (c))
C. Less: Exemption, if available, u/s 54B/54D/54G/54GA
D. Taxable Long -term capital gains (B – C)
Note: No deduction shall be allowed on account of securities transaction tax. (Sec. 48)

Basis of Charge of Capital Gains
Any profits or gains arising from the transfer of a capital asset effected in the previous year, shall be chargeable to income-tax under the head 'Capital Gains' and shall be deemed to be the income of the previous year in which the transfer took place unless such capital gain is exempt u/s 54, 54B, 54D, 54EC, 54F, 54G or 54GA. The following are the essential conditions for taxing capital gains:
a)      there must be a capital asset;
b)      the capital asset must have been transferred;
c)       there must be profits or gains on such transfer, which will be known as capital gain;
d)      such capital gain should not be exempt u/s 54, 54B, 54D, 54EC, 54F, 54G or 54GA.

Q.2. What do you mean by capital asset? What are its types?
Ans: Meaning Capital Assets : Under section 2(14), property of any kind whether movable assets, immovable assets, tangible-intangible assets, incorporated rights, held by any assessee, is a capital asset for the purpose of Income Tax Act. However, the following assets are excluded from the definition of capital assets:
a)      Any stock in trade, consumable stores or raw material, held for the purposes of business or profession.
b)      Personal effects of the assessee, i.e. 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.
c)       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 1000 or more or (b) n any notified area.
d)      6.5 % gold bonds, 1977 or 7% Gold bonds, 10980 or National Defense Gold Bonds, 1980,issued by the Central Government.
e)      Special Bearer Bonds 1991.
f)       Gold Deposit Bonds, issued under gold Deposit Scheme, 1999.

Types of Capital Assets: Capital assets are of two types
a)      Short-term capital asset
b)      Long-term capital asset
a)      Short-term capital asset [Section 2(42A)]: A capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer is known as a short term capital asset. However, the following assets shall be treated as short-term capital assets if they are held for not more than 12 months (instead of 36 months mentioned above) immediately preceding the date of its transfer:
a.       Shares held in a company.
b.      Any other security listed in a recognised stock exchange in India.
c.       Units of the Unit Trust of India or units of a Mutual Fund.
d.      Zero coupon bond.
b)      Long-term capital asset [Section 2(29A)]: It means a capital asset which is not a short-term capital asset.

Q.3. What do you mean by “Transfer” of capital asset? State the transactions which are not regarded as transfer.
Ans: Meaning of Transfer: Transfer, in relation to capital asset, includes:
(i)      the sale, exchange or relinquishment of the asset; or
(ii)    the extinguishment of any rights therein; or
(iii)   the compulsory acquisition thereof under any law; or
(iv)  in a case where the asset is converted by the owner thereof into, or is treated by him, as stock-in-trade of a business carried on by him, such conversion or treatment; or
(v)    the maturity or redemption of zero coupon bonds; or
(vi)  any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract; or
(vii) any transaction which has the effect of transferring, or enabling the enjoyment of any immovable property.

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? How it is computed?
Ans: Cost of acquisition Cost of Acquisition (COA) means any capital expense at the time of acquiring capital asset under transfer, i.e., to include the purchase price, expenses incurred up to acquiring date in the form of registration, storage etc. expenses incurred on completing transfer.

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: Following capital gains are exempted from tax:
a. Compensation received on compulsory acquisition of agricultural urban land on or after 1 – 4 – 2004:
Ø  For individual and HUF only
Ø  Such land has been used for agricultural purposes during the preceding two years by such individual or a parent of his or by such HUF.
b. Exemption of long-term capital gain arising from sale of shares and units:
Ø  Such equity shares are sold through recognised stock exchange,
Ø  Whereas units of equity oriented fund may either be sold though the recognised stock exchange or may be sold to the mutual fund.
Ø  Such transaction is chargeable to securities transaction tax.

c. Exemption of capital gains under sections 54, 54B, 54D, 54EC, 54F, 54G and 54GA
Sec.
Assessee to whom allowed
Conditions to be satisfied
Quantum of exemption
54
Individual/ HUF
Ø Long Term Residential house Property income of which is chargeable under the head 'Income from house property'.
Ø Purchase of another residential house should be within one year before or 2 years after, or construction should be within 3 years after the date of transfer.
Actual amount invested in new asset or the capital gain whichever is less.
54B
Individual
Ø Transfer (excluding compulsory acquisition) should be of urban agricultural land.
Ø It must have been used in the 2 years immediately preceding the date of transfer for agricultural purposes either by the assessee or his parent.
Ø Another agricultural land should be purchased within 2 years after the date of transfer.
Actual amount invested in new asset or the capital gain whichever is less.
54D
Any assessee which is an industrial undertaking
Ø There must be compulsory acquisition.
Ø The property compulsorily acquired should be land and building forming part of an industrial undertaking.
—do—


Ø The asset must have been used in the 2 years immediately preceding the date of transfer of the assessee for the purpose of the business of the undertaking.
Ø Within a period of 3 years after the date of compulsory acquisition any other land or building should be purchased or constructed for the use of existing or newly set up industrial undertaking.

54EC
Any assessee
Ø The asset transferred should be a long-term capital asset
Ø Within a period of 6 months after the date of transfer, the capital gain must he invested in the specified assets i.e. bonds redeemable after 3 years issued on or after 1-4-2007 by NHAI & RECL
Actual amount invested subject to maximum Rs. 50 lakhs in new asset or the capital gain whichever is less.
54F
Individual/ HUF
Ø The asset transferred should be a long-term capital asset, not being a residential house.
Ø Within a period of 1 year before or 2 years after the date of transfer, a residential house should be purchased or constructed within a period of 3 years after the date of transfer.
If the cost of the new residential house is not less than the net consideration then the whole of the capital gain. Otherwise, LTCG ´


Ø The assessee should not own more than one residential house on the date of transfer.



Ø The assessee should not within a period of 2 years purchase or should not within a period of 3 years construct any residential house other than the new asset.

54G
Any assessee being an industrial undertaking
Ø Machinery, plant, building, or land used for the business of an industrial undertaking situated in an urban area should have been transferred.
Ø Transfer should be due to shifting to any area other than an urban area.
Ø Within a period of 1 year before or 3 years after the date of transfer purchased machinery, plant or acquired building or land or constructed building and completed shifting to the new area.
If the cost of the new assets and expenses incurred for shifting are greater than the capital gain, the whole of such capital gain. Otherwise capital gain to the extent of the cost of the new asset.
54GA
Any assessee being an industrial undertaking
Ø Machinery, plant, building, or land used for the business of an industrial undertaking situated in an urban area should have been transferred.
Ø Transfer should be due to shifting to any Special Economic Zone whether developed in any urban area or any other area.
Ø Within a period of 1 year before or 3 years after the date of transfer purchased machinery, plant or acquired building or land or constructed building and completed shifting to the new area.
If the cost of the new assets and expenses incurred for shifting are greater than the capital gain, the whole of such capital gain. Otherwise capital gain to the extent of the cost of the new asset.

Capital Gain Scheme: If the new asset is not acquired under sections 54, 54B, 54D, 54F, 54G and 54GA or the full amount could not be invested upto the due date of furnishing the return of income, the assessee can deposit the desired amount under the Capital Gain Scheme on or before the due date of return and thus can acquire the asset within the stipulated time out of money withdrawn from such scheme at a later date. In the case of section 54EC the Capital Gain Scheme is not applicable.

Q.6. Write short notes on:

a) Full value of consideration
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. Examples of deductible expenses are: Brokerage or commission, paid for securing a purchase, cost of stamp, registration fees borne by vendor, litigation expenditure for obtaining compensation for the compulsory acquisition of land etc.

b) Cost of improvement
Ans: Any expenditure incurred, by which the value of the capital asset is increased, is considered is cost of improvement. Any capital expenditure, incurred by an assessee for making any additional improvement to the capital asset, is considered as cost of improvement. Any expenditure, incurred to protect or complete the title to the capital asset, is also considered as cost of improvement and is deducted while computing the capital gain. However, any cost of improvement, incurred before April 1, 1981, is not taken into consideration. In other words, any capital expenditure, incurred on improvement of a capital asset before April 1, 1981 is not considered and is taken as equal to zero.

c) Taxability of Capital gains
Ans: a) Tax on STCG in Case of Capital Assets other than Equity shares and units of equity oriented fund: Capital gain income from assets held one year or less is taxed at the ordinary income tax rates in effect for the year, ranging from 10% to 35%.
b) Tax on STCG in case of equity shares and units of equity oriented fund Section 111A: Such gains are taxable only when Such transaction is chargeable to securities transaction tax and Transferred through a recognised stock exchange. Tax @ 15 % is charged on such capital gains. No deduction under Chapter VI-A (sections 80C to 80U) shall be allowed from such income.
c) Tax on long term capital gains Section 112: Long-term capital gain on shares which are subject to STT is exempted u/s 10(38) but other gains are taxable at a rate of 20%. Long-term capital gain is taxable at the special rate of 20% but the tax payable by the assessee on long-term capital gain from securities listed on any recognised stock exchange in India or units of UTI or Mutual Funds Covered under section 10(23D) and Zero Coupon Bonds shall be minimum of the following 2 amounts:
·         Tax @ 20% on long-term capital gains computed after indexation of cost of such shares, securities, units or bonds; or
·         Tax @ 10% on long-term capital gains computed without indexation of its cost.

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.

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