C.A Yogesh Kesariya

Capital GainMSU PG DEPLOMA

C.A Yogesh Kesariya

• FOLLOWING CONDITIONS MUST BE SATISFIED TO CONFIRM CHARGEBILITY:-

1. There is a capital asset.2. Assessee should transfer the capital asset.3. Transfer of capital assets should take place during the

previous year.4. There should be gain or loss on account of such transfer

of capital asset.5. Such gain should not be exempt under section 54, 54B,

54EC, 54F, 54G or 54GA .If aforesaid conditions are satisfied, capital gain shall be arise and taxed in respective previous year.

BASIS OF CHARGE

C.A Yogesh Kesariya

Capital assets means any property held by assessee will not include following:1. Stock in trade held for business.2. Agricultural land in India not in urban area i.e., an area with population more than 10,000.3. Items of personal effects, i.e., personal use excluding: i-Jewellery, precious stones, iii-Archaeological collections, Drawings, Paintings, Sculptures.4. Special bearer bonds 1991.(instruments does not exist at present)5. 6.5% Gold bonds 1977, 7% Gold bonds & National Defence Bonds 1980. (instruments does not exist at present)6. Gold Deposit Bonds 1999.

CAPITAL ASSETS[sec 2(14)]

C.A Yogesh Kesariya

Non existence of definition of ‘property’

• The word ‘property’ used in section 2(14) includes not only tangible assets but also intangible assets.

• The word property does not mean merely physical property but also includes rights, title or interest in it.

C.A Yogesh Kesariya

TYPES OF CAPITAL ASSETSThere are two types of Capital Assets:

1. Short Term Capital Assets (STCA): An asset, which is held by an assessee for less than 36 months, immediately before its transfer, is called Short Term Capital Assets. In other words, an asset, which is transferred within 36 months of its acquisition by assessee, is called Short Term Capital Assets.

2. Long Term Capital Assets (LTCA): An asset, which is held by an assessee for 36 months or more, immediately before its transfer, is called Long Term Capital Assets. In other words, an asset, which is transferred on or after 36 months of its acquisition by assessee, is called Long Term Capital Assets.

C.A Yogesh Kesariya

The period of 36 months is taken as 12 months under following cases:• Equity or Preference shares,• Securities like debentures, government securities, which are listed in recognized stock exchange,• Units of UTI• Units of Mutual Funds• Zero Coupon Bonds

WHEN PERIOD IS NOT 36 MONTHS?

C.A Yogesh Kesariya

• The profit on transfer of STCA is treated as Short Term Capital Gains (STCG) sec 2(42B)

• while that on LTCA is known as Long Term Capital Gains (LTCG). Sec 2(29B)

TYPES OF CAPITAL GAINS

C.A Yogesh Kesariya

• Transfer in this context includes following:1. Sale of asset2. Exchange of asset3. Relinquishment of asset (means surrender

of asset)4. Extinguishments of any right on asset

(means reducing any right on asset)5. Compulsory acquisition of asset6. The maturity or redemption of zero coupon

bonds.

WHAT IS TRANSFER SEC 2(47)

C.A Yogesh Kesariya

• The capital gain can be computed by subtracting the cost of capital asset from its transfer price.

COMPUTATION OF CAPITAL GAIN

Particulars AmountFull Value of Consideration -----------

Less: Cost of Acquisition*(COA) -----------

Cost of Improvement*(COI) -----------

Expenditure on transfer -----------

Capital Gains -----------

Less: Exemption U/S 54 -----------

Taxable Capital Gains -----------

*To be indexed in case of LTCA

C.A Yogesh Kesariya

• Full value of consideration includes whole sale price or exchange value or compensation including enhanced compensation received for capital asset in transfer. The following points are considered in relation to full value of consideration.

1. The consideration may be in cash or kind.2. The consideration received in kind is valued at its fair

market value.3. It may be received or receivable.4. The consideration must be actual irrespective of its

adequacy.

FULL VALUE OF CONSIDERATION

C.A Yogesh Kesariya

• Expenditure incurred wholly and exclusively for transfer of capital asset is called expenditure on transfer.

• It is fully deductible from the full value of consideration while calculating the capital gain.

• Examples of expenditure on transfer are :– Commission or Brokerage paid by seller,– Registration fees & cost of stamp papers etc.– Travelling expenses, and litigation expenses

EXPEDITURE ON TRANSFER

C.A Yogesh Kesariya

• 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.

• In other words, 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 are included in the cost of acquisition.

COST OF ACQUISITION

C.A Yogesh Kesariya

• Where the capital asset became the property of the assessee in any of the following manner, the cost of acquisition of asset shall be deemed to be cost for previous owner:

1. On any distribution of assets on the total or partial partition of a Hindu undivided family;

2. Under a gift or will; 3. By succession, inheritance or devolution4. On any distribution of assets on the dissolution of a firm,

body of individuals, or other association of persons, where such dissolution had taken place at any time before the 1st day of April, 1987,

DEEMED COST OF ACQUISITIONUnder sec 49(1)

C.A Yogesh Kesariya

5. On any distribution of assets on the liquidation of a company,

6. Under a transfer to a revocable or an irrevocable trust,

7. On a transfer by wholly owned Indian subsidiary company to its holding company or vise-versa.

8. On conversion of self acquired property of a member of HUF to the Joint family property, etc.

9. On any transfer in a scheme of amalgamation of two Indian(or foreign) companies subject to certain conditions u/s 47(vi);

DEEMED COST OF ACQUISITIONContinue...

C.A Yogesh Kesariya

• The price at which the rights issue is made plus amount paid to person renouncing right is treated as cost of acquisition.

• Right Issue is normally at a discount to the market price.

COST OF ACQUISITION OF RIGHT SHARES

C.A Yogesh Kesariya

• the cost of acquisition is zero.• In case the bonus shares have been

allotted to assessee before 1-4-1981 he can opt for market value of such shares on 1-4-1981 as cost of acquisition.

COST OF ACQUISITION OF BONUS SHARES

C.A Yogesh Kesariya

• Where full value of the consideration as a result of the transfer of any part or entire block of assets exceeds the cost of acquisition of that block of depreciable assets, there will be a capital gain , which will always be a short term capital gain.

COST OF ACQUISITION OF DEPRECIABLE ASSETS

Under sec 50

C.A Yogesh Kesariya

• Indexed cost of acquisition means an amount which bears to the cost of acquisition the same proportion as cost inflation index for the year in which the asset is transferred bears to the cost inflation index for the first year in which the asset was held by the assessee or for the year beginning on 1-4-1981 which ever is later.

• Cost Inflation Index(CII), in relation to a previous year, means such index as the central government may, having regard to 75% of a average rise in the consumer price index for urban non-manual employees for the immediately preceding previous year to such previous year, by notification in the official gazette, specified in this behalf.

INDEXED COST OF ACQUISITION

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C.A Yogesh Kesariya

Continue...Mode a) Assets acquired directly by the assessee himself

CII of the year of transfer Cost of acquisition x --------------------------------------

CII of the year of acquisition

Mode b) Asset acquired from the previous owner n any mode given u/s 49(1):

INDEXED COST OF ACQUISITION

CII of the year of transfer Cost of acquisition previous owner x --------------------------------------- CII of the year in which the

asset is first held by the assessee

Asset can be acquired in following two modes:

C.A Yogesh Kesariya

• Cost of improvement is the capital expenditure incurred by an assessee for making any addition or improvement in the capital asset.

• It also includes any expenditure incurred in protecting or curing the title.

• Cost of improvement includes all those expenditures, which are incurred to increase the value of the capital asset.

• Any cost of improvement incurred before 1st April 1981 is not considered or it is ignored.

COST OF IMPROVEMENT

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C.A Yogesh Kesariya

• The reason behind it is that for carrying any improvement in asset before 1st April 1981, asset should have been purchased before 1st April 1981.

• If asset is purchased before 1st April we consider the fair market value.

• The fair market value of asset on 1st April 1981 will certainly include the improvement made in the asset.

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COST OF IMPROVEMENT

C.A Yogesh Kesariya

INDEXED COST OF IMPROVEMENT

Indexed Cost of improvement =

CII of the year of transfer

Cost of acquisition x ---------------------------------------- CII of the year of improvement

C.A Yogesh Kesariya

1. Transfer of bonds and debenture by company or govt. other than capital indexed bonds issued by government,

2. Transfer of shares & debentures by non-resident in foreign currency in Indian company.

3. Transfer of undertaking or division in a slump sale,

4. Transfer of offshore funds,5. Transfer of GDR by non-resident purchased in

foreign currency.6. Transfer of securities by FII.[sec 115AD]

INDEXED COST NOT ALLOWED

C.A Yogesh Kesariya

• Up to 1984-85 conversion of capital asset into stock in trade was not treated as transfer & no capital gain was charged on it.

• From 1984-85 The profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and,

CAPITAL GAIN ON CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE

Under sec 45(2)

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C.A Yogesh Kesariya

for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.

CAPITAL GAIN ON CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE

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C.A Yogesh Kesariya

• In the absence of a specific provision to deal with this type of situation, two formulas can be evolved to work out the profits and gains on transfer of assets.

• One Formula which had been adopted by the assessing officer, i.e., difference between the book value of the shares and the market value of the shares on the date of conversion, be taken as a business income and the difference between the sale price of the shares and the market value of the shares on the date of conversion, be taken as capital gain. 

CAPITAL GAIN ON CONVERSION OF STOCK IN TRADE IN CAPITAL ASSET

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*HERE WE TAKE SHARES AS VARIOUS ASSETS.

C.A Yogesh Kesariya

• The other formula which was adopted by the assessee, i.e., the difference between the sale price of the shares and the cost of acquisition of share, which was the book value on the date of conversion with indexation from the date of conversion, should be computed as a capital gain.

• In the absence of a specific provision, out of these two formulas, the formula which was favorable to the assessee, should be accepted. 

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CAPITAL GAIN ON CONVERSION OF STOCK IN TRADE IN CAPITAL ASSET

C.A Yogesh Kesariya

• Normally, firm/AOP/BOI is not considered a distinct legal entity from its partners or members and so transfer of a capital asset from the partners to the firm/AOP/BOI is not considered ‘Transfer’.

• However, under the Capital Gains, it is specifically provided that if any capital asset is transferred by a partner to a firm/AOP/BOI by way of capital contribution or otherwise, the same would be construed as transfer.

DISTRIBUTION OF CAPITAL ASSETS ON DISSOLUTION OF FIRM,AOP/BOI

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C.A Yogesh Kesariya

• For the purpose of computation of capital gain, fair market value shall be taken as full value of consideration.

DISTRIBUTION OF CAPITAL ASSETS ON DISSOLUTION OF FIRM,AOP/BOI

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C.A Yogesh Kesariya

• In this case, settlement of the amount of compensation usually takes a long time. The compensation is initially fixed by the Land Acquisition Officer and is subject to appeal and re-determination by courts.

• The compensation amount may vary as the case progresses from one authority to another. The transferor may get paid in instalments as and when a higher authority awards further (enhanced compensation)compensation.

COMPULSORY ACQUISITION OF ASSETS UNDER ANY LAW

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C.A Yogesh Kesariya

• Capital gain is taxable in previous year in which compensation has been received.

• As the deductions in computing the capital gains are considered while computing the capital gains in the initial year, no further deductions are allowed in the subsequent calculations on account of cost of acquisition etc.

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COMPULSORY ACQUISITION OF ASSETS UNDER ANY LAW

C.A Yogesh Kesariya

• Capital gain on transfer of Following intangible assets are taxable

1. Goodwill2. Route permits3. Loom hours4. Trademarks5. Rights to manufacture specific products6. Tenancy rights• Cost will be original purchase price plus

transaction cost plus improvement cost.

CAPITAL GAIN ON TRANSFER OF INTANGIBLE ASSETS

C.A Yogesh Kesariya

• In Income Tax Act depreciation is provided on only four types of assets:

1. Buildings2. Furniture3. Machinery and plant4. Intangible Assets• For calculating depreciation different blocks are

made based on the name of asset and then the rate of depreciation, thus a block will contain only that asset which will have the same name and same depreciation.

CAPITAL GAIN TAX ON TRANSFER OF DEPRECIABLE ASSET

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C.A Yogesh Kesariya

• For the purpose of computing capital gain following are deducted from consideration:

1. Expense on transfer2. Cost of acquisition

but for the case of transfer of depreciable asset Cost of acquisition will be aggregate of the following:i.WDV of block at beginningii.Actual cost of any asset falling in same block, acquired during year.

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CAPITAL GAIN TAX ON TRANSFER OF DEPRECIABLE ASSET

C.A Yogesh Kesariya

• This exemption is available subject to fulfillment of the following requirements:

1. The transferor shall be an individual or the HUF,2. The asset to be transferred must be of long-term

capital asset, being buildings or lands appurtenant thereto, being a residential house,

3. The income from such residential house shall be assessable under the head "Income from House Property",

LONG TERM CAPITAL GAIN FROM THE TRANSFER OF RESIDENTIAL HOUSE PROPERTY

UNDER SEC 54

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C.A Yogesh Kesariya

4. The transferor assessee should purchase a residential house in India within a period of one year before or two years from the date of transfer or construct a residential house within three years from the date of the transfer of the original house.

5. The new house property purchased or constructed has not been transferred within a period of three years from the date of purchase or construction.

LONG TERM CAPITAL GAIN FROM THE TRANSFER OF RESIDENTIAL HOUSE PROPERTY

UNDER SEC 54Continue...

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C.A Yogesh Kesariya

• Deposit Scheme under Section 54: Where the amount of capital gain is not so utilized for

the purchase or construction of a new residential house before the due date of furnishing of the return of income, it shall be deposited by him on or before the due date in an account with a public sector bank in accordance with the Capital Gain Account Scheme, 1988.

• If the new house property is transferred within a period of three years from the date of the purchase or construction, the amount of capital gains arising there from, together with the amount of gains exempted earlier, will be chargeable to tax in the year of sale of the house property.

LONG TERM CAPITAL GAIN FROM THE TRANSFER OF RESIDENTIAL HOUSE PROPERTY

UNDER SEC 54Continue...

C.A Yogesh Kesariya

• This exemption is available subject to fulfillment of the following requirements:

1. Assessee – Individual 2. Asset transferred - Agricultural land used by

individual or his parent for agricultural purposes during 2 years preceding date of transfer.

3. Nature of Asset - Short/Long Term4. New asset to be purchased/constructed-

Agricultural land (urban or rural)5. Time-limit for purchase/construction - Purchase

within 2 years from the date of transfer.

CAPITAL GAIN ON THE TRANSFER OF AGRICULTURAL LAND

UNDER SEC 54(B)

C.A Yogesh Kesariya

• Capital gains arising on the compulsory acquisition of any land or building forming a part of an industrial undertaking is exempt subject to the following requirements:

1. Such land or building was used by the assessee for the purpose of industrial undertaking for 2 years preceding the date of compulsory acquisition,

2. The assessee has purchased any land or building or constructed a building within 3 years from the date of the receipt of the compensation,

3. Newly acquired land or building should be used for the purpose of shifting or re-establishing the said undertaking or setting up another industrial undertaking.

CAPITAL GAIN ON COMPULSORY ACQUISITION OF LAND AND BUILDING OF AN INDUSTRIAL UNDERTAKING

UNDER SEC 54(D)

C.A Yogesh Kesariya

• This exemption is available an individual, HUF, company or any other person

• who invests the long term capital gain, within 6 months of a the transfer of the capital asset, in any of the specified bond (issued on or after April 1, 2006) redeemable after 3 years:

1. National Highway Authority of India (NHAI), or2. Rural Electrification Corporation Ltd. (REC)

• There is a limit of Rs. 50 Lakh on the investments on or after April 1, 2007.

LONG TERM CAPITAL GAIN EXEMPTION FOR INVESTMENT IN CERTAIN BONDS

UNDER SEC 54(EC)

C.A Yogesh Kesariya

• The exemption is available only an individual or a HUF

• who transfers (or sells) a capital asset that results in a long-term capital gain, and then invests the amount of gain in acquiring a new residential house.

• This exemption is available subject to fulfilment of the following requirements: 

LONG TERM CAPITAL GAIN FROM THE TRANSFER OF A CAPITAL ASSET OTHER THAN RESIDENTIAL HOUSE PROPERTY

UNDER SEC 54(F)

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C.A Yogesh Kesariya

• The transferor assessee should purchase or a residential house in India within a period of one year before or two years from the date of transfer or construct a residential house within three years from the date of the transfer of the original house. (Construction must be completed within these 3 years.) &

• The new house property purchased or constructed has not been transferred within a period of three years from the date of purchase or construction.

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LONG TERM CAPITAL GAIN FROM THE TRANSFER OF A CAPITAL ASSET OTHER THAN RESIDENTIAL HOUSE PROPERTY

UNDER SEC 54(F)

C.A Yogesh Kesariya

• This exemption is available an individual, HUF, company or any other person,

• Who transfers the capital assets (being plant, machinery, land or building or any right in the land or building) being used for the purpose of industrial undertaking situated in an urban area to any area other than urban area.

CAPITAL GAIN ON TRANSFER OF CAPITAL ASSETS IN CASE OF SHIFTING OF INDUSTRIAL UNDERTAKING FROM URBAN AREA

UNDER SEC 54(G)

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C.A Yogesh Kesariya

• The assessee purchases within one year before or 3 years after the date of transfer:

1. Purchases plant or machinery for the purpose of business of industrial undertaking in the area to which the said undertaking has shifted,

2. Acquires building or land or constructed building for the purpose of his business in the said area,

3. Shifts the original asset and transferred the establishment in the said area, and 

4. Incurs expenses on such other purpose as may be specified in a scheme framed by Central Government for the purpose of this section.

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CAPITAL GAIN ON TRANSFER OF CAPITAL ASSETS IN CASE OF SHIFTING OF INDUSTRIAL UNDERTAKING FROM URBAN AREA

UNDER SEC 54(G)

C.A Yogesh Kesariya

• This exemption is available to an individual, HUF, company or any other person.

• who transfers the capital assets (being plant, machinery, land or building or any right in the land or building) being used for the purpose of industrial undertaking situated in an urban area to a special economic zone (SEZ).

CAPITAL GAIN ON TRANSFER OF CAPITAL ASSETS IN CASE OF SHIFTING OF INDUSTRIAL UNDERTAKING FROM URBAN AREA TO ANY

SEZUNDER SEC 54(GA)

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C.A Yogesh Kesariya

• The assessee purchases within one year before or 3 years after the date of transfer:

1. Purchases plant or machinery for the purpose of business of industrial undertaking in the area to which the said undertaking has shifted, 

2. Acquires building or land or constructed building for the purpose of his business in the said area, 

3. Shifts the original asset and transferred the establishment in the said area, and 

4. Incurs expenses on such other purpose as may be specified in a scheme framed by Central Government for the purpose of this section.

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CAPITAL GAIN ON TRANSFER OF CAPITAL ASSETS IN CASE OF SHIFTING OF INDUSTRIAL UNDERTAKING FROM URBAN AREA TO ANY SEZ

C.A Yogesh Kesariya

C.A YOGESH KESARIYA