Tuesday, May 14, 2013

For Dec 2013 ICWAI Stage I Examination Paper (7): Fast track notes on Income Under the Head Capital Gains

Chargeability of Capital Gains: [Section 45(1)]: Two points must be considered
Ø  Any profits or gains arising from the transfer
Ø  Of capital assets effected during the previous year

What is Transfer? sec. 2(47)
Ø  Sale, exchange, extinguishment of rights
Ø  Destruction of assets and Insurance claim received [sec. 45(1A)]
Ø  Conversion into to stock in trade [45(2)]
Ø  Transfer to AOP, BOI, Firm [sec. 45(3)]
Ø  Dissolution of Firm, AOP, BOI [sec. 45(4)]
Ø  Compulsory acquisition  [sec. 45(5)]

Not a Transfer and therefore, exempt from capital gains tax: [sec. 47]
Ø  Any Transfer on partition of HUF
Ø  Any transfer of Liquidation of Company
Ø  Any transfer on account of gift or will.
Ø  Any transfer of a capital asset by an Indian to its wholly owned subsidiary company or vice versa
Ø  Transfer of assets and shares under a scheme of amalgamation of an Indian company.
Ø  Conversion of Bonds and debentures into shares or debentures
Ø  Transfer of historical importance assets.

Here, Capital Assets under Sec. 2(14) means
Ø  Property of any kind held by an assessee
Ø  Which can be Sold including property of his business or profession,
Except the Following:
1. Stock-in-trade, consumable stores or raw materials held for the purpose of business or profession.
2. Personal movable properties viz. furniture, motor vehicles, refrigerators, musical instruments etc. held for personal use of the assessee or his family. But personal property does not include the following:
Ø  Jewellery
Ø  Residential house property
Ø  Archaeological collections, drawings, paintings, sculptures, or any work of art.
3. Rural Agricultural land: (Land within the jurisdiction of a municipality or cantonment board having population of 10,000 or more or land situated within 8 kilometers from the local limits.
4. Special Bearer Bonds, 1991, 6.5% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defense Bonds, 1980, Gold deposit bonds issued under Gold Deposit Scheme, 1999. It is not necessary that the assessee should be the initial subscriber to the Gold Bonds.

In the previous year
The capital gain is deemed to be income of the previous year in which transfer is effected. But there are 3 exceptions to this rule where capital gain is taxable when the amount is received
Ø  Destruction of assets and Insurance claim received [sec. 45(1A)]
Ø  Conversion into to stock in trade [45(2)]
Ø  Compulsory acquisition  [sec. 45(5)]

Type of Capital Assets
Short-term capital asset: Assets held upto 3 years before their transfer. [Sec. 2(42A)]. But the above limit is one year in case of following assets:
Ø  Any Kind of Shares (equity or preference)[May or may not be listed]
Ø  Listed debentures, Listed bonds & Listed Govt. securities
Ø  Any kind of Units of UTI or a mutual fund.
Ø  Zero coupon bonds[May or may not be listed]
Long term capital asset: Assets held for more than 3 years. [Sec. 2(29A)].
(Period of Holding Includes date of Purchase but excludes date of sale)

The period of holding in the following cases shall be determined as under:
Case
Exclusion/Inclusion of period
 (i)   Shares held in a company in liquidation
Exclude the period subsequent to the date of liquidation
(ii)   Property acquired in any mode given under section 49(1) (e.g. by way of gift will, etc.)
Include the holding period of previous owner also.
(iii)  In case of amalgamation and demerger
Include the holding period of shares in the Amalgamating/demerged Company by the Assessee.
(iv) Trading or clearing rights of recognised stock exchange pursuant to its demutualisation or corporatisation
Include the period for which the person was a member of the recognised stock exchange in India
(v) Right to Subscribe shares or securities with or without payment (Bonus shares), ESOP, Sweat equity shares, Specific shares
From the date of allotment of such shares
(vi) Period of holding of the right by a person who has renounced the right.
From the date of offer of such right by the company or institution to the date of renouncement.
(vii) Right to subscribe to share or any other securities acquired by a person in whose favour the right has been renounced by the existing holder.
From the date of allotment of such shares

Type of Capital-Gains and Its computation
Ø  On transfer of short-term capital asset, short-term capital gain arises [Section 2(42B)]
Ø  On transfer of long term capital asset, the long-term capital gain arises [Section 2(29B)].

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)

Full value of consideration
Ø  Actual Consideration received in cash or in kind at transfer of capital asset.
Ø  If it is received in kind, then fair market value (Not Market Value) of such assets is taken as FVOC.
Ø  If FVOC received in installments, total consideration shall be considered for computing capital gains.
Ø  If, due to any reason, consideration is not determinable, the fair market value of the asset shall be taken into consideration

Cost of Acquisition (COA)
S.N.
Type of Capital Asset
Cost of acquisition to the assessee
1.
Goodwill (Business only), trademark, Patent , right to manufacture or produce or process any article, right to carry on any business, tenancy rights, Route permits or loom hours:
a.       If acquired without paying any price U/s 49(1)
b.      Self Generated
c.       If acquired by paying price
FMV is not allowed in such assets

a.       Cost of Previous owner
b.      Nil (Self Generated)
c.       The price paid
2.
Assets acquired without paying any price [Sec. 49(1)]
Ø  Distribution of assets of HUF, BOI, AOP
Ø  Assets received under Gif, Inheritance, Will, Succession
Ø  Transfer by Holding company to its 100% subsidiary or vice-versa
Cost of acquisition of Previous owner + Cost of Improvement of P/Y Less Depreciation (FMV if Acquired before 1 – 4 – 81)
Note: Period of holding from the Previous owner but for indexation year of acquisition of Current owner
3.
Shares in a Amalgamated India company [Sec. 49(2)]
Cost of shares of amalgamating company
4.
Conversion of debentures, deposits or debenture stock
Cost of acquisition of original assets
5.
Ø  Cost of shares of Demerged company
Ø  Cost of shares of Resulting Company
Cost of original shares distributed between both companies on the basis of net book value
6.
Conversion of Capital assets into Trading assets or Stock in Trade
Market value on the date of conversion
7.
Bonus shares
If issued before 1 – 4 – 81: FMV
If issued after 1 – 4 – 81: Nil
8.
Right shares
If not renounced Amount paid to the company, If renounced =Nil (But for purchaser in such case, COA will be amount paid to company + amt. paid to renouncer)
9..
Distribution of assets on Liquidation of a Company
FMV  of the asset on date of distribution
10.
Cost of specified security or sweat equity share or ESOP already treated as perquisites under section 17(2)(vi) [Section 49(2AA)]
Fair market value which has been taken into account for the purpose of valuation of perquisite.
11.
Cost of acquisition of property received without consideration or for inadequate consideration [Section 49(4)]
Where the capital gain arises from the transfer of a property, the value of which has been subject to income tax under section 56(2)(vii), the cost of acquisition of such property shall be deemed to be value which has been taken into account for section 56(2)(vii).
12.
In case of Depreciable assets (Only STCG arises)
Opening WDV + Cost of Additions +Selling Exp.
Note: FVM is not considered if assets are purchased on 1 - 4 - 1981 or onwards.
Cost of improvement (COI)
Ø  Any expenditure incurred to improve the value or usage of the capital asset.
Ø  Costs of improvement incurred prior to 1.4.81 are ignored.
Ø  For Long Term Capital Asset, all improvements shall be indexed even done within 3 years before the date of transfer.

Expenditure on transfer
Ø  Expenses on transfer include any expenditure incurred, for the purpose of transfer like advertisement expenses, brokerage, stamp duty, registration fees, legal expenses etc.
Ø  Securities transaction tax shall be part of cost when shares are being purchased and shall not treated like expenses on transfer when these are being sold. (5th proviso of sec. 48)

Indexing At a Glance [Sec. 48 (iii)]
Ø  For long term capital assets only.
Ø  No indexation for Bonds (Other than Capital index bond), Debentures, Repurchase of unit’s u/s 80ccb.
Ø  Formula: (Cost of acquisition or Cost of improvement X C.I.I of the year of sale)/C.I.I. of the year of acquisition or Improvement.
Ø  For Cost of improvement before 1 – 4 – 81, No indexation is necessary.
Ø  For sec. 49(1), CII of the year of acquisition by the present owner is taken.

Set off & carry forward of capital losses
Ø  As per section 70, LTCL can be adjusted only against LTCG. While STCL can be adjusted either against STCG or LTCG.
Ø  As per section 71, the net capital loss, if any, cannot be adjusted against other heads of income.
Ø  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.
Ø  Return of income (loss) must be submitted in time limits.

Treatment of Enhanced Compensation
Ø  Deemed income of the previous year in which such amount is received by the assessee.
Ø  It is taxable on receipt basis.
Ø  In this case, cost of acquisition/ cost of improvement is taken as Nil, because they have already been claimed while calculating taxable initial compensation.
Ø  But litigation expenses and/or expenses on recovery of such compensation is deductible.
Ø  If the compensation (enhanced / original) is received by any other person because of death of the transferor, it is taxable as income of the recipient. Recomputation of capital gains in case of reduction in compensation [Section 45(5)]

Slump Sale U/S 50B
Ø  Slump Sale means sale of running concern for a LUMP SUM consideration
Ø  Steps to Calculate Capital Gain
Step 1: Calculate NET Worth = Aggregate Value of Assets – value of outside liabilities (Ignore revaluations)
Step 2: Aggregate value of Assets (Sum of the following):
Depreciable assets: Written down value after deducting depreciation
For assets allowed as deduction u/s 35D (Specific Business): Nil
For other assets: Book Value of such assets
Step 3: Capital Gain (Short/Long): Net sale consideration – Net worth
Ø  Certificate from a chartered accountant stating that the net worth has been correctly calculated.

Transfer of Land or building or Both [Sec. 50C]
Full value of Consideration under this case will be minimum of the following:
Ø  Value adopted by the state govt. authority for registration of deed for the purpose of stamp duty.
Ø  Value adopted by Valuation officer referred by the assessing officer.

Treatment of Advance money received and Forfeited [Sec. 51]
Ø  Advance money received by the present owner not by the previous owner
Ø  Here, cost of acquisition will be: Cost of Acquisition or WDV or FMV on 1 – 4 – 81 Less: Advance money forfeited
Ø  Amount forfeited is higher than cost of acquisition, in this situation cost shall be taken as NIL. Excess of forfeited amount over cost of acquisition shall be assessed to tax as capital gain when such asset is sold.
Ø  Forfeiture of advance money before or after 1 – 4 – 81 must be deducted.

Exempted Capital Gains
Compensation received on compulsory acquisition of agricultural urban land on or after 1 – 4 - 2004[Section 10(37)]:
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.
Exemption of long-term capital gain arising from sale of shares and units [Section 10(38)]
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.

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.

Note: 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.

Taxability of Capital Gains
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%.
Tax on STCG in case of equity shares and units of equity oriented fund Section 111A
Ø  The transaction of sale of such equity share or unit is entered into on or after 1-10-2004;
Ø  Such transaction is chargeable to securities transaction tax;
Ø  Transferred through a recognised stock exchange;
Ø  Tax payable by the assessee @ 15 % on short-term capital gains.
Ø  No deduction under Chapter VI-A (sections 80C to 80U) shall be allowed from such income.

Tax on long term capital gains Section 112
Ø  Long-term capital gain on shares which are subject to STT is exempted u/s 10(38).
Ø  Long-term capital gain on assets except shares which are subject to STT is taxable at a rate of 20%.
Ø  Tax on long-term capital gains from listed securities: Although the 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.