WHAT IS CAPITAL GAINS WHICH INCOME IS TAXABLE UNDER THE HEAD CAPITAL GAINS WHAT IS CAPITAL ASSET? I-11

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1 CONTENTS 1 WHAT IS CAPITAL GAINS 1.1 Concept of capital gains Legislative background for taxation of capital gains in India 1 2 WHICH INCOME IS TAXABLE UNDER THE HEAD CAPITAL GAINS 2.1 Charging sections - Sections 45, 46 and 46A Conditions to be fulfilled for taxing capital gains Tax-free capital gains Whether situs/location of a capital asset matters for taxability of capital gains? 8 3 WHAT IS CAPITAL ASSET? 3.1 Definition of capital asset in section 2(14) of the Act Property Property held as stock-in-trade is not capital asset Consumable stores or raw materials held for business/ profession not a capital asset Personal effects are not capital assets 40 I-11

2 CONTENTS I Jewellery is capital asset Paintings are capital assets Work of art/drawings are capital assets Sculptures are capital assets Archaeological collections are capital assets Immovable property (except stock-in-trade and rural agricultural land) are capital assets Silver bars/bullion/sovereigns/silver coins are capital assets and not personal effects Silver utensils are personal effects and not capital assets Agricultural land situated in India in rural area is not a capital asset 48 4 TYPES OF CAPITAL ASSETS : SHORT-TERM CAPITAL ASSETS AND LONG-TERM CAPITAL ASSETS 4.1 Classification of capital asset into short-term capital asset and long-term capital asset How to compute the holding period of a capital asset? 71 5 WHAT IS TRANSFER? 5.1 Definition of transfer in section 2(47) of the Act Meaning of transfer Transfer by sale Transfer by exchange Transfer by relinquishment Extinguishment of any rights in a capital asset Compulsory acquisition of a capital asset under any law Conversion of a capital asset into stock-in-trade Part performance of a contract of sale of immovable property Transfer of rights in immovable properties through the medium of co-operative societies, companies, etc. 91

3 I-13 CONTENTS 5.11 Transfer by a person to a firm or other association of persons [AOP] or Body of Individuals [BOI] Distribution of capital assets on dissolution Distribution of money or other assets by the company on liquidation The maturity or redemption of a zero coupon bond Family arrangement - Whether transfer? 92 6 WHICH TRANSFERS DO NOT GIVE RISE TO TAXABLE CAPITAL GAINS 6.1 Transfers which do not give rise to taxable capital gains Distribution by a HUF on Total/Partial Partition Transfer of capital asset under a gift or a will or irrevocable trust Transfers of capital assets between a parent company and its 100% subsidiary company Transfer of capital asset by amalgamating company to amalgamated company /7 Transfer on amalgamation of banking company with a banking institution Transfer by demerged company to resulting Indian company Transfer of shares by demerged foreign company to resulting foreign company Transfer in reorganization of co-operative banks Transfer of shares in amalgamation or demerger of Co-operative Banks Transfer by a shareholder in a scheme of amalgamation Transfer by non-resident of bonds/gdrs Transfer of works of art, etc Conversion of bonds, debentures, debenture-stock or deposit certificates into shares or debentures Conversion of FCCBs into shares/debentures Transfer of land of sick industrial company Succession of firm by company 115

4 CONTENTS I Transfer of capital asset by AOP/BOI in course of demutualization/corporatization of stock exchange Conversion from general partnership to LLP - Whether gives rise to taxable capital gains? Transfer of proprietorship to company Transfer of membership right in recognized stock exchange Conversion of private company/unlisted public company into LLP Transfer in a scheme for lending of any securities Reverse mortgage transactions by senior citizens - i.e. individuals aged 60 years or more Exemption from tax to transfer of govt. security by one non-resident to another - Section 47(viib) Taxation of capital gains arising to sponsor on conversion of SPV shares into units of business trust [Section 47(xvii)] Tax neutrality on merger of similar schemes of Mutual Funds Tax neutral conversion of preference shares to equity shares [Section 47(xb)] Extension of capital gain exemption to Rupee Denominated Bonds YEAR OF TAXABILITY OF CAPITAL GAINS 7.1 Introduction Insurance claim Conversion of asset into stock-in-trade Transfer by depository or participant of beneficial interest in securities Transfer of assets by way of capital contribution Distribution of assets on dissolution of Firm/AOP/BOI or otherwise Compulsory acquisition Enhanced compensation on compulsory acquisition Year of taxability of capital gains when owner of land transfers land to developer under Joint Development Agreement 148

5 I-15 CONTENTS 7.9A Entitlement to goodwill Transfer by partner of right in firm s asset for consideration payable in instalments Accrual of right to receive profits determinative Sale of part of asset COMPUTATION OF CAPITAL GAINS - SHORT-TERM CAPITAL GAINS AND LONG-TERM CAPITAL GAINS 8.1 Tax incidence depends upon whether capital gains is longterm capital gains or short-term capital gains How to compute short-term capital gains How to compute long-term capital gains other than longterm capital gains taxable under section 112A How to compute long-term capital gains in respect of listed equity shares, equity-oriented MFs and units of business trust u/s 112A Cases in which benefit of indexation of cost of acquisition/ cost of improvement is not available for computing long-term capital gains HOW TO COMPUTE FULL VALUE OF CONSIDERATION 9.1 Existence of consideration - A prerequisite for taxability as capital gains Consideration Full value of consideration Fair market value Computation of capital gains in real estate transactions - Section 50C Conversion by the owner of a capital asset into, or its treatment as, stock-in-trade of a business carried on by him [Section 45(2)] Contribution of capital asset to firm/llp/aop/boi by partner/member - Section 45(3) 174

6 CONTENTS I Distribution of capital assets on dissolution of firm/llp/ AOP/BOI - Section 45(4) Compulsory acquisition under any law for the time being in force - Section 45(5) Insurance claim received in respect of capital asset destroyed by act of god etc. - Section 45(1A) Transfer by way of distribution of assets by company in liquidation to its shareholders - Section 46(2) Special provision for full value of consideration for transfer of unquoted share - Section 50CA Where the consideration is not ascertainable or cannot be determined - Section 50D WHAT IS EXPENDITURE ON TRANSFER OF CAPITAL ASSETS? 10.1 Cost of Transfer Expenditure excluded from definition of cost of transfer Legal expenses incurred for obtaining Compensation for compulsory acquisition Expenditure incurred for obtaining probate of the will Transfer charges paid to co-operative society Expenditure incurred before or after passing of title Liability/obligation Interest on provident fund loan Damages for mental agony and suffering Expenses on staff after the takeover of undertaking Amount paid for getting land acquired by Government Where option under section 55(2)(b)(i) is exercised Payment for freeing property of encumbrance Payment for release of interest Brokerage Assumed value of solatium Amount embezzled Interest on delayed payment of unearned increase 196

7 I-17 CONTENTS 11 WHAT IS COST OF ACQUISITION? 11.1 Meaning/definition of cost of acquisition Ground rent - Whether deductible as COA Interest on moneys borrowed to purchase asset - Whether deductible as COA Interest paid to partners - Whether COA Payment to estate of deceased partner - Whether COA Litigation expenses to register transfer of shares is COA of shares Payment having no connection with the capital asset Agricultural land becoming capital asset by notification - How COA to be computed Income-tax dues - Whether COA Sums paid under will - Whether COA Urban land tax and other taxes - Whether COA Cost of acquisition of shares obtained in family settlement Subsequent events do not affect cost of acquisition Date of acquisition COA where asset becomes capital asset after acquisition but before sale Cases in which the Act deems cost of acquisition of capital asset to be nil Cases in which cost of acquisition deemed to be cost to the previous owner Cost of acquisition of shares of amalgamated company in exchange for shares of amalgamating company - Section 49(2) Cost of shares/debentures acquired on conversion of bonds/ debentures/deposit certificates/fccbs into shares/debentures - Section 49(2A) Cost of acquisition of ESOPs/sweat equity shares - Section 49(2AA)/section 49(2AB) A Cost of acquisition in case of unit of business trust acquired by sponsor in exchange for shares in SPV 224

8 CONTENTS I Cost of acquisition of shares in the resulting company in a demerger and cost of original shares in demerged company Cost of acquisition of intangible assets purchased Capital asset acquired by a shareholder on distribution of its assets in liquidation - Section 55(2)(b)(iii) Cost of acquisition of bonus shares Where conditions for exemption of transfers between parent and its 100% subsidiary are violated subsequently Cost of acquisition of shares acquired on stock-splits etc Cost of acquisition of rights shares Cost of acquisition of capital asset acquired long ago very Cost of acquisition of immovable property taxed as gift Cost of acquisition of jewellery, bullion, shares and securities, paintings, sculptures etc. taxed as gifts under section 56(2)(vii)/(viia)/(x) Cost of acquisition in case of depreciable assets on which depreciation allowed at SLM rates - Section 50A Cost of acquisition in case of slump sale - Section 50B Where enhanced compensation is received Cost of acquisition of certain assets - Calves, colts, trees etc Shares acquired by non-resident assessee on redemption of GDRs Tax neutrality on merger of similar schemes of Mutual Funds WHAT IS COST OF IMPROVEMENT? 12.1 Cost of improvement - Definition Allowance of deduction Expenses incurred by persons other than assessee Improvement of title Asset acquired before and transferred in any previous year relevant to AYs to Assets acquired before and transferred in any previous year relevant to AY or subsequent AY 251

9 I-19 CONTENTS 12.7 Assets acquired after but on or before and transferred in any previous year relevant to AY or subsequent AY Assets acquired after Taxability of advance for transfer of a capital asset where advance is forfeited (Sections 51 and 56) WHAT IS INDEXED COST OF ACQUISITION AND INDEXED COST OF IMPROVEMENT? 13.1 Indexation benefit for computing long-term gains - Relief from inflation Cases in which indexation benefit is not available for computing long-term capital gains : Indexed cost of acquisition/improvement - Meaning of Indexation benefit linked to period of holding of asset and not to its owner Computation of indexed cost of acquisition/improvement ROLLOVER DEDUCTION IN RESPECT OF PROFIT ON SALE OF PROPERTY USED FOR RESIDENCE [SECTION 54] 14.0 Provisions of section 54 in a nutshell Profit on sale of property used for residence [Section 54] Sale of new residential house within 3 years Buildings or land appurtenant thereto Sale of independent residential unit forming part of a larger house - Whether eligible for deduction under section Purchase - Meaning of Where house is partly purchased and partly constructed Construction of new house Nexus to sale proceeds Where assessee does not own land on which new house is constructed 285

10 CONTENTS I Sale of land gifted to spouse Purchase of new property in name of spouse Where property purchased is partly non-residential Acquisition of fraction of ownership - Whether eligible for deduction under section Capital Gains Accounts Scheme Extension of time for acquiring new asset or depositing or investing capital gain [Section 54H] DEDUCTION OF ROLLOVER OF GAIN ON TRANSFER OF LAND USED FOR AGRICULTURAL PURPOSES [SECTION 54B] 15.0 Provisions of section 54B in brief Gain on transfer of land used for agricultural purposes Quantum of deduction under section 54B Sale of new land within 3 years Who can claim the exemption under section 54B User of land for agricultural purposes in two years immediately preceding transfer Whether new land purchased should be in assessee s name only to qualify for section 54B deduction? Purchase of new land before sale of old land Capital Gains Accounts Scheme Extension of time for acquiring new asset or depositing or investing capital gain ROLLOVER DEDUCTION IN RESPECT OF CAPITAL GAIN ON COMPULSORY ACQUISITION OF LANDS AND BUILDINGS [SECTION 54D] 16.0 Provisions of section 54D in a nutshell Capital gain on compulsory acquisition of lands and buildings Quantum of deduction 305

11 I-21 CONTENTS 16.3 Tax implications on sale of new asset within 3 years Who can claim the exemption under section 54D Industrial undertaking - Meaning of Enhanced compensation Exemption in case of depreciable assets Capital Gains Accounts Scheme Extension of time for acquiring new asset or depositing or investing capital gain ROLLOVER DEDUCTION IN RESPECT OF INVESTMENT OF CAPITAL GAINS IN SPECIFIED BONDS [SECTION 54EC] 17.0 Provisions of section 54EC in a nutshell Pre-conditions for deduction under section 54EC Ceiling on investment - ` 50 lakhs in a financial year Transfer of specified asset within 3 years Whether capital gains arising under section 50 is long-term capital gains for section 54EC purposes? Time-limit of 6 months for investment in specified bonds under section 54EC Name in which bonds should be purchased Specified bonds for investment under section 54EC Direct nexus not required Extension of time for acquiring new asset or depositing or investing capital gain A CAPITAL GAINS NOT TO BE CHARGED ON INVESTMENT IN UNITS OF A SPECIFIED FUND 17A.1 Backdrop A.2 Capital gains exemption on investment in specified funds - Section 54EE 334

12 CONTENTS I DEDUCTION IN RESPECT OF LONG TERM CAPITAL GAIN INVESTED IN RESIDENTIAL HOUSE [SECTION 54F] 18.0 Provisions of section 54F in brief Long term capital gain invested in residential house Conditions for deduction Quantum of deduction Net consideration Purchase/construction of second residential house Date of purchase of new house Sale of second vacant land and investment in second dwelling unit Exemption for minor No deduction for extension of house Transfer of new residential house Whether deduction is available if new house purchased in joint names of assessee and his wife? Capital Gains Accounts Scheme Extension of time for acquiring new asset or depositing or investing capital gain TAX INCENTIVES FOR TRANSFER OF ASSETS ON SHIFTING OF INDUSTRIAL UNDERTAKINGS FROM URBAN AREA/SHIFTING OF INDUSTRIAL UNDERTAKING FROM URBAN AREA TO ANY SPECIAL ECONOMIC ZONE (SEZ) [SECTION 54G/54GA] 19.0 Provisions of section 54G/54GA in brief Transfer of assets on shifting of industrial undertakings [Section 54G] Conditions for deduction under section 54G Quantum of deduction under section 54G 352

13 I-23 CONTENTS 19.4 Sale of new asset within three years-tax implications Shifting of industrial undertaking from urban area to any special economic zone (SEZ) [Section 54GA] Capital Gains Accounts Scheme TAX INCENTIVES FOR INVESTMENT IN CAPITAL OF A SMALL OR MEDIUM ENTERPRISE UNDER NEW SECTION 54GB 20.1 Introduction Conditions to be satisfied for availing the rollover relief under new section 54GB TAX COMPUTATION IN RESPECT OF STCG 21.1 Tax on short-term capital gains Tax on short term capital gain in case of units of business trusts [Section 111A] TAX COMPUTATION IN CASE OF LONG-TERM CAPITAL GAINS 22.1 Overall scheme of tax computation on LTCG Tax on long-term capital gains from shares, securities and units Tax on long-term capital gains other than from shares, securities and units Concessional tax rate of 10% not applicable to long-term capital gains from units of GETFs/Debt-oriented mutual funds - Section 112(1) 369

14 CONTENTS I LONG-TERM CAPITAL GAINS TAX ON LISTED EQUITY SHARES, UNITS OF EQUITY-ORIENTED MUTUAL FUNDS AND UNITS OF BUSINESS TRUSTS 23.1 Taxation of long-term capital gains from listed equity shares and units of equity-oriented MFs upto AY New Scheme of taxation of long-term capital gains from listed equity shares, units of equity-oriented MFs and units of business trusts - Section 112A Rationale behind the introduction of new scheme of taxation by the Finance Act, Conditions for applicability of new section 112A Computation of tax Computation of LTCG Cost of Acquisition (COA) New Section overrides section Applicability of New Section to different assessees Applicability of section 112 in certain cases Computation of long-term capital gains under the New Section Condition (b) : The total income of the assessee should include income chargeable as capital gains Condition (c) : The asset has to be long term capital asset Condition (d) : Section 112A applies only if LTCG arises from Specified Asset Condition (e) : Section 112A is applicable if STT is paid Cost of acquisition Computation of tax if section 112A applies Deductions under Chapter VI-A are not available qua capital gains under section 112A Rebate under section 87A Taxation of non-residents Miscellaneous Taxation of long term capital gains in the case of foreign institutional investor 439

15 I-25 CONTENTS 24 REFERENCE TO VALUATION OFFICER 24.1 Statutory provisions Valuation Officer Valuation procedure Purpose for which reference may be made Binding nature of Valuation Officer s report Where assessment is completed before receipt of valuation report Where valuation report is not received Reference after assessment Reference cannot be made without giving opportunity and disclosing reasons Second reference Appeal Appearance by registered valuer Rectification of mistakes Power to take evidence on oath, etc LOSS UNDER THE HEAD CAPITAL GAINS 25.1 Loss under the head Capital gains - Whether same as capital loss Carry forward and set-off of losses under the head Capital gains On Liquidation of Company Revaluation of Investment Where transaction of sale is genuine Sum assessed as dividend under section 2(22) Carry forward and set off 461

16 CONTENTS I DISTRIBUTION OF ASSETS BY COMPANIES IN LIQUIDATION 26.0 Introduction Coverage of section 46(2) Nature of asset in the hands of shareholders Liquidation of subsidiary company and application of section Realisation of asset by liquidator Distinction between a company in liquidation and a company on liquidation Section 46(2) - A deeming provision Section 46(2) is a charging provision Liability to capital gains HOW TO COMPUTE CAPITAL GAINS IN CASE OF BUY-BACK OF SHARES/ SPECIFIED SECURITIES 27.1 What is buy-back? Tax implications of buy-back for shareholder - Section 46A Analysis of section 46A Where buy-back held to be disguised dividends Withholding tax of 20% of profits distributed by unlisted companies introduced by the Finance Act, 2013 w.e.f CAPITAL GAIN AND DEPRECIABLE ASSETS 28.1 Introduction Statutory provisions of section Power generation undertakings [Section 50A] Legal decisions - In assessee s favour Legal decisions - In Revenue s favour 497

17 I-27 CONTENTS 29 SLUMP SALE 29.1 Introduction Slump sale - Definition Computation of capital gain from slump sale [Section 50B] Negative Net Worth Complete sale of unit or undertaking is a must Lock, stock and barrel sale Comparative study of slump sale and demerger Audit certificate in Form No. 3CEA Analysis of requirements of Form 3CEA CAPITAL GAIN ON INTANGIBLE ASSETS 30.1 Goodwill Route permits/stage carriage permits Import licences/entitlements Rights under a contract Tenancy rights Loom hours Leasehold rights Life interests Remainderman s reversionary interest Devaluation gain Patent Right to manufacture, produce or process any article or thing Right to carry on any business or profession CHARITABLE TRUST AND CAPITAL GAINS 31.1 Introduction 521

18 CONTENTS I Trust wholly for charitable or religious purposes [Section 11(1A)(a)] Trust in part for charitable or religious purposes [Section 11(1A)(b)] Capital gains kept in fixed deposit in bank Capital gain kept as deposit in public sector companies Capital gain used for redeeming pledged asset Capital gain used for acquiring English Mortgage Advance receipt of sale proceeds used for regular objects Time limit for reinvestment New sub-section (7) of section CAPITAL GAIN IN REAL ESTATE TRANSACTIONS 32.1 Immovable property Period of holding immovable property before transfer to maximize tax advantages Entering an agreement to sell does not transfer the property Cash component of consideration should be less than Rs. 20,000 to avoid violation of section 269SS Immovable property transactions between firm/llp and partners Membership of Co-operative Society Mortgage transactions Reverse Mortgage Agricultural land Deemed transfers Deemed sale consideration - Section 50C Section 50C vis-a-vis transfers under section 45(2), 45(3) and 45(4) Exemptions under sections 54, 54EC and 54F Development agreements (Joint Development Agreements) Lease right years lease 541

19 I-29 CONTENTS Sub-lease for 97 years Composite consideration Single transaction - Whether business Repurchase of sold property Mortgage followed by sale Where auction sale is set aside Taxation regime for REITs and InVITs Real Estate Investment Trusts (REITs) Infrastructure Investment Trust (InVIT) Income-investment model of REITs and InVITs Taxation regime introduced by the Finance (No. 2) Act, 2014 for REITs and InVITs Definition of business trust Taxation of business trusts STT levy on transactions in units of a business trust Taxation of income in the hands of unit holder Taxation of capital gains arising to sponsor on conversion of SPV shares into units of business trust No TDS on interest income payable by SPV to business trust Lower withholding tax rate of 5% on interest income in case of ECBs by business trust ALTERNATIVE INVESTMENT FUNDS 33.1 Backdrop New Special tax regime for AIFs Taxation of income of investment fund Taxation of unit holder NON-RESIDENTS 34.1 No indexation benefit for non-residents in case of shares/ debentures Exemptions 579

20 CONTENTS I Legal decisions Transfer of shares by amalgamating foreign company to amalgamated foreign company Units purchased in foreign currency Capital gain on transfer of global depository receipts purchased in foreign currency Capital gain in the case of foreign institutional investors [Section 115AD] Non-residents referred to in Chapter XII-A Meaning of the terms used Working of the Chapter XII-A Return of income not required to be filed in certain cases POWER OF CBDT TO RELAX ANY REQUIREMENT FOR CLAIMING DEDUCTIONS 35.1 Power of CBDT under section 119(2)(c) Section 119(2)(c) applies to sections 54 to 54GB Application for relief on plain paper 593 APPENDIX : Gist of relevant Circulars 595

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