Analysis of selective provisions & recent issues in Capital Gain Taxation I. T. Bar Association, 09/06/2018

Transcription

1 Analysis of selective provisions & recent issues in Capital Gain Taxation I. T. Bar Association, 09/06/2018 Tushar P. Hemani Advocate, High Court

2 Capital Gain Income can be taxed under the head capital gain if it fulfills the following conditions: There must be a capital asset; There should be a transfer of the capital asset; The capital asset should be something which can be acquired by paying a cost i.e., it should be capable of determining the cost of acquisition of the capital asset; and There must be accrual of consideration for transfer of capital asset.

3 Categories of Issues Fundamentals of Capital Gains Deeming Fictions under Capital Gains Indexation and Computation Exemptions

4 Fundamental Issues

5 Facts: Karuna Estates & Developers 170 ITD 249 (Visakhapatnam Trib.) Partners of the assessee-firm transferred certain plots of lands held by them as their respective capital contribution and the same was taken as trading stock of the assessee-firm. The sum credited to the partners capital accounts was taken as cost of lands by the assessee-firm on the count that as per section 45(3), value recorded in the books of accounts of the assessee-firm is to be taken as fair market value for the purpose of computing capital gains in the hands of the partners. Tushar Hemani, Advocate 5

6 AO found that value so adopted by the assessee-firm for stock of land was much higher than fair market value (FMV). Hence, AO adopted value as per Sub-Registrar s office (SRO) as FMV, P&L a/c was recast and certain additions were made. Held: S.45(3) provides for methodology to determine capital gains in the hands of the partner and not in the hands of partnership-firm. If the firm keeps the underlying asset as capital asset, then AO may adopt the amount credited to partners capital as value of capital asset for the purpose of depreciation. Tushar Hemani, Advocate 6

7 In this case, capital asset of the partner has been converted into trading asset of assessee-firm. Thus, character of asset has changed in the hands of firm. Further, assessee-firm made payment to the partners by way of crediting their capital account and such purchase cost of land was claimed as expenditure. Partners are covered by the provisions of S.40A(2)(b). Hence, provisions of S.40A(2)(a) would apply and if payment to partners towards such land is found to be excessive or unreasonable as compared to fair market value, AO can disallow the same u/s 40A(2)(a). Tushar Hemani, Advocate 7

8 Facts: CIT vs. Balbir Singh Maini 86 taxmann.com 94 (SC) A co-operative housing society, of which assessee is a member, entered into a tripartite Joint Development Agreement (JDA) with two developers for development of a land. Such JDA was not registered. As per the JDA, part consideration was received and balance consideration was to be received only after the permission for development is granted by authorities. Somehow, such permission was not granted and hence, JDA did not take off the ground. Accordingly, even balance consideration was never received. AO held that S.53A of The Transfer of Property Act, 1882 is applicable to transactions under the JDA and accordingly, transfer in terms of S.2(47)(v) has been effected since possession was handed over in part performance of JDA. Thus, he made addition in respect of capital gain. Tushar Hemani, Advocate 8

9 Held: As per S.17(1A) of The Indian Registration Act, 1908 as amended by Amendment Act of 2001, an unregistered agreement (like JDA in this case) shall have no effect in law for the purposes of S.53A. Since JDA has not been registered, it has no binding force in the eye of law and hence, no transfer can be said to have taken place under such JDA. Hence, question of any capital gain does not arise at all. For want of requisite permissions, the transaction envisaged in the JDA could not materialize and did not result into any income which was dependent upon obtaining requisite permissions. Thus, no profit/gain ever arose from transfer of capital asset which could be brought to tax u/s 45 r.w.s. 48. Tushar Hemani, Advocate 9

10 Distinction between possession for the limited purpose of development vis-à-vis possession in part performance of an agreement to sell a property. Capital Gain is only on real income and not on hypothetical or notional income. S.2(47)(vi) of the Act can be invoked even if there is no change in the membership of Society. in any other manner whatsoever is wide so as to include these kinds of arrangements. Tushar Hemani, Advocate 10

11 Issues: Wef 01/04/2018, registered JDA shall be governed by 45(5A) of the Act. Unregistered JDA would not be treated as transfer within the meaning of S.2(47)(v) in view of this SC decision. Decision of Chaturbhuj Dwarkadas Kapadia [260 ITR 491, (Bom)] Issues with regard to transfer in year one and right to receive consideration or actual receipt of consideration in later years. Tushar Hemani, Advocate 11

12 Facts: Kaushalya Devi 92 taxmann.com 335 (Del) Assessee initially entered into an agreement to sale an immovable property to Mr. A and received certain sum as advance. However, such deal did not materialize. Later, the said property was sold to another person and LTCG earned on sale of such property was declared as income. However, assessee had to pay certain sum to Mr. A for forgoing his right in the underlying property. While computing capital gain, assessee claimed liquidated damages (i.e. sum paid to Mr. A) as deduction u/s 48(i). Such claim was denied by AO. Tushar Hemani, Advocate 12

13 Held: It was held that earlier agreement to sell contained specific clauses that Mr. A would be given property free from all encumbrances and that vacant and peaceful possession of the property would be given to him. In the event of failure to execute sale deed and deliver vacant peaceful possession, damages shall be paid to him. Further, there was a close nexus and connect between payment of such liquidated damages and transfer of property to the ultimate purchaser resulting into LTCG in the hands of the assessee. There was a proximate link and the expenditure was incurred was in furtherance and to effectuate transfer of the asset and was not remote and unconnected. Tushar Hemani, Advocate 13

14 Under such circumstances, liquidated damages were incurred wholly and exclusively in connection with transfer of the underlying asset and hence, the same are allowable as deduction u/s 48(i). However, Hon ble Court observed that the above ratio should not be interpreted to mean that whenever an assessee pays amount under an earlier agreement in terms of settlement or even a court decree, the same would be treated as expenditure wholly and exclusively in connection with transfer (i.e. subject matter of capital gains). Nature and character of the earlier agreement, its timing, payment claimed as expenditure and date of transfer resulting into capital gains are aspects which need to be taken into consideration. Tushar Hemani, Advocate 14

15 R. F. Nagrani HUF 93 taxmann.com 302 (Bom) Facts: Assessee, a retiring partner, received certain sum as goodwill upon retirement from the concerned partnership firm. Such sum came to be taxed as Long Term Capital Gain by the AO. Tushar Hemani, Advocate 15

16 Held: Amount received by a retiring partner as goodwill on retirement from a partnership firm cannot be subjected to capital gains tax in his hands. Tushar Hemani, Advocate 16

17 Narendra J. Bhimani 169 ITD 245 (Rajkot Trib.) Facts: Assessee sold certain plots of land and offered resultant gain to tax as capital gains. AO found that assessee converted an agricultural land into non-agricultural land, floated plotting scheme with due permission of the authorities and eventually sold such plots. AO held that sale of such plots was an adventure in the nature of trade and hence, proceeds thereof are liable to be taxed as business income and not capital gains. Tushar Hemani, Advocate 17

18 Held: ITAT, in light of the followings facts, held that income on sale of such plots was to be taxed as capital gain : Land was purchased years back; Land was all along held as capital asset ; With the passage of time and rapid urbanization, sellable standard unit size had considerably come down; Further, since land was in residential area, where smaller sized plots are required by the end users, assessee had to divide the land holding into plots in order to get the market price for land; It was a one-off transaction; Even sale consideration was not ploughed back in land investments; Tushar Hemani, Advocate 18

19 CIT vs. Dynamic Enterprises 40 taxmann.com 318 (Kar)(FB) Facts: Assessee-firm purchased a property under a registered sale deed. Later, assessee-firm was reconstituted and five partners brought cash by way of capital contribution. Nearly a year thereafter, erstwhile three partners retired and had withdrawn their capital as standing in books of assessee-firm. AO held that there was transfer of property from old firm to reconstituted firm and that incoming partner tried to evade capital gain tax as well as stamp duty and therefore, capital gain tax was liable to be paid by assessee-firm as per section 45(4).

20 Held: It was held that in order to attract section 45(4) capital asset of firm must be transferred in favor of partner resulting in such firm ceasing to have any interest in such capital asset so transferred and concerned partner should acquire exclusive interest in such capital asset. In assessee s case, partnership continued to exist after retirement of three partners and business was carried on by remaining partners. Thus, neither the firm dissolved nor there was any distribution of capital asset when three partners retired from assessee-firm. Retiring partners were merely given cash representing their value of share in partnership firm. In absence of (1) distribution of capital asset and (2) transfer of capital asset in favor of retiring partners, no profit or gain arose in the hands of assessee-firm. Hence, question of assessee-firm being assessed u/s 45(4) and charging it tax for profit which never accrued to it doesn t arise at all.

21 CADD Centre vs. ACIT 65 taxmann.com 291 (Madras) Facts: Assessee-firm, consisting of two partners holding equal stakes, revalued its assets and Firm was converted into Pvt. Ltd. Co. as a going concern. All assets of firm got vested as assets of company in which same partners were interested. AO took a view that transfer of business assets of assessee firm to company would constitute distribution of assets and would attract capital gain as contemplated u/s 45(4).

22 Held: For invoking S.45(4), two conditions are to be fulfilled viz. (1) transfer by way of distribution of capital assets and (2) such transfer should be on dissolution of firm or otherwise. When firm is converted into company there is no distribution of assets and as such, there is no transfer. Rather, there is only taking over of assets from firm to company. Thus, the said condition was not satisfied in assessee s case. S.45(4) is applicable only when firm is dissolved. Thus, even the said condition is not satisfied. It was observed that no consideration was received by assessee-firm on transfer of assets from firm to company; Firm had only revalued its assets which will not amount to transfer. In light of the above, it was held that vesting of property in private limited company is not consequent or incidental to transfer. There is no transfer of capital assets as contemplated u/s 45(1).

23 Facts: DCIT vs. R. L. Kalathia & Co. 66 taxmann.com 249 (Guj) Assessee-firm revalued its assets and credited partners capital account in the ratio of their shares in firm. Thereafter, assess-firm got converted into a limited company and shares to the extent of revaluation of assets were allotted to partners in firm as directors of limited company. AO took a view that capital gain arising on transfer of assets from assessee-firm to assessee-company was liable to tax u/s 45. CIT(A) upheld AO s view whereas ITAT held that the said transaction could not be brought within the ambit of either S.45(1) or S.45(4).

24 Held: Hon ble the High Court held that the primary requirement for invoking S.45(4) is that there has to be distribution of capital assets. The said factor is totally missing in the assessee s case as there is no distribution of capital assets either by way of dissolution of firm or otherwise. Thus, ITAT was justified in holding that sale of business of firm as a going concern to the company for a consideration of paid-up capital share capital does not amount to transfer liable to tax as capital gain.

25 Facts: Pipelines India vs. ACIT 67 taxmann.com 112 (Madras) Partners of assessee-firm constituted a private limited company ( company for short) which was admitted as a partner in the assessee-firm. Later on, natural partners executed a release deed giving up all their rights in assessee-firm in favor of the company. As a consequence, company became absolute owner of assessee-firm. Natural partners were allotted shares in company for relinquishing their rights in assessee-firm. AO, after holding that there was transfer of assets by way of distribution of capital assets on dissolution of assessee-firm, invoked S.45(4) & computed capital gain.

26 Held: For attracting S.45(4), conditions which need to be satisfied are (1) profits and gains should arise; (2) from transfer of capital asset; (3) by way of distribution of capital asset; (4) on dissolution of firm or AOP or BOI not being company or a co-operative society and (5) or otherwise. In the present case, partners have taken equity shares in company which was inducted as partner. Therefore, whatever rights they had in capital assets of firm by virtue of being its partners, the same continued to exist in the form of equity shares which they held in company. Thus, one form of ownership which they had as partners of firm got converted into another form. Hence, this was neither a case of transfer of capital asset nor a case of distribution of capital asset. Accordingly, S.45(4) couldn t have been invoked.

27 ITO vs. Alta Inter-Chem Industries 32 taxmann.com 138 (Ahd Trib.) Facts: AO found that on , there was a major change in shareholding pattern of assessee-firm and five new partners have been introduced. Further, assets of assessee-firm were revalued on AO was of the view that by aforesaid revaluation, investments made by new partners had been appreciated without paying any taxes. It was also the case of AO that assessee had not fulfilled condition prescribed u/s 47(xiii) of the Act. Hence, it was disentitled for exemption and thus, capital gain u/s 45(iv) was attracted.

28 Held: It was held by Hon ble the ITAT that it was a case of Conversion from firm to company and in the said process, no transfer is involved. Hence, appreciation of assets in the process of conversion from firm to company was not liable to be taxed under the head capital gain.

29 Arun Sunny vs. DCIT 184 Taxman 498 (Ker) A property held by assessee since period even prior to became capital asset as per notification issued on The controversy between the assessee and Department was as to what is the date on which cost of acquisition/fair market value of such property has to be computed. Is it the date of notification i.e on which such property was notified as capital asset or it is to be computed as on in terms of S.55(2)(b).

30 It was held that incidence of levy u/s 45 is on capital gain computed in the manner provided for in section 48 r.w.s. 55(2). Deduction permissible u/s 48 is in respect of Cost of acquisition of capital asset transferred, whether or not it was capital asset on the date of its acquisition. The only condition to attract charge u/s 45 is that property transferred must be a capital asset on the date of transfer and it is not necessary that it should have been capital asset also on the date of its acquisition. Accordingly, cost as at is to be adopted and not cost as at the date of notification.

31 CIT vs. D. P. Sandu Bros. Chembur P. Ltd. 142 Taxman 713 (SC) If an income cannot be charged to tax u/s 45 because of inapplicability of provisions of section 48, then it is not open for the Revenue to tax such income under the residuary head.

32 Issues wrt Deeming Fiction

33 Date for the purpose of Valuation Normally date of registration of conveyance deed; However, if transferred within the meaning of S. 2(47), then the date of agreement to sale shall be date for determining the Jantri rate. Dy CIT Vs. S Venkat Reddy 324 Taxmann.com 24 (Hyd.) ITO.v. Modipon Ltd. (Delhi)(Trib.) (09/01/2015)

34 Where Agreement to sale is entered into and part consideration is received in a given year and Sale deed is executed in subsequent year, then transfer of property is said to have taken place in earlier year i.e. the year in which Agreement to sale has been entered into. [CIT vs. Shimbhu Mehra 65 taxmann.com 142 (Allahabad)].

35 Reference to DVO AO is bound to refer the matter to DVO. [Manjula Singhal vs ITO (2011) 46 SOT 149 (Jodh.) & Ajmal Fragrances and Fashions Pvt. Ltd. 34 SOT 57 (Mum)] Reference once made, valuation of DVO is binding on AO, even if it is less than circle rate.[bharti Jayeesh Sangani Vs ITO (2011) 128 ITD 345 (Mum)] Burden to claim that Circle rate is higher than FMV is on Assessee. [Sharad Dinesh Photograper Vs ITO (2011) 43 SOT 452 (Mum)]

36 If the Assessee does not object before the AO in terms of Section 50 C (2), AO is not obliged to make a reference to the DVO. Ambattur Clothing Co. Ltd ITR 248 (Mad) Sanjaybhai Z. Patel - 48 SOT 231 (Ahd)] If the Purchaser has objected to the SDV before the stamp authorities it does not still debar the seller to object to the said valuation before the AO. B. N. Properties Holdings Pvt. Ltd. [2010] 6 ITR (Trib) 1 (Chennai)

37 For the purpose of computing capital gain on transfer of land or building, if value ascertained by Valuation Officer doesn t exceed value adopted by State Stamp Duty Authority, then value ascertained by Valuation Officer shall prevail. However, if valuation as per Valuation Officer exceeds State Stamp Duty Authority, then valuation of such stamp authority shall prevail. [Pr.CIT vs. Rajabhai Lumbhabhai Ladhiya (2016) 65 taxmann.com 18 (Gujarat)]. If Assessee has challenged the SDV before Stamp Valuation authority, can it still request the AO to make a reference to DVO? ( any other authority )

38 Valuation of Land / Building / Both Section 50 C applies only in cases where it is a capital asset and such capital asset is land or building or both land and building. Any rights in land or building or both are therefore not covered. For purpose of section 50C, land and building are not to be considered as separate assets and their joint valuation is to be adopted. [J. Anjaneya Sharma v. CIT 221 Taxmann 148 (AP)]

39 Various Rights Transferable Development Rights (TDRs) / Floor Space Index (FSI) TDRs are held to be immovable properties. However, the same is not land / building / both. Development Agreement Arif Akhtar (45 SOT 257 (Mum) Transfer within the meaning of S. 2(47)

40 Lease right is neither Land or Building or both hence Sec.50 C not applies. Atul G. Puranik v/s. ITO (2011) 132 ITD 499 (Mum); ITO Vs. Pradeep Steel Re Rolling Mills (P) Ltd. [39 Taxman. Com123 (Mum)] DCIT Vs. Tejinder Singh [ 50 SOT 391 (Kol)] Provisions of section 50C are not applicable on transfer of Tenancy rights [Fleurette Marine Novelle Hatam (2015) 61 taxmann.com 362 (Mumbai Trib.)].

41 50C vis-à-vis Confirming Party When a person receives consideration as a confirming Party, would S. 50C apply? Example: A executes Agreement to Sale on in favour of B for Rs Cr. (Stamp Duty Value (SDV) on Cr.) Sale Deed is executed between A and C with B as confirming Party for Rs Crores on (SDV on is 2.50 Crores)

42 Questions: Whether any additional tax payable by either A or B? Reference date for A (whether or for SDV), assuming substitution of date permissible even for 50C B only transfers his right to purchase the land and not land. (Transfer of rights)

43 Transfer of shares results in transfer of Land / Building If land / building is held through an SPV, being a private limited company, whether transfer of shares of such SPV will amount to transfer of land / building / both and thus covered by 50 C? Transfer of shares of a company instead of transfer of assets owned by such company is a valid transaction: Bhorukha Engineering Ltd. vs. DCIT 356 ITR 25 (Kar) Irfan Abdul Kader Fazlani & Others [(2013) 29 taxmann.com 424 (Mumbai Trib) Lifting of corporate veil was not permitted.

44 Property of company is not property of shareholder. Shareholders merely have interest in company arising out under AoA, measured by a sum of money for the purpose of liability and by share in distributed profit [Electronics Corporation of India Ltd vs Secretary (1999) 4 SCC 458].

45 S. 50C vs 50B Business as a whole is sold as a going concern for a lump sum consideration. Such deal may include land/building or both. Book value of such land and building could be significantly lower than market value Total consideration for the undertaking itself could be less than individual value of land / building / both Whether Section 50 C can be invoked

46 Section 50 C applies when there is a transfer and such transfer is of land / building / both Sale of undertaking as slump sale is not sale of each of underlying asset separately However, it should fall within the definition of Slump Sale u/s 2(42C) and Undertaking u/s. 2(19AA) DCIT vs Summit Securities (135 ITD 99)(SB)(Mum)

47 S.50C vs S.45(3) Whether the SDV can be substituted in cases where the asset is introduced as capital contribution by the Partner if the amount credited to the capital account of the partner is less than the SDV Canoro Resources 180 Taxman 220 Transfer Pricing Vs. 45 (3)

48 S. 50C Vs. S. 50 If a building being a depreciable asset is disposed off at a value which is less than the SDV, whether S 50 C will apply Section 50 only substitutes the cost of acquisition and not the full value of consideration United Marine Agencies [130 ITD 113 (Mum)(SB)] held that S 50 does not debar application of Section 50 C

49 S. 50C vis-à-vis S. 54 / 54 F / 54 EC etc. If actual consideration is substituted with SDV, impact on Section 54 / 54 F / 54 EC Section 54 and 54 EC, the exemption is granted with reference to capital gains and not with reference to net consideration Therefore, increased consideration to be taken into account for considering the eligibility U/s. 54 / 54 EC.

50 Case of 54 F Deduction granted in proportion of investment in new asset made to the net consideration ; net consideration defined in explanation to S 54 F (1) Section 50 C uses the term for the purpose of section 48 and therefore does not extend to 54F 54F Deduction = Capital Gain x Consideration Invested in New Property Actual Consideration Received (not SDV) Gouli Mahadevappa v. ITO (2013) 356 ITR 90 (Kar.)

51 Raj Kumar Parashar 167 ITD 237 (Jaipur Trib.) Facts: Assessee sold a property resulting into capital gain. However, entire sale consideration was deposited into capital gain account scheme for the purpose of purchasing a new house property and eventually, new property was also purchased within the prescribed time limit. Hence, entire capital gain was exempt u/s 54F. AO invoked section 50C, substituted sale consideration by stamp duty valuation (which was almost four times the actual sale consideration) and computed capital gain after duly granted benefit of deduction u/s 54F to the extent of actual investment in new house property. Tushar Hemani, Advocate 51

52 Held: As per S.54F, where cost of new asset is not less than net consideration in respect of the original asset, then whole of such capital gain shall not be charged under section 45 of the Act. Net consideration for the purposes of section 54F has been defined as full value of consideration received or accruing as a result of transfer of capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer. Tushar Hemani, Advocate 52

53 Consideration determined u/s 50C based on stamp duty authority valuation is not the consideration which has been received by or accrued to the assessee. Rather, it is a value which is deemed to be the full value of consideration for the limited purposes of determining income chargeable as capital gains u/s 48. Thus, provisions of section 50C cannot be applied to section 54F for determining full value of consideration. Accordingly, once net consideration is fully invested in the new asset, the whole of the capital gain (even as worked out in terms of section 50C) shall not be charged under section 45. Tushar Hemani, Advocate 53

54 S. 50C vis-à-vis S. 69B S.50C cannot apply in the hands of the Purchaser: CIT vs. M/s. Sarjan Realities Ltd. [Tax Appeal No.1374 of 2011, (Guj)] DCIT vs. Vallabhbhai (2012) 27 taxmann.com 306 (Ahd) Vishnuprasad S. Agarwal vs. ITO ITA Nos.2567 & 2571/Ahd/2011, Order dated

55 TDS u/s 194IA Tax deductible sum for the purpose of TDS u/s 194IA shall be the actual consideration paid/payable and not the value replaced by Section 50C.

56 S. 50C not applicable to Charitable Trust eligible for S. 11 benefits Deeming fiction created by virtue of section 50C in determining capital gain cannot be extended to section 11(1A). Section 11(1A) has to be applied for definite or limited purpose for which it is created. Sec 11(1A) being specific section governing taxability of capital gains for trusts and a complete code in itself, shall prevail over Sec 50C which is a general section and does not start with a nonobstante clause. The Upper India Chamber of Comm. [TS-735-ITAT-2014(LKW)]

57 50C vs S.271(1)(c) Deeming fiction cannot extend to penalty. CIT vs Madan Theaters Limited (2014) (44 taxmann.com 382) (Kol) CIT vs Fortune Hotels & Estate (P) Ltd. (2014)(52 taxmann.com 330)(Bom)

58 Facts: CIT vs. Polestar Industries (2014) 41 taxmann.com 237 (Guj) Assessee earned Short term capital gain on sale of Depreciable assets worked out u/s 50 of the Act. Admittedly, such depreciable assets were held for more than 36 months and hence, the same were Long Term Capital Assets. Assessee had claimed deduction u/s 54EC in respect of investment made in specified bonds within specified time limit which was denied by AO on the count that by virtue of provision of section 50, concerned capital gain was Short term capital gain whereas deduction u/s 54EC is available only in respect of capital gain arising on sale of Long Term Capital Asset.

59 Held: It was held that deeming fiction prescribed u/s 50 of the Act was only for the purpose of mode of computation of capital gain u/s 48 and 49 and not for other provisions. Capital gain arising on sale of Long Term Capital Asset, if invested in specified asset, cannot be charged to tax and exemption provided u/s 54EC cannot be denied to the assessee merely on account of the fact that deeming fiction is created u/s 50. Thus, assessee cannot be charged to capital gain when Short term capital gain on sale of Long term capital asset gets invested in areas specified under the law i.e. (Bonds prescribed u/s 54EC in the present case).

60 Akash Association 87 taxmann.com 84 (Guj) Facts: Assessee transferred a plot of land under a banakhat (agreement to sale) and declared resultant capital gain. No final sale deed was ever executed. AO was of the view that sale consideration declared by the assessee was on the lower side and hence, AO made a reference to DVO u/s 55A for the purpose of determining FMV of the land as on the date of transfer. Eventually, AO adopted value of land as assessed by DVO and computed capital gain accordingly. Tushar Hemani, Advocate 60

61 Held: S.50C provides for adoption of value taken by stamp valuation authorities for the purpose of stamp duty as full value of consideration of the transferred asset for the purpose of section 48 of the Act. However, reference to DVO u/s 55A for ascertaining full value of consideration is not permissible. The above position would remain unaltered even if final sale deed has not been executed since the expressions adopted or assessed or assessable used u/s 50C would include even a case where the document evidencing transfer of capital asset has not been presented for registration. Tushar Hemani, Advocate 61

62 Indexation & Computation

63 New Base year and Holding period Finance Act, 2017, wef 01/04/2018 made the following amendments: Holding period to qualify for long-term gains has been reduced to 2 years from 3 years for an immovable property being land or building or both [S.2(42A) 3 rd Proviso] in place of 1981, has been made the new base year for calculating indexed cost of acquisition [55(2)(b) rw Explanation to S.48].

64 Why change in the base year? Why was the base year changed from 1981 to 2001? There has been a considerable hardship in determining this fair value since it depends on a period which is more than three decades old. Property prices appreciated at a much higher rate between 1981 and 2001, compared to the increase in CII or inflation.

65 Relevant Provisions S. 55 Meaning of adjusted, cost of improvement and cost of acquisition. (2) For the purposes of sections 48 and 49, cost of acquisition, (b) in relation to any other capital asset, (i) where the capital asset became the property of the assessee before the 1st day of April, 2001, means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of April, 2001, at the option of the assessee ;

66 Relevant Provisions (ii) where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, and the capital asset became the property of the previous owner before the 1st day of April, 2001, means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of April, 2001, at the option of the assessee;

67 Relevant Provisions S. 48 Mode of computation. Explanation. For the purposes of this section, (iii) 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 the 1st day of April, 2001, whichever is later;

68 Relevant Provisions (iv) indexed cost of any improvement means an amount which bears to the cost of improvement the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the year in which the Improvement to the asset took place; (v) Cost Inflation Index, in relation to a previous year, means such Index as the Central Government may, having regard to seventy-five per cent of average rise in the Consumer Price Index (urban) for the immediately preceding previous year to such previous year, by notification in the Official Gazette, specify, in this behalf.

69 What is Fair Market Value? S. 2(22B) defines fair market value, in relation to a capital asset, means (i) the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date ; and (ii) where the price referred to in sub-clause (i) is not ascertainable, such price as may be determined in accordance with the rules made under this Act ;

70 What is Fair Market Value? As per Income tax Guidelines for Immovable properties of 2009 Market value is the price that a willing purchaser would pay to a willing seller for a property, having due regard to its existing conditions, with all its existing advantages and its potential possibilities when laid out in its most advantageous manner. Fair Market Value is the estimated price which any asset in the opinion of Valuation officer would fetch if sold in the open market on the valuation date.

71 What is Fair Market Value? The terms Market Value and Fair Market Value are synonym except for the word Fair introduces an element of a hypothetical market. The expression if sold does not contemplate actual sales or actual state of market. The expression Open Market does not contemplate a purely hypothetical market exempt from the restriction imposed by law. The fair market value excludes sentimental value advertisement, brokerage, stamp-duty, commission etc. for affecting the sale transaction.

72 How to find FMV? How to find Fair Market Value or FMV? According to the Income-tax Act, 1961, FMV shall be the higher of the cost of acquisition of the property or the price that the property shall ordinarily sell for if sold in the open market. There is no fixed formula to calculate FMV of a property. Average Sale price of similar properties in the neighbourhood sold in the year 2001 Jantri/ Circle Rates or Guidance Value. Real Estate Indices e.g. National Housing Bank s (NHB s) Residex, the Reserve Bank of India (RBI) Housing Price Index (HPI) and Residential Property Price Index (RPPI). Registered Valuer

73 Facts: Smt. Vidhi Agarwal 88 taxmann.com 306 (Allhabad) Assessee s mother-in-law purchased a flat in 1970 and gifted the same to the assessee in Assessee sold the above flat during Asst. Year Assessee, for the purposes of computing capital gains, relied on the provisions of section 55(2)(b)(ii) and disclosed value of such flat as at on the basis of a valuation report of an approved valuer. AO discarded such valuation report on the count that no evidence was led in support of the valuation report, such as circle rate, etc. Tushar Hemani, Advocate 73

74 Held: As per section 55(2)(b)(ii), where assessee becomes owner of an asset after from a previous owner who, in turn, may have acquired that asset prior to , cost of acquisition shall be either FMV as at or cost of previous owner, at the option of the assessee. Once assessee exercises his option to adopt FMV as at on the basis of a approved valuer s report, then such valuer s report itself is a piece of evidence. Such valuation report need not be further supported by any other evidence in the form of circle rate, etc. Tushar Hemani, Advocate 74

75 Issues wrt Exemptions

76 M. Raghuram 169 ITD 315 (Chennai Trib.) Once assessee invests entire capital gain in the new house property within the time period stipulated u/s 54 of the Act, then the mere facts that construction was not completed by the builder and possession was not handed over to the assessee within the stipulated time period would not come in the way of claim for deduction u/s 54 of the Act. Tushar Hemani, Advocate 76

77 Mustansir Tehsildar 168 ITD 523 (Mum. Trib.) Booking a new residential house in an under construction project amounts to construction and not purchase for the purposes of claiming exemption under section 54. Section 54 is silent about commencement of construction and hence, commencement of construction can precede the date of sale of the original asset. Tushar Hemani, Advocate 77

78 CIT vs. Bharti Mishra 41 taxmann.com 50 (Del) Facts: Assesse earned capital gain on sale of share and claimed exemption u/s 54F in respect of construction of a house property. AO denied exemption u/s 54F on the count that construction of the said house property had commenced prior to the date of sale of shares.

79 Held: Section 54F doesn t stipulate that construction of house property must begin after the date of sale of original/old asset. There is no condition or reason for ambiguity and confusion which requires moderation or reading words of the said section in a different manner. Section 54F is a beneficial provision and is applicable to an assessee when the old capital asset is replaced by a new capital asset in form of a residential house. Once an assessee falls within the ambit of a beneficial provision, then the said provision should be liberally interpreted. Accordingly, exemption u/s 54F was allowed to the assessee.

80 Laxmi Narayan 402 ITR 117 (Rajasthan) Where assessee purchases new agricultural land out of sale proceeds of his agricultural land, deduction u/s 54B is available even if the final conveyance deed is executed in the name of assessee s wife. Tube-well and other expenses are for betterment of agricultural land for the purposes of carrying out agricultural activities. Hence, such expenses must be considered as part of investment for the purpose of deduction u/s 54B. Tushar Hemani, Advocate 80

81 CIT vs. Kamal Wahal 30 taxmann.com 34 (Del) Facts: Assessee sold a property which into capital gain and claimed deduction u/s 54F in respect of investment of sale proceeds in a vacant plot and purchase of residential house in the name of his wife. AO took a view that concerned investment ought to have been made in assessee s name and not in wife s name. Accordingly, deduction u/s 54F was denied.

82 Held: Section 54F merely says that assessee should have purchased/constructed a residential house. It doesn t require that new residential property must be purchased in the name of the assessee. Assessee had purchased new property only in the name of wife and not in the name of a stranger or someone who is unconnected with him. There was also no dispute as to entire investment coming out of sale proceeds of property sold by assessee and no contribution from assessee s wife. In such a scenario, it was held that assessee was eligible for deduction u/s 54F of the Act.

83 Dr. (Smt.) Sujhata Ramesh 401 ITR 242 (Karnataka) Once assessee invests capital gain arising on sale of a property in the prescribed bonds, there is substantial compliance of the provisions of section 54EC of the Act. Merely because there is some delay in making such investments (six months in this case), deduction u/s 54EC should not be denied. CBDT must, upon receiving application u/s 119, condone delay in making such investments once reasonable cause for delay is shown. Tushar Hemani, Advocate 83

84 Jyotindra H. Shodhan 87 ITD 312 (Ahd)(SB) Facts: Assessee sold some plots of land and executed sale deeds on but on account of litigation, last and final payment towards sale consideration was received on Assessee invested the same in specified bonds and claimed exemption u/s 54E on the ground that such investments were made within six months of receipt of final installment. AO denied exemption u/s 54E on the count that such investments were not made within six months of transfer as contemplated u/s 54E.

85 Held: It was held that S.54E specifically provides for investment in specified bonds within a period of six months from the date of transfer and there is no ambiguity in the said statutory provision. Since assessee failed to make investment within six months from the date of transfer, assessee was not eligible for exemption u/s 54E.

86 Shankar Lal Saini 89 taxmann.com 235 (Rajasthan) Even if unutilized sale consideration is deposited in capital gain account scheme before the due date of furnishing return of u/s 139(4) (i.e. belated return), deduction u/s 54B and 54F cannot be denied; Legislature requires depositing unutilized sale consideration in capital gain account scheme before due date of furnishing return u/s 139 which implies due date u/s 139(1) as well as 139(4). Tushar Hemani, Advocate 86

87 CIT vs. Ms. Jagriti Agarwal 15 taxmann.com 146 (P&H) Facts: Assessee sold a house on (i.e. AY 06-07) and filed belated return u/s 139(4) on claiming deduction u/s 54 since assessee had purchased another property on AO denied claim u/s 54 of the Act on the counts that assessee failed to deposit amount of capital gain in capital gain accounts scheme and also failed to purchase to house property before the due date of filing return of income which was as per section 139(1) of the Act.

88 Held: Section 139(4) provides for an extended period of limitation as an exception to section 139(1). Such extended time is one year from the end of relevant assessment year and in assessee s case, such extended time limit works out to Section 139(4) is not an independent provision but relates to time contemplated u/s 139(1) and therefore, sub-section (4) to section 139 has to be read along with sub-section (1). Accordingly, due date of furnishing return of income as per section 139(1) is subject to extended period provided u/s 139(4). Since assessee has filed return of income within time limit prescribed u/s 139(4), assessee is eligible for benefit u/s 54 of the Act.

89 Smt. M. K. Vithya 91 taxmann.com 102 (Chennai Trib.) If construction of a new residential house is completed within the stipulated time period of three years, the mere fact that in the year of transfer, assessee failed to deposit unutilized sale consideration in the capital gain account scheme before the due date of furnishing return of income cannot be a ground to deny exemption u/s 54F. Tushar Hemani, Advocate 89

90 Smt. Amina Ismil Rangari 167 ITD 199 (Mum. Trib.) Exemption u/s 54F claimed even in a belated return of income filed in response to notice u/s 148 is allowable since section 54F neither makes it mandatory to file return of income within the stipulated time period nor places an embargo as regards claim of such exemption in case return of income is filed belatedly. Tushar Hemani, Advocate 90

91 CIT vs. Devdas Naik 49 taxmann.com 30 (Bom) Facts: Assessee sold a bungalow and bought three flats, one in his own name, another in name of assessee and his wife and the third one in the name of his wife. Assessee claimed deduction u/s 54 on purchase of two flats in which he was either sole owner or a joint owner. AO denied the said claim on the count that it was contrary to the legislative intent and also the plain language of section 54 of the Act.

92 Held: Hon ble the High Court observed that though two flats were acquired under two distinct agreements and from different sellers, map of general layout and internal layout indicated that there was only one common kitchen. Flats were constructed in such a manner that adjacent flats can be combined into one. In light of the above, it was held that so long as there is a residential unit or house, benefit or deduction cannot be denied. In the present case, there was a single unit. Once there was a single kitchen, plans can be relied upon. In such peculiar factual backdrop, deduction u/s 54 was allowed.

93 CIT vs. Ashok Kumar Ralhan 46 taxmann.com 416 (Del) Facts: Assessee sold a property in October 2006 and declared capital gain. He had purchased a property in December 2004 on construction of which he claimed to have certain sum in respect of which exemption was claimed u/s 54F. AO denied exemption u/s 54F on the count that there was no need for the assessee either to reconstruct or renovate the purchased property as it was already fully constructed. CIT(A), relying on certificate issued by an architect wherein it was stated that earlier structure was demolished and thereafter new structure was made on the plot, held that it was a case of new construction after demolition and hence, assessee was eligible for exemption u/s 54F. The said view was upheld by ITAT.

94 Held: Hon ble the High Court observed that based on factual finding recorded by first appellate authority and affirmed by ITAT, it was apparent that it was a case of construction u/s 54F. Section 54F requires that construction should be carried out within a period of three years from the date of sale of the capital asset and the in the instant case, construction was carried out within the prescribed time frame. Accordingly, it was held that assessee was eligible for exemption u/s 54F.

95 CIT vs. Sambandam Udaykumar 19 taxmann.com 17 (Kar) Facts: Assessee sold certain shares, earned capital gain and claimed exemption u/s 54F in respect of investment made in construction of a residential house. AO found that flooring work, electrical work, fitting of door shutters and window shutters were still pending. AO took a view that even after a lapse of three years from the date of transfer of shares, construction of residential house was not complete. Hence, AO denied exemption u/s 54F of the Act.

96 Held: Section 54F is a beneficial provision of promoting construction of residential house and therefore, the same has to be construed liberally. The intention of the legislature was to encourage investments in acquisition of a residential house. Completion of construction or occupation is not the requirement of law. The condition precedent for claiming benefit u/s 54F is that capital gain realized on sale of capital asset should have been parted by the assessee and invested either in purchasing or constructing a residential house.

97 In assessee s case, developer of house had acknowledged that only minor fittings like window shutters and some electrical work were pending. Assessee had produced sale deed showing transfer of property in assessee s name. Assessee had also been put in possession of such property. Thus, object of section 54F i.e. encouraging investment in a residential building was completely fulfilled. In light of the above, exemption u/s 54F was granted to the assessee.

98 Success is not final, failure is not fatal: it is the courage to continue that counts. Winston S. Churchill Thank You