DIRECT TAX REFRESHER COURSE Current Controversial Issues under Capital Gains and Section 56 Compiled by Milin Mehta Chartered Accountant
Statutory Warning Anything said in this paper could be valid only till A.Y. 2013-14 and its applicability should be rechecked after introduction of GAAR and other subordinate legislation under it. The presenter does not take any responsibility of actions by the Tax officials on account of introduction of GAAR [it is not sure whether the Government would take responsibility or not]. In any of the statements in the paper if there is any hint of reduction of tax liability, the same is treated to be not applicable after A.Y. 2013-14.
Amendments to Capital Gains - 1 Section 2 (14) Capital Asset Explanation inserted wref 1.4.62 property includes and shall be deemed to have always included any rights in or in relation to an Indian Company, including rights of management or control or any other rights whatsoever. Can it therefore be argued then when a shareholder having controlling interest in a company transfers his controlling stake, there are two transfers? i.e. transfer of shares and transfer of controlling interest. If yes, what is cost of acquisition thereof? Whether the AO can apportion the consideration between shares and controlling stake and give differing tax treatment? Shares of listed Company [Exemption / Differential Rate of Tax] Shares held for less than 3 years but more than 1 year and transfer of controlling interest together with shares Refer to Madras High Court [1999] 236 ITR 51 Dr. D. L. Ramchandra Rao in connection with bifurcation of consideration for land and building for composite sale Also see amendment to Section 2 (47) Transfer Explanation 2 Transfer includes disposing off or parting with an asset or any interest therein or creating any interest in any asset in any manner whatsoever. Notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India; Take case of real estate companies [SPVs for land holding]
Amendments to Capital Gains - 2 In case of amalgamation Exception, where the shareholder itself is the amalgamated company Section 47 any transfer by a shareholder, in a scheme of amalgamation 35a, of a capital asset being a share or shares held by him in the amalgamating company, if (a) the transfer is made in consideration of the allotment to him of any share or shares in the [amalgamated company except where the shareholder itself is the amalgamated Company, and] (b) the amalgamated company is an Indian company A Ltd. [Amalgamated Co / Transferee Company] holds 60,000 shares of B Ltd. [Amalgamating Co. / Transferor Company] B Ltd Merges in A Ltd. And accordingly, shares of B Ltd. held by A Ltd. Is extinguished. This may amount to transfer Cost of acquisition of an asset on conversion of a Partnership into LLC under section 47 (xiii) or Proprietorship to LLC under 47 (xiv) covered wref 1.4.1999.
Amendment to Capital Gains - 3 Insertion of Section 50 D Where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer. Cases of Contingent Payments Joint Development Agreements Indefinite consideration 54 B [Agricultural Land] benefit also granted to HUFs 54GB Exemption of Capital Gains on investment in Shares Individual / HUF Sale of residential house or a plot of land Investment in shares of eligible company Reference to DVO U/s. 55A of the Act [1 st July, 2012] 1.4.1981 value [FMV less than claimed by the Assessee] Poonam P Bhandari [Bombay Tribunal]
Amendment to Section 56 Donee based income tax on gifts received Original exemption applied only where the gifts received by an individual from his / her relative Gifts received by the HUF from any person [including its members] will not be considered as exempted as relative definition did not include HUF or its members Amendment made w.r.e.f. 1.10.2009 for excluding the gifts received by HUF from its members Gifts received from members only exempted. Accordingly parents given gifts to son s HUF is not exempted Relative of a member giving gift to the HUF is not exempted The provisions of clubbing contained in Section 64 (2) would apply Impressing separate property of a member with the character of property belonging to the firm; Throwing such property in common stock of family Transferring, directly or indirectly, to the family without adequate consideration Allotment of Shares at more than its fair market value [Separately dealt]
Other Judicial Controversies
Capital Asset Essential ingredients for charge of Capital Gains Capital Asset Transfer Date of Transfer Full value of Consideration received or accrued Cost of Acquisition / Improvement Special / Deeming Fiction including exemptions [Roll Over, etc.] Capital Asset Amendments made by the Finance Act, 2012 [controlling interest] Shares Held as Capital Asset Vs. Stock in Trade Part of the shares held as stock in trade and other part held as capital asset Conversion of stock in trade into capital asset [Reverse of Section 45(2)]
Agricultural Land - Exclusion The Act provides for Agricultural land, but excludes Land situated within a municipality (including a municipal corporation, notified area committee, town area committee or town committee) or a cantonment board having population of not less than 10,000 Within notified area (not being more than 8 KMs) from local limits of such municipality or cantonment boards Agricultural Land Gemini Pictures 220 ITR 43 (SC) Also See, 204 ITR 631 (SC), 127 ITR 664 (Guj), 209 ITR 946 (Bom), 208 ITR 638 (Guj) What is local limits: Whether includes urban agglomeration? How the limit of 8 Kms [or less] computed? By Road / as the crow flies Refer to Laukik Developers 303 ITR 356 (Bom) (AT) Road Distance to be seen and not as the crow flies
Stock in Trade This is one exemption a person would not like to fall in; Gives rise to one of the most important controversies of today s time Capital Gain / Business Income General Principles Royal Commission [1955] on taxes on profits and income Subject matter of realisation i.e. nature of asset. Asset should be capable of producing income or enjoyment by merely holding / owning it; Length of holding it Frequency of Similar Transactions Supplementary work in connection with the property Circumstances responsible for its realisation Motive of the investment G. Venkataswami Naidu [1959] 35 ITR 594 (on page 609) (SC) celebrated decision on Land transactions One single test cannot be applied but cumulative effect of all the circumstances to be considered.
Stock in Trade - Securities Genesis of the Problem Section 10 (38) for listed securities long term gain Section 112 for listed securities short term gain 10 % Now concessional tax treatment of unlisted company s shares held by Non-residents Present Times, the issue is of the Loss and not of Profits Circular No. 4 / 2007 dated 15.6.2007 Referred to Associated Industrial Development [82 ITR 586 (SC)] The Assessee to lead the evidence Possible to have two portfolios, one for investment and one for trading Factors that can prove two different portfolios Separate DMat Accounts Accounting Entries Broker, Bank Accounts, etc. Delivery of Shares CIT vs. Rewashanker A. Kothari, (2006) 283 ITR 338 (Guj.) Gopal Purohit Bombay High Court
Securities Interesting Issue Assessee holding listed shares held as investment Cost of Acquisition Rs. 100.00 lacs Market Value as on 1.4.2008 Rs. 150.00 lacs Market Value as on 29.12.2008 Rs. 40.00 lacs Assessee sells these securities in Stock Market as on 29.12.2008 for Rs. 40.00 lacs Could there be some difference in taxation had this been converted into stock in trade on 1.4.2008? Section 45 (2) For loss on sale of listed securities, useful reference may be made to Royal Turf Club 144 ITR 709 (Cal) Whether covered by Section 14 A (loss) refer to Navin Bharat Industries 270 ITR 1 (AT) (Bom)(SB) Buy-back of Shares Interesting recent development AAR no. P of 2010 dated 22nd March 2012 Selective Buyback treated as Dividend Interesting contention that buy back of shares from wholly owned subsidiary
Transfer - Conventional Transfer means Transfer inter vivos [Section 5 of TP Act, 1882] Transfer between two persons Existence of both persons at one point of time is necessary to fall within conventional definition Part IX Conversion of a Firm into Company Texspin Engineering 263 ITR 345 (Bom) Section 47 (xiii) partnership to Company All assets and liabilities relating to the business All partners become shareholders in same proportion as to balance in capital account Partners of the firm do not receive any consideration or benefit other than by way of allotment of shares Aggregate shareholding not less than 51 % and it remains so for a period of 5 years Change in partnership capital prior to sale Cost of acquisition in the hands of company Section 49 originally did not require substitution [Depreciation Fifth proviso to 32 (1)]. FA 2012 made amendment wref 1.4.1999
Interesting case of Development Recent concept of Joint Development Agreements [JDA] The Land owner and the developer enter into an agreement The proceeds of the sale of developed property is distributed between the land owner and the developer in agreed proportion [proportion generally fixed based on relative investment by respective party] The question arises as to at what stage the land owner is liable to pay capital gains tax on its land K. Radhika TS 533 ITAT 2011 (HYD) Section 53 A is not applicable as the purchaser has not performed or willing to perform his part of the contract [i.e. share 45 % of the proceeds] Willingness arises only after a person is able to perform 2 (47) (i) Not applicable as no transfer in conventional manner 2 (47 (v) not applicable as no part performance in terms of section 53 A of the Transfer of property act 2 (47)(vi) not applicable the Tribunal is silent on this. The Assessee argued that 2 (47)(v) / (vi) applicable when factually the transfer is complete, but the documents are executed in such a manner that title does not pass but the purchaser is entitled to enjoy the property [modern methods of transfer] Additional argument that the consideration cannot be ascertained [Amendment by FA 2012 Section 50 D]
Admission or retirement of Partner Does not involve any transfer However, if the new partner brings asset into the firm Section 45 (3), considers the same as transfer Full value of consideration is equal to the amount credited to the capital of the said partner Concept of market value / 50 C value, etc. does not arise Canoro Resources 313 ITR 2 (AAR) [Section 45 (3) Vs. 92] Kartikeya Sarabhai / Sunil Siddharthbhai 156 ITR 509 (SC) Consider the case as under: New partners admitted Old partners retire later [there is no dissolution of the Firm] Concepts used in Section 45 (4) Transfer of a capital asset By way of Distribution of Assets On Dissolution or otherwise Whether also covers a case where there is no distribution of capital asset Burlington Exports 45 ITD 424 (Bom) J. Kimatrai [2007] 11 SOT 462 (Bom) Concept Definition of Transfer U/s. 2 (47) not amended Malabar Fisheries Co. 120 ITR 49 (SC) Whether covers cases other than dissolution say retirement A. N. Naik 136 Taxman 107 (Bom)
Deeming Fiction S. 50 / 50 C Section 50 - Concerning the depreciable asset Section 2 (42A) given a by-pass and irrespective of holding the asset is treated as short term capital asset Limited for the purpose of section 48 and 49 (i.e. for computing capital gains, indexation, etc. Does not have application for the purpose of section 54, 54EC or 112, etc. Ace Builders 76 ITD 389 (Bom); Weikfield Products 71 TTJ 518 (Pune) Section 50 C Concerning the Stamp Duty Value Adopted, Assesed or Assessable The concept that if the document is not actually assessed is now gone for excluding Covers only land / building / both, but does not cover any right or interest in the said land / building / both Like Development rights / lease hold rights Atul Puranik [TS- 197-ITAT-2011(Mum)] & Tejinder Singh [TS-121-ITAT-2012(Kol)] Does not cover cases other than capital asset for transferor and therefore does not apply to land dealer Kan Construction and Colonizers (P) Ltd [TS-252-HC-2012(ALL)] Not barred in Section 50 cases ETC Industries Ltd [TS-340-ITAT-2012(Ind)] Limited Application For the purpose section 48 i.e. computation provision only. Has no application for computing the exemption U/s. 54 F, which are linked to full value of consideration received Cannot be applied for addition U/s. 69B, etc. ITO v. Inderjit Kaur(Mrs) (2012) 50 SOT 377 (Chandigarh)(Trib.)
Section 54 / 54EC Capital gain on sale of a residential house exempt from tax to the extent invested in another residential house Whether only one house or more than one houses Whether house in India / outside India Leena J. Shah 6 SOT 721 (Ahd) Prema P. Shah 282 ITR 211 (AT) (Bom) 54 (2) Deposit in Capital Gains Deposit Scheme Whether obligatory to deposit? [Concept not utilised before the date of furnishing return U/s. 139] Shri R.K.P. Elayarajan [TS-422-ITAT-2012(CHNY)] 54EC Per person per Financial Year If 6 months period fall in more than one year, whether Rs. 50.00 lacs per year can be invested - Shri Aspi Ginwala [TS-192-ITAT-2012(Ahd)] Contra - Shri Raj Kumar Jain & Sons (HUF ) [TS-142-ITAT-2012(JPR)] Clubbing of income Applicable prior to clubbing and therefore each minor child entitled to take benefit separately from parents Shri Shankar Sharma [TS-379-ITAT- 2012(Kol)] If investment within 6 months impossible, 6 months from date of receipt is permissible - Mahesh Nemichandra Ganeshwade v. ITO ( Pune)(Trib.)www.itatonline.org Consider Gift of Asset immediately prior to sale
Section 56 Gifts Received Section 56 (vii) Donee based Income tax on Gifts Received Amount of money and also gift of specified assets Any sum of money [Cash] Any immovable property without consideration Stamp Duty Valuation Any property either without consideration or without adequate consideration Property includes only capital asset [in the hands of recipient] Shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, any work of art or bullion Fair Market value for immovable property is Stamp Duty Valuation FMV for shares which are listed [meaning listed on recognised stock exchange and quotation is made in ordinary course of business not a concept same as thinly traded quoted price on the stock exchange either on the date or immediately preceding date if not quoted on the date of transaction FMV of unlisted shares Book Value [Adjusted Asset minus adjusted liabilities] Adjustment for Provision for Tax and Advance Tax paid Partly paid shares, etc. adjustment built in To be worked out on the valuation date meaning the date of receipt of the property In case of the Asset, the concept is that of receipt of the Asset Allotment of Shares
Section 56 Shares When a firm / Closely held company, receives shares of a closely held company either without consideration or at consideration less than fair market value 1 st June, 2010 effective date Fair market value = book value as mentioned in earlier slide. For shares and securities of unlisted company received for less than FMV if received by Individual / HUF - Section 56 (2) (vii) If received by firm / unlisted company Section 56 (2) (viia) If received by AOP / BOI [Trust, etc.] Not yet covered If a closely held company receives any consideration for issue of shares at premium that exceeds the fair market value of the shares then such excess is chargeable to tax in the hands of the Company Not to apply to Venture Funding / or from notified person / class of persons [like private equity, etc.] FMV for this purpose shall the value as per the prescribed method or value of tangible / intangible assets of the company [to the satisfaction of the AO] Though the provision appears to be discretionary / arbitrary and capable of being put to misuse, it should not be objected as absence thereof has led to huge misuse by unscrupulous assessees
Section 57 (iii) Akin to Section 37 (1) Residuary section However, the concept is far narrower: Any other expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income Not a concept of for the purpose of business or profession Decision in the case of Dr. V. P Gopinathan 248 ITR 449 (SC) Amount deposited in the bank as FDR, interest thereon offered to tax U/s. 56 Monies borrowed against the FDR and utilised for various purposes Interest paid on borrowing not allowed as deduction as interest expense not for earning such income. Very restricted view as FDR could have been encashed and money could have been utilised. The fact that the borrowing was made, goes on to show that the borrowing was made [and therefore interest paid] was for continuing to earn interest income
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