ISSUES IN CAPITAL GAIN NIHAR JAMBUSARIA 25 July, 2010
BUSINESS INCOME VS. CAPITAL GAINS Whether the assessee whose substantial income comprises long term capital gain can be said to be a trader of shares and doing share trading business and income from it is taxable as business income or capital gains? CIT V/S. Gopal Purohit - ITA No. 1121/09 Dt. 6/01/10 (2010-TIOL-129-HC-MUM-IT) Management Structure & Systems Pvt. Ltd. Vs. ITO [2010-TIOL-254-ITAT-MUM] ACIT Vs. Dinesh K. Mehta HUF [I.T.A.No. 976/Mum/2009] Page 2
INDEXATION BENEFIT Where an assessee acquires a capital asset by any mode specified in S.49(1), whether indexation is allowable from the previous year of acquisition by the assessee or from the previous year in which the previous owner acquired the capital asset? Pushpa Sofat 82 ITD I (Chd.) Kishore Kanoongo 102 ITD 437(Mun.) DCIT V. Manjula J Shah dated 16.10.2009 Page 3
INDEXATION BENEFIT Whether the indexation benefit can be claimed treating the sale of land as a long term capital gain, even though the Assessee has claimed depreciation on the land since 1948? CIT vs. M/s Contractor & Co. [2010-TIOL-99-HC-Mum-IT] Whether the assessee's claim of computation of long term capital gains on the sale of shares, other than the bonus shares of Infosys Technologies, after giving the benefit of indexation is in consonance with the proviso to Section 112(1) and the other provisions of the Act? CIT Vs. Anuj Sheth (HUF) [2010-TIOL-297-HC-MUM-IT] Page 4
LAND AND BUILDING Where building along with land attached to it is transferred, the period of holding of land shall be computed from the date of acquisition of land and the period of acquisition of the building from the date of completion of construction. CIT V. Vimal Chand Golecha 201 ITR 442(Raj.) CIT V. Citi Bank N.A. 261 ITR 570(Bom.) 2009-TIOL-29-ARA-IT Page 5
CAPITAL GAIN VS. TRANSFER PRICING PROVISIONS Whether the proposed firm can be granted the status of a firm for the purposes of the Act if it satisfies the conditions listed u/s 184? Whether the Capital Gains arising on the transfer of a capital asset by a partner to the proposed firm would be governed by the provisions of Sec. 45 (3), or by the transfer pricing provisions? Whether by applying the transfer pricing provisions to determine the consideration for the transfer of the participating interest, the provisions of Article 24 (non discrinimation clause) of the Tax Treaty would be attracted? Canoro Resources Ltd. In re [2009-TIOL-10-ARA-IT] Page 6
CAPITAL GAIN UNDER THE INDIA- MAURITIUS DTAA Whether the capital gain earned by a Mauritius company on transfer of shares and securities in India is taxable in India? DDIT vs. M/s Saraswati Holding Corporation Inc. [2009-TIOL-529-ITAT-DEL] E*Trade Mauritius Ltd. [2010-TIOL-20-ARA-IT] ` Page 7
APPLICABILITY OF SEC. 112 TO N.R.I. Whether tax payable on the long term capital gains arising on transfer of listed equity shares by non - resident would be 10% of the amount of capital gains as per proviso to sec. 112(1)? Whether while calculating the amount of long term capital gain, interest paid by the assessee as per the directives of a Statutory body will be treated as a part of the cost of acquisition of the shares? Burmah Catrol Plc. [2008-TIOL-13-ARA-IT] TAXABILITY OF THE CAPITAL GAIN Whether capital gain arises in a business re-organisation if consideration thereof is not determinable? Dana Corporation [2009-TIOL-29-ARA-IT] Page 8 `
COST OF ACQUISITION Whether the interest on loan taken for purchase of the property is to be included in the cost of acquisition for computing Capital Gain? CIT vs. Shri Hariram Hotels (P) Ltd. [229 CTR 455 (Kar.)] CIT vs. Maithreyi Pai [152 ITR 247 (Kar.)] COST OF ACQUISITION - ESOPS Whether the amount received by the assessee on sale of share received under a stock option plan is liable to tax under the head "Capital gains" and if so whether there is any cost of acquisition so as to bring to tax the net receipts? In the alternative whether it is short-term capital gain or long-term capital gain? Bomi S. Billimoria vs. ACIT (124 TTJ 960) Page 9
EXEMPTION U/S 54F Whether deduction u/s 54F can be claimed if the Assessee has purchased a second plot on a different date which is adjacent to the first plot? ACIT vs. Narendra Mohan Uniyal Page 10
EXEMPTION U/S 54EC, 54F IN RELATION TO DEPRICIABLE ASSET If a capital asset on which deprecation has been allowed is transferred, the capital gain is taxable as shortterm capital gain U/S 50. Section 50 overrides S.2(42A) for the purpose of Ss.48 & 49. Sections 54EC and 54F apply to gain arising on transfer of long-term capital asset and not to long-term capital gain. Therefore exemption U/S 54EC and 54F allowable. ACC Industries Pvt. Ltd V ACIT 76 ITD389(Mum.) Weikfield Pro71 ITJ 518Ltd. Co.(I) Pvt Ltd V DCIT (Pune) All the above cases stated that fiction created in subsection (1) and (2) of Sec. 50 is restricted only to the mode of computation of capital gains contained in sec 48 and 49 and does not apply to other provisions and therefore an assessee is entitled to exemption u/s 54E in respect of capital gain arising on transfer of a longterm capital asset on which depreciation is allowed. CIT V/s ACE Builders (P) Ltd. [281 ITR 210 (Bom.)] CIT V/s Assam Petroleum Industries (P) Ltd.[262 ITR 587 (Gau.) CIT V/s Legal Heirs of late Dr Mrs S.R. Pandit, ITA No. 144/2007 dt.30.08.2005 [Bom HC] Page 11
EXEMPTION U/S 54EC Whether maximum amount of 50 lakhs to be invested in the specified asset be spread over two financial years? Page 12
DISSOLUTION AND RECONSTITUTION OF A FIRM No capital gain is taxable u/s. 45(4), if a firm is dissolved and reconstituted and none of the assets is distributed. CIT V. Vijayalakshami Metal Indusries 256 ITR 540(Mad.) Retiring Partner receiving more than the amount at his credit in the capital account, whether any capital gain arises in the hands of the firm or the partner. CIT V.R. Lingmallu Raghukumar 247 ITR 801(S.C.) Tibunal G.Patel V. CIT 236 ITR 515(S.C.) Contrary Bishanlal Kanodia V.CIT 257 ITR 449(Del.) Page 13
CONVERSION OF STOCK IN TRADE INTO CAPITAL ASSET It was held that there is no provision similar to section 45(2) with respect to conversion of stock in trade to capital asset. It was further held that holding period is to be considered from the date of acquisition. CIT V/s Bright Star Investments (P) Ltd. [24 SOT 288 (Bom.)] Not considering the decision of Bombay Tribunal in the case of Bright Star, in the above case it was held that the period to be considered from the date of conversion to investment. Splendor Constructions (P) Ltd. V/s ITO [27 SOT 39(Delhi)] Page 14
APPLICATION OF SECTION 50C In the case below it was held that stamp duty valuation by the Stamp Valuation Authority under provisions of Sec 50 cannot be invoked where the income from transfer is business income. M/s Inderlok Hotels Pvt. Ltd. V/s ITO, ITA No. 4376/M/2008, Bench I, dt. 5/2/2009 Whether Section 50C applies to rights in Land & Building like tenancy rights? Kishori Chandra Gaitonde vs. ITO [ITA No. 1561/M/09] Page 15
CONVERSION OF TENANCY INTO OWNERSHIP In the above case the assessee was initially in the occupation of flat as a tenant. Later he acquired it by purchase from the original owners with all the rights and interest therein including occupancy right. There was an union of the interests of the lessor and the lessee and tenancy was extinguished. It was held that the flat sold within a period of 4-5 months thereafter was Short Term Capital Gain. Dr. D.A. Irani V/s First ITO [7 ITD 160 (Bom.) Page 16
CASE STUDY Assessee was occupying a premises as a tenant since 2000-01. The premises were to be redeveloped. The developer offered the tenant a new flat on ownership basis in lieu of his tenancy rights on 27-06-03 The assessee offered the fair market value of the property as the capital gain and claimed exemption u/s 54 in respect of investment in new property. The cost of acquisition in respect of the tenancy right was taken as NIL The new property was sold on 30 th June 2006. The assessee took the FMV of the property as on 27-06-03 as the cost of acquisition and after claiming exemption u/s 54EC offered the balance to tax. A.O. held that assessee had not incurred any money on conversion of tenancy, except for the stamp duty paid, hence only the stamp duty expenses is the cost of acquisition The other issue was related to the sale consideration being lower than the value adopted for stamp duty. The assessee agreed to the valuation adopted by the valuation authority The assessee is in appeal before the CIT(A) against the A.O. s contention that the FMV of the property as the time of acquisition should not be considered as the cost of acquisition. Page 17
REAL ESTATE ISSUES Land converted into stock in trade and then developed, the developed property sold during the period of construction. Income from development and sale of flats declared by percentage completion method. When would capital gains be taxable? Consider S.45(2) Date of Purchase of land- 1-4-2001 Cost Rs.5 lacs Date of conversion into Stock in Trade 1-4-2006 F.M.V. Rs. 40 lacs Income from development of prop. Declared by percentage completion method 2006-07 to 2009-10 Page 18
TAX TREATMENT OF DEEP DISCOUNT BONDS Circular No. 2 0f 2002 dt 15-2-2002 Whether interest to be declared every year, although no rate of interest is specified Whether income on sale of bonds even after 3 years Short term Capital Gains? Page 19
REAL ESTATE ISSUES Where Society transfers additional entitlement (development right)to the Developer for development. Is such transfer of development right liable to tax? Development Right is a capital asset as per the Provisions of Section 2(14) of the Act For computing Capital gains there should be sale consideration and cost of acquisition along with the cost of improvement thereto. Gain on transfer of capital asset whose cost is not ascertainable, no capital gain chargeable to tax under section 45 of the Act- CIT v. B.C.Srinvasa shetty [1981] 128 ITR 294 (SC) If the assessee has not incurred any cost of acquisition on a capital asset, such capital asset does not fall in the category of the capital asset specified under section 55(2) of the Act. Therefore, it is covered by the Judgment of the Supreme Court in case of B.C.Srinvasa shetty (Supra) - M/s New Shailaja CHS Limited [supra]. Page 20
REAL ESTATE ISSUES The rights are acquired by virtue of being owner of the plot in the specified area, but this does not mean that the cost incurred on the plot is the cost of acquiring development right- Jethalal D.Mehta v. Dy. CIT [(2005) 2 SOT 422 (Mumbai)]. Accordingly, transfer of TDR to Builder for development of property does not attract Capital Gain Tax. CIT v. B.C.Srinvasa shetty [supra]. Cost of the land and building of the existing structure could not be attributable to the additional FSI received by means of the Development Control Regulations,1991.-[M/s New Shailaja CHS Limited [ITA No.512/Mum/2007]. There is difference in the situation when cost of acquisition is Rs. NiL and where the cost of acquisition cannot be ascertained or no cost has been incurred.-[m/s New Shailaja CHS Limited[supra] Page 21
REAL ESTATE ISSUES Whether compensation received by the society or by members for allowing the developer( rightful owner of TDR/FSI ) to develop or construct the property is liable to be taxed in the hands of the society or members? Transferable Development Rights were owned or possessed by the builder in terms of the regulations, it was permissible for the builder to utilise the said transferable right in or with respect to the prescribed area including the land. Om Shanti Cooperative Society [ITA. No. 2550 /Mum/2008] No Capital gain tax on permitting construction of additional floors, whether or not any right is available with the society or its members, as it does not involve any cost of acquisition in the light of decision of the Supreme Court in the case of CIT vs. B.C.Srinivasa Shetty (Supra)- Om Shanti Cooperative Society [supra] Taxability in the hands of Members Compensation paid to the Members of the society, not holding any capital asset, will not attract capital gain tax under section 45 of the Act- Deepak S.Shah v. ITO [(2009) 29 SOT 26 (Mumbai)]. Page 22
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