(iii) CORRECTION IN INCOME TAX VOLUME 2 PAGE NO. 29 & 30 As per the provisions of section 47, transfer by way of conversion of bonds into shares is not regarded as transfer for the purpose of capital gains. Therefore, capital gains tax liability does not arise in the given situation. Question 19. Write a note on cost with reference to certain modes of Acquisition. Answer: Cost with reference to certain modes of acquisition Section 49(1) If any person has received an asset through the transaction section 47 and subsequently asset was sold by him, in such cases cost of acquisition and cost of improvement of previous owner shall be considered to be cost of acquisition/improvement of the assessee and also cost of improvement by assessee shall be taken into consideration. As per section 2(42A), time period of previous owner shall also be taken into consideration. E.g. Mr. X purchased house 01.04.2001 2,00,000 and incurred 3,00,000 on improvement on 01.07.2002 and it was received by his son Mr. Y on 01.07.2011 and Mr. Y incurred 4,00,000 on improvement 01.07.2013 and house was sold by him on 01.07.2017 100,00,000, in this case tax liability of Mr. Y shall be Full value of consideration 100,00,000.00 = 2,00,000 / 100 x 272 (5,44,000.00) Less: Indexed Cost of improvement = 3,00,000 / 105 x 272 (7,77,142.86) Less: Indexed Cost of improvement = 4,00,000 / 220 x 272 (4,94,545.45) Long term capital gains 81,84,311.69 Gross Total Income 81,84,311.69 Total Income (rounded off u/s 288A) 81,84,310.00 Tax on LTCG 79,34,310 (81,84,310 2,50,000) @ 20% 15,86,862.00 Add: Surcharge @ 10% 1,58,686.20 Tax before education cess 17,45,548.20 Add: PEC @ 2% 34,910.96 Add: SHEC @1% 17,455.48 Tax Liability 17,97,914.64 Rounded off u/s 288B 17,97,910.00 Cost of acquisition in case of assets received as gift Section 49(4) (applicable w.e.f 01.10.2009) If any individual or HUF has received gift in kind and it was taxable under section 56, in such cases, at the time of sale, cost of acquisition of such asset shall be the value which has been taken into consideration for the purpose of computing taxable amount of gift. Example Mr. X purchased one house property on 01.07.2002 for 2,00,000 and it was gifted to Mr. Y on 01.11.2011 and value for the purpose of charging stamp duty was 5,00,000 and subsequently the house property was sold by Mr. Y on 01.01.2018 for 25,00,000, in this case tax liability of Mr. Y shall be computed in the manner given below: Income under the head capital gain Full value of consideration 25,00,000.00 Less: Indexed Cost of acquisition 5,00,000 x 17-18/11-12 (7,39,130.43) (5,00,000 x 272/184) Long term capital gain 17,60,869.57 Gross Total Income 17,60,869.57 Total Income 17,60,869.57 Rounded off u/s 288A 17,60,870.00
2 Tax on 15,10,870 (17,60,870-2,50,000) @ 20% u/s 112 3,02,174.00 Add: PEC @ 2% 6,043.48 Add: SHEC @ 1% 3,021.74 Tax Liability 3,11,239.22 Rounded off u/s 288B 3,11,240.00 Illustration 18: Mr. X purchased one house on 01.10.2002 for 2,00,000 and incurred 5,00,000 on its improvement in F.Y. 2009-2010 and Mr. X gifted the house on 01.10.2012 to his friend Mr. Y when its value for the purpose of charging stamp duty was 10,00,000. Mr. Y sold the house on 01.01.2018 for 42,00,000. Compute his tax liability. Computation of Capital Gains Full value of consideration 42,00,000.00 = 10,00,000 / 200 x 272 = 13,60,000.00 (13,60,000.00) Long Term Capital Gain 28,40,000.00 Income under the head Capital Gain 28,40,000.00 Gross Total Income 28,40,000.00 Total Income 28,40,000.00 {Since normal income is nil, as per section 112 deficiency of 2,50,000 shall be allowed from long term capital gain and balance income shall be taxed at flat rate of 20%} Tax on 25,90,000 (28,40,000 2,50,000) @ 20% u/s 112 5,18,000.00 Add: PEC @ 2% 10,360.00 Add: SHEC @ 1% 5,180.00 Tax Liability 5,33,540.00 (b) Presume Mr. Y is son of Mr. X. Computation of Capital Gains Full value of consideration 42,00,000.00 = 2,00,000 / 105 x 272 = 5,18,095.24 (5,18,095.24) Less: Indexed cost of improvement = 5,00,000 / 148 x 272 = 9,18,918.92 (9,18,918.92) Long Term Capital Gain 27,62,985.84 Income under the head Capital Gain 27,62,985.84 Gross Total Income 27,62,985.84 Total Income (Rounded off u/s 288A) 27,62,990.00 {Since normal income is nil, as per section 112 deficiency of 2,50,000 shall be allowed from long term capital gain and balance income shall be taxed at flat rate of 20%} Tax on 25,12,990 (27,62,990 2,50,000) @ 20% 5,02,598.00 Add: PEC @ 2% 10,051.96 Add: SHEC @ 1% 5,025.98 Tax Liability 5,17,675.94 Rounded off u/s 288B 5,17,680.00 Question 20: Explain Reverse Mortgage. Answer: As per section 47, reverse mortgage shall not be considered to be transfer for the purpose of capital gain. Under reverse mortgage, an individual can mortgage his house property to the bank and the bank shall grant a loan against the security of house property and such loan shall be given in monthly/quarterly installments
3 CORRECTION IN INCOME TAX VOLUME 2 PAGE NO. 34 capital gains, its cost of acquisition shall be reduced by the amount of the exemption earlier allowed. 7. Capital gains account Scheme 1988: The amount of capital gain has to be utilised till the last date of furnishing of return of income otherwise amount should be deposited in capital gains account scheme 1988 and proof of such deposit should be enclosed with the return of income. Subsequently the amount should be withdrawn from this scheme and should be utilised for the specified purpose otherwise it will be considered to be long term capital gain of the year in which the prescribed period has expired. 8. Extension of time for acquiring new asset or depositing or investing amount of capital gain section 54H: If the asset has been acquired compulsorily by the Government, period of investment shall be determined from the date of payment instead of the date of compulsory acquisition. 9. If any person has purchased a house and has deposited some amount in capital gain account scheme for construction on the same house, In that case exemption shall be allowed even for the amount so deposited as decided in B.B. Sarkar vs Commissioner Of Income-Tax (CALCUTTA HC) Illustration 22: Mr. X purchased one residential house on 01-07-2001 for 2,00,000 and it was sold by him on 01-07-2017 for 100 lakhs and he purchased one house in 01-07-2018 for 20,00,000. He sold this house on 01-07-2019 for 22,00,000. Compute his Tax Liability for A.Y. 2018-19 and also capital gains for various years. Full value of consideration 1,00,00,000.00 = 2,00,000 / 100 x 272 = 5,44,000 (5,44,000.00) Long Term Capital Gains 94,56,000.00 Less: Exemption u/s 54 (20,00,000.00) Long Term Capital Gains 74,56,000.00 Income under the head Capital Gain (LTCG) 74,56,000.00 Gross Total Income 74,56,000.00 Total Income 74,56,000.00 {Since normal income is nil, as per section 112 deficiency of 2,50,000 shall be allowed from long term capital gain and balance income shall be taxed at flat rate of 20%} Tax on 72,06,000 (74,56,000 2,50,000) @ 20% 14,41,200.00 Add: Surcharge @ 10% 1,44,120.00 Tax Before Education cess 15,85,320.00 Add: PEC @ 2% 31,706.40 Add: SHEC @ 1% 15,853.20 Tax Liability 16,32,879.60 Rounded off u/s 288B 16,32,880.00 Computation of Capital Gain for the assessment year 2020-21 Capital gain on sale of House Full value of consideration 22,00,000.00 Less: Cost of acquisition (20,00,000 20,00,000) () Short Term Capital Gain 22,00,000.00 Illustration 23: Mr. X purchased one residential house on 01.04.2002 for 5,00,000. This house was acquired compulsorily by the Government on 01.10.2013 and compensation of 50,00,000 was fixed by the government but the amount was paid by the Government on 01.03.2018. The assessee has purchased one residential house on 01.01.2018 for 2,00,000 and the house was sold by him on 01.01.2019 for 4,00,000. Compute his tax liability for the assessment year 2018-19 and also capital gains for the various years. Computation of capital gains under section 45(5) Capital gain shall be computed in the year in which the asset was acquired i.e. in the previous year 2013-14 and shall be taxed in the year in which the first payment has been received i.e. in the previous year 2017-18 Full value of consideration 50,00,000.00
4 CORRECTION IN INCOME TAX VOLUME 2 PAGE NO. 75 As per section 50C, FVC shall be taken to be 22,00,000 for land and 13,00,000 for the building and capital gains shall be computed separately for land and building. In the given problem, land has been held for a period exceeding 24 months and building for a period less than 24 months. Therefore, land is a long-term capital asset, whereas building is a short-term capital asset. Computation of Capital Gains chargeable to tax Long term capital gain on sale of land Consideration received or accruing as a result of transfer of land 5,19,000 /122 x 272 Long-term capital gain (A) Short-term capital loss on sale of building Consideration received or accruing from transfer of building Less: Cost of construction Short term capital loss (B) 22,00,000 (11,57,114.75) 10,42,885.25 13,00,000 (14,00,000) (1,00,000) Long-term capital gain (A-B) 9,42,885.25 Question 6(a). (5 Marks) Compute the total income of Mr. X for the assessment year 2018-19 from the following particulars: () Income from business before adjusting the following items: 1,75,000 (a) Business loss brought forward from assessment year 2014-15 70,000 (b) Current depreciation 40,000 (c) Unabsorbed depreciation of earlier year 1,55,000 Income from house property (Gross annual value) 4,32,000 Municipal taxes paid 32,000 Mr. X sold a plot at Noida on 12 th Sep., 2017 for a consideration of 6,40,000, which had been purchased by him on 20 th Dec., 2015 at a cost of 4,10,000. Long-term capital loss on sale of shares sold through recognized stock exchange (STT paid) (75,000) Long-term capital gain on sale of land 60,000 Dividend from domestic company on shares held as stock in trade 22,000 Dividend from a domestic company carrying on agricultural business 10,000 During the previous year 2017-18, Mr. X has repaid 1,67,000 towards housing loan from a scheduled bank. Out of 1,67,000, 97,000 was towards payment of interest and rest towards principal payments. Cost inflation indices are as under: Financial Year Index 2014-15 240 2017-18 272 Computation of total income of Mr. X for the A.Y 2018-19 I. Income from house property Gross Annual Value Less: Municipal taxes paid Net Annual Value (NAV) Less: Deductions under section 24 (a) 30% of NAV u/s 24(a) (b) Interest on housing loan u/s 24(b) Income under the head House Property II. Income from business Income from business Less : Current year depreciation under section 32 4,32,000 (32,000) 4,00,000 (1,20,000) (97,000) 1,83,000 1,75,000 (40,000) 1,35,000
5 CORRECTION IN INCOME TAX VOLUME 2 PAGE NO. 153 Problem 20. Following is the profit & Loss account of Mr. A, a dealer in shares and securities for the year ended on 31 st March, 2018: (Debits) (Credits) To Trading Expenses 103,60,000 By Sales 113,54,000 To Administrative Expenses 1,15,000 By Interest on fixed deposit with bank 18,500 To Financial Expenses 50,265 By Dividend from Indian company 66,360 To Demat and Delivery charges 5,350 By Interest on GST refund 330 (Assessment Year 2016-17) To Securities Transaction Tax 6,500 To Net profit before depreciation 9,02,075 114,39,190 114,39,190 Compute Total Income and Tax Liability of Mr. A for Assessment Year 2018-19. Answer = Total Income: 8,35,720; Tax Liability: 82,030 Problem 21. Mr. X is engaged in the business of plying goods carriages. On 1 st April, 2017, he owns 10 trucks (out of which 6 are heavy goods vehicles). On 2 nd May, 2017, he sold two of the heavy goods vehicle and purchased two light goods vehicles on 6 th May, 2017. Those new vehicles could however be put to use only on 15 th June, 2017. Compute the Total Income and Tax Liability of Mr. X for the Assessment Year 2018-19, taking note of the following data in two situations i.e. presumptive basis and normal basis. Freight charges collected 9,90,000 Less: operational expenses 5,25,000 Depreciation as per sec 32 1,85,000 Other office expenses 15,000 (7,25,000) Net Profit 2,65,000 Other business and non-business income 1,00,000 Answer = Presumptive Basis: Total Income: 10,15,000; Tax Liability: 1,20,510 Non-presumptive Basis: Total Income: 3,65,000; Tax Liability: 5,920 Problem 22. Profit and loss account of Mr. A for the previous year 2017-18 is asunder: (Debits) (Credits) Salaries & Wages 6,00,000 Gross Profit 14,50,000 Advertisement 1,00,000 Long term capital gains 4,00,000 Travelling Expenses 2,00,000 Recovery of bad debts (earlier it was 50,000 allowed) Depreciation on business assets 50,000 Donation to an approved institution for 70,000 rural development eligible project Interest paid 2,30,000 General Expenses 3,50,000 Net Profit 3,00,000 19,00,000 19,00,000 Additional informations: (i) Salaries and wages include the sum of 1,60,000 paid to Mr. A (ii) Payment of interest includes:
6 REVISED SOLUTION OF ILLUSTRATION 15 INCOME TAX VOLUME 2 PAGE NO. 228 Illustration 15: Mr. X is retired from ABC Ltd. on 10.11.2017 after serving the employer for 20 years and 10 months. The employer has paid him leave salary of 5,00,000. The employee was entitled for 2 month leave per year of service. During entire service, he has availed 6 month leave and has encashed 7 month leave. The employee was getting basic pay 27,000 p.m. but it was increased to 33,000 p.m. w.e.f. 01-07- 2017. He was getting DA 9,000 per month but it was increased to 12,000 per month w.e.f. 01-07-2017. 50% of DA forms part of salary. Compute his Tax Liability for the Assessment Year 2018-19. Basic Pay [(27,000 x 3)+(33,000 x 4)+(33,000 /30 x 10)] 2,24,000.00 DA [(9,000 x 3)+(12,000 x 4)+(12,000 /30 x 10)] 79,000.00 Leave Salary {Sec 10(10AA)} 2,56,750.00 Working Note: Least of the following is exempt: 1. 5,00,000 2. 10 x 34,750 = 3,47,500 3. 3,00,000 4. 7 x 34,750 = 2,43,250 Received = 5,00,000 Exempt = (2,43,250) Taxable = 2,56,750 Computation of leave at the credit Leave Entitlement = 1 month x 20 = 20 month Less: Leave availed = (6) month Less: Leave Encashed = (7 ) month Leave at the credit = 7 month Calculation of average salary 11-01-2017 to 10-11-2017 Basic Pay [(27000/30 x 20) + (27,000 x 5) + (33,000 x 4)+ (33,000/30x10)] = 2,96,000 Dearness Allowance [(4,500/30 x 20) + (4,500 x 5) + (6,000 x 4)+ (6,000/30x10)] = 51,500 Total 3,47,500 Average Salary = 3,47,500/10 = 34,750 Gross Salary 5,59,750.00 Income under the head salary 5,59,750.00 Gross Total Income 5,59,750.00 Total Income 5,59,750.00 Tax on 5,59,750 at slab rate 24,450.00 Add: PEC @ 2% 489.00 Add: SHEC @ 1% 244.50 Tax Liability 25,183.50 Rounded off u/s 288B 25,180.00