UNDERSTANDING CAPITAL GAINS FOR MY FRIENDS IN CA FINAL: By CA Nitin Nanda

CAPITAL GAINS

Applicable for A.Y.2013-14

Today very few people might have not known the word Capital Gains Tax. Section 45 of the Income Tax Act, 1961 deals with taxability of capital gains. Section 45 says that any profits & gains arising from the transfer of capital asset effected in the previous year is taxable as capital gain. In this topic, two terms are important, one is capital gain and other is transfer. This capital gain is nothing but the income of person who transfers his asset in any previous year.

Definition –Capital Asset:-

A capital asset means property of any type which is held by assessee whether or not connected with his business or profession, but does not include-

1. Any stock-in-trade, consumable stores or raw materials held for the purpose of the business or profession of the assessee,

2. Personal effects, i.e.movable property (including wearing apparel and furniture ) held for personal use by the assessee or any member of his family dependent on him, but excluding-jewellery, archaeological collections, drawings, paintings, sculptures or any work of art.

3. Rural agricultural land in India

4. 6 ½% Gold Bonds, 1977, or 7% Gold Bonds 1980, or National Defence Gold Bonds,1980 issued by the Centra Government.

5. Special Bearer Bonds 1991 issued by the Central Government.

6. Gold Deposit Bonds issued under the Gold Deposit Scheme,1999 notified by CG.

 Rural Agricultural Land In India-

Only rural agricultural land in India are excluded from taxability. It means land which is in urban area is taxable on transfer. So any land situated within the limits of any municipality or cantonment board having a population of 10,000 or more as per latest census will be held as urban land and hence capital assets. Further agri land situated in areas within a distance of 8 kms from the local limits of such municipality or cantonment board will also be capital asset. Such areas shall be notified by the CG.Jewellery- ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals,whether or not containing any precious or semi-precious stones and whether or not worked or sewn into any wearing apparel. This is a capital asset and profit on sale of jewellery is charged to tax.

 Zero Coupon Bond-

Zero Coupon Bond means a bond issued by any infrastructure capital company or infrastructure capital fund or a public sector company or a scheduled bank on or after 1st june 2005, in respect of which no payment and benefit is received or receivable before maturity or redemption from such issuing entity and which the CG may notify in this behalf. CG has specified some bonds issued on or before 31.3.2009 as ZCB- like 10 year ZCB of HUDCO,SIDBI,NABARD, IDFC, National Housing bank, 15 year ZCB of HUDCO, Power Finance Corporation. New bonds issued by CG are (issued on or before 31.3.2011) 10 years Bhavishya Nirman Bond of NABARD and 10 years Deep Discount Bond of Rural Electrification Corporation Ltd.

The income on transfer of ZCB(not held as stock in trade) is treated as capital gains. For this purpose maturity or redemption of ZCB is treated as transfer. ZCBs held for more than 12 months are treated as long term capital gains. Where tax payable in respect of any income arising from transfer of ZCBs exceeds 10% of the amount of capital gains before giving effect to indexation, then such excess shall be ignored for the purpose of computing tax payable.

Short term capital asset-It is a capital asset held by the assessee for not more than 36 months immediately preceding the date of transfer.

Long term capital asset-It is a capital asset held by the assessee for more than 36 months immediately preceding the date of transfer.

But in case of company shares, securities, units of Unit Trust of India and of Mutual Fund, ZCBs if these are held for more than 12 months, these will be treated as long term capital asset.

 Transfer [Section 2(47)]:-

The act contains an inclusive definition of the term Transfer. It includes-

1. The sale, exchange or relinquishment of the asset; or

2. The extinguishment of any rights therein; or

3. The compulsory acquisition under any law;

4. Conversion thereof into stock-in-trade of a business;

5. The maturity or redemption of zero coupon bonds;

6. Part performance of the contract; i.e. handing over of possession of immovable property on receipt of consideration. Even if conveyance/deed is not registered.

Receipts from Insurance parties [sec 45(1A)]

When any person receives any money or other assets under insurance from insurance company for damage to or destruction of any capital asset, as a result of flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature, riot or civil disturbance, accidental fire or because of action of enemy or action taken in combating an enemy, then any profits or gains arising from receipt of such money shall be taxable as capital gains.

 Conversion or treatment of a capital asset into stock-in-trade [sec.45(2)]

A owner of a capital asset may convert that asset into stock-in-trade of his business carried on by him. Then profits and gains arising on conversion of such asset will be charged to tax as capital gains. The profit will be considered his income in the PY in which such stock is sold out by him. Fair market value on the date of conversion will be treated full value of consideration. Any conversion done of capital asset into stock in trade before 1.04.1985 will not attract tax on capital gains in the hands of assessee.

Transfer of beneficial interest in securities [sec.45(2A)]

Where any person has at any time during the PY any beneficial interest in any securities, then any profits/gains arising from the transfer made by Depository or participant of such beneficial interest in respect of securities shall be charged to tax as capital gains in the hands of beneficial owner in the year of transfer. It shall not be regarded as income of the Depository who is deemed to be the registered owner of the securities. For this purpose, cost of acquisition and period of holding of securities shall be determined on FIFO basis.

Further, the date of brokers note shall be treated as the date of transfer when securities are traded through stock exchanges. And holding period shall be reckoned to take place directly between the parties and not through stock exchanges.Where securities are acquired in several lots at different points of time, FIFO method shall be used to reckon the period of the holding of securities. Indexation, wherever applicable for long term assets shall be applied.

Here, beneficial Owner means a person whose name is recorded as such with a depository.

Depository means a company formed & registered under the Companies Act, 1956 and which has been granted a certificate of registration under SEBI Act, 1992.

 Introduction of Capital asset as Capital contribution [sec.45(3)]

When any person transfers a capital asset to a firm, AOP or BOI in which he is partner/member  or a newly coming partner/member, by way of capital contribution or otherwise, then the amount recorded in the books of the firm, AOP,BOI will be chargeable to tax as capital gains in the year of transfer.

 Distribution of Capital Assets on a firm’s dissolution [sec.45(4)]

On the dissolution of firm, AOP,BOI, or Otherwise, profits or gains arising from transfer of capital asset by way of distribution to members/partners, will be taxable as capital gains. The fair market value of such assets on the date of transfer shall be full value of consideration.

Compensation on compulsory acquisition [sec.45(5)]

On taking over of land & building and other capital assets by CG, by way of compulsory acquisition, the profits/gains arises. The compensation which are determined and paid by CG are treated as capital gains and charged to tax in the year of Receipt after deducting cost of acquisition. The Govt. may enhance as well as reduce the compensation previously enhanced on appeal of the assessee or for some other reason. In this case cost of improvement and expenditure on transfer are taken as NIL.

 Repurchase of Mutual Fund units referred to sec.80 CCB [sec.45(6)]

The difference between repurchase price and the amount invested will be chargeable to tax in PY in which such repurchase takes place or plan referred to sec. 80CCB is terminated.

 Capital gains on distribution of assets by Companies in liquidation [sec.46]

Where the assets of a company are distributed to its shareholders on its liquidation, such distribution shall not be deemed as transfer. But for this exemption, the assets of the company must be distributed in specie to shareholders on liquidation. If liquidator sells assets of company resulting in capital gains, and distributes the funds so collected, then company will have to pay tax on such gains.

When shareholders receive money or other assets from the company, they will be charged to tax as capital gains in respect of the market value of the assets received on the date of liquidation. The portion of the distribution  to the extent of accumulated profit is deemed as dividend income u/s2(22)C. the same will be deducted from the amount received /fair market value for the purpose of determining consideration for computing capital gains.

Subsequently, if shareholder sells such asset received on liquidation, at a price which is in excess of his cost of acquisition determined as above will be taxable as capital gain in his hands.

 Capital gains on Buyback of shares [sec.46A]

Any consideration received by a shareholder or a holder of other specified securities from any company on purchase of its own shares or securities shall be chargeable to tax as capital gains on the difference between the consideration and and the cost of acquisition. Such capital gains shall be chargeable in the year in which such shares/securities were purchased by the company.

Transactions not regarded as transfer [sec.47]

This section contains various transactions which are not to be regarded as transfer, so there will be no tax on transfer within the scope of this transactions.

 Withdrawal of Exemption [sec.47A]-

Capital gains arising from the transfer of a capital asset by a company/subsidiary company to its wholly owned subsidiary company/holding company is exempt from tax. But if at any time before the expiry of 8 years from the date of transfer of asset, if such asset is converted by the transferee company into stock in trade of its business, such exemption will be withdrawn. Also if before expiry of 8 years, holding company ceases to hold the whole of capital of other company, such exemption will not be available. So amount exempt earlier will be deemed as capital gains by virtue of such transfer of capital assets.

Capital Gain formula-

Full value of consideration-expenditure incurred wholly and exclusively in connection with such transfer-cost/indexed cost of acquisition-cost/indexed cost of improvement.

Cost of Acquisition-

This is the Actual price paid for acquiring the capital assets. In case such capital asset is received by any mode other than purchase,(i.e. by gift, by succession, by will, on partition of HUF by members, on amalgamation of two companies etc.) the actual cost will be the cost to the previous owner who had beared such cost.

Cost of Acquisition before 1.04.1981-if an assessee or previous owner had purchased any capital asset before 1.04.1981, then actual cost or fair market value as on 1.04.1981 whichever is more is/can be taken as cost of acquisition at the option of the assessee.

In case of right shares, cost of acquisition shall be actual price paid for acquiring such shares if such right is exercised, and if it is renounced in favour of any other person, then such cost shall be NIL. If bonus shares are allotted to the assessee, cost shall be NIL, however, if such bonus shares are received before 1.04.1981, assessee may opt to take fair market value as on 1.04.1981 as cost of such bonus shares.Indexation, wherever necessary can be provided.

Cost of Improvement-

The assessee can claim deduction in respect of cost incurred on improvements, repairs etc. any cost of improvement incurred before 1.04.1981 is not to be considered. It shall be ignored.

Computation of Capital Gains in case of Depreciable Assets [sec.50]-

Section 50  provides for computation of capital gains in case of depreciable assets. Where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed, shall be computed as follows:

Where the full value of consideration received/accruing for sell of asset or all assets within the block during PY exceeds the total of the following-

1. Expenditure incurred wholly & exclusively for transfer of assets

2. WDV of the block of assets at the beginning of previous year

3. Actual cost of any asset within same block purchased in the same year,

Then such excess shall be deemed short term capital gains (irrespective of the period of holding of asset-i.e. for more than 36 months,)

Capital Gains in respect of Slump sales [sec.50B]-

Any profits or gains arising from the slump sale(one or more undertakings) effected in PY shall be chargeable to income tax as capital gains (long term or short term as appropriate).Net worth of the undertaking shall be deemed to be cost of acquisition and cost of improvement for capital gain calculation purpose.

Net worth- total value of all assets of the undertaking minus value of all liabilities as appearing in the books of account.

In case of depreciable assets-WDV of block of assets calculated as per sec. 43(6)(C)I.

In case of capital assets in respect of which whole expenditure has been allowed-NIL.

For all other assets-book value.

Every assessee in case of slump sale shall furnish in the prescribed form along with the return of income a report of CA indicating computation of net worth of the undertaking and certifying that the net worth of the undertaking or division has been correctly arrived at.

 Section 50C:-

Where the consideration received or accruing as a result of transfer of a capital asset, being land or building or both,is  less than the value adopted or assessed or assessable by any authority of state government (stamp valuation authority) for the purpose of payment of stamp duty in respect of such assets such value adopted or assessed or assessable shall be deemed as full value of consideration.

Where the assessee claims before AO that value adopted by authority exceeds fair market value of the property as on the date of transfer,and such value so adopted/assessed or assessable has not been disputed in any appeal or revision or court, then AO may refer the valuation of the capital asset to a valuation officer as defined in sec.2(r) of the Wealth Tax Act,1957.Where such value ascertained by such valuation officer exceeds the value adopted or assessed by the stamp authority,the value adopted or assessed or assessable shall be taken as the full value of consideration received as a result of the transfer.

Section 50D (New Section):-In a case, 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, the fair market value of the said asset on the date of transfer shall be deemed as full value of consideration received or accruing as a result of the transfer.

Section 51 (Advance money received ):-

When the assessee receives some advance money or deposit and due to break down of negotiation the assessee retains such advance money, then while calculating tax on capital gain, such advance must go to reduce the cost of acquisition. Cost of acquisition shall be reduced by the amount of advance.

 New Exemption Section (54GB)-

Sec 54GB has been inserted to exempt long term capital gains on sale of a Residential Property (house or plot of land) owned by an Individual or HUF in case of re-investment of sale consideration in the equity shares of an eligible company being a newly incorporated SME company engaged in the manufacturing sector, which is utilized by the company for the purchase of new plant & machinery.

Eligible Company- the company should be-

1. Incorporated in the FY in which the capital gain arises or in the following year on or before the due date of filing return of income by the individual or HUF;

2. Engaged in the business of manufacture of an article or thing ;

3. A company in which the individual/HUF holds more than 50% of the share capital or 50% of the voting rights after the subscription in shares by the individual/HUf;

4. A Company which qualifies to be a SME (small or medium enterprise), under the Micro, Small and Medium Enterprises Development Act, 2006, i.e.investment in the equipment is more than Rs.25 lakhs but less than Rs.10 crore.

 Conditions to be satisfied to claim exemption under this new section-

1. The  amount of net consideration should be used by the individual or HUF before due date of furnishing return of income, for subscription in in shares

2. The amount of subscription as share capital is to be utilized by the eligible company for the purchase of new plant & machinery within 1 yr from the date of subscription in equity shares.

3. If the amount of net consideration subscribed as equity shares is not utilized by the company for purchase of new P&M before the due date of filing the return by the assessee, then unutilized amount shall be deposited in any a/c with specified bank or institution before such due date of filing return of income. The return of income filed by assessee shall be accompanied by such proof of deposit.

4, The said amount is to be utilized in accordance with any scheme notified by CG.

The Plant and Machinery shall be new in all respects and shall not be pre-utilized by any other person as well as it shall be for only manufacturing of articles purpose.

 How much is exempt-

                                           amount invested in new plant & machinery

LTCG *          ------------------------------------------------------------------

                                                                 Net consideration

The exemption under this section would not be available for transfer of Residential Property made after 31.03.2017.If the amount deposited by the company in banks etc. is not utilized wholly/partly for purchase of new P & M, within the period specified, then the capital gains not charged to tax on a/c of such deposit shall be charged to tax as income of assessee.

If equity shares of the company acquired by the individual/HUF or plant and machinery acquired by the company are sold out within 5 yrs from the date of acquisition, the amount of capital gains exempted earlier shall be deemed to be income of the assessee in the year in which such assets are sold.

Capital Gains Account Scheme-

Capital gains are exempt to the extent of investment of such gains/considerations in specified assets within the specified time. If such investment is not made before the date of filing of return of income, then capital gains shall be deposited in CGAS. Such deposit should be made before filing return of income or on or before the due date of filing return of income. Unutilized deposit amount shall be taxable in the year in which specified period expires.

 Section 111A-short term capital gains in respect of equity shares/units of an equity oriented fund:-

Rate of tax-15%, subject to conditions-

1. Such Transaction shall be entered into on or after 1.10.2004;

2. It shall be chargeable to securities transaction tax ;

3. In case of resident individuals/HUFs, if the basic exemption limit is not fully exhausted by any other income ,then STCG will be reduced by the unexhausted basic exemption limit and only the balance would be taxed @ 15%. (except-non residents).

Section 112-Tax on long term capital gains

Rate of tax-20%.

Where the total income as reduced by long term capital gains is below taxable limit, then such LTCG shall be reduced by the amount by which total income falls short to the maximum taxable limit/exemption limit. Then balance amount shall be taxed @ 20%.

LTCG on non corporate non resident/foreign company-(new section)-

LTCG on transfer of unlisted securities would be taxable at 10% on the capital gains calculated such amount without giving effect to indexation provisions. In respect of other LTCG rate of tax will be 20%.

Domestic company-LTCG rate-20%.

Section 10(38)- there is exemption on long term capital gains on sale of equity shares/units of an equity oriented fund subject to such transaction shall be charged to STT and and sold through stock exchange.

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