Students’ Referencer on Income Tax, Service Tax and VAT – AY 2012 – 2013
Recent Judgment in Capital Gains – Effect of Latest Decision
Due to the following Bombay and Delhi High Court Judgment, the Indexed Cost of Acquisition for
LTCG as given in Page 7.5, Question No. 10 shall be computed in the following manner.
CII for
transfer of
Gifted
Asset
If an Assessee acquired a Capital Asset by way of Gift and transferred such Asset, then Indexed
Cost of Acquisition would be with reference to the year in which previous owner held the asset
and not the year in which assessee became the owner. Therefore the CII should be based on the
year in which the previous owner acquired the asset and not the year in which the assessee
became the owner. [CIT Vs. Manjula J. Shah 16 Taxmann 42 (Bom.)] and [Arun
Shungloo Trust Vs. CIT 205 Taxmann 456 (Del.)]
Latest
Note: FMV = Fair Market Value, CII = Cost Inflation Index, ICA / ICI = Indexed Cost of Acquisition / Improvement.
When asset is acquired by assessee or Assessee received the Asset u/s 47 from transferor –
A. Indexed Cost of Acquisition (ICA):
1. Acquired prior to 1.4.1981:
ICA = FMV on 1.4.1981 or (Cost of Acquisition of Assessee / Previous Owner whichever is high) × CII for year of transfer
100
2.
Acquired on or after 1.4.1981:
ICA = Cost of Acquisition incurred by Assessee or Previous Owner × CII for year of transfer
CII for year of acquisition
B.
Indexed Cost of Improvement (ICI): (in both the above cases A.1 and A.2)
ICI = Cost of improvement incurred by Assessee or Previous Owner × CII for year of transfer
CII for year of improvement
Note: ICI can be computed only if it is incurred on or after 01.04.1981.
The answers to the practical questions shall be solved based on the latest case law and are as follows –
Page 7.23, Question No. 43 –
43. Mr. Thomas inherited a house in Jaipur under will of his father in May 2006. The house was purchased by his father in
January 1981 for ` 2,50,000. He invested an amount of ` 7,00,000 in construction of one more floor in this house in June
2008. The house was sold by him in November, 2011 for ` 37,50,000. The valuation adopted by the registration authorities
for charge of stamp duty was ` 47,25,000 which was not contested by the buyer, but as per assessee’s request, the
Assessing Officer made a reference to Valuation Officer. The value determined by the Valuation Officer was ` 47,50,000.
Brokerage at 1% of sale consideration was paid by Mr. Thomas to Mr. Sunil. The market value of house as on 01.04.1981
was ` 2,70,000. Compute the amount of Capital Gain chargeable to tax for AY 2012–13.
Assessee: Mr. Thomas
Previous Year: 2011–12
Computation of Capital Gain
Particulars
Assessment Year: 2012–13
Sale Consideration
(WN 1 & 2)
Less: Expenses on Transfer
(` 37,50,000 × 1%)
Net Consideration
Less: Indexed Cost of Acquisition = FMV on 1.4.81 or Cost of Acquisition by Previous Owner, whichever
is higher × CII for year of transfer ÷ CII of year in which it is first held by assessee. (2,70,000 ×
785/100) – (W.N. 3)
Less: Indexed Cost of Improvement = (Cost of Improvement × CII of Year of Transfer ÷ CII of Year of
Improvement) = 7,00,000 × 785/582
Long Term Capital Gain
`
47,25,000
(37,500)
46,87,500
(21,19,500)
(9,44,158)
16,23,840
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Students’ Referencer on Income Tax, Service Tax and VAT – AY 2012 – 2013
Notes:
1. U/s 50C where the value declared by assessee is less than Stamp Duty Authority Value, value adopted by Stamp Duty
Authority shall be treated as sale consideration for the purpose of Capital Gains.
2. Where the value determined by the Valuation Officer exceeds the value adopted by the Stamp Valuation Authority, the
Capital gain shall be computed based on the value adopted by Stamp Duty Authority only.
3. The indexation benefit shall be given from the period in which previous owner held the asset or 01.04.1981 whichever is later.
[CIT Vs. Manjula J. Shah 16 Taxmann 42 (Bom.)]
Page 7.28, Question No. 52 –
52. Mr. Surinder furnishes the following particulars for the previous year ending 31.03.2012 and requests you to compute the
taxable Capital Gain–
He had a Residential House, inherited from his father in December 2000, the Fair Market Value of which on 1.4.1981 is ` 5
Lakhs. In the year 2002–2003, further construction and improvements cost ` 6 Lakhs.
On 10.5.2011, the House was sold for ` 72 Lakhs. Expenditure in connection with transfer is ` 50,000.
On 20.12.2011, he purchased a Residential House for ` 15 Lakhs.
Assessee: Mr. Surinder
Less:
Less:
Less:
Less:
Previous Year: 2011–2012
Assessment Year: 2012–2013
Computation of Capital Gain on Sale of Inherited Property
Particulars
`
`
Sale Consideration Received
Expenses on Transfer
Net Sale Consideration
Indexed Cost of Acquisition [Cost of Acquisition × CII of Year of Transfer ÷ CII of the
year in which the asset was first held by the assessee = (` 5,00,000 × 785/100)]
Indexed Cost of improvement [Cost of Improvement × CII of Year of Transfer ÷ CII of
Year of Improvement = (` 6,00,000 × 785/447)]
Long Term Capital Gains
Exemption u/s 54 = Least of the following
Long Term Capital Gain
Cost of new house acquired
Taxable Long Term Capital Gains
72,00,000
(50,000)
71,50,000
39,25,000
10,53,691
21,71,309
15,00,000
(49,78,691)
21,71,309
(15,00,000)
6,71,309
Working Notes:
1. Nature of Asset Transferred: Residential House Property
2. Period of Holding: From the date of purchase of previous owner (Before 01.04.1981) to 10.5.2011, i.e. more than 3
years. Hence, Long Term Capital Asset.
3. Since Mr. Surinder inherited the property, benefit of indexation in respect of Cost of Acquisition can be availed from the
date of original acquisition by his father. [CIT Vs. Manjula J. Shah 16 Taxmann 42 (Bom.)]
Page 9.3, Question No. 6 –
6.
Arjun was holding 3,000 listed Shares in White Light Limited purchased by him on 8.8.2010 at ` 60 per share. He gifted them
to his girlfriend, Chitrangada on 10.2.2011. Arjun married Chitrangada on 1.3.2011. Chitrangada was allotted bonus shares by
the Company at the rate of one share for every three shares held on 10.9.2011. She sold all shares including Bonus Shares at
` 150 per Share. State in whose hands Capital Gain on sale of Shares is taxable. Also compute the Capital Gain.
1.
Principle: U/s 64(1)(vi), where an Individual transfers an asset to his / her spouse for inadequate consideration, then
the income from such asset shall be clubbed in the hands of the individual.
2.
Legal Position: The spouse relationship shall exist both at the time of transfer of asset, and at the time of accrual of
income. [Philip John Plasket Thomas 49 ITR 97 (SC)]
3.
Conclusion: Here, spouse relationship between Arjun and Chitrangada did not exist on the date of transfer, i.e.
10.2.2011, and so Income of Chitrangada shall not be clubbed in the hands of Mr. Arjun.
4.
Computation of Capital Gains in the hands of Chitrangada for the AY 2012–2013:
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Students’ Referencer on Income Tax, Service Tax and VAT – AY 2012 – 2013
Particulars
Sale Consideration (No. of Shares × Sale Price per share)
Original Shares Bonus Shares
3,000 × ` 150 =
` 4,50,000
1,000 × ` 150
= ` 1,50,000
` (1,98,734)
NIL
(Note)
` 2,51,266
` 1,50,000
LTCG
STCG
Less: Indexed Cost of Acquisition of Original Shares – Cost of Acquisition × CII of
Year of Transfer / CII of Year of First Held by the Assessee = 3000 × ` 60 × 785/711
Capital Gains
Nature of Capital Gains
Note: Cost of Acquisition of Bonus shares is Nil. Hence no indexation is applied. The Indexation Benefit for Ordinary Shares
shall be given from the period in which previous owner held the asset. [CIT Vs. Manjula J. Shah 16 Taxmann 42 (Bom.)]
Page 14.29, Question No. 20 –
Mr. A, a Senior Citizen, has furnished the following particulars relating to his House Properties –
Particulars
Nature of Occupation
Municipal Valuation
Fair Rent
Standard Rent
Actual Rent per month
Municipal Taxes paid
Interest on Capital borrowed
House I – `
Self Occupied
1,80,000
2,70,000
2,25,000
—
18,000
2,10,000
House II – `
Let–out
3,60,000
4,50,000
2,70,000
27,000
36,000
2,70,000
Loan for both Houses were taken on 1.4.2007. House II remained vacant for 4 months.
Besides the above two houses, A has inherited during the year an old house from his grandfather. Due to business
commitments, he sold the house immediately for a sum of ` 900 Lakhs. The house was purchased in 1962 by his grandfather
for a sum of ` 6 Lakhs. However, the Fair Market Value as on 1.4.1981 was ` 60 Lakhs. With the sale proceeds, A purchased a
new house in March 2012 for a sum of ` 300 Lakhs and the balance was used in his business.
The other income particulars of Mr. A besides the above are as follows (AY 2012–2013) –
•
Business Loss
` 6 Lakhs
•
Income from Other Sources (Bank Interest)
` 3 Lakhs
•
Investments made during the year PPF
` 1,00,000
•
ICICI Infrastructure Bond Purchased
` 90,000
[CII for PY 1981–1982 is 100; CII for PY – 2011–2012 is 785]
Compute Total Income of Mr. A and his Tax Liability for the Assessment Year 2012–2013.
Solution:
Assessee: Mr. A
Previous Year: 2011–2012
Assessment Year: 2012–2013
Computation of Total Income
Particulars
Amount
1. Income from House Property:
(a) House I: Self Occupied – Annual Value u/s 23(2)
NIL
Less: Deduction u/s 24 = Interest on Housing Loan taken on 1.4.2007 [W.N. 1] 1,50,000 (1,50,000)
(b) House II: – Let–out – Annual Value u/s 23(1)(c)
[W.N. 2]
2,16,000
Less: Municipal Taxes Paid
(36,000)
Net Annual Value
1,80,000
Less: Deduction u/s 24:
(a) Deduction at 30% of NAV
(54,000)
(b) Interest on Borrowed Capital
(2,70,000) (1,44,000)
(2,94,000)
2. Profits and Gains of Business or Profession – Loss
(6,00,000)
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Students’ Referencer on Income Tax, Service Tax and VAT – AY 2012 – 2013
Particulars
3. Capital Gains – Sale of Residential House Property – Long Term Asset
Sale Consideration
Less: Expenses on Transfer
Net Consideration
Less: Indexed Cost of Acquisition – Fair Market Value as on 1.4.81 × CII of year
of Sale / CII of year of first held by Assessee (` 60 Lakhs × 785/100)
Long Term Capital Gain
Less: Exemption u/s 54 – New House purchased
4. Income from Other Sources: Bank Interest
Gross Total Income
Less: Deduction under Chapter VI–A – Sec.80C
– Investment on PPF
– ICICI Infrastructure Bonds
[Total Deduction of ` 1,90,000 is Restricted to ` 1,00,000 u/s 80CCE]
Total Income
Total Tax Payable [W.N. 5]
Add:
Education Cess at 2%
Add:
Secondary and Higher Education Cess at 1%
Net Tax Payable (Rounded off)
Amount
9,00,00,000
NIL
9,00,00,000
4,71,00,000
4,29,00,000
3,00,00,000
1,29,00,000
3,00,000
1,23,06,000
1,00,000
90,000
1,00,000
1,22,06,000
23,91,200
47,824
23,912
24,62,940
Working Notes:
1. It is assumed that the construction of the house was completed within 3 years from the end of the financial year in
which the loan was taken. Interest on loan for Self-Occupied Property is up to a Maximum of ` 1,50,000.
2.
Annual Value of House Property II is computed as under –
(a) Fair Rent of ` 4,50,000 > Municipal Valuation of ` 3,60,000. Hence Fair Rent is selected.
(b) Standard Rent of ` 2,70,000 < Step (a) Rent. Hence, Standard Rent is selected.
(c) Actual Rent of ` 2,16,000 < Selected Rent of ` 2,70,000 owing to vacancy. Hence, Actual Rent received during let–
out period is the annual value u/s 23(1)(c).
3.
Loss of ` 8,94,000 under the head Income from House Property and Business Income has been fully set off against
Long Term Capital Gain, since it is beneficial to the assessee.
4.
The indexation benefit shall be given from the period in which previous owner held the asset or 01.04.1981 whichever is later.
[CIT Vs. Manjula J. Shah 16 Taxmann 42 (Bom.)]
5.
Since Mr. A is liable to tax only because of LTCG, Tax on Total Income shall be computed as =
= 20% (Total Income – Basic Exemption Limit) = 20% (1,22,06,000 – 2,50,000).
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