INCOME FROM CAPITAL
G AIN
1.
BASIS OF CHARGE [sec.45(1) ] :Normally, only revenue receipt are taxed. as an exception to this
normal rule, agains arising form sales of capital assets or
subjected to tax. Capital gains means any profits or gains from
the transfer of capital assets. Such gains are taxed under the head
‘capital gains’ in previous year in which the transfer of the capital
asset takes place. Thus, income is charged under the head ‘capital
gain ’,if the following condition are satisfied :
I. There should be a ‘capital assets’
II. There should be a ‘transfer’ of such capital assets.
III. Such transfer should take place in the ‘previous year’.
IV. There should be profits or gains.
These conditions are explained in details below
2.
There must be a capital assets :-
“capital assets” is defined to mean property of any kinds, held by the
assessee, whether or not connected with his business or profession.
‘property’ may be tangible or intangible. Land, building, vehicles,
goodwill, tenancy rights, leasehold rights, license, patents, trademarks
etc. are some example of capital assets.
 Capital assets must be transferred [sec.2(47) ] :a) sale/exchange/relinquishment :
sale means transfer of ownership in exchange for a price.
exchange is a transfer in kind; i.e. a mutual transfer of
ownership of one asset for the ownership of another by two
persons. Examples are transfer of a building by Mr. A to Mr.
B who is turn transfers is machinery to Mr. A; or conversion
of debentures into preference shares. Though there may be
only one transfer by way of exchange, capital gains may
arise to both the parties. Relinquishment means giving up,
b)
c)
d)
e)
f)
g)
abandoning or surrender. Examples are surrender of tenancy
rights; surrender of share by a co- owner; renouncement of
entitlement to rights shares etc.
Extinguishment :
Extinguishment means termination, extinction; thus amount
received on maturity of fixed deposits with bank, amount
paid by company to shareholder on reduction of share
capital or redemption of preference share are examples of
such extinguishment
compulsory acquisition :
Normally, the transfer of assets in voluntary. However, as an
exception, compulsory acquisition under a law is treated as a
transfer. Acquisition of immovable property under land
acquisition Act; nationalization of industrial undertaking;
are some examples.
conversion into stock :
Normally, transfer involves two parties; a person cannot be
taxed for transferring his owned property to himself.
However, as an exception, conversion of capital assets into
stock-in-trade is treated as a transfer. Thus if an investor in
shares starts a business of dealing in share and treats his
existing share investment as the stock-in-trade of the new
business, such conversion is treated as a transfer.
Part performance of contract :
Normally, transfer of an immovable property is complete
only on registration of the conveyance deed. Giving
profession to the purchase of the immovable property
against full payment of purchase price is only a part
performance of the contract. Still under the extended
meaning of transfer, such part performance is treated as fullfledged transfer and the against are brought to tax.
Flats in co-operative societies :
Flats in group housing scheme are owned by a co-operative
society and all allotted to individual members for
occupation. On sale of any flat, the ownership remain with
the society; what is transferred is only the right of
occupation. The transfers.
Zero coupon bonds :
According to sec. 2(48), a zero coupon bond capital means a
bond issued by any infrastructure capital company or
infrastructure capital fund or public sector company on or
after 1-6-2005 and notified by the central government. No
payment or benefit is receivable on such bonds before
1
maturity or redemption. Maturity or redemption of such
bonds is treated as ‘transfer’
3.
Date of transfer within previos year :Capital assets divided into two types
Short term capital assets
Long term capital assets
a) SHORT TERM CAPITAL ASSET :
Normally, “short term capital assets” means a capital asset
held by an assessee for not more than 36 months
immediately prior to it’s date of transfer. However. In the
following case, an asset, held for not more than 12 months is
treated as short term capital assets Equity or preference share in a company (whether share are
quoted or not)
 Securities (like debentures, government securities) listed in a
recognized stock exchange in India
 Units of unit trust of India (whether quoted or not)
 Units of mutual funds specified under sec. 10(23D)
( whether
quoted or not)
 Zero coupon bond
‘month for this purpose should be ascertained on date-to- date basis
e.g. March 26- April 25 etc.
Gains from transfer of short term capital assets give rise to short
term capital gains.
2
b) LONG TERM CAPITAL ASSET :
An asset other than a short term capital asset is regarded as a
long term capital asset. Thus, shares/ securities/ units held
for 12 months (or more) or any other asset held for 36
months (or more) are long term assets. Gains from transfer
of long term capital assets give rise to long term capital gain.
Particular
Rs
Full value of consideration
Less: 1. Index cost of acquisition
2. Index cost of Improvement
3. Transfer Expenses
Rs
XX
XX
XX
XX
XX
Long term capital gain
XXX
E.g. :- Mrs. Vidya Purchase a property for Rs. 2,00,000/in the year 1969-70 following expenses were incurred for
the house property.
1. Cost of construction in the year 1978-79 Rs. 150000/2. Cost of construction of 1st floor in 1984-85 Rs. 350000/3. Alteration to house property in 1993-94 Rs. 300000/4. Fair market value of the property on 1st April 1981 is Rs.
500000/- the house property is sold to Mr. Alok in the
previous year 2007-2008 for Rs. 500000/5. Expenses incurred on transfer during the previous year is
Rs. 5000/Compute the capital gain for Assessment year 2007-2008
[Cost of Inflation Index: 1981-82: 100, 1984-85: 125, 199394: 244, 2007-08: 551]
3
Solution :
Name of the Assessee: Mrs. Vidya
Previous year: 2007-2008
Assessment year: 2008-2009
Legal Status: Individual
Residential Status: Resident & Ordinary Resident
Computation of long term capital gain
Particular
Full value of consideration
Less: - 1. Index cost of acquisition
2. Index cost of Improvement
3. Transfer expenses
Rs.
Rs.
50,00,000
27,55,000
22,20,259
5000
49,80,259
Long term capital gain
4.
19,741
Property received as a guift or under will :-
A property received as a gift or under a will (transfer) his
sold the cost of acquisition for the assessee will be cost to the previous
owner or fair market value as on 1-4-1981. Which able higher will be
taken. However indexing will be done from the year of transfer till the
year of sell.
E.g. :Mr. A purchase a house property in December 1975 for Rs.
50,000/-. This property was gifted to his friend Mr. B in July, 1985. The
following expenses were incurred by Mr. A and Mr. B on addition to the
house.
4
1. Addition of one room by Mr. A in 1978-79 45,000/2. Addition of two room by Mr. A in 1982-83 100,000/3. Addition of three room by Mr. B in 1990-91 200,000/Fair market value of the house on 1st April, 1981 was Rs. 100,000/-. The
property was sold for Rs. 20,00,000/- in November, 2007.
Compute the taxable capital gains in the hands of Mr. B for the
assessment year 2008-09. (2007-08:551. 1982-83:109, 1990-91:182)
Solution :
Name of assesses : Mr. B
Previous year : 07-08
Assessment year : 08-09
Legal status : Individual
Residential status : resident & ordinarily resident
Computation of long term capital gain
Particular
Rs.
Full value of consideration
Less : Index cost of acquisition
5,51,000
Index cost of improvement
11,11,000
Rs.
20,00,000
16,62,000
Long term capital gain
3,38,000
Expenditure on transfer [sec. 48] :-
5.
1.
2.
Expenditure incurred (by the transferor) wholly and
exclusively in connection with the transfer of a
capital asset can be deducted from full value of
consideration.
The words “expenditure incurred wholly and
exclusively which is necessary to effect the transfer,
e.g. brokerage or commission paid for securing a
purchaser; cost of stamp, registration fees borne by
5
3.
vendor, traveling expenses incurred in connection
with transfer etc.
However, expenditure already claimed as deduction
under heads, is not deductible.
Depreciable assets [sec.50] :-
6.
1.
Applicable to depreciable assets :These special rule applicable only to capital assets belonging to
any block of depreciable assets (plant, machinery, building etc.). There
are two cases in which capital gain arise.
I. When , out of a block of assets only some assets are
transfer.
II. When all assets are transferred.
2. Case A – if entire block of assets is transfer :A) Transfer of all assets :In this case a book of assets ceases to exist because all
assets in that block are transferred during the previous year.
B)
Computing cost of acquisition :The case of acquisition in such a case is the
Total of the following –
a) written down value of block of assets at the
beginning of the previous year;
b) Actual cost of any asset in that block of asset
acquired during the previous year.
C)
Deemed short term capital gain :If the selling price is greater then opening
W.D.V. and purchase made during the year the
Difference is called deemed short term capital
gain.
E.g.:Computation of deemed short term capital gain
Particular
Rs
Selling price
Less: 1. opening balance 1-4-08
100,000
2. Purchase
50,000
Deemed short term capital gain
Rs
3,50,000
1,50,000
20,000
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C)
Deemed short term capital loss :If the selling price is lower than opening W.D.V.
And purchase made during the previous year
the Difference is called deemed short term
capital loss.
E.g.:Computation of deemed short term capital loss
Particular
Rs
Rs
Selling price
3,50,000
Less : 1. Opening balance 1-4-08
200000
2. Purchase
200000
4,00,000
Deemed short term capital loss
50,000
Case B – if only part of the block of assets is
transferred :A) Transfer of some assets :In this case assets belonging to a block are
transferred. [but the block of assets dose not
cease to exist as in the case A ]
3.
B)
Computation of capital gain :Particulars
Amount Amount
Full value of consideration
Xxx
Less : 1. Transfer expenses
Xx
2. Opening W.D.V. of block
Xx
3. Cost of addition of block
Xxx
Xx
Short term capital gain
xxxx
C)
Deemed short term capital gain :If the selling price is greater than opening
W.D.V and purchase mode during the year the difference is
called deemed short term capital gain.
E.g.:Particular
Amount Amount
Selling price
3,50,000
Less : 1. Opening balance 1-4-08 100,000
2. Purchase
50,000 1,50,000
Deemed short term capital gain
200,000
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D)
E)
No capital gain & no loss :If the selling price is lower than opening balance and
purchase mode during the year there is no capital gain
ands no any kind of loss.
E.g.:Particular
Amount Amount
Selling price
3,50,000
Less : 1. Opening balance 2,00,000
2. purchase
2,00,000 4,00,000
Closing W.D.V
50,000
Capital gain on transfer of depreciable assets :Particular
Full value of consideration
Less : 1. transfer expenses
2. Opening W.D.V.
3. Cost pf addition
Amount Amount
Xxx
Xx
Xx
Xx
Xxx
Short term capital gain/ loss
xxxxx
7.
Cost of improvement :Cost of improvement is defined as follows :I. Cost of improvement in relation to goodwill of a business
or a right to manufacture, produce or process any article or
thing is taken to nil.
II. Cost of improvement in relation to any other capital asset
means all expenses of capital nature incurred in marketing
any addition/ alteration to the capital asset by the assessee
[or the previous owner in case specified in sec. 49(I)]
Excludes :Cost of improvement does not, however include the
following :I. Any expenditure which is deductible in computing the
income chargeable under any other head; and
II. Expenditure incurred prior to April 1, 1981
[ where the capital asset become the property of the
assessee or the previous owner before Aril 1,
1981, irrespective of where the assessee opts for treating
the fair market value as on 1-4-1981 as his cast of
acquisition or not]
8
Index cost :-
8.
The index cost is relevant only for computing long
term capital gains. Index cost means original coat as
adjusted for inflation shown by a price index. Thus, suppose
the original cost of an asset was Rs. 100 in March 1982. The
price index show that Rs. 100 in March 1982 is equivalent to
Rs. 480 in March 2005. If this asset is sold in March 2005
for Rs. 500, the index cost of this asset will be taken as Rs.
480; the capital gain wlii be taken as Rs. 20 (Rs. 500 less
than indexed cost Rs. 480). This helps to tax only the real
gains earned by the assessee on sale of an assets
I. Cost inflation index :The indexed cost is computed with the help of cost
inflation index. Indexing is applied to both the cost of
acquisition as well as the cost of improvement. “cost
inflation index” for any year means such index as the
central government may, having regard to seventy- five
per cent of the average rise in the consumer price index
for urban non-manual employees for the immediately
preceding previous year to such previous year, by
notification in the official gazette, specify in this behalf.
The base previous year for is 1981-1982. the index for
various previous years is as shown below :Financial
Year
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
Cost Of
Inflation
100
109
116
125
133
140
150
161
172
Financial
Year
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
Cost Of
inflation
182
199
223
244
259
281
305
331
351
9
Financial
Year
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
Cost Of
inflation
389
406
426
447
463
480
497
519
551
E.g.:Mrs. X sells the following capital assets during the previous year 07-08.
House
Sales consideration
Year of acquisition
Cost of acquisition
Cost of improvement in 94-95
Amount
6,40,500
1983-84
18,000
1,05,407
Solution :Particular
Sales consideration
Less : Index cost of acquisition
1983-84
2007-08
18000
85500
116
551
Less : Index cost of improvement
1994-95
2007-08
1,05,407
2,24,244
259
551
Long term capital gain
9.
Amount
Amount
6,40,500
85500
2,24,244
3,09,744
3,30,756
Conversion of capital asset into stock-intrade :I. Conversion of investment into stock-in-trade will be
treated as transfer under sec. 2(47). It will be treated as
transfer in the year in which capital asset is converted into
stock-In-trade.
II. The notional capital gain arising from transfer by way of
conversion of a capital asset into stock-in-trade will be
chargeable to tax in the year in which the stock-in-trade is
sold.
III. For the purpose of computing the capital gain in such
cases, the fair market value of the capital asset on the date
on which it was converted or treated as stock-in trade
shall be deemed to be the full value of consideration
received or accruing as a result of the transfer of the
capital asset.
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IV. Period of holding of the asset runs from the date of
acquisition of the asset to the date of such conversion.
V. Business income from such converted stock-in-trade
arises in the year such stock is sold. Business income is
equal to sale value of stock less fair market value of the
asset on the date of conversion.
10.
Cost of original and bonus share :Cost of acquisition
No.
Situation
Original share’s
A
Original share &
Bonus Share’s
Acquired Before
1- 4-1981
Original share acquired
before
1- 4-1981 but bonus
share allotted on or after
1- 4-1981
Original share and bonus
shares
Acquired on or after
1- 4-1981
Actual cost or fair
market value on
1- 4-1981, whichever
is more
Actual cost or fair
market value on
1- 4-1981
Whichever is more
B
C
Actual cost
*****************
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Bonus
share’s
Fair
market
value on 14-1981
Nil
Nil