715 capital gain

8/22/2019 715 Capital Gain

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NEERAJ GUPTA CA IPCC TAX CLASSES CAPITAL GAINS

www.ngpacollege.com Assessment Year 2013-14 For sms only 9810139214 Page 1

CHAPTER - 6

TAXATION OF CAPITAL GAINS

IMPORTANT SECTIONSSections Particulars

45(1) Basis of charge

45(1A) Capital gains arising from insurance claims

45(2) capital gain arising on conversion of capital asset into stock in trade

45(3) Capital contribution by existing or new partners

45(4) Capital gain on distribution of assets on dissolution of firm/ AOP

45(5) Capital gain on transfer of an asset by way of compulsory acquisition

46 Capital gain on distribution of assets by companies in liquidation [DISCUSSEDIN IFOS]

46A Capital gains on purchase of own shares or securities

47 Transactions not treated as transfer

48 Mode of computation of capital gain

49(1) Cost to the previous owner

49(2) Cost of shares of amalgamated companies

49(2A) Cost of acquisition in the case of shares acquired on conversion ofdebentures

49(2AA) Cost of acquisition of shares etc. under ESOP

49(2C) Cost of acquisition of shares in the resulting company

49(2D) Cost of acquisition of original share of the demerged company

50B Computation of capital gain in case of slump sale

50C Computation of capital gains in real estate transactions

50D FMV taken as FVOC in certain cases

51 Advance money forfeited

54 Profit on sale of property used for residence

54B Capital gain on transfer of urban agricultural land

54D Compulsory acquisition of land & building forming part of industrialundertaking

54EC Bonds of NHAI etc against long term capital gains54F Investment in residential houses of LTCG through other assets

54G Shifting of industrial undertaking from urban to rural areas

54GA Shifting of industrial undertaking from urban to SEZs

54GB Reinvestment in new manufacturing SME company

54H Extension of time limits in case of compulsory acquisitions

55A Reference to Valuation Officer
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Other sections2(14) Capital asset defined

2(29A) Long term capital asset defined

2(29B) Long term capital gain defined

2(42A) Short term capital asset defined

2(42B) Short term capital gain defined

2(42C) Slump sale defined

2(47) What is transfer ?

112 Computation of tax on Long term Capital Gains

111A STCG Tax on securities subject to STT

115 F Exemption to NRIs

Question 1 : Explain the main charging section of capital gains.

Ans: Chargeabil ity of Capital Gains : [Sect ion 45(1)] Any profits or gains arising from the transfer ofcapital assets effected during the previous year is chargeable to income-tax under the head Capital gains.

Taxation of capital gains, thus, depends on two aspects - capital asset and transfer.

Transfers Resulting in Capital Gains Transfer basically means the act by which a person conveys property i.e. ownership to one or more persons. It covers many transactions as per Section 2(47). Sale is the most important example of the term transfer.

Transaction not deemed as Transfer: [Section 47] FEW EXAMPLES

Following transactions are not regarded as transfer and are, therefore, exempt from capital

gains tax:-(1) Any transfer on account ofgift or will.

(2) Any transfer of a capital asset by a company to its wholly owned subsidiary company orvice versa provided the transferee company is an Indian company.

(3) Any transfer of capital assets under a scheme of amalgamation to the amalgamatedcompany, which is an Indian company. Above are just few examples on Section 47, a detailed discussion will be later in

the assignment.


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Question 2 : Explain the two types of Capital assets and resulting two types of Capital Gains.

Ans: Capital Assets Section 2(14) 'Capital Assets' means property of any kind held by an assessee

including property of his business or profession, butexcludes non-capital assets.

Some important examples of capital assets are house property, shares, debentures, jewellery,diamonds, lands etc.

Non-capital Assets

Properties, which are not capital assets, are-1. Stock-in-trade, consumable stores or raw materials held for the purpose of business or

profession.

2. Personal movable properties viz. furniture, motor vehicles, refrigerators, musicalinstruments etc. held for personal use of the assessee or his family. However, jewellery is acapital asset. As a result, any gains arising on sale of personal car or any other personaleffect (other than jewellery) is not taxable.

House property used by assessee for his residence, though a personal asset is notexempted and is a capital asset, as it is an immovable property.

From assessment year 2008-09, jewellery, archaeological collections, drawings,paintings, sculptures, or any work of art will not be taken as personal effects.Consequently, on transfer of these assets, capital gain will be chargeable to tax from theassessment year 2008-09.

3. Rural Agricultural land: Agricultural land in India but excluding agricultural land situated within the jurisdiction of a municipality or cantonment

board having population of 10,000 or more or agricultural land situated within 8 kilometers from the local limits of above

mentioned municipality/cantonment board

The above provisions simply means that agricultural land in rural area is not subject tocapital gains tax but agricultural lands in urban areas are taxable.

4. Special Bearer Bonds, 1991. It is not necessary that the assessee should be the initialsubscriber to the Special Bearer Bonds.

5. 6.5% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Bonds, 1980. It isnot necessary that the assessee should be the initial subscriber to the Gold Bonds.

6. Gold deposit bonds issued under Gold Deposit Scheme, 1999.


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Question 3. Whether following transactions will be considered for computation of capital gains ?

(a) Sale of personal car by assessee

(b) Sale of car being used for business purpose

(c) Sale of a car by car dealer [held as stock in trade ]

(d) Gift of shares

(e) Sale of land

(f) Transfer of jewellery by way of will

(g) Sale of house property by property dealer

(h) Sale of rural agricultural land

(i) Sale of household furniture

(j) Sale of electronics goods and other household utensils

Type of Capital Assets Capital assets are of two types: one short-term capital asset and long term capital asset.

All assets held upto three years before their transfer are treated as short-term capitalassets [Section 2(42A)].

Thus all assets held for more than three years are known as long-term capital assets[Section 2(29A)].

But the above limit i s one year in case of following assets i.e. upto one year of holding theyare known as short term capital assets and after one year they are known as long term capitalassets.

Such assets are:

1. Shares (equity or preference) [May or may not be listed]

2. Listed debentures, Listed bonds & Listed Govt. securities

3. Units of UTI or a mutual fund. [May or may not be listed]

4. Zero coupon bonds[May or may not be listed]

Zero coupon bonds means notified bond issued by any infrastructure capital company or

public sector company, in respect of which no benefit is receivable before maturity.

Type of Capital-Gains There are two types of capital gains. On transfer of short-term capital asset, short-term capital gain arises [Section 2(42B)] and on transfer of long term capital asset, the long-term capital gain arises[Section 2(29B)].


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Question 4 : Explain the computation of STCG & LTCG.

Ans: Computation of Short term Capital GainsFull value of consideration(-) cost of acquisition of the capital asset

(-) cost of improvement to the capital asset(-) transfer expenditure like brokerage, legal expenses, etc.,-------------------------------------Short term capital gains======================Note: No deduction shall be allowed on account of securities transaction tax.

Full value of consideration

It is the consideration received at transfer of capital asset.

It may be in cash or in kind.

If it is received in kind, then fair market value of such assets is taken as FVOC.

FVOC does not mean the market value of asset.

While computing capital gain, we taken actual consideration ignoring the correct marketprice [subject to provisions of section 50C]

Even if the FVOC is not fully received i.e. to be received in installments, totalconsideration shall be considered for computing capital gains.

If, due to any reason, consideration is not determinable, the fair market value of the

asset shall be taken into consideration [Section 50D, applicable from AY 2013-14]

Cost of Acquisition

Where the asset is purchased, the cost of acquisition is the price paid.

Brokerage and stamp duty paid at the time of purchase of asset is included in cost ofacquisition.

Where the asset is acquired by way of exchange for another asset, the cost ofacquisition is the fair market value of that given asset as on the date of exchange. FVOCis the market value of asset received.

Cost of improvementBasically it refers to any expenditure incurred to improve the value or usage of the capital asset.For example construction of additional floor in an already acquired building. Costs ofimprovement incurred prior to 1.4.81 are ignored. It means they are not deductible.

NOTE : If Asset is a Long Term Capital Asset then all improvements shall be indexed evendone within 3 years before the date of transfer.


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Expenditure on transfer

Expenses on transfer include any expenditure incurred, for the purpose of transfer likeadvertisement expenses, brokerage, stamp duty, registration fees, legal expenses, travellingexpenses incurred in connection with the transfer, amount paid to co-op society for securing

NOC etc.Please note: Securities transaction tax shall not be part of cost when shares are beingpurchased and shall not treated like expenses on transfer when these are being sold.

Question 5.Mr. A purchased 200 shares of NGPA LTD.[Non-listed] @ 340 per share [brokerage 1%] on30.7.2011. He sold such shares on 24.5.2012 @ 470 per share [brokerage 1%]. Decide the typeof capital gain and compute taxable income if his income from other source of the year is Rs.80,000.

Question 6.Mr. X purchased a plot of land in Sector 7 Rohini for Rs. 5,00,000 on 30.7.2010. He constructeda ground floor during J ul-Sep 2011 at a cost of Rs. 1,70,000. During Mar 2012 he constructedthe first floor of the house at an expenditure of Rs. 58,000. The complete house is sold for Rs.11,50,000 on 12.12.2012. Brokerage paid 2% both at time of purchase and at the time of sale.Compute his taxable income for the assessment year 2013-14 on the assumption that his houseproperty income is Rs. 40,000.

Computation of Long term Capital GainsFull value of consideration(-) Indexed cost of acquisition of the capital asset(-) Indexed cost of improvement of the capital asset(-) transfer expenditure like brokerage, legal expenses, etc.,

_________________________________________Long term capital gain [LTCG]

====================================Indexed cost of acquisition:

COA X COST INFLATION INDEX OF YEAR OF TRANSFERCOST INFLATION INDEX OF YEAR IN WHICH ASSET WAS FIRST HELD BY ASSESSEE

Indexed cost of improvement:

COI X COST INFLATION INDEX OF YEAR OF TRANSFERCOST INFLATION INDEX OF YEAR OF IMPROVEMENT

Cost inflation index

Financial year : 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88Cost ofinflation index :

100 109 116 125 133 140 150


161 172 182 199 223 244 259


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281 305 331 351 389 406 426


447 463 480 497 519 551 582

Financial year : 2009-10 2010-11 2011-12 2012-13Cost ofinflation index :

632 711 785 852

Note :- The 'cost of acquisition' shall not be indexed in case of long-term capital assets beingbonds or debentures. Other situations are discussed later in the chapter.

Question 8: Explain rules relating to treatment of losses in the head Capital Gains

Ans: Rules of set off & carry forward of capi tal losses As per section 70, LTCL can be adjusted only against LTCG. While STCL can be

adjusted either against STCG or LTCG. As per section 71, the net capital loss, if any, cannot be adjusted against other heads of

income. As per section 74, the capital loss can be carried forward for next 8 assessment years.

Return of income (loss) must be submitted in time limits. In subsequent year also, if STCL is there it can be adjusted either against STCG OR

LTCG, but LTCL can be adjusted only against LTCG.

Question 9. Mr. N purchases a plot for Rs. 60,000 in the month of June 2001. He constructed

ground floor and first floor of the house for Rs. 2,23,000 during financial year 2004-05. Secondfloor of the house is constructed during 2011-12 at a cost of Rs. 35,100. The house is sold forRs 26,00,000 on 22.1.2013. Brokerage paid @ 1.5% at the time of sale. Compute taxableincome for the assessment year 2013-2014 on the assumption that his business income is Rs.1,70,000.

Question 10. Compute taxable income for the assessment year 2013-14 with the help offollowing data:

Non-listed debentures Land Shares[Non-listed]Date of purchase 12.12.2007 16.6.2010 16.6.2010Cost of acquisition 30,000 6,00,000 7,50,000Date of sale 21.9.2012 21.9.2012 21.9.2012

Selling consideration 50,000 8,00,000 7,12,000

His income from other source for the financial year 2012-13 is Rs. 1,20,000.

Question 11. Mr. X purchased 300 shares of NGPA Ltd.[non-listed] @ Rs. 1,500 per share on1.9.2007. He sold all the shares on 22.5.2012 for Rs. 9,12,000. On 1.9.2007 he also investedRs. 2,30,000 in the shares of PQR Ltd.[non- listed]. These shares are sold for just Rs. 1,08,000on 25.1.2013. Compute taxable income for the assessment year 2013-14 on the assumptionthat his income from house property [computed] is Rs. 2,00,000.


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Question 12. X sells the following capital assets during the previous year 2012-13 :Shares (Rs.) House property

(Rs.)Sale consideration

Year of acquisitionCost of acquisitionCost of improvement incurred in 1998-99

6,00,000

2001-20022,00,000

--

4,00,000

1992-9325,00080,000

Question 13. N furnishes the following information about his incomes during previous year2012-13 :(i) Sale of stock of steel utensils for Rs 12,00,000 purchased for Rs 10,80,000.(ii) Capital gain Rs. 10,000 from a house, which he occupied for two years before the date

of sale 31.12.2012.(iii) Household furniture purchased in 2010 for Rs 35,000 is sold only for Rs 8,000.(iv) On 31-12-2012, he sold equity shares of NGPA Ltd., for Rs. 1,80,000, which were

purchased by him on 1-5-1993 for Rs. 20,000.(v) He sold an agricultural land for Rs. 3,00,000 during the previous year. The land was

owned by him for the last eight years, and was purchased for Rs. 16,000. The land issituated in a village with population of 9,000.

Compute his taxable income from capital gain for assessment year 2013-14.

Question 14 : How will you compute capital gain if property is acquired before 1.4.81.

Ans: COMPUTATION OF CAPITAL GAIN IF PROPERTY ACQUIRED BEFORE 1981

Where capital asset became the property of the assessee before 1.4.1981, he has an option toadopt the fair market value of the asset as on 1.4.1981, as its cost of acquisition.

Naturally, assessee will opt for this if it is higher. Thus, in very simple terms it can be expressedas the fair market value as on 1.4.81 or original cost whichever is high can be taken as cost ofacquisition. Cost of improvement incurred before 1.4.1981 is to be ignored.

In such cases, while computing indexed cost of acquisition, base index shall be taken at100.

Question 15. Compute total capital gain in the following situation:

Gold Bonds House property

Date of purchase 14.7.79 14.7.79 14.7.79Cost of acquisition 1,00,000 2,00,000 4,10,000Improvement in 80-81 --- -- 1,20,000Improvement in 2k- 01 --- --- 3,70,000F.M.V. on 1.4. 81 96,000 2,10,000 5,86,000Selling price [2012 13] 6,80,000 14,80,000 39,90,000


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Question 16. X purchases a house property for Rs. 70,000 on J une 3, 1977. The followingexpenses are incurred by him for making addition / alteration to the house property:

a. cost of construction of first floor in 1978-79

b. cost of construction of the second floor in 1984-85c. Alteration/ reconstruction of the property in 1995-96

Rs.1,00,000

3,00,0002,00,000

Fair market value of the property on April 1, 1981 is Rs. 4,00,000. The house property is sold byX on J uly 10, 2012 for Rs. 40,00,000 (expenses incurred on transfer : Rs. 40,000).

Question 17 : If the assessee acquired asset by way of Gift or will etc., how will you determinethe cost of such asset.

Ans: Cost of Acquisi tion of Previous Owner [section 49(1)]If the asset is acquired by an assessee in the following circumstances the cost of acquisition ofthe asset shall be deemed to be the cost for which the previous owner of the property acquired

it. Circumstances when cost of previous owner is takenAcquisition of asset:

(a) on any distribution of asset on the total or partial partition of a Hindu undivided family; or

(b) under gift or Will; or

(c) by succession, inheritance ; or

(d) on any distribution of assets on the liquidation of a company; or

(e) under a transfer to a revocable or an irrevocable trust; or

(f) on transfer by a parent company to its Indian subsidiary company which is wholly owned

by the parent company; or

(g) on the transfer by a subsidiary company to its Indian holding company which owns thewhole of the share capital of the subsidiary company; or

(h) on the transfer of capital asset by the amalgamating company to the amalgamatedcompany if the amalgamated company is an Indian company; or

(i) when any of the members of a H.U.F. converts his self-acquired property into H.U.F.property. (The cost of the property to the H.U.F. will be taken as the cost of the propertyto the individual converting the property).

(j) Under a scheme of conversion of private company/unlisted company into LLP.

(k) On any transfer in the case of conversion of firm/sole proprietary concern into company

SPECIAL POINTS ABOUT CONCEPT OF PREVIOUS OWNER

The previous owner of the asset means the last previous owner who acquired the assetby any means other than those stated from (a) to (k) above.

While deciding whether the asset is a short-term capital asset or a long-term capitalasset, the period of holding of previous owner is also to be considered.


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As per default law the base index shall be of the year in which the asset was first held byassessee. But Bombay High court has decided in CIT v Manjula J. Shah [2012] 204taxman 691 that base index for indexation shall be taken to be the index of the year inwhich asset is acquired by previous owner. So it has been used in the illustrations.

For indexing the improvements, the index of the year of improvement shall be

considered.

Improvements before 1.4.81 is to be ignored.

NOTE: As per section 55(3), where the cost for which the previous owner acquired the propertycannot be ascertained, the cost of acquisition to the previous owner means the fair market valueon the date on which the capital asset became the property of the previous owner.

Question 18. Mr. X purchased a piece of land in the month of Feb. 95 for Rs. 1,50,000 &constructed ground floor during May 95 [total expenditure Rs. 1,20,000]. House is gifted to hisfriend Mr. A during 2006-2007. The house is sold by him on 23.12.2012 for Rs. 18,90,000[brokerage 1% at the time of sale].

Question 19. Mr. X purchased jewellery worth Rs. 1,00,000 in 1977. After his death in 1979 thejewellery is transferred to Mrs. X as per the will. Fair market of jewellery on 1.4.81 is Rs.1,80,000. Mrs. X sold jewellery on 14.6.2012 for Rs. 9,00,000. Compute the capital gainschargeable to tax.

Question 20. X purchases a debenture in A Ltd. on J anuary 5, 2009 for Rs. 30,000. He giftsthese debentures to his friend Y, on J une 12, 2009 (fair market value on J une 12, 2009 : Rs.40,000). Y dies on March 10, 2010 and as per his will debentures are transferred to his son Z(fair market value on March 10, 2010 : Rs. 60,000). Z sells these debentures on November 19,2012 for Rs. 80,000. Determine the amount of capital gain arising to X, Y and Z from theaforesaid transactions. Debentures are not listed in any recognized stock exchange in India.

Question 21. A Ltd. purchases a plot of land for Rs. 20,000 on June 8, 1977. The companyspends Rs. 1,80,000 on construction of a residential building in 1977-78 on the plot of land. In1979-80, the building is transferred to B Ltd. (a 100 percent Indian subsidiary company of ALtd.) for a consideration of Rs. 3,50,000. Fair market value of the building on April 1, 1981 is Rs.4,00,000. B Ltd. sells the building for Rs. 16,00,000 on May 18, 2012. Find out the capital gainchargeable to tax for the assessment year 2013-14.

Question 22. X purchases the following assets on March 22, 2010:Cost Rs.

Listed debentures of A Ltd.Listed debentures of B Ltd.

50,00060,000

On J uly 18, 2010, he gifts debentures of B Ltd. to his son Y. X dies on May 5, 2012 and as perhis will debentures of A Ltd. are transferred to his son Y. On Feb 12, 2013, Y sells debenturesof A Ltd. for Rs.90,000 (expenditure on transfer : Rs.1,000) and debentures of B Ltd. forRs.70,000 (expenditure on transfer : Rs.2,000). Find out the amount of capital gains chargeableto tax for the assessment year 2013-14.


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Question 23. X purchases a house property for Rs. 80,000 on May 18, 1967. He gets the firstfloor of the house constructed in 1967-68 by spending Rs. 50,000. He dies on November 10,1979. The property is transferred to Mrs. X by his will. Mrs. X spends Rs. 40,000 and Rs. 65,000during 1979-80 and 1987-88 respectively for renewals / reconstruction of the property. Mrs. Xsells the house property for Rs.35,00,000 on March 10, 2013 (brokerage paid by Mrs. X is Rs.

35,000). The fair market value of the house on April 1, 1981 is Rs. 1,55,000.

Question 24. A Ltd. owns the following assets :

Cost of acquisitionDate of acquisition

Units of UTIRs. 1,30,000

March 12, 2010

House propertyRs. 80,000

March 12, 2010

These capital assets are transferred by A Ltd. to its wholly-owned Indian subsidiary company B Ltd. on April 2, 2011. On J uly 9, 2012, these assets are transferred by B Ltd. for aconsideration of Rs. 5,00,000 (i.e., units : Rs. 2,00,000 house property : Rs. 3,00,000).Compute the capital gain chargeable to tax in the case of B Ltd. for the assessment year 2013-

14.

Question 25. X acquired the property in the previous year 1984 85 for Rs.6,00,000 and paidRs.20,000 as registration charges. X died on 15-8-2002 and the property was transferred to hisson Y through inheritance. The market value of the property as on 15-8-2002 is Rs. 9,00,000. Ysold this property on 31-7-2012 for Rs. 22,00,000. Compute the capital gain for the assessmentyear 2013-14.

Question 26 : Explain the tax treatment of advance money forfeited in deals relating to capitalassets.

Ans: TREATMENT OF ADVANCE MONEY RECEIVED: [Section 51]

Where at any time in the past, a capital asset has been the subject of negotiations for transfer and the assessee has received and retained any advance or other money in respect of such negotiations, such advance or other money is to be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition of a capital asset it is necessary to reduce any amount received by way of advance on any other earlier

occasion.

Amount forfeited by prev ious owner is to be ignored.

That is not taxable both in the year of forfeiture, as well as in the year in which it istransferred to the assessee.


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Amount forfeited is higher than cost of acquisi tion : In this situation cost shall be takenas NIL. Excess of forfeited amount over cost of acquisition will not be taxable as it is acapital receipt. [Travancore rubber & Tea Co. Ltd. (SC)]

Question 27. Mr. A purchases a land in 1977 for Rs. 60,000. He constructed ground floor in

1977-78 [total expenditure : Rs. 30,000]. He enters into an agreement for sale of property, but,as the buyer could not pay the balance, Mr. A forfeited the advance of Rs. 20,000. Heconstructed first floor during 1984-85 [total expenditure : Rs. 40,000]. Later on due to his death,the property is transferred as per the will to his son Mr. B during 87-88. Mr. B also incurred Rs.80,000 for construction of second floor of the building during 95-96. During financial year 98-99Mr. B enters into an agreement to sell the property for Rs. 12,00,000 after receiving an advanceof Rs. 120,000. But as the buyer could not pay the balance, the advance is ultimately forfeitedby Mr. B. Finally the property is sold to Mr. C for Rs. 20,00,000 during 2012-13. Compute thecapital gains for Mr. B on the assumption that fair market value of the property on 1.4.81 is Rs.1,50,000.

What shall be your answer if the amount forfeited by Mr. Y is Rs. 2,40,000 & not Rs. 1,20,000.

Question 28. X purchases a house property on J uly 2, 1976 for Rs. 60,000 (brokerage paid : 5per cent) for his own residence. On J une 14, 1986, he enters into an agreement to sell thehouse to A for Rs. 4,00,000 (after receiving an advance of Rs. 40,000). On As failure to paythe balance within the stipulated period of 60 days, X forfeits the advance money. X dies onDecember 10, 1987 and as per his will the property is given to Mrs. X. Mrs. X enters into anagreement on March 10, 1992 to sell the property to B after receiving an advance of Rs. 60,000and on Bs failure to pay the balance within 2 months, as per the agreement, the advancemoney is forfeited by Mrs. X. Mrs. X ultimately sells the property to Y on November 20, 2012 forRs. 30,00,000 (brokerage paid @ 1.5 per cent). Find out the chargeable capital gain for theassessment year 2013-14 on the assumption that fair market value of the property on April 1,1981 is (a) Rs. 61,000 or (b) Rs. 1,50,000. Discuss whether advance money forfeited by X and

Mrs. X is chargeable to tax.

Question 29. X purchases a property on April 1, 1975 for Rs. 90,000. He enters into anagreement for sale of the property to A on December 5, 1982 and receives Rs. 20,000 asadvance. A could not, however, keep his promise and advance of Rs. 20,000 given by him isforfeited by X. Later on he gifts the property to his friend Y on J une 15, 1987.

The following expenses are incurred by X and Y for renewal of the property:

Addition of two rooms by X during 1978-79Addition of first floor by X during 1983-84Addition of second floor by Y during 1992-93

Cost Rs.20,00050,000

1,00,000

Fair market value of the property on April 1, 1981 is Rs. 1,02,000.Y enters into an agreement to sell the property for Rs. 8,00,000 to B on J une 1, 1998 afterreceiving an advance of Rs. 80,000. B could not pay the balance within the stipulated time oftwo months and Y forfeits the advance of Rs. 80,000 as per agreement with B. Y ultimatelyfinds a buyer in C to whom property is transferred for Rs. 18,00,000 on J une 15, 2012.Compute the capital gain chargeable to tax in the hands of Y for the assessment year 2013-14.


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Question 30: How will you find the cost of bonus shares.

Ans: COST OF ACQUISITION OF BONUS SHARES:

(a) Where bonus shares was received prior to 1st Apri l, 1981, the fair market value on 1st

April, 1981 is taken as their cost of acquisition (Indexation facility available).

(b) If received after this date then cost is taken as nil.

Above provisions do not affect calculation of capital gains on original shares,which will be done as per normal provisions.

NOTE: The period of holding of bonus shares shall be determined from the date of allotment ofbonus shares (and not from the date of acquisition of original shares).

Note: The above rules are applicable in respect of shares, securities, debentures, bonds, unitsallotted without any payment on the basis of holding of any other financial assets.

Question 31. Mr. A purchased 600 shares of NGPA Ltd. on 12.12.78 @ 60 per share[brokerage paid @ 1.5%]. During 1980 he received 300 bonus shares and during 98-99 hereceived 200 bonus shares. On 17.12.2012 he sold all the shares @ Rs. 800 per share[brokerage paid @ 1%]. Compute capital gains on the assumption that fair market value ofshares as on 1.4.81 is Rs. 90 per share. What shall be your answer if fair market value of share is Rs. 50 as on 1.4.81?

Question 32. On J uly 15, 2012, X holds the following shares in A Ltd.

SharesDate

of acquisitionTotal investment

Rs.

2,000 original shares

600 bonus shares I700 bonus shares II1100 bonus shares III

April 17, 1972

May 16, 1978October 15, 1995J une 10, 2008

2,00,000

NilNilNil

On J uly 15, 2012, X transfers the above-noted 4,400 @ Rs.500 per share (fair market value onApril 1, 1981 is Rs. 70 per share) in the National Stock Exchange. Find out the capital gainschargeable to tax for the assessment year 2013-14.

Question 33: How will you treat the right shares regarding computation of capital gains.

Ans: COST OF ACQUISITION OF RIGHT SHARES:(a) On the basis of entitlement if the assessee subscribed to right issue Amount actually

paid to the company to acquire these shares will be taken as cost.(b) If the assessee renounced the right in favour of any other person Nil. [For computationof capital gain for right holder]

(c) If the assessee has purchased the right to subscribe for the additional shares Purchase price paid to purchase the right plus the amount paid to the company for theacquiring the right shares.


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If such right shares are sold after one year, indexation facility is also available. Theindexation shall start from the date of allotment of shares by the company & not fromthe date of offer.

NOTE:The amount realized by the original shareholder by selling his rights entitlement will be

short term capital gain in his hands (as the cost is taken as NIL). The period of holding of therights entitlement will be reckoned from the date of offer made by the company to the date ofrenouncement.

Question 34 Mr. X purchased 500 shares of NEERAJ GUPTA (p) Ltd. @ Rs. 300 per share on30.10.98. During 1999-2000 the company offered him a right to subscribe 400 shares @ Rs.190 per share i.e. Rs. 10 as face value & Rs. 180 as share premium. Mr. X subscribed 300shares and renounced his right in favour of Mr. Y for a consideration of Rs. 1,700 for thebalance 100 shares on 3.4.2000. Mr. Y paid Rs. 19,000 to the company for the shares. Sharesto both of them were allotted on 5.4.2000. Discuss the tax implications & financial year oftaxation if Mr. X sells all the 800 shares @ Rs. 680 per share on 23.12.2012. Also compute capital gain for Mr. Y if he sells all his shares for Rs. 810 per share on

22.1.2013.

Question 35. N purchased 1,000 listed equity shares of Rs. 10 each for Rs. 50 per share in1989-90 and incurs an expenditure of Rs. 500 on brokerage. In J uly 1995 he receives 300bonus shares. In September, 2003 he gets 200 rights share for Rs. 20 each. He sold 100 bonusshares in November, 2012 at Rs. 80 per share and 100 right shares @ 85 per share inDecember 2012. Find out the capital gains for the assessment year 2013-14.

Question 36. A had purchased 2000 shares of Rs. 10 each of a company on 14-6-1997 for Rs.50,000. Company declared a right issue in the ratio of 4 : 1 at a price of Rs. 40 per share inOctober, 2012. He sold the right for 300 shares against Rs. 25 per share and remaining 200shares were purchased by him, which were allotted on 15-11-2012. He sold all the shares @

Rs. 80 each on 10-2-2013 through a recognised stock exchange. He paid brokerage @ 2% atthe time of sale. Compute taxable capital gain.

Question37. A acquired 5,000 shares by way of gift in J une, 1977 from his mother when themarket value of such shares was Rs. 80,000. The mother had acquired such shares in 1976 forRs. 60,000. A was allotted 2,000 bonus shares in 1980 and 1000 bonus shares in 1990. Themarket value of the shares as on 1-4-1981 was Rs. 25 per share. In J une 1999 A was offeredby the company to buy right shares @ Rs. 50 in the ratio of 2 : 1. A renounced 40% of the rightto B for a sum of Rs. 32,000 and balance shares were purchased by him. All the shares weresold on 20-9-2012 @ Rs. 200 per share through a recognised stock exchange. Compute histaxable capital gains for the assessment year 2013-14.


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Question 38 : Explain computation of capital gain if capital asset is converted into stock intrade.

Ans : CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE: Section 45(2)

Section 45(2) provides w.e.f. Assessment year 85-86 that,

the profits and gains

arising from the transfer

by way of conversion by the owner of a capital asset

into stock-in-trade

of a business carried on by him

shall be chargeable to tax

as his income of the previous year

in which

such stock in trade is sold..

For computing the capital gains on such conversion,

the fair market value of the asset

on the date of conversion

shall be deemed to be

the full value of the consideration

received

as a result of the transfer of the capital asset.

Business gain

shall be the difference between the selling price and

the fair market value of the capital asset

on the date of conversion.

Upto assessment year 84-85, (Conversion upto 31 March, 1984)

Capital gain arising on such conversion is not taxable by virtue of a Supreme Court ruling [ CITv Bai Shirinbai K.Kooka]. The effect of this judgement has now been nullified by the TaxationLaws (Amendment) Act, 1984 by amending section 2(47) and Section 45 with effect fromassessment year 85-86.

If the asset converted into stock in trade is a Long-term capital asset, its indexed cost shall becomputed as under:

Indexed cost of acquisition = Cost of Acquisition CII of year of conversion-------------------------------------------------CII of year of acquisition by assessee

Indexed cost of improvement shall also be calculated in the same way.


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Benefit of Section 54EC One can claim exemption under section 54EC if specifiedinvestment is made within 6 months from the date of transfer. For this purpose, the period of 6months shall be computed from the date of sale of stock-in-trade Circular 791, dated J une 2,2000. But same benefit cannot be extended to other exemptions.

Question 39. X purchased jewellery worth Rs 1,00,000 in financial year 86-87. During 99-2000he converted his jewellery as a part of stock in trade. On the date of conversion the fair marketvalue of jewellery is Rs 3,95,000. Later on during previous year 2012-13 he sold the same

jewellery for Rs. 6,00,000. Compute the capital gain taxable, if any, and decide the assessmentyear of its taxation. Also compute the business income for current year.

Question 40. Y purchased a scooter in the year 2007-08 for Rs 8000. In the previous year 09-10 he started business of selling second hand scooters. He also converted his personal scooterinto stock in trade [fair market value of scooter on date of conversion is Rs. 6,000]. This scooteris sold for just Rs 5,000 during 2012-13. Compute his capital/ business loss for the assessmentyear 2013-14.

Question 41. X invested Rs. 20,000 to acquire 1000 shares of XYZ Ltd. on 14-10-2005. Heholds the shares as investments. On 10-12-2008 he started a business of dealing in shares andconverts his holding into his stock-in-trade. The market value of the shares as on the date ofconversion was Rs. 90 per share. The shares were sold in the previous year 2012-13 for a sumof Rs. 96,000. Compute the capital gain and business income.

Question 42. (a) A had acquired gold ornaments in 1975 for Rs. 1,50,000. The market value ofgold ornaments as on 1-4-1981 was Rs. 2,00,000. The above gold was converted into stock-in-trade, to start a business of gold ornaments on 10-6-2007, when the market value was Rs.19,00,000. The above gold ornaments were sold on 15-6-2012 for Rs. 32,00,000.Compute capital gain and other income, taxable for the Assessment Year 2013-14.

(b) Assume in above Question that the date of conversion is 10

th

J une 1983.

Question 43: If a person enters a partnership firm and introduces his capital asset as capitalcontribution, then whether any tax liability is attracted by such transaction.

Ans: TRANSFER OF ASSETS AS CAPITAL CONTRIBUTION: Sect ion 45(3) Section 45(3) provide that the profits or gains arising from the transfer of a capital asset by a person to a firm or

other AOP/ BOI in which he is a partner or becomes a partner or member, by way of capital contribution, shall be chargeable to tax as his income of the previous year in which such transfer takes place.


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For computing the capital gains, the amount recorded in the books of account of the firm/ AOP/ BOI as the value of the capital asset shall be deemed to be

the full value of the consideration received as a result of the transfer of the capital asset.

Market value of asset on the date of transfer is not relevant. If non-capital asset like personal car is introduced, then capital gain shall not be

computed.

Question 44. Mr. A purchased a house in the year 85-86 for Rs 8 lacs. He later on transferredthis house to his son B for Rs 11 lacs during 93-94. B joined a partnership firm in 2012-13 andbrings this house as his capital contribution. Rs 65 lacs is recorded as his capital contributionthough market value of the house on the date of contribution was Rs 69 lacs. Compute thecapital gain arising from above transaction.

Question 45. A and B formed a partnership firm during 2012-13. Soon after its formation, Abrings the following assets as his capital contribution.

Gold

Rs.

BuildingRs.

Fair market value on the date of transferAmount recorded in booksActual cost

Year of acquisition

14,00,00013,00,000

90,0002008-09

38,00,00039,00,00027,00,000

2010-11

Compute the taxable capital gain of A.

Question 46. A acquired a property by way of gift from his father in the previous year 1990-91when its FMV was Rs. 5,00,000.

The father had acquired the property in the previous year 1982-83 for Rs. 3,00,000. Thisproperty was introduced as capital contribution to a partnership firm in which A became apartner on 15-9-2012. The market value of the asset as on 15-9-2012 was Rs. 29,00,000, but itwas recorded in the books of account of the firm at Rs. 28,00,000. Is there any capital gainchargeable in the hands of A? If yes, compute the amount.

Question 47. What is capital gain rules when asset is distributed to partners at the time of itsdissolution.

Ans: DISTRIBUTION OF ASSETS ON DISSOLUTION OF FIRM/ AOP/ BOI: Section 45(4)

The profits or gains arising from the transfer of a capital asset by way of distribution of assets on dissolu tion of a firm/ AOP/ BOI, is chargeable as the income of the firm etc. of the previous year in which the transfer takes place under section 45(4) of the Act.


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For computing the capital gains [in the hands of transferor firm] the fair market value ofthe asset on the date of transfer will be deemed to be the full value of theconsideration received as a result of the transfer.

For computing gains in the hands of partnership firm, its fair market value, which is

relevant, but for the partners it is the agreed value, which is relevant for computingcapital gain in the future.

If a firm distributes a depreciable asset, the capital gain / loss shall always be short termcapital gain / loss.

45(4) is not applicable for retirement. It means, in this case, if a partner is going out, thenagreed value shall be taken as FVOC for the firm. Similarly, it shall be the COA for theoutgoing partner, if he subsequently sells the asset.

Question 48. A firm consisting of two partners P & Q distributes its assets to them on 10thJ anuary, 13. The details are as follows:

Land (taken by P) Shares (taken by Q)

Date of acquisition 1.7.79 10.10.99Cost of acquisition 5,00,000 4,00,000Fair market value as on 1.4.81 6,00,000 --Fair market value on the date of distribution 55,00,000 48,00,000Agreed value between thepartners and the firm 56,00,000 47,00,000

Land and shares were sold by P & Q on 22.1.13 for Rs 58 lacs & Rs 49.5 lacs respectively.Compute capital gain taxable for the assessment year 2013-14 in the hands of partnership firm,P & Q.

Question 49. Whether a case of retirement is covered by section 45(4) ?

Question 50. A firm consists of 3 partners namely A, B and C. C retires from the firm on 10-10-2012. His capital balance and the profits till the date of retirement stood at Rs. 10,00,000. Thefirm transferred its land to C in settlement of his account. The market value of the land as onthat date was Rs. 15,00,000. The land was acquired of by the firm on 1-6-1999 for Rs. 21,000.Compute capital gain in the hands of the firm. What is the COA for C if he subsequently sellsthe land.

Question 51. How is compulsory acquisition compensation treated for the purpose of capitalgains?

Ans: COMPULSORY ACQUISITION: Sect ion 45(5)

This sub section covers a capital asset that is:(a) Transferred by way of compulsory acquisition under any law, or(b) Transferred in respect of which the consideration was determined or approved by the

central Govt. or the RBI.


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INITIAL COMPENSATION: As per section 45(5), the capital gain arising on transfer by way of compulsory acquisition of a capital asset is chargeable to tax

as income of the previous year in which such compensation/ consideration or part thereof is first received.

Part there of is first received : For example, compensation is fixed at Rs 20 lacs out of which Rs15 lacs is received in 2012-13 and balance is received in 2013-14. In this case total Rs 20 lacsshall be considered for capital gain computation in FY 2012-13 itself.

If the asset compulsory acquired by govt is a long-term capital asset, its indexed value will becomputed as under:

Indexed COA = Cost of acquisition CII of year of compulsory acquisition

------------------------------------------------CII of year of acquisition by assessee

ENHANCED COMPENSATION:

Any subsequent enhancement of the amount of compensation/ consideration will be deemed to be the income under the head Capital gains of the previous year in which such amount is received by the assessee even if appeal is pending in any court or tribunal.

In both the cases, Year of determination of compensation is not relevant. It is taxableon receipt basis.

In this case, cost of acquisition/ cost of improvement is taken as Nil, because theyhave already been claimed while calculating taxable initial compensation.

But litigation expenses and/or expenses on recovery of such compensation isdeductible.

If the compensation (enhanced / original) is received by any other person because ofdeath of the transferor, it is taxable as income of the recipient.

Recomputation of capi tal gains in case of reduction in compensation [Section 45(5)] Where such amount of the compensation is subsequently reduced by any court, Tribunal or other authority, the capital gain of that year, in which the compensation received was taxed, shall be recomputed accordingly. [see 155(16)]

Special point: While recomputing, legal expenses of this fresh case is also deductible.


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Question 52. The State Government compulsorily acquires a property on J uly 1, 2004. Theproperty was owned by ABC Ltd. The company purchased it for Rs. 8 lakh on October 1, 1999.It incurred Rs. 2 lacs in making certain capital alterations to it during May, 2000. Acompensation of Rs. 70 lakh is awarded to ABC Ltd., which it receives on August 1, 2009 to theextent of Rs 55 lacs. Balance is received on 2/4/2010. PQR Ltd. files an appeal against the

State Government in respect of the amount of compensation. The High Court enhances thecompensation by Rs. 15 lakh on March 12, 2012, which ABC Ltd. receives on J une 1, 2012.ABC Ltd. incurs Rs. 2 lakh as legal expenses in this connection. Compute the capital gainarising in this case. Also decide the various assessment years in which the taxation shall beattracted.

Question 53.The Central Government acquires a house property owned by X on December17, 1999. This property was purchased on April 10, 1977 for Rs. 70,000 (cost of improvementincurred during 1985-86 : Rs. 60,000 and fair market value of the property on April 1, 1981 wasRs. 1,30,000). The Government awards Rs. 22,00,000 as compensation out of whichRs.5,00,000 is received on J une 4, 2012 and Rs. 17,00,000 is received on April 10, 2013.Expenditure incurred by X for getting compensation fixed : Rs. 5,000. Being aggrieved against

the award, X flies an appeal. The High court, as per order dated July 1, 2015, enhanced thecompensation from Rs. 17,00,000 to Rs. 19,50,000 (legal expenditure incurred in courtsproceedings : Rs. 20,000). X receives the additional compensation of Rs. 2,50,000 on April 14,2016. Compute the income under the head Capital gains.

Question 54. How is cost of shares calculated which are received from coversion ofdebentures.

Ans: CONVERSION OF DEBENTURES INTO SHARES [SEC. 49(2A)]Any transfer by way of conversion of bonds, debentures, deposit certificates in any form, of acompany into shares or debentures of that company is not treated a transfer [Section 47(x)].

Thus, no capital gain arises at the time of conversion. On the sale of shares or debenturesreceived on such conversion, capital gain would arise.

For computing capital gain, the cost of converted bonds/ shares/ debentures is taken at pricepaid for the acquisition of original bonds/ shares/ debentures or certificate etc.

For example, X holds 300 convertible debentures of Rs 1000 each, purchased at Rs 1200 each.The debentures are converted into 100 equity shares of Rs 50 each but market value being Rs3700 of each share. The cost of acquisition of shares will be taken at Rs 3,60,000.(i.e. @ 3600each share).

For computing whether the asset is a STCA or LTCA, the period of holding of originaldebentures/ deposit certificates is to be ignored i.e. the period will start from the date ofallotment of shares.

Similarly indexation will start from the previous year of conversion.

Cost of Acquisition of shares will be of the cost of Debentures.

Question 55. Mr. A acquires certain debentures of B Ltd. on 10.7.2004 for Rs. 2,00,000. As perthe conversion clause in the debenture deed, the debentures are converted into equity shares inB Ltd. on 18th Feb., 2011. Mr. A sells the shares during 2012-13 for Rs 9,00,000. Compute thecapital gain arising from such transaction.


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Question 56. X acquired 100 partly convertible debentures of Rs 1,000 each on 10.7.2003.30% of each debenture was converted into 6 equity share of Rs 10 each on 2.11.2009. All theshares were sold on 3.3.13 @ 200 each. Brokerage is paid @ 2% at the time of sale. On 10thmarch 2013, all debentures also sold @ 770 each. Compute the capital gain chargeable for theassessment year 2013-14.

Question 57. X gets 1,000 partly convertible debentures (face value Rs. 100) of A Ltd. (costbeing Rs. 150 per debenture) at the time of original allotment to him on May 10, 1993. As perterms of allotment A Ltd. converts 60 percent portion of each debenture into 3 equity shares offace value of Rs. 10 on J uly 18, 2002. On September 1, 2012, X transfers 1,800 equity sharesin A Ltd. @ Rs. 250 per share and 1,000 (non convertible portion) debentures @ Rs. 98 perdebenture. Find out the amount of capital gains chargeable to tax for the assessment year2013-14.

Question 58 : How to deal with shares received at the time of amalgamation for the purpose ofcapital gains ?

Ans : Cost of Acquisi tion of shares in the Amalgamated Company [Sec. 49(2)]

Where the shareholders of amalgamating company are issued shares in the amalgamated -company, the cost of such shares in the amalgamating company is deemed to be the price paidfor the acquisition of original shares in the amalgamated company.

Above provision applicable only if Amalgamated Company is an Indian Company.

To find out whether or not shares in the amalgamated company are long-term capitalasset, the period of holding shall be determined from the date of acquisition of shares inthe amalgamating company.

The indexation will start from the date of allotment of shares in the amalgamatingcompany.

Question 59. A Ltd., an Indian Company, takes over the business of B Ltd. in a scheme ofAmalgamation of the two companies. Sumit has purchased 200 shares in B Ltd. in 2002-03 forRs 50 per share. As per the scheme of amalgamation, he gets 80 shares in A Ltd. in 2007-08.Compute capital gain if 50 of such shares are sold in 2012-13 for Rs. 1,70,000.

Question 60: Explain capital gains tax law if non residents invests in India with foreignexchange.

Ans : Capi tal gain in the case of t ransfer of shares/ debentures by non-residents

(First p roviso to Section 48 and rule 115A)

In the case of an assessee who is a non-resident, Who acquires shares or debentures of Indian co. by utilising foreign currency, Any capital gain, whether short-term or long-term, Arising from the transfer of such shares/debentures of an Indian company, Shall be computed in the following manner and no indexation of cost will be done,

even if it is a long-term capital asset:


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Full value of consideration (converted into foreign currency at average TT buying and TT sellingrate on date of sale)Less:(i) Expenses on transfer (converted into foreign currency at average TT buying and TT

selling rate on date of sale)

(ii) Cost of acquisition (converted into foreign currency at avg. TT buying and TT selling rateon date of acquisition)------------------------------------------------------------------------------= Capital gain in foreign currency------------------------------------------------------------------------------

Capital gain in foreign currency, which may be long-term or short-term, shall be converted intoIndian rupees at the TT buying rate only (not the average rate) on the date of transfer of thecapital asset.

No indexation of cost of acquisition even if the asset is a long-term capital asset.

The above provisions are applicable only for non-residents and that too only in case ofshares or debentures of Indian Company. If a non-resident purchases another asset say

a house property or jewellery, then normal provisions shall apply i.e. no conversion inforeign currency required, & indexation is also available.

The above provisions are applicable both for short term and long-term assets.

Above provisions also applicable in case of reinvestments of such capital.

Exchange rate of the date on which money is transferred is irrelevant.

Exchange rate of the date on which expenditure on transfer is incurred is irrelevant. In this

case exchange rate of date of sale is to be considered.

Option of Market value as on 1.4.81 is available.

Question 61. X, a non-resident, remits US $ 60,000 to India on J une 9,1995. The amount ispartly utilised on J une 17, 1995 for purchasing 5,000 shares in XYZ Ltd., an Indian company atthe rate of Rs 60 per share. These shares are sold for Rs 760 per share on J uly, 10 2012.

Find out the capital gains chargeable to tax for the assessment year 2013-14 on the assumptionthat telegraphic transfer buying and selling rate of US dollars adopted by the SBI is as follows:

-----------------------------------------------------------Buying (1 US $) Selling (1 US $)

Rs. Rs.-----------------------------------------------------------

J une 17,1995 21.00 23.00J uly 10, 2012 42.00 43.00


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www ngpacollege com Assessment Year 2013-14 For sms only 9810139214 Page 23

Question 62. X, a non-resident remits US $ 90,000 to India on April 24, 1992. This amount ispartly utilised in purchasing a house property worth Rs. 2,50,000 on 30.5.92, jewellery worth Rs.2,00,000 on 01.6.92 & Rs. 1,00,000 is incurred in purchasing shares of an Indian company.on02.6.92.

X transfers these assets on J an 18, 2013 for total consideration of Rs. 55,00,000 (Houseproperty: Rs. 17,00,000; J ewellery for Rs. 18,00,000 & shares: Rs. 20,00,000). Find out theamount of capital gains chargeable to tax for the assessment year 2013-2014 on theassumption that telegraphic transfer buying / selling rate of US dollar adopted by SBI is asfollows:

-----------------------------------------------------------Buying (1 US $) Selling (1 US $)

Rs. Rs.-----------------------------------------------------------

J une 2, 1992 15.00 16.00J an 18, 2013 40.00 41.00

715 capital gain

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