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Applied Direct Taxation110

Capital Gains

Capital asset means property of any kind except the following:

(a) Stock-in-trade, consumable stores or raw-materials held for the purpose of Business orProfession.

(b) Personal effects like wearing apparel, furniture, motor vehicles etc., held for personal useof the tax payer or any member of his family. However, jewellery, even if it is for personaluse, is a capital asset.

(c) Agricultural land in India other than the following:

(i) Land situated in any area within the jurisdiction of municipality, municipal corpora-tion, town area committee, town committee, or a cantonment board which has popu-lation of not less than 10,000 according to the figures published before the first day ofthe previous year based on the last preceding census.

(ii) Land situated in any area around the above referred bodies up to a distance of 8 kms.from the local limits of such bodies as notified by the Central Government.

(d) 6 per cent Gold Bonds, 1977, 7 per cent Gold Bonds, 1980, National Defense Gold Bonds,1980 and Special Bearer Bonds, 1991 issued by the Central Government.

(e) Gold deposit bonds issued under the Gold Deposit Scheme, 1999 notified by the CentralGovernment.

Though there is no definition of property in the Income-tax Act, it has been judicially heldthat a property is a bundle of rights which the owner can lawfully exercise to the exclusion ofall others and is entitled to use and enjoy as he pleases provided he does not infringe any law

of the State. Property can be movable (gold, jewellery, furniture, car) or Immovable (land,building, house). It can be tangible (gold, jewellery, furniture, car, land, buildings) or intan-gible (goodwill, brand, copyrights. It can be corporal or incorporeal. All the properties areassets, if it does not fall in the aforesaid exceptions stated in clause (a) to (e), above. Thus, if anassessee sells his household furniture or utensils, the difference in sales price and cost will not

be regarded as capital gain because these are personal effects and are not covered in the defini-tion of capital asset. Similarly, sale of stock does not result into capital gain, but as one is awareit results into profits or gains from business.

Case Law :

Under the charging section, the crucial requirements are that there must be a transfer and thetransfer must be of a capital asset. The implication is that at the time of the transfer the subjectof the transfer must be a capital asset. - M. Venkatesan v. CIT 144 ITR 886 (Mad.).

A contract for sale of land is capable of specific performance. It is also assignable. A right toobtain conveyance of immovable property is clearly property as contemplated by section2(14) - CIT v. Tata Services Ltd. 122 ITR 594 (Bom.).

A business as a going concern would constitute a capital asset within the meaning of section 45- CIT v. F.X. Periera & Sons (Travancore)(P.) Ltd. 184 ITR 461 (Ker.).

Route permits are capital assets - Route permits for plying buses issued by authorities underthe Motor Vehicles Act are property for the deprivation of which compensation is payable tothe permit holder and, hence, such route permits are capital assets in the hands of the assessee-


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111Applied Direct Taxation

transport company - Addl. CIT v. Ganapathi Raju Jegi, Sanyasi Raju 119 ITR 715 (AP)

Only those effects can legitimately be said to be personal which pertain to the assessee person.In other words, an intimate connection between the effects and the person of the assessee must

be shown to exist to render them personal effects. The enumeration of articles like wearingapparel, jewellery and furniture mentioned by way of illustrations in the definition of per-sonal effects also shows that the Legislature intended only those articles to be included in thedefinition which were intimately and commonly used by the assessee - H.H. Maharaja RanaHemant Singhji v. CIT 103 ITR 61.Where certain land was situated in the most important and busiest thoroughfare in city andland was surrounded on all sides by industrial and commercial buildings, and no agriculturaloperations were being carried on any land nearby, the mere fact that vegetables were beingraised thereon at the time of the sale or for some years prior thereto, could not change the

nature and character of the land from non-agricultural to agricultural - CIT v. Gemini PicturesCircuit (P.) Ltd. 85 Taxman 594/220 ITR 43.

TYPES OF CAPITAL ASSETS AND CAPITAL GAINS

For the purpose of taxation assets are divided into two categories viz. (i) Long Term Capitalasset and (ii) Short Term Capital asset.

(a) Long Term Capital Asset [Sec. 2(29A)]: It is defined as a capital asset which is not a short-term capital asset.

If capital asset is held by the assessee for more than thirty-six months it becomes a Long-termcapital asset. In the case of shares in a company, securities listed in a recognised stock exchange

in India, units of Unit Trust of India or units of Mutual Fund specified u/s. 10(23D) as the casemay be, such an asset will be treated as a long term capital asset if it is held for more thantwelve months.

(b) Short Term Capital asset [Sec. 2(42A)]: If capital asset held by an assessee for not morethan thirty-six months immediately preceding the date of its transfer is known as short termcapital asset. However, the following assets shall be treated as short term capital asset if theyare held for not more than 12 months preceding the date of transfer.

(i) Equity or preference shares held in a company.

(ii) Securities listed in a recognised stock exchange in India.

(iii) Units of the Unit Trust of India or units of a Mutual Fund specified u/s. 10(23D).

PERIOD OF HOLDING IN CERTAIN CASES

Normally the period is counted from the date of acquisition to the date of transfer. However, ithas the following exceptions:

(i) in the case of a share held in a company on liquidation the period subsequent to the dateon which the company goes into liquidation would not be considered.

(ii) where the cost of acquisition is to be taken as the cost to the previous owner [Sec. 49(1) e.g.gift, will, succession, merger, etc.], the period of holding by the previous owner shouldalso be considered.


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Capital Gains

(iii) where the capital asset is the shares of an amalgamated company acquired in lieu of the

shares of the amalgamating company, the period of holding of the shares of the amalgam-ating company should also be considered.

(iv) where the capital asset is the shares or any other security subscribed by the assessee in aright issue, or subscribed to by the person in whose favour the assessee renounces hisright, the period should be considered from the date of allotment of such asset.

(v) where the capital asset is the right to subscribe to a rights offer and it is renounced, thedate of offer of the rights should be taken as the date of acquisition.

(vi) where the capital asset is share(s) in an Indian company which has become the property ofthe assessee in consideration of a demerger, the period for which the share(s) of thedemerged company were held should also be considered.

(vii) where the capital asset is the financial asset acquired without any payment (e.g. bonusshares), the period should be considered from the date of allotment of such asset.

(viii) in the case of a capital asset, being any specified security or sweat equity shares allottedor transferred, directly or indirectly, by the employer free of cost or at concessional rate tohis employees (including former employee or employees), the period shall be reckonedfrom the date of allotment or transfer of such specified security or sweat equity shares.

In respect of capital assets other than those mentioned above, the period for which any capitalasset is held by the assessee shall be determined subject to any rules which the CBDT maymake in this behalf.

Case Law :

Bonus shares issued by a company are acquired by a shareholder when they are issued andthey must be taken to be held by shareholder from the date of their issue and not from the datewhen the original shares, in respect of which they are issued, were acquired by the shareholder- Executive of the Will of Late Shri Manecklal Premchand v. CIT 48 Taxman 310/ManecklalPremchand v. CIT 186 ITR 554.

A member of a housing society becomes owner of flat on date on which he acquires shares insociety and question as to whether flat is a long-term capital asset has to be decided by takingthat date into consideration rather than date of possession of flat - CIT v. Anilaben UpendraShah 262 ITR 657134 Taxman 522.

(c) Long Term Capital Gain [Sec. 2(29B)]: Gains arising due to transfer of long term capital

asset, as defined above, are called as long term capital gain.

Any asset on which depreciation is allowed under the Income-tax Act, it is held as short termcapital gain (Section 50).

In respect of long term capital gain, certain concessions like exemption, lower tax rate, deduc-tion of indexed cost of acquisition are available.

(d) Short Term Capital Gain [Sec. 2(42B)]: Gains arising due to transfer of short term capitalasset, as defined above, are called as short term capital gain.

Short term capital gain is included in taxable total income of the assessee and normal tax rate isapplicable, for income-tax payment..


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8.2 TRANSFER [Sec. 2(47)]

Transfer is defined in a much wider sense than as is commonly understood. A layman looselycalls it sale. In order to attract capital gains tax, transfer should take place. Meaning of trans-fer includes sale, but it includes many more category of transactions.

Transfer, in relation to capital asset, includes the following:

(i) Sale, exchange or relinquishment of a capital asset. A sale takes place when title in theproperty is transferred for a price. The sale need not be voluntary. An involuntary sale likethat by a Court of a property of judgment debtor at the instance of a decree holder is alsotransfer of a capital asset.

An exchange of capital asset takes place when the title in one property is passed in consider-

ation of the title in another property.

Relinquishment of a capital asset arises when the owner surrenders his rights in property infavour of another person. For example, the transfer of rights to subscribe the shares in a com-pany under any Rights Issue, to a third person.

(ii) Extinguishment of any rights in a capital asset. This covers every possible transactionwhich results in destruction, termination, cessation or cancellation of all or any bundle ofrights in a capital asset. For example, termination of a lease or and of a mortgagees inter-est in a property.

(iii) Compulsory acquisition of the capital asset under any law. Acquisition of immovableproperties under the Land acquisition Act, acquisition of industrial undertaking under

the Industries (Development and Regulation) Act or preemptive purchase of immovableproperties by the Income-tax Department are some of the examples of compulsory acqui-sition of a capital asset.

(iv) Conversion of a capital asset into stock-in-trade. Normally, there can be no transfer ifthe ownership in an asset remains with the same person. However, the Income-tax Actprovides an exception for the purpose of capital gains. When a person converts any capi-tal asset owned by him into stock-in-trade of a business carried on by him, it is regarded asa transfer. For example, where an investor in shares starts a business of dealing in sharesand treats his existing investments as the stock-in-trade of the new business, such conver-sion arises and is regarded as a transfer.

(v) Contract of the nature of Part performance. Normally transfer of an immovable propertyworth Rs. 100 or more is not complete without execution and registration of a conveyancedeed. However, section 53A of the Transfer of Property Act envisages situations whereunder a contract for transfer of an immovable property, the purchaser has paid the priceand has taken possession of the property, but the conveyance is either not executed or ifexecuted is not registered. In such cases the transferor is debarred from agitating his titleto the property against the purchaser.


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Capital Gains

(vi) Transfer of rights in immovable properties through the medium of cooperative societ-

ies, companies etc. Usually flats in a building and in group housing schemes are regis-tered in the name of a co-operative society constituted by a number of members. A Com-pany may be formed with an object of owning a building and shareholders are entitled toenjoy occupancy of certain tenement. In such circumstances transfer of rights to use andenjoy the flat is effected by changing the membership of cooperative society or by trans-ferring the shares in the company.

(vii) Transfer by a person to a firm or other Association of Persons (AOP) or Body of Indi-viduals (BOI). Normally, firm/AOP/BOI is not considered a distinct legal entity from itspartners or members and so transfer of a capital asset from the partners to the firm/AOP/BOI is not considered as Transfer. However, under the Capital gains, it is specificallyprovided that if any capital asset is transferred by a partner to a firm/AOP/BOI by way of

capital contribution or otherwise, the same would be construed as transfer.

(viii) Distribution of money or other assets by Company on Liquidation. If a shareholderreceives any money or other assets from a Company in liquidation, the shareholder isliable to pay capital gains as the same would have been received in lieu of the shares held

by him in the company. However, if the assets of a company are distributed to the share-holders on its liquidation, such distribution shall not be regarded as transfer by the com-pany.[ Sec. 46(2)].

(ix) the maturity or redemption of a zero coupon bond.

Case Law :

The definition of transfer under section 2(47) is merely inclusive and does not exhaust otherkinds of transfer Sunil Siddharthbhai v. CIT 156 ITR 509 (SC).

A transfer of a capital asset takes place when the investiture of title takes place under a lawrelating to compulsory acquisition of property Mangalore Electric Supply Co. Ltd. v. CIT 113ITR 655 (SC).

Transaction of reduction of share capital by company and pro rata distribution of amount/assets to shareholders amounts to transfer within meaning of section 2(47) - CIT v. G.Narasimhan 102 Taxman 66/236 ITR 327 (SC).

Redemption of preference shares involves transfer - Redemption of preference shares by thecompany will squarely come within the phrase sale, exchange or relinquishment of the asset

- Anarkali Sarabhai v. CIT 90 Taxman 509/224 ITR 422 (SC).

An exchange involves the transfer of property by one person to another and reciprocally thetransfer of property by the other to the first person. There must be a mutual transfer of owner-ship of one thing for the ownership of another - CIT v. Rasiklal Maneklal (HUF) 177 ITR 198/43 Taxman 259.

A relinquishment takes place when the owner withdraws himself from the property and aban-dons his rights thereto; it presumes that the property continues to exist after the relinquish-ment - CIT v. Rasiklal Maneklal (HUF) 177 ITR 198/43 Taxman 259.


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TRANSACTIONS NOT REGARDED AS TRANSFER [Sec. 46(1), 47]

Under the Act, certain transactions are expressly excluded from being considered as transfer.When any person undertakes transactions of the nature which are nor regarded as transfer,capital gain does not arise and no tax becomes payable. The following are categories of suchtransactions:

(a) Distributions of assets by companies in liquidation to the shareholders of a company.[Sec. 46(1)]

(b) (i) distribution of capital assets on the total or partial partition of a HUF.

(ii) transfer of a capital asset under a gift or will or an irrevocable trust except transferunder a gift or an irrevocable trust, of shares, debentures or warrants allotted by acompany to its employees under Employees Stock Option Plan or Scheme;

(iii) transfer of a capital asset by a company to is subsidiary company, if :

(a) the parent company or its nominees hold the whole of the share capital of asubsidiary company,

(b) the subsidiary company is an Indian company,

(c) the capital asset is not transferred as stock-in-trade,

(d) the subsidiary company does not convert such capital asset into stock-in-tradefor a period of 8 years from the date of transfer, and

(e) the parent company or its nominees continue to hold the whole of the sharecapital of the subsidiary company for 8 years from the date of transfer.

(iv) transfer of a capital asset by a subsidiary company to the holding company, if

(a) the whole of the share capital of the subsidiary company is held by the holdingcompany,

(b) the holding company is an Indian Company,

(c) the capital asset is not transferred as stock-in-trade,

(d) the holding company does not convert such capital asset into stock-in-trade for aperiod of 8 years from the date of transfer, and

(e) the holding company or its nominees continue or hold the whole of the sharecapital of the subsidiary company for 8 years from the date of transfer.

(v) in a scheme of amalgamation, transfer of a capital asset by the amalgamating companyto the amalgamated company if the amalgamated company is an Indian company.

(vi) transfer of shares of an amalgamating company, if :

(a) the transfer is made in consideration of the allotment of share or shares in theamalgamated company, and

(b) the amalgamated company is an Indian company. [Sec. 47(vii)]

(c) any transfer in a business reorganisation, of a capital asset by the predecessor co-operative bank to the successor co-operative bank


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Capital Gains

d) any transfer by a shareholder, in a business reorganisation, of a capital asset

being a share or shares held by him in the predecessor co-operative bank if thetransfer is made in consideration of the allotment to him of any share or shares inthe successor co-operative bank

(vii) transfer of shares of an Indian Company, by an amalgamating foreign company tothe amalgamated foreign company, if :

(a) at least twenty-five per cent of the shareholders of the amalgamating foreigncompany continue to remain shareholders of the amalgamated foreign companyand

(b) such transfer does not attract tax on capital gains in the country, in which theamalgamating company is incorporated. [Sec. 47(via)]

(c) Sec. 47(viaa): Amalgamation of banking company with the banking institutions.Any transfer of a capital asset by banking company to banking institution in ascheme of amalgamation of such banking company with such banking institutionsanctioned and brought into force by the Central Government u/s 45(7) of theBanking Regulation Act, 1949.

(viii) in a demerger :

(a) transfer of a capital asset by the demerged company to the resulting company, ifthe resulting company is an Indian company;

(b) transfer of share or shares held in an Indian company by the demerged foreigncompany to the resulting foreign company if :

(i) the share holders holding not less than three fourths in value of the shares of thedemerged foreign company continue to remain shareholders of the resultingforeign company; and

(ii) such transfer does not attract tax on capital gains in the country, in which thedemerged foreign company is incorporated.

(c) transfer or issue of shares, in consideration of demerger of the undertaking by,the resulting company to the shareholders of the demerged company. [Sec. 47(vib),(vic), (vid)]

(ix) transfer of bonds or Global Depository Receipts, purchased in foreign currency, by anon-resident to another non-resident outside India. [Sec. 47(viii)]

(x) transfer of any work of art, manuscript, drawing, to the Government or a Universityor the National Museum, or any such other public museum or institution notified bythe Central Government in the Official Gazette to be of national importance.[Sec. 47(ix)]

(xi) transfer by way of conversion of bonds or debentures, debenture stock or depositcertificate in any form, of a company into shares or debentures of that company.


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(xii) transfer of membership of a recognised stock exchange made by a person (other

than company) on or before 31.12.1998, to a company in exchange of shares allottedby that company. However, if the shares of the company are transferred within 3years of their acquisition, the gains not charged to tax by treating their acquisitionas not transfer would be taxed as capital gains in the year of transfer of the shares.[Sec. 47(x)]

(xiii) transfer of land of a sick industrial company, made under a scheme prepared andsanction under the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of1986) where such sick industrial company is being managed by its workerscooperative and such transfer is made during the period commencing from theprevious year in which the said company has become a sick industrial company u/s. 17(1) of that Act and ending with the previous year during which the entire networth of such company becomes equal to or exceeds the accumulated losses.[Sec. 47(xii)]

(xiv) (i) transfer of a capital asset or intangible asset by a firm to a company as a result ofsuccession of the firm by a company in the business carried on by the firm; or

(ii) transfer of a capital asset to a company in the course of Corporation of a recognisedstock exchange in India as a result of which AOP/BOI is succeeded in suchcompany, if

(a) all the liabilities of the AOP or BOI relating to the business immediately beforethe succession become the assets and liabilities of the company,

(b) all the partners of the firm immediately before the succession become theshareholders of the company in the same proportion in which their capitalaccounts stood in the books of the firm on the date of succession,

(c) the partners of the firm do not receive any consideration or benefit, directly orindirectly, in any form or manner, other than by way of allotment of shares in theCompany and

(d) the aggregate of the shareholding in the company of the partners of the firm isnot less than fifty per cent of the total voting power in the company and theirshareholding continues to be as such for a period of five years from the date ofsuccession. If the conditions laid down above are not complied with, then the

amount of profits arising from the above transfer would be deemed to be theProfits and gains of the successor company for the pervious year during whichthe above conditions are not complied with.

(e) W.e.f. Assessment Year 2002-2003, the corporatisation of recognised stockexchange in India is carried out in accordance with a scheme approved by SEBI.[Sec. 47(iii)].

(xv) Where a sole proprietary concern is succeeded by a company in the business carriedon by it as a result of which the sole proprietary concern sells or otherwise transfersand capital asset or intangible asset to the company, if :


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Capital Gains

(a) all the assets and liabilities of the sole proprietary concern relating to the business

immediately before the succession become the assets and liabilities of thecompany.

(b) the shareholding of the sole proprietor in the company is not less than fifty percentof the total voting power in the company and his shareholding continues to soremain as such for a period of five years from the date of the succession and

(c) the sole proprietor does not receive any consideration or benefit, directly orindirectly, in any form or manner, other than by way of allotment of shares in thecompany [Sec. 47(xiv)].

(xvi) Transfer in a scheme of lending of any securities under an arrangement subject to theguidelines of Securities and Exchanges Board of India (SEBI).With effect fromassessment year 2003-04 securities which are subject to guide lines issued by RBI isalso included for this purpose.

(xvii) any transfer in a business reorganisation, of a capital asset by the predecessorco-operative bank to the successor co-operative bank.

(xviii) any transfer by a shareholder, in a business reorganisation, of a capital asset being ashare or shares held by him in the predecessor co-operative bank if the transfer ismade in consideration of the allotment to him of any share or shares in the successorco-operative bank.

Case Law :

When a proprietary business is converted into a partnership business by the induction ofpartners, there is a transfer of part of the assets at least by the assessee in favour of theinducted partners. Since the transfer did not result in yielding any profit or gain to theassessee, no gains should be subjected to tax under section 45 - CIT v. H. Rajan & H. Kannan236 ITR 42 .

The date of sale or transfer is the date when the sale or transfer takes place, and for the purposeof determining such a date, entries in the account books are irrelevant - Alapati Venkataramiahv. CIT 57 ITR 185 .

THE CENTRAL GOVERNMENT OF DIRECT TAXES ISSUED THE FOLLOWINGCIRCULARS IN REGARD TO DETERMINATION OF DATE OF TRANSFER/PERIOD OF

HOLDING ETC. OF CAPITAL ASSET.

Circular No. (i) If securities are transacted through stock exchanges, the date of brokersnote should be treated as the date of transfer provided the transaction isfollowed up by delivery of shares and also the transfer deeds. Similarly, inrespect of the purchase of the securities, the holding period shall be reck-oned from the dated of the brokers note for purchase on behalf of the in-vestors.

(ii) In case the transactions take place directly between the parties and notthrough stock exchanges, the Board has clarified that the date of contract of


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sale as declared by the parties shall be treated as the date of transfer

provided it is followed up by actual delivery of shares and the transfer ofdeeds.

(iii) In cases where the shares are purchased in several lots at different points oftime and are taken delivery of in one lot and are subsequently sold in parts,in the absence of correlation of the dates of purchase and sale through spe-cific numbers of the scrips, it is difficult to determine the period of holdingof the shares which are sold in parts. In this retgard, Board has clarified thatFirst-in-first-out (FIFO) method shall be adopted to reckon the period ofholding. Therefore, the shares acquired first will always be treated as soldfirst and the shares acquired last will be taken to be remaining with theassessee.

(iv) The FIFO method will be applied only in respect of the dematerialised hold-ings because in the case of sale of dematerialised securities, the securitiesheld in physical form cannot be construed to have been sold as they con-tinue to remain in the possession of the investor and are identified sepa-rately.

(v) In the depository system, the investor can open and hold multiple accounts.In such a case, where an investor has more than one security account, theFIFO method will be applied account wise. This is because in case where aparticular account of an investor in debited for sale securities, the securitieslying in his other account cannot be construed to have been sold as they

continue to remain in that account.(vi) If in an existing account of dematerialized stock, old physical stock is

dematerialised and entered at a later date, under the FIFO method, the ba-sis for determining the movement out of the account is the date of entryinto the account.

8.3 VARIOUS PROVISIONS OF THE INCOME TAX ACT FORCOMPUTATION OF INCOME UNDER THE HEAD CAPITALGAIN

CAPITAL GAIN

Capital gain arises from transfer of a capital asset. Charge over capital gain is created bysection 45 r.w.s. 2(24) [defining income] of the Act. Unless expressly exempt under the Act,capital gain is liable to tax.

Section 45 provides as under:

(1) Any profits or gains arising from the transfer of a capital asset effected in the previousyear shall, be chargeable to income-tax under the head Capital gains, and shall be deemedto be the income of the previous year in which the transfer took place.


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Capital Gains

(1A)Apart anything contained in sub-section (1), when any person receives during any previ-

ous year any money under an insurance from an insurer on account of damage to, anycapital asset, as a result of

(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or

(ii) riot or civil disturbance; or

(iii) accidental fire or explosion; or

(iv) action by an enemy or action taken in combating an enemy.then, any profits arising from receipt of such money shall be chargeable to income-tax underthe head Capital gains and shall be deemed to be the income of such person of the previousyear in which such money or other asset was received.

(2) Apart anything contained in sub-section (1), the profits arising from the transfer by way ofconversion by the owner of a capital asset into stock-in-trade of a business carried on byhim shall be chargeable to income-tax as his income of the previous year in which suchstock-in-trade is sold or otherwise transferred by him. The fair market value of the asseton the date of such conversion or treatment shall be deemed to be the full value of theconsideration received.

(2A) Where any person has had at any time during previous year any beneficial interest in anysecurities, then, any profits arising from transfer made by the depository of such benefi-cial interest in respect of securities shall be chargeable to income-tax as the income of the

beneficial owner of the previous year in which such transfer took place and shall not beregarded as income of the depository who is deemed to be the registered owner of securi-

ties. The cost of acquisition and the period of holding of any securities shall be determinedon the basis of the first-in-first-out method

(3) The profits or gains arising from the transfer of a capital asset by way of distribution ofcapital assets on the dissolution of a firm or other association of persons or body of indi-viduals (not being a company or a co-operative society) or otherwise, shall be chargeableto tax as the income of the firm, of the previous year in which the said transfer takes placeand. The fair market value of the asset on the date of such transfer shall be deemed to bethe full value of the consideration received.

(4) Apart anything contained in sub-section (1), where the capital gain arises from the trans-fer of a capital asset, being a transfer by way of compulsory acquisition under any law, ora transfer the consideration for which was determined or approved by the Central Gov-

ernment or the Reserve Bank of India, and the consideration for such transfer is enhancedor further enhanced by authority, the capital gain shall be dealt with in the followingmanner, namely:

(a) the capital gain computed with reference to the compensation awarded in the firstinstance or by the Central Government or the Reserve Bank of India shall be charge-able as income under the head Capital gains of the previous year in which suchcompensation or part thereof, was first received and

(b) the amount by which the consideration is enhanced by any other authority shall bedeemed to be income chargeable under the head Capital gains of the previous yearin which such amount is received by the assessee;


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(c) where in the assessment for any year, the capital gain arising from the transfer of a

capital asset is computed by taking the consideration referred to in clause (a) or, asthe case may be, enhanced consideration referred to in clause (b), and subsequentlysuch consideration is reduced by any authority, such assessed capital gain of thatyear shall be recomputed by taking the consideration as so reduced by authority to bethe full value of the consideration.

Explanation.For the purposes of this sub-section,

(i) in relation to the amount referred to in clause (b), the cost of acquisition and the costof improvement shall be taken to be nil;

(ii) the provisions of this sub-section shall apply also in a case where the transfer tookplace prior to the 1st day of April, 1988;

(iii) where by reason of the death of the person who made the transfer, or for any otherreason, the enhanced compensation or consideration is received by any other person,the amount referred to in clause (b) shall be deemed to be the income, chargeable totax under the head Capital gains, of such other person.

(6) The difference between the repurchase price of the units referred to in sub-section (2) ofsection 80CCB and the capital value of such units shall be deemed to be the capital gainsarising to the assessee in the previous year in which such repurchase takes place or theplan referred to in that section is terminated and shall be taxed accordingly.

CHARGEABILITY [Sec. 45, 46, 46A]

Any profits or gains arising from the transfer of capital asset effected in the previous year shallbe chargeable to Income-tax under the head capital gains. Chargeability of capital gains areanalyzed as under:-

(i) Sec. 45

Sec. Mode of transfer Year of chargeability Value of consideration

45(1) Transfer of a capital asset Previous year in which Consideration for thetransfer takes place transfer

45(2) Conversion of a capital Previous year in which Fair market value as on theasset into stock -in-trade. stock-in-trade is sold. date of conversion.

45(2A)Transfer of securities made Previous year in which Consideration for theby the depository transfer takes place on transfer and chargeable

FIFO method in case of beneficial owner.

45(3) Transfer of a capital asset Previous year in which The value of the asset bypartner/member to a recorded transfer takes place.firm/AOP/BOI as capitalcontribution or otherwise.


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Capital Gains

Sec. Mode of transfer Year of chargeability Value of consideration

45(4) Transfer of a capital asset Previous year in which Fair market as on theby way of distribution on transfer takes place. date of transfer.dissolution or otherwise ofa firm or association ofpersons.

45(5) Transfer of a capital asset Previous year in which The initial compensation orby way of compulsory compensation is received. enhanced compensation ifacquisition under any law. any.

45(6) Repurchase of units of refer Previous year in which Repurchase price.to in sec. 80CCB. repurchase takes place or

the scheme terminates.

46(2) Shareholders receiving In the year assets are Money receipt or marketassets from the liquidator received from the value of the assets on thefrom the liquidation of liquidator. date of distributionthe company. by the liquidator

reduced by the deemeddividend u/s. 2(22) (e).

46A Purchase by a company Previous year in which such Consideration for theof its own shares or other shares or other securities are purchase of shares.securities. purchased.

Case Laws :

The fact that capital gains are connected with the capital assets of a business will not makethem the profits of the business - CIT v. Express Newspapers Ltd. 53 ITR 250.

Where business is sold as a going concern valuing plant and machinery, etc., surplus arisingover and above difference between written down value and actual cost has to be taxed undersection 45 - CIT v. Artex Mfg. Co. 93 Taxman 357/227 ITR 260.

Any surplus arising from the transfer of a going concern from a firm to a company in which allthe erstwhile partners of the firm became shareholders of the company was liable to be as-sessed to capital gains in the status of body of individuals and not in the status of association of

persons - Artex Mfg. Co. v. CIT [1981] 131 ITR 559 (Guj.).Surplus arising on sale of shares by an investment company is capital gain, and not businessprofit - CIT v. Sugar Dealers [1975] 100 ITR 424 (All.).

The word otherwise used in section 45(4) takes into its sweep not only the cases of dissolutionbut also the cases of subsisting partners of a partnership, transferring assets in favour of aretiring partner - CIT v. A.N. Naik Associates [2004] 136 Taxman 107 (Bom.).


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COMPUTATION OF CAPITAL GAIN

In order to ascertain or compute the capital gain, it is necessary it bifurcate the gain into thefollowing categories:

1. Capital gain from Depreciable Asset

2. Capital gain from other than Depreciable Asset

(i) Short Term Capital gain

(ii) Long Term Capital gain

3. Computation of Capital Gain in case of Compulsory Acquisition of Property.

4. Capital Gain in Case of a Slump Sale

Computing capital gain in all cases stated above is summarized in the following table:

A DEPRECIABLE ASSET RUPEES REMARKS

Full Value of consideration XXXXXXXX From Sale of One orMore or All the

Assets In The Block

Less: Expenses in connection with the transfer XXX

= Net consideration XXXXXX

Less: Opening Written Down value of Block of XXXX Block To Which Asset

Assets Belongs

Less: Additions in the Block During the Year XXXX

= Gross capital gains XXXXXX

Less: Exemption u/s. 54, 54D, 54EC, 54ED, 54F XXXXX

= Net capital gains XXXXX Deemed To Be ShortTerm Gain

COMPUTATION OF CAPITAL GAINS IN CASE OF DEPRECIABLE ASSET

[Sec 50]:In case of asset on which depreciation has been claimed and allowed for the purpose of in-come-tax, called depreciable assets, there will be no indexation or the capital gains is deemedto be Short-term Capital Gains.

Section 50 provides for the computation of capital gains in case of depreciable assets. It Kindlynote that where the capital asset is a depreciable asset forming part of a block of assets, section50 has an overriding effect. This is in spite of anything contained in section 2(42A) which de-fines a short- term capital asset. Section 50provides that where the capital asset is an assetforming part of a block of assets in respect of which depreciation has been allowed, the provi-sions of sections 48 and 49 shall be subject to the following modifications :


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Capital Gains

A. Where the full value of consideration received or accruing for the transfer of the asset plus

the full value of such consideration for the transfer of any other capital asset falling withthe block of assets during previous year exceeds the aggregate of the following amountsnamely:

(1) expenditure incurred wholly and exclusively in connection with such transfer;

(2) WDV of the block of assets at the beginning of the previous year;

(3) the actual cost of any asset falling within the block of assets acquired during the pre-vious year such excess shall be deemed to be the capital gains arising from the trans-fer of short-term capital assets.

B. Where all assets in a block are transferred during the previous year, the block itself willcease to exist. In such a situation, the difference between the sale value of the assets andthe WDV of the block of assets at the beginning of the previous year together with theactual cost of any asset falling within that block of assets acquired by the assessee duringthe previous year will be deemed to be the capital gains arising from the transfer of short-term capital assets.

Now, let us discuss each ingredient of Computation :

Full Value of consideration :

Simply stated it is the price or compensation for which transfer has taken place.

This means in the case of sales, the consideration bargained for CIT v. Gillanders Arbuthnot &Co. 87 ITR 407 (SC).

The compensation paid in pursuance of a contract of insurance cannot be considered as consid-eration - C. Leo Machodo v. CIT 172 ITR 744 (Mad.)

Interest received on unpaid sale price cannot be treated as profits and gains arising from thetransfer of capital asset under section 45, but just a revenue receipt - Mount Stuart Tea Estateand Amar Coffee Plantation v. CIT 239 ITR 489 (Mad.).

In a case capital gain is received in foreign currency, for conversion of amount received intoIndian currency, uniform rate of exchange should be adopted for determining value of acqui-sition and consideration received for transfer of capital asset - Jayakumari & Dilharkumari v.CIT 189 ITR 99 (Kar.).

The expression full value of consideration cannot be construed as the market value but as theprice bargained for by the parties to the sale. The expression full value means the whole pricewithout any deduction whatsoever and it cannot refer to the adequacy or inadequacy of theprice bargained for - CIT v. George Henderson & Co. Ltd. 66 ITR 622.

Immovable Property [Sec. 50C].

In the case of transfer of land or building, if the sale consideration received is less than thevalue determined by the stamp duty authorities, then such value would be deemed to be theFull Value of the Consideration for computation of capital gains.


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However, if the assessee contains that such stamp duty value is higher than Fair Market Value

of the property transferred and the assessee has not disputed such determination of value inany appeal, revision or reference, then the assessing officer may refer the matter to the Valua-tion Officer.

If the Fair Market Value determined by the Valuation Officer is less than the value determinedby stamp duty authorities, the assessing officer may take such Fair Market Value to be the FullValue of the consideration. However, if the Fair Market Value is more than the value deter-mined by stamp duty authorities then the stamp duty value would be deemed to be the FullValue of Consideration for computation of capital gains.

Consideration in Installments

If the Full Value of Consideration agreed upon is received in installments, the entire value of

consideration has to be considered in computation of capital gain in the year the capital asset istransferred.

Advance Money Received [Sec 51]

An assessee may receive some advance in respect of the transfer of capital asset. Due to thebreak-down of the negotiation, the assessee might have confiscated and retained the advance.Section 51 provides that while calculating capital gains, the above advance retained by theassessee must go to reduce the cost of acquisition.

Expenses in connection with the Transfer

Expenses like commission or brokerage for sale, advertisement, lawyers fees for transaction

are deductible as transaction costs.The words in connection with used in section 48(i) are very wide in their ambit and hencethere is no warrant for importing a restriction that to qualify for deduction the expendituremust necessarily have been incurred prior to the passing of title. It is immaterial whether theexpenditure was incurred prior to subsequent to the passing of title - CIT v. Dr. P. Rajendran[1981] 127 ITR 810 (Ker.).

Legal expenses incurred for obtaining compensation in compulsory acquisition cases are de-ductible - CIT v. R. Ranga Setty (supra). Also, see CIT v. Dr. P. Rajendran [1981] 127 ITR 810(Ker.)/ CIT v. Smt. M. Subaida Beevi [1986] 160 ITR 557 (Ker.)/ V.A. Vasumathi v. CIT [1980]123 ITR 94 (Ker.).

Expenditure incurred by the assessee towards amounts paid to tenants for vacating the pre-mises which is sold has nexus with the transaction of sale, since without the tenants vacatingthe premises the building cannot be sold. The said expenditure would hence be allowableas deduction in the computation of capital gains - Naozar Chenoy v. CIT [1998] 234 ITR95 (AP).

Where the assessee paid a certain sum to his son who had instituted a suit seeking injunctionrestraining the assessee from selling a property, so as to remove the encumbrance priorto selling that property, the said sum was deductible - CIT v. Abrar Alvi [2001] 247 ITR 312(Bom.).


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Capital Gains

Written Down Value

The asset sold belongs to certain Block of Assets. The written down value of such block ofassets at the beginning of the previous year in which transfer took place is considered. ThisWDV is deducted from the net consideration.

It is possible that the opening WDV of such block of assets at the beginning of the previous yearmay be Nil.

Additions During the Year

There of one or more assets in the block of assets acquired during the previous year to whichthe asset sold belongs. Cost of such assets is deductible.

Case Law:

The cost of acquisition of the depreciable asset is bound to be computed in accordance withsection 50. In other words, section 55(2) is applicable only in respect of sections 48 and 49 ofthe Act and it has no application to section 50 of the Act - CIT v. Peirce Leslie & Co. Ltd. 227ITR 759.

On block of assets on which depreciation is allowed on cost method [S. 50A] Where thecapital asset is used in an undertaking engaged in generation or generation and distribution ofpower on which depreciation is allowed at a certain percentage on actual cost u/s. 32(1)(i) inany previous year, then for the purpose of computing capital gains on such asset, the written

down value of the asset as adjusted shall be taken as the cost of acquisition of the asset.

Short Term Capital Gain

The excess net consideration from sale of depreciable asset over opening WDV and additionsduring the year represents capital gain from sale of depreciable asset/s. Irrespective of periodof holding of the depreciable asset; such a capital gain is deemed to be from Short Term CapitalAsset (sec. 50).

However, if the depreciable asset is held for more than thirty-six months i.e. is a long termcapital asset, exemption under the relevant sections available for can be availed.

Note: - Short term capital loss may arise only when the block of asset ceases to exist i.e. onlyassets in the block are transferred. [Sec. 50(2)]


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Let us discuss each ingredient of Computation, which is not discussed above :

COST OF ACQUISITION [Sec 55]

Stated simply, cost of acquisition means the cost for which the asset is purchased or acquiredby the assessee.With respect to certain assets special provisions have been made, which decide the cost ofacquisition. These are as follows:

(i) Goodwill of a business or a trademark or brand name associated with a business or aright to manufacture, produce or process any article or thing, or right to carry on anybusiness, tenancy rights, stage carriage permits and loom hours - In the case of the abovecapital assets, if the assessee has purchased them from a previous owner, the cost of acqui-

sition means the amount of the purchase price.

(ii) Self-generated assets - There are circumstances where it is not possible to ascertain cost ofacquisition. For example, suppose a doctor starts his profession. With the passage of time,the doctor acquires lot of reputation. He opens a clinic and runs it for 5 years. After 5 yearshe sells the clinic to another doctor for Rs.10 lacs which includes Rs.2 lacs for his reputa-tion or goodwill. Now a question arises as to how to find out the profit in respect of good-will. It is obvious that the goodwill is self-generated and hence it is difficult to calculatethe cost of its acquisition. However, it is certainly a capital asset.

B OTHER THAN DEPRECIABLE ASSET - SHORT TERM

Full Value of consideration XXXXXXXX


= Net consideration XXXXXX

Less: Cost of acquisition XXXX

Less: Cost of Improvement XXX

= Gross capital gains XXXXX

Less: Exemption u/s. 54B, 54D and 54G ifapplicable

XXXX

= Net capital gains XXXXXXX


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Capital Gains

The Supreme Court in CIT v/s. B.C. Srinivasa Shetty [1981] 128 ITR 294 (SC) held that in order

to bring the gains on sale of capital assets to charge under section 45, it is necessary that theprovisions dealing with the levy of capital gains tax must be read as a whole. Section 48 dealswith the mode of computing the capital gains. Unless the cost of acquisition is correctlyascertainable, it is not possible to apply the provisions of section 48. Self-generated goodwill issuch a type of capital asset where it is not possible to visualise cost of acquisition. Once section48 cannot be applied, the gains thereon cannot be brought to charge. This decision of the Su-preme Court was applicable not only to self-generated goodwill of a business but also to otherself-generated assets like tenancy rights, stage carriage permits, loom hours etc. In order tosupersede the decision of the Supreme Court cited above, section 55 was amended. Accord-ingly, in case of self-generated assets namely, goodwill of a business or a trademark or brandname associated with a business or a right to manufacture, produce or process any article or

thing, or right to carry on any business, tenancy rights, stage carriage permits, or loom hours,the cost of acquisition will be taken to be nil. However, it is significant to note that the aboveamendment does not cover self-generated goodwill of a profession. So, in respect of self-gener-ated goodwill of a profession and other self-generated assets not specifically covered by theamended provisions of section 55, the decision of the Supreme Court in B. C. Srinivasa Settyscase will still apply.

(iii) Other assets - In the following cases, cost of acquisition shall not be nil, but will be deemedto be the cost for which the previous owner of the property acquired it:

Where the capital asset became the property of the assessee

(1) On any distribution of assets on the total or partial partition of a Hindu undividedfamily.

(2) Under a gift or will.

(3) By succession, inheritance or devolution.

(4) On any distribution of assets on the liquidation of a company.

(5) Under a transfer to a revocable or an irrevocable trust.

(6) Under any such transfer referred to in sections 47(iv), (v), (vi), (via) or (viaa).

(7) Where the assessee is a Hindu undivided family, by the mode referred to in section 64(2).

(iv) Financial assets - Many times persons who own shares or other securities become entitled

to subscribe to any additional shares or securities. Further, they are also allotted addi-tional shares or securities without any payment. Such shares or securities are referred to asfinancial assets in Income-tax Act. Section 55 provides the basis for ascertaining the cost ofacquisition of such financial assets.

(1) In relation to the original financial asset on the basis of which the assessee becomesentitled to any additional financial assets, cost of acquisition means the amount actu-ally paid for acquiring the original financial assets.

(2) In relation to any right to renounce the said entitlement to subscribe to the financialasset, when such a right is renounced by the assessee in favour of any person, cost ofacquisition shall be taken to be nil in the case of such assessee.


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Capital Gains

(d) the sub-division of any of the shares of the company into shares of smaller

amount, or(e) the conversion of one kind of shares of the company into another kind.

In the above circumstances the cost of acquisition to the assessee will mean the cost of acquisi-tion of the asset calculated with reference to the cost of acquisition of the shares or stock fromwhich such asset is derived.

Note:

Fair Market Value in relation to a capital asset, means

(i) The price which the capital asset would ordinarily fetch on sale in the open market on therelevant date; and

(ii) Where the price referred to in sub-clause (i) is not ascertainable, such price as may bedetermined in accordance with the rule made under this Act.

[SEC. 2(22B)]

(vi) Where the cost for which the previous owner acquired the property cannot be ascer-tained, the cost of acquisition to the previous owner means the fair market value on thedate on which the capital asset became the property of the previous owner.

Cost of Acquisition for Non-residents

In order to give protection to non-residents who invest foreign exchange to acquire capitalassets, section 48 contains a proviso. Accordingly, in the case of non-residents, cost of acquisi-tion, etc. of shares or debentures of an Indian company is to be computed as follows:

The cost of acquisition, the expenditure incurred wholly and exclusively in connection withthe transfer and the full value of the consideration are to be converted into the same foreigncurrency with which such shares were acquired. The resulting capital gains shall be recon-verted into Indian currency. The aforesaid manner of computation of capital gains shall beapplied for every purchase and sale of shares or debentures in an Indian company. Rule 115Ais relevant for this purpose.

Case Law:

The interest paid on borrowings for the acquisition of a capital asset must fall for deduction

under section 48. But, if the same sum is already the subject-matter of deduction under otherheads like those under section 57, it cannot find a place again for the purpose of computationunder section 48 - CIT v. Maithreyi Pai [1985] 152 ITR 247 (Kar.).

COST OF IMPROVEMENT [Sec 55]

When an asset is acquired, before it is sold, it is possible that certain improvements are made.For example, leveling and fencing of land, loft or partition is constructed in building acquired,accessories like CD player, career may be added to a car, etc. costs incurred on such improve-ments are also deductible while computing capital gain.


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Section 55 provides that cost of any improvement,

(1) in relation to a capital asset being goodwill of a business or a right to manufacture, pro-duce or process any article or thing or right to carry on any businessshall be taken to benil;and

(2) in relation to any other capital asset:

(i) where the capital asset became the property of the previous owner or the assesseebefore the 1st day of April, 1981 means all expenditure of a capital nature incurred inmaking any additions or alterations to the capital asset on or after the said date by theprevious owner or the assessee, and

(ii) in any other case, means all expenditure of a capital nature incurred in making anyadditions or alterations to the capital asset by the assessee after it became his prop-erty, and, where the capital asset became the property of the assessee by any of themodes specified in sub-section (1) of section 49, by the previous owner.

However, such a cost of improvement does not include any expenditure which is deductible incomputing the income chargeable under the head Interest on securities, Income from houseproperty, Profits and gains of business or profession, or Income from other sources.

C OTHER THAN DEPRECIABLE ASSET - LONG TERM

Full Value of consideration XXXXXX


= Net consideration XXXX

Less :Indexed Cost of acquisition XXX

Less: :Indexed Cost of Improvement XXX

= Gross capital gains XXXX

Less: Exemption u/s. 54, 54B, 54D, 54EC, 54ED, 54F and 54G, ifapplicable XXX

= Net capital gains XXXXXX


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Capital Gains

Explanation 2 provides that the aggregate value of total assets of such undertaking or division

shall be as follows:(i) In the case of depreciable assets: the written down value of block of assets determined in

accordance with the provisions contained in sub-item (C) of item (i) of section 43(6)(c) and(ii) the book value for all other assets.

8.4 EXEMPTIONS

(a) Transfer of a residential house and investment in residential house [Sec. 54].

If an individual or HUF having LTCG from transfer of a residential unit makes investment topurchase or construct a residential unit, the amount invested in the new residential unit isallowed as a deduction from the LTCG. The new residential unit can be constructed within 3years from the date of transfer or can be purchased one year before or two years after the dateof transfer.

To claim this deduction, the assessee, after taking into consideration the amount that he hasalready invested for construction or purchase of the new residential unit upto the due date offiling of return of income in his case, should deposit the remaining amount which he intends touse for purchasing or constructing the new residential unit in a Capital Gains Deposit Accounton or before the due date for filing of the return and enclose proof of investment in construc-tion or purchase and proof of making such deposit into the capital gains account along withthe return of income. Based on this he would be allowed the deduction from the LTCT for that

assessment year.The amount which is deposited in the Capital Gains Deposit Account has to be utilised by himwithin two/three years from the date of transfer for the purpose of purchase/construction ofthe new residential unit. In case he fails to utilise this amount either wholly or partly for theabove purpose within this period the amount remaining unutilised would be taxed as Capitalgains in the year in which the above mentioned period is over.

The cost of the new residential unit purchased/constructed would be reduced by the amountof deduction allowed from LTCG if the new house purchased or constructed is transferredwithin a period of 3 years from its date of purchase/construction.

Case Law :

(i) Capital gains account scheme - For transfer of deposit under Capital Gains AccountsScheme, 1988 from Account B to Account A, clearance of Assessing Officer is not re-quired - Sadula Janardhan (HUF) v. State Bank of Hyderabad 286 ITR 291

(b) Transfer of Agricultural lands [Sec. 54B].

If LTCG is arising from transfer of land which is being used by the assessee for agriculturalpurposes for at least 2 years prior to the date of transfer, then, the assessee can invest in pur-chasing any other land for being used for the purpose of agriculture within 2 years from thedate of transfer of the original agricultural land and the amount invested by him for purchaseof a new agricultural land would be allowed as a deduction from the LTCG.


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Case Law :

(i) Land need not be agricultural land - The exemption under section 54B is available to theseller of a capital asset being land. It does not restrict the benefit to agricultural land only.However, the land against which the benefit is sought must have been used by the asses-see or his parent for agricultural purpose in the two years immediately preceding the dateof sale - CITv. Smt. Savita Rani 133 Taxman 712/ 270 ITR 40.

(c) Compulsory Acquisition of Land and Buildings of Industrial Undertakings [Sec. 54D].

This deduction is available to all categories of tax payers. The conditions for claiming thisdeduction are as under:

(i) the asset transferred is land or building or any right in land or building which forms partof new industrial undertaking belonging to the tax payer.

(ii) asset in question is transferred by way of compulsory acquisition under any law.

(iii) the asset in question was used for the purpose of industrial undertaking at least for twoyears immediately before the date of compulsory acquisition.

The deduction is available if within 3 years of the date of compulsory acquisition, the taxpayerfor the purposes of shifting or re-establishing the old industrial undertaking or setting up anew industrial undertaking.

(a) purchases any other land, building or any right in any other land or building, or

(b) constructs any other building.

Deduction from the LTCG is given to the extent of above investment.

If the new asset is not acquired by the due date from furnishing the return of income for therelevant assessment year, the unutilized amount of capital gains must be deposited in a CapitalGains Deposit Account.

The cost of acquisition of the new asset would be reduced by the amount of deduction allowedfrom Capital Gains if the new asset purchased/constructed is transferred within a period of 3years of its purchase or construction LTCG for a period of 3 years from its date of acquisi-tion.

Case Law :

(i) Meaning of industrial undertaking - The words industrial undertaking should be un-derstood to have been used in section 54D in a wide sense, taking in its fold any project or

business a person may undertake. Thus, the running of a lodge can be said to be anindustrial undertaking within the meaning of section 54D - P. Alikunju M.A. Nazeer CashewIndustries v. CIT166 ITR 804.

d) Capital gain on transfer of capital assets not to be charged in certain cases [Sec. 54E]

(1) Where the capital gain arises from the transfer of a long-term capital asset before the 1stday of April, 1992, (the capital asset so transferred being hereafter in this section referredto as the original asset) and the assessee has, within a period of six months after the date ofsuch transfer, invested or deposited the whole or any part of the net consideration in any


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Capital Gains

specified asset (such specified asset being hereafter in this section referred to as the new

asset), the capital gain shall be dealt with in accordance with the following provisions ofthis section, that is to say,

(a) if the cost of the new asset is not less than the net consideration in respect of theoriginal asset, the whole of such capital gain shall not be charged under section 45;

(b) if the cost of the new asset is less than the net consideration in respect of the originalasset, so much of the capital gain as bears to the whole of the capital gain the sameproportion as the cost of acquisition of the new asset bears to the net consideration]shall not be charged under section 45:

Provided that in a case where the original asset is transferred after the 28th day of February,

1983, the provisions of this sub-section shall not apply unless the assessee has invested ordeposited the whole or, as the case may be, any part of the net consideration in the new asset byinitially subscribing to such new asset

Provided further that in a case where the transfer of the original asset is by way of compulsoryacquisition under any law and the full amount of compensation awarded for such acquisitionis not received by the assessee on the date of such transfer, the period of six months referred toin this sub-section shall, in relation to so much of such compensation as is not received on thedate of the transfer, be reckoned from the date immediately following the date on which suchcompensation is received by the assessee or the 31st day of March, 1992, whichever is earlier

(1A) Where the assessee deposits after the 27th day of April, 1978, the whole or any part of thenet consideration in respect] of the original asset in any new asset, being a deposit referred to insub-clause (vi) of clause (a)ofExplanation 1 below sub-section (1), the cost of such new assetshall not be taken into account for the purposes of that sub-section unless the following condi-tions are fulfilled, namely

(a) the assessee furnishes, along with the deposit, a declaration in writing, to the bank or theco-operative society referred to in the said sub-clause (vi) with which such deposit is made,to the effect that the assessee will not take any loan or advance on the security of suchdeposit during a period of three years from the date on which the deposit is made;

(b) the assessee furnishes, along with the return of income for the assessment year relevant tothe previous year in which the transfer of the original asset was effected or within suchfurther time as may be allowed by the Assessing Officer, a copy of the declaration referred

to in clause (a) duly attested by an officer not below the rank of sub-agent, agent or man-ager of such bank or an officer of corresponding rank of such co-operative society.

(1B) Where on the fulfilment of the conditions specified in sub-section (1A), the cost of the newasset referred to in that sub-section is taken into account for the purposes of sub-section(1), the assessee shall, within a period of ninety days from the expiry of the period of threeyears reckoned from the date of such deposit, furnish to the Assessing Officer a certificatefrom the officer referred to in clause (b) of sub-section (1A) to the effect that the assesseehas not taken any loan or advance on the security of such deposit during the said period ofthree years.


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(1C) Notwithstanding anything contained in sub-section (1), where the capital gain arises from

the transfer of the original asset, made after the 31st day of March, 1992, in respect ofwhich the assessee had received any amount by way of advance on or before the 29th dayof February, 1992 and had invested or deposited the whole or any part of such amount inthe new asset on or before the later date, then, the provisions of clauses (a) and (b) of sub-section (1) shall apply in the case of such investment or deposit as they apply in the case ofinvestment or deposit under that sub-section

(2) Where the new asset is transferred, or converted (otherwise than by transfer) into money,within a period of three years from the date of its acquisition, the amount of capital gainarising from the transfer of the original asset not charged under section 45 on the basis ofthe cost of such new asset as provided in clause (a) or, as the case may be, clause (b), of sub-section (1) shall be deemed to be income chargeable under the head Capital gains relat-

ing to long-term capital assets] of the previous year in which the new asset is transferredor converted (otherwise than by transfer) into money.

(3) Where the cost of the equity shares referred to in sub-clause (va) of clause (a) ofExplanation1 below sub-section (1) is taken into account for the purposes of clause (a) or clause (b) ofsub-section (1) a deduction with reference to such cost shall not be allowed under section80CC.

Case Law:

(i) Benefit under section 54E is available only if there is a transfer of capital asset - For thepurpose of benefit under section 54E, transfer is a condition precedent and when a trans-

action is not treated as a transfer, the assessee is not entitled to the benefit of section 54E.Thus, since the distribution of assets to shareholders on liquidation of a company is nottreated as a transfer under section 46(1), benefit of section 54E cannot be availed on theconsideration received from such distribution - CITv. Ruby Trading Co. (P.) Ltd. 124 Taxman186 .

(e) Capital gain on transfer of long-term capital assets not to be charged in the case of investment in specified securities [Sec. 54EA].

(1) Where the capital gain arises from the transfer of a long-term capital asset before the 1stday of April, 2000 (the capital asset so transferred being hereafter in this section referred toas the original asset) and the assessee has, at any time within a period of six months afterthe date of such transfer, invested the whole or any part of the net consideration in any of

the bonds, debentures, shares of a public company or units of any mutual fund referred toin clause (23D) of section 10 specified by the Board in this behalf by notification in theOfficial Gazette (such assets hereafter in this section referred to as the specified securities),the capital gain shall be dealt with in accordance with the following provisions of thissection, that is to say,

(a) if the cost of the specified securities] is not less than the net consideration in respect ofthe original asset, the whole of such capital gain shall not be charged under section 45;

(b) if the cost of the specified securities is less than the net consideration in respect of theoriginal asset, so much of the capital gain as bears to the whole of the capital gain thesame proportion as the cost of acquisition of the specified securities bears to the net


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Capital Gains

consideration shall not be charged under section 45.

(2) Where the specified securities] are transferred or converted (otherwise than by transfer)into money at any time within a period of three years from the date of their acquisition,the amount of capital gain arising from the transfer of the original asset not charged undersection 45 on the basis of the cost of such specified securities as provided in clause (a) orclause (b) of sub-section (1) shall be deemed to be the income chargeable under the headCapital gains relating to long-term capital assets of the previous year in which the speci-fied securities are transferred or converted (otherwise than by transfer) into money.

However in a case where the original asset is transferred and the assessee invests the whole orany part of the net consideration in respect of the original asset in any specified securities andsuch assessee takes any loan or advance on the security of such specified securities, he shall be

deemed to have converted (otherwise than by transfer) such specified securities into money onthe date on which such loan or advance is taken.

(3) Where the cost of the specified securities] has been taken into account for the purposes ofclause (a) or clause (b) of sub-section (1), a rebate with reference to such cost shall not beallowed under section 88.

(f) Capital gain on transfer of long-term capital assets not to be charged in certain cases[Sec. 54EB]

(1) Where the capital gain arises from the transfer of a long-term capital asset before the 1stday of April, 2000](the capital asset so transferred being hereafter in this section referredto as the original asset), and the assessee has, at any time within a period of six months

after the date of such transfer invested the whole or any part of capital gains, in any of theassets specified by the Board in this behalf by notification in the Official Gazette (suchassets hereafter in this section referred to as the long-term specified assets), the capitalgain shall be dealt with in accordance with the following provisions of this section, that isto say,

(a) if the cost of the long-term specified asset is not less than the capital gain arising fromthe transfer of the original asset, the whole of such capital gain shall not be chargedunder section 45 ;

(b) if the cost of the long-term specified asset is less than the capital gain arising from thetransfer of the original asset, so much of the capital gain as bears to the whole of thecapital gain the same proportion as the cost of acquisition of the long-term specified

asset bears to the whole of the capital gain, shall not be charged under section 45.

(2) Where the long-term specified asset is transferred or converted (otherwise than by trans-fer) into money at any time within a period of seven years from the date of its acquisition,the amount of capital gains arising from the transfer of the original asset not chargedunder section 45 on the basis of the cost of such long-term specified asset as provided inclause (a), or as the case may be, clause (b) of sub-section (1) shall be deemed to be theincome chargeable under the head Capital gains relating to long-term capital assets ofthe previous year in which the long-term specified asset is transferred or converted (other-wise than by transfer) into money.


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Explanation.In a case where the original asset is transferred and the assessee invests the

whole or any part of the capital gain received or accrued as a result of transfer of the originalasset in any long-term specified asset and such assessee takes any loan or advance on the secu-rity of such specified asset, he shall be deemed to have converted (otherwise than by transfer)such specified asset into money on the date on which such loan or advance is taken.

(3) Where the cost of the long-term specified asset has been taken into account for the purposesof clause (a) or clause (b) of sub-section (1), a deduction from the amount of income-tax withreference to such cost shall not be allowed under section 88.

g) Investment in certain bonds [Sec. 54EC]. If an assessee having LTCG invests in any of thefollowing assets, the amount invested is eligible for deduction up to a maximum of theLTCG

(a) bonds redeemable after three years issued on or after 01.04.2007 by National HighwayAuthority of India (NHAI).

(b) bonds redeemable after three years issued on or after 01.04.2007 by Rural ElectrificationCorporation Ltd. (RECL).

The investment is to be made within six months from the date of transfer of the original capitalasset. The bonds should not be transferred or converted into money for a period of three yearsfrom the date of acquisition. In case the bonds are transferred within 3 years from the date oftheir acquisition, the deduction allowed for investment earlier would be taxed in the year ofsuch transfer as capital gains. For this purpose it would be considered as transfer even if theassessee takes any loan or advance on the security of the specified securities. For the invest-

ment in the bonds rebate u/s. 88 will not be available.Amount of exemption:

(a) if the cost of the long-term specified asset is not less than the capital gain arising from thetransfer of the original asset, the whole of such capital gain but does not exceeding Rs. fiftylakh shall not be charged under section 45;

(b) if the cost of the long-term specified asset is less than the capital gain arising from thetransfer of the original asset, so much of the capital gain as bears to the whole of the capitalgain the same proportion as the cost of acquisition of the long-term specified asset bears tothe whole of the capital gain, shall not be charged under section 45.

(h) Investment in equity shares [Sec. 54ED]

If an assessee has LTCG from transfer of listed securities before the 1st day of April, 2006 [secu-rities as defined in Securities, Contracts (Regulation) Act and listed in any recognised StockExchange in India] or unit and invests in acquiring equity shares satisfying the following con-ditions, the amount invested is eligible for deduction up to a maximum of the LTCG.

(a) the issue is made by a public company formed and registered in India.

(b) the shares forming part of the issue are offered for subscription to the public.

The investment has to be made within six months from the date of the transfer of the listedsecurity or unit.


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Capital Gains

The equity shares should not be sold or otherwise transferred within a period of one year from

the date of their acquisition. In case they are transferred within one year the deduction allowedin investment would be taxed in the year of such transfer as LTCG.

For the investment in the equity shares rebate u/s. 88 will not be available.

Amount of Exemption :

(a) if the cost of the specified equity shares is not less than the capital gain arising fromthe transfer of the original asset, the whole of such capital gain shall not be charged undersection 45;

(b) if the cost of the specified equity shares is less than the capital gain arising from the trans-fer of the original asset, so much of the capital gain as bears to the whole of the capital gain

the same proportion as the cost of the specified equity shares acquired bears to the wholeof the capital gain shall not be charged under section 45.

(i) Transfer asset and investment in residential income [Sec. 54F].

If an individual or a HUF having LTCG arising out of sale of capital asset other than a residen-tial house and the assessee has, within a period of one year before or two years after the date onwhich the transfer took place purchased, or has within a period of three years after that dateconstructed, a residential house, the capital gain shall be dealt with in accordance with thefollowing provisions of this section,

(a) if the cost of the new asset is not less than the net consideration in respect of the originalasset, the whole of such capital gain shall not be charged under section 45 ;

(b) if the cost of the new asset is less than the net consideration in respect of the original asset,so much of the capital gain as bears to the whole of the capital gain the same proportion asthe cost of the new asset bears to the net consideration, shall not be charged under section45:

where, net consideration = full value of consideration cost of transfer.

In this case, however, cost of the new asset is not changed. But the assessee should not ownmore than one residential house in which he has invested as on the date of transfer and also, heshould not purchase/construct any other residential house for a period of 1/3 years from thedate of transfer. In case he owns more than one residential house as on the date of transfer he is

not eligible for this deduction. In case he purchases/constructs a house within 1/3 years fromthe date of transfer after getting this deduction, the amount allowed as deduction would betaxed as capital gains in the year of such purchase/construction.

Case Laws :

(i) Provision is not ultra vires the constitution - Provision of section 54F as applicable toassessment year 2000-01 and which applies to one residential house, cannot be said to bediscriminatory and violative of fundamental rights on ground that in subsequent yearsexemption under section 54F was extended to two residential houses - Abdul Gaffar v.ITO 154 Taxman 416


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(ii) Exemption is not allowable if existing house is extended - Section 54F emphasizes on con-

struction of residential house. The said construction must be real one. It should not be asymbolic construction. A mere extension of the existing building would not give benefit tothe assessee as contemplated under section 54F. Mere construction by way of extension ofthe old existing house would not mean constructing a residential house as contemplatedunder section 54F - CIT v. V. Pradeep Kumar 53 Taxman 138

(j) Transfer of fixed asset of industrial undertaking effected to shift it from urban area [Sec.54G]

The deduction is available to all categories of tax payers. The conditions for claiming the de-duction are as under :

(i) the transfer is effected in the course of or in consequence of shifting the undertaking from

an urban area to any area other than an urban area.(ii) asset transferred is machinery, plant, building, land or any right in building or land used

for the business of industrial undertaking in an urban area.

(iii) the capital gain is utilised within one year before or 3 years after the date of transfer (a) forpurchasing new machinery or plant or building or land for tax payers business in thatnew area; or (b) shifting of the old undertaking and its establishment to the new area; or(c) incurring of expenditure on such other purposes as specified in the scheme notified forthe purpose.

Deduction from LTCG is given to the extent of the outlay for aforesaid asset and activities.

The unutilized amount of capital gains as on the date on which return of income for the rel-evant Assessment year is due; must be deposited in a Capital Gains Deposit account and fail-ure to utilize the amount within the stipulated period it shall be chargeable as capital gains(long/short term).

The cost of acquisition of the new asset is reduced by the amount of exemption allowed fromcapital gains if the new asset is transferred within a period of three year of its purchase orconstruction for the purpose of computation of capital gains in respect of the transfer of thenew asset.

(k) Extension of time limit available for acquiring new asset

To claim exemption u/s 54, 54B, 54D, 54EC and 54F as the case may be or under capital gains

scheme, the period of investment will begin from the date when the compensation is received.Where the compensation is received in instalment, the period of investment in the specifiedasset/deposit in capital gains scheme will be considered for each instalment separately. If en-hanced compensation is received, the period of investment shall be reckoned from the datewhen the enhanced compensation is received.

Exemption of capital gains on transfer of assets in cases of shifting of industrial undertak-ing from urban area to any SEZ

The deduction is available to all categories of tax payers for of shifting of industrial undertak-ing from urban area to any Special Economic Zone. The conditions for claiming the deductionare as under :


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Capital Gains

(i) the transfer is effected in the course of or in consequence of shifting the undertaking from

an urban area to any Special Economic Zone.(ii) asset transferred is machinery, plant, building, land or any right in building or land used

for the business of industrial undertaking in an urban area.(iii) the capital gain is utilised within one year before or 3 years after the date of transfer (a) for

purchasing new machinery or plant or building or land for tax payers business in theSEZ; or (b) shifting of the old undertaking and its establishment to the SEZ; or (c) incur-ring of expenditure on such other purposes as specified in the scheme notified for thepurpose.Deduction from LTCG is given to the extent of the outlay for aforesaid asset and activities.

The unutilized amount of capital gains as on the date on which return of income for the rel-evant Assessment year is due; must be deposited in a Capital Gains Deposit account and fail-

ure to utilize the amount within the stipulated period it shall be chargeable as capital gains(long/short term).

The cost of acquisition of the new asset is reduced by the amount of exemption allowed fromcapital gains if the new asset is transferred within a period of three year of its purchase orconstruction for the purpose of computation of capital gains in respect of the transfer of thenew asset.

(h) Extension of time limit available for acquiring new asset

To claim exemption u/s 54, 54B, 54D, 54EC and 54F as the case may be or under capital gainsscheme, the period of investment will begin from the date when the compensation is received.Where the compensation is received in installment, the period of investment in the specified

asset/deposit in capital gains scheme will be considered for each installment separately. Ifenhanced compensation is received, the period of investment shall be reckoned from the datewhen the enhanced compensation is received.

(i) Investment Not Made before Due Date for Filing of the Return of Income:

The amount of the capital gain which is not invested by the assessee for the purpose stated inSection 54, 54B, 54D, 54F, 54G and 54GA before the date of furnishing the return of incomeunder section 139, the following provisions apply:

(i) The amount intended to be applied under the exemption section shall be deposited byhim before furnishing such return, such deposit being made in any case not later than thedue date applicable in the case of the assessee for furnishing the return of income under

sub-section (1) of section 139, in an account in any such bank or institution as may bespecified in, and

(ii) utilised in accordance with, any scheme which the Central Government may, bynotification in the Official Gazette, frame in this behalf and

(iii) such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for the purchase or con-struction of the new asset together with the amount so deposited shall be deemed to be thecost of the new asset :

It is further provided that if the amount deposited as aforesaid is not utilised wholly or partly


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143A e D ect T t o

for the purpose of investment, then,

(i) the amount not so utilised shall be charged under section 45 as the income of the previousyear in which the period of three years from the date of the transfer of the original assetexpires; and

(ii) the assessee shall be entitled to withdraw such amount in accordance with the schemeaforesaid.

EXEMPTION LONG TERM CAPITAL GAINS TO NON-RESIDENT [Sec. 115 F]

In the case of an assessee being a non-resident Indian transfers any long term foreign exchangeasset, gains arises on such transfer is exempt if the net consideration is invested within a periodof six months after the date of transfer in the specified foreign exchange asset. If the net consid-eration is invested partly in the specified foreign exchange asset within the stipulated time, the

exemption is available which is equal to:

Long term capital gains Amount invested Net consideration

Where the new asset is transferred or converted into money within a period of three years fromthe date of its acquisition, the exemption granted shall be deemed to be the income chargeableunder the head long term capital gains of the pervious year in which the new asset is trans-ferred or converted into money.

A non-resident Indian may elect not to be governed by the provisions of section 115F for anyassessment year, by submitting his return of income for that assessment year y/s 139 and de-claring therein that the provisions of section 115F shall not apply to him for that assessmentyear. In such a case the income and tax of the non-resident shall be computed like other normal

cases for the assessment year [ sec. 115-I].WITHDRAWAL OF EXEMPTIONS [Sec. 47A]

Following are the cases where exemptions are allowed by virtue of sec. 47 may be withdrawnfor failure to fulfill certain conditions:-

(i) Where the capital gains arising on the transfer of the capital asset from the holding com-pany to the subsidiary company or vice-versa was exempt from capital gains by virtue ofsec. 47(iv) and 47(v) and if at any time before the expiry of 8 years from the date of transferthe capital asset so transferred is converted into stock-in-trade by the transferee companyor the parent company ceases

capital gain 8

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