Computation of Capital Gain in Certain Special Cases

Computation of Capital Gain in Certain Special Cases

Here we discuss all the Provisions towards Computation of Capital Gain in certain Special Cases and the method of Computation is different.

Table of Contents

1.  [Section 45(1A)]: Capital Gain in case of amount received from an insurer on account of Damage or Destruction of any Capital Asset

Where any person receives at any time during any  previous year any money or other assets under an insurance from an insurer on account of damage to,  or destruction of, any capital 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 (whether with or without a  declaration of war),

then, any profits or gains arising from receipt of such money or other assets shall be chargeable to  income-tax under the head “Capital gains”.

Thus section 45(1A) has itself become the charging section in this case. It has nothing to do with  section 45 and as such, there will be capital gain even if no capital asset has been transferred.

In which previous year the capital gain shall arise:

In the above case, the capital gain shall be  deemed to be the income of the previous year in which such money or other asset was received.

What shall be full value of consideration in this case?:

It shall be value of any money or the fair  market value of other assets for the date of such receipt.

Note :

1.      Insurance monies for loss of raw material shall be treated as normal trading receipts as raw material is not a  capital asset. [CIT v Needle Industries (India) Ltd. (2000) 245 ITR 556 (Mad)]

2.      Where asset is destroyed and there is no insurance or insurance compensation is not received, neither section  45(1A) nor section 45 shall be attracted. Since destruction of asset shall not be treated as transfer, the cost of  the asset destroyed shall be treated as dead loss. But if any insurance claim in received, it will amount to  transfer as per section 45(1A).

Explanation of Section 45(1A)

Section 45(1A) of the Income Tax Act in India deals with the tax treatment of amounts received from an insurer on account of damage or destruction of a capital asset. Here’s a brief explanation of how this section works:

(1).    Applicability:

Section 45(1A) applies to individuals, Hindu Undivided Families (HUFs), and other assessees.

(2).    Capital Asset:

It applies to any capital asset, which can be land, building, machinery, plant, or any other asset of a capital nature.

(3).    Insurance Claim:

When a capital asset is damaged or destroyed, and the owner receives an amount as insurance compensation, this amount is considered a capital receipt.

(4).    Tax Treatment:

  • The amount received from the insurer is not directly taxable as income in the hands of the assessee.
  • Instead, the tax implications come into play when the asset is transferred or sold in the future.
  • The cost of acquisition and the period of holding for the purpose of calculating capital gains are adjusted based on this insurance compensation.
  • The insurance compensation reduces the cost of acquisition of the damaged or destroyed asset. The reduced cost is used to calculate capital gains when the asset is eventually sold or transferred.
  • The period of holding is also adjusted to include the period for which the damaged asset was held before it was destroyed or damaged. This is done to determine if the asset qualifies for long-term or short-term capital gains tax treatment when it is eventually sold.
  • The actual computation can be complex, and it’s advisable to seek the assistance of a tax consultant or chartered accountant to ensure compliance with the tax laws.

In summary, Section 45(1A) of the Income Tax Act in India provides for the adjustment of the cost of acquisition and period of holding of a capital asset when an amount is received from an insurer due to the damage or destruction of the asset. The tax liability arises when the asset is sold or transferred in the future, and the adjusted cost and holding period are used to calculate the capital gains. It’s important to maintain proper records and seek professional advice to accurately calculate and report the capital gains when the asset is eventually disposed of.

Understanding of Section 45(1A)

(1)        When a capital asset is damaged or destroyed, it can lead to a financial loss for the owner. However, in certain cases, the owner may receive compensation from an insurer for the damage or destruction of the asset. In such situations, it is important to understand the implications of this compensation in terms of capital gain.

(2)        According to Section 45(1A) of the Income Tax Act, any amount received from an insurer on account of damage or destruction of a capital asset is considered as a capital gain. This means that the amount received is taxable under the head of capital gains.

(3)        The tax treatment of such compensation depends on whether the asset is a short-term capital asset or a long-term capital asset. If the asset was held for a period of less than 36 months before its damage or destruction, it is considered a short-term capital asset. On the other hand, if the asset was held for a period of 36 months or more, it is considered a long-term capital asset.

(4)        In the case of short-term capital assets, the compensation received is added to the owner’s income and taxed at the applicable income tax rates. However, if the asset is a long-term capital asset, the compensation is taxed at a special rate of 20%.

(5)        It is important to note that if the compensation received is less than the cost of acquisition of the asset, it will be considered as a capital loss. This capital loss can be set off against any other capital gains made by the owner in the same financial year. If there are no other capital gains to set off the loss against, it can be carried forward for up to 8 years and set off against future capital gains.

2. [Section 45(1B)]: Capital Gain in case of Profits or Gains arising from receipt of the amount on Maturity of High Premium Unit Linked Insurance Policy (ULIP)

(1)        Unit Linked Insurance Policies (ULIPs) have gained popularity as a dual investment-cum-insurance product. ULIPs offer individuals the opportunity to invest in various asset classes while providing life insurance coverage. However, when it comes to the maturity of a high premium ULIP, there are certain tax implications to consider.

(2)        Under Section 45(1B) of the Indian Income Tax Act, 1961, any profits or gains arising from the receipt of the amount on maturity of a high premium ULIP are considered as capital gains. This means that such gains are subject to taxation as per the prevailing capital gains tax rates.

(3)        It is important to note that the tax treatment of capital gains on the maturity of high premium ULIPs differs based on the holding period. If the ULIP is held for less than 36 months, the gains are considered short-term and taxed at the individual’s applicable income tax slab rate. On the other hand, if the ULIP is held for 36 months or more, the gains are classified as long-term and taxed at a lower rate of 20% with indexation benefit.

To calculate the capital gains on the maturity of a high premium ULIP, the following formula can be used:

Capital Gains = Maturity Amount – Premium Paid

Notwithstanding anything contained in section 45(1),

  • where any person receives at any time during any previous year
  • any amount including the amount allocated by way of bonus, under a unit linked insurance policy, to which exemption under section 10(10D) does not apply (as premium/aggregate premium payable in any previous year for Unit Linked Insurance Policy/Policies exceeds Rs. 2,50,000),
  • then, any profits or gains arising from receipt of such amount by such person shall be chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of such person of the previous year in which such amount was received
  • and the income taxable shall be calculated in such manner as may be prescribed.

Taxability of ULIP on Sale or Redemption:

The Finance Act, 2021 has included such ULIPs [to which exemption under section 10(10D) does not apply] in the definition of equity oriented fund in section 112A so as to provide these policies the same treatment as unit of equity oriented fund.

Thus provisions of sections 111A and 112A would apply on maturity/redemption of such ULIPs. Section 112A does not allow any indexation of cost and long-term capital gain is chargeable to tax at the special rate of 10% of an amount exceeding Rs. 1,00,000 in aggregate.

Understanding of Section 45(1B)

Unit Linked Insurance Policies (ULIPs) have gained immense popularity in recent years due to their dual benefits of insurance coverage and investment opportunities. One of the key features of ULIPs is the option to choose a high premium policy, which offers higher returns on maturity.

When the amount on maturity of a high premium ULIP is received, it may be subject to capital gain tax under section 45(1B) of the Income Tax Act. It is important to understand the implications of this tax and how it affects your overall investment strategy.

(1).    Applicability:

Section 45(1B) applies specifically to high premium ULIPs. High premium ULIPs are those insurance policies where the annual premium paid by an individual exceeds 10% of the actual capital sum assured. If the policy qualifies as a high premium ULIP, the provisions of Section 45(1B) come into play when the policy matures.

(2).    Taxation on Maturity:

Under Section 45(1B), when a high premium ULIP matures, any amount received by the policyholder or the nominee is treated as a capital gain. This capital gain is taxed as income in the hands of the policyholder in the year of receipt.

(3).    Tax Calculation:

The taxable capital gain is calculated as the difference between the amount received on maturity and the total premium paid by the policyholder during the term of the policy. This amount is added to the individual’s total income for that year and taxed at the applicable income tax rates.

(4).    Exemption and Deductions:

The tax treatment under Section 45(1B) does not provide for any specific exemptions or deductions related to high premium ULIPs. The entire capital gain amount is generally included in the individual’s total income.

(5).    TDS (Tax Deducted at Source):

In certain cases, the insurance company may be required to deduct TDS on the amount paid to the policyholder upon maturity. The TDS rates and requirements are subject to the provisions of the Income Tax Act.

(6).    Indexation Benefit:

Unlike some other capital gains, such as those from the sale of property, Section 45(1B) does not provide for indexation benefits. Indexation is a method used to adjust the cost of acquisition for inflation, which can reduce the taxable capital gain.

(7).    Reporting and Compliance:

Policyholders are required to report the maturity proceeds from high premium ULIPs in their income tax return and pay any applicable taxes. Non-compliance can result in penalties and interest.

3. Capital Gain on Conversion of Capital Asset into Stock-in-Trade [Section 45(2)]

(1)        In the world of business and taxation, there are various provisions and regulations that govern the treatment of capital assets and stock-in-trade. One such provision is section 45(2) of the Income Tax Act, which deals with the capital gain on the conversion of a capital asset into stock-in-trade. In this blog post, we will delve deeper into this provision and understand its implications.

(2)        Section 45(2) of the Income Tax Act states that if a capital asset, being land or building, or both, is converted into stock-in-trade, then the profits or gains arising from such conversion shall be chargeable to tax as income of the previous year in which the stock-in-trade is sold or otherwise transferred.

(3)        This provision essentially means that if an individual or a business entity converts a capital asset, such as a piece of land or a building, into stock-in-trade, any profits or gains arising from the sale or transfer of the stock-in-trade will be treated as taxable income.

(4)        It is important to note that the capital gains on such conversion are not calculated at the time of conversion itself. The tax liability arises only when the stock-in-trade is sold or transferred. This means that if the stock-in-trade is held for a long period of time without any sale or transfer, there will be no tax liability.

(5)        The capital gains on the conversion of a capital asset into stock-in-trade are calculated in accordance with the provisions of the Income Tax Act. The cost of acquisition of the capital asset is considered as the cost of acquisition of the stock-in-trade. Similarly, the period of holding the capital asset is considered as the period of holding the stock-in-trade.

(6)        It is also worth mentioning that section 45(2) provides certain exceptions to the tax liability. If the converted stock-in-trade is held as stock-in-trade for a period of less than 36 months, and is subsequently converted back into a capital asset, then the capital gains arising from such conversion are not chargeable to tax.

(7)        Furthermore, if the converted stock-in-trade is held as stock-in-trade for a period of 36 months or more, and is subsequently converted back into a capital asset, then the capital gains arising from such conversion can be deferred by investing the gains in specified assets as per the provisions of section 54F of the Income Tax Act.

(8)        In conclusion, section 45(2) of the Income Tax Act deals with the capital gain on the conversion of a capital asset into stock-in-trade. It is important for individuals and business entities to understand the implications of this provision and comply with the tax laws accordingly. By doing so, they can ensure that they fulfill their tax obligations and avoid any unnecessary tax liabilities.

Overview of the Provisions under Section 45(2)

Section 45(2) of the Indian Income Tax Act, 1961, deals with the taxation of capital gains arising from the conversion of a capital asset into stock-in-trade. This section is relevant when an individual or business converts a capital asset (such as land, building, or securities) into stock-in-trade (inventory) for the purpose of their business. Here’s an overview of the provisions under Section 45(2):

(1).    Applicability:

Section 45(2) applies when there is a transfer of a capital asset into stock-in-trade. This typically happens when a taxpayer, who was holding a capital asset for investment purposes, decides to use it in their business as stock-in-trade. Common scenarios include a builder converting land into inventory for construction or a trader converting investments into trading securities.

(2).    Tax Event:

The conversion of the capital asset into stock-in-trade is considered a transfer for tax purposes, even if there is no actual sale or consideration involved. This means that capital gains tax is triggered at the time of conversion.

(3).    Computation of Capital Gains:

The capital gains are computed as the fair market value (FMV) of the capital asset on the date of its conversion into stock-in-trade, minus the cost of acquisition. If the asset has been held for more than 24 months (long-term capital asset), it is taxed at the applicable long-term capital gains tax rate. If held for 24 months or less (short-term capital asset), it is taxed at the short-term capital gains rate.

(4).    Fair Market Value:

The FMV is determined as per the rules and guidelines specified under the Income Tax Act. It may involve valuations, appraisals, or other methods to ascertain the market value of the asset at the time of conversion.

(5).    Cost of Acquisition:

The cost of acquisition is the original cost of acquiring the asset. If the asset was received as a gift or inheritance, special rules may apply to determine the cost of acquisition.

(6).    Exemptions and Deductions:

Some exemptions and deductions available for capital gains under other sections of the Income Tax Act may also apply in the case of Section 45(2). For example, if the taxpayer invests the capital gains in specific assets like residential property or eligible bonds, they may be eligible for exemptions.

(7).    Advance Tax:

The taxpayer may be required to pay advance tax on the capital gains arising from the conversion, depending on the amount involved.

Reporting and Compliance: It is important to report the capital gains from the conversion in the income tax return and comply with all the provisions of the Income Tax Act related to capital gains.

4.  Capital Gain on Conversion of Stock-in-Trade into Capital Asset [Section 28(via)]

Introduction

In the world of business and finance, it is not uncommon for companies to convert their stock-in-trade into capital assets. This conversion can have significant implications for the company’s financial statements, tax liabilities, and overall profitability. One important aspect to consider in such conversions is the capital gain that may arise as a result. In this blog post, we will delve deeper into Section 28(via) of the tax code, which specifically deals with the capital gain on the conversion of stock-in-trade into capital assets.

What is Section 28(via)?

Section 28(via) of the tax code is a provision that governs the taxation of capital gains arising from the conversion of stock-in-trade into capital assets. It states that any profits or gains arising from such conversions shall be deemed to be the income of the previous year in which the conversion took place.

This provision is applicable to all individuals, businesses, and entities who have converted their stock-in-trade into capital assets. It is important to note that the capital gain arising from such conversions is subject to taxation under the Income Tax Act.

Calculation of Capital Gain

The capital gain on the conversion of stock-in-trade into a capital asset is calculated by subtracting the cost of acquisition from the full value of consideration received or accruing as a result of the conversion.

The cost of acquisition includes the purchase price of the stock-in-trade, any incidental expenses incurred during the acquisition, and any other costs directly attributable to the acquisition. On the other hand, the full value of consideration includes the fair market value of the capital asset as on the date of conversion.

Tax Implications

As per Section 28(via), the capital gain arising from the conversion of stock-in-trade into capital assets is subject to tax under the head ‘Capital Gains’. The tax rate applicable to such capital gains depends on the nature of the asset and the period of holding.

If the capital asset is held for more than 36 months, it is classified as a long-term capital asset, and the applicable tax rate is lower compared to short-term capital gains. Conversely, if the capital asset is held for 36 months or less, it is classified as a short-term capital asset, and the applicable tax rate is higher.

Conclusion

Section 28(via) of the tax code plays a crucial role in determining the tax implications of converting stock-in-trade into capital assets. It ensures that any profits or gains arising from such conversions are subject to taxation under the Income Tax Act. Businesses and individuals should carefully evaluate the tax implications and consider consulting with tax professionals to ensure compliance with the provisions of Section 28(via).

5.  Capital Gain in case of Zero-Coupon Bonds on its Maturity and Redemption

Zero-coupon bonds, also known as deep discount bonds, are fixed-income securities that do not pay periodic interest (coupons) during their term. Instead, they are issued at a discount to their face value and mature at face value. The gain or profit arising from the redemption or maturity of zero-coupon bonds is typically treated as a form of capital gain for tax purposes. The specific tax treatment can vary by jurisdiction, but we’ll provide a general overview of how it’s often handled:

(1) Meaning of Zero-Coupon Bond [Section 2(48)]:

“Zero coupon bond” means a bond—

(a)        issued by any infrastructure capital company or infrastructure capital fund or infrastructure debt fund or public sector company on or after the 1St day of June, 2005;

(b)        in respect of which no payment and benefit is received or receivable before maturity or redemption from infrastructure capital company or infrastructure capital fund or infrastructure debt fund or public sector company; and

(c)        which the Central Government may, by notification in the Official Gazette, specify in this behalf.

(2) Maturity and Redemption of Zero-Coupon Bond to be regarded as a Transfer [Section 2(47)]:

As per clause (b) above, the payment of and benefit from zero coupon bond shall be received or receivable from the issuing company/fund only at the time of maturity or redemption. Consequently, clause (iva) has been inserted in section 2(47) to provide that the maturity or redemption of a Zero-Coupon Bond shall be regarded as a transfer.

(3) Transfer of Zero-Coupon Bond will be subject to Capital Gain Tax:

The profits arising on the transfer of such Zero-Coupon Bond shall be chargeable under the head “capital gains”. Further, if such Zero-Coupon Bonds are held for not more than 12 months, such capital asset shall be treated as short-term capital asset and hence shall be subject to short-term capital gain. On the other hand, where these bonds are held for more than 12 months, such capital gain shall be treated as long-term capital gain.

(4) Taxability of Long-Term Capital Gain from Zero-Coupon Bond [Proviso to Section 112(1)]:

The long-term capital gain on zero coupon bonds shall be chargeable to tax at 10% of long-term capital gain without indexation of cost of such bonds.

(5)  Accrual of Interest:

While zero-coupon bonds do not make periodic interest payments, the bondholder is deemed to earn interest over the life of the bond, even though it’s not received until maturity. This accrued interest is the difference between the face value of the bond and the price at which it was purchased.

(6)  Tax Classification:

The gain realized upon the maturity or redemption of zero-coupon bonds is typically considered a form of capital gain for tax purposes. The classification of this gain as short-term or long-term depends on the holding period of the bond.

(7)  Short-term Capital Gain:

If the zero-coupon bond is held for one year or less before redemption, the gain is usually classified as a short-term capital gain. Short-term capital gains are typically subject to higher tax rates compared to long-term capital gains.

(8)  Long-term Capital Gain:

If the bond is held for more than one year before redemption, the gain is generally considered a long-term capital gain. Long-term capital gains often receive more favorable tax treatment, with potentially lower tax rates.

(9)  Taxation Rates:

The tax rates for capital gains can vary from one country to another and may depend on the individual’s total income, the presence of any tax treaties, and other factors. It’s essential to consult the tax laws of your specific jurisdiction or seek advice from a tax professional to determine the exact tax rates applicable to your situation.

(10)      Tax Reporting:

Bondholders are typically required to report the gain from the maturity or redemption of zero-coupon bonds in their annual tax returns. Accrued interest may also need to be reported, even though it was not received until maturity.

(11)      Tax Deferral:

Some jurisdictions may allow for tax deferral on the accrued interest until the bond matures. In such cases, taxpayers may not be required to report the accrued interest as income until the bond matures.

(12)      Tax Exemptions and Deductions:

Some jurisdictions may provide exemptions or deductions for certain types of capital gains, depending on factors like the age of the bondholder, the use of the proceeds, or other specific circumstances.

6. [Section 45(3)] : Capital Gain on Transfer of Capital Asset by a Partner/Member to a Firm/AOP/BOI as Capital Contribution

Section 45(3) of the Indian Income Tax Act, 1961, deals with the taxation of capital gains arising from the transfer of a capital asset by a partner or member to a partnership firm (including an Association of Persons or Body of Individuals) as a capital contribution. Here’s an overview of this provision:

Understanding Section 45(3)

Section 45(3) of the Income Tax Act deals with the tax implications arising from the transfer of a capital asset by a partner or member to a firm, AOP, or BOI as a capital contribution. According to this section, if a partner or member transfers a capital asset to a firm, AOP, or BOI, the transfer shall be considered as a transfer made by the partner or member resulting in capital gains.

Taxation of Capital Gains

When a capital asset is transferred, the capital gains arising from such transfer are subject to taxation. The capital gains are calculated by taking the difference between the fair market value (FMV) of the asset on the date of transfer and the cost of acquisition of the asset. The capital gains are then taxed as per the applicable tax rates.

Applicability:

Section 45(3) is applicable when a partner or member transfers a capital asset (such as land, building, or securities) to a partnership firm in exchange for a share in the firm. This transfer is considered a contribution of capital to the partnership.

Tax Event:

The transfer of the capital asset to the partnership is treated as a transfer for tax purposes, even though there may not be any sale or consideration involved. This means that capital gains tax is triggered at the time of the transfer.

Computation of Capital Gains:

The capital gains are computed as the difference between the full value of the consideration received or accruing to the partner/member and the cost of acquisition of the capital asset. The cost of acquisition is usually the original cost of acquiring the asset by the partner/member.

Exemptions and Deductions:

While capital gains are generally taxable, there are certain exemptions and deductions available under the Income Tax Act. For example, if the transfer of the capital asset qualifies as a long-term capital gain, it may be eligible for a lower tax rate. Additionally, there are certain exemptions available under Section 54, 54F, and 54EC for reinvestment in specified assets like residential property or bonds.

Under Section 45(3), there is a provision that allows for a tax exemption if the following conditions are met:

  • The transfer of the capital asset is to a firm (including AOP/BOI).
  • The transfer is in exchange for a share or interest in the firm.
  • The partner/member continues to be a partner/member in the firm after the transfer.
  • The capital gains are credited to the partner/member’s capital account in the firm.

If these conditions are satisfied, the capital gains arising from the transfer may be exempt from taxation, provided certain other conditions are also met.

Reporting and Compliance:

It is important for the partner or member to report the capital gains from the transfer in their income tax return and comply with all the provisions of the Income Tax Act related to capital gains. Proper documentation and records of the transaction should also be maintained.

When a partner or member transfers a capital asset to a firm, AOP, or BOI, both the transferor and the transferee are required to comply with certain reporting and documentation requirements. The transferor needs to calculate and report the capital gains arising from the transfer in their income tax return. The transferee, on the other hand, needs to obtain a valuation report of the capital asset from a registered valuer.

Advance Tax:

Depending on the amount involved, the partner/member may be required to pay advance tax on the capital gains.

Tax Consultation:

Given the complexity of tax laws and individual circumstances, it’s advisable to consult with a qualified tax advisor or financial expert who is knowledgeable about the current tax regulations in India. They can provide guidance specific to your situation and ensure compliance with the law.

Conclusion

The transfer of a capital asset by a partner or member to a firm, AOP, or BOI as a capital contribution can have capital gains tax implications. It is important to understand the provisions of Section 45(3) of the Income Tax Act and comply with the reporting and documentation requirements. Seeking professional advice can help in ensuring proper tax planning and minimizing the tax liability arising from such transfers.

7. [Section 45(5)] : Capital Gain on Transfer by way of Compulsory Acquisition of an Asset

(1)        When an asset is acquired by the government through the process of compulsory acquisition, it can have tax implications for the owner. One of the key considerations is the capital gain that may arise from such a transfer. In this blog post, we will explore the provisions under Section 45(5) of the Income Tax Act that deal with capital gain on transfer by way of compulsory acquisition.

(2)        Section 45(5) of the Income Tax Act states that any compensation received by an individual or a company for the transfer of a capital asset by way of compulsory acquisition shall be treated as the full value of consideration received for the transfer. This means that the compensation received will be considered as the sale proceeds for calculating capital gains.

(3)        It is important to note that the date of acquisition for the purpose of calculating capital gains under Section 45(5) is the date on which the government makes the first payment or takes possession of the asset, whichever is earlier. This is different from the usual date of acquisition in other cases.

(4)        Now let’s understand how the capital gain is calculated in case of compulsory acquisition. The capital gain is calculated by deducting the cost of acquisition and improvement from the full value of consideration received. The cost of acquisition is the amount of money paid to acquire the asset, while the cost of improvement includes any expenses incurred to improve the asset.

(5)        Once the capital gain is calculated, it is taxed as per the applicable tax rates. For individuals, it is taxed under the head ‘Capital Gains’ and for companies, it is taxed as per the normal tax rates applicable to them.

(6)        However, there is a provision under Section 45(5) that allows individuals to claim exemption from capital gains tax on transfer by way of compulsory acquisition. According to this provision, if the compensation received is reinvested in another capital asset within a specified period, the capital gains tax can be deferred. This provision is similar to the provisions for claiming exemption under Section 54F and Section 54EC of the Income Tax Act.

(7)        It is important to note that the exemption under Section 45(5) is available only if the compensation received is reinvested in a residential property in India. If the compensation is not reinvested within the specified period or is invested in any other type of asset, the capital gains tax will become payable.

(8)        In conclusion, capital gain on transfer by way of compulsory acquisition is an important tax consideration for individuals and companies. The provisions under Section 45(5) of the Income Tax Act determine how the capital gain is calculated and taxed. It is advisable to consult a tax professional to understand the specific implications of compulsory acquisition on capital gains and to explore any available exemptions.

Section 45(5) of the Indian Income Tax Act, 1961, deals with the taxation of capital gains arising from the compulsory acquisition of an asset, typically by a government authority. Here’s an overview of this provision:

Applicability:

Section 45(5) applies when an asset (such as land, building, or any other property) is compulsorily acquired by a government authority or any other entity with the power of eminent domain. This means that the owner is legally required to transfer the asset, often for a public purpose like infrastructure development.

Tax Event:

The compulsory acquisition of the asset is considered a transfer for tax purposes, even though it may not be a voluntary sale or transaction. As a result, capital gains tax is triggered at the time of the acquisition.

Computation of Capital Gains:

The capital gains are computed as the difference between the compensation or consideration received for the compulsory acquisition and the cost of acquisition of the asset. The cost of acquisition is typically the original cost of acquiring the asset by the owner.

Exemptions and Deductions:

Under Section 45(5), there is a provision for tax exemptions in certain cases. The capital gains arising from the compulsory acquisition may be exempt from taxation if the compensation received is reinvested in specified assets such as residential property or bonds, subject to certain conditions and limits.

Reporting and Compliance:

The owner of the asset is required to report the capital gains from the compulsory acquisition in their income tax return and comply with all the provisions of the Income Tax Act related to capital gains. Proper documentation and records of the compensation received and any reinvestment should be maintained.

Advance Tax:

Depending on the amount of compensation received, the owner may be required to pay advance tax on the capital gains.

Tax Consultation:

Given the complexity of tax laws and individual circumstances, it’s advisable to consult with a qualified tax advisor or financial expert who is knowledgeable about the current tax regulations in India. They can provide guidance specific to your situation and ensure compliance with the law.

Initial Compensation/Consideration:

Initial compensation/consideration, as the case may be, shall be taken to be the sale consideration of the asset and the capital gain shall be computed accordingly. This capital gain shall be the income of the assessee of that previous year in which either whole or a part of the compensation/consideration is actually received and not the year of compulsory acquisition/determination of consideration by Central Government or RBI.

Enhanced Compensation/Consideration:

Sometimes, the assessee is not satisfied with the compensation/consideration determined and may go in for an appeal against the amount determined. If on appeal the compensation / consideration is enhanced, the additional compensation/consideration or further enhanced compensation/consideration is called ‘enhanced compensation’/ consideration. Such enhanced compensation / consideration shall be fully taxable as capital gain in the year in which it is received. The cost of acquisition and improvement thereto will be taken as nil, since it has already been deducted at the time of computation of capital gain for initial compensation/consideration.

The entire amount of enhanced compensation/consideration after deducting expenses of realization, if any, shall be taken to be the capital gain of the year in which it is actually received. Such capital gain shall be long-term or short-term depending upon the original capital gain.

It is possible that the person may die before the enhanced compensation/consideration is received and the enhanced compensation/consideration is received by his legal heirs. Such enhanced compensation/consideration will be taxable in the hands of the person who receives the same.

As per Explanation to section 45(5)(b), the cost of acquisition and the cost of improvement in the case of enhanced compensation/consideration shall be taken to be nil. However, the expenses for realization of such enhanced compensation/consideration may still be claimed as a deduction as expenses of transfer.

Year of Taxability of Capital Gains when Compensation is received in pursuance of an Interim Order of any Court, Tribunal or other Authority [Proviso to section 45(5)(b)]

There was uncertainty about the year in which the amount of compensation received in pursuance of an interim order of the court is to be charged to tax, due to court orders.

Accordingly, a proviso was inserted under section 45(5)(b) to provide that the amount of compensation received in pursuance of an interim order of the court, Tribunal or other authority shall be deemed to be income chargeable under the head ‘Capital gains’ in the previous year in which the final order of such court, Tribunal or other authority is made.

Where a Right to Receive the Compensation is in Dispute [Section 45(5)(c)]:

Where the amount of the compensation or consideration is subsequently reduced by any court, Tribunal or other authority, the capital gain of that year, in which the compensation or consideration received was taxed, shall be recomputed by the Assessing Officer accordingly. Hence, the capital gain shall be taxable even if the compensation amount is in dispute as the assessee shall be entitled to get the assessment amended if compensation is later on reduced.

8. [Section 46] : Capital Gains on Distribution of Assets by Companies in Liquidation

(1)        When a company goes into liquidation, it is important to understand the implications it can have on the distribution of assets and any potential capital gains that may arise. Section 46 of the tax code specifically addresses this issue and provides guidance on how capital gains should be treated in such situations.

(2)        Under Section 46, when a company in liquidation distributes its assets to its shareholders, any gains realized from the distribution may be subject to capital gains tax. This is because the distribution is treated as if the shareholders had sold their shares, and any gain is considered a capital gain.

(3)        It is important to note that the capital gains tax rate will depend on the holding period of the shares. If the shares were held for less than a year, the gains will be subject to short-term capital gains tax rates, which are typically higher than long-term rates. On the other hand, if the shares were held for more than a year, the gains will be subject to long-term capital gains tax rates, which are generally more favorable.

(4)        However, Section 46 also provides certain exemptions from capital gains tax on the distribution of assets in liquidation. For example, if the distribution is made to the shareholders as part of a plan of reorganization, merger, or consolidation, the gains may be tax-free. Additionally, if the distribution is made to the shareholders in complete liquidation of the company, the gains may also be exempt from capital gains tax.

(5)        It is important for shareholders to carefully consider the tax implications before accepting a distribution of assets from a company in liquidation. Consulting with a tax professional can help ensure that the proper steps are taken to minimize any potential tax liabilities.

(6)        In conclusion, Section 46 of the tax code governs the treatment of capital gains on the distribution of assets by companies in liquidation. While capital gains tax may be applicable on such distributions, there are certain exemptions available depending on the circumstances. It is crucial for shareholders to seek professional advice to understand the specific tax implications and potential exemptions applicable to their situation.

Section 46 of the Indian Income Tax Act, 1961, deals with the taxation of capital gains arising from the distribution of assets by companies in liquidation. When a company goes into liquidation, its assets are typically sold or distributed to its shareholders.

The tax treatment of capital gains under this section is as follows:

Distribution of Assets:

When a company is in the process of liquidation, it distributes its assets to its shareholders. This distribution can take various forms, including cash payments or distribution of physical assets.

Tax Event:

Under Section 46, the distribution of assets by the company in liquidation is considered a transfer for tax purposes, and any capital gains arising from this distribution are subject to taxation.

Computation of Capital Gains:

The capital gains are calculated as the difference between the fair market value (FMV) of the asset at the time of distribution and its cost to the company. If the FMV is higher than the cost, it results in a capital gain.

Tax Rate:

The capital gains tax rate for assets distributed during liquidation depends on whether the asset is a short-term capital asset or a long-term capital asset. If the asset is held for 24 months or less before distribution, it’s considered a short-term capital asset and taxed at the applicable short-term capital gains rate. If it’s held for more than 24 months, it’s considered a long-term capital asset and taxed at the applicable long-term capital gains rate.

Reporting and Compliance:

Shareholders who receive assets during liquidation are required to report any capital gains arising from the distribution in their income tax return. Proper documentation, such as the calculation of FMV and cost, should be maintained.

Exemptions and Deductions:

Some exemptions and deductions available for capital gains under other sections of the Income Tax Act may also apply in the context of capital gains from the distribution of assets during liquidation. For example, if the capital gains are reinvested in specified assets like residential property or eligible bonds, the taxpayer may be eligible for exemptions.

Advance Tax:

Depending on the amount of capital gains, shareholders may be required to pay advance tax on the gains.

9-[Section 50C] :  Computation of Capital Gains in Real Estate Transactions

Section 50C of the Indian Income Tax Act, 1961, is applicable to the computation of capital gains in real estate transactions, specifically for the sale of land or building or both. It is aimed at ensuring that the fair market value (FMV) of the property is appropriately considered for taxation, even if the actual sale consideration is lower.

Section 50C makes a special provision for determining the full value of consideration in cases of transfer of immovable property. It provides that where the consideration declared to be received or accruing as a result of the transfer of land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government (i.e., “stamp valuation authority”) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration, and capital gains shall be computed on the basis of such consideration (i.e., stamp duty value) under section 48 of the income- tax Act.

However, where the value adopted or assessed or assessable by the stamp valuation authority does not exceed 110%, of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of section 48, be deemed to be the full value of the consideration. [Third proviso inserted under section 50C(1)]

in other words, if there is any variation between the Stamp duty price and actual consideration for the purpose of section 50C which is not more than 10% of the actual consideration, such variation shall be ignored and consideration price in this case shall be taken as actual consideration.

Here’s how the computation of capital gains works under Section 50C:

What is Section 50C?

Section 50C of the Indian Income Tax Act was introduced to prevent tax evasion and ensure fair valuation of real estate transactions. It states that if the consideration for the transfer of a capital asset, being land or building or both, is less than the value adopted or assessed by the stamp valuation authority for the purpose of payment of stamp duty, then the value adopted or assessed by the stamp valuation authority shall be deemed to be the full value of the consideration for the purposes of computing capital gains.

Applicability:

Section 50C applies when an individual or entity transfers a capital asset, which is land or a building or both, and the sale consideration received or accruing to the seller is lower than the value adopted or assessed by the Stamp Valuation Authority for the purpose of determining stamp duty.

How is Capital Gains Computed under Section 50C?

When a property is sold or transferred, the capital gains are calculated based on the full value of consideration. However, if the stamp valuation authority has assessed the property at a higher value than the actual sale price, the deemed value assessed by the stamp valuation authority will be considered for computing the capital gains.

For example, if Mr. A sells a property for Rs. 50 lakh, but the stamp valuation authority has valued the property at Rs. 60 lakh, then the capital gains will be computed based on the deemed value of Rs. 60 lakh instead of the actual sale price of Rs. 50 lakh.

Exceptions to Section 50C

Section 50C does not apply in certain cases. It is not applicable when:

  • The transfer of property is made under a scheme of amalgamation or demerger
  • The transfer is between a holding company and its subsidiary
  • The transfer is between two subsidiaries of a holding company
  • The property being transferred is a stock-in-trade of the assessee
  • The property being transferred is a capital asset of the assessee, being an undertaking or division transferred to a business reorganization

Fair Market Value (FMV):

The FMV of the property is the key factor in the computation of capital gains under Section 50C. This FMV is determined based on the rates fixed by the Stamp Valuation Authority for stamp duty purposes.

Comparison of Sale Consideration and FMV:

If the sale consideration received or accruing to the seller is lower than the FMV determined by the Stamp Valuation Authority, then the FMV is deemed to be the sale consideration for the purpose of computing capital gains.

  • If Sale Consideration < FMV (Stamp Duty Value): The FMV becomes the sale consideration, and capital gains are calculated based on this higher value.
  • If Sale Consideration ≥ FMV: The actual sale consideration is used for capital gains computation.

Capital Gains Calculation:

The capital gains are calculated as follows:

Capital Gains = Sale Consideration – Cost of Acquisition – Cost of Improvement – Exemption (if applicable)

  • The cost of acquisition includes the actual purchase price of the property.
  • The cost of improvement includes expenses incurred to improve the property.
  • Exemptions, such as those under Section 54 for reinvestment in another property, can be claimed if the conditions are met.

Tax Rate:

Capital gains from the sale of real estate are taxed at either short-term or long-term capital gains tax rates, depending on the holding period. If the property is held for 24 months or less, it’s considered a short-term capital asset, and the gains are taxed at the applicable short-term capital gains rate. If held for more than 24 months, it’s considered a long-term capital asset, and the gains are taxed at the applicable long-term capital gains rate.

Reporting and Compliance:

Taxpayers are required to report the capital gains and the sale consideration in their income tax returns. Proper documentation, such as property sale agreements and valuation reports, should be maintained.

Rationalization of Section 50C in case sale consideration is fixed under agreement executed prior to the date of registration of immovable property [First and Second provisos to Section 50C]

Where the date of the agreement fixing the amount of consideration and the date of registration for the transfer of the capital asset are not the same, the value adopted or assessed or assessable by the stamp valuation authority on the date of agreement may be taken for the purposes of computing full value of consideration for such transfer. [First proviso]

However, the first proviso shall apply only in a case where the amount of consideration, or a part thereof, has been received by way of an account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account or such other electronic mode as may be prescribed, on or before the date of the agreement for transfer. [Second proviso]

Where valuation, can be referred to the Valuation Officer:

If the following conditions are satisfied, the Assessing Officer may on the basis of claim made by the assessee refer the valuation of the relevant asset to a Valuation Officer in accordance with section 55A of the Income-tax Act:

(i)         where the assessee claims before the Assessing Officer that the value adopted or assessed by the stamp valuation authority exceeds the fair market value of the property as on the date of transfer; and

(ii)        the value so adopted or assessed or assessable by stamp valuation authority has not been disputed, in any appeal or revision or reference before any authority or Court.

Consequences where the value is determined by the Valuation Officer:

If the fair market value determined by the Valuation Officer is less than the value adopted for stamp duty purposes, the Assessing Officer may take such fair market value determined by the Valuation Officer to be the full value of consideration. However, if the fair market value determined by the Valuation Officer is more than the value adopted or assessed or assessable for stamp duty purposes, the Assessing Officer shall not adopt such fair market value and will take the full value of consideration to be the value adopted or assessed or assessable for stamp duty purposes.

If the value adopted or assessed for stamp duty purposes is subsequently revised in any appeal, revision or reference, the assessment made shall be amended to recompute the capital gains by taking the revised value as the full value of consideration and the provision of section 154 (relating to rectification of mistake) shall apply thereto.

The expression “assessable” means the price which the stamp valuation authority would have, notwithstanding anything to the contrary contained in any other law for the time being in force, adopted or assessed, if it were referred to such authority for the purposes of the payment of stamp duty.

[Section 46A] : Capital Gains on Purchase by Company of its Own Shares or Other Specified Securities

(1)        Capital gains tax is an important aspect of the Indian Income Tax Act, 1961. Section 46A of the act specifically deals with the capital gains arising from the purchase of a company’s own shares or other specified securities. It is crucial for individuals and companies to understand the provisions of this section to ensure compliance with the tax laws.

(2)        When a company purchases its own shares or specified securities, it is generally done through a buyback or redemption process. This can lead to capital gains for the shareholders who sell their shares back to the company. However, these gains are subject to taxation as per the provisions of Section 46A.

(3)        The capital gains tax under Section 46A is applicable to both resident and non-resident shareholders. The tax liability arises from the difference between the sale consideration received by the shareholder and the cost of acquisition of the shares or securities. The capital gains are classified as short-term or long-term depending on the holding period of the shares.

(4)        For short-term capital gains, the tax rate is the applicable rate as per the individual or company’s income tax slab. In the case of long-term capital gains, the tax rate is 20% with indexation benefit. Indexation allows adjusting the cost of acquisition for inflation, thereby reducing the tax liability.

(5)        It is important to note that the tax liability arises only when there is a transfer of shares or securities. If the shareholder continues to hold the shares or securities after the buyback or redemption, there is no immediate tax liability. However, when the shareholder eventually sells the shares in the future, the capital gains will be calculated from the original purchase date.

(6)        To calculate the capital gains, the shareholder needs to determine the cost of acquisition of the shares or securities. This includes the purchase price, brokerage charges, stamp duty, and any other incidental expenses. Additionally, if the shares were acquired through inheritance or gift, the cost of acquisition would be determined differently.

(7)        It is advisable for companies and shareholders to maintain proper documentation and records of the purchase and sale transactions. This includes invoices, receipts, contract notes, and other supporting documents. In case of any scrutiny or audit by the tax authorities, these records will serve as evidence of the transactions and help in determining the tax liability accurately.

Provisions of Section 50C

Section 50C of the Indian Income Tax Act, 1961, is applicable to the computation of capital gains in real estate transactions, specifically for the sale of land or building or both. It is aimed at ensuring that the fair market value (FMV) of the property is appropriately considered for taxation, even if the actual sale consideration is lower.

Here’s how the computation of capital gains works under Section 50C:

Applicability:

Section 50C applies when an individual or entity transfers a capital asset, which is land or a building or both, and the sale consideration received or accruing to the seller is lower than the value adopted or assessed by the Stamp Valuation Authority for the purpose of determining stamp duty.

Fair Market Value (FMV):

The FMV of the property is the key factor in the computation of capital gains under Section 50C. This FMV is determined based on the rates fixed by the Stamp Valuation Authority for stamp duty purposes.

Comparison of Sale Consideration and FMV:

If the sale consideration received or accruing to the seller is lower than the FMV determined by the Stamp Valuation Authority, then the FMV is deemed to be the sale consideration for the purpose of computing capital gains.

  • If Sale Consideration < FMV (Stamp Duty Value): The FMV becomes the sale consideration, and capital gains are calculated based on this higher value.
  • If Sale Consideration ≥ FMV: The actual sale consideration is used for capital gains computation.

Capital Gains Calculation:

The capital gains are calculated as follows:

Capital Gains = Sale Consideration – Cost of Acquisition – Cost of Improvement – Exemption (if applicable)

  • The cost of acquisition includes the actual purchase price of the property.
  • The cost of improvement includes expenses incurred to improve the property.
  • Exemptions, such as those under Section 54 for reinvestment in another property, can be claimed if the conditions are met.

Tax Rate:

Capital gains from the sale of real estate are taxed at either short-term or long-term capital gains tax rates, depending on the holding period. If the property is held for 24 months or less, it’s considered a short-term capital asset, and the gains are taxed at the applicable short-term capital gains rate. If held for more than 24 months, it’s considered a long-term capital asset, and the gains are taxed at the applicable long-term capital gains rate.

Reporting and Compliance:

Taxpayers are required to report the capital gains and the sale consideration in their income tax returns. Proper documentation, such as property sale agreements and valuation reports, should be maintained.

Company liable to pay Tax on Distributed Income to Shareholders [Section 115QA(1)]

Notwithstanding any thing contained in any other provisions of this Act (which also include section 46(A) the domestic company in addition to tax which it is required to pay on its total income shall be charged to additional income-tax @20% on the distributed income subject to the following:

(1)        The domestic company buys back its own shares whether listed or unlisted.

(2)        Such shares must be bought from the shareholder.

Distributed income means the consideration paid by the company on buy-back of shares as reduced by the amount which was received by the company for issue of such shares determined in the manner as may be prescribed.

Income received by Shareholder on Buy Back of Share by the Company to be Exempt [Section 10(34A)]

When a company decides to repurchase its own shares from shareholders, it is known as a buyback of shares. This can happen for various reasons, such as to return surplus cash to shareholders or to boost the value of remaining shares.

Under Section 10(34A) of the Income Tax Act, the income received by a shareholder on the buyback of shares by the company is exempt from taxation. This means that any profits or gains made by the shareholder from the buyback are not subject to income tax.

This exemption applies to both resident and non-resident shareholders. However, there are certain conditions that need to be met in order to avail of this exemption. The buyback must be approved by the company’s board of directors and must be in accordance with the provisions of the Companies Act.

It is important for shareholders to understand the tax implications of a buyback of shares. By availing of the exemption under Section 10(34A), shareholders can avoid paying tax on the income received from the buyback.

If you are a shareholder considering a buyback of shares, it is advisable to consult with a tax professional who can guide you through the process and help you understand the tax implications.

See also  [Section 45(2)] : Capital Gain on Conversion of Capital Asset into Stock-in-Trade
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