Here we discuss all the Provisions towards Computation of Capital Gain in certain Special Cases and the method of Computation is different.
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.
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).
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)
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 l0(IOD) 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.
3. Capital Gain on Conversion of Capital Asset into Stock-in-Trade [Section 45(2)]
(1) The conversion of capital asset into stock-in-trade is treated as a ‘transfer’ within the meaning of section 2(47).
(2) However, section 45(2) provides that although such a conversion of capital asset into stock-in-trade will be a transfer of the previous year iii which the asset is so converted, but the capital gain will not arise in the previous year in which the asset is converted, it will arise in the previous year in which such converted asset is sold or otherwise transferred.
(3) Indexation of cost of acquisition and improvement, if required, will be done till the previous year in which such conversion took place.
(4) Further, the fair market value of the asset, as on the date of such conversion, shall be deemed to be full value of the consideration of the asset.
(5) The sale price minus market value as on the date of conversion shall be treated as business income and taxed under the head ‘Profits and gains of business and profession’.
4. Conversion of Stock-in-Trade into Capital Asset [Section 28(via)]
Provisions relating to Conversion of Stock-in-Trade into Capital Asset [Section 28(via)]
The fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset, determined in the prescribed manner shall be chargeable to tax as business income.
(i) Where a capital asset referred to in section 28(via) is used for the purposes of business or profession, the actual cost of such asset to the assessee shall be the fair market value which has been taken into account for the purposes of the said clause. [Explanation 1A under section 43(1)]:
(ii) Hence, where the capital gain arises from the transfer of a capital asset referred to in section 28(via), the cost of acquisition of such asset shall be deemed to be the fair market value which has been taken into account for the purposes of the said clause [Section 49(9)].
(iii) Further, the period of holding of such capital asset shall be reckoned from the date of conversion or treatment of such inventory into capital asset.
5. Capital Gain in case of Zero-Coupon Bonds on its Maturity and Redemption
(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.
6. [Section 45(3)] : Capital Gain on Transfer of Capital Asset by a Partner/Member to a Firm/AOP/BOI as Capital Contribution
The profits or gains arising from the transfer of capital asset held by a person, to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which:
(a) he is or
(b) becomes a partner or member,
by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year, in which such a transfer takes place and, for the purposes of computation of capital gain, in the hands of the partner/member, the amount recorded in the books of account of the firm, association or body of individuals for such capital asset shall be deemed to be the full value of the consideration.
It may be observed that the sale consideration in this case shall be the amount as recorded in the books of the Firm/AOP, etc. and not the market value of the asset as on the date of the transfer.
7. [Section 45(5)] : Capital Gain on Transfer by way of Compulsory Acquisition of an Asset
(1) Where a capital asset, other than urban agricultural land, has been compulsorily acquired under any law, it will be treated as a transfer of the previous year in which the asset is compulsorily acquired.
(2) Indexation, if required, will be done till the previous year of compulsory acquisition.
(3) However, the capital gain will be taxable in the previous year in which the compensation is received.
(4) Similarly, if there is a transfer of capital asset other than urban agricultural land, the consideration for which was determined or approved by the Central Government or the Reserve Bank of India, it will be treated as transfer of the previous year in which the consideration is determined but capital gain will be taxable in the previous year in which such consideration is received.
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.
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
As already discussed, as per section 46(1), where the assets of a company are distributed to its shareholder on its liquidation, such distribution shall not be regarded as a transfer by the company. Therefore, there will be no capital gain to the company. However, where a shareholder on the liquidation of a company, receives any money or other asset from the company in lieu of the shares held by him, such a shareholder shall be chargeable to income-tax under the head ‘Capital gains’ in respect of the money and the asset so received. In this case, the consideration price for capital gain purposes shall be money received and/or the market value of the other assets on the date of distribution minus deemed dividend within the meaning of section 2(22)(c).
In determining whether the capital gain in the above case is short-term or long-term, the period subsequent to the date on which the company goes into liquidation shall not be considered.
Sale of Assets received on Liquidation:
As per section 55(2)(b)(iii), if the asset (other than cash) acquired by the shareholder, at the time of liquidation, is subsequently transferred by the shareholder; then for the purpose of computation of capital gain of such transfer, the cost of acquisition of such asset shall be the market value of the asset on the date of distribution. In this case, deemed dividend will not be deducted. In other words, for determining the consideration price of the shares transferred, deemed dividend will be deducted from the fair market value of the asset as on the date of distribution. But for determination of cost of acquisition in case of transfer of such asset, deemed dividend will not be deducted from the fair market value of the asset.
9. [Section 50C] : Computation of Capital Gains in Real Estate Transactions
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.
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.|
10. [Section 46A] : Capital Gains on Purchase by Company of its Own Shares or Other Specified Securities
Where a shareholder or a holder of other specified securities receives any consideration from any company for purchase of:
(a) its own shares held by such shareholder or
(b) other specified securities held by holder of other specified securities,
then, subject to the provisions of section 48, the difference between the cost of acquisition and the value of consideration received by the shareholder or the holder of other specified securities, as the case may be, shall be deemed to be the capital gains arising to such shareholder or the holder of other specified securities, as the case may be, in the year in which such shares or other specified securities were purchased by the company.
In other words, section 46A is again a charging section and capital gain, in this case, shall arise in the previous year in which shares or other specified securities are purchased by the company and all the provisions of section 48 shall apply to such transaction.
As regards buy back of its own share by the company, the above section 46A shall not be applicable as in that case, the company has to pay tax as per section 115QA given below and shareholder is not liable to pay any tax on the consideration received from the company.
|“Specified securities” includes employees’ stock option or other securities as may be notified by the Central Government from time to time.|
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)]
Any income arising to an assessec, being a shareholder, on account of buy back of shares (not being listed on a recognised stock exchange. However, w.e.f. 5.7.2019, whether listed on recognized stock exchange or not) by the company as referred to in section 115QA shall be exempt.