Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Computation of Capital Gains in different Cases

Computation of Capital Gains in different Cases
Computation of Capital Gains in different Cases

Table of Contents

1.   Computation of ‘Capital Gain’ in case of ‘Zero Coupon Bonds’

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.

The Long-Term Capital Gain on Zero Coupon Bonds shall be chargeable to tax at 10% of Long-Term Capital Gains without indexation of cost of such Bonds.

Note :

(1) 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.

(2)          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 public sector company or scheduled bank.

(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 public sector company; and

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

2.   [Section 45(1)]- 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”.

Note :

1.            Thus section 45(1A) has itself become the charging section in this case, there will be capital gain even if no capital asset has been transferred.

2.            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.
3.            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.

3.   Capital Gain on Conversion of Capital Asset into Stock-in-Trade or Stock-in-Trade into Capital Asset .

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

(1)          The conversion of capital asset into stock-in-trade is treated as a ‘transfer’

(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 in 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’.

(B)   [Section 28(via)]- Conversion of Stock-in-Trade into Capital Asset

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.

Where a Capital Asset 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.

Further, Section 49(9) provides that 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.

4.   [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.

5.   [Section 45(4)]- Capital Gain on Transfer of a Capital Asset by way of Distribution on the Dissolution of a Firm/AOP/BOI:

The profits or gains arising from the transfer of a capital asset in specie to the partners/members thereof by way of distribution on the dissolution of a Firm or other association of persons or body of individuals (not being a company or a cooperative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place.

In such a case, there will be a capital gain to the Firm / AOP etc.

For the purposes of computation of capital gain, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accuring as a result of transfer, instead of the value at which it is given to the partner/member.

6.   [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.

7.   Capital Gain on Conversion of Debentures into Shares [Section 47(x), 49(2A) and Rule
8AA]:

When any debentures or part thereof of a company are converted into shares of that company, the transaction is not considered as a transfer and hence no capital gain is chargeable.

However, when these shares are, thereafter, actually transferred, capital gain shall arise and be chargeable in the previous year in which the shares are transferred.

The cost of acquisition of the shares shall be that part of the cost of debenture in relation to which shares were acquired by the assessee. [Section 49(2A)]

Further, for the purpose of computing the period of holding of such shares, the period for which the bond, debenture, debenture-stock or deposit certificate, as the case may be, was held by the assessee prior to the conversion shall also be included. [Rule 8AA(2)]

8.   [Section 47(xb), 49(2AE)]- Capital Gains on Conversion of Preference Shares into Equity Shares

As per section 47(xb), the conversion of preference share of a company into its equity share shall not be regarded as transfer, hence no capital gain is chargeable.

However, when these shares are, thereafter, actually transferred, capital gain shall arise and be chargeable in the previous year in which the shares are transferred. The cost of acquisition of such shares shall be deemed to be that part of the cost of the preference share in relation to which such asset is acquired by the assessee. [Section 49(2AE)]

Further, for the purpose of computing the period of holding of such shares, the period for which the preference shares were held by the assessee shall also be included. [Explanation 1 to section
2(42A)]

9.   [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).

Sale of assets received on liquidation:

As per section 55(2Xb)(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 tulsie of the asset on the date of distribution. In this case, deemed dividend will not be deducted.

10. Capital Gain on Sale of Goodwill of a Business / Trademark or Brand Name / Tenancy Rights / Route Permits or Loom Hours, Right to Manufacture or Right to Carry on any Business:

Generally there is no capital gain on transfer of self-generated assets as the cost of acquisition of such assets cannot be computed. But certain amendments have been made in the Income-tax Act and now capital gain arising on the transfer of the following assets is chargeable to tax:

(i)            Goodwill of a Business. (There will, however, be no capital gain on sale of goodwill of a profession; )

(ii)           Trademark or Brand Name associated with the business;

(iii)          Right to Manufacture, Produce or Process any article or thing, for a consideration e.g. Patent, Copyright, Formula, Design:

(iv)          Right to Carry on any Business or Profession,

(v)           Tenancy Rights;

(vi)          Route Permits;

(vii)        Loom Hours.

11. [Section 50]- Capital Gain on Transfer of Depreciable Assets:

in certain cases, there can be capital gain on the transfer of depreciable assets, which form part of a block of assets. if the full value of the consideration as a result of transfer of any part or entire block of assets exceeds the cost of acquisition of that block of depreciable assets, there will be a capital gain, which will always be short- term capital gain. For the purpose of computing the capital gains, the following are normally deducted:

(a)           Expenses on Transfer;

(b)          Cost of acquisition and cost of improvement there to taken as the aggregate of the following:

(i)          WDV of the block of assets at the beginning of the year: and

(ii)          Actual cost of any asset falling within that block, acquired during the year..

12. [Section 50C]- 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 105%, 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.

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 5% of the actual consideration, such variation shall be ignored and consideration price in this case shall be taken as actual consideration.

13. [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.

14. Capital Gain on Sale of Land and Building to be computed separately in case of Building Constructed by the Assessee:

Where the assessee acquires land and constructs the building on the same in any subsequent previous year then, for the purpose of computation of capital gain, the period of holding of the land and period of holding of the building shall be separately determined. The period of holding of land shall be from the date of purchase of land till the date of sale of the house property.

On the other hand, the period of holding of the building shall be from the date of completion of building till the date of sale of the house property.

Thus, for computing capital gain, the indexation of cost, if required, will be computed separately for the land and for the building.

15. Capital Gain in the case of Transfer of Shares / Debentures by Non-Residents

As already discussed, in the case of long-term capital gain, the cost of acquisition and cost of improvement thereto are both indexed. However, in the case of an assessee who is a non-resident, any capital gain, whether short-term or long-term, arising from the transfer of a capital asset being shares/debentures of an Indian company, bought in foreign currency, shall be computed in the following manner and no indexation of cost will be done, even if it is a long-term capital gain:

(a)          Cost of Acquisition:

This  shall be converted into the foreign currency, which was initially utilised in the purchase of such shares/debentures. For the purpose of such a conversion, average rate of TT buying and TT selling, on the date of acquisition of such shares/debentures, shall be taken;

(b)          Expenses of Transfer :

This will also be converted into the same foreign currency, which was initially utilised for acquisition of such shares/debentures. For the purpose of conversion average rate of TT buying and TT selling, on the date of transfer, shall be taken;

(c)           Full Value of Consideration

This shall also be converted into the same foreign currency which was initially utilised for purchase of such shares/debentures. Here also the average rate of TT buying and TT selling of the foreign currency, on the date of sale, shall be taken;

(d)          Capital Gain will now be Computed as under:

Full value of consideration (converted into foreign currency at average TT buying and TT selling rate on date of sale)
Less: (i) expenses on transfer (converted into foreign currency at average TT  buying and TT selling rate on the date of sale)
(ii)           cost of acquisition (converted into foreign currency at average TT buying and  TT selling rate on the date of acquisition)
Capital gain in foreign currency

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

See also  [Section 7(1)(c)]- Activities specified in Schedule-I, treated as Supply of Goods or Services under GST even if made without Consideration
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