Capital Gains [Income Tax]

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Capital Gains

[INCOME TAX]

Assessment Year 2016-17

Complete coverage of tax provisions for PGBP

in Question & Answer format with practical illustration

Compilation of

CMA Suggested Answers [December 13 to June 15]

CA IPCC Suggested Answers [May 98 to November 15]

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10. CAPITAL GAINS

Content

Section Important Definitions in Capital Gains Page

2(14) Capital Asset (CA)

2(29A) Long term Capital Asset (LTCA) 2(29B) Long term capital gains (LTCG) 2(42A) Short Term Capital Asset (STCA) 2(42B) Short Term Capital Gains (STCG) 2(42C) Slump sale

2(47) Transfer

2(48) Zero Coupon Bond

Content

Section Important Exemptions in Capital Gains Page

10(33) Exemption of capital gain on transfer of US64

10(36) Exemption in respect of long-term capital gains on transfer of listed shares 10(37) Exemption on compulsory acquisition of agriculture land

10(38) Exemption of LTCG from listed equity shares under head capital gain 10(41) Exemption of capital gain for power sector companies

10(43) Exemption of reverse mortgage

S Content Page

45(1) General computation of short term and long term capital gains 45(1A) Insurance claim received on loss of assets

45(2) Conversion of capital asset into stock-in-trade. (Note: indexation based on year of conversion, not on year of sale)

45(2A) Sale of shares held as depository (FIFO method shall be adopted)

45(3) Introduction of capital asset by a partners into the firm or by a member into the AOP or BOI

45(4) Distribution of capital asset to partners / members on dissolution of firm / AOP / BOI 45(5) Compulsory acquisition of capital asset by Govt. / Approved authority

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45(6) Receipt of Assets / Cash from company on liquidation in the hands of shareholder 46 Capital gains on distribution of assets by companies in liquidation

46A Capital gains on purchase by company of its own shares or other specified securities 47 Transactions not regarded as transfer

47A Withdrawal of exemption in certain cases 48 Mode of computation

49 Cost with reference to certain modes of acquisition

50 Special provision for computation of capital gains in case of depreciable assets 50A Transfer of Depreciable Assets by Power Sector Units

50B Sale or undertaking as a going concern or Slump Sale

50C Transfer of Land or Building or both at less than stamp duty value

50D If consideration received or accruing as a result of transfer of a capital asset is not ascertainable or cannot be determined

51 Forfeiture of Advance Money received in respect of unfructified transfer 54 Profit on sale of property used for residence

54B Capital gain on transfer of land used for agricultural purposes not to be charged in certain cases

54D Capital gain on compulsory acquisition of lands and buildings not to be charged in certain cases

54EC Capital gain not to be charged on investment in certain bonds

54F Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house

54G Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area

54GA Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area to any Special Economic Zone

54GB Capital gain on transfer of residential property 54H Extension of time-limit for acquiring new asset

55 Meaning of adjusted, cost of improvement and cost of acquisition for the purpose of S.48 & 49

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10. CAPITAL GAINS

Cost inflation index for different previous years PY CII PY CII PY CII PY CII

1981-82 100 1990-91 182 1999-00 389 2008-09 582 1982-83 109 1991-92 199 2000-01 406 2009-10 632 1983-84 116 1992-93 223 2001-02 426 2010-11 711 1984-85 125 1993-94 244 2002-03 447 2011-12 785 1985-86 133 1994-95 259 2003-04 463 2012-13 852 1986-87 140 1995-96 281 2004-05 480 2013-14 939 1987-88 150 1996-97 305 2005-06 497 2014-15 1024 1988-89 161 1997-98 331 2006-07 519 2015-16 1081 1989-90 172 1998-99 351 2007-08 551

IMPORTANT DEFINITIONS IN CAPITAL GAINS

Section Description Definition

2(14) Capital Asset (CA) Includes property of any kind except stock, personal effects, Rural agricultural land etc. [Jewellery is a capital asset]

2(29A) Long term Capital Asset (LTCA)

Not a short term capital asset 2(29B) Long term capital

gains (LTCG)

Capital gains arising from transfer of LTCA 2(42A) Short Term Capital

Asset (STCA)

Financial Capital Assets – held for not more than 12 months Other Capital Assets – Held for not more than 36 months 2(42B) Short Term Capital

Gains (STCG)

Capital Gains arising from transfer of STCA 2(42C) Slump sale

2(47) Transfer Sale, Exchange, relinquishment, Extinguishment of rights, Compulsory acquisition, Conversion of CA into stock in trade, Maturity / Redemption of zero coupon bond, Part Performance of contract, enjoyment of

immovable property. 2(48) Zero Coupon

Bond

Bond issued by Infrastructure capital Company or Infrastructure Capital Fund or Public Sector Company or w.r.e.f AY 2009-10, Scheduled Banks on or after 01.06.2005 with no benefit before maturity or redemption

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IMPORTANT EXEMPTIONS IN CAPITAL GAINS Section Important Provisions

10(33) Capital gain on transfer of US64

10(36) Exemption in respect of long-term capital gains on transfer of listed shares 10(37) Exemption on compulsory acquisition of agriculture land

10(38) Exemption of LTCG from listed equity shares under head capital gain 10(41) Exemption of capital gain for power sector companies

10(43) Exemption of reverse mortgage

S Content Computation

45(1) Computation of capital gain CG = SC – CA or ICA YOT 45(1A) Insurance claim received on loss of assets CG = CR – CA or ICA YOR 45(2) Conversion of capital asset into stock-in-trade.

(Note: indexation on year of conversion)

CG = FMV – CA or ICA; BI = SC – FMV

YOTCS 45(2A) Sale of shares held as depository

(FIFO method shall be adopted)

CG = SC – CA or ICA YOT 45(3) Introduction of capital asset by a partner

(member) into the firm (AOP or BOI)

CG = BV – CA or ICA YOI 45(4) Distribution of capital asset to partners

(members) on dissolution of firm (AOP or BOI)

CG = FMV – CA or ICA YOD 45(5) Compulsory acquisition of capital asset by Govt.

/ Approved authority (a) Normal Compensation

(Indexation upto year of compulsory acquisition)

CG = NCR – CA or ICA YORI (b) Enhanced Compensation CG = ECR - Expenses incurred

(c) Reduction of enhanced compensation Re-compute (b)

45(6) Repurchase of units (80CCB) by company CG = BBP – CA YOR 46 Capital gains on distribution of assets

by companies in liquidation FMV of assets received ×× + Cash received ×× - Dividend (S.2(22)(c)) ×× - CA or ICA ×× CG ×× YOR

46A Buy back of shares or specified securities CG = BBP – CA or ICA YOB BBP – Buy Back Price

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BV – Book Value

CA – Cost of Acquisition CG – Capital Gain

CI – Cost of Improvement CR – Claim Received

ECR – Enhanced Compensation Received ICA – Indexed Cost of Acquisition ICI – Indexed Cost of Improvement NCR – Normal Compensation Received SC – Sale Consideration

YOD – Year of Distribution YOI – Year of Introduction YOR – Year of Receipt

YORB – Year of Repurchase or Buyback YORI – Year of Receipt of I installment YOT – Year of Transfer

YOTCS – Year of Transfer of Converted Shares

S

47 Transactions not regarded as transfer 47A Withdrawal of exemption in certain cases 48 Mode of computation

49 Cost with reference to certain modes of acquisition

S

50 Computation of capital gains in case of depreciable assets

CG = SC less (Expenses on transfer + opening WDV + additions during the year)

YOT 50A Transfer of Depreciable Assets by Power

Sector Units

CG = SC less Original CA YOT 50B Sale or undertaking as a going concern or

Slump Sale

CG = Lump SC Less Net Worth (No indexation for LTCG)

YOT 50C Transfer of Land or Building or both at less

than stamp duty value

CG = Value determined by Stamp Duty Authority less CA or ICA

YOT 50D If SC of capital asset is not ascertainable SC = FMV on the date of transfer

[from AY 2013-14] 51 Forfeiture of Advance Money received in

respect of unfructified transfer

The advance is reduced from Cost of Acquisition / WDV/ FMV

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S

54 Profit on sale of property used for residence

54B Capital gain on transfer of land used for agricultural purposes not to be charged in certain cases 54D Capital gain on compulsory acquisition of lands and buildings not to be charged in certain cases 54EC Capital gain not to be charged on investment in certain bonds

54F Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house

54G Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area

54GA Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area to any Special Economic Zone

54GB Capital gain on transfer of residential property 54H Extension of time-limit for acquiring new asset

55 Meaning of adjusted, cost of improvement and cost of acquisition for the purpose of S.48 & 49 55A Reference to Valuation Officer

[CMA RTP D11][CS EP D09 & J12, 5 marks & 3 marks]

Question: What are capital assets? What items are not included in capital assets [S.2(14)]?

Answer: Capital assets mean property of any kind held by the assessee, whether or not connected with

his business or profession, but does not include.

Exclusion 1 Any stock in trade, consumable stores or raw materials held for the purpose of business or profession.

Exclusion 2 Personal effects of the assessee. It means moveable property including wearing apparel and furniture held for his personal use or for the use of any member of his family dependent upon him but exclude (a) Jewellery (b) Painting (c) Archaeological Collection (d) Drawing (e) Sculptures (f) any work of art even though it is meant for personal use of assessee

Exclusion 3 Rural agricultural land in India.

Exclusion 4 6½% Gold Deposit Bonds, 1977 or 7% Gold Bonds, 1980 or National Defense Gold Bonds, 1980 issued by Central Government.

Exclusion 5 Special Bearer Bonds, 1991

Exclusion 6 Gold Deposit Bonds issued under Gold Deposit Scheme, 1999

Important Notes:

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(a) Ornaments make of silver, gold, platinum, or any other metal or any alloy containing one or more of such precious metal, whether or not containing any precious or semi-precious stones and whether or not worked or sewn into any wearing apparel.

(b) Precious or semi-precious stones, whether or not set in any furniture, utensil of other article or worked or sewn into any wearing apparel.

2. Agricultural land situated in rural area is not a capital asset: For this chapter, rural area means the land situated:

(a) In any area within the territorial jurisdiction of a municipality having a population of 10,000 or more; (b) In any area specified by the government.

3. Examples of personal effect are furniture, car, scooter etc. Silver bars, rupee coins for pooja, festivals etc is capital asset and not personal effect.

4. Personal effects of movable assets are not capital assets are not a capital asset. However personal effects of immovable assets are capital assets and hence capital gain arises on the sale of residential houses etc.

[CMA RTP J12 & D12]

Question: Ritu received a gift, from her mother, 6 ½ % Gold Bonds of the value of ₹5 lakhs in 1980. These

bonds were redeemed by the Government on 1.10.2003 and he received gold of equivalent value, weighting 5,000 grams approximately of fair market value of ₹10 lakhs. The gold was sold by him on 1.7.2015 for ₹24 lakhs. Examine the impact of the transactions in Ritu’s assessment.

Answer: Vide Circular No.415 dated 14.3.1985 [152 ITR (St.) 205], exchange of gold bonds for gold on

redemption does not attract Capital gains because it is not a capital asset. In case of subsequent sale of such gold, capital gain is chargeable to tax. For this purpose:

Date of acquisition = date of redemption of such gold bonds;

Cost of acquisition of gold = market value of the gold on the date of redemption.

Computation of Capital Gains on sale of gold

Consideration for transfer of gold 24,00,000 Less Indexed Cost of Acquisition [₹10,00,000 × 1081/463] 23,34,773

Long Term Capital Gains 65,227

[CMA RTP J12 & D12]

Question: A farmer resident of Bikaner sold his rural agricultural land in Nepal and received ₹5 lacs over the cost of acquisition of this land. Explain the taxability of sale.

Answer: U/s 2(14), only rural agricultural lands in India are not a capital asset. In this given case, the

farmer has sold rural agricultural lands in Nepal and therefore, the transaction attracts the provisions of capital gains.

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[CMA RTP J12 & D12]

Question: A Plantation company, holding several acres of land, sold trees of spontaneous growth. The Assessing officer is of the opinion that the capital gains arises. Discuss

Answer: Sale proceeds of spontaneous growth will not result in capital gains, as they do not bring in any

profit or gain [Suman Tea & Plywood Industries Pvt. Ltd (1997) 226 ITR 34 (SC)].

Question: Write short note on long term capital asset as defined u/s 2(29A)?

Answer: A capital asset which is not a Short Term Capital Asset is a Long term Capital Asset. In other

words, if the asset is held for more than 36 months or 12 months, as the case may be, such an asset will be treated as Long Term Capital Assets.

Question: Write Short note on Short Term Capital Assets as defined u/s 2(42A)?

Answer: A capital asset held by an assessee for not more than 36 months immediately preceding the date

of its transfer is known as a short term capital asset.

However, the following assets shall be treated as short term capital assets if the period held is not more than 12 months immediately preceding the date of its transfer.

a. Equity or Preference shares in a company (listed in a recognized stock exchange in India) (but up to 10th July 10, 2014, whether shares are quoted or not is considered)

b. Any other securities listed in the recognised stock exchange in India.

c. Units of UTI or Units of an equity oriented mutual fund (whether quoted or not) (but up to 10th July

10, 2014 only Mutual Funds specified u/s 10(23D) (whether quoted or not is eligible) was considered) d. Zero Coupon Bonds whether quoted or not.

Zero Coupon Bonds means notified bond issued by any infrastructure capital company or public sector company, in respect of which no benefit is receivable before maturity.

Question: Write Short note on Capital Gains?

Answer: Since there are two types of capital assets, there will be two types of capital gains.

a. Short Term Capital Gain as defined u/s 2(42B) of the Income Tax Act, 1961-It implies that any profit or gains arising from the transfer of short term capital assets is called short term capital gain.

b. Long Term Capital Gain as defined u/s 2(29B) of the Income Tax Act, 1961-it implies that any profit or gains arising from the transfer of long term capital assets is called long capital gain.

[CMA RTP J12 & D12]

Question: Well Wishers & Associates, a partnership firm, is holding land. This firm is not engaged in real

estate business. The land was sold during the year. Discuss taxability, whether, this would be assessed to tax as business income or capital gain.

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Answer: Land held by partnership firm, which is not engaged in real estate business, would be treated as

fixed asset of the firm. Transfer of the same is assessable as capital asset, hence capital gains and not as business income. [Mohakampur Ice & Storage 281 ITR 354 (All.)]

Question: Define slump sale

Answer: S.2(42C) "slump sale" means the transfer of one or more undertakings as a result of the sale for a

lump sum consideration without values being assigned to the individual assets and liabilities in such sales.

[CMA RTP J12 & D12]

Question: Explain the tax treatment of income from Deep Discount Bonds (DDBs). Answer: Deep discount bonds as clarified vide Circular No. 2/2002 as follows:

1. Income based on market value

i. Income treated as interest for investors ii. Income treated as business income for traders

2. For original subscribers, Income = difference between market value on 31st March of the previous year

and 1st April of the previous year

For subsequent purchases, income = difference between market value on 31st March of the previous

year and cost of purchase of the bond 3. If there is a transfer before maturity:

i. For the Investor, Short term Capital Gains = Sale Price less Cost of Bond; ii. For Traders, Business Income = Sale price less cost of bond.

4. Cost of bond = Cost of acquisition + Income already taxed up to the date of transfer. 5. If there is a redemption on maturity:

i. For the Investor, Interest Income = Redemption Price less market value as on the last valuation date, immediately preceeding the maturity date.

In case of a trader, this interest income would be construed as Business Income.

ii. For subsequent purchasers, Interest Income = Redemption price less cost of the bond to such purchaser.

In case of a trader, this interest income would be construed as Business Income.

Where, Cost of bond = cost of acquisition + income already taxed by the bond holder up to the date of redemption

[CS INTER G1, D00, 5 marks]

Question: Write short note on definition of transfer u/s 2(47). Answer: "Transfer" in relation to capital assets includes:-

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a. The sale, exchange, or relinquishment of the asset; or b. The extinguishment of any rights therein; or

c. The compulsory acquisition thereof under any law; or

d. In a case where the asset is converted by the owner thereof into, or is treated by him as stock-in-trade of a business carried on by him, such conversion or treatment; or

e. Any transaction involving the allowing of the possession of any immovable property to be taken or retain in the part performance of the contract as referred in Section 53A of the Transfer of Property

Act, 1882.

f. Allotment or lease under a housing building scheme of society, company or other association. g. The maturity or redemption of Zero Coupon bonds.

Important Points:

a. Surrender of preference shares on redemption thereof amount to 'transfer' as there is

relinquishment by the shareholder of his rights in preference shares. Decided in the case of Anarkali

Sarabhai (SC)

b. Reduction of face value of share and consequent payment to the shareholder towards such reduction amount to transfer as it results in extinguishments of right in the shares held by the shareholder. Decided in the case of Kartikeya Sarabhai (SC)

Question: When does the transfer complete and effective? Answer:

1. Movable property: title to a movable property passes at the time when property is delivered pursuant to a contract to sell. Entries in the books of account are not relevant for determining date of transfer.

2. Immovable property:

(a) immovable property when documents are registered: transfer is compete on registration.

(b) immovable property when documents are not registered: transfer is complete on satisfaction of conditions laid u/s 53A of the Transfer of Property Act, which are listed below.

1. there should be a contract in writing

2. the transferee has paid consideration or is willing to perform his part of the contract and 3. the transferee should have taken possession of the property.

[CA INTER N06, 1 Mark]

Question: Fill up the blanks: As per section 2(47), ______ or ________ of a zero coupon bond will be

treated as ‚transfer’‛ for the purpose of capital gains tax.1

1

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[CMA INTER SY12,D13, 2 Marks]

Question: Is the right of management in an Indian company a capital asset? On relinquishment directly

or indirectly, is it liable to tax?

Answer: Yes, it is a capital asset in view of the Explanation to section 2(14) inserted by the Finance Act,

2012. It is a 'transfer' in view of Explanation 2 to section 2(47). Hence the relinquishment is liable to capital gains tax.

[CMA RTP J12 & D12]

Question: Amit owns a plot of land acquired on 1.7.2005 for a consideration of ₹4 lakhs. He enters into an

agreement to sell the property on 23.3.2016 for a consideration of ₹11 lakhs. In part performance of the contract, he handed over the possession of land on 25.3.2016 on which date, he received the full consideration. As on 31.3.2016, the sale was pending registration. Discuss liability of capital gains for the assessment year 2016-17 (no computation is required)

Answer: U/s 2(47), transfer includes part performance of a contract of the nature specified in S.53A of the

Transfer of Property Act. In the given case, consideration was received by Amit and the possession was handed over on 25.3.2016 hence, the part performance condition is satisfied. Capital gain on the above transaction is chargeable to tax as income for the assessment year 2016-17.

[CS EP D09 & J10, 3 Marks & 3 Marks]

Question: Write Short note on taxability of Zero Coupon Bonds?

Answer: Meaning of Zero Coupon Bond: Section 2(48) defines the expression Zero Coupon Bond as

bond issued by any infrastructure capital company or infrastructure capital fund or a public sector company on or after 1st June, 2005, in respect of which no payment and benefit is received or receivable

before maturity or redemption from such issuing entity.

Tax Implications: The income of transfer of a ZCB (not being held as stock-in-trade) is to be treated as

capital gains. S.2(47)(iva) provides that maturity or redemption of ZCB shall be treated as a transfer for the purposes of capital gains tax

Nature of Capital Gain: ZCBs held for not more than 12 months would be treated as short term capital

assets. Where the period of holding of ZCBs is more than 12 months, the resultant long term capital gains arising on maturity or redemption would be treated in the same manner as applicable to capital gains arising from the transfer of other listed securities or units covered by section 112.

Question: Explain capital gain on transfer of US64 [S.10(33)]

Answer: Any income arising from the transfer of a capital asset being a unit of US64 is not chargeable to

tax where the transfer of such assets takes place on or after April 1, 2002. This rule is applicable whether the capital asset (US64) is long term capital asset or short term capital asset.

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[CA INTER N04, 4 Marks]

Question: State the provisions relating the exemption in respect of long-term capital gains on transfer of listed Equity Shares.

Answer: Section 10(36), inserted by Finance Act, 2003 w.e.f. A.Y. 2004-05, provides that any income

arising from the transfer of a long-term capital asset, being an eligible equity share in a company shall be exempt provided that these were acquired on or after 1.3.2003 but before 1.3.2004 and held for a period of 12 months or more; Eligible equity share means:

(i) Any equity in a company being a constituent of BSE-500 Index of the Stock exchange. Mumbai as on the 1.3.2003 and the transactions of purchase and sale of such equity share are entered into on a recognized stock exchange in India.

(ii) Any equity share in a company allotted through a public issue on or after the 1.3.2003 and listed in a recognized stock exchange in India before 1.3.2004 and the transaction of sale of such share is entered into or a recognizes stock exchange in India.

Question: Write Short note on exemption on compulsory acquisition of agriculture land u/s 10(37)? Answer: In the case of an individual or HUF, an income from the transfer of urban agricultural land shall

be exempt if

(a) such land was being used for agricultural purposes by such Individual or HUF or his parents, during two years immediately preceding the date of transfer.

(b) transfer is by way of compulsory acquisition under any law, or consideration is determined by Central Government or RBI

(c) such income has arisen from the compensation received by assessee on or after 1st April, 2004.

[CA INTER M06, 4 Marks]

Question: X is in possession of agricultural land situated within urban limits, which is used for

agricultural purposes during the preceding 3 years by his father. On 4.4.2015 this land is compulsorily acquired by the Government of India on a compensation fixed and paid by it ₹10 lakhs. Advise X as to the tax consequences, assuming that the entire amount is invested in purchase of shares.

Answer: Capital gain of ₹10 lakhs arising on compulsory acquisition shall be exempt u/s 10(37).

[CA INTER N05, 2 Marks]

Question: State whether True or False: Where an urban agriculatural land owned by an individual,

continuously used by him for agricultural purposes for a period of two years prior to the date of transfer, is compulsorily acquired under law and the compensation is fixed by the State Government, resultant capital gain is exempt.

Answer: False. As per Section 10(37), where an individual owns urban agricultural land which has been

used for agricultural purposes for a period of two years immediately preceding the date of transfer, and the same is compulsorily acquired under any law and the compensation is determined or approved by

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the Central Government or the Reserve Bank of India, resultant capital gain will be exempt. In this case, however, the compensation has been fixed by the State Government and hence the exemption will not be available.

Question: Write Short note on exemption of LTCG from listed equity shares u/s 10(38) under head capital gain?

Answer: Long term capital gain from transfer of equity shares or units of equity - oriented mutual fund

(where funds are invested in equity shares in domestic company, more than 65% of total proceeds of fund) shall be exempt if -

i. They are sold through recognized stock exchange. ii. Security transaction tax is chargeable on such transaction. iii. Transfer took place on or after 01.10.2004

"Equity oriented fund" means a setup under mutual fund scheme specified u/s 10(23D) and whose investible funds are invested in the equity shares in the domestic companies to the extent of more than 65% of the total proceeds of such fund.

[CA INTER N09, 3 Marks][CMA RTP J12]

Question: Write short note on reverse mortgage? [S. 10(43)]

Answer: Exemption of income received in a transaction of reverse mortgage [S.10(43)]. This scheme is for

the benefit of senior citizens, who own a residential house property. In order to supplement their existing income, they can mortgage their house property with a scheduled bank or housing finance company, in return for a lump-sum amount or for a regular monthly / quarterly / annual income.

The senior citizens can continue to live in the house and receive regular income without the botherations of having to pay back the loan. The loan will be given up to say, 60% of the value of residential house property mortgaged. Also, the bank / housing finance company would undertake a revaluation of the property once every 5 years. The borrower can use the loan amount for extension of residential property, family's medical and emergency expenditure etc. amongst other. However, he cannot use the amount for speculative or trading purposes. The bank will recover the loan along with the accumulated interest by selling the house after the death of the borrower. The excess amount will be given to the legal heirs. However, before resorting to sale of the house, preference will be given to the legal heirs to repay the loan and interest and get the mortgaged property released.

[CA INTER M09, 3 Marks]

Question: Mr. Abhik’s father, who is a senior citizen had pledged his residential house to a bank under a

notified reverse mortgage scheme. He was getting loan from bank in monthly installments. Mr. Abhik’s father did not repay the loan on maturity and given possession of the house to the bank to discharge his loan. How will the treatment of long-term capital gain be made on such reverse mortgage transaction?

Answer: Reverse Mortgage - At the time of pledging the property to the bank, capital gain is not

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loan or monthly installment. When possession of the property is given to the bank, there is no transfer and, consequently, capital gain is not chargeable to tax. However, when bank transfers the property to realize the amount of loan and interest, capital gain will be taxable as the transaction is treated as ‚transfer‛. If this transfer takes place during the lifetime of Abhik’s Father (generally in the case reversed mortgage, bank transfers the property after the death of the person who has pledged the property), capital gain would be taxable in the hand of Abhik’s Father.

If transfer by the bank takes place after the death of Abhik’s father then capital gain will be taxable in the hands of legal heirs of Abhik’s father.

Question: Write short note on method of calculation of capital gains u/s 48? Answer:

Computation of Short Term Capital Gain Computation of Long Term Capital Gain Consideration Received ××× Consideration Received ××× Less Expenses of Transfer ××× Less Expenses of Transfer

Net Consideration ××× Net Consideration ××× Less Cost of Acquisition ××× Less Indexed Cost of Acquisition ××× Less Cost of Improvement ××× Less Indexed Cost of Improvement ××× Short Term Capital Gain ××× Long Term Capital Gain ××× Less Exemption u/s 54B, 54D, 54G, 54GA ××× Less Exemption u/s 54 to 54GA ×××

Taxable STCG ××× Taxable LTCG ×××

Question: Write short note on concept of indexation in case of long term capital gains?

Answer: If the capital gain arises from the transfer of a long term capital asset, then for the purpose of

computing capital gains:

i. 'Indexed Cost of Acquisition' is taken instead of 'Cost of Acquisition (COA)'. ii. 'Indexed Cost of Improvement' is taken instead of 'Cost of Improvement (COI)'.

Note 1: No deduction will be allowed in respect of payment of securities transaction tax in computing income under the head capital gains.

Note 2: COI is always indexed in case of long term capital asset irrespective of year in which such improvement was incurred.

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Note 3: Indexation of cost shall not be allowed in case of transfer of bonds & debentures other than capital indexed bonds issued by the Government.

In the following cases benefit of indexation is not allowed:-

Capital Assets

Bond or Debentures (Other than capital indexed bond issued by Government)

Share or Debenture of Indian Co. acquired by utilizing convertible foreign exchange (first proviso of section 48)

Depreciable assets

Slump Sale under Selection 50B

Transfer of units purchased in foreign currency by an assessee covered u/s 115AB Transfer of GDR's purchased in foreign currency by an assessee covered u/s 115ACA Transfer of Securities by Foreign Institutional Investors (FII) u/s 115AD

Question: Write Short note on cost of improvement under head capital gain?

Answer: Cost of improvement incurred before 01.04.1981 shall be ignored for all cases.

All expenditure incurred on improvement of assets by the assessee or the previous owner on or after 01.04-1981 shall be treated as cost of improvement.

[CMA RTP J12]

Question: What conditions must be satisfied for the purpose of taxing capital gain u/s 45(1)?

Answer: Any profits or gains arising from the transfer of capital assets effected in the previous year, shall

be chargeable to income tax under the head 'capital gain' and shall be deemed to be the income of the previous year in which the transfer took place unless such capital gain is exempt u/s 54, 54B, 54D, 54EC, 54ED, 54F, 54G and 54GA

In other words, capital gains tax liability arises only when the following conditions are satisfied 1 There should be Capital Asset.

2 The capital asset is transferred by the assessee. 3 Such transfer takes place during the previous year 4 Any profit or gain arises from the result of transfer

5 Such profit or gain is not exempt from tax u/s 54, 54B, 54D, 54EC, 54ED, 54F, 54G and 54GA All of the above conditions must be satisfied at a one point of time for the purpose of taxing capital gains.

[CMA INTER SY08, D13, 1 Mark]

Question: In case of transfer of a capital asset by an assessee who acquired the same from his father by

way of gift, the cost of acquisition of such asset for the purpose of computing capital gain is1

1

(18)

a) Nil

b) Cost of acquisition of the asset to father

c) Fair market Value of the asset on the date of gift d) Arm's length price of the asset on the date of gift

Question: Write short note on insurance claim received u/s 45(1A) under head capital gains?

Answer: If any person receives any money or other assets on account of insurance claim from the

insurance claim from the insurer on account of damage to, or destruction of, any capital asset from Flood, typhoon, hurricane, earthquake & other convulsion of nature

Riot or civil disturbance Accidental fire or explosion

Action by enemy or action taken in combating an enemy

Then any profit from the receipt of such money shall chargeable to capital gain and shall be deemed to be the income of such person of the previous year in which such money or asset was received and money received or FMV of the asset received, shall be deemed to be full consideration.

i. Full value of consideration = Money received or FMV of asset on date of receipt. ii. Total period of Holding = Date of acquisition to date of destruction.

Capital Gain = Insurance Money Received or FMV of Asset minus COA, COI or ICOA and ICOI. If compensation received for depreciable asset, then provision of S.50 shall apply.

[CA INTER N06, 7 Marks]

Question: Mr. A, is an individual carrying on business. His stock and machinery were damaged and

destroyed in a fire accident. The value of stock lost (totally damaged) was ₹6,50,000. Certain portion of the machinery could be salvaged. The opening WDV of the block as on 1-4-2015 was ₹10,80,000.

During the process of safeguarding machinery and in the firefighting operations, Mr. A lost his gold chain and a diamond ring, which he had purchased in April, 2009 for ₹1,20,000. The market value of these two items as on the date of fire accident was ₹1,80,000.

Mr. A received the following amounts from the insurance company:

1 Towards loss of stock ₹4,80,000 2 Towards damage of Machinery ₹6,00,000 3 Towards gold chain and diamond ring ₹1,80,000

You are requested to briefly comment on the tax treatment of the above three items under the provisions of the income-tax Act, 1961.

Answer: Tax Treatments:

Stock Machinery Gold & Diamond

Sale Consideration (Compensation) 4,80,000 6,00,000 1,80,000 Less Cost of acquisition 6,50,000

(19)

Less Indexed cost of acquisition * + 2,05,253

Business income (1,70,000)

Short-term capital gain (loss) (4,80,000)

Long-term capital gain (loss) [S.45(1A)] (25,253)

[CA INTER M00, M07 & N12, 5, 6 & 4 Marks]

Question: Discuss the tax implications arising consequent to conversion of a capital asset into stock-in-trade of business and its subsequent sale.

[CS EP J10, 4 Marks]

Question: Explain with the help of suitable illustration how capital gains are computed u/s 45(2) in case

of conversion of capital asset into stock-in-trade

Answer: Capital Gain from conversion of capital asset into Stock in Trade shall be charged to tax in the

previous year in which the Stock in Trade is sold or otherwise transferred by the assessee

In the above case, FMV of the assets on the date of conversion of capital assets into stock in trade shall be taken to the account.

Capital Gain = FMV of the asset on the date of transfer –Indexed cost of acquisition and improvement.

PGBP = Sale consideration – FMV of the asset on the date of transfer. Indexation shall apply on the basis of the year in which conversion takes place.

Section 45(2) is applicable only if the asset has been converted into stock-in-trade w.e.f. 01.04.1984

onwards. If the conversion is prior to 01.04.1984, no capital gains shall be computed as per Supreme

Court decision in Bai Shirinbai K.Kooka v. CIT (1962) 46 ITR 86 (SC).

[CA INTER M08, 5 Marks]

Question: Aarav converts his plot of land purchased in July, 2009 for ₹80,000 into stock-in-trade on

31st March, 2015. The fair market value as on 31.3.2015 was ₹1,90,000. The stock-in-trade was sold for

₹2,25,000 in the month of January, 2016.

Find out the taxable income, if any, and if so under which ‘head of income’ and for which Assessment Year?

Answer:

Computation of taxable income of Mr. Aarav for A.Y.2016-17 1 Long term capital gains

Full value of consideration (Fair market value on the date of conversion) 1,90,000

Less Indexed cost of acquisition * + 1,29,620 60,380

2 Profits & Gains of Business or Profession

(20)

Less Fair market value on the date of conversion 1,90,000 35,000

95,380

Question: Write short note on dematerialization u/s 45(2A) under head capital gain?

Answer: Where any person had, at any time during the previous year, any beneficial interest in any

security, then any profit and gain arising from transfer made by depositary shall be chargeable to tax as an income of the beneficial owner of the previous year in which the transfer took place.

Cost of Acquisition (COA) and period of holding (POH) shall be determined on the FIFO basis.

[CMA RTP J11]

Question: The depository account shows the following details of M’s holdings: Date of

Credit

Particulars Quantity

10.11.2004 Shares of XYZ LTD. purchased in physical form on 10.11.2004 @ ₹20 per share

300

30.11.2005 Purchased dematerialised shares of Y Ltd. 500 on 25.11.2005 @ ₹70 per share 06.12.2007 Shares of XYZ LTD. held in physical form, were got dematerialised on 01.12.2007

M sold 600 dematerialised shares on 6th June 2015 @ ₹200 per share. Brokerage is paid @ 2% of sale price.

Compute capital gains.

Answer:

a) Person Liable: The sale of shares held under Dematerialized format with a depository is chargeable to tax as the income of the beneficial owner.

b) Cost of Acquisition and period of holdings: The cost of acquisition and the period of holding shall be determined on FIFO Method. [Circular No. 768 dated 24.6.1998]

i. FIFO method will be applied for each account independently.

ii. When physical stock is dematerialised, the date of credit into the depository account shall be considered for the purpose of FIFO method, but indexed cost of acquisition shall be computed on the basis of year of acquisition.

Consideration for Transfer

600 Share @ ₹200 per share 1,20,000 Less : Brokerage 2% 2,400

Indexed Cost of Acquisition

(21)

(ii) (100 × 20 × 1081 / 551) 3,924 80,051

Long Term Capital Gain 37,549

Question: Write short note on transfer of capital asset by a partner to firm u/s 45(3) under head capital gain?

Answer: Capital gain arising from the transfer of a capital asset by way of contribution to the firm or

otherwise, shall be chargeable to tax in the previous year in which such transfer takes place.

For the purpose of sale consideration, the amount recorded in the books of the firm as a value of capital asset shall be taken

[CMA RTP D10]

Question: Vijay has three motor cars which are used by him exclusively for his personal purposes. The

cost of the cars was ₹6,50,000, ₹8,00,000 and ₹10,00,000. The first car was transferred by him on 15.1.2016 to firm in which he is a partner as his capital contribution. The market value of the car as on 15.1.2016 is ₹5,00,000, but it was recorded in the books of account of the firm at ₹6,00,000. Compute the capital gain if any, chargeable for the AY 2016-17.

Answer: Since the car is a moveable property and was used by Mr. Ayan for his personal purposes only,

it will be treated as a personal effect.

W.e.f. A.Y. 2008-09, ‚Personal effect‛ means moveable property including wearing apparel and furniture held for personal use by the assessee or any member of his family dependent on him but excludes: (i) Jewellery (ii) Archaeological collections (iii) Drawings (iv) Paintings (v) Sculptures (vi) Any work or art.

[CMA RTP J11]

Question: Nisith acquired a property by way of gift from his father in the year 1991-92 when its FMV was

₹3 lacs. His father had acquired the property during 1984-85 for ₹4 lacs. This property was introduced as capital contribution to a partnership firm in which Nisith became a partner on 15.6.2015. The market value of the asset as on that date was ₹40 lacs, but it was recorded in the books of account of the firm at ₹34 lacs. Is there any capital gain chargeable in the hands of Mr. Nisith?

Answer:

Computation of Capital Gains

Consideration for Transfer 34,00,000

Less: Indexed Cost of Acquisition(4,00,000 × 1081/125) 34,59,200 Long Term Capital Loss 59,200

a) Full value of consideration is taken as the value at which it is recorded in the books of accounts of the firm.

(22)

b) Market value of the asset on the date of transfer is not relevant.

Question 17: Write short note on dissolution of firm u/s 45(4) under the head capital gain?

Answer: Capital Gains arising from the transfer of the capital assets by a firm at the time of dissolution of

the firm or otherwise, shall be chargeable to tax as an income of the firm in which such distribution takes place. For the purpose of the sale consideration, FMV of the capital assets on the date of distribution shall be taken.

Capital Gain = FMV on the date of transfer - Cost or Indexed COA

[CMA RTP J11]

Question: A firm consists of 3 partners X, Y & Z. Z retires from the firm on 15.10.2015. His capital balance

and the profits till the date of retirement stood at ₹16 lacs. The firm transferred its land to Z in settlement of his account. The market value of the land as on that date was ₹30 lacs. The land was acquired by the firm on 1.5.96 for ₹4 lacs. Compute the capital gains in the hands of the firm.

Answer:

Computation of Long Term Capital Gains for the A.Y. 2016-17

Consideration for Transfer 30,00,000 Less Indexed Cost of Acquisition (4,00,000 × 1081/305) 14,17,705

Long Term Capital Gains 15,82,295

[CMA RTP J11]

Question: PQR & Co. is a partnership firm, consisting 3 partners P, Q and R. the firm is dissolved on

31.12.15. The assets of the firm were distributed to the partners as under:

Particulars Block of machinery (given to P) Stock (given to Q) Land (given to R) Year of acquisition 1995-96 2007-08 1978-79 Cost of acquisition (₹) 7,20,000 4,00,000 10,000 Market value as on 31.12.15 15,00,000 6,00,000 30,00,000 WDV as on 31.12.15 10,40,000 — — Value at which given to partners as per agreement 10,00,000 4,50,000 18,00,000 Market value as on 1.4.81 — — 2,70,000 Compute the income taxable in the hands of the firm for the assessment year 2016-17. What shall be the cost of acquisition of such assets to the partners of the firm?

(23)

Answer:

Computation of Short Term Capital Gains on block of Machinery

Sale consideration (i.e. the market value) 15,00,000

Less Cost of Acquisition (WDV of the block) 10,40,000 Short Term Capital Gains 4,60,000 Income from Business (on transfer of stock)

Market value of stock 6,00,000

Less Cost of Acquisition 4,00,000

Business Income 2,00,000

Computation of Capital Gains on transfer of Land

Consideration for transfer 30,00,000

Less Indexed cost of Acquisition: ( 2,70,000 × 1081/100) 29,18,700

Long term capital gains 81,300

Cost of acquisition of assets to the Partners

Partner“ P 10,00,000 Partner“ Q 4,50,000 Partner“ R 18,00,000

Question 18: Write short note on compulsorily acquisition u/s 45(5) u/h capital gain?

Answer: Where a Capital asset is compulsorily acquired by the Government of similar agency, under any

law then,

1. Capital gain shall be computed in the year in which the asset was acquired.

2. Capital gain for initial compensation / original compensation shall be taxable in the year in which such compensation or part thereof is first received by the assessee.

3. Any additional compensation, increased compensation received by the assessee is taxable in the year in which such additional amount is received.

4. For the purpose of additional compensation COA & COI Shall be zero.

5. Any expense incurred for the purpose of realization of the additional compensation shall be deducted from the sale consideration.

6. Nature of additional compensation should be same as an initial compensation.

7. Reduction of compensation: Where original compensation / enhanced compensation is reduced by court, then the Capital gain shall be recomputed accordingly.

(24)

[CMA RTP D11, J12 & D12]

Question: Mr. B acquired a house property for ₹50,000 in 1969-70. On his death in October 1989 the house

was acquired by his son C. The market value of the house as on 01.04.1981 was ₹3,00,000. This house was acquired by the Government on 15.3.2012 and a compensation of ₹32 lacs is paid to him on 25.3.2016. C filed a suit against the Government challenging the quantum of compensation and the court ordered for giving additional compensation of ₹14,00,000. He incurred an expenditure of ₹40,000 as expenditure in connection with the suit. The additional compensation was received on 25.3.2017. Compute capital gains chargeable to tax.

Answer:

Computation of Long Term Capital Gains for the A.Y. 2016-17

Consideration for transfer (being the compensation) 32,00,000 Less Indexed Cost of Acquisition(3,00,000×785/100) 23,55,000

Long Term Capital Gains / Loss 8,45,000 Computation of Long Term Capital Gains for the A.Y. 2017-18

Enhanced Compensation received 14,00,000 Less Cost of Acquisition NIL Cost of Improvement NIL Legal Expenses (40,000)

Long Term Capital Gains 13,60,000

Question: Assume from the previous problem, that the enhanced compensation is reduced by Supreme

Court from ₹14,00,000 to ₹10,00,000 on 7.7.2017 and the legal expenses incurred ₹20,000.

Answer:

Re-computation of Long Term Capital Gains for the A.Y. 2018-19 Revised enhanced compensation received 14,00,000 Less Cost of Acquisition NIL Cost of Improvement NIL Legal Expenses [40,000 + 20,000] 60,000

Long Term Capital Gains 13,40,000

Note: the assessing officer can re-compute the income of the AY 2018-19 within 4 years from the end of

the year in which order of the Supreme Court, reducing the compensation, is passed (i.e. 31.03.2023).

Question: State the provisions u/s 45(6) related to repurchase of units. Answer: Capital gain = Repurchase price less capital value of the units

(25)

[CA INTER M02, 6 Marks]

Question: State the provisions relating to the computation of capital gains in the hands of shareholder of a company on distribution of assets upon liquidation. (S.46)

Answer: In the hands of the company (S.46(1)): Where the assets of a company are distributed to its

shareholders on its liquidation, such distribution shall not be regarded as transfer by virtue of Section 47.

In the hands of the shareholders (S.46(2)): Where a shareholder on the liquidation of a company received

any money or other assets from the company, he shall be chargeable to income tax under this head for such receipt and sale consideration of shares shall be

a. Distribution in Cash: Amount received less dividend u/s 2(22)(c).

b. Distribution in Kind: Fair market value (FMV) of assets on the date of liquidation less deemed divided u/s 2(22)(c).

While computing the period of holding of such assets the period after the date of liquidation shall be ignored.

Capital Gain on the sale of assets received at the time of Liquidation: The cost of acquisition of the asset

received in liquidation, shall be its fair market value on the date of distribution, without deducting deemed dividend u/s 2(22)(c).

[CMA RTP D11]

Question: Define accumulated profits for a company under liquidation.

Answer: Accumulated profits for a company in liquidation includes all profits of the company upto the

date of liquidation.

Accumulated profits should include the credit balance of profit and loss account, general reserves, investment allowance, capitalized profits and profits of the year upto the date of distribution/liquidation. However, provisions and reserves meant for specific liability, to the extent of the liability shall not be included. Provision for income tax, provision for dividend, reserve for depreciation do not form part of the accumulated profits.

Securities premium is not accumulated profits.

It may consist of exempted incomes, like agricultural income.

It will include current profits and all profits of the company till the date of liquidation, subject to the exception provided therein.

[CA INTER M08, 8 Marks]

Question: Ms. Vasumathi purchased 10,000 equity shares of Rajesh Co. Pvt. Ltd. on 28.2.2010 for

₹120,000. The company was wound up on 31.07.2015. The following is the summarized financial position of the company as on 31.07.2015.

Liabilities Assets

(26)

General reserve 40,00,000 Cash at Bank 6,50,000 Provision for taxation 2,50,000

48,50,000 48,50,000

The tax liability (towards dividend distribution tax) was ascertained at ₹3,00,000 after considering refund due to the company. The remaining assets were distributed to the shareholders in the proportion of their shareholding. The market value of 6 acres of agricultural land (in an urban area) as on 31.07.2015 is ₹10,00,000 per acre.

The agricultural land received above was sold by Ms. Vasumathi on 29.2.2016 for ₹15,00,000. Discuss the tax consequences in the hands of the company and Ms. Vasumathi.

Answer: In the hands of the company: As per section 46(1), in case of distribution of capital assets

amongst the shareholders on liquidation of the company is not regarded as ‚transfer‛ in the hands of the company. Consequently, there will be no capital gains in the hands of the company.

In the hands of Ms. Vasumathi (shareholder)

Section 46(2) provides that such capital gains would be chargeable in the hands of the shareholder.

Ms. Vasumathi holds 1/6th of the shareholding of the company Amount (₹ )

Market value of agricultural land received (1 acre @ ₹10 lakhs) 10,00,000 Add Cash at bank (1/6th of ₹(6,50,000 – ₹3,00,000) 58,333

10,58,333 Less Deemed Dividend u/s 2(22) (c ) 1/6th of (₹40,00,000 – ₹50,000) 6,58,333

Consideration for computing Capital Gain 4,00,000 Less Indexed cost of acquisition of Shares 2,05,253

Long term capital gains 1,94,747

Sale consideration of agricultural land 15,00,000 Less Fair market value of the agricultural land on the date of distribution 10,00,000

Short term capital gain 5,00,000

Note: Dividend u/s 2(22) (c) ₹6,58,333 will be exempt under section 10(34).

Note: Since the question states that there is refund due to the company, it is assumed that the provision

for taxation of ₹250,000 shown in Balance Sheet is in respect of dividend distribution tax. Therefore, the tax liability in respect of dividend distribution tax ascertained at ₹3,00,000 has to be reduced from bank balance while computing full value of consideration under section 46(2), ₹50,000, being the difference between ₹3,00,000 and ₹2,50,000 has to be reduced from General Reserve for calculating deemed dividend under section 2(22)(c ).

(27)

[CMA RTP D10]

Question: What is the tax treatment of consequence for repurchase or buy back of shares or specified securities by a company?

Answer: As per the provisions in Sec. 46A:

1. Where a shareholder receives any consideration from the company for purchase of its own shares or

other specified securities, it is a transfer chargeable under the head Capital Gains.

2. The Capital Gains taxable in the previous year in which the shares or securities are purchased by the Company.

3. Capital Gains = Value of Consideration Received Less Cost of Acquisition or Indexed cost of acquisition.

4. No deemed dividend: In case of buy back of shares, there is no question of deemed dividend u/s 2(22)(d).

Reference Legal Decisions: Shares held as

Stock-in-Trade

Incase Shares treated as Stock-in-Trade are exchanged for Shares of other companies, then, Business Profit = Market Value of Shares exchanged Less Book Value of Original Shares. [Orient Trading Co. Ltd. 224 ITR 371 (SC)]

Reduction of Capital

When there is a reduction in the Face Value of the Shares and consequent payment by the Company to the Shareholders towards such reduction, the reduction of Share Capital is charged to Capital Gains Tax. [Kartikeya vs. Sarabhai 228 ITR 163 (SC)]

[CMA RTP J12 & D12]

Question: X Ltd. having an issued capital of ₹50,00,000 in equity shares of ₹100 each. On March 2016,

company decided to buy-back equity shares to the extent of 20%. Tushar, holding 500 shares of the company, has received the buy-back consideration on the shares bought-back, @ ₹130 per share. He had purchased these shares 14 months earlier @ ₹105 per share. Discuss the taxability.

Answer: Where a shareholder receives any consideration from the company for purchase of its own

shares or other specified securities, it is a transfer chargeable under the head capital gains. Such capital gain is chargeable to tax in the previous year in which the shares or securities are purchased by the company.

Computation of Capital Gains

Consideration for transfer of 100 equity shares [500 shares × 20%] @ ₹130 per share 13,000 Less Indexed Cost of Acquisition [100 equity shares × 105 × 1081/1024] 11,084

Long term Capital Gains 1,916

[CA INTER N03, 6 Marks]

(28)

Tax Act, 1961. (List at least six of such transactions). Answer: Transactions not regarded as transfer [Section 47]

The following transactions will not be regarded as transfer for the purposes of capital gains tax.

S Provisions

(i) Any distribution of capital asset on the total or partial partition of HUF.

(iii) Any transfer of capital asset under a gift or will or an irrevocable trust. However, it would not include transfer under gift or an irrevocable trust of a capital asset being shares or debentures or warrants allotted by a company to the employees under the ESOP scheme in accordance with the guidelines issued by the Central Government in this behalf.

(iv) Transfer of capital asset to its wholly owned Indian subsidiary company by a holding company

(v) Transfer of capital asset by a wholly owned subsidiary company to its Indian holding company

(vi) Transfer of capital asset by the amalgamating company to the Indian amalgamated company in a scheme of amalgamation

(via) Transfer of shares held in an Indian company by the amalgamating foreign company in a scheme of amalgamation to the amalgamated foreign company, if –

(a) at least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company, and

(b) such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated.

(viaa) any transfer, in a scheme of amalgamation of a banking company with a banking institution sanctioned and brought into force by the Central Government

(viab)1 any transfer, in a scheme of amalgamation, of a capital asset, being a share of a foreign

company, referred to in the Explanation 5 to clause (i) of sub-section (1) of section 9, which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the amalgamating foreign company to the amalgamated foreign company, if—

(A) at least twenty-five per cent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company; and

(B) such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated;

(vib) Transfer of capital asset by the demerged company to the resulting Indian company in a scheme of demerger

1

(29)

(vic) Transfer of capital asset, being a share or shares held in Indian company, by the demerged foreign company to the resulting foreign company, if –

(a) the shareholders holding not less than three-fourths in the value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company; and

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

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

(vicb) any transfer by a shareholder, in a business reorganisation, of a capital asset being a share or shares held by him in the predecessor co-operative bank if the transfer is made in consideration of the allotment to him of any share or shares in the successor co -operative bank.

(vicc)1 any transfer in a demerger, of a capital asset, being a share of a foreign company , referred to

in the Explanation 5 to clause (i) of sub-section (1) of section 9, which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the demerged foreign company to the resulting foreign company, if—

(a) the shareholders, holding not less than three-fourths in value of the shares of the demerged foreign company, continue to remain shareholders of the resulting foreign company; and

(b) such transfer does not attract tax on capital gains in the country in which the demerged foreign company is incorporated:

(vid) any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is made in consideration of demerger of the undertaking;

(vii) any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company, if—

(a) the transfer is made in consideration of the allotment to him of any sh are or shares in the amalgamated company except where the shareholder itself is the amalgamated company, and

(b) the amalgamated company is an Indian company;

(viia) any transfer of a capital asset, being bonds or Global Depository Receipts referred to in sub-section (1) of sub-section 115AC, made outside India by a non-resident to another non-resident; (viib) any transfer of a capital asset, being a Government Security carrying a periodic payment of interest,

made outside India through an intermediary dealing in settlement of securities, by a non-resident to

1

(30)

another non-resident.

(viii) any transfer of agricultural land in India effected before the 1st day of March, 1970;

(ix) any transfer of a capital asset, being any work of art, archaeological, scientifi c or art collection, book, manuscript, drawing, painting, photograph or print, to the Government or a University or the National Museum, National Art Gallery, National Archives or any such other public museum or institution as may be notified by the Central Government in the Official Gazette to be of national importance or to be of renown throughout any State or States.

(x) any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificates in any form, of a company into shares or debentures of that company;

(xa) any transfer by way of conversion of bonds referred to in clause ( a) of sub-section (1) of section 115AC into shares or debentures of any company;

(xi) any transfer made on or before the 31st day of December, 1998 by a person (not being a company) of a capital asset being membership of a recognised stock exchange to a company in exchange of shares allotted by that company to the transferor.

(xii) any transfer of a capital asset, being land of a sick industrial company, made under a scheme prepared and sanctioned under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) where such sick industrial company is being managed by its workers' co-operative

(xiii) any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, or any transfer of a capital asset to a company in the course of demutualisation or corporatisation of a recognised stock exchange in India as a result of which an association of persons or body of individuals is succeeded by such company :

Provided that—

(a) all the assets and liabilities of the firm or of the association of persons or body of individuals relating to the business immediately before the succession become the assets and liabilities of the company;

(b) all the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the succession;

(c) the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company; and (d) the aggregate of the shareholding in the company of the partners of the firm is not less than fifty per cent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession;

(31)

out in accordance with a scheme for demutualisation or corporatisation which is approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);

(xiiia) any transfer of a capital asset being a membership right held by a member of a recognised stock exchange in India for acquisition of shares and trading or clearing rights acquired by such member in that recognised stock exchange in accordance with a scheme for demutualisation or corporatisation which is approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);

(xiiib) any transfer of a capital asset or intangible asset by a private company or unlisted public company to a limited liability partnership or any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into a limited liability partnership in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008 (6 of 2009):

Provided that—

(a) all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the limited liability partnership;

(b) all the shareholders of the company immediately before the conversion become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in the limited liability partnership are in the same proportion as their shareholding in the company on the date of conversion;

(c) the shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the limited liability partnership;

(d) the aggregate of the profit sharing ratio of the shareholders of the company in the limited liability partnership shall not be less than fifty per cent at any time during the period of five years from the date of conversion;

(e) the total sales, turnover or gross receipts in the business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed sixty lakh rupees; and

(f) no amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of three years from the date of conversion.

(xiv) [CMA INTER SY12, J15, 4 Marks]

Question: State the conditions to be satisfied when a sole proprietary concern is succeeded by a

company, to avail tax exemption in respect of capital gains.

Figure

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References

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