Taxation

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Capital Gains
Chapter
06
CAPITAL GAINS [37]
Capital gains
It is the gain arising on disposal of capital asset by the
person in a tax year.
Income excludes the gain exempt from tax.
Capital asset
Capital asset means;
Property of any kind
Held by a person whether or not connected with a
business
Capital asset does not include;
Any stock in trade (except stock and shares)
Consumables stores or raw materials held for
business purposes
Depreciable asset on which deduction for
depreciation allowed
Intangible asset on which deduction for amortisation is
allowed
Any immovable property
Any moveable property held for personal use or use
by the dependent, except painting, jewellery etc.
Examples of
capital assets
Share of partner from AOP
Shares of companies
Franchise (right to manufacture)
Shares of companies
Leasehold rights
Computation of
gain
= Consideration received cost of asset
Gain on asset
held for more
than one year
= Gain x (i.e. 75% of gain is taxable)
FMV is cost
FMV is considered cost of an asset when asset becomes
the property of a person under following situations;
Under a gift, bequest or will
By succession, inheritance or devolution
On distribution of asset on dissolution of AOP or
liquidation of a company
FMV is determined on date of acquisition or transfer.
Purpose of this provision is that in respect of assets
having no cost of acquisition, capital gain cannot be
taxed, However, if a person subsequently transfers such
asset , he will not be taxed on gross receipt basis, instead
cost of acquisition will be FMV.
Example 01
Mr. X, a dealer in stocks and shares, earned gross receipts of Rs. 500,000 on sale of shares
and stock during the tax year 2009. He treated it as business income for the year and after
deducting all expenses declared income of Rs. 100,000. The taxation officer rejected this
return and treated it as capital gains u/s 37. After allowing costs and shares of Rs. 100,000
he taxed Rs. 400,000 as capital gains. Give your comments.
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Solution 01
Taxation officer is right. Any stock and shares even if stock in trade are treated as
capital assets and gain / (loss) is dealt u/s 37.
Example 02
X, an individual received, by way of gift, a painting from his uncle on July 1, 2008. On
January 1, 2009 he sold that painting in an auction for Rs. 150,000 and paid Rs. 10,000 as
commission to auction house. FMV of painting at the date of acquisition was Rs. 75,000.
Calculate the capital gain.
Solution 02
Capital gain = Rs. 150,000 75,000 10,000 = Rs. 65,000
COST AND CONSIDERATION [76 - 77]
Cost
= Consideration given for acquiring asset + incidental
expenditure for acquiring & disposing asset + expenditure
for improvement or alteration of asset
Cost does not include the amount already deducted as
expense or inadmissible u/s 21.
Consideration
= Higher of amount received or FMV
FMV of consideration received in kind determined at the
time of disposal.
Example 03
M/s CBT purchased an asset for Rs. 5,000,000 and paid Rs. 50,000 as freight to bring the
asset to factory premises. Further the company hired an engineer for putting the asset to
work and paid him Rs. 100,000. What is the cost of asset?
Solution 03
Total cost of the asset in the hands of company is Rs. 5, 150,000.
Example 04
Mr. Y sold his business asset to Mr. A and received Rs. 500,000 and an old asset.
The market value of that asset at time of acquisition was Rs. 100,000. What will be the total
consideration received by Mr. Y?
Solution 04
Total consideration received will be Rs. 600,000 (i.e. 500,000 + 100,000)
Taxation
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Example 05
On August 1, 2008, Mr. B sold 5,000 securities of government for a consideration of Rs. 25
each. The securities were purchased on November 25, 2005 at Rs. 10 each. Calculate
taxable gain.
Solution 05
= (Rs. 125,000 50,000) = Rs. 75,000 x 75% = Rs. 56,250
Example 06
X, an individual, acquired 5,000 shares of an unlisted company for Rs. 500,000. He sold
these shares within a year for Rs. 775,000 and paid Rs. 25,000 as commission to a broker.
Calculate the capital gain.
Solution 06
= (Rs. 775,000 500,000 25,000) = Rs. 250,000
DEDUCTION OF LOSSES [38]
Deduction
allowed
In computing income under the head Capital Gains loss on one
asset during the year can be deducted from gain on other asset.
When loss
not allowed
Deduction for loss on following assets in not allowed;
Whose gain is not chargeable to tax 9i.e. exempt)
A painting, sculpture, drawing or other work of art;
jewellery;
a rare manuscript, folio or book;
a postage stamp or first day cover;
a coin or medallion; or
an antique.
EXEMPTIONS [PART I SECOND SCHEDULE]
On sale of shares
or redeemable
capital etc
Gain on sale of following assets are exempt upto June 30,
2010;
shares of public company
sale of modaraba certificates
sale of redeemable capital instrument
sale of PTCL vouchers issued by Government of Pakistan
Others
Shares of public company sold by an approved foreign
institutional investor)
Sale of shares of industrial undertaking established in
Export Processing Zone.
NON RECOGNITION OF GAIN/ (LOSS) [79]
No gain/ (loss)
No gain/ (loss) shall arise on following transfers of assets to
a resident ;
between spouses under an agreement to live apart;
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transmission of the asset on the death of a person;
by reason of a gift of the asset;
by reason of the compulsory acquisition of the asset
under any law where the consideration received
for the disposal is reinvested by the recipient in an
asset of a like kind within one year of the disposal;
by a company to its shareholders on liquidation
of the company; or
by an association of persons to its members on
dissolution of the association where the assets are
distributed to members in accordance with their
interests in the capital of the association.
Cost for recipient
For capital assets shall be FMV.
For other assets shall be equal to the cost of the asset
for the transferor.
Cost in case of
compulsory
acquisition
Cost of replacement asset = cost of asset disposed off +
excess of consideration given for asset replaced and
consideration received for asset disposed off.
It means that if consideration paid for new asset <
consideration received for asset disposed then cost of
replaced asset = cost of asset disposed off.
Example 07
On 1
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July 2008 government introduced a law prohibiting the production of black shopping
bags and resultantly took over all the machines of ABC Ltd. worth Rs. 500,000 and
compensated the company with Rs. 700,000. The company purchased new machines on
February 24, 2009 for Rs. 800,000 capable of producing white bags.
Will the gain taxable? What is cost of new machines?
Solution 07
Although there is gain of Rs. 200,000 yet, it will not be chargeable to tax as it is a case of
compulsory acquisition by the government and the company reinvested it in an asset of
similar kind within 12 months of disposal of asset.
Cost of replaced asset (Rs.) = 500,000 + (800,000 700,000) = 600,000
Example 08
Mr.A on liquidation of a company in which he is a shareholder received Rs. 100,000 against
his 5,000 shares (market value Rs. 10 per share). What will be gain/ (loss) on disposal of
shares?
Solution 08
Although there is gain of Rs. 50,000 yet it will not be chargeable to tax as he has received it
on liquidation of the company.
Taxation
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VALUATION OF BONUS SHARES [79]
Face value Not included in income
Cost per share
after bonus issue
Cost of old shares/ all shares inclusive bonus shares
I