Capital Gains 1

WORKSHOP ON DIRECT TAXES
Capital Gains – Part I

June 2016
Capital Gains - Part I 1

Concept of Capital gains
Basic principles
•
General principle of taxation
ü
Revenue receipts are
taxable unless specifically
exempt
ü
Capital receipts are not
taxable unless specifically
covered
•
Capital gains – covered within
the scope of the term ‘income’
under section 2(24)(vi)

Arrangement of sections
• Section 45 - Charging section
• Section 46 – Capital gains on distribution of assets by companies in liquidation
• Section 46A - Capital gains on buyback of shares
• Section 47 – Transactions not regarded as transfer (exceptions)
• Section 47A - Withdrawal of exemption in certain cases
• Section 48 - Mode of computation
• Section 49 - Cost with reference to certain modes of acquisition
• Section 50 - Special provision for computation of capital gains in case of
depreciable assets
• Section 50B - Slump Sale
• Section 50C - Defines full value of consideration in certain cases
• Section 51 - Advance money received
• Section 54 to 54GA - Exemptions of capital gains in certain cases
• Section 55 - Cost of Acquisition/ Cost of improvement

Basis of charge – Section 45
• Profits or gains on transfer of capital assets – 45(1)
• Compensation for damage or destruction of asset from insurer –
45(1A)
• Conversion of capital asset into stock in trade – 45(2)
• Transfer of beneficial interest in securities by depositories
taxable in the hands of registered owner – section 45(2A)
• Contribution of asset to a partnership firm/ AOP/ BOI as capital
– 45(3)
• Distribution of capital assets to partners on dissolution of firm –
45(4)
• Compensation received for compulsory acquisition of capital
asset – 45(5)
• Difference between repurchase price and capital value of units
of Mutual Funds under Equity Linked Savings Scheme – 45(6)
Basis of charge – Section 45(1)
Any profits and gains arising from the transfer of a capital
asset effected in the previous year, shall save as otherwise
provided in sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G or
54GA be chargeable to income-tax under the head ‘Capital
Gains’ and shall be deemed to be the income of the previous
year in which the transfer took place
Components to constitute ‘Capital gains’

•
Gains
•
Transfer
•
Capital asset
•
Availability of exemptions

Basis of charge – Definitions
Section 2(14) Capital asset

Section 2(29A) Long term capital asset
Section 2(42A) Short term capital asset
Section 2(47) Transfer in relation to a capital asset
Section 47 Transactions not regarded as transfer –

exceptions to section 2(47)

Basis of charge – Definition of capital asset
•
Property* of any kind held by an assessee (whether or not connected
with his business or profession)
•
Securities held by Foreign Institutional Investors (‘FII’)
EXCLUSIONS
•
Stock-in-trade (other than those held by FIIs), raw materials,
consumable stores held for the purpose of business or profession
•
Personal effects excluding jewellery, archaeological collections,
drawings, paintings, sculpture, or any works of art
•
Agricultural land situated in India (not within municipality or
cantonment board or within the specified distance)
•
Gold bonds
•
Special bearer bonds
•
Gold deposit bonds
* Property includes rights in relation to Indian company including rights of

management and control or any other rights
Basis of charge – Concept of indirect
transfer

Basis of charge – Short term v. long term
* Including unit of UTI/ equity oriented fund, zero coupon bond

Basis of charge – Long term v. Short term
Inclusions
•
Period of holding by previous owner
•
Period of holding by amalgamating company/ de-merged
company in the hands of amalgamated/ resulting company
•
Bonus shares or debenture – date of allotment of bonus share –
NOT the date of allotment of original share or debenture
•
Rights shares – date of allotment of shares – NOT date of
allotment of rights
Exclusions
•
Period subsequent to the date on which the company goes into
liquidation

Basis of charge – Definition of transfer
•
Sale, exchange or relinquishment of the asset
•
Extinguishment of any rights in the asset
•
Compulsory acquisition of asset under any law
•
Conversion of the asset into stock-in-trade
•
Maturity or redemption of a zero coupon bond
•
Any transaction involving the allowing of the possession of any
immovable property to be taken or retained in part performance
of a contract – referred to in section 53A of Transfer of Property
Act, 1882
•
Any transaction which has the effect of transferring or enabling
the enjoyment of any immovable property
Transfer shall be deemed to include disposing off or parting with any asset
irrespective of whether it has taken place on account of transfer of shares of a
foreign company

Computation mechanism - Basics
Step 1 Determine full value of consideration
Step 2 Deduct:
i) Expenditure incurred wholly and exclusively in
connection with the transfer
ii) Cost/ Indexed cost of acquisition
iii) Cost/ Indexed cost of improvement
Step 3 Deduct – Exemptions, if any
Step 4 Capital gain/ loss

Section 45(2)
•
Overrides provisions of section 45(1)
•
Gains arising from transfer by way of conversion by the owner of a
capital asset into stock-in-trade - chargeable to tax as capital gains
in the year in which the stock-in-trade is sold or otherwise
transferred
•
Consideration - Fair market value on the date of conversion
Example [assuming section 45(2) is not in existence]

•
Cost of acquisition – INR 1,000
•
Fair market value as on date – INR 1,000,000
•
The assessee can convert the capital asset into stock trade and
record the same at fair market value as on date
•
Net gain on transfer as per Profit & Loss account would be Nil
Basis of charge – Section 45(3) and (4)
Section 45(3)
•
Profits or gains arising from transfer of capital asset
•
By way of contribution to the firm by way of capital or otherwise
•
Consideration – Value recorded in the books
•
Cost of acquisition in the hands of the firm – amount recorded in the
books
Section 45(4)
•
Profits or gains arising on distribution of assets by a firm on
dissolution
•
Consideration – Fair value of the asset as on the date of distribution
•
Whether dissolution includes retirement? – both views are possible
depending on the facts - prone to litigation

Section 45(5)
•
Overrides section 45(1)
•
Transfer of capital asset by way of compulsory acquisition or where
consideration is determined by Central Govt
•
Consideration/ Additional consideration - taxable in the year of
receipt

Exemptions – section 47
•
Distribution of capital assets on the total or partial partition of a HUF
•
Transfer of a capital asset under a gift, will or an irrevocable trust
(excluding ESOPs)
•
Transfer of a capital asset by a holding company to its wholly-owned
Indian subsidiary and vice versa (subject to certain conditions)
•
Transfer of capital assets, shares in a scheme of amalgamation/
demerger if the amalgamated/ resulting company is an Indian
company
•
Transfer of bonds or GDRs made outside India by a non-resident to
another non-resident

•
Transfer of agricultural land in India before 1 March 1970
•
Transfer of capital asset, being any work of art, archaeological,
scientific or art collection, etc to Government, University, etc
•
Conversion of bonds/ debentures, etc into shares/ debentures
•
Transfer of land of a sick industrial company under a scheme
prepared and sanctioned by SICA, 1985 subject to certain conditions
•
Transfer of any capital/ intangible assets by a firm to the company
which succeeds the concern
•
Transfer by a sole proprietary concern of any capital/ intangible
assets to a company which succeeds the concern

•
Transfer by a recognized stock exchange of any capital asset to the
company in the course of corporatization of the exchange
•
Any transfer of a capital/ intangible asset by a private company/
public unlisted company to a LLP or transfer of a share or shares held
in the company by a shareholder as a result of conversion of the
company into a LLP (subject to conditions)
•
Transfer in a scheme for lending of any securities under a stock
lending scheme which is subject to the guidelines of SEBI/ RBI
•
Transfer of a capital asset in a transaction of reverse mortgage under
a scheme made and notified by the Central Government
•
Transfer of shares of SPV to a trust under scheme of REIT
•
Transfer of units of mutual fund under consolidation
Computation of Capital gains
Mode of computation - Section 48
Step 1 Determine full value of consideration
Step 2 Deduct:
connection with the transfer
ii) Cost/ Indexed cost of acquisition
iii) Cost/ Indexed cost of improvement
Step 3 Deduct – Exemptions, if any
Step 4 Capital gain/ loss

Consideration - Meaning
•
Amount that the transferor receives or is entitled to receive as
consideration for the transfer of the capital asset
•
Not necessarily the market value of the asset on the date of
transfer or the value of asset obtained in all cases
•
Fair market value of consideration received in kind
•
Section 50C- stamp duty value
•
Section 50D – Where consideration cannot be determined, FMV of
the asset transferred
•
Treatment of contingent consideration?

Deemed consideration
S.No. Mode of transfer Deemed full value of consideration Section
1 Asset received from insurer on FMV on the date of receipt 45(1A)

account of damage or destruction
of capital asset
2 Conversion of capital asset into FMV on the date of conversion 45(2)
stock-in-trade
3 Introduction of capital into Amount recorded in the books of accounts 45(3)
Firm/AOP/BOI
4 Distribution of assets on FMV on the date of distribution 45(4)
dissolution of Firm/ AOP/ BOI
5 Shareholders receiving assets on Market value on date of distribution (-) 46(2)
liquidation of company deemed dividend under section 2(22)(c)
6 Gift, etc of shares or debentures Market value on the date of gift etc Proviso 4
allotted under ESOP to section
48
7 Transfer of land or building or Value adopted by stamp valuation authority 50C
both if consideration declared by assessee is less

Transfer of shares/ debentures by a non-resident
Applicability
• Where the transferor is a non-resident;
• Capital asset transferred - shares or debentures of an Indian company;
• Purchased in foreign currency;
• No indexation even if long-term capital gains
Computation
• Capital gain shall be computed by converting the cost of acquisition, expenses on transfer
and full value of consideration into the same foreign currency as was initially utilized for
purchase of asset
• Reconverting the capital gains in such foreign currency into the Indian currency
Method of Conversion into foreign currency (Rule 115A)

• Cost of acquisition (in foreign currency) = (COAQ in INR/ Average SBI TT rate) on date of
acquisition (A)
• Expenses on transfer = (Expenditure in INR/ Average TT rate) on date of transfer (B)
• Full value of consideration = (Consideration in INR/ Average TT rate) on date of transfer
(C)
• Capital Gains in foreign currency = A – B – C
• Capital gains in INR = Capital gains in foreign currency x SBI TT buying rate

Transfer of capital asset – other cases
Particulars Short term Long term
Consideration
Deduct:
connection with the transfer *
ii) Cost/ Indexed cost of acquisition No indexation Indexation
iii) Cost/ Indexed cost of improvement benefit
available**
Deduct – Exemptions, if any NA Available
Capital gain/ loss
* No deduction in respect of Securities Transaction Tax

** Other than asset in the nature of bond/ debenture other than capital indexed bonds
Indexed cost of acquisition to be computed using Cost Inflation Index

Cost of acquisition
Is typically “cost to assessee”, i.e. price which the assessee paid, or the amount which the
assessee has incurred, for acquisition of the asset
Includes incidental costs
Deemed cost of acquisition – section 49

S No Mode of acquisition of capital asset COA to the Section
assessee
1 i. Distribution of assets on the total or partial partition of COA to the 49(1)
a Hindu undivided family, or previous owner
ii. Gift or will, or
iii. Succession, inheritance or devolution, or
iv. Distribution of assets on the liquidation of a company, or
v. Transfer to a revocable or an irrevocable trust, or
vi. Transfer by holding company to wholly owned subsidiary
or vice versa, or
vii. Transfer in a scheme of amalgamation of two Indian Cos
or two foreign companies
viii.Conversion of self acquired individual property into HUF
property

Cost of acquisition
Deemed cost of acquisition – section 49
S No Mode of acquisition of capital asset COA to the assessee Section
2 Allotment of shares in the amalgamated Cost of acquisition in the 49(2)

company in a scheme of amalgamation amalgamating company
3 Shares or debentures acquired on Cost of corresponding debentures, 49(2A)
conversion of debentures, debenture- ddebenture-stock, bond or deposit
stock, bond or deposit certificate certificate
4 ESOP FMV for computing perquisite 49(2AA)
value (on date of exercise)
5 COA of partners’ rights in LLP which was COA of shares in the company 49(2AAA)
formed by way of conversion of a
company

Cost of acquisition
Deemed cost of acquisition - section 49
S No Mode of acquisition of capital asset COA to the assessee Section
6 COA of shares in the resulting company COA of shares in demerged Co. x Net 49(2C)
allotted due to demerger book value of assets transferred in
demerger/ Net worth of demerged
company before demerger *
7 COA of original shares of demerged Original COA Minus COA of shares in 49(2D)
company the resulting Company as computed
in section 49(2C)
8 Transfer by holding company to its Cost to the transferee company shall 49(3)
subsidiary company or vice versa AND be the cost for which such asset was
exemption is withdrawn under section acquired by it
47A
Net worth = Aggregate of paid up capital and general reserves as appearing in the balance sheet of
the demerged company immediately before demerger

Cost of acquisition in relation to certain assets –
S.
55(2)
Mode of acquisition of capital asset COA to the assessee Section
No
1 i. Goodwill of a business, trademark or Amount of purchase price 55(2)(a)(i)
brand name associated with a business
ii. Right to manufacture or produce or
process any article or thing
iii. Right to carry on any business or
tenancy rights
iv. State carriage permits or loom hours
purchased from previous owner
2 Same assets as mentioned in (1) above NIL (FMV as on 1-4-1981 not allowed) 55(2)(a)(ii)
but self generated
3 COA of right shares:
i. When assessee subscribes to right Amount actually paid for acquiring 55(2)(aa)(ii)
shares right shares
ii. Right renounced in favour of any other NIL 55(2)(aa)(iii)
person Amount paid for acquiring shares plus 55(2)(aa)(iv)
iii. COA in respect of person in whose amount paid to person renouncing the
favour right is renounced right
Cost of acquisition in relation to certain assets –
S 55(2)
Mode of acquisition of capital asset COA to the assessee Section
No
4 i. Equity shares allotted to a shareholder on COA of the original membership of 55(2)(ab)
corporatization of stock exchanges stock exchange
ii. Trading or clearing rights, acquired by
shareholder mentioned in 4(i) above NIL Proviso to
55(2)(ab)
5 Any other asset becoming the property of COA to the assessee or its FMV as on 55(2)(b)(i)
the assessee before 1-4-1981 1-4-1981 at the option of the
assessee
6 Capital asset becoming the property of the COA to the previous owner or its FMV 55(2)(b)(ii)
assessee in any of the modes specified in as on 1-4-1981 at the option of the
section 49(1) and it became the property of assessee
the previous owner before 1-4-1981
7 Capital asset becoming the property of the FMV of the asset on the date of 55(2)(b)(iii)
assessee on distribution by the company on distribution
liquidation provided capital gains tax has been
assessed under section 46(2)
8 Shares or stock of company becoming COA calculated with reference to COA 55(2)(b)(v)
assessee’s property by consolidation, of shares or stock from which asset is
conversion etc of shares or stock derived
Indexed cost of acquisition - Second Proviso to
Sec
•
48
Applies to capital gains from transfer of long-term capital asset
•
Does not applies to the following:
• Where first proviso applies i.e. Capital gains arising to a non resident from transfer of shares/
debentures of Indian company purchased in Foreign Currency
• Bonds and debentures except for capital indexed bonds
•
Indexed COA shall be as under:
Mode I- Assets acquired directly by the assessee himself
a) Asset acquired on or after 1.4.1981= COA X Cost Inflation Index (CII)) of the year of transfer
Cost Inflation Index of the year of acquisition
b) Asset acquired before 1.4.1981= COA or FMV as on 1.4.1981 X CII of the year of transfer
CII of PY 1981-82 (i.e. 100)
Mode II- Assets acquired from previous owner in mode given under section 49(1)
COA to the previous owner X CII of the year of transfer

CII of the year in which the asset is first held by the assessee

Cost of improvement – section 55(1)
S Capital asset Cost of improvement (‘COI’) to the assessee Section
No
1 Goodwill of a business or a right to NIL 55(1)(b)(1)
manufacture, produce or process
any article or thing or right to carry
on any business
2 Where the capital asset became the Capital expenditure incurred in making any 55(1)(b)(2)(i)
property of the previous owner or additions or alterations to the capital asset on or
the assessee before 1-4-1981 after 1-4-1981 by the previous owner or the
assessee
3 Capital assets acquired after 1-4- Capital expenditure incurred in making any 55(1)(b)(2)(ii)
1981 additions or alterations to the capital asset by
the assessee after it became his property and
where the capital asset became the property of
the assessee by any mode specified in section
49(1), capital expenditure incurred by the
previous owner also be treated as cost of
improvement

Indexed cost of improvement – section 55(1)
Explanation (iv) to section 48
•
Indexed COI for Cost of improvement incurred prior to 1.4.1981 – To be ignored
•
COI incurred after 1.4.1981
I. Cost incurred by the assessee
Cost incurred X CII of the year of transfer

CII of the year in which improvement made by the
assessee
II. Cost incurred by the previous owner
Cost incurred X CII of the year of transfer

CII of the year in which improvement made by
the Previous owner and not of the year in which
the asset first held by the assessee

Depreciable assets – section 50
•
Concept of block of assets based on nature of asset and rate of depreciation
Nature of asset Rate of depreciation

Plant and Machinery Computers – 60%
Energy generation and saving devices – 80%
Others - 15%
Buildings Temporary fittings – 100%
Factory building – 10%
Others – 5%
Furniture 10%
Intangibles 25%

Consideration Block cease to exist Block exists
Exceeds (WDV+ actual cost of asset Short-term capital gain Short-term capital
acquired during the year+ expenses on gain
transfer)
Is less than (WDV+ actual cost of asset Short-term capital loss Balance left shall be
acquired during the year+ expenses on WDV at the end of the
transfer) year

Case study
Asset Scenario 1 Scenario 2
Amount (in INR) Amount (in INR)
Plant A 500,000 500,000
Plant B 400,000 400,000
Plant C 600,000 600,000
Total 1,500,000 1,500,000
Additions during the year 700,000 700,000
2,200,000 2,200,000
Disposal of assets (A&B) 2,500,000 2,000,000

Short term capital gain/ (loss) 300,000 Nil
WDV as at the end of the previous year Nil 200,000

Slump sale – section 50B
Meaning of Slump Sale [Section 2(42C)]
• Transfer of one or more undertaking as a result of sale
• For a lump sum consideration
• Without assigning values to individual assets and liabilities
Tax implications
• For determining
into the nature
consideration of capital
(capital gain,
gain will period of if
be long-term holding of undertaking
undertaking is held forwill
morebe than
taken36
months)
• Cost of acquisition - Net worth of the undertaking as on date of transfer
• Net Worth is aggregate value of assets less the book value of liabilities
• Aggregate value of assets
• Depreciable asset - Written down value (determined in accordance with the Act)
• Capital assets inunder
as a deduction respect of which
section 35ADwhole
- NIL of the expenditure has been allowed or allowable
• Other assets - Book value of the assets

Slump sale – section 50B
Other aspects
•
Determination of value for stamp duty purposed would not shall not violate this
condition [Explanation 2 to section 2(42C)
•
Benefit of indexation would not be available
Issues for consideration
•
Where any asset of the undertaking is not transferred (say, motor cars), whether such
transfer shall be regarded as slump sale?
•
Where the value of asset has been computed separately and the Business Transfer
Agreement captures the lumpsum amount as consideration, whether such transfer be
regarded as slump sale?
•
Incase of negative net worth, whether the same should be considered as deemed cost
of acquisition?
•
In a case where the transferor receives consideration in the form of shares, whether
the provisions of section 50B would apply?

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WORKSHOP ON DIRECT TAXES

Capital Gains – Part I

Capital Gains - Part I 1

Capital Gains - Part I 2

Capital Gains - Part I 3

Components to constitute ‘Capital gains’

Capital Gains - Part I 5

Section 2(14) Capital asset

Section 2(42A) Short term capital asset

Section 2(47) Transfer in relation to a capital asset

Section 47 Transactions not regarded as transfer –

Capital Gains - Part I 6

* Property includes rights in relation to Indian company including rights of

Capital Gains - Part I 8

* Including unit of UTI/ equity oriented fund, zero coupon bond

Capital Gains - Part I 9

Capital Gains - Part I 10

Capital Gains - Part I 11

Step 1 Determine full value of consideration

Step 3 Deduct – Exemptions, if any

Step 4 Capital gain/ loss

Capital Gains - Part I 12

Example [assuming section 45(2) is not in existence]

Capital Gains - Part I 14

Capital Gains - Part I 15

Capital Gains - Part I 16

Capital Gains - Part I 17

Step 1 Determine full value of consideration

Step 3 Deduct – Exemptions, if any

Step 4 Capital gain/ loss

Capital Gains - Part I 19

Capital Gains - Part I 20

1 Asset received from insurer on FMV on the date of receipt 45(1A)

Capital Gains - Part I 21

Method of Conversion into foreign currency (Rule 115A)

Capital Gains - Part I 22

Capital gain/ loss

* No deduction in respect of Securities Transaction Tax

Capital Gains - Part I 23

Deemed cost of acquisition – section 49

Capital Gains - Part I 24

2 Allotment of shares in the amalgamated Cost of acquisition in the 49(2)

Capital Gains - Part I 25

Capital Gains - Part I 26

Mode I- Assets acquired directly by the assessee himself

COA to the previous owner X CII of the year of transfer

Capital Gains - Part I 29

Capital Gains - Part I 30

I. Cost incurred by the assessee

Cost incurred X CII of the year of transfer

II. Cost incurred by the previous owner

Cost incurred X CII of the year of transfer

Capital Gains - Part I 31

Nature of asset Rate of depreciation

Capital Gains - Part I 32

Consideration Block cease to exist Block exists

Capital Gains - Part I 33

Disposal of assets (A&B) 2,500,000 2,000,000

Capital Gains - Part I 34

Capital Gains - Part I 35

Issues for consideration

Capital Gains - Part I 36

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