Capital Gain Tax in Special Cases

Presented by: Kartik Tripathi (A017), Suhail Desai (A028), Vaibhav Kumar (A030)
INDEX

1. Theory

a. Capital Gain from Zero Coupon Bonds

b. Capital Gain in case of amount received from an Insurer on amount of damage or destruction of any capital
assets
c. Capital Gain in the case of Transfer of Depreciable assets
d. Capital Gains on Conversion of Capital Asset into Stock-in-Trade
e. Capital Gain on Transfer of Capital Asset by a Partner/Member to a Firm/AOP/BOI as Capital Contribution
[Section 45(3)]
f. Capital Gain on Distribution of Capital Assets by a Firm, AOP/BOI to Partners at the time of Dissolution
[Section 45(4)]
g. Capital Gain on Compulsory Acquisition of a Capital Asset [Section 45(5)]
h. Computation of Capital Gains in case of Joint Development Agreement [Section 45(5A)] [W.e.f. A.Y. 2018-19]

2. Sums
Capital Gain Case: Zero Coupon Bonds

(1) Maturity and redemption of zero coupon bond to be regarded as a transfer [Section 2(47)]:

As per clause (b) above, the payment of and benefit from zero coupon bond shall be received or receivable from the issuing
company/fund only at the time of maturity or redemption. Consequently, clause (iva) has been inserted in section 2(47) to
provide that the maturity or redemption of a zero coupon bond shall be regarded as a transfer.

(2) Transfer of zero coupon bond will be subject to capital gain tax:

The profits arising on the transfer of such zero coupon bond shall be chargeable under the head "capital gains". Further, if
such zero coupon bonds are held for not more than 12 months, such capital asset shall be treated as short term capital
asset and hence shall be subject to short-term capital gain. On the other hand, where these bonds are held for more than
12 months, such capital gain shall be treated as long-term capital gain.

(3) Taxability of long-term capital gain from zero coupon bond [Proviso to section 112(1)]:

The long-term capital gain on zero coupon bonds shall be chargeable to tax at 10% of long-term capital gain without
indexation of cost of such bonds.
Capital Gain Case: Amount Received From Insurer

Condition:
Where any person receives at any time during any previous year any money or other assets under an insurance from an
insurer on account of damage to, or destruction of, any capital asset, as a result of—
i. flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
ii. riot or civil disturbance; or
iii. accidental fire or explosion; or
iv. action by an enemy or action taken in combating an enemy (whether with or without a declaration of war),

then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the
head "Capital gains".

In which previous year the capital gain shall arise:

In the above case, the capital gain shall be deemed to be the income of the previous year in which such money or other
asset was received.

What shall be full value of consideration in this case?:

It shall be value of any money or the fair market value of other assets for the date of such receipt.
Capital Gain Case: Transfer of Depreciable Asset
The following rules are applicable:
Capital gain arises only in two cases -
If a depreciable asset is transferred, capital gain (or loss) will arise only in the following two cases –
1. When on the last day of the previous year written down value of the block of assets is 0 (zero) [sec. 50(1)].
2. When the block of assets is empty on the last day of the previous year [sec. 50(2)].

In no other case capital gain is chargeable to tax, when a depreciable asset is transferred. This rule is equally applicable whether
depreciation is allowed in the current year (or any of earlier years).

Cost of acquisition -
In the above two cases, cost of acquisition shall be the aggregate of the following–

Step 1 : Find out written down value of block of assets at the beginning of the previous year.

Step 2 : Add: Actual cost of‡ any asset(s) falling within that block of asset acquired by the assesse during the previous year
(whether put to use or not)

Always Short-Term -
On transfer of depreciable assets gain (or loss) is always short-term capital gain (or loss). It can never be treated as long-term
capital gain (or loss).
Capital Gain Case: Conversion of Capital Asset

If capital asset is converted into stock-in-trade during a previous year relevant to the assessment year
1985-86 (or any subsequent year), the following special rules are applicable–

1. The conversion of capital asset into stock-in-trade is treated as a 'transfer' within the meaning of section 2(47).
2. However, section 45(2) provides that although such a conversion of capital asset into stock-in trade will be a transfer
of the previous year in which the asset is so converted, but the capital gain will not arise in the previous year in
which the asset is converted, it will arise in the previous year in which such converted asset is sold or otherwise
transferred.
3. Indexation of cost of acquisition and improvement, if required, will be done till the previous year in which such
conversion took place.
4. Further, the fair market value of the asset, as on the date of such conversion, shall be deemed to be full value of the
consideration of the asset.
5. The sale price minus market value as on the date of conversion shall be treated as business income and taxed under
the head 'Profits and gains of business and profession'.
Capital Gain Case: Transfer/ Distribution of Capital Asset

Capital Gain on Transfer of Capital Asset by a Partner/Member to a Firm/AOP/BOI as

Capital Contribution [Section 45(3)]

A capital asset is transferred by a partner to his partnership firm by way of his capital contribution (or otherwise). It is
treated a “transfer” and capital gain will be taxable in the hands of the partner. The amount recorded in the books of
account is taken as full value of consideration. This rule is also applicable when a member transfers a capital assets to
his association of persons or body of individuals.

Capital Gain on Distribution of Capital Assets by a Firm, AOP/BOI to Partners at the time
of Dissolution [Section 45(4)]

It is treated as transfer. Capital gain is taxable in the hands of firm. The fair market value of the asset on the date of
distribution is taken as full value of consideration. This rule is also applicable when an asset is transferred by an
association of persons or body of individuals.
Capital Gain Case: Compulsory Acquisition of Capital Asset

The special rules given below are applicable where the Government has acquired an asset of a person
by way of compulsory acquisition. These rules are also applicable when consideration is approved or
determined by the Central Government or RBI (even if there is no compulsory acquisition).

Initial Compensation -
Initial compensation† is taken as full value of consideration. Capital gain is chargeable to tax in the year in which the
initial compensation (or part thereof) is first received. Indexation benefit is, however, available up to the year in which
the asset is compulsorily acquired.

Additional Compensation -
If a Court/Tribunal/authority enhances compensation, it will be taxable in the year in which enhanced compensation or
additional compensation is received. For this purpose cost of acquisition and cost of improvement are taken as nil.
However, litigation expenses or incidental expenditure for obtaining additional compensation is deductible.

If the enhanced compensation is received by any other person (because of the death of the transferor or for any other
reason), it is taxable as income of the recipient.
Capital Gain Case: Joint Development Agreement

Where the capital gain arises to an assesse, being an individual or a Hindu undivided family, from the transfer of a
capital asset, being land or building or both, under a specified agreement, the capital gains shall be chargeable to
income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is
issued by the competent authority provided the following conditions satisfied :

1. the assesse should be an individual or HUF

2. he holds the land or building or both
3. he transfers such land or building or both to the developer
4. he has entered into a specified agreement with such developer for developing a real estate project. (For meaning of
specified agreement see box above)

If the above conditions are satisfied, the capital gains shall be chargeable to income-tax as income of the previous year
in which the certificate of completion for the whole or part of the project is issued by the competent authority.

Full value of the Consideration for Computing the Capital Gain under Section 45(5A):

The stamp duty value of his share (i.e. share of the individual or HUF), being land or building or both, in the project on
the date of issuing of said certificate of completion as increased by any monetary consideration received, if any, shall be
deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.
INDEX

1. Theory

a. Capital Gain from Zero Coupon Bonds

b. Capital Gain in case of amount received from an Insurer on amount of damage or destruction of any capital
assets
c. Capital Gain in the case of Transfer of Depreciable assets
d. Capital Gains on Conversion of Capital Asset into Stock-in-Trade
e. Capital Gain on Transfer of Capital Asset by a Partner/Member to a Firm/AOP/BOI as Capital Contribution
[Section 45(3)]
f. Capital Gain on Distribution of Capital Assets by a Firm, AOP/BOI to Partners at the time of Dissolution
[Section 45(4)]
g. Capital Gain on Compulsory Acquisition of a Capital Asset [Section 45(5)]
h. Computation of Capital Gains in case of Joint Development Agreement [Section 45(5A)] [W.e.f. A.Y. 2018-19]

2. Sums
Sum 1 : Distribution of Capital Asset by Firm

X ,Y & Z are three partners of M/s XYZ, a partnership firm. On 10th March, 2019, the firm is dissolved. The followings assets
are distributed to the partners on the same day. Determine Capital Gains.
Sum 2 : Distribution of Capital Asset by Liquidation

Mr. X Purchased 2000 Shares of A Ltd on 1-1-05 for 20,000. The company A Ltd goes into Liquidation on 30-06-17 and he
receives the following from the Liquidator on 02-03-19:

Cash : 25,000
Machinery : BV : 40,000 & FMV : 60,000.

As on 30.06.17, the accumulated profits of the company were 1,50,000. Mr X holds 20% of shares of A Ltd. Mr. X sells the
Machinery on 31.03.19 for `1,00,000. The Company had acquired the Machinery on 1-1-01 for `40,000. Determine tax
treatment.

LTCG for A/Y 19-20 u/s 46(2) in hand of Mr. X

Sum 3 : Conversion of Capital Asset into Stock in Trade

Mr. X had purchased jewellery on 15-1-1995 for `1,00,000. (FMV as on 1-4-2001 is `3,00,000). The assessee
starts a jewellery business and brings jewellery as stock in trade of the jewellery business on 01-01-2016 when
the fair Market value of the jewellery is `18,00,000. The jewellery is sold on 20-12-18 for `20,00,000. Compute
Capital Gains for AY 2019-20.

Capital Gain computation: Fair Market Value 18,00,000

Less - Indexed cost of acquisition (300000*254/100) 7,62,000

Long Term Capital Gain 10,38,000

Business Income Calculation: Sales consideration 20,00,000

Less - Cost of Jewellery 18,00,000

Business Income 2,00,000

Sum 4 : Transfer of Depreciable assets (1/3)

Singhania & Co., a sole proprietorship own six machines, put in use for business in March, 2018. The depreciation on these
machines is charged @15%. The written down value of these machines as on 1st April, 2018 was Rs. 8,50,000. Three of the
old machines were sold on 10th June, 2018 for
Rs. 11,00,000. A second hand plant was bought for Rs. 8,50,000 on 30th November, 2018. You are required to:
(i) Determine the claim of depreciation for Assessment Year 2019-20.

Since the value of the block as on 31.3.2019 comprises of a new asset which has been put to use for less than 180 days, depreciation is
restricted to 50% of the prescribed percentage of 15% i.e. depreciation is restricted to 7½%. Therefore, the depreciation allowable for the year
is ` 45,000, being 7½% of ` 6,00,000.
Computation of depreciation for A.Y.2019-20
Particulars `
W.D.V. of the block as on 1.4.2018 8,50,000

Add: Purchase of second hand plant during the year 8,50,000

17,00,000
Less: Sale consideration of old machinery during the year 11,00,000

W.D.V of the block as on 31.03.2019 6,00,000

Sum 4 : Transfer of Depreciable assets (2/3)

(ii) Compute the capital gains liable to tax for Assessment Year 2019-20.

The provisions under section 50 for computation of capital gains in the case of depreciable assets can be invoked only
under the following circumstances:

(i)When one or some of the assets in the block are sold for consideration more than the value of the block.
(ii)When all the assets are transferred for a consideration more than the value of the block.
(iii)When all the assets are transferred for a consideration less than the value of the block.

Since in the first two cases, the sale consideration is more than the written down value of the block, the computation would
result in short term capital gains.

In the third case, since the written down value exceeds the sale consideration, the resultant figure would be a short-term
capital loss.

In the given case, capital gains will not arise as the block of asset continues to exist, and some of the assets are sold for a
price which is lesser than the written down value of the block.
Sum 4 : Transfer of Depreciable assets (3/3)

(iii) If Singhania & Co. had sold the three machines in June, 2018 for ` 21,00,000, will there be any difference in your
above workings? Examine.

If the three machines are sold in June, 2018 for Rs. 21,00,000, then short term capital gains would arise, since the sale
consideration is more than the aggregate of the written down value of the block at the beginning of the year and the
additions made during the year.

Particulars Rs. Rs.

Sale consideration 21,00,000

Less: W.D.V. of the machines as on 1.4.2018 8,50,000

Purchase of second hand plant during the year 8,50,000 17,00,000

Short term capital gains 4,00,000

Sum 5 : Transfer of Capital Asset by a Partner/Member

X, Y and Z form a partnership firm. Soon after formation of the firm, X brings a house property as his capital
contribution on August 20, 2018. On the date of transfer fair market value of the house is Rs. 20,00,000.
However, the amount recorded in the books of firm is Rs. 18,00,000. The house was purchased by X in 2005-06
for Rs. 2,50,000. Find out the amount of capital gain.

Solution :
Capital gain will be taxable in the hands of X for the assessment year 2019-20 –
Full value of consideration (i.e., amount recorded in the books of Rs. 18,00,000
account of the firm)

Less: Indexed cost of acquisition (Rs. 2,50,000 × 280 ÷ 117) Rs. 5,98,291

Long-term capital gain Rs. 12,01,709

Sum 6 : Compulsory Acquisition of Capital Asset

(a) Mr. X purchased a house Property in Delhi on 15-4-02. Cost of acquisition Rs. 1,00,000. It is compulsorily acquired by the
government on 25-12-15.Compensation determined Rs. 6,00,000

(b) Compensation paid by government: Rs.4,00,000 on 10-05-18: and Rs. 2,00,000 on 15-04-19. Compute Capital Gains.

Solution: (a) & (b) : LTCG on original compensation for A/Y 19-20 : Rs.6,00,000 – Rs. [1,00,000 x 254/105] = Rs.3,58,095

• Mr. X. files an appeal in the Delhi High court on 20-10-2019.The HC increases the Compensation from Rs. 6,00,000 to Rs.
9,30,000 by its order dated 25-1-2020. Legal expenses incurred by Mr. X is Rs. 10,000. The government on 20-06-20 pays
additional compensation of Rs.3,30,000 but the government files an appeal in the Supreme court against the Judgment of
Delhi High Court. Compute Capital Gains.

Solution: LTCG on enhanced compensation for A/Y 21/22 : `3,30,000 -`10,000 = `3,20,000

• The supreme court reduces the quantum of compensation from `9,30,000 to `7,50,000 by its judgment dated 20th March,
2020. Mr X repays `1,80,000 to government on 25th March, 2021. Legal Expenditure by Mr. X in Supreme Court is `25,000.
Compute Capital Gains.

Solution: Recomputed LTCG of A/Y 21/22 : `3,20,000 -`1,80,000 -`25,000 = `1,15,000

THANK YOU