9/12/2018

Critical Issues in
Capital Gains

Indore Branch of CIRC of ICAI CA Kirti Kumar Joshi

Mobile:- 9753974737

CHARGEABILITY
Should be a Capital asset

Transfer in the previous year

Profit as a result of transfer

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Capital asset

CAPITAL ASSET - Section 2(14)

“Property of any kind”
• Tangible assets or Intangible
• Connected or not with business
Exceptions
• Stock in trade
• Personal effects
• Rural Agricultural land in India
Status on the Date of transfer

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CAPITAL ASSET - Section 2(14)

Gold Silver Coins for Puja:- No

Silver Utensils:- Personal effect
Stamp Collection, Live Stock

Rural Agricultural Land

Agricultural Land situated in India or out side India
is a capital assets, Except Rural Agriculture Land.

Rural Agriculture land is situated Beyond

Distance Population

Outside M. limits Upto 10k

2km from M. Limit 10k to 1 Lakh

6km from M. Limit 1 Lakh to 10 Lakh

8km from M. Limit >10 Lakhs

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Rural Agricultural Land

Aerial Distance (Where the revenue record maintain)

Population according to the last preceding census - 2011

Meaning of Agricultural Land – connection with Agriculture

• CWT v. Court of Wards (105 ITR 133)(SC)
• Shiv Shankar v. CIT (94 ITR 433)(Del)

Temporary suspension of agricultural activities?

• 119 ITR 438(Mad.)

Sale of Agriculture land to a coloniser who developers colony –

Treatment in hands of Transferor?
• 292 ITR 481(Mad)

Types of Capital Assets

“Short Term” held for 36 Months

Listed shares & securities & Eq MF 12 Months

Exceptions 24 Months
Un listed eq. or pre.
Immovable Property
shares

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Points to Pick
Holding need not be as capital assets, entire period of
holding will be considered
• (Keshavji Karsondas 207ITR 737)

Property constructed on land purchased earlier

Two different component a)Land b)building

• (Vimal Chand Golecha 201 ITR 442)

Flat booked under letter of allotment/agreement for sale?

Assets received on dissolution of firm, Period of holding?

Rate of Tax
Long term Short term
Capital Asset capital Asset

20% Normal Rate

Equity Shares or Equity Shares/

EOU and STT
EOU+ STT– applicable -
Exempt 15%

Listed Securities except

unit + STT (without
Indexation) – 10%

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Transfer

“Transfer” includes
Sale / exchange /relinquishment

Extinguishment of any rights

Compulsory acquisition of a capital asset under any

law

Conversion of a capital asset into stock-in-trade

• Section 45(2) – Chargeable in the year of sale of stock in trade

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“Transfer”
Agreement for transfer not provide possession cannot be treated
as transfer.

If authority to take permission from various authority is transfer,

indicates passing complete control. (Chatrubhuj Dwarkadas
Kapadia)

Entered in a MOA with Builder to get take all formality complete

builder is acting as an agent. (Jasbir singh sarkaria)

Grant of a permissible right to build and rights vest with the

assessee, not transfer. (Atam Prakash & Sons)

“Transfer”

Rollover of Mutual Fund is

Transfer ?
Circular No.6/2015

Cancellation of Agreement
and Compensation received
K.R. Srinath v CIT (Mad)

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Joint Development Agreements

Joint Development Agreements

Builders comes and offer

Residential Commercial
Property Property
- Will it be liable to Capital Gain ?
- What Amount ?
- Which point of Time Capital Gain arise ?
- Can avail benefit U/s 54/54F ?

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How to Compute Capital Gain in JDA

Consideration

50% Constructed Area Kind + Money

- Take Guideline Value/ Stamp Valuation

-Sec 50(D) If consideration is not determine take Market Value.
- If you have provide old building and ask for scrap, benefit u/s 54
can not be availed.

- Conversion of capital assets in to stock in trade and then enter in

to agreement.

Joint Development Agreement

Individual or HUF

Chargeable to tax in which

Certificate of completion issued

Whole or Part is transferred

before completion

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Individual / HUF JDA

Transfer share
before after
completion

Yes No

CG in which CG in the
Stamp Value+
Certificate Year Handed
Cash
Received to Developer

Individual / HUF JDA

What when actual Transfer The

Capital Assets ?
Sale Consideration
Less:- Value of Consideration

Section 194IC TDS@10% on Cash

consideration

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Transfer
Convert into Stock in trade
• Capital Gain shall be computed in the year when such
converted asset is Sold
• Cost indexation shall be done till the year of conversion
• Business Income also to be calculated in the year of
Sale
• Affidavits, Disclosure in B/S, Disclosure in Tax Audit
Report

Conversion of stock in trade into capital Asset :- No

specific provisions, beneficial to the assessee
(ACIT v Brisght Star Investment (P.) Ltd.)

Transfer

Conversion of Firm in to
Company

Conversion of Company
into LLP
• CIT v. Texspin Eng. (263 ITR 345)(Bom)

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Transfer
Assets declared under
IDS 2016

Immovable Property Movable Property

Date of Holding from

From 1 June 2016
Registry

Depreciable Assets

No, Indexation available

Always be short term Capital Gain

Block Concept will be applicable

Gain on Sale of Depreciable assets held for more than 3 Years

Taxed @ applicable to LTCG. (Manali Investment) (Ace Bulder)

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Depreciable Assets

Applicable when entire business transfer ?

What if Assets is not Put to use ?
Taxability presumptive taxation?

Exemption on Depreciable Assets

Assessee sold Building for 50 Lakhs

Depreciation was claimed on such Building

Sale consideration on Sale of Land invested in REC

Bonds.

Exemption u/s 54EC?

• Assam Petroleum (262 ITR 587)(Gau)
• Ace Builders (281 ITR 210)(Bom)

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Conversion of Currency is Transfer ?

Conversion of one currency into another

currency, repatriation of foreign exchange.

Not transfer :- (Jaya Kumar and Dilhar

Kumar), (E.ID. Parry Ltd)

Conversion is Transfer :- Kirloskar Asea

Ltd.

Indexation

Assets 49(1)

Assets converted into new assets

FMV for Indexation on April 1, 2011

• CIT V Debmalya Sur (Cal)

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Indexation
Amount Paid in Installment
Indexation from ?
Charanbirshingh Jolly Vs
ITO (Mum)
Can Refer to Valuation
Officer for VMV

Family Settlements

Existence of Dispute and friction

Bonafide Realignment of Interest and

Rights

Not transfer
• CIT v. A.L. Ramanatham (245 ITR 494)(Mad)
• CIT v. Kay ARR Enterprises (299 ITR 348)(Mad)

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Section 10(38)

STT Paid at the time of

Purchase of Share Exemption
Notification 43/2017

Issue of Share, ESOP etc.

Partnership Firm (Sec 45(4))

Amount credited to retired

partner and revaluation of
assets ?

ITO V Ramesh M shah (Mum)

Prashant Joshi V ITO (Mum)

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Partnership Firm (Sec 45(4))

Amount credited to retired

partner and revaluation of
assets ?

ITO V Ramesh M shah (Mum)

Prashant Joshi V ITO (Mum)

Partnership Firm (Sec 45(4))

3 Partner purchase property 5

New Partner entered 3 old
partner out, Capital Gain ?

CIT v Dynamic Enterprises

(2014) (Chennai)

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Compulsory acquisition

Enhanced Compensation received

What if later on compensation reduce ?

What if compensation against security?

When transfer land was not capital assets at

the time of enhancement it will Capital Assets?

Self Generated Assets

Transfer of Self Generated Assets Taxable

Goodwill of business, right to carry on any

business, Tenancy right, route permits etc.

If Not mentioned in above- BC Srinivasa

setty

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Insurance Claim

Condition 1:- compensation

because of “Damage to or
destruction of “ capital assets

Condition 2:- Flood, typhoon,

hurricane nature OR Riot OR
Fire Or enemy action

Insurance Claim

Road Accident ? Vania Silk

Mills P Ltd\d V CIT (SC)

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Capital Gains Exemption

Capital Gains Exemption

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Capital Gain Exemption

Assets sold in the name of husband and purchase in the name
of wife Exemption u/s 54 Allowed or Not ? (V. Natarajan)

Where assessee utilized sale consideration for other purpose

and borrowed the money for purchase of house exemption u/s
54 is available or Not? (Bombay Housing Corporation)

Can the construction of property commence before the date of

transfer. (Bharti Mishra)

If sold urban agri land and purchase rural agri land and transfer
new agri land within 3 Yrs.?

Indexed COA in Gift/Inheritance

“the year in which the

asset was first held
by the assessee”
• Manjula Shah 16 Taxman.com 42 (Bom)
• Jhanvi S Desai 7 TMI 496 (Bom)

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Some other interesting decisions on

Capital Gains…
Sum paid for discharge of mortgage loan taken by previous owner be regarded
as cost of acquisition (Arunachalam (RM) v CIT)

Insurance monies for loss of assets shall be taxable on receipt basis.

Amount paid to tenant for vacating the premises is allowed as

expenses on transfer (Eagle Theatres)

Earnings from letting out property were held to be Income from House
Property.
Though Objects of company to acquire/sell & lease properties (Chennai
Properties & Investments Ltd.)

Some other interesting decisions on

Capital Gains…
Capital loss not allowed under Capital Gain if assets becomes
value less (Natarajan (C.A.) v CIT)

Amount spent on stamp duty for transfer will be allowed as

expenses on transfer (Abdul Qayume v CIT)

Interest paid by firm to partner on its capital at the time of purchase

of assets cant be treated as cost of acquisition (MLG Enterprises)

If Part possession is transfer capital gain should be assessed

proportionately (Jeelani Basha)

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Some other interesting decisions on

Capital Gains…
Stock in trade was bought as capital contributed by Partner sec
45(3) will be applicable. Capital Gain will attract.

In case of compulsory acquisition Original compensation is

received by legal heir, capital gain in the hands of deceased
assessee.

No, Capital Gain on conversion of Debenture into Share.

Transaction is not considered as transfer

Property acquired as grant from Govt. Capital Gain not chargeable

where cost of assets is indeterminate. (B.C. Srinivasa Setty)

Interest on Loan for Acquisition of

Asset
CIT Vs. K. Raja Gopala Rao (2001 252 ITR 459
Mad)
• Payment of consideration for the sale indisputably having been
made with the borrowed funds, the borrowing directly related to
the acquisition and, interest paid thereon would form part of the
cost of acquisition.

ACIT v. C. Ramabrahmam(ITA 943/Mds/2012)

• Deduction of interest on housing loan against income from
house property does not preclude the taxpayer to include the
same interest in the cost of acquisition of the house property at
the time of computing capital gains on sale of such house
property

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 9/12/2018

Section 50C

Section 50C

Transfer of Land or Building or both

Sale consideration would be higher of

• Actual Consideration
• Stamp Duty guidelines if > 105% of Actual consideration

Cases where market value is less than Stamp

Value
• Challenge such value by appeal to Stamp authority
• Refer to DVO

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Section 50C
What if property is transferred under POA & sale
deed not executed ?
• Navneet Kumar Thakkar V ITO(2008)

Difference between Agreement fixing date and

Registration of Sale deed ?
• Bank/ECS

What if valuation officer is not based upon

relevant consideration ?

Exemptions and 50C and 54F

Case Study
• Sale consideration Rs. 40 lakhs
• Guideline value Rs. 70 lakhs; and
• Indexed cost of acquisition Rs. 20 lakhs
• Invested Rs. 45 lakhs
• Sale Consideration 70.00
• Less:- Index Cost 20.00
• LTCG before 54F 50.00
• Exemption u/s 54F (50*45/40) 50.00
• LTCG NIL

Gyanchand Batra vs. ITO 133 TTJ 482 (Jp)

• 54F - Investment of Net Amount actually realised

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Investment v. Stock in Trade

Real Estate Developer can have certain Land as

Investment and certain Land as Stock in Trade

• Kunjilal Gupta vs. CIT (1964) (52 ITR 27) (All)

A Trader in shares can have two separate

Portfolios of Shares held as Investment and Stock
in trade
• Gopal Purohit 228 CTR 582 (Bom)
• Radials International (ITA 1386/Del/2010)
• ACIT v. Moolsons Holdings(ITA No.7254/MUM/2011)

Investment v. Stock in trade

Shares of Private
Limited Company
•CIT v. Renato Finance
and Invesment(Bom HC)

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Exemptions

Investment in Capital Gains Account

Scheme
Upto Due date in Section 139(1)
• 31st July for Individuals – Non Audit cases
• 30th September – Audit Cases or Partners
• Smt. Rosamma Korah [2014] 45 taxmann.com 153 (Cochin) –
Against
• Muthuletchumi J. vs. DCIT (2012) 34 CCH 193 (Cochin Trib.) -
Favour
Utilise the consideration upto due date in 139(4)
• Exemption available
• Fathima Bai vs. ITO (2009) 32 DTR (Kar) 243,
• CIT vs. Jagtar Singh Chawla [2013] 33 taxmann.com 38 (P & H),
• CIT vs. Jagriti Aggarwal (2011) 15 taxmann.com 146 (P & H),
• Nipun Mehrotra vs. ACIT (2008) 110 ITD 520 (Bangalore),

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House Property

CHARGEABILITY
Should be a building or land
appurtenant thereto

Assessee is owner

Not use by business of owner

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Building & Land appurtenant

“‘Buildings’ includes - office building,

godown, warehouse, factory, halls, shops,
stalls, platforms etc
• Basti huts with a life of 5 yrs is building- Tinsukia
development corporation v CIT

Land appurtenant means pertaining to or

belonging to and not adjacent

• If land is capable of being sold separately, not HP.

Some issues

Small house on large property, if land can be

use as separate (CIT v Zaibunniasa Begum)

Person owns building but not the owner of land

upon which building stands (Tinsukia
Development Corporation)

Person provided fund and title deed in any other

name (CIT V Hasina Begum)

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Some issues

Property use by partnership business

and partner is owner –Nil- annual value.
(CIT v Thomas [ker])

Rent of vacant land, is not covered

under HP

Some issues on Annual Value

Municipal tax borne by the tenant NOT added back.
• - (CIT v Gillanders Arbuthnot and co Ltd [Cal])

Repair expenses contractually borne by the tenant NOT added

back.
• - (CIT v Parbutty Churn Law [Cal])

NO notional interest on deposit should be considered.

• - (CIT v Asian Hotels Ltd [Del])

However contrary view

• - (CIT v K. streetlite electric corporation [P&H])

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Some issues on Annual Value

Property let to tenant in Rs. 450000/-

Property sub let by tenant in Rs. 500000/-

What should be the Annual value ?

(CIT v Indra Co Ltd [Cal])

• When unrealised rent shall be excluded :

If the following conditions are satisfied.

1. The tenancy is bonafide.

2. The defaulting tenant has vacated or steps have been

taken to compel him to vacate the property.

3. The defaulting tenant is not occupying any other

property of the assessee.

4. The assessee has taken all reasonable steps to

institute legal proceedings for the recovery of the unpaid
rent

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