CHAPTER Income under the Head "Capital Gains" [Sections 45 to 55A] SECTIONWISE STUDY Sections Parfleulars Discussed under Para | Page 1 7 3 (45, Capital gains la5Ca) Basis of charge Ti | aes }45(1A) ‘Capital gain arises from insurance claims received for damage or destruction of a| 7.13b 313 capital asset \45(1B) Profits or gains arising from receipt of the amount on maturity of high premium unit) 7.13¢ | 314 linked insurance policy chargeable to tax under the head Capital gains [45(2) ‘Capital gain on conversion of capital asset into stock-in-trade 7.134 | 315 [45(2A) ‘Transfer of securities by depository 714 _| 336 |45(3) Capital gain on transfer of capital asset by a partner/member to a firm/AOP/BOI as | 7.13 317 ‘capital contribution la5c@) Capital gain on transfer of apital asst by way of distbution on dissolution ofa firm/| 713 | 318 "AOP. a5) ‘Capital gain on transfer by way of compulsory acquisition ofan asset Tag | 324 [45(5A) | Special provisions for computation of capital gains in case of joint development| 7.13h | 325 ‘agreement las Capital gain on dstrTbuton of asets by companies in liquidation 73k _|_327 sci ‘Whether capital gain arises to company or not 7b, | 294 risk |_327 6A Capital gains on purchase of own shares or seats Ti3s_[ 334 [a7(x), 49(2A) | Capital gain on conversion of debentures into shares 713i | 326 \& rule SAA, [s7(xb), | Conversion of preference shares into equity shares Ty | 37 |49(2AE), [Explanation | to sec lazy fara ‘Withdrawal of exemption in cerainease5 Ts | 6 las ‘Mode of computation of capital gain 75 [296 Section 48 | Capital gain inthe case of wansfer of certain shares(debentares by non-resident 716 | 337 Proviso 1/ Rule 115A [Explanarion | Tadexed cox oF acquisition Th] 308 i 10 seo. 48 [Explanation | Tadexed coxt of improvement Taz] an iv) to sec. 8 kis Deemed cost of acquisition Tea} a Scanned with CamScannerChap.7 Income under the Head "Capital Gains" 287 ~_ Sections Particulars Discussed under Para | Page 1 2 z 50 “Special provision for computation of capital gains in case of depreciable asscts 78g, | 304 [50a Capital gain of depreciable assets of electricity companies 1a 2 [50B ‘Special provision for computation of capital gains in ease of slump sale 73-0 [330 soc ‘Computation of capital gains in realestate transactions 7A3p_| 333, [SOCA Fair market valve to be full value of consideration for transfer of share other than| 7.13q | 333 quoted shares [50D Fair market value to be full value of consideration in certain cases Tse [334 4 Profit on sale of property used for residence 7.18 | 340 S48 Capital gain on transfer of land used for agriculture purposes not to be charged in] 7.19 | 343 certain cases [sa Capital gain on compulsory acquisition of lands and buildings not to be charged in| 7.20 | 345 ‘certain cases [sac Capital gain on transfer of long-term capital assets not to be charged on investmentin | 7.21 | 347 certain bonds S4BE ‘Capital gain not to be charged on investment in units of a specified fund 722 | 348 [sar Capital gain on transfer of certain capital assets not to be charged in case of 723 | 348 investment in residential house [sac Exemption of capital gains on transfer of assets in cases of shifting of Industrial 724 | 350 ‘Undertaking from urban area IS4GA ‘Exemption of capital gain on transfer of asets due to shifting of industrial 725 | 353 ‘undertaking from urban area to Special Economic Zone [S4GB Exemption of long-term capital gains tax on transfer of residential property invested | 726 |” 353 ina new manufacturing SME company sant Extension of time for acquiring new asset or depositing or investing amount of capital | 7.27 | 355 gain iss ‘Meaning of cost of improvement and cost of acquisition” 55(1(6) __| Cost of improvement 710_|_308 55(2) Cost of acquisition 78_| 299 [Other Sections discussed in this Chapter 4 laa) Capital asset defined 72a_[ 288 [2226 Fair market value defined 7.80 | 302 [229B) Long-term capital gain defined 7.20(2) | _292 Ia@2ay ‘Short-term capital asset defined 726(1) | 290. [acaaBy ‘Short-term capital gain defined 7.26(2) | 292 faaacy Slump sale defined 713-0 [331 i2a7) ‘What is transfer? 73a_| 293 [2asy “Meaning of Zero Coupon Bond 2 7.13a_[ 313 1037) Capital gains on compensation received on compulsory acquisition of agricultural and | 7.17A [339 situated within specified urban limits TTA “Fax on short-term capital gains in case of equity shares and units of equity oriented fund | 7.28 | 356 12 ‘Computation of tax on Long Term Capital Gains other than refered to in section 112A [7.29 [357 naa "Tax on long-term capital gains in certain cases 7.30_|_360 TSF “Exemption of Tong-term capital gains arising to non-resident Indian on transfer of 7.160 | 338 “foreign exchange asset’ nis ‘Option not to avail ofthe provisions of section 115F 7.166 | 339 Scanned with CamScanner7” Systematic Approach wo Income Ta Chap. 7 HOW TO COMPUTE CAPITAL GAINS (Computation of Short-term Capltal Galas ull value of consideration Ee Tess (@) Expenditure incurred wholly and exclusively Th Connection With auch a TaNsTe, [By Cost of acquisition = (©) Cost of improvement = Es [Gross short-term capital gains eS ess: Exemption, available, ws BSD SGHOA Es Taxable Shor term capital gains 7 (Computation of Long-term Capital Gains ull value of consideration = ess: (a) Expenditure incurred wholly and exclusively in connection with sucha taster = By Ircexed Cost af eoquisition = [(@) Indexed Cost of improvement 7 = Long-term capital gains Ee Less: Exemption ifavailable ws $4348 HEC SER SP MGSIGA MOB Eas Taxable Tong-term capital gains = ‘SYSTEMATIC STUDY. 7.1 Basis of Charge [Section 45(1)] Any profits of gains arising ftom the rmgfer of « capital ase effected in the previous year, shall be chargeable to ‘incomestax under the head ‘Capital Gains’ and shall be deemed to be the income of the previous year in which the transfer took place unless such capital gan is exempt under section 3, S4B, SMD, S4EC. MEE, SUF, SAG, 34GA oF SHGB. ‘The following are the essential conditions for taxing capital gains: (A) there must be a capital asset; (B) the capital asset must have been transferred: (C) there must be profits or gains on such transfer, which wil be known as capital gain; (D) such capital guin should not be exempt under section $4, $4B, $4D, S4EC, SHEE, S4F, $4G, SAGA or SAGB. Ifthe above conditions are satisfied, the capital gan shall arise and taxed in the previous year in which the asset is transfered, subject to certain exceptions mentioned in para 7.4, T._Inease of profit or gain fom insurance claim, due to damage or desraction of property, there will be capital pain although no asset has been actually transfered in such case [Seetion 45(1A)] Reter para 7.130. 2. Similarly, where a specifi person (ée, partner ofa firm ora member of AOP/BOI) recelves any stock in trade of a capital asset from the specified entity (Ze. trom a firm or AOP of BOI) in connection with diswohition ot reconstitution ofthe specified entity, the profit or gain fom the receipt of stock in trade ce capital asset in sommection ‘with the dissolution reconstitution willbe treated as deemed transfer and liable to tax in the hands ofthe specified entity as business income in case of stock in trade and capital gain incase of capital asset, Further thereat reconstitution ofa specified entity, section 4S(4) may also get attracted in the hands of the specified entity: For deuils see para. 7.132) 7.2 (A) There must be a capital asset Capital gain arises ony when a capital asst is transferred. the aset transferred is not a capi twit covered under te head apa gi beta er lacey] Dhar) 7.2a What isa capital asset [Section 2(14)]: “Capital asset” means— (propery of any kd held by an asessee, whether or not connected With his business of profession; (b) any securities held by a Foreign Institutional Investor which bas invested i ities i ’ Ceidmnntieds Secteninaad Rehumchanl stile oe 1090, wn euntes in accordance withthe (©) any unit linked insurance policy to which exemption under section 10(L0D) does not applicability ofthe fourth and fith proviso thereof. (Inserted by the Finance Act Fourth and fith proviso of section 10(10D) relate to payment ot aggregate pe £22,50,000 made in any previous year in case of Unit Linked Insurance Plicy Poli ty on account of the 2021 Weel AY, 2021-2022). iyments of premium exceeding ies issued on or after 1-2-2021, Scanned with CamScannerChap. 7 Income under the Head "Capital Gains" 289 ‘but does not include— any stock-in-trade [other than the securities referred to in sub-clause (6) above], consumable stores or raw (O atrial eld for te purposes ot his business cr profession, (i personal effects, that isto say, movable property (including wearing apparel and furniture), held for personal use by the assessee or any member of his family dependent on him. However, the following assets shall not be treated as personal effects though these assets are moveable and may be held for personal use: (2) jewellery; (0) archaeological collections; (©) drawings; (A) paintings; (©) sculptures; o D_any work of ar. T. The house property, in which the assessee ives, is though intimately used by him for personal purposes, but it will not be a personal effect as it isan immovable property 2, Personal effects are no doubt ‘assets’ but they are not called capital assets for capital gain purposes. ‘Similarly, stock in trade, et., are assets but these are not capital assets for capital gain purposes. 3. Jewellery includes— (a) omaments made of gold, silver, platinum or any other precious metal or any alloy containing one or ‘more of such precious metals, whether or not containing any precious or semi-precious stone, and ‘whether or not worked or sewn into any wearing apparel; (8) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked ‘or sewn into any wearing apparel. 4, Securities held by forcign institutional investors (FU) shall always be treated as capital asset. These cannot be treated as stock-in-trade. 5. "Securities" include— (osshares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities ofa like nature in ‘or of any incorporated company or other body corporate; (ia) derivative: (ib) units or any other instrument issued by any collective investment seheme to the investors in such schemes; (ic) security receipt as defined in clause (-g) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (id) units or any other such instrument issued to the investors under any mutual fund scheme;] (ie) any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including morigage debi, as the ease may be; (ii) Government securities: ia) such other instruments as may be declared by the Central Government to be securities; and (iii)_rights or interest in securities. (iii) agricultural land in India, which i not an urban agricultural land. In other words, it must be a rural agricultural land; ‘Rural agricultural land means an agricultural Tand in India— (©) if situate in any area which is comprised within the jurisdiction of a municipality (whether known as a ‘municipality, municipal corporation, notified area commitce, town committee or by any other name) and its population should be less than 10,000, or (If situate outside:the limits of municipality, etc. it should be situated at a distance, measured aerally (shortest aerial distance),— () being more than two kilometers, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than 10,000 but not exceeding 1,00,000; or (i) being more than six kilometers, from the local limits of any municipality or eantonment board refered to in item (a) and which has a population of more than 1,00,000 but not exceeding 10,00,000; or Scanned with CamScanner290 ‘Systematic Approach to Income Tax Chap.7 (III) ‘being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than 10,00,000. ‘The expression "population" means population according to the last preceding census of which the relevant figures have been published before the first day ofthe previous year. (©) Urban agricultural land is although a capital asset but any capital gain arising from the compulsory ‘acquisition of such land shall be exempt as per section 10(37) if certain conditions mentioned in that section are satisfied (i) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under Gold “Monetisation Scheme, 2015 and 2019 notified by the Central Government. (1) Property of any kind: As can be seen, the definition of capital asset is very sweeping nature and covers the Property of any kind barring the exceptions mentioned above. Property of any kind used in section 2(14) are of ‘widest amplitude and include not only tangible assets but also intangible rights. It may be either corporeal or ‘incorporeal. Corporeal means of a material nature ¢. physical things like land, building, jewellery, shares, cars, scooter, etc. Not only these assets but non-corporeal assets like route permits for buses, tenancy rights, lease hold rights, copyrights, etc. wll also be covered under the definition of capital assets (2)_ Property held to be capital assets: All assets like goodwill, leasehold rights, manufacturing licence, route permits, shares of companies, residential or commercial houses, patents and trade marks, jewellery, land are called capital assets. However, assets meant purely for personal use and which are movable like household utensils, appliances, furniture, carpets, TV set, refrigerators, musical instruments for personal use, vehicles like cycle, scooter car only for personal use are not to be treated as capital assets as these will be covered under personal effects. However, ifthe car is used in the business or profession, it will not be treated as personal effect and thus lable to capital gai The property transferred must be capital asset on the date of transfer: To attract charge of capital gain, the property transferred must be a capital asset on the date of transfer and itis not necessary thet it should have been a ‘capital asset also on the date of the acquisition by the assessee. Ifthe concemed asset does not fall with in the definition of capital asset on the date of transfer, no capital gain can be levied. 7.2b Types of capital assets Capital assets are of two types: (0). Short-term capital asset (2) Long-term capital asset (1) Short-term capital asset [Section 2(42A)|: 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. Exceptions () The following assets shall be treated as short-term capital assets if they are held for not more than 12 months (instead of 36 months mentioned above) immediately preceding the date of its transfer (@) a security including shares (other than unit) listed in a recognised stock exchange (8) a.unit of an equity oriented fund (6) &2er0 coupon bond (i) The following assets shall be treated as short-ierm capital assets if they are held for not more than 24 months {instead of 36 months/12 months mentioned above) immediately preceding the date of Us transfer. (@) Share of a company (not being a share listed in a recognised stock exchange in India) (b) An immovable property being land and building or both. Hence, if unlisted share or immovable property is transferred after 24 months fom the date of its acquisition, the sain arising from the transfer of share or immovable property shall be treated as long-term capital gain rma of certain period for computing the period of holding of an asset {Explanation \(i) to section 24: ‘The period of holding in the following cases shall be determined as under: Case Exclusion/Inclusion of period (@_ Shares held in a company in liquidation [Exclude the period subsequent tothe date of liquidation |i) Property acquired in any mode given under [Include the holding period of previous owner also, section 49(1) (e.g. by way of gift will, ete.) India Scanned with CamScannerChap.7 Income under the Head "Capital Gains” 291 |i) Inventory converted in to or treated as a capital [The period shall be reckoned ffom the date of its asset referred to in section 28(via) (conversion or treatment (Inserted w.e.f. A.Y. 2019-20) |e) Shares in an Indian Amalgamated Company Include the holdi i . ling period of shares in the acquired in a scheme of Amalgamation |Amalgamating Company by the Assessee, |) Shares in Indian Resulting company acquired in lInchude the holding period of shares in the Demet case of demerger [Company by the Assessee ia ((w (@) Trading o clearing rights of recognised stock |Include the period for which the person was @ member exchange pursuant to its demutualisation or lof the recognised stock exchange in India corporatisation (B) equity shares in a company acquired by a |include the period for which the person was a member person pursuant to the demutualisation or lof the recognised stock exchange in India corporatisation of recognised stock exchange (vi) Capital asset, being a unit of @ business trust, Include the period for which the share or shares were allotted pursuant to transfer of share or shares as {held by the assessee. referred to in section 47(xvii) |(i) Unit or units, which becomes the property of the |Include the period for which the unit or units in the assessee in consideration of a transfer referred to {consolidating scheme of the mutual fund were held by in section 47(2vitf) the assessee (a) Share or debenture of a company, which becomes [Include the period for which the bond, debenture, the property of the assessee in the circumstances |debenture-stock or deposit certificate, as the case may ‘mentioned in section 47(x) of the Act. (ce. |be, was held by the assessee prior to the conversion. conversion of bonds or debentures into shares oF debentures of the same company) [See rule 8AAQ)] [(® In the casc of a capital asset, being equity shares [Include the period for which the preference shares were in a company, which becomes the property of the |held by the assessee assessee in consideration of a transfer referred to in section 47(xb) (ie. conversion of preference share into equity share) (Ga _In the case of a capital asset, being a unit or units, [Include the period for which the unit or units in the which becomes the property of the assessee in |consolidating plan of a mutual fund scheme were held consideration of a transfer referred to in section [by the assessce 47(xix) (i.e. transfer of units held in the consolidating plan of a mutual fund scheme to ‘consolidated plan ofthe scheme. (Gi) In the case of a capital asset, being @ unit or units [Include the period for which the original unit or units in in a segregated portfotio, referred to in section |the main portfolio were held by the assessee. 492AG) ‘Mlastration 7.1: Inthe following cases, determine whether the asset held was shor-tem or long-term capital asst. (@ Rholds 1000 shares in G Lid., a listed company, which goes into liquidation on 31.10.2022. R purchased these shares ‘on 31.1.2022. The company made the payment to R on 31.3,2023. R got a diamond ring by way of gift ftom his uncle on 1.1.2022. This ring was purchased by his uncle on 30.12.2019. R sold ths ring on 31.12.2022. R acquires 1000 shares in G Ltd, a listed company, on 28.2.2022. He surrenders these shares to the company on 31,8202) in pursuance of scheme of amalgamation. He is allotted 500 shares in S Ltd., a listed company, the amalgamated company in lieu of such shares surrendered, R sells these shares on 31.3.2023. R acquires 1000 shares in G Ltd, a listed company, on 29.3.2022. He is allotted 500 shares ofa resulting company S Ld. listed company, in the scheme of demerger on | 4.2022, He transfers these shares on 29.3.2023. Solution (a). Short-term capital asset (since shares were held for 9 months 311.2022 to 31.10.2022), (8) Long-term capital asset (holding period more than 3 years 30.12.2019 to 31.12.2022), (©). Long-term capital asset (holding period more than one year 28.2.2022 to 31.3.2023). (@ Long-term capital asset (holding period more than one year 29.3.2022 to 29,3.2023) as 12 months will end on 28.3.2023. See Bharti Gupta Ramola v CIT above. o 0 @ Scanned with CamScanner292 @ Systematic Approach to Income Tax Chap.7 Holding period in case of shares or any other security [Explanation \(y(e) and (0 ‘The period of holding, inthe following circumstances will be computed as under: 1. [Right to subscribe to shares or any other lsecurities(may be called as financial assets subscribed to by the assessee on the basis of right to [subscribe to such financial assets. [The period shall be reckoned from the date of allotment lof such financial asset. 2. [Right to subscribe to share or any other securities lacquired by a person in whose favour the right has [been renounced by the existing holder. [do 3. [Period of holding of the right by a person who has renounced the right. IThe period shall be reckoned from the date of offer of uch right by the company or institution 10 the date of Irenouncement, which in normal circumstances will be short-term. 4, [Period of holding of a financial asset allotted hwithout any payment and on the basis of holding of lany other financial asset e.g. bonus shares. [The period will be reckoned from the date of allotment lof such financial asset (not from the date of allotment lof the original shares). [Period of holding of specific security or sweat lequity shares allotted or transferred, directly or indirectly, by the employer free of cost or at @ concessional rate to his employees (including former employees). [The period shall be reckoned from the date of allotment lor transfer of such specific security or sweat equity {share ‘6. [Share or shares of a company, which is acquired by Ithe non-resident assessce on redemption of Global [Depository Receipts referred to in section 15ACCAX6) IThe period shall be recknoned from the date on which a Irequest for such redemption was made For calculating period of holding of capital asset, Gupia Ramola v CIT (2012) 20 Taxmnan.com 762 (Del)) The date on which the asset is transferred should be included eg. ifthe date of sale of an asset is 1.12.2022, the period of holding shall be calculated till 1.12.2022. [Bharti the head “Capital gains” Gai) Incase of the amount which is chargeable to income-tax as income of specified entity under section 45(4) under the amount or a part of it shall be deemed to be from transfer of short-term capital asst, if tis attributed to,- (a) capital asset which is short-term capital asset at the time of taxation of amount under of section 45(4); or (b) capital asset forming part of block of asset; or (©) capital asset being self-generated asset and self-generated goodwill as defined in clause (ii) of Explanation to sub-section (4) of section 45; [Rule 8AA(S)]. [Notification No. 76/2021] Long-term capital asst [Section 2(29AA)| It means a capital asset which is not a short-term capital asset. In other words ‘an asset will be treated as a long-term capital asset. if the asset is held by the assessee for more than 36 months/24 months/12 months, as the case may be, such Type of capital gains: Since there are two types of capital asses, there wll be 1wo types of capital gains ie — (i) [Section 2(42B) short-term capital gain — [gain arising on the transfer of short-term| capital asset (Gi _| Section 2(29B) long-term capital gain — gain arising on the transfer, of long-term| capital asset. “There is a need to Take the distinction between short-term and long-term capital gain as short-term capital gain (other than referred to in section 111A) like any other incomes is taxable at normal rate of income-tax, whereas long-term capital gain is taxed at a concessional rate, (B Capital asset must have been transferred 7.3 Capital gain arises only when there is a transfer of capital asst. Ifthe capital asset isnot transfered of there is any transection which isnot regarded as transfer (See para 73, there will ot be any capital gai However, in case of profits or Scanned with CamScannerchp.7 Income under the Head "Capital Gains" _ ~ Paar eee due to damage or destruction of property, there will be capital gain although no asset has been 3a What is transfer [Section 2(47)] ‘Transfer, in relation to capital asset, includes: (Othe sale, exchange or relinquishment of the asset; or (ii) the extinguishment of any rights therein; or (iii). the compulsory acquisition thereof under any law; or (iv) ima case where the asset is converted by the owner thereof into, or is treated by him, as stock-in-rade ofa business carried on by him, such conversion or treatment; or (0). the maturity or redemption of zero coupon bonds; or (#) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract ofthe nature referred to in section 53A of the Transfer of Property Act, 1882; or (vi) any transaction (whether by way of becoming a member of, o acquiring shares in a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of any immovable property. (1) Sale, exchange or relinquishment of the asset (@ Sale: There is no definition of sale under the Income-tax Act, 1961. In order to find out legal implication of sale ‘one must resort to the Transfer of Property Actin the case of immovable property and to the Sale of Goods Act in the case of movable property ‘Section 54 of the Transfer of Property Act which defines sale and also deals with mode of transfer and contract for sale reads as under: Sale is a transfer of ownership in exchange fora price paid or promised or part-paid and part promised. (©) Exchange: When two persons mutually transfer the ownership of one thing for the ownership of another, neither thing or both things being money only, the transaction, according to section 118 of the Transfer of Property Act, 1882 is called an exchange. The definition of the word exchange is not limited to immovable property. It also includes barter of moveable assets. Like sale, exchange requires two persons. There cannot be exchange with one self. Exchange covers both ‘movable and immovable properties. Exchange is a bilateral transaction involving two parties each of whom ‘owns an asset which constitute the subject matter of exchange. While in the case of sale, the consideration for transfer is necessarily money, in the case of exchange, the consideration is another asset. Person liable to be assessed in exchange: In this case, though there is only one transaction of exchange, the tax liability is on two persons on different amounts of notional gain. Further, one of them may be liable to short- term capital gains tax and the other to long-term capital gains tax. : (©) Relinguishment of the asset: Relinguishment means withdrawn from, abandoning or giving up anything. By relinguishment a person ceases to own the asset concerned through some act on his part. In other words, the ‘owner withdraws himself from the properly and abandons his rights hereto, The property, however, continues to cexist and will become the property of someone else. (2) Extinguishment of rights in an asset: Extinguishment connotes total destruction, annihilation, termination or ‘extinction of a capital asset. However, destruction or extinction of a capital assct is not regarded as transfer except in ase of section 45(1A) (refer para 7.13b). Infact, there should be a destruction or extinction of "rights” in the capital eset as it may be noticed that in respect of the expression "rlinquishment or Exchange”, the subject matter of ‘transfer is "assets and in case of extinguishment", it is "rights", Examples of extinguishment— (i. Forfeiture of shares is an extinguishment of right. i) Extinguishment of capital rights. (iii). Reduction of share capital ofa company and payment to share holders. ‘Where there is a reduction of capital by a company and repayment is made to the shareholders, such repayment has two components: (a) distribution attributable to accumulated profits which will be chargeable as deemed dividends as per section 2(22)(d), and () distribution attributable to capital which will be subject to capital gain tax. ‘acquisition thereof under any law: Section 2(47) of the Income-tax Act includes compulsory i Scaetion cpt ‘asset under any lavas transfer for the purposes of section 45 of the Act. ete Scanned with CamScanner294 ‘Systematic Approach to Income Tax Chap. 7 Acquisition of immovable properties under the Land Acquisition Actor acquisition of industrial undertaking under the Industries (Development and Regulation) Act are some of the examples of compulsory acquisition of a capital asec tn such cases, tough the asesiee was not willing to anf the asst, it has been compulsorily acquired (A) Ina case where the capital asset is converted or treated by the owner as stock-in-trade of a business carried on by ‘him, such conversion or treatment: Though, normally there can be no transfer if the ownership in an asset remains ‘withthe same person, however, the Income-tax Act provides an exception. When a person converts any capital asset ‘owned by him into stock-in-trade of a business carried on by him, it is regarded as a transfer. For example, where an investor in shares starts a business of dealing in shares and teats his existing investments as the stock-intrade ofthe new business, such conversion is regarded asa transfer. () Any transaction involving the allowing of the possession of any immovable. to be taken or retained in art performance of the contract of the nature referred to in section 53A of the Transfer of Property Act: ‘Normally transfer of an immovable property worth 2100 or more is not complete without execution and registration of a conveyance deed. However, section 53A of the Transfer of Property Act envisages situations where under 8 contract for transfer of an immovable property, the purchaser has paid the price and has taken possession of the property, but the conveyance is not registered. In such cases the transferor is debarred from agitating his tie to the property against the purchaser. ‘This would cover cases where (a) possession of the property has been handed over to the buyer; (b) sale consideration has been paid tothe seller; (c) then although the sale deed has not been executed in favour ofthe buyer certain other documents like Power of Attorney/Agreement to SelVWill, etc. have been executed and registered. In this case, the buyer will be deemed to be the owner of the property The Act of giving possession of an immovable property in part performance of a contract is treated as ‘transfer for the purposes of capital gains tax. This extended meaning of transfer applies also to cases where possession is already with the purchaser and he is allowed to retain it in part, performance of the contract. (© Any transaction which has the effect of trarsferring or enabling the enjoyment of any immovable property (whether by becoming a member of, or acquiring shares in a cooperative society, company or other association of persons by way of any agreement or arrangement or any other manner whatsoever): Usually flats in multi- Storeyed building and other dwelling units and plots in group housing schemes are registered in the name of a co- ‘operative society formed by the individual allottes. Sometimes, companies are also floated for this purpose and allottees take shares in such companies. The sharcholder/member in this case are deemed owners of the flavVhouse/ land although the legal owner is the co-operative society or the company. Ifthe deemed owner transfers the rights to tse and enjoy the flat by changing the membership of co-operative society or by transferring the shares in the company, it willbe treated asa transfer. Examples of transfer (@) Redemption of preference shares by a company isa transfer inthe hands of shareholders and they will be liable to capital gain forthe same. [Anarkali Sarabai v CIT (1997) 90 Taxman 509 (SC)] (®) Conversion of preference share into ordinary shares amounts to transfer in hands of the shareholders. [CIT v ‘Motors and General Stores P. Ltd. (1967) 66 ITR 692 (SC)]. (©) Distribution of capital assets in case of liquidation of a company is nota transfer in the hands of the company but a transfer in the hands of the shareholders. (@ Proprietary business taken over by a firm. (CIT v Ramakrishnan (1969) 73 ITR 356 (Ker)(FB)], (©) Slump sale of an undertaking ofa business (Section 50B). () Grant of mining lease at premium [4.R. Krishnamurthy and Another v CIT (1989) 176 ITR 416 (SC) © Saanior ream received for lease of plots for 99 years [R.K. Palshikar HUF v CIT (1988) 172 ITR 310 (sc) 7.3b Transactions not regarded as transfer [Sections 46 and 47] 47. “The meaning of transfer is given in section 2(47), whereas transactions not regarded as transfer are covered wss 46 and Inman waneactons although there is a transfer but these are not considered to be transfer for purposes of capital guns. ‘Some of the relevant transactions which are not regarded as transfer are; ( (i). where the assets ofa company are distributed to its shareholders on liquidation of @ company, such distribu ot be regarded as transfer inthe hands ofthe company [Section 46(1)} pany, such distribution shall (a any distribution of capital asses onthe total or partial partion of Hindu Undivided Family [Section 47(0]; iii) any transfer of a capital asset under a gift or will or an irrevocable trust (Section 47(i)}; (is). any transfer of capital asst by a company tits 100% subsidiary company provided the subsidiary company is an Indian company [Section 47(i)} Scanned with CamScannerchap. 7 ‘Income under the Head "Copital Gains" 295 (©) any transfer of a capital asset by a 100% subsidiz __ Indian company [Section 47(¥)]. (0) any transfer in a scheme of amalgamation of a capital asset by the amalgamatin, Regu heap yas nda aay 2 ung company tthe amalgamate (vit) any transfer in a scheme of amalgamation of shares held in an Indian company by the amalgama i company tothe amalgamated foreign company if certain conditions are snisicds ?“'* Amatgamatig foreign (iit) any transfer, in a demerger, of a capital asset by the demerged company to the resulting company, ifthe resulting company is an Indian company (Section 47(vib)|; 7 7 a (a) any transfer in a demerger, of a capital asset, being a share or shares held in an Indian company, by the demerged foreign company to the resulting foreign company, if certain conditions are satisfied. (@)_ any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the eneaed Company if the transfer or issue is made in consideration of demerger of the undertaking (Section (vid); (x) any transfer by a shareholder, in a scheme of amalgamation, of shares held by him in the amalgamating company if certain conditions are satisfied: (rif) any transfer of Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015, by way of redemption, by an assessce being an individual. (iif) any transfer ofa capital asset, being— (a) bond or Global Depository Receipt referred to in section 11SAC(1); or (b) rupee denominated bond ofan Indian company; ot (©) derivative, or i ite oie securities as may be notified by the Central Government in this behalf (clause (d) inserted by the nance (No. 2) Act, 2019, wef. A.Y. 2020-21). tmade by a non-resident on a recognised stock exchange located in any International Financial Services Centre and ‘Where the consideration for such transaction is paid or payable in foreign currency. (Section 47(viiab)]; xv) any transfer of a capital asset, being any work of art, archaeological, scientific 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 {Section 47()]; (o) 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 [Section 47(2)]; (evi) any transfer by way of conversion of preference shares of a company into equity shares of that company (Section 41Gb); (evit) 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 provided the following conditions are satisfied: (@) all the assets and liabilities ofthe firm, 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 ofthe succession; (© 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; (a) the aggregate of the shareholding in the company of the partners of the firm is not less than $0% of the total voting power in the company and thei Shrcoldng continues tb as sch fo a peridot 5 years fom the date of the succession [Section 47(xi)}; an Covi) any tansfer of capital eto tangible ast by a private company o unsted pubic company hereatirin this Clause referred to as the company) to a limited liability partnership or any transfer of a share or shares held in the ‘Company by a shareholder asa result of conversion ofthe company into limited liability partner-ship in accordance Sith the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008 provided following conditions are satisfied: (@) all the assets and liabilities ofthe company immediately before the conversion become the assets and libilities of the limited liability partnership; (© all the sharcholders of the company immediately before the conversion become the partners of the limited Tiability partnership and their capital contribution and profit sharing ratio in the limited liability parmership are inthe same proportion as their shareholding in the company on the date of conversion; lary company to its holding company, if the holding company is an Scanned with CamScannerad Systematic Approach to Income Tax Shem (© the shareholders ofthe company do not receive any consideration or benefit, direct or indirectly. in any form or manner, other than by way of share in profit and capital contribution inthe Limited liability partnership; (@) the aggregate of the profit sharing ratio of the sharcholders 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; (©) the total sales, tumover or gross receipts in 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 (ca) te toll value ofthe assets as appearing in the books of account of the company in any ofthe three Previous years preceding the previous yearn which the conversion takes place doesnot exceed £9 erore; and (D1 amount is pad, 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. {Section 47(xiid)}; For the purposes of this clause, the expressions "private company” ‘the meanings respectively assigned to them in the Limited Liabli section 47¢xtib)] (xix) where a sole proprietary concem is succeeded by a company sole proprietary concern sells or otherwise transfers any capital asset or i following conditions are satisfied (@) all the assets and libilties of the sole proprietory concem relating to the business immediately before the succession become the assets and liabilities ofthe company; (8) the shareholding of the sole proprietor in the company is not less than $0%, of the total voring power in the company and his shareholding continues to remain as such for a period of 5 years from the date of the succession; and (©) the sole proprietor does not receive any consideration or benefit, diretly or indirectly, ‘other than by way of allotment of shares in the company [Section 47(xis)]; (x) any transfer of a capital asst in a transaction of reverse mortgage under a scheme made and notified by the Central Government [Section 47(2vi)]; (exi) any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating scheme of a ‘mutual fund, made in consideration of the allotment to him of a capital asset, being unit or units, in the ‘consolidated scheme of the mutual fund shall not be regarded as transfer. Provided that the consolidation is of two or more schemes of equity oriented fund or of two or more schemes of a fund other than equity oriented fund [Section 47(xvt)]; (exit) any transfer by a unit holder of a capital asst, being a unit or units, held by him in the consolidating plan of a ‘mutual fund scheme, made in consideration ofthe allotment to him of a capital asset, being a unit or units, in the Consolidated plan ofthat scheme of the mutual fund. (Section 47(xi)] Tt may be observed that the above transactions are not treated as transfer for purposes of capital gains. 7.4 Capital gain should arise in the previous year in which transfer took place ‘Normally, capital gain arises in the previous year in which the transfer of the asset takes place even if the consideration for the wansfey ie received or realised in a later year. There arc, however, 4 exceptional cases where capital gain is taxable not in the year of transfer of the aset, but in some other year. These exceptions are: (damage or destruction of any capital asset by fire or other calamities (discussed in para 7.13); id) conversion of capital asset into stock-in-trade (discussed in para 7.13¢); (ii) compulsory acquisition ofan asset (discussed in para 7.130. (iv) transfer of capital asset, being land or building or both by an individual HUF under a specified agreement with the developer [Section 45(SA)] (discussed in para 7.132) sale 7.5 Computation of capital gains [Section 48] ‘As already discussed, capital gains are of two types: (Short-term capital gain which arises on the transfer ofa short-term capital asset; and i), Long-term capital gain which arises onthe transfer ofa long-term capital asset Short-term capital gin isthe exces ofthe fill vl of consideration over the aggregate of the following thre: (i) expenses of transfer, wo cost of acquisition ofthe asset and cost of improvement there to ily or simse Gi, see amendmen blow ‘and “unlisted public company” shall have ity Partnership Act, 2008. [Explanation to Tm the business carried on by it as a result of which the intangible asset to the company provided the in any form or manner, I Scanned with CamScannerChsp.7 Income under the Head "Capital Gains” 207 ‘Whereas in the case of long-term capital gain, the capital ga the aggregate of the following three amounts (Expenses of transfer; (ii) Indexed cost of acquisition of the asset and Indexed cost of improvement (see also exceptions below); (il) for clause (ii), see amendment below. From capital gain, computed as above, certain exemptions are available under sections $4/54B/S4D/S4EC! S4F/54G/S4GA/S4GB. The capital gain after claiming the said exemption(s) is known as taxable long-term or short-term capital gain. A format to compute the capital gain is given below: ‘Computation of Short-term Capital Gain: Full value of consideration Tess: (a) Expenditure incurred wholly and exclusively in connection with such a shall be the excess of the full value of consideration over transfer, (@) Cost of acquisition a (© Cost of improvement S| i Gross short-term capital gains Less: Exemption, if available, ws S4B/S4D/S4G/S4GA Taxable Short-term capital gains, [Computation of Long-term Capital Gains Fall value of consideration Less: (a) Expenditure incurred wholly and exclusively in connection with such a transfer (0) Indexed Cost of acqui (@) Indexed Cost of improvement Long-term capital gains Less: Exemption i Taxable long-term capital gains Amendment made by the Finance Act, 2021 Due to substitution of section 45(4) by the Finance Act, 2021, the following elause (lif) has been inserted in section 48 we. ALY. 2021-22 for the purpose of computation of capital gain Tn ease of value of any money or capital asst received by a specified person from a specified entity referred to in section 45(4), the amount chargeable to income-tax as income of such specified entity under that sub-section which i aributable to the epital asset being transferred by the specified entity, calculated in the prescribed manner.[Foratibution of cos ee rules 8AA(S) and 8AB under section 45(4) para 7.134] Note._The above clause (ii is applicable for computation ofboth short-term or long-term capital gain. ion. lable ws 54/54B/S4D/S4ECIS4BE/S4F/S4GISAGA/S4GB = Exceptions Computation of eptal gain incase of non-resident who transfered the shares/debentures ofan Indian company op mcre acquired in foreign currency [First proviso 10 section 48 In the case of an assesse, who is a non venent capital gains arising from the transfer ofa capital asset being shares in, or debentures of, an Indian ‘company shall be computed by converting the cost of acquisition, texpenditureincured wholly and exclusively in connection with such wansfer and the fll value ofthe consideration received or accruing as a result ofthe transfer of the capital aset athe same rorcign currency as was initall utilised in the purchase ofthe shares or debentures, and the capital sr one muted in such frig currency shal be resonvered into Indian currency, o however, ht the aforesaid xin so com nputation of capital gains shall be applicable in respect of eaptal gains accruing or arising from every rane at thereafter in, and sale of, shares i, or debentures of, an Indian company. eanvermetpove proviso was inserted so as nolo tax the capital gin inthe hands of «non-resident on account of aan cy fuctuation in transection relating to purchase and sale of shares, 2 Cost of acquisit sment to be indexed in case of long-term capital asset unless otherwise specified a aca ro econ 4p: Where longterm copia gin arses om the tanfr ofa long-term capt est {Second provapite gain arising to # non-resident from the transfer of shares in or debentures of, an Indian Scanned with CamScanner‘Systematic Approach to Income Tax ‘Chap. 7 company referred to in the first proviso, the cost of acquisition and cost of improvement mentioned under clause (i) of section 48, above, shall be substituted by the words “indexed cost of acquisition” and “indexed cost of improvement”, respectively. First and second proviso not to apply in case of long-term capital asset referred to in section 112A[Third proviso to section 48): The above first and second provisos shall not apply tothe capital gus arising from tho Wansfer ofa long-term capital asset being an equity share in a company or a nit of an equity oriented fund or a unit ofa business trust referred to in section 112A. ao i Indexation of cost of acquisition/improvement not allowed in certain cases [Fourth proviso 10 section Indeation of ast of econ and idee cost of mprvemet refed to a second proviso above shall not apply to the long-term capital gain arising from the transfer of a long-term capital asset, being a bond or debenture other than— (@) capital indexed bonds issued by the Government; oF (6) Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015, inst a foreign currency to be ignored at the time of redemption of rupee denominated bond [Fifth proviso to section 48}: In case of an assessee being a non-resident, any gains arising on account of appreciation of rupee against a foreign currency atthe time of redemption of rupee denominated bond of an Indian company held by him, shall be ignored for the purposes of computation of full value of consideration under this section 1. Where shares, debentures or warrants referred to in the proviso to section 47(Hi) are transferred under a gift or an itrevocable trust, the market value on the date of such transfer shall be deemed to be the full value of consideration received or accruing asa result of transfer forthe purposes of this section: [Sixth proviso to section 48] 2, No deduction shall be allowed in computing the income chargeable under the head “Capital gains” in respect of any sum paid on account of securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004] [Seventh proviso to section 48] 7.6 Full value of consideration Full value of consideration means what the transferor receives, or is entitled to receive as consideration for the capital asset transferred. It is not necessarily always the market value of the asset on the date of transfer. The Legislature has used the expression full value of consideration instead of merely saying consideration because the transfer for the purpose of section 45(1) includes not merely sale, but also other modes of transfer such as exchange, relinquishment of the asset, ‘extinguishment of rights in the capital asset, etc. In a case of transfer where the consideration is not in money, the value placed by the partes tothe transaction will have to be taken as the consideration, ‘The expression full value means the whole price without any deduction whatsoever and it cannot refer to the adequacy or inadequacy of the price bargained for. Nor has it any reference to the market value of the capital asset which is the subject ‘matter of transfer. Receipt of consideration in instalments: Even if te full value of consideration agreed upon is received in instalments in Aifferent years, the entire value of consideration has to be taken into account for computing the capital gains which become chargeabie in the year of transfer. Consideration in case of exchange: In case of exchange, the full value of consideration shall be the market value of the property granted in exchange. Deemed full value of consideration: In some cases, instead of actual consideration, the full value of consideration shall be the deemed value. Such cases have been summarized inthe table given below: ‘Summarised Table of deemed value of consideration 3 SLNo ‘Mode of Transfer Deemed full value of consideration | Relevant Section | Discussed in applicable Para 1. [Money or asset received from an| Value of money andlor FM.V. of asset| Sec. 45(1A) [Para 7.130 insurer on account of damage or|on the date of receipt destruction of any Capital Asset 2, | Conversion into oF treatment of capital FIM.V. of the asset as on the date of is| Seo 43 asset as stock-in-trade [conversion or treatment 2) | ParetTii3d 3, introduction of capital in kind into|Amount recorded in the books of] Ses.45@ Firm or AOP/BOI by partner! member | account of the Firm or AOP/BOI as the| nO) ‘| Pare7-13€ value of the Capital Asset Scanned with CamScannerIncome under the Head "Capital Gains" 299 stribution of asset in cash or kind on dissolution or reconstitution —of| specified entity F.M.V. as on the date of distribution Sec, 9B and 45(4)| Para 7.13¢ ‘Transfer by an individual or HUF of| capital asset being land and building or fpoth under specified agreement for [developing a real estate project ‘Stamp duty value, on the date’of issue of| [certificate of completion, of the share of| the individual or HUF in the land or building or both as increased by the consideration received in cash, if any ‘See. 45(5A) Para 7.13h Shareholders receiving money and fassets from the liquidator on the liquidation of the company ‘Money and market value of the assets on| the date of distribution minus amount assessed as deemed dividend wis 2(22)(c) See. 46(2) Para 7.13k Transfer of land or building or both [Not less than value adopted by or| assessed or assessable by "stamp valuation authority" if consideration declared by assessee is less See. 50C Para 7.13p Transfer of a capital asset where Fair market value on the date of transfer ‘See. 50D Para 7.13r consideration is not ascertainable or cannot be determined. 7.7 Expenses on transfer Expenses on transfer include any expenditure incurred, whether directly or indirectly, for the purpose of transfer like advertisement expenses, brokerage, stamp duty, registration fees, legal expenses, etc. However, any expenses which have been claimed as a deduction under any other provisions ofthe Act cannot be claimed as a deduction under this claus. 78 Cost of acquisition [Section 55(2)] Cost of acquisition is the price which the assessee has paid, or the amount which the assessee has incurred, for acquisition of the asset. Expenses incurred for completing the ttl are a part ofthe cost of acquisition. Interest on money borrowed for acquiring capital assets will form part of cost of asset: (1) Interest on loan taken for acquiring a capital asset (other than house property) will become part of the cost of acquisition. (CIT v Mithlesh Kumari (1973) 92 ITR 9 (DeD]. Inthe ease of house property, any interest (whether current or accumulated) is allowed as deduction under section 24(6) and thus will not form part of cost of acquisition Interest paid by the firm to its partner on capital contribution for the purchase of capital asset cannot be treated as part of cost of acquisition Interest on the asset acquired by the assessee carying on business or profession till such asset is put to use, shall form part of the cost of acquisition but any interest paid forthe period after the asset is put to use shall be treated as revenue expense and hence will not form part of cost of acquisition. ‘Sum paid for discharge of mortgage: Where the property has been mortgaged by the previous owner during hs lifetime and the accasoe, after inheriting the same, has discharged the mortgage deb the amount paid by him for the purpose of Clearing off the mortgage shal be regarded as cost of acquisition under section 48 read with section $5(2) of the Act. [Arunachalam (RM) v CIT (1997) 227 ITR 222 (SC)] The position is, however, different where the mortgage is created by se elacer ates he has acquired the propery. The clearing off ofthe mortgage debt by him prior to transfer of the property raul nat entitle him to claim deduction under section 48 ofthe Act because in such a case he did not acquire any interest in the property subsequent to his acquiring the same. [Jagadish Chandran (V.S.M.R.) v CIT (1997) 227 TTR 240 (SC)} Cost of acquisition includes deemed cost of acquisition, 7.8a Deemed cost of acquisition 4) Cost tothe previous owner (Section 49()]: Where the capital aset became the property ofthe assessce in any ofthe wastrcr mentioned below, the cost of acquisition of the asset shall be deemed to be cost for which the previous ‘owner of the property acquired i (onthe distribution ofthe assets on total partial parition of Hindu Undivided Family; () under gift or wills : (©) by succession, inheritance or devolution; @)omany distribution ofasets onthe liquidation ofa company; (©) ona transfer toa revocable or irrevocable trust {ona tansferby a wholly owed Indian subsiiary company to its holding company o vice vrs Q) @) Scanned with CamScanner300 a ay 7 o Systematic Approach to Income Tax Chap.7 (@) on any transfer in a scheme of amalgamation of two Indian companies subject to certain conditions w/s 47(vi); (H) on any transfer, in a demerger, of a capital asset by the demerged company to the resulting company as per section 47(vib); (0 on transfer of a capital asset or intangible asset by a firm to a company as a result of succession, as per section ‘47(xiii) subject to certain conditions; (on any transfer by a private company or unlisted public company to a limited liability partnership firm as a result of conversion of the company into limited liability partnership in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008; & on transfer of capital asset or intangible asset by a sole proprietary concem to a company as on result of succession as per section 47(xiv) subject to certain conditions ; (D onconversion of self acquired property of a member of a Hindu Undivided Family tothe joint family property Note.—There are few other cases also, where the cost of the asset is taken as cost of the previous owner. These have not been discussed as they are not relevant for CA Intermediate. ‘Previous owner means the last previous owner of the capital asset, who acquired it through a mode of acquisition ‘other than that referred to in clauses (a) to (J) above. In other words, previous owner means the previous owner ‘who actually paid for the asset. Cost of shares of amalgamated company (Section 49(2)|: Where the shareholder of an amalgamating company gets the shares of the amalgamated company in lieu of the shares held by him in an amalgamating company, the cost of acquisition of such shares of the amalgamated company shall be deemed to be the cost of acquisition to him of the shares of the amalgamating company. For example, X purchases 100 shares of R Company Ltd. for 210 each on 45.11.2020. In 2021-22, R Company Ltd. amalgamates into S Company Ltd. and under the scheme of amalgamation, X receives 10 shares of S Company Lid. in liu of the 100 shares of R Company Ltd. The cost of acquisition of 10 shares of $ Company Ltd. will be £1000 ie. the cost of acquisition of the shares of R Company Ltd. in lieu of which hie has received the shares of S Company Lid. Th the above case ifthe shares ofthe S Ltd. are later on.transferred, for computing the nature of capital gan, the period of holding the shares in the amalgamating company shall also be considered as per section 2(42A) i.e. in this case, the period of holding shall commence from 5-11-2020. Cost of acquisition in the case of shares/debentures acquired on conversion of bonds or debentures or debentures stock or deposit certificates (Section 49(24)]: As regards share or debenture of a company which became the property ofthe assessee in consideration ofa transfer referred to in section 47(x) and (xa) Le. bonds or debentures or debentures stock or deposit certificates are converted into shares or debentures, the cost of acquisition of the shares/debentures issued on such conversion shall be deemed to be that part of the cost of the debenture/debenture stock/deposit certificate, in relation to which such an asset is acquired by the assessee. For example, X has subscribed to 10 partly convertible debentures of 2100 each of R Co. Ltd. on 4.4.2021. On 5-2-2023, he receives 4 shares of 210 each per debenture and the remaining value of the debenture is £50 i. the 4 shares have been received by him in lieu of a part of the cost of the debenture which is 250. Therefore, the cost of 4 shares shall be &50. In case of a capital asset, being a share or debenture of a company, which becomes the property of the assessee in the circumstances mentioned in section 47(x) of the Act, there shall be included the period for which the bond, debenture, debenture-stock or deposit certificate, as the case may be, was held by the assessee prior to the conversion [Rule 84A(2)] Example: In the above case if these 4 share are sold on 6-8-2023, its period of holding shall be taken from 4-4-2021 10 5-8-2023. Similarly, cost of acquisition of shares received upon exchange of Foreign Currency Exchangeable Bond shall be the price at which corresponding bond was acquired. Cost of specified security or sweat equity share already treated as perquisites under section 17(2)vi) {Section 49(24A)|: Where the capital gain arises from the transfer of specified security or sweat equity share, which bas already been taxed under the head salary as perquisite, the cost of acquisition of such security or share shall be the fair market value which has been taken into account forthe purpose of valuation of perquisite. Cost ofthe right of partner on conversion of company to Limited Liability Partnership (Section 49(2AAA)}: Where the capital asset being rights of a partner referred to in section 42 of the Limited Liability Partnership Act, 2008 became the property of the assessee on conversion of company to Limited Liability Partnership, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the share or shares in the company immediately before its conversion. Scanned with CamScannerchap.7 Income under the Head "Capital Gains” aol (VM) Cost of acquisition of the units of the consolidated scheme acquired in lieu of unis held in a consolidating scheme ee 20g lew of units held in a consolidating ‘Where the capital asset, being a unit or units in a consolidated scheme of a mutual fund, acquired in lieu of units held in a consolidating scheme, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the unit or units in the consolidating scheme of the mutual fund. (V1) Cost of acquisition of equity share on conversion of preference share into equity share [Section 49(2AB)]: Where the capital asset, being equity share of a company, became the property of the assessee in consideration of a transfer referred to in section 47(xb), the cost of acquisition of the asset shall be deemed to be that part of the cost of the preference share in relation to which such asset is acquired by the assessee. (VIL!) Cost of acquisition of the units in the consolidated plan of mutual fund scheme [Section 49(2AF)]: Where the capital asset, being a unit or units in a consolidated plan of a mutual fund scheme, became the property of the assessee in consideration of a transfer referred to in clause (rix) of section 47, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the unit or units in the consolidating plan of the scheme of the mutual fund. (1X) Cost of acquisition of a unit or units in the segregated portfolio [Section 49(2AG) inseted by the Finance Act, 2020 wef AY. 2020-21]: The cost of acquisition of a unit or units in the segregated portfolio shall be the amount which beats, to the cost of acquisition of a unit or units held by the assessee in the total portfolio, the same proportion as the net asset value of the aset transferred tothe segregated portfolio bears to the net asset value ofthe total portfolio immediately before the segregation of portfolios. In other words, it shall be as under: Cost of acquisition of its held by the assessee in te total portfolio x [Net asset value of the asset transferred to the segregated portfo ‘Net asset value of the total portfolio immediately before the segregation of portfoi (4) Cost of acquisition of the original units held by the unit holder in the main portfolio [Section 49(2AH) inserted by the Finance Act, 2020 w.e. A.Y. 2020-21]: The cost ofthe acquisition ofthe original units held by the unit holder in the main portfolio shall be deemed to have been reduced by the amount as so arrived at under sub-section 49(24G). (XD Cost of acquisition of the shares in he resulting company [Section 49(2C)]: It shall be the amount which bears to the cost of acquisition of shares held by the assessee in the demerged company the same proportion as the net book value of the assets transferred in a demerger bears to the net worth of the demerged company immediately before such demerger. In other words: Cost of acquisition ofthe Cost of acquisition of ile vals af he ects rater erage ‘hares in the resulting = share held by the assessee x =< SE coupeey’ inthe demerged company "Net worh of the demerged company immediately before demerger “"Net worth" for this section shall mean the agaregate of the paid up share capital and general reserves as appearing in the books of accounts of the demerged company immediately before demerger. If the shares of the resulting company are later on transferred, then for computation of nature of capital gain, the period for which the shares were held in demerged company shall also be considered [Section 2(42A)). (XI) Cost of acquisition ofthe original share ofthe demerged company {Section 45(2D)| It shall be deemed to have been reduced by the amount as so arrived at under sub-section (2C) above i.e. original cost of acquisition — cost of acquisition of the shares in the resulting company. Section 49(2C) and section 49(2D) are also applicable in relation to business reorganization of a co-operative bank as referred to in section 44DB [Section 49(2E)] (XIN) Cost of acquisition of property received without consideration or Jor inadequate consideration (Section 44}: Where the capital gain arises from the transfer of a property, the value of which has been subject to income tax under section 56(2\vi) [now 56(2))], the cost of acquisition of such property shell be deemed to be value w! has been taken into account for section 56(2)(vi) [now 56(2)(x)]. Similarly, cost of acquisition of shares acquired by a fim or a closely held company without consideration or for inadequate consideration will be the value which has been taken into account and has been subjected to tax under section 56(2)(viia) [now 56(2)(x)]. Example: (1) R receives an immovable property without consideration from a unrelated person, The stamp duty value ofthe immovable property is €60 lakhs. In tis case £60 lakh will be taxable in the hands of R under the head income from other sources” (See section 56(2)(vi) [now 56(2)(x)] under the Chapter 8) and the cost of acquisition in the hands of R shall be %60,00,000. Scanned with CamScanner302 Systematic Approach to Income Tax Chap.7 ose fair market value is €2,90,000. In this (2) A firm purchases shares of a closely held company for %1,40,000 whi I be treated as income of the firm under ‘ase difference between the FMV and the purchase price Ze. %1,50,000 shal the head "income other sources" as per section 56(2X.vila) [now 56(2)x)] However, the cost of acquisition of such shares in the hands of the firm shall be %2,90,000 as per section 49(4) instead of €1,40,000 asthe firm has already pai tax on 81,50,000. (IV). Cost of acquisition of an asset declared under the Income Declaration Scheme, 2016 [Section 49(5)] transfer of an asset declared under the Income Declaration Scheme, 2016, and the tax, surcharge and penalty have been paid in accordance with the provisions of the Scheme on the fair market ‘value ofthe asset as on the date of commencement of the Scheme (i.e. on 1.6.2016), the cost of acquisition of the asset shall be deemed to be the fair market value of the asset which has been taken into account for the purposes of the said Scheme. Where the capital gain arises from the (XY) Cost of acquisition of the share inthe project being land and building in a joint development agreement referred in section 45(5A) [Section 49(7)]: Where the capital gain arises from the transfer of a capital asset, being share in the project, in the form of land or building or both, referred to in section 45(S5A), not being the capital asset referred to in the proviso to the said sub-section, the cost of acquisition of such asset, shall be the amount which is deemed as full value of consideration in that sub-section. For section 45(5A) see para 7.13h. (XVI) Cost of acquisition of the capital asset where the inventory has been converted into or treated as capital asset [Section 49(9)] ‘Where the capital gain arises from the transfer ofa capital aset referred to in section 28(via), the cost of acquisition Cf such asset shall be deemed to be the fair market value which has been taken into account for the purposes of the said clause. 7.8b Cost of acquisition of assets acquired before 1.4.2001 [Section 55(2)(0)] In the following cases, the assessee has an option to take either the actual cost of acquisition or the fair market value of the asset as on 1.4.2001 to be the cost of acquisition for computation of capital gains: (q) where an asset has been acquired by the assessee himself before April 1, 2001, he has an option to take either the actual cost of acquisition or the fair market value of the asset as on 1.4.2001 to be cost of acquisition for ‘computation of capital gain. (For availing the option the assessee will obviously opt for that value which is more.) (©) where the assets were acquired by the assessee through a mode given under section 49(1) (Discussed under para 78a) and the previous owner acquired that asset before 14.2001. In this case also, the assessee has an option to take the cost of acquisition as the cost tothe previous owner or the fair market value of that asset as on 1.4.2001 for the purpose of the computation of capital gain. However, in case of a capital asset, being land or building or both, the fair market value of such an asset on 14.2001 shall not exceed the stamp duty value, wherever available, of such asset as on 1.4.2001. In other words, ifthe stamp duty value of land and building is available on 1.4.2001, the fair market value shall be the stamp duty value of such land and building Ifthe stamp duty valu isnot available, the fair market value shall bbe determined as per section 2(22B) discussed above. ‘The “stamp duty value” shall mean the value adopted or assessed or assessable by any authority of the Central Goverment or a State Government for the purpose of payment of stamp duty in respect of an immovable property. (Explanation) i) The option in the above ease is not available for depreciable assets, (Gi) The option is not available in case of goodwill of a business, brand or trademark associated with the business, tenancy rights, loom hours, route permits and right to manufacture produce or process any article cor thing, whether self-generated or purchased. Examples (@ Where a house property was purchased by X on 1.1.1995 for %30,000 and the fair market value of the house as on 1.4.2001 was €1,20,000 the assessee may opt to adopt 21,20,000 as the cost of acquisition. (i) Where certain shares of a company were purchased by X on 1.1.1995 at the rate of 2200 per share and the market aro esha as on 2.201 1 a0 pr shares nn Ter mu sa an aot 20 Ft share as the cost of acquisition. : " . . (lil) Where X purchased a house property on 1.1.1995 for 330,000 and the property passed on to his son Y on death of X con 15.6.2021, the fir market value house as on 1.4.2001 being 21,20,000, ¥ may opt to adopt 21,20,000 as the cost of acquisition. Scanned with CamScannerChap. 7 Income under the Head “Capital Gains” 303 (jv) Where a house property was purchased by X on 1.1.1995 for 830, 7 PSt est ra ay 22 GRIND i ent ae 21,00,00,000 as the cost of acquisition being the stamp duty value as on 1.42001 and not €1,20,00,000 ‘What is fair market value [Section 2(22B)]: Fair market value in relation to the capital market means — (the price which the capital asset would ordinary fetch if sold in the open market on the relevant date; and (i) where the price referred to in (i) is not ascertainable, such price as may be determined in accordance with the rules made under the Income-tax Act. +7.8¢ Cost of acquisition of goodwill of a business or profession or a trade mark or brand name associated with business or right to manufacture, produce or process any article or things or right to carry on any businest oF profession, tenancy rights, stage carriage permits or loom hours [Section 55(2)(a)] It shall be as under: (0) in the case of acquisition of such asset bythe ascessee by purchase rom a previous ovmer— the amount ofthe purchase price; and (ii) in the case falling under section 49(1)(i) to (iv) and where such asset was acquired by the previous owner (as defined in that section) by purchase—the amount of the purchase price for such previous owner; and (ii) in any other case—ail Further, in case of goodwill of business or profession acquired by the assessee by way of purchase from a previous ‘owner (either directly or through modes specified under section 49(1)(j) to (iv) and any deduction on account of depreciation under section 32 has been obtained by the assessee in any previous year preceding the previous year relevant to the asoessment year commencing on or after 14.2021, then the cost of acquisition willbe the purchase price as reduced by the depreciation so obtained bythe assessee before the previous year relevant o assessment year commencing on 1.42021 184 Cost of acquisition of right shares [Section 55(2\(aa)] ‘Where an assessee, by virtue of holding certain shares, becomes entitled to subscribe to any additional shares then: (a) the cost of acquisition of the original shares shall remain unchanged i.e. it shall be the amount actually paid for acquiring the original shares; (b) the cost of acquisition of the right shares, when the assessee subscribes to the shares on the basis of the said ‘entitlement, shall be the amount actually paid for acquiring the right shares; (©) the cost of acquisition of the right to acquire such shares, when such a right is renounced in favour of any other person, shall be taken tobe nil (das regards, the person in whose favour the right to subscribe tothe shares has been renounced, the cost of acquisition of such right share shall be the amount paid by him to the company for acquiring the shares plus the amount paid to the person renouncing the right Example: 1. R holds 100 shares of ABC Lid, a listed company which were acquired by him in 1999 for 10 per share. ‘The market value of the shares as on 16.2022 is %250 per share. The company offers him a right to subscribe to 100 additional shares at the rate of 2160 per share. If he subscribes to the shares then his cost of acquisition will be as under: (@) for the original 100 shares 210 per share (©) for the additonal 100 right shares 2160 per share 2. In the above example, if R does not subscribe to the additional shares but renounces the right in favour of ¥ at the rate ‘of 250 per share, then the entire amount of &5,000 received by him would be treated as capital gains, as the cost of acquisition of the right is nil. 3. TTY, in favour of whom the right was renounced, subscribes to the 100 shares then his cost of acquisition will be as under: Particulars z (@ amount paid tothe company 76,000] (®) amount paid to X for acquiring the right to subscribe to the shares 5,000] posal 21,000 118 Cost of acquisition of bonus shares oF any other financial aset allotted without payment [Section 55(2)(aa)(iia)] (A) Bonus shares or financial aset alloted without payment after 1.4.2001: The cost of acquisition in relation to the fnoncial assets (Le, share or any other security) allotted to the assessee on or after 1.4.2001 without any payment and on the basis of holding of any other financial asset, shall be taken to be nil. Therefore, the cost of bonus SKareelsceurity shall be taken to be nil and the entire sale consideration received on the transfer of the bonus ‘hares/security shall be treated as capital gains. Scanned with CamScannerChap. 7 1s have been allotted fo the 1 for market value as on 308 Systematic Approach to Income Tax (B) Bonus shares or financial asst alloted without payment before 14.2001: I bonus Shave assessee before 1-420, although the cost of such bonus shares snl, the asessee ™aY 2P 14.2001 as the cost of acquisition of such bonus shares. “Tis coat of acquisition of original shares sal be the amount actualy paid to aequie the origina shares. 77f Cost of acquisition for purpose of computing long-term capital gain under section TI2A [Section SSX) The cost of acquisition for the purposes of computing capital gains in relation (0 @ Jong-term capital asset, being: (a) an equity share in a company; or (6) a unit of an equity oriented fund; or (©) aunit ofa business trust referred to in section 112A, acquired by the assessee before 1.2.2018, shal be higher of — i) the actual cost of acquisition of such asset; and Gi) the lower of — (©) the fair market value of such asset (For meaning of FMV see below); and (b) the full value of consideration received or accruing as. For details see section 112A late i tis Chapter. 7.8¢ Cost of acquisition of depreciable assets [Section 50] ‘As already discussed under the chapter on Profits and gains of business and case of electricity companies are part of block of assets. ‘Where the full value of the consideration as a result of the transfer of any part or entire block of asset exceeds the cost of acquisition ofthat block of depreciable assets, there wil be a capital gan, which will always be a shor te" cp I gain. The sect of acquisition of a block of depreciable asses is the written down value ofthe block atthe beginning of the year plus ‘etual cost of any asset falling within the same block, acquired during the year Tn other words, the excess of the sale consideration over the agaregate of term capita gain: (@ expenditure in connection with the transfer; {@) the written down value ofthe block of assets inthe beginning ofthe year, and (6) the actual cost of any asset filling within the block of asset acquired during the previous year. ‘Such an excess shall be deemed to be the capital gan rising, from the transfer of shor term capital assets. ‘Amendment made by the Finance Act, 2021 W.e.f. A.Y. 2021-22 “A proviso has been inserted in section 0(2) to provide tat in a case where goodwill of a business or profession formed part of block of asset for the assessment year beginning on 1.4.2020 and depreciation has been obtained by the assessee under the Act, the written down value of that block ‘of asset and short-term capital gain, if any, shall be determined in the manner as may be prescribed. (See, Rule SAC under para 7.13) ‘Explanation. —For the purposes of this section, reduction of the amount of goodwill ofa business or profession, from the ‘a result ofthe transfer of the capital asset. profession’, all depreciable assets except in the following three amounts shall be the short- block a sect in aocordance with sub-item (B) of item (i) of sub-clause (c) of clause (6) of section 43 shall be deemed to be transfer. Summarised Table of cost of acquisition SLNo. Type ofeapital asset Cost of acquisition to the assessee | Relevant section applicable 7. [Goodwill of @ business or profession, or[Amount of purchase pri ogi oF 5 pe, ori, rag, en Re Mol IO Ibusiness, right to manufacture or produce or|before 1.4.2001 aa [process any article or thing ot right to carry on| lany business or profession* or tenancy rights, [state carriage permits or loom hours purchased from previous owner [Same assets as above but self-generated [Nil (FMV on 1.4.2001 not allowed) (@) Allotment of additional Financial asset, Le.,/Amount actually paid share or security ISs@yantin, I55(2)(aa) Scanned with CamScanner