Capital Gains

26 March 2024 09:39

Section 45 - charging provision

Section 48 - computation provision

We started income taxes on the unwritten rule that all revenue receipts are taxable unless
expressly exempted, all capital receipts are exempt unless expressely included. So the
definition of capital receipt and asset becomes important and you have to be mindful that
the gain or loss wrt to the transfer of the capital asset has to be taxed. You are not taxed on
the capital asset or receipt itself, but only on the gain thereof. So we have strong
jurisprudence which says that in case the computation provision fails, then the charging
provision also fails because in those situations the assumption is that the legislation never
wanted you to tax that.

Section 48 goes thus:

Full value of consideration minus:
- Cost of acquisition
- Cost of improvement
- Expenditure incurred wholly and exclusively in connection with transfer
This will give you a gross amount.
You can also seek exemptions from section 54 and this will give you a net capital gain or
loss.

Full value of consideration - you have a capital asset which is transferred, if you make a gain
or loss and it is about the areas stipulated in 54, the gains or loss can be exempted. Suppose
you have a laptop and you sell it - you get 20k. From this amount you deduct the cost of
acquisition. If you have incurred any expenditure to improve it. Or if you have any
expenditure with related to the transfer, you can claim. This is showing what is giving you
gain or loss.

In case there is no cost of acquisition - but you have a transfer - then the computation
provision fails, so the charging provision also fails. So non compete fees - it was that
something was getting transferred and you got full value of consideration, that information
is getting transferred now, you are undertaking to take restriction. If the statute cannot
answer a cost of acquisition, the assumption is that since this provision fails, the charging
provision has never intended that this kind of income shall be brought to tax. The moment
you say cost of acquisition is nill, you can proceed with the computation and charge it. So
not being able to arrive at the cost of acquisition is a strong defence - capital revenue
exempt unless made expressly taxable.

Suppose your gross amount is 2Cr. You want to save the tax so you invest the amoutn
1.75Cr [minus 25L cost of acquisition] so you buy House property, the entire 1.75 crore will
be exempted.

Long term and short term capital assets - 2(42A)

In capital gains, there is a primary bifurcation in the capital asset on the basis of the
holding period - the asset can be short term or long term - the computation is mostly the
same, however
- Instead of taking cost of acquisition or improvement in the long term asset - we
 calculated indexed cost of acquisition and indexed cost of improvement. The CA
books will give you situations and different formulae to arrive at an indexation. The
indexation is essentially to take care of the inflationary value of your asset over a
period of time. After having adjusted those values, you will be able to arrive at the
corerct capital gain or loss. So if you take the example of the HP - the value of which is
2Cr. It is possible that the property which is right now giving you 2Cr is purchased in
1987, would then have been 5L cost of acquisition. So if you put the 5L in your
computation, you will have mad gain, so the simplistic value is not giving you the
correct assessment of the gain you have made. Consequently, there are formulae in
the rulebook, you apply and adjust them in an indexed form, arrive at a value which
now after application of the value might come to 40L. Hence, the figure which you
now arrive at - 1Cr 60L is reflecting your true position.
- Suppose in 1995 you built another storey on that property - that is a cost of
improvement which will also be indexed.

When the period of holding is not more than 12 months - when you are dealing in the
properties and assets of such kind - units or unit trust of india - units of any equity

Section 2(42A)

Default - if your period of holding is more than 3 years it gets classified as long term capital
assets. But if its securities, shares, etc then it has to be more than 1 year only to be LTCA.
And for immovable property, its 2 years to be a LTCA.

Apart from the computation - you also have the rates of tax being prescribed be different
for each. When you are making a short term capital gain - section 111A comes into picture
- STCG is taxed by including the gain in your total income - if the slab is 15% you pay
15% tax, if 30, 30% tax.
- For long term capital gain - section 112 - LTCG taxable at the rate of 20%.
○ Full value of consideration - in case of a transfer of a land or building it will be
undertaken by 50C.
 In case of the transfer of the land or building if the sale consideration is
lesser than the stamp duty value of the asset - then your full value of
consideration will have to be taken as the value adopted, or assessed or
assessable by the stamp duty authority. The consideration you take needs
to be in the margin of 5% +/-.
 The fair market value cannot be contested - but there are procedures
where if the assessee doesn’t accept the stamp duty valuation, they can
take it to court.
 Cost of Acquisition - section 55(2) - if the assessee received the assets
being a shareholder upon liquidation - so here the cost of acquisition is fair
market value of the asset on the date of distribution.
 Or if shares are allotted in a scheme of amalgamation - the cost of
acquisition is the cost of the shares in the amalgamating company
 Section 49 - cost of acquisitions to be taken in specified modes of
acquisition - if you have adopted the property under a partition deed or if it
was gifted to you - in those situations, what should be your cost.
 Cost of improvement - section 55(1) - all expenditures of capital nature
incurred in making additions or alterations - any such expenditure
deductible for income from other sources, that will not be included. If you
took benefit of repairs, etc under any other head, and that expenditure was
capital in nature so you couldn’t claim it anywhere else, you can get it
adjusted here upon transfer of asset. However if you have been able to
claim it already, you cannot get that changed.
 Expenditure incurred on the brokerage for arranging the deed - legal
expense for preparing the converyance document, advertisement,
commission to auctioneer or agent. All of these will be considered
expenditure wholly or exclusively in transfer.
 Underlying fundamentals of the head of capital gains - when your
computation provision fails, your charging provision also fails
□ B C Srinivasa Shetty v. CIT, 1981 ruling, SC - foundational but imp
ratio
BCSS entered into a transaction where a partnership firm into the
manufacture and sale of agarbattis was getting dissolved. Upon
dissolution it transferred its assets and liabilities to whoever was the
taker including their goodwill. The partnership firm demonstrated the
receipts - but they did not report for the receipts towards goodwill.
Authorities said goodwill is also your capital asset which stood
transferred upon dissolution, the assessee argued that even though
we have a receipt - full value of consideration - we do not have a cost
of acquisition [pritam das narang] - section 48 will not be applicable at
all and you cannot invoke the charging provision. Since I cant compute
it, you cant charge me with it.
The buyer when they will subsequently sell it, then will have a cost of
acquisition. But there was no cost of acquisition at the first instance
for the first generator of it. So the judgement discusses that goodwill
is an asset but the valuation of it is difficult to arrive at.
Held: a variety of elements goes into its making and its composition
varies in diff trades and in diff businesses in the same trade. While
one element may preponderance - although goodwill was easy to
define - its value fluctuates from one moment to another because of
changes in reputation - it is affected by everythign in the business -
name, business, intro to old customers, absence of customer, etc.
 there can be no account in value of the factors producing it. It might
be the reputation of the business or what kind of relationships they
have with their competitiors - the fact that they arent defaulting on
their credit payments - there are tangible and intangible factors.
Ratio: section 45 charges the profits and gains arising out of transfer
of assets to income. For the purpose of imposing the charge
parliaemtn has enacted detailed provisions. Anything at varience with
such a set procedure, you cannot ifnore it. All transactions
encompassed by section 45 must fall under the governance to its
computation provisions, a transaction to which the computation
provisions cannot apply must be regarded as never intended to fall
within the scope of section 45. this inference flows from the general
provisions of the IT act where the charging provision is always
accompanied by the computation provisions. The character of the
computation provision in each case bears a relationship to the
nature of the charge. The charging and the computation provisions
constitute an integrated code - when there is a case to which
computation cannot apply, it is evident that such a case was not
intended to fall within the charging section.

□ Sri Krishna Dairy & Agri Farm v. CIT [AP HC]

If you are into dairy activities, your capital asset will be cattle. In the
relevant previous year, some of the cattles gave birth to calves and
the assessee sold them. The department said you have earned an
income on account of STCG. Assessee says I have full value of
consideration, but I don’t have cost of acquisition. The kind of birth
being given by the animal is incidental to my main business. They
invoke Srininvasa shetty's case.

□ We also have another comparitive - CIT v. Ramaswamy Mudaliar

An HUF purchased a mare with the intention of getting her to
participate in races. But once she was purchased she never
participated in the horse races but was rather sent to the stud farm.
Whilst at the stud farm, the mare gave birth to offsprings. Once they
were born, for their training, maintenance and good health, there also
the expenditure was incurred on them. Whether or not would you
want to put it as a capital gains tax?
They said we are not attributing differnet amounts, it’s a total
lumpsum amount - you have full value of consideration, cost of
acquisiton - would you want to go ahead with this and if yes how.
So the court said this expenditure can be considered your cost of
improvement. This is to put across a point that this understanding is
broad. Are we taking the cost of acquisition as the cost of
improvement? The fact that you have sent the mare to the stud farm
is so that you can profit out of it - so it is not as incidental as it was in
sri krishna dairy.
Cost of acquisition is the expenditure which an assess incurs to
acquire a capital asset. Cost of imporvement is an expenditure
incurred etiehr to make additions to the asset or improvement that is
capital in nature eg: making additional floor on the house. In this case,
the cost of improvement was being read broad enough ot become the
cost of acquisition - so the expenditure on the mare while it was at
 the stud farm, you can consider it cost of acquisiton of offspring or
even a cost of improvement

Section 45 - presumption that there is:

○ A capital asset - 2(14) capital asset means property of any kind whether or not
connected with business or profession or any securities held by foreign
institutional investors. The moment you say property of any kind it includes
tangible, intangible, movable, immovable, etc, the net is wide. With the vodafone
amendments, the management rights of a company even incorporated outside
india was recognised as an amendment. A broad definition of capital assets is
coming with carveouts.
 Exceptions -
□ stock in trade - raw materials, consumables for the business of
profession of the assessee. If you are a computer trader and you sell
computers as stock in trade, these are not your capital receitps but
your revenue receipt, these are your circulating asset.
For a real estate developer, the houses in their hands is a stock in
trade, so it will be their revenue receipt, but in the house proeprty
provisions, we have the exception that if houses were stock in trade
but were vacant after 2 years of colelction of completion certificate,
they will be held as deemed to be let out
□ Personal effects movable properties including wearing apparel and
furnitiure held for personal use by the assessee or any member of his
family. So if the laptop in my hands is an asset, it is my personal effect
so you wont pay capital gains tax.
Exceptions - jewellery, sculptures, paintings are not your personal
effects. Jewellery includes ornaments of gold, silver, platinum, or any
other precious metal or amalgam or such metals. Precious stones may
or may not be there. But then why don’t we pay tax on selling gold
jewellery - because the department allows you to hold jewellery up to
some amount without tax consequences. This includes sarees, gold
studded tables, etc also.
The definition of jewellery is very broad in the statute and it could
include even wearing apparal studded with precious and semi
precious stones - they are not personal effects

The courts have interpreted personal effect as something where there

is an intimate connection between the effects and the person of the
assessee. Eg: silver utensils, personal effect or jewellery? The court
says that the frequency of the use does not make it a personal effect.
Using silver coins everyday or the fact that the it is a spoon also
doesn’t maek it your personal effect if they are in the showcase. Or
the fact that you use the items only occasionally - some of them are in
terms of heirloom jewellery. This doesn’t mean that there is no
intimate connection, it can still be a personal effect. So you will find
all these cases

CIT v. Her Highness Maharani Usha Devi

Ex ruler who had been given some jewellery, she sold it off a
piece, question was whether it was a capital asset or not.
The court will keep into account
- Frequency of the use of the property
 - Intimate connection
- Nature of the property
Even if it is heirloom and is rarely used, it is passed off down
generations and that makes it a personal effect. Usually if it is a
personal effect it is regularly in use, that frequency of use will
depend on the nature of the item, so everyday kind of
ornaments you wear. Heirlooms cannot be used everyday, but
that doesn’t take away from making it a personal effect.

Comments: the line of distinction is not clear.

In another case, the assessee had KGs of silver in the form of utensils.
This couldn’t be claimed as the personal effect just because the form
is one of a utensil. Your assessee should not be able to dodge the
application of the taxing statute merely under the plea that it is a
jewellery. But there are also unclear casees where despite regular
use it hasn’t been considered a personal asset.

The kind of silverware etc only comes forward through like raids and
all. The kind of gold and silver that each of the households have, the
government cannot all of a sudden intervene and take stock.

Gold bonds are also exceptions - these are saving mobilisation

activities by the government and these also fall outside the
definintion of capital assets.

After the vodafone ruling, the capital asset related definition had an explanation
included
Property includes and should be deemed to have always included any rights in or in
relation to an indian company and including the right to management, right to
control or any other right whatsover. The case of shivraj gupta in the non compete
fees related discussion, that shivraj gupta also transferred the right to control the
asset because of the his voting power. It is not a standalone rights instead of transfer
of shares but going ahead after vodafone has made us have such a distinction to
capture indirect transfers.

□ Agricultural land -
When you sell agricultural land, the land itself is outside the cap asset
and no cap gains applies. Section 2(14)(c)(iii) provides the definition.
Usually, it is outside municipal locations and this is only about
agricultural land in India and not outside India. If agricultural land is
outside India, then it is not covered. Invariably, a prima facie evidence
of whether it is agri land or not is its entry in land revenue records as
agri lands. If a plot of land is registered as agricultural land, then
assessees claim it must be exempt. This is fruitful since the value of
land always appreciates and you can make a gain exempt from tax.
The prima facie evidence is that the land revenue court would have
land being categorized.

But merely because land is recorded as agri land is not sufficient to

raise claims of exemptions. There could be factual enquiries which
can be made.
 Sarifabibi Mohmed and Othrs v. CIT Gujarat
The SC ruling of 1993 had 13 such questions to inquire into such
matters.
1) whether it is classified that way in land records and subject to
payment of land revenue?
2) If it was entered that way in revenue records but never actually used
for agri purposes
3) Whether the land was actually or ordinarily used for agri purposes at
the relevant time
4) Whether such user of land was for long period or a temporary
character
5) Whether the land had ceased to be put to agri use when it was
transferred
6) whether it was put to alternative use and weather this was temporary
or permanent in nature
7) Whether it was in a developed area - is physical characteristics,
surrounding areas, characteristics of land surrounding it. Say
surrounded by industry or the land so barren that you can’t grow
crops - all these will indicate that it's not agri land even though
entered that way in revenue records.
8) In a case, some part of land on which plants and other part of land
was used for something else. Assesse purchased land in municipal
land, some industry and others vegetation.
9) When you sell vegetation land, is it agricultural land?
Held: The land was registered in municipal records as urban land and
the mere fact that vegetables were being raised there before the sale
and a few years later doesn’t mean its character is agri land. The fact
that your land is capable of getting converted into agri land is not
relevant criteria
- The question is was at the relevant time, was it being used for
agricultural purposes?
So merely because you’re doing these vegetation and other kinds of
things doesn’t mean it becomes agri land.

○ Held by an asseessee -That is transferred

○ Consequently there is a gain or a loss

Transfer
There should be a capital asset which is transferred during the relevant previous year and
then the assessee makes a gain or a loss.
- Transfer in relation to capital asset includes the sale, exchange or relinquishment of
the asset.
- Or extinguishment of any rights therein. This includes compulsory acquisition thereof
of any asset and it also includes where the asset is converted by the owner as stock in
trade.
- Maturity and redemption of 0 coupon bond
- Any transaction inolving the allowing of possession of an immovable property to be
taken or retained in a part performance contract under 253 of ToPA.
- Any transaction which has the effect of transferring or enabling enjoying of immovable
propert y

The definition of transfer gives you modes through which transfer takes place and includes
modes that might not otherwise be concerned as a transfer.
- Sale - transfer of a capital asset by virtue of a sale
- Exchange - barter for immovable property.
- Relinquishment - withdrawing rights from the asset in favour of someone else
○ Gift - property given without consderation.

These terms were looked very closely into

CIT v. Rasik Lal Manik Lal, 1993 ruling - pertains to the 1922 act
The assessee had gotten shares in the scheme of amalgamation. When you have company A
amalgamating with company B, shares of company A will go out of existence and
shareholders with get shares of company B as per the agreed upon ratio. The assessee had
90 shares in A and got 45 shares in B. the question was whether the new shares that he got,
can it be said that there was a transfer and should I tbe chargeable to tax. The court looked
into the possibilities of what was transfer and how it should be looked into.
- This is not a sale - when you gave the sahres away in one company and got shares in
another, it wasn’t sold to someone
- Not an exchange - because an exchange involves the transfer of proeprty by one
person to another and the reciprocal transfer or another property. There must be a
mutual transfer of ownership for one thing for the ownership of another. When it
applied exchange, the court said the assessee did not exchange it cause there was no
mutual transfer. The shares of A were going out of existence.
- Is there a relinquishment? Can you say that the assessee has withdrawn oneself from
the shares? - SC says relinquishment takes plave when the owner withdraws
themselves from the property and abandons their rights thereto, but for it to happen,
the property must be in existence. It presumes that property continues to exist even
after the rights have been reliquished. However the shares of company A don’t exist at
all anymore. Here the court says that even if the assessee relinquished his right from
the shares, the shares ar going out of existence
So amalgamation schemes don’t fall within the defintiion of transfer. It is an
extinguishment of the rights. But since the 1922 act did not contain this form of transfer
back then, the transaction could not be taxed.

Along with whatever is the definition of transfer in sectoin 2(47), we also have sectoin 47
which lists out transactions not to be considered transfer - section 47's justification is that
the economic ownership of the asset continues as it is.
- Partition of HUF - the assets of the HUF is being divided and being a member you are
getting the assets, it is not considered a transfer at this stage. It is however a transfer if
you sell off the asset you get this way
- Liquidation of the company leading to distribution of assets of the company in the
hadns of the sharehodlers - not a transfer because economic ownership continues as it
is.
- So mergers, demergers, etc are also not considered as transfer
- When in a scheme of amalgamation you get the shares subject to compliance with
some conditions
○ Company formed after amalgamation is an indian company - so if its not an
indian company then it will be outside the scope of 47
○ 3/4 of the shareholders continue in the new company
○ All the assets and liabilities are taken over
Then In the first instance such an extinguishment will not be taxed. However when you
go ahead to then sell your shares further that will be subjected to capital gains tax.
 - Gifted items or gotten items under a will - they are not transfers in the first instance,
subsequent sale or transfer will attract capital gains

Section 49 - computation - enables you to arrive at the cost of acquisition in different

kinds of specified modes of acquisition.
- When you first got those assets in the scheme of amalgamation you didn’t pay any
capital gains tax, but if you sell it off further, the computation table comes into
picture - you will have to find cost of acquisition
○ Take the cost of acquisition of the shares in your amalgamated company, that is
the shares in the company you had originally held shares in [company A]
○ If it’s a will, then take the cost of acquisiton of the previous owner

Vania Silk Mills v CIT, 1991, SC

The assessee company was the owner of machinery that they had leased to company B.
company B took insurance on the machine, the machine caught fire. Once it caught fire the
insurance claim was raised. The insurance company took the necessary procedure, paid
indemnification, took away the machinery and the leasee passed the insurance payout to
the original owner.
AO says because the machinery was taken to the premises of the leasee, there is a transfer.
There is an extinguishment of rights that doesn’t fit the conditions of 47. consequently,
since the machinery is taken away [standard for insurance companies].
Issue: was there any transfer?
Assessee said this is an accident by fire under an indemnification contract, this is not
technically a transfer within the meaning of capital asset being extinguishment of rights on
account of the transfer. This is extinguishment of asset itself. Here the assessee says that
the asset itself has gotten extinguished, this isnt what the statute intends to charge.
Held: in this kind of a scenario, the existence of an asset during the process of transfer is a
precondition. The asset should continue to remain in existence during the process of
transfer. When an asset is destroyed there is no question of transferring to anyone. The
destruction of the loss of the asset brings the destruction of the right of the owner in the
asset. But it is not on account of transfer, it is on account of disappearance of the asset
itself. So whatever right was veested in the asset was also destroyed. This cant be equated
with the extinguishment of rights under section 2(47).

To circumvent this, the statute has been amended - Section 45(1)(A) - not withstanding
anything contained in subsection 1 - where any person receives money or other assets
under an insurance on account of damange or destruction of any capital asset because of
flood, typhoon, hurricane, natural disaster, or riots and civil disasters or accident by fire or
action by any enemy or action taken in combating an enemy, 45(1)(a) will attract and the
amount will be taxed.
Ma'am thinks this is a bad law.

What is interesting is that a matter has sought to combine both the ratios to argue a case.

CIT v. Mrs Grace Collis, 2001 (SC)

An assessee had acquired shares in the scheme of amalgamtion. She was a shareholder of
company S, she later got shares of NS. Subsequently she sold off the shares. So in the first
instance 47 should come in. if you get shares plus cash 47 wouldn’t apply since it would be a
transfer, but she only got shares so it was an amalgamation. So section 49 applied when she
resold it.
- Cost of acquisition of original shareholding - compute and give. Assessee didn’t submit
computation
She took a plea saying that section 49 makes a reference to 47(7) - if your mode of
acquisition was a transfer which took place as per 47(7) then you calculate 49. but there are
references under 47 where she looks at 2(47) and says there is no transfer at all. She
combined the ratio of Rasik Lal Manik Lal and Vania Silk.
RLML - there is no exchange, no relinquishment, for when she got the shares. She is now
combining this with Vania to say that her asset isnt in existence, the asset shouldn’t get
destroyed in the process of extinguishment of rights. So when my original transfer does not
fall within the scope of 47, how then are you calculating a cost of acquisition. If there is no
transfer 47(7) doesn’t apply and 49 only exists in reliance. So then why should I compute and
give you an amount?
In Vania the transfer was involuntary, but their ratio is extinguishment of rights according
to transfer cannot be considered transfer if the asset is destroyed. So the ratio of vania is
surviving since it doesn’t look into the voluntariness of the transfer in its ratio. Their
decision is that the exiwtence of an asset during the trasnfer is a precondition. So even if
you say during the process the asset existed, it never trasnferred it just destroyed.

Doubt:
Kartik referred to explanation 2 which would include a situation like this however that
amendment was brought in 2012 post vodafone. But the time of these case, ma'am
thinks is a rbilliant combination of proceddings

Held: SC reread Vania Silk Mills - we have given careful thought to the defintion of transfer
in 2(47) and the decision of the court is VSM. In our view the definition includes
extinguishment of rights in a capital asset distinct and independent from the transfer
thereof. We don’t approve of the limitation of the expression extinguishment of rights
thereof to extinguishment on account of transfer. To so read the transaction is to render it
meaningless. So the SC relooks at the VMS and says we don’t want to read it as confined
to extinguishemnt on acconut of transfer. Extinguishment of rights in itself should be
sufficient whether or not it is extinguishment on account of transfer. So the rights were
extinguished on the signing of the scheme of amalgation so it falls within the definition of
transfer.

In VSM they way the SC was reading the situation - the extinguishment of rights therein
being the asset and the existence of an asset being a precondition. So this extinguishment is
on account of transfer. The assessee was saying this is an indemnification contract and not a
transfer. At the end the insurance company took charge over the destroyed asset. But the
income tax statute is talking about my extinguishment over my rights, but here my asset
itself is extinguished. This cant be equated on account of transfer. In Grace collis, the SC is
diluting the requirement read into the statue by VMS.

Had
Explanation 2 to 2(47) was added - Explanation 2.—For the removal of doubts, it is hereby
clarified that "transfer" includes and shall be deemed to have always included disposing of
or parting with an asset or any interest therein, or creating any interest in any asset in any
manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or
involuntarily, by way of an agreement (whether entered into in India or outside India) or
otherwise, notwithstanding that such transfer of rights has been characterised as being
effected or dependent upon or flowing from the transfer of a share or shares of a company
registered or incorporated outside India;
Existed back then, the provision would have been attracted

The definition of transfer that has been made inclusive in nature - from the itemised
lineups, it is not voluntary, it is a compulsory acquisition of your property that maybe the
state wants for public purposes, even that is icnluded in the definition of transfer so that an
involuntary transfer wont be exempt from capital gains tax.

JDA - joint development agreements

2(47) - part performance of the contract with reference to immovable property. We
looked at this earlier in the HP property where a residential property was put in the hands
of someone. We look at the consequences for the transferer here. Under CG tax, we are
essentially covering not just HP related transactiosn but also those which you might have
come across in respect of joint development agreements

Given the real estate situation. You might have owners with lands in prime repairs with
properties that are in disrepair. If you want to reconstruct, the builders and developers
approach owners to get into a collaborative agreement by virtue of which the land owner
will aloow the builder to develop the land and then take the money out of it. The entire
society might approach the builder, ask them to reconstruct property.

So lets say you are the owner of the land and are being approached by the builder, you can
say that make a multistory apartment, give me one flat and you can sell the rest with some
share of the profits coming to me, etc. either the builder will purchase the land altogether.
Often there are bilateral agreements between the owner of the land and the builder.
Sometimes there is a tripartite agreement between the owner, builder and the buyer. So
builder will say I will finish by this date, owner will say I transfer this much of the land. Or
the owner could also ask for cash amount and that the piece of land will be transferred to
the buyer or the builder.

Usually these JDAs are signed with GPA - general power of attorney. As a result of it, the
owner will allow the builder to have access to those premises.
- Possession will be given
- GPA - the builder can seek licenses, approval plans in the name of the builder and
proceed with construction
- Payment to owner can also have been made in installments

Tax angle - tax authorities would consider the year in which the JDA and GPA was signed as
the year in which the transfer happened so in that year the Capital gains tax was paid.
Assessees were syaing that we havent received the full amount yet, and sometimes if the
project has run into difficulties the builder only steps into the land. So the assessee said why
should we be made to pay the tax immediately?

Section 53A Topa

1st set of cases they were getting was where
- Possession to develop test - if the owner of the land has handed over the possession
to the builder, signed the JDA cum GPA nad partly received compensation, the courts
would ask this to see whether the possession had been given. The year in which the
agreement is signed and the possession is handed over is the relevant year. The fact
that the payment of cosndieration was deferred was of no consequence.

2nd set of cases - courts began to realise and apply

- Actual development test - where the assessees argue that having put the builder in
the possession nothing more was happening. Builder did not pursue the approval or
having pursued was denied the approvals or the project was not taking off. Despite the
fact that the owner was giving the possession, the actual development was not
happening. This meant that part performance on the builders side was not happening -
therefore there was a breach on the side of the builder and 53A falls to the ground - is
not appilcable. So if from the facts it could be inferred that the developer has not
perfromed his part of the contract, 53A of ToPA is negated and it does not amount to
transfer and therefore there is no Capital gains tax payable.

3rd series of cases

- Retention of control - the assessee signed and agreement but the control given was
limited. There was no GPA given to the builder, the only permission was allowign
access to the premise. But all other approvals and permissions were retianed by the
owner meaning that the builder was still working for the original owner. The
completion certificates, other kinds of approval were all to be taken in the name of the
original owner. The courts led to the decision that there is no transfer so no capital
gains tax is payable - you will decipher this only from the kind of agreement that is
signed and the kind of powers given.

4th test which comes from amendments made to ToPA - under 53A there was an
amendment which required that the contract signed between the parties has to be
registered. If the contract is not registered it will not have recognition under ToPA so if one
party has partly performed and the other has not, it will not be enforceable in the court of
law.
- Unregistered Agreement Test - So a series of cases came to light where the JDA was
signed but not registered. So the court said that the IT act is piggybacking off of TOPA
and if the agreement is not meeting the definitional standards under ToPA it will not
be considered a transfer under the IT act either. If you do not choose to get it
registered, you might not have any sort of remedy left.

In 2017, the position in the statute is - 45(5A) - it is said that where capital gains arises to an
individual or an HUF for transfer of a capital asset being land or building or both under a
specified agreement, capital gains shall be chargeable in the previous year in which the
certificate of completion for the whole or part of the project is issued by the competent
authority.
- So if you are individual or HUF
- Your chargeability will be the year in which the completion certificate is obtained
from the competant authority
- If however the person has transferred any interest in the land before the CC comes,
then the tabulation will be from the day on which you transfered, that year will be the
relevant year and you will be paid on an immediate basis.

CIT v. Balbir Singh Maini (2017) SC

An assessee who was the member of a cooperative housing society. A CHS had entered into
an agreement with two diff builders who were collaborating to rebuild the property. It was
with respect ot the transfer of 21acres of land in different installment basis. In the 3 acres
where the conveyance deed was transferred and registered and they had transferred some
23cr. A total of 8 acres had been conveyed. The balance acres - the matter was pending
before the HC and they never got approval. So the development never happened. The
department had claimed the entire amount however from BSM. BSM came to court and
said that it is only these two phases which have gotten finality, the other isnt taking off and
you cant charge me the CG cause I will never receive it anyway. The amount is never going
to accrue to me. BSM is saying you cant invoke Section 2(47)(V) since the 14 acres is not
going to materialise at all and you cant invoke it in the year in which JDA is being signed.
The authorities were saying - should we then invoke the clause of - putting someone in
possessoin amounting to enjoument of the property.
Held: the CHS had given very limited license to the builder and only to the extent of those
lands which stood originally conveyed. They had also given limited entry to the builder on
the acres. The transaction which has the effect of giving possession or enjoyment of
immovable property, even that cant apply. Further since this payment will never reach the
assesssee, it has never acrrued to him so you cant tax him in the year in which the JDA was
signed.

De facto enjoyment or property. So any transaction which has the effect of rendering
enjoyment. Even in balbir singh they were trying to invoke the case of having an effect of
transferring, but the SC said that the agreement is restrictive in its approach and
application, thye are not allwoing the builder to have an unrestricted access. There is no de
facto transfer that has occurred either.

45(5A)
Statutory amendment happens after this - in case of individuals and HUFs the completion
certificate is an essential certificate to invoke the charging provision. Which year will you
attract the charging section? In the year in which completion certificate has been
obtained. Companies have been excluded because being the company you are better
situated to respond to conditions of non performance. Real estate and the kind of tax
implications are huge, so to then subject an assessee on an amoutn they havent even
realised is wrong.
Companies, firms and other professional entities cannot claim this though.

Exemptions to Capital Gains

Section 54
If an Individual or HUF sells or transfers a residential property and then invests the capital
into another residential property -
- The initial capital asset has to be held for atleast 1 year - so as to make it a long term
capital asset and avoid this provision being used as a business
- If a trasnfer is made on 1st april 2022 - then the amount from that transfer can be
claimed as exempt here if the new residential property is purchased from 1st april
2021 to 31st march 2024. that is before 1 year or within 2 years of the transfer of the
capital asset, for the purchase of a house
- The time for investment increases to 3 years after in case of construction
Then you can claim a tax exemption to the extent of the amount of the capital gain
you invest under section 54, whatever the balance amount is (if any) will be subjected
to CG tax under section 45.
- There is a lockin period - you cannot sell off this new property within 3 years, if you do
then the exemptions you claimed will be rolled back.

Sometimes, it is difficult to spend the amount earned from a transfer within a year. In
such situations, the amount earned will be unutilized. A special account can be created for
depositing the amount earned by CG. Taking the earlier example further, you will have to
give proof of your capital gains account to the IT department. Based on this evidence, relief
will be provided.

You put the amount in a recognized scheme saying this is a capital gains amount and you
can show it to the assessees, and you can then avail the exemption this year itself.
For example, if X on 31 January has sold a residential property. Applying the formula,
let us say your gains are getting 2 crores consideration, and indexed cost of acquisition plus
improvement is 30 lakhs. So your gain is 1.70 crores. This amount can be invested in either
purchase (2 years from now or 1 year before purchase) or construction of new property
(within 3 years).

You can take this 1.7 crores and deposit it in special scheme and put it with returns and
demonstrate that this is the amount you will start utilizing in periodic basis. In case you have
utilized this entire amount on new property construction, then that 1.7 crores is exemption.
But if any amount is not utilized - you pay cap gains tax on that

If however the lockin period is violated you will roll back the exemption - therefore, the
amount that was the cost of acquisition will be subtracted from the capital gain and the
rest will be taxed.

Whatever the amount is remaining which is unutilised after the expiry of the relevant time
period, you will pay tax on it. Suppose you deposit the amount for exemption and it remains
unutilised or used for some other purposes, then at the end of the time period when you
cant demonstrate that there is a residential property, you will be taxed on the amount.

The reason for this is to ensure that there is an ease of home buying. But if you are buying a
new house, you will be given a lockin period - these limits are there to ensure that this
doesn’t become a business for tax exemption.

From 1st of april 2020 - there is a beneficial reading - if the amount of capitgal gains does
not exceed 2cr, then the assessee may at his option construct two residential houses in
india. Before this provision, the reading was that you could only get 1 residential HP out of
the proceeds if you transferred 1 HP.
Section 54F
This provides exemption for transfer of any long term capital asset other than residential
house. You can invest this capital gain for residential or construction purpose. Conditions:
- assessee is an individual or HUF
- Long term capital gain due to transfer of long term capital asset
- amount of gain is utilized for purchase of residential house or construction of
residential house (timeline remians the same)

Disqualifiers - This exemption applies primarily to first time home owners.

If you already had 2 HP, then 54F is not an exemption you can claim.

CIT v. Geeta Duggal, 2013, Delhi HC

Assessee who had a JV agreement with the builder where the builder was to demolish the
existing premises the assessee had and construct a new apartment. Under this the builder
would get the top floor and an interest on the land and the other floors were to be given to
geeta duggal. She was also to get 4cr and the other floor were to be sold. GD surrendered
the 4Cr for tax - said it was her full value of consideration - from this she had a cost of
acquisition of 80L being deducted, came to balance amount, claimed an exemption under
54EC [when the amount is invested in other investments, around 50L she invested]. So the
balance amoutn - 2Cr 70L I will pay the tax. The AO said that the property is also being
constructed and the value of that is 3cr. You also are getting 3 different floors - you cant
take an exemption on it so easily, the statute applied at that time to just one property.
And so her total income was calculated to be 5.5 crore ish. GD argued that she did already
invested the 3cr value of the property into the construction.
The court held that the house property being constructed cannot be rejected on the ground
that the units are capable of being used as independent units or that they have different
entry points to the property. If the unit you are getting constructed is such that you can set
aside a portion or that floor as independent, you shouldn’t count it as each floor being just a
hosue. This is because assessees are at liberty to construct the proeprty as per their own
comfort and the statute doesn’t prescribe any manner for how it hsould get constructed.
The only requirement is that it should be for residential use and not commercial use - a
person may construct a hosue according to his plans - and he might do so such that he
might use the ground floor for his own residence and let out an independent entry. One
may build a hosue such that some units can have independent entrance for it to be let out
or he could make an arrangements for families to live together but also have privacy.
Therefore, GD getting different floors, the assesing officers cannot quesiton this. Court is
giving a liberal interpretation saying you cant insist that a construction has to happen in
specific way. So the HC is allowing her to take the exemption under 54 putting the point that
since the statute doesn’t insist on the manner in which the hosue is constructed.

Now after 2020 there Is a number specified, 2 properties if capital gain not more than 2cr.
If you also have used some of the proeprty to be let out as commercial asset, you cant claim
that kind of an exemption on it.

Section 54GB - exemption with respect to transfer of residential hosue and invest in
business. Eligible businesses
- Manufacturing sector - if you sell HP, buy
- Eligible startups - the ones engaged in innovation, development or improvement of
products, processes or services or a scalable business model with high potential of
employment generation or wealth creation [like aatmanirbhar property].

Section 54GB
- Long term capital asset
- This amount is utilized for a subscription of equity shares of an eligible company: The
company is an Indian company, is into manufacturing and qualifies as an eligible
startup. This is tied to Atmanirbhar Bharat and youth generation of jobs.
- within one year, the company has utilized this for purchase of a new asset.
- having purchased shares, you cannot transfer shares within a stipulated period (5
years) or the asset purchased by the company also cannot be sold within a period of 5
years. You must continue with the startup.

When you create capital for the company and invest it by purchasing equity shares.
Checkthis - ma’am thinks its individual

Section 54B
Transfer of agricultural land
- Transfer of capital asset being agricultural land which in the 2 years preceding was
used by individuals or HUF for agricultural purposes.
- Here, there is no condition on it being short term or long term
- You are utilizing the amount for purchase of another agricultural land
- Such a purchase is within a period of 2 years of the date of transfer

Section 54G
Exemption on transfer of assets for shifting the industrial undertaking to any area other
than urban area. Assessee has within a period of 1 year before or 3 years after - acquired a
new building or purchased a new machine in a non-urban area