Computation of Income from CAPITAL GAINS As Amended by Finance Act, 2023

Description CONTENTS Chapter 1 : Introduction 1 Justification of Capital Gains Tax…………………………………………………………………..1 Background of introduction of Capital Gains-tax…………………………………………..1 Abolition of capital gains-tax…………………………………………………………………………2 Prof. Nicholos Kaldor’s recommendation………………………………………………………2 Residential status for the purpose of taxation of Capital gain………………………..4 Capital gains are chargeable on accrual basis…………………………………………………4 Mercantile method of accounting has to be followed…………………………………….4 Capital gain is part of income though under separate head…………………………..5 One deeming section cannot be extended by importing another deeming section…………………………………………………………………………………………………….5 Capital gains in case of erstwhile State Ruler…………………………………………………5 Chapter 2 : Essential conditions for taxation of profits under the head ‘Capital Gains’ 10 (1) There must be a capital asset which is owned by the assessee as defined in section 2(14)……………………………………………………………………….10 (2) The capital asset must have been transferred by the assessee during the previous year………………………………………………………………………………..11 (3) There must be profits and gains as a result of such transfer, which will be known as capital gain……………………………………………………………..11 (4) Such capital gain should not be exempt under section 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA or 54GB………………………………………….11 Chapter 3 : “Capital asset” means 12 Existence of a capital asset on the date of transfer in the hands of transferor is essential …………………………………………………………………………..14 Property of any kind is a capital asset………………………………………………………….14 Property also means the right, title or interest in it………………………………………15 Not treated as capital asset…………………………………………………………………………..15 Assets can never be personal effects and treated as a capital asset [Exception]……………………………………………………………………………………………16 Chapter 4 : Transfer in relation to a capital asset 31 (i) Sale……………………………………………………………………………………………………..32 (ii) Exchange…………………………………………………………………………………………….33 (iii) Relinquishment of the assets………………………………………………………………35 (iv) Extinguishment of any rights in an asset…………………………………………….35 (x) CONTENTS (v) Compulsory acquisition as asset under any law [Section 2(47)(iii)]………………………………………………………………………………..36 (vi) Personal effects converted into stock-in-trade [Section 2(47)(iv)]………………………………………………………………………………..36 (vii) Maturity or redemption of a Zero Coupon Bond [Section 2(47)(iva)]………………………………………………………………………………37 (viii) Allowing possession of immovable properties under part performance of a contract [Section 2(47)(v)]……………………………………….37 (ix) Any transaction which has the effect of transferring an immovable property (Membership of housing society, company, etc.) [Section 2(47)(vi)]………………………………………………………..38 (x) Transfer when complete and effective………………………………………………..39 Chapter 5 : Scope of deemed transfer for taxing capital gains 47 Rule laid down by section 53A of Transfer of Property Act, 1882…………………48 Difference between English Law and Section 53A of Transfer of Property Act, 1882 Regarding Doctrine of Part Performance………………..48 Capital gains are not taxed until the property is actually transferred in accordance with the agreement…………………………………………………………….50 Chapter 6 : Period of holding 61 Holding Period as Asset to be considered [Holding need not be as capital asset]…………………………………………………………………………………………69 Calculation of period of holding…………………………………………………………………..69 Previous owner means the last previous owner…………………………………………..70 Period of holding of Conversion of Stock-in-Trade into Capital Asset shall be reckoned from the date of conversion or treatment…………………70 Holding by the Firm and Partner…………………………………………………………………70 Chapter 7 : Chargeability of capital gains [Section 45] 76 Basis of charge (Section 45)…………………………………………………………………………..76 (i) There should be a capital assets [Section 2(14)]……………………………………76 Property of any kind is wide term and includes all………………………………………76 (ii) The capital asset is transferred by the assessee [Section 2(47)]……………76 Year of chargeability of gains……………………………………………………………………….77 Capital gain or Business income…………………………………………………………………..77 Chapter 8 : Any profits or gains arising from transfer of a capital asset [Section 45(1)] 86 When section 45(1) is attracted…………………………………………………………………….86 Year of taxability………………………………………………………………………………………….87 Full value of consideration…………………………………………………………………………..87 (xi) CONTENTS Chapter 9 : Capital gains when insurance is received [Section 45(1A)] 94 When section 45(1A) is attracted………………………………………………………………….95 When section 45(1A) is not applicable………………………………………………………….95 Nature of transaction……………………………………………………………………………………96 Period of holding…………………………………………………………………………………………96 Capital Gains assessable in the hands of………………………………………………………96 Year of taxability – in the year of receipt of claim…………………………………………96 Full value of consideration for the purpose of section 48……………………………..96 Chapter 10 : Taxation of proceeds of high premium unit linked insurance policy (ULIP) [Section 45(1B)] 101 Rule to compute capital gains on sum received from ULIPs not exempt under section 10(10D)…………………………………………………………….103 Chapter 11 : Capital gains on conversion of capital assets into stock-in-trade [Section 45(2)] 105 Background………………………………………………………………………………………………..105 Relevant provisions……………………………………………………………………………………106 Nature of transaction …………………………………………………………………………………106 Year of transfer…………………………………………………………………………………………..106 Capital Gains assessable in the hands of…………………………………………………….106 Year in which chargeable……………………………………………………………………………106 Capital Gain shall be computed in the year when such converted asset is sold…………………………………………………………………………………………106 lndexation of cost of acquisition & improvement shall be done till the year of conversion……………………………………………………………………106 There must be a capital asset………………………………………………………………………107 Fair Market Value of the inventory…………………………………………………………….108 Cost of acquisition………………………………………………………………………………………108 Period of holding of such capital asset……………………………………………………….108 Treated as business income………………………………………………………………………..108 Business income also to be calculated in the year of sale…………………………….108 Essential conditions……………………………………………………………………………………108 Computation of capital gain……………………………………………………………………….109 Chapter 12 : Chargeability of capital gain on transfer of security by depository [Section 45(2A)] 115 Definitions as per section 2(1) of the Depositories Act, 1996……………………….115 Year of taxability – In the year of transfer……………………………………………………116 Essential conditions……………………………………………………………………………………116 (xii) CONTENTS Rate of Tax………………………………………………………………………………………………….116 Nature of transaction (Particulars of transfer)…………………………………………….117 Capital Gains assessable in the hands of…………………………………………………….117 Year of taxability – in the year of transfer……………………………………………………117 Full value of consideration for the purpose of Section 48……………………………117 Computation of capital gain……………………………………………………………………….117 Transfer of Securities in a Demat form [Section 45(2A)]……………………………..118 Chapter 13 : Capital gain on transfer of capital asset by a partner, member to a firm or association of persons or body of individuals, as capital contribution [Section 45(3)] 122 Background………………………………………………………………………………………………..122 Nature of transaction (i.e., Particulars of transfer)………………………………………123 Year of taxability………………………………………………………………………………………..123 Capital Gains assessable in the hands of…………………………………………………….123 Full value of consideration for the purpose of Section 48……………………………123 Provisions in Brief : Capital Contribution by Partner [Section 45(3)]………….123 Essential conditions……………………………………………………………………………………124 Section 45(3) vs Section 50C ……………………………………………………………………….124 Computation of Capital gains tax under Section 45(3)………………………………..124 Chapter 14 : Capital gain on transfer of capital assets by a firm/AOP/BOI to partner/member on its reconstitution [Section 45(4)] 130 Understanding of provisions of section 45(4)……………………………………………..131 Pre-conditions for applicability …………………………………………………………………132 Section 45(4) overrides section 45(1) ………………………………………………………….133 Understanding of provisions of section 9B…………………………………………………135 Pre-conditions for applicability of section 9B……………………………………………..136 Year of transfer…………………………………………………………………………………………..141 Year of taxation of income …………………………………………………………………………141 Manner of computation of income …………………………………………………………….141 Computation on account of section 48(iii) ………………………………………………….142 Understanding the provisions with example:…………………………………………….143 Computation of Capital Gains Tax under Section 45(4)………………………………143 Rate of tax ………………………………………………………………………………………………….144 CBDT Guidelines under sections 9B and 45(4)……………………………………………144 Distribution of stock-in-trade to partners on dissolution……………………………146 Computation of capital gain……………………………………………………………………….146 (xiii) CONTENTS Capital gain on partnership firm dissolution……………………………………………..146 Section 45(4) is not applicable…………………………………………………………………….147 Chapter 15 : Capital gain on transfer by way of compulsory acquisition of an asset by Government [Section 45(5)] 162 Nature of transaction (i.e., Particulars of transfer)………………………………………163 Capital Gains assessable in the hands of…………………………………………………….163 Year in which chargeable……………………………………………………………………………163 When is section 45(5) applicable?……………………………………………………………….164 Computation of capital gain……………………………………………………………………….164 Initial Compensation …………………………………………………………………………………164 Taxability of enhanced compensation [Section 45(5)(b)]…………………………….165 Cost of acquisition and cost of improvement for enhanced compensation [Explanation to section 45(5)(b)]…………………………………..165 Tax treatment of compensation received under interim order of a Court, Tribunal or other authority [Proviso to Section 45(5)(b)]…………………….165 Compensation received by legal heirs………………………………………………………..165 Reduction of compensation………………………………………………………………………..166 Treatment of interest awarded under the Land Acquisition Act, 1894………..166 Interest on enhanced compensation is revenue receipt………………………………167 CBDT has clarified the taxability of compensation on compulsory acquisition of Agriculture & Non-Agriculture land……………………………167 Chapter 16 : Special provisions for computation of capital gains in case of Joint Development Agreement [Section 45(5A)] 178 Legislative intent for introduction of Section 45(5A)…………………………………..178 Specified agreement (Joint Development Agreement) [Explanation (ii) to Section 45(5A)]……………………………………………………………………………………180 Salient features of definition of Specified Agreement…………………………………180 Taxability of Joint Development Agreement from the point of view of Land Owner……………………………………………………………………………………….181 Land owners liable to capital gains only when the builder completes the construction and gets the completion certificate…………………………………181 Cost of acquisition of the share in the project being Land or Building or both [Section 49(7)]…………………………………………………………………………181 Cost of construction of the land owner’s portion that the owner buys after construction of the complete structure………………………………………..182 Taxability of Joint Development Agreement from the point of view of Builder Developer………………………………………………………………….182 Provisions of Section 45(5A) shall not apply………………………………………………183 (xiv) CONTENTS Case of conversion of land held by land owner as capital asset to Stock-in-trade before entering in to JDA…………………………………………….183 Computation of Capital Gain……………………………………………………………………..184 Consequences if land owner transfers his share before issue of completion certificate………………………………………………………………………….184 Liability to Deduct TDS on monetary consideration (payment under joint development agreement) [Section 194-IC]………………………..186 GST Applicability to Joint Development Agreement………………………………….187 Chapter 17 : Re-purchase of units under section 80CCB [Section 45(6)] 201 Nature of transaction (i.e., Particulars of transfer)………………………………………201 Capital Gains assessable in the hands of…………………………………………………….201 Computation of capital gain……………………………………………………………………….202 Year of taxability………………………………………………………………………………………..202 Full value of consideration for the purpose of Section 48……………………………202 Chapter 18 : Computation of various types of capital gains 203 Types of capital asset………………………………………………………………………………….203 [1] Long-term capital asset [Section 2(29A)]…………………………………………….203 Reduction of holding period for computation of capital gains for immovable property [Third proviso to section 2(42A)]……………………….203 Conversion of leasehold rights into freehold rights—Gain would be long-term capital gain…………………………………………………………………………203 [2] Short-Term Capital Asset [Section 2(42A)]…………………………………………..204 Property constructed on a land purchased earlier………………………………………204 Rebate of tax under Section 87A…………………………………………………………………204 Deduction under sections 80C to 80U…………………………………………………………204 Chapter 19 : Short-term capital gains in certain cases [Section 111A] 206 Meaning of short-term capital gain and long-term capital gain………………….206 Short-Term Capital Asset……………………………………………………………………………206 Difference between long-term and short-term capital gains……………………….206 Short-term capital asset [Section 2(42A)]…………………………………………………….207 Applicability of Section 111A……………………………………………………………………..210 Short-Term Capital Gains covered under Section 111A……………………………..210 Short-Term Capital Gains not covered under Section 111A………………………..211 Tax on Short-Term Capital Gain…………………………………………………………………211 Adjustment of Short-Term Capital Gain (STCG) against Basic exemption limit…………………………………………………………………………………..212 (xv) CONTENTS Deduction under Chapter VIA [i.e., sections 80C to 80U]…………………………..212 Computation of Short-Term Capital Gains ………………………………………………..213 Computation of Short-term capital gains (Section 48 for non-depreciable assets)……………………………………………….213 Chapter 20 : Tax on long-term capital gains [Section 112] 216 Difference between Section 112 and Section 112A of Income Tax Act, 1961………………………………………………………………………….218 Section 112 Exceptions:………………………………………………………………………………219 Adjustment of Long-Term Capital Gain against basic exemption limit………219 Computation of long-term capital gains……………………………………………………..220 Tax on long-term capital gain…………………………………………………………………….222 Tax on long-term capital gain @ 10% in certain special cases…………………….222 Chapter 21 : Long-term capital gains on transfer of Zero Coupon Bonds 224 Meaning of Zero Coupon Bond………………………………………………………………….224 List of Zero Coupon Bonds as notified by the Central Government for the purpose of section 2(48) of the Act…………………………………………..225 Maturity or redemption of a Zero Coupon Bond to be regarded as transfer [Section 2(47)(iva)]…………………………………………………………………227 Tax Treatment of Zero Coupon Bonds……………………………………………………….227 Tax treatment in the hands of company issuing such bonds [Section 36(l)(iiia)]………………………………………………………………………………227 Taxation as Capital Gains/Business Income in the hands of Investors……….227 Transfer of zero coupon bonds taxable as capital gains in the hands of investor………………………………………………………………………………………………228 TDS not applicable on Maturity/Redemption……………………………………………228 CBDT amends Income Tax Rules to facilitate issuance of Zero Coupon Bonds by Infrastructure Debt Fund…………………………………………………….228 Chapter 22 : Tax on long-term capital gains in certain cases [Section 112A] 229 Eligible assessee………………………………………………………………………………………….231 Applicability of Section 112A……………………………………………………………………..231 Benefit of Deduction under Chapter VIA & Rebate under section 87A shall be allowed………………………………………………………………………………….232 Threshold limit of long-term capital gain exemption………………………………….232 Set-off long-term capital loss from long-term capital gain………………………….232 Concept of Grandfathering…………………………………………………………………………232 Rate of tax under Section 112A…………………………………………………………………..232 (xvi) CONTENTS How tax is computed under Sections 112A and 112…………………………………..233 Cost of acquisitions in respect of the long-term capital asset acquired by the assessee before 01.02.2018………………………………………….233 Computation under Section 112A………………………………………………………………235 Chapter 23 : Capital gains tax on sale of Bonus Shares 236 What is bonus share……………………………………………………………………………………236 Bonus Shares – Period of Holding………………………………………………………………236 Cost of Acquisition of Bonus shares [Section 55(2)]…………………………………….236 Provisions of section 56(2)(vii)(c) are not applicable to bonus shares …………237 Expenses incurred for issue of bonus shares are to be allowed as revenue expenditure………………………………………………………………………238 Chapter 24 : Bonus stripping transactions [Section 94(8)] 239 Concept of Bonus Stripping……………………………………………………………………….239 Provision of Bonus Stripping under section 94(8)……………………………………….239 Conditions for applicability to attract the provisions of section 94(8)…………242 Income-tax implications on Bonus Stripping………………………………………………243 Benefits of Indexed cost of Acquisition available……………………………………….243 Chapter 25 : Capital gains tax on sale of Right Shares 247 Cost of acquisition of such Right Share………………………………………………………247 Right Entitlement……………………………………………………………………………………….247 Tax treatment …………………………………………………………………………………………….248 Chapter 26 : Capital gains taxation of Mutual Funds 249 Factors determining the tax status of Mutual Funds…………………………………..249 Liquid Funds………………………………………………………………………………………………250 Hybrid Funds…………………………………………………………………………………………….250 Calculation of Capital Gains under Mutual Fund………………………………………250 Capital Gains Tax Rates on Mutual Funds from Assessment Year 2021-22………………………………………………………………………………………………..250 Chapter 27 : Capital gains on Self-generated Capital Asset [Section 55(2)(a)] 253 (i) Goodwill of business (Not of profession)………………………………………………253 (ii) Loom hours………………………………………………………………………………………….255 (iii) Route permits or Stage carriage permits……………………………………………..256 (iv) Surrender of Tenancy right…………………………………………………………………256 (v) Trademark or brand name associated with business……………………………259 (vi) Right to manufacture, produce or process any article, or thing for a consideration………………………………………………………………………………………259 (xvii) CONTENTS (vii) Right to carry on any business…………………………………………………………….259 Computation of capital gain in the case of SELF-GENERATED ASSETS……260 Chapter 28 : Capital gains from transfer of unlisted shares 262 Exception wherein this is not Applicable……………………………………………………262 Unlisted shares of a company to be short-term capital asset if held for not more than 24 months [Third proviso to section 2(42A)]…………..262 CBDT clarifies that income/loss arising from transfer of unlisted shares to be considered under head “Capital Gain” irrespective of holding period, with certain exceptions………………………264 Taxability of surplus on sale of shares and securities…………………………………265 Chapter 29 : Capital Gains on distribution of Assets by Companies in its Liquidation [Section 46] 269 No capital gain to company on distribution of assets to shareholder on liquidation [Section 46(1)]…………………………………………………………………..269 Company – Distribution of assets by a Company at the time of liquidation would not be regarded as transfer [Section 46(1)]…………….269 Capital gains on distribution of assets by companies in its liquidation………269 Applicability of section 46(1)………………………………………………………………………270 Tax treatment in the hands of the company……………………………………………….270 Tax treatment in the hands of the shareholders………………………………………….271 Shareholders liable to capital gains tax on receiving of money and asset on the liquidation of the company [Section 46(2)]………………………272 Determination of capital gain under section 46(2)………………………………………272 Period of holding [Section 2(42A)]……………………………………………………………..272 Cost of acquisition of the assets [Section 55(2)(b)(iii)]…………………………………272 Computation of capital gain……………………………………………………………………….272 Chapter 30 : Capital gains on purchase by a company of its own shares or other specified securities (buy-back) [Section 46A] 279 Objectives of Buy-back of Shares………………………………………………………………..279 Buy-back of shares by companies and its treatment under Income-tax Act, 1961…………………………………………………………………………..280 Ways of distributable Reserves benefits for its members……………………………284 Tax on buy-back of shares in case of listed companies……………………………….285 Rules with respect to buy-back of shares [Rule 40BBl…………………………………287 Clarification of tax issues arising out of the provision to allow buy-back of shares by the companies……………………………………………………………………..291 (xviii) CONTENTS Chapter 31 : Transactions not treated as transfer[Section 47] 293 [I] Capital gain on distribution of assets in kind by companies to its shareholders at the time of liquidation [Section 46(1)]………………………..293 [2] Any distribution of capital assets on the total or partial partition of a Hindu Undivided Family (HUF) [Section 47(i)]……………………………293 [3] Any transfer of a capital asset under a Gift or will or an irrevocable trust [Section 47(iii)]…………………………………………………………294 [4] Transfer of capital asset by holding company to its subsidiary company [Section 47(iv)]…………………………………………………..295 [5] Transfer of capital assets by 100% subsidiary company to its Indian holding company [Section 47(v)]……………………………………………..298 [6] Transfer of capital asset in a scheme of amalgamation [Section 47(vi)]……………………………………………………………………………………299 [7] Transfer of capital asset in a scheme of amalgamation of two foreign companies [Section 47(via)]……………………………………………..300 [8] Transfer in a scheme of amalgamation between a banking company [Section 47(viaa)]…………………………………………………………………301 [9] Transfer of capital asset being a share of a foreign company in the scheme of amalgamation not to be regarded as transfer subject to certain conditions being satisfied [Section 47(viab)]……………302 [10] Transfer in a demerger of a capital asset by the demerged company to resulting company (in a scheme of demerger) [Section 47(vib)]………302 [11] Transfer of shares in Indian company in scheme of demerger between two foreign companies [Section 47(vic)]……………………………….303 [12] In a business reorganization by predecessor co-operative bank to the successor co-operative bank or to the converted banking company [Section 47(vica)]…………………………………………………………………………………304 [13] Being shares by shareholder of a predecessor co-operative bank or to the converted banking company in a business reorganization [Section 47(vicb)]………………………………………………………………………………..304 [14] Transfer of capital asset being a share of a foreign company in the scheme of demerger not to be regarded as transfer subject to certain conditions being satisfied [Section 47(vicc)] (with effect from assessment year 2016-17)…………………………………………………………………….305 [15] Transfer/allotment of shares by the resulting company to the shareholders of the demerged company in a scheme of demerger [Section 47(vid)]………………………………………………………………………………….306 [16] Allotment of shares in Amalgamated Company in lieu of shares held in amalgamating company [Section 47(vii)]………………………………..306 [17] Transfer of capital asset of foreign currency convertible bonds or (xix) CONTENTS GDR by a non-resident to another non-resident [Section 47(viia)] ……..310 [18] Transfer of Rupee Dominated Bonds outside India by a non-resident to another non-resident [Section 47(viiaa]……………………..310 [I9] Transactions by a non-resident on a recognized stock exchange located in any International Financial Services Centre where consideration is paid or payable in foreign currency [Section 47(viiab)]……………………………………………………………………………….311 [20] Any transfer, in a relocation, of a capital asset by the original fund to the resulting fund [Section 47(viiac)]………………………………………314 [21] Allotment of shares of the resultant fund to the shareholders of the original fund as a result of relocation [Section 47(viiad)]…………..314 [22] Transfer of capital asset by Indian Infra Finance Co. to an I nstitution established for financing infrastructure and development [Section 47(viiae)]………………………………………………………….318 [23] Transfer of capital asset under a plan approved by Central Government [Section 47(viiaf)]………………………………………………….. 318 [24] Exemption from tax to transfer of Government Security by one non-resident to another [Section 47(viib)]…………………………………….319 [25] Any transfer of Sovereign Gold Bond issued by the Reserve Bank of India (RBI) under the Sovereign Gold Bond Scheme, 2013 by way of redemption, by an assessee being an individual [Section 47(viic)] ……..320 [26] Conversion of Gold to Electronic Gold Receipt and vice versa [Section 47(viid)]…………………………………………………………………………………320 Cost of acquisition of the asset [Section 49(10]……………………………………………320 [27] Transfer of agricultural land in India before 01.03.1970 [Section 47(viii)]………………………………………………………………………………….320 [28] Any transfer of a capital asset being any work of art, manuscript, painting, etc. to Government/University/National Museum, etc. [Section 47(ix)]…………………………………………………………………………………….321 [29] Conversion of bonds or debentures into shares [Section 47(x)]……………321 [30] Conversion of Foreign Currency Exchangeable Bonds [Section 47(xa)]……………………………………………………………………………………322 [31] Any transfer by way of conversion of preference share of a company into its equity share [Section 47(xb)]……………………………………323 [32] Transfer by way of exchange of membership of a recognized stock exchange for shares of a company [Section 47(xi)]……………………..324 [33] Transfer of land by sick industrial company which is managed by its workers’ co-operative [Section 47(xii)]………………………………………324 [34] Transfer of capital assets in the case of conversion of firm into company [Section 47(xiii)]…………………………………………………………………..325 (xx) CONTENTS [35] Transfer of a capital asset, being a membership right held by a member of recognized stock exchange in India [Section 47(xiiia)]………328 [36] On Conversion of a private limited or Unlisted Public Company into Limited Liability Partnership (LLP) [Section 47(xiiib)]…………………329 [37] Transfer of a capital asset in the case of conversion of a sole proprietary concern into a company [Section 47(xiv)]…………………………335 [38] Transfer involved in a scheme of lending of any securities [Section 47(xv)]…………………………………………………………………………………..336 Conditions to be satisfied before the benefit of the section…………………………337 [39] Reverse mortgage transactions by senior citizens – i.e., individuals aged 60 years or more [Section 47(xvi)]………………………………………………337 [40] Any transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust to the transferor not to be treated as transfer [Section 47(xvii)]…………………………………………………………………………………339 [41] 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 [Section 47(xviii)]………………………………………………………………………………..340 [42] Any transfer by a unit holder of a capital asset, being a unit or units held by him in the consolidating scheme of mutual fund [Section 47(xix)]…………………………………………………………………………………..341 [43] Exempt transfer of interest in a joint venture held by a PSU in exchange for shares of a foreign company [Section 47(xx)]…………………342 [44] Family settlement………………………………………………………………………………..342 [45] Transfer of Sick Unit to Employees’ Co-operative……………………………….344 Chapter 32 : Withdrawal of exemption in certain cases [Section 47A] 345 Transfer of capital asset between holding and subsidiary company – Withdrawal of exemption in case of fully Holding and Subsidiary Company [Section 47A(1)]…………………………………………346 Stock Exchange [Section 47A(2)]…………………………………………………………………346 Non-compliance of any specified condition by successor company [Section 47A(3)]…………………………………………………………………………………..346 Withdrawal of exemption availed under Section 47(xiiib) on non-fulfillment of conditions – Deemed Profits [Section 47A(4)]…………347 Consequences of withdrawal of exemption………………………………………………..347 Withdrawal of exemption availed under Section 47(xiiib) on non-fulfillment of conditions – Deemed Profits [Section 47A(4)]…………347 Consequences of withdrawal of exemption………………………………………………..347 (xxi) CONTENTS Re-computation of income in the case of transferor company if exemption withdrawn by section 47A-Section 155(7B)……………………….348 Chapter 33 : Mode of computation of capital gains [Section 48] 351 Method of Computing Capital Gain [Section 48]………………………………………..354 [I] Computation of capital gain in case of non-residents [First proviso to section 48]……………………………………………………………………………………..355 [2] Indexed Cost of Acquisition and Improvement -Indexation [Second proviso to section 48]…………………………………………………………..356 [3] Long-term capital gains arising from transfer of an equity share, or a unit of an equity oriented fund or a unit of a business trust as referred to in Section 112A [Third Proviso to Section 48]……..357 [4] Appreciation of rupee shall be ignored for the purposes of computation of full value of consideration [Fourth Proviso to Section 48]…………………………………………………………………………………….358 [5] Fifth Proviso to Section 48—Shares, etc. transferred under ESOP ……….358 [6] Sixth Proviso to Section 48-Securities Transaction Tax (STT)……………….359 Chapter 34 : Expenditure incurred wholly and exclusively in connection with transfer of capital asset [Section 48 (i)] 364 Wholly and exclusively………………………………………………………………………………364 Word ‘connection’ in section 48(i) ……………………………………………………………..365 Deduction of expenditure…………………………………………………………………………..365 In case of sale of a house property……………………………………………………………..365 (i) Brokerage or Commission paid for securing a purchaser……………………..365 (ii) Cost of Stamp Papers or Registration Fees borne by the Vender (Seller)………………………………………………………………………………….365 (iii) Travelling Expenses in connection with transfer (Sale)………………………365 (iv) Litigation Expenses for claiming Enhancement in Compensation………366 (v) Where property has been inherited, expenditure incurred with respect to procedures associated with the will and inheritance, obtaining succession certificate, costs of executor, may also be allowed……………366 (vi) Advertisement cost incurred by the seller to get buyer………………………366 In case of sale of jewellery………………………………………………………………………….366 Expenditure allowed under other heads of income…………………………………….366 Compensation paid to related parties to get them vacate the land transferred cannot be allowed as deduction under section 48(i) in computing capital gains………………………………………………………………….366 Chapter 35 : Cost of acquisition of the asset and the cost of any improvement thereto [Section 48(ii)] 379 Cost of Acquisition…………………………………………………………………………………….379 (xxii) CONTENTS Cost of Improvement………………………………………………………………………………….379 Mode of computation [Section 48]………………………………………………………………379 Chapter 36 : Special provisions in the case of a non-resident Indian (NRI) [First and Section proviso to section 48] 386 Mode of Computation for non-resident (First Proviso to section 48 and Rule 115A)……………………………………………………………………………………387 Capital gain in the case of transfer of shares/debentures by non-residents [First Proviso to section 48 and rule 115A]………………………………………….387 Chapter 37 : Cost Inflation Index [Explanation (v) to Section 48] 390 Background………………………………………………………………………………………………..390 Indexed cost of acquisition…………………………………………………………………………391 How to do indexation…………………………………………………………………………………391 Cost of Inflation Index………………………………………………………………………………..391 Shifting base year from 1981 to 2001 for computation of capital gains [Section 55(2)(b)]…………………………………………………………………………………391 Cost Inflation Index Applicable from Financial Year 2020-21 (Assessment Year 2021-22) with Base Year 2001-02…………………………….392 Cost of acquisition – Property inherited indexed cost to be determined as on 01.04.1981……………………………………………………………….396 Gifted property : Indexation……………………………………………………………………….396 In case of transfer by gift, will, trust, etc., indexed cost to be determined with reference to holding by previous owner………………….396 Indexed cost of gifted assets has to be determined with reference to previous owner………………………………………………………………………………396 Family arrangement is analogous to partition attracting Section 49 [Family arrangement (Settlement)]……………………………………………………..397 Indexed cost of acquisition of house inherited from father – Sale of house inherited from father – Cost of acquisition of house to the assessee has to be deemed to be the cost for which the previous owner had acquired it …………………………………………………………397 Chapter 38 : Cost with reference to certain modes of acquisition [Section 49] 398 Cost of Acquisition (COA)………………………………………………………………………….398 [1] Cost of Acquisition of Asset to the Previous Owner to calculate Capital Gain (Deemed cost of acquisition) [Section 49]……………………..399 Cost of acquisition on notional basis…………………………………………………………..400 Deemed cost of acquisition…………………………………………………………………………403 Computation of indexed cost of acquisition……………………………………………….405 (xxiii) CONTENTS Computation of Indexed Cost of Acquisition and Improvement can be divided into 5 cases:……………………………………………………………………………405 [2] Cost of Acquisition of Shares of Amalgamated company [Section 49(2)]……………………………………………………………………………………411 [3] Cost of acquisition in the case of Sharesi Debentures acquired on Conversion of Bonds or Debentures or Debentures Stock or Deposit Certificate [Section 49(2A)]…………………………………………………..412 Employee Stock Option Plan (ESOP) [Sec. 49(2AA)]…………………………………..413 [4] Cost of acquisition of specified security or sweat equity shares referred to in section 17(2)(vi) (i.e., Employee Stock Option Plan (ESOP) [Section 49(2AA)]………………………………………………………….413 Directs Revenue to accept cost of ESOP shares as per Section 49(2AA), if tax residency certificate (TRC) found in order…………………………………413 [5] Cost of the partnership rights of a partner on conversion of a company into LLP {i.e., Transfer of right of a partner in Limited Liability Partnership (LLP) consequent to conversion referred to in section 47(xiiib)} [Section 49(2AAA)]………………………………………………..414 [6] ESOP/Sweat Equity Shares [Section 49(2AB)]…………………………………..414 [7] Global Depository Receipts-Cost of acquisition of shares [Section 49(2ABB), w.e.f. 01.04.2016]…………………………………………………414 [8] Cost of acquisition of unit of a business trust acquired inconsideration of transfer of asset referred to in section 47(xvii) [Section 49(2AC)]……………………………………………………..415 [9] Cost of acquisition of the units of the consolidated scheme acquired in lieu of units held in a consolidating scheme [Section 49(2AD)]………………………………………………………………………………415 [10] Cost of acquisition of equity share on conversion of preference share into equity share [Section 49(2AE)]………………………………………….415 [11] Cost of acquisition of the units in the consolidated plan of mutual fund scheme [Section 49(2AF)]……………………………………………..415 [12] Cost of acquisition of a unit or units in the segregated portfolio [Section 49(2AG)]………………………………………………………………………………416 [13] Cost of the acquisition of the original units held by the unit holder in the main portfolio [Section 49(2AH)]………………………………………………..416 [14] Cost of the acquisition of any transfer of a Capital asset being shares referred to in section 47(XX) [Section 49(2AI)]…………………………………..416 [15] Cost of acquisition of shares of resulting company (Demerger) [Section 49(2C)]…………………………………………………………………………………416 [16] Cost of acquisition of the original shares of the demerged company [Cost of the acquisition of demerged company’s shares after demerger] [Section 49(2D)]……………………………………………………………….417 (xxiv) CONTENTS [17] Business reorganization of Co-operative Bank [Section 49(2E)]…………417 [18] Cost of Acquisition to Transferee Company where section 47A is applicable [Section 49(3)]…………………………………………………………………..417 [19] Cost of acquisition of the property received/acquired in a manner given under section 56(2)(vii)/(viia) i.e., without consideration or for inadequate consideration [Section 49(4)]……………………………………..417 [20] Cost of assets acquired on liquidation of a company………………………..418 [21] Cost of acquisition in case where capital gain arises from the transfer of an asset declared under the Income Declaration Scheme, 2016 [Section 49(5)]……………………………………………………………………………418 [22] Cost of acquisition in case where reconstituted plot or land, received under land pooling scheme [Section 49(6)]…………………………419 [23] Cost of acquisition of the share in the project being land or building or both in a joint development agreement referred in section 45(5A) [Section 49(7)]…………………………………………………………….419 [24] Cost of acquisition of capital assets for entities where tax on accreted income paid [Section 49(8)]…………………………………………………419 [25] Conversion of Stock-in-Trade into Capital Asset-Cost of acquisition on subsequent sale of capital asset [Section 49(9)]…………..420 [26] Cost of the Electronic Gold Receipt…………………………………………………..420 Chapter 39 : Capital gain on Depreciable Assets [Section 50] 423 Special provision for computation of capital gains in case of depreciable assets……………………………………………………………………………….423 Conditions for claiming depreciation…………………………………………………………424 Computation of Capital Gains in case of depreciable assets……………………….425 Section 50 comes into picture……………………………………………………………………..425 Calculation of capital gains in case of depreciable capital asset………………….426 [1] Where part of the block of depreciable assets is transferred, i.e., the block does not cease to exist [Section 50(1)]………………………………………426 [2] When entire block of depreciable assets is transferred, i.e., the block ceases to exist [Section 50(2)]…………………………………………………………….427 Rule for Computation of short term capital gains and written down value under section 50 where depreciation on goodwill has been obtained [Rule 8AC]………………………………………………………………………………………….428 Chapter 40 : Special provision for cost of acquisition in case of depreciable asset [section 50A] 434 Cost of acquisition in case of depreciable assets on which depreciation allowed at SLM rates – Section 50A…………………………………………………….434 Power generation undertakings [Section 50A]……………………………………………435 (xxv) CONTENTS Chapter 41 : Special provision for computation of capital gains in case of Market Linked Debenture [section 50AA] 436 Special provision for computation of capital gains in case of Market Linked Debenture. …………………………………………………………………436 Chapter 42 : Capital gain in case of Slump Sale [section 50B] 437 Background………………………………………………………………………………………………..437 “Slump Sale” meaning [Section 2(42C)]……………………………………………………..439 Slump Exchange is held to be taxable…………………………………………………………440 (i) Taxpayer owns an Undertaking…………………………………………………………..440 (ii) He transfers the undertaking by way of Sale……………………………………….440 All types of transfers are covered within the scope of slump-sale………………440 (iii) Transfer takes place for a lump sum consideration…………………………….440 Special Provision………………………………………………………………………………………..440 Who is eligible……………………………………………………………………………………………441 Nature of transaction………………………………………………………………………………….441 Taxability of capital gains arises in the year of transfer of the undertaking………………………………………………………………………………………..441 Nature of capital gains : Short-term or long-term……………………………………….441 Cost of Acquisition and Cost of Improvement……………………………………………441 Computation of “Net Worth”…………………………………………………………………….441 Indexation not available on cost of acquisition, i.e., net worth……………………442 Period of Holding………………………………………………………………………………………442 Computation of capital gains……………………………………………………………………..442 Revaluation of assets shall not be considered……………………………………………..442 Chartered Accountant’s report certifying the computation of Net Worth to be enclosed [Section 50B(3) & Rule 6H]…………………………443 Chapter 43 : Valuation of consideration in case of land or building or both [Section 50C] 454 Background………………………………………………………………………………………………..454 With effect from Assessment Year 2021-22 – No adjustment if variation between stamp duty value & sale consideration does not exceed 110% [Third proviso to section 50C]…………………………………………………………….456 From Assessment Years 2019-20 to 2020-21 – No adjustment if variation between stamp duty value & sale consideration does not exceed 105% [Third proviso to section 50C]………………………………………..456 Basic Ingredients of Provisions of section 50C……………………………………………457 Value to be adopted for Capital Gains………………………………………………………..458 Meaning of Stamp Duty Value (Circle Rate)………………………………………………459 (xxvi) CONTENTS Year of Taxability……………………………………………………………………………………….459 Computation of capital gain……………………………………………………………………….459 Applicability of section 50C to section 45(2), 45(3), 45(4), 45(5)…………………..459 Coverage of section 50C is very wide…………………………………………………………459 Applicability of Section 50C/43CA viz-a-viz Section 56(2)(vii)(b) as amended by Finance Act, 2013……………………………………………………………460 Reference to Valuation Officer……………………………………………………………………460 Section 50C also applicable to documents not registered……………………………460 Section 50C would not apply on compulsory acquisition of land by NHAI as stamp duty is not payable on such transfer………………………….460 Sale of property held with commercial intent taxable as business income, Section 50C inapplicable………………………………………….461 Chapter 44 : Special provisions for full value of consideration for transfer of assets other than capital assets in certain cases [Section 43CA] 479 Background………………………………………………………………………………………………..479 Other electronic modes [Rule 6ABBA]……………………………………………………….481 Sale value of consideration [Proviso to Section 43CA(1)]……………………………481 Stamp duty value can be up to 120% of the consideration if the transfer of “residential unit” is made between 12.1 1.2020 and 30.06.2021 [Second proviso to Section 43CA]……………………………………………………….482 Explanation in section 43CA clarifies that for the purposes of this section, “residential unit” means………………………………………………………..482 Tax auditor’s duty if 2nd proviso to section 43CA(1)/4th proviso to section 56(2)(x) applies……………………………………………………………………483 Applicability of Section 43CA…………………………………………………………………….483 Preference to Valuation Officer (Provisions of Section 50C(2) and (3) made applicable to section 43CA) [Section 43CA(2)]……………………..484 Where valuation can be referred to the Valuation Officer [Section 50C(2)]…………………………………………………………………………………..484 Consequences where the value is determined by the valuation officer………484 Stamp Duty value on the date of agreement to be deemed consideration [Section 43CA(3)]………………………………………………………….485 Chapter 45 : Special provisions for full value of consideration for transfer of unlisted/unquoted shares [Section 50CA] 489 Section 50CA shall not apply to any consideration received or accruing as a result of transfer by such class of persons and subject to such conditions as may be prescribed…………………………………………………………489 Valuation of unquoted shares…………………………………………………………………….489 (xxvii) CONTENTS FMV of unquoted equity shares…………………………………………………………………489 Quoted Share……………………………………………………………………………………………..491 Chapter 46 : Fair market value deemed to be full value of consideration in certain cases [Section 50D] 492 Background………………………………………………………………………………………………..492 “Fair Market Value (FMV)”………………………………………………………………………..493 Conditions for applicability of provision of section 50D…………………………….493 Where the consideration is not ascertainable or cannot be determined – Section 50D…………………………………………………………………………………………494 Example of case where consideration cannot be determined and section 50D would apply ……………………………………………………………………494 Chapter 47 : Advance money received [Section 51] 497 Background………………………………………………………………………………………………..497 Consequential amendment in section 51 to avoid double taxation……………..497 Applicability of section 51………………………………………………………………………….498 Advance money received and forfeited shall be treated as “Income from Other Sources” under section 56(2)(ix)……………………………………………….498 Reasons for Introduction of Section 56(2)(ix) : Change in Tax Treatment of Amount Forfeited……………………………………………………………………………….499 Chapter 48 : Consideration for transfer in cases of understatement [Section 52] 503 Consideration for transfer in cases of understatement ………………………………503 Chapter 49 : Exemption of capital gains from a residential house [Section 53] 504 Exemption of capital gains from a residential house…………………………………..504 Chapter 50 :Capital gains exempt from income-tax 505 [1] Capital gain arising on conversion of an Indian branch of foreign bank into a subsidiary Indian company : [Section 115JG]……………………………505 Quantum of Exemption………………………………………………………………………………506 Essential Conditions…………………………………………………………………………………..506 [2] Compensation under section 96 of RECTLARR Act, 2013—Exemption from income-tax, stamp duty and fees………………………………………………..507 [3] Non-Resident’s Capital assets situate abroad would not be taxable………509 Chapter 51 : Exemption in respect of long-term or short-term capital gain arising on transfer of units of unit scheme, 1964 (US 64) (transferred on or after 01-04-2002) [Section 10(33)] 510 Quantum of Exemption………………………………………………………………………………510 Essential conditions……………………………………………………………………………………510 (xxviii) CONTENTS Chapter 52 : Exemption in respect of capital gain on compensation received on compulsory acquisition of urban agricultural land situated within specified urban limit [Section 10(37)] 512 Quantum of exemption………………………………………………………………………………513 Essential conditions:…………………………………………………………………………………..513 Taxability of interest received by assessee on enhanced compensation awarded by Court, pursuant to compulsory acquisition of assessee’s agricultural land by Government……………………………………….514 Interest on late receipt of compensation from Compulsory Acquisition is taxable………………………………………………………………………………………………..515 Chapter 53 : Tax incentive for the development of capital of Andhra Pradesh [Section 10(37A)] 524 Background………………………………………………………………………………………………..524 Essential conditions……………………………………………………………………………………525 Chapter 54 :Exemption in respect of long-term capital gain arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity share in a company or a unit of an equity oriented fund or a unit of a business trust [Section 10(38)] 527 “Equity Oriented Fund” means—………………………………………………………………529 Conditions precedent for exemption………………………………………………………….529 Eligible..530 Section 112A – Applicability……………………………………………………………………….530 Transactions of acquisition of equity shares to be not eligible for exemption under section 10(38)……………………………………………………………………………531 CBDT notifies transactions for which the condition of chargeability to STT for claiming exemption under Section 10(38) of the Income Tax Act, 1961 shall not apply…………………………………………………………………………………….531 Chapter 55 : Exemption for capital gain arises from the transfer of a Residential House Property [Section 54] 543 Who can claim exemption………………………………………………………………………….545 Which original asset is qualified for exemption………………………………………….545 Which new asset should be purchased or acquired…………………………………….545 Time limit for acquiring the new assets………………………………………………………545 Chapter 56 : Relief of tax on capital gains in certain cases [Section 54A] 572 Relief of tax on capital gains in certain cases………………………………………………572 Section 54A omitted by the Finance (No. 2) Act, 1971, with effect from (xxix) CONTENTS 01.04.1972…………………………………………………………………………………………….572 Exemption from capital gain arises from the transfer of urban agricultural land used for agricultural purpose [Section 54B] 574 Who can claim exemption………………………………………………………………………….575 Nature of the Asset…………………………………………………………………………………….575 Which original asset is qualified for exemption………………………………………….575 Which new asset should be purchased……………………………………………………….575 Essential conditions……………………………………………………………………………………576 Consequences if new agricultural land is transferred within 3 years………….576 Capital Gains Account Scheme, 1988 of deposit in respect of exemption under section 54B ………………………………………………………………………………576 Consequent if, the deposit amount is not utilized………………………………………577 Chapter 58 : Capital gain on transfer of jewellery held for personal use not to be charged in certain cases [Section 54C] 590 Section 54C was omitted by the Finance Act, 1976, with effect from 01.04.1976 ……………………………………………………………………………. 590 Chapter 59 : Exemption from capital gain arises from the compulsory acquisition of land and building used for industry [Section 54D] 591 Who can claim exemption………………………………………………………………………….592 Which original asset is qualified for exemption………………………………………….592 Which new asset should be purchased……………………………………………………….592 Essential conditions……………………………………………………………………………………593 Amount of exemption available…………………………………………………………………593 Consequences if new land or building is transferred within 3 years…………..593 Scheme of deposit in Capital Gains Accounts Scheme, 1988 in respect of exemption under section 54D…………………………………………………………594 Consequence if the amount is not utilized …………………………………………………594 Chapter 60 : Capital gain on transfer of capital assets not to be charged in certain cases [Section 54E] 596 Capital gain on transfer of capital assets not to be charged in certain cases………………………………………………………………………………………..596 Chapter 61 : Exemption from capital gain arises from the transfer of long-term capital assets not to be charged in the case of investment in specified securities [Section 54EA] 600 Exemption under section 54EA—Sale of flats received from developer for transfer of land and invested the amount in specified securities…………601 Investment in specified securities – Exemption – Time limit……………………….601 (xxx) CONTENTS Chapter 62 : Exemption from capital gain arises from the transfer of a long-term capital assets not to be charged in certain cases [Section 54EB] 602 Difference between Section 54EA and Section 54EB as far as capital gains tax exemptions are concerned………………………………………..603 Chapter 63 : Capital gain arises from the transfer of a long-term capital asset being land or building or both not to be charged on investment in certain bonds (Financial Assets) [Section 54EC] 605 Who can claim exemption?…………………………………………………………………………607 Nature of the Asset…………………………………………………………………………………….608 Which original asset is qualified for exemption?………………………………………..608 Which new asset should be purchased (acquired)?…………………………………….608 Essential conditions……………………………………………………………………………………609 Holding period of new asset………………………………………………………………………609 Consequences if the asset is transferred within 5 years – Withdrawal of Section 54EC exemption if bonds issued on or after 01.04.201 8 transferred or redeemed within 5 years [Proviso to section 54EC(2)]………………………………………………………………..609 Amount of exemption available under section 54EC………………………………….610 Period for investment is to be made in asset (i.e., Time limit for Investment)…………………………………………………………..610 Chapter 64 : Capital gain arises from the transfer of certain listed securities or unit, not to be charged in certain cases [Section 54ED] 615 Exemption available up to assessment year 2006-07…………………………………..615 Chapter 65 : Capital gain arises from the transfer of a long-term capital asset not to be charged on investment in units of a specified fund [Section 54EE] 617 Essential Conditions…………………………………………………………………………………..618 Quantum of deduction……………………………………………………………………………….618 Revocation of exemption……………………………………………………………………………618 Chapter 66 : Exemption from Capital gain arises from the transfer of a long-term capital asset other than a house property [Section 54F] 620 Who can claim exemption?…………………………………………………………………………622 Which original asset is qualified for exemption?………………………………………..622 Which new asset should be acquired for exemption…………………………………..622 (xxxi) CONTENTS Deduction is eligible only in respect of one residential house…………………….623 Time limit for purchase or construction of new house……………………………….623 Essential conditions……………………………………………………………………………………623 Understanding the term ‘Net Consideration’ …………………………………………….624 Amount of exemption available…………………………………………………………………624 Consequences of transferring the residential house purchased before 3 years……………………………………………………………………………………..624 Capital Gains Account Scheme, 1988 of deposit in respect of exemption under section 54F………………………………………………………………………………..625 Deposit in Savings Bank Account – Not eligible for exemption…………………..625 Consequences if the deposit amount is not fully utilized for the purchase or the construction of a residential house ………………………………………………625 Chapter 67 : Exemption from capital gain arises from the transfer of assets in the case of shifting of industrial undertaking from urban area [Section 54G] 659 Who can claim exemption?…………………………………………………………………………660 Which original asset is qualified for exemption?………………………………………..660 Holding Period of Original Assets……………………………………………………………..661 Amount considered to have been invested in new asset…………………………….661 Essential conditions……………………………………………………………………………………661 Amount of exemption available under section 54G……………………………………662 Consequences of if the new asset transferred within 3 years………………………662 Capital gains Account Scheme, 1988 of deposit in respect of exemption under section 54G……………………………………………………………..662 Consequences if the deposited amount is not fully utilized……………………….662 Chapter 68 : Exemption from capital gain arises from the transfer of assets in the case of shifting of industrial undertaking from urban area to any special economic zone (SEZ) [Section 54GA] 670 Who can claim exemption?…………………………………………………………………………672 Which original asset is qualified for exemption?………………………………………..672 Transfer of capital asset………………………………………………………………………………672 Which new asset should be purchased?……………………………………………………..673 Essential conditions……………………………………………………………………………………673 Quantum of exemption available……………………………………………………………….673 Consequences if the new asset is transferred within 3 years………………………674 Scheme of deposit in respect of exemption under section 54GA…………………674 (xxxii) CONTENTS Chapter 69 : Exemption from capital gain arises from the transfer of residential property not to be charged in certain cases (house or plot of land) [Section 54GB] 675 Who can claim exemption?…………………………………………………………………………678 Assets to be acquired for exemption (i.e. Investment to be made)………………678 Essential conditions……………………………………………………………………………………679 Period during which exemption available………………………………………………….679 Time limit for acquiring the new assets………………………………………………………680 Amount of exemption available under section 54GB………………………………….680 Capital Gain Deposit Account Scheme, 1988………………………………………………681 Withdrawal of exemption if equity shares in company or new asset acquired by company is sold or transferred within a period of 5 years (or 3 years for computer and software) from date of acquisition………………………………………………………………………………………….681 Chapter 70 : Extension of time acquiring new asset or depositing or investing amount of capital gain [Section 54H] 682 Background………………………………………………………………………………………………..682 Chapter 71 : Cost of any improvement for the purposes of sections 48 and 49 [Section 55(l)(b)] 684 General meaning………………………………………………………………………………………..684 Cost of improvement………………………………………………………………………………….685 Cost of improvement of capital asset if acquired before 01.04.2001 (expenditure incurred before 01.04.2001- not considered)…………………..686 Expenses allowable under other heads of income are to be ignored (Double deduction not permitted) ……………………………………………………..686 Cost of improvement of various assets [Section 55(l)(b)] ……………………………686 Indexed cost of improvement…………………………………………………………………….687 Indexed cost of improvement…………………………………………………………………….687 Expenses incurred have been held to be cost of improvement……………………687 Chapter 72 : Cost of acquisition for the purpose of sections 48 and 49 [Section 55(2)] 694 Cost of Acquisition under section 55(2)………………………………………………………697 Cost of acquisition being the Fair Market Value (FMV) as on 01.04.2001 [Section 55(2)]……………………………………………………………………………………..697 Cost of acquisition of an asset acquired before 01.04.2001………………………….697 Cost of acquisition for assets acquired on or before 01.04.2001 [Section 55(2)(b)(i)l……………………………………………………………………………..698 (xxxiii) CONTENTS Cost of acquisition being the Fair Market Value (FMV) as on 01.04.2001 [Section 55(2)]……………………………………………………………………………………..698 Cost of acquisition [Section 55(2)]………………………………………………………………698 Notional cost of acquisition………………………………………………………………………..699 [1] Cost of acquisition of goodwill of a business or a trade mark or a brand name associated with a business [Section 55(2)(a)]…………………..699 Intangible Assets [Section 55(2)(a)]…………………………………………………………….701 [2] Cost of acquisition of Right Shares [Section 55(2)(aa)]…………………………..702 Cost of acquisition for the purpose of calculating Tax payable under section 11 2A [Section 55(2)(ac)]……………………………………………….703 Computation of cost of acquisition – Fair Market Value of the Asset as on 01.04.2001 [Proviso to Explanation (b)(ii) of Section 55(2)(ac)]…………………………………………………………………………………703 Cost of acquisition of Original Shares [Section 55(2)(b)]……………………………..704 Other assets [Section 55(2)(b)]…………………………………………………………………….704 Cost of acquisition of Right Shares [Section 55(2) read with section 55(2)(b)]…………………………………………………………………………………..705 Chapter 73 : Cost of acquisition to the previous owner where the cost for which the previous owner acquired the property cannot be ascertained [Section 55(3)] 715 Cost of Acquisition of Asset to the Previous Owner to calculate Capital Gain [Section 49(1)]……………………………………………………………………………………..715 Period of holding of previous owner………………………………………………………….716 Chapter 74 : Reference to valuation officer [Section 55A] 719 Valuation Officer [Section 2(r)]…………………………………………………………………..720 Appointment of Valuation Officers [Section 12A]………………………………………720 Circumstances when reference can be made to Valuation Officer………………720 Conditions for reference to Valuation Officers [Rule 111AA]……………………..720 Appearance by registered valuer in certain matters [Section 287A]……………721 Determination of Fair Market Value (FMV)……………………………………………….721 Procedure to be followed by the Valuation Officer…………………………………….721 Reference to Departmental Valuation Officer for capital gains purpose……..722 Requirement to refer the case……………………………………………………………………..722 Adopting value determined by DVO based on CPWD rates………………………722 Chapter 75 : Tax on income from units purchased in foreign currency or capital gains arising from their transfer [Section 115AB] 726 Tax on income from units purchased in foreign currency or capital gains arising from their transfer………………………………………………726 (xxxiv) CONTENTS Nature of income………………………………………………………………………………………..727 Deduction under sections 80CCC to 80U……………………………………………………727 TDS on long-term capital gains from units referred to in section 115AB [Section 196B]……………………………………………………………………………………..727 Who is responsible to deduct tax under section 196B…………………………………728 Nature of Payment……………………………………………………………………………………..728 When to Deduct TDS under Section 196B…………………………………………………..728 Rate of TDS under Section 196B………………………………………………………………….728 SEBI to be approving authority for “overseas financial organization” [Finance Act, 2001 – Circular No. 14/2001, Dated 09.11.2001]……………………………728 Tax incentive to off-shore mutual funds for investment in India [Finance (No. 2) Act, 1991 – Circular No. 621, Dated 19.12.1991, As Amended by Circular No. 642, Dated 11.12.1992 and Circular No. 698, Dated 28.12.1994]…………………………………………………….729 Chapter 76 : Tax on income from bonds or global depository receipts purchased in foreign currency or capital gains arising from their transfer [Section 115AC] 730 Global Depository Receipts (GDRs)……………………………………………………………732 Taxability of Global Depository Receipts (GDRs)……………………………………….732 Concessional rate of tax under section 115AC extended to other notified schemes [Finance Act, 2001 – Circular No. 14/2001, Dated 09.11.2001]………………………………………………………………………………..734 Tax incentive for investment in bonds or shares of Indian companies issued abroad [Finance Act, 1992 – Circular No. 636, Dated 31.08.1992]………………………………………………………………………………..734 No capital gain arises from conversion of foreign currency convertible bonds into shares ……………………………………………………………………………….735 Chapter 77 : Tax on income of specified fund or investment division of an offshore banking unit or foreign institutional investor from securities or capital gains arising from their transfer [Section 115AD] 737 Taxability of gains earned by Offshore Funds…………………………………………….743 Treatment of the gains accrued up to 31.01.2018 in the case of Flls…………….743 Tax treatment of transfer of share or unit between 01.02.2018 and 31.03.201 8 in the case of Flls……………………………………………………………….743 Tax treatment of transfer made on or after 01.04.2018 in case of Flls…………..743 Foreign Institutional Investors (FII) Taxation……………………………………………..743 No tax will be deducted at source in case of payment of long-term capital gains by Foreign Institutional Investors (Flls)………………………….743 (xxxv) CONTENTS Section 115AD of the Income-tax Act, 1961 – Income of Foreign Institutional Investors from Securities or Capital Gains arising from their Transfer – Taxability of – Notified Foreign Institutional Investors………………………744 Section 115AD, read with Section 2(14) of the Income-Tax Act, 1961 – Foreign Institutional Investors – CBDT Clarifies Differential Regime between Domestic Investors (Including AIF Category III) and FPIs existed even prior to General Budget 2019 and was not creation of the Finance (No. 2) Act, 2019…………………………………………………………..744 Section 111A and section 112A, read with section 115AD of the Income-Tax Act, 1961 – Capital Gains in Certain Cases – Government withdraws enhanced Surcharge on tax payable on Transfer of Certain Assets……..745 Chapter 78 : Tax on investment income and long-term capital gains [Section 115E] 749 Reduction in the rate of long-term capital gains tax in the case of nonresidents [Finance Act, 1997 – Circular No. 763, Dated, 18.02.1998]…….749 Modification of the provisions relating to certain incomes of non-residents [Finance Act, 1985 – Circular No. 421, Dated, 12.06.1985]……………………………………………………………………………….749 Original shares having been purchased in foreign exchange, bonus shares are also foreign exchange assets under section 115E………………..750 Benefit of concessional rate of tax would not be available on short-term capital gains arising from sale of shares……………………………………………..750 Chapter 79 : Long-term capital gain on transfer of foreign exchange assets by a non-residential Indian (NRI) not to be charged in certain cases [Section 115F] 753 Eligible assessee………………………………………………………………………………………….754 Essential conditions……………………………………………………………………………………754 Quantum of exemption………………………………………………………………………………755 Consequences if the new asset is transferred within 3 years………………………756 Option to avail or not to avail the benefit of section 115F with assessee [Section 115-1]……………………………………………………………………….756 Chapter 80 : Capital gain accounts scheme, 1988 758 Background………………………………………………………………………………………………..758 Who can deposit in Capital Gains Account Scheme?………………………………….758 Who can accept deposit?…………………………………………………………………………….759 Time limit to deposit the amount……………………………………………………………….760 Types of account under Capital Gains Accounts Scheme……………………………761 Transfer from Deposit Account-B to Deposit Account-A – Approval of Assessing Officer is not mandatory ……………………………………………………762 (xxxvi) CONTENTS Nomination………………………………………………………………………………………………..762 Withdrawals from Deposit Accounts …………………………………………………………763 No creation of any charge…………………………………………………………………………..763 Closure of Deposit Account………………………………………………………………………..763 Consequences if the deposit amount is not fully utilised……………………………763 In case an individual dies before the expiry of the two/three years……………764 Chapter 81 : Securities transaction tax (STT) 768 When is Securities Transaction Tax (STT) levied………………………………………..768 Features of Securities Transaction Tax………………………………………………………..769 Securities Transaction Tax Rate………………………………………………………………….769 Value for calculating the Securities Transaction Tax…………………………………..770 Securities on which Securities Transaction Tax (STT) is applicable…………….771 Long-term capital gain tax – exempted under section 10(38)………………………772 Short-term capital gain – taxable under sections 111A and 115AD…………….773 Securities liable to short-term capital gains………………………………………………..773 Where total income consists of short-term capital gains and other income……….773 The most common Futures contract traded in India are Nifty Futures……….774 Chapter 82 : Self-off and carry forward of capital loss [Sections 70, 71 & 74] 776 [I] Set-off of Capital Losses – Inter-source adjustment – under the same head of income [Section 70]……………………………………………………..776 [2] Set-off of Capital Losses – Inter-head adjustment – one head against income from another head [Section 71]……………………………………………..776 [3] Carry forward of Capital Losses………………………………………………………….776 Chapter 83 : Tax deducted at source (TDS) 780 [1] Tax Deducted at Source on Sale of Immovable Properties [Section 194-IA]…………………………………………………………………………………..780 (2) TDS on payment under joint development agreement………………………….784 [3] TDS on Payment of compensation on acquisition of Immovable Property [Section 194-LA]…………………………………………………………………..785 Chapter 84 : Rate of capital gains tax 788 Basics of capital gains tax in brief……………………………………………………………….791 Chapter 85 : Income held as business income and not capital gains 794 Sale of land to be treated as business income if it was held as stock-in-trade in books of account………………………………………………………795 (xxxvii) CONTENTS Conversion of agricultural land into residential plots and sale of residential plots – Consideration over fair market value to be assessed as business income – No question of law………………………………795 Chapter 86 : Important forms 796 FORM NO. 3CEA……………………………………………………………………………………….796 FORM No. 5B……………………………………………………………………………………………..798 FORM No.10 IH…………………………………………………………………………………………802 FORM No. 16B……………………………………………………………………………………………806 FORM No. 26 QB………………………………………………………………………………………..807 FORM A……………………………………………………………………………………………………..809 FORM B……………………………………………………………………………………………………..811 FORM C……………………………………………………………………………………………………..813 FORM D……………………………………………………………………………………………………..815 FORM E……………………………………………………………………………………………………..817 FORM F……………………………………………………………………………………………………..818 FORM G……………………………………………………………………………………………………..820 FORM H…………………………………………………………………………………………………….821