Income Tax Law - Capital Gains - PDF

3.358 INCOME TAX LAW UNIT – 4 : CAPITAL GAINS LEARNING OUTCOMES After studying this unit, you would be able to – ♦ comprehend the scope of income chargeable under this head; ♦ comprehen...

3.358 INCOME TAX LAW UNIT – 4 : CAPITAL GAINS LEARNING OUTCOMES After studying this unit, you would be able to – ♦ comprehend the scope of income chargeable under this head; ♦ comprehend and identify the assets classified as “capital assets” for the purposes of chargeability under this head; ♦ comprehend the meaning of short-term capital asset and long-term capital asset; ♦ compute the period of holding for determining whether an asset is a short- term capital asset or long-term capital asset; ♦ identify the transactions to be considered as transfer for the purpose of capital gains; ♦ identify the transactions not regarded as transfer; ♦ compute the capital gains from transfer of capital assets in the manner prescribed; ♦ determine the cost of acquisition and indexed cost of acquisition, in case of long term capital asset for the purpose of computing the capital gains; ♦ compute capital gains in case of depreciable assets; ♦ compute capital gains in case of market linked debentures and other specified securities; ♦ compute capital gains in case of slump sale; ♦ compute the exemption available for investment of capital gains/net consideration on transfer of certain assets; ♦ compute the capital gains chargeable to tax after deducting the exemptions available in respect of capital gains; ♦ appreciate the concessional tax treatment available for short-term capital gains and for long term capital gains on transfer of listed equity shares/units of an equity oriented fund; ♦ compute the tax liability applying the special rates of tax on long-term capital gains and short-term capital gains and the normal rates of tax. © The Institute of Chartered Accountants of India  CAPITAL GAINS 3.359 Proforma for computation of income under the head “Capital Gains” Particulars Amt Amt (`) (`) Full value of consideration received or accruing as a xxx result of transfer In case of a Short-term capital asset Less: Expenditure incurred wholly and exclusively in xxx connection with such transfer (for e.g., brokerage on sale) (Note: Deduction on account of STT paid will not be allowed) (STCA) Net Sale Consideration xxx Less: Cost of acquisition (COA) [Refer table at page 3.464] xxx Cost of improvement (COI) [Refer table at page xxx xxx 3.466] Short-term capital gain (STCG) xxx Less: Exemption under sections 54B/54D xxx Short-term capital gain chargeable to tax xxx In case transfer takes place before 23.7.2024 Full value of consideration received or accruing as a xxx result of transfer In case of a Long-term capital asset (LTCA) Less: Expenditure incurred wholly and exclusively in xxx connection with such transfer (for e.g., brokerage on sale) (Note: Deduction on account of STT paid will not be allowed) Net Sale Consideration xxx Less: Indexed cost of acquisition (ICOA) xxx CII for the year in which the asset is transferred Cost of × CII for the year in which the asset was acquisition first held by the assessee or P.Y. 2001-02, whichever is later Less: Indexed cost of improvement (ICOI) xxx xxx CII for the year in which the asset is Cost of transferred × improvement CII for the year in which the improvement took place © The Institute of Chartered Accountants of India  3.360 INCOME TAX LAW Long-term capital gains (LTCG) xxx Less: Exemption under sections 54/54B/54D/54EC/54F xxx [Refer Table at pages 3.468-3.470] Long-term capital gains chargeable to tax xxx In case transfer takes place on or after 23.7.2024 Full value of consideration received or accruing as a xxx result of transfer Less: Expenditure incurred wholly and exclusively in xxx connection with such transfer (for e.g., brokerage on sale) (Note: Deduction on account of STT paid will not be allowed) Net Sale Consideration xxx Less: Cost of acquisition (COA) [Refer table at page 3.464] xxx Less: Cost of improvement (COI) [Refer table at page xxx xxx 3.466] Long-term capital gains (LTCG) xxx Less: Exemption under sections 54/54B/54D/54EC/54F xxx [Refer Table at pages 3.468-3.470] Long-term capital gains chargeable to tax xxx Rate of tax on Short-term Capital Gains (STCG) Section Rate of tax STCG arising on transfer of listed equity shares, units of equity- oriented fund and unit of business trust 1 - STT should have been paid on such sale. If transfer takes place Rate of tax Before 23.7.2024 15% 111A On or after 23.7.2024 20% STCG arising from transaction undertaken in foreign currency on a recognized stock exchange located in an International Financial Services Centre (IFSC) would be taxable at a concessional rate of 15% or 20%, as the case may be, even though STT is not paid in respect of such transaction. The provisions relating to business trust would be dealt at Final level. 1 © The Institute of Chartered Accountants of India  CAPITAL GAINS 3.361 Note - STCG arising on transfer of other Short-term Capital Assets would be chargeable at normal rates of tax. Rates of tax on Long-term Capital Gains (LTCG) Section Rate of tax 112A LTCG exceeding ` 1,25,000 would be taxable - @10%, if transfer takes place before 23.7.2024 - @12.5%, if transfer takes place on or after 23.7.2024 on the transfer of following long-term capital assets - - listed equity shares, if STT has been paid on acquisition and transfer of such shares - units of equity-oriented fund and unit of business trust, if STT has been paid on transfer of such units Total exemption in a previous year cannot exceed ` 1.25 lakhs. If such transaction is undertaken on a recognized stock exchange located in an IFSC, LTCG would be taxable at a concessional rate of 10% or 12.5%, as the case may be, where the consideration for transfer is received or receivable in foreign currency, even though STT is not paid in respect of such transaction. Benefit of indexation and currency fluctuation would not be available. 112 Long-term capital Rate of tax asset (LTCA) If transfer takes place before 23.7.2024 Unlisted securities, or Non-corporate non-resident/ foreign shares of a closely held company - 10% without the benefit of company indexation and foreign currency fluctuation Other Assessees – 20% with indexation benefit Listed securities (other - 10% without indexation or than a unit) or a zero- - 20% with indexation benefit coupon bond whichever is more beneficial to the assesse Other Assets (other - 20% with indexation benefit than taxable u/s 112A) © The Institute of Chartered Accountants of India  3.362 INCOME TAX LAW If transfer takes place on or after 23.7.2024 Land or building or both Individual or HUF, being a resident – if acquired before 12.5% without indexation or 20% with 23.7.2024 indexation benefit, whichever is more beneficial to the assessee Other Assessees – 12.5% without indexation - Land or building or 12.5% without indexation both if acquired on or [In case of non-residents, LTCG on transfer after 23.7.2024 of unlisted securities, or shares of a closely or held company, would be taxable @12.5% - Other Assets (other without indexation and foreign currency than taxable u/s 112A) fluctuation] Notes: In case of a resident individual or a Hindu Undivided Family (HUF), the LTCG taxable u/s 112 or 112A or STCG taxable u/s 111A shall be reduced by the unexhausted basic exemption limit and the balance shall be subject to tax. In respect of bonds or debentures (whether listed or unlisted) transferred before 23.7.2024, the resultant capital gains will be considered either long- term or short-term, based on the holding period, and taxed accordingly. If unlisted debentures or bonds are transferred on or after 23.7.2024, the resulting capital gains will always be treated as short-term, regardless of the holding period. Indexation benefit is in any case not available for bonds/debentures, even if transferred before 23.07.2024. No deduction under Chapter VI-A can be claimed in respect of such LTCG chargeable to tax u/s 112 or u/s 112A or STCG chargeable to tax u/s 111A. Rebate u/s 87A is not available in respect of tax payable on LTCG u/s 112A. In case the assessee pays tax under default tax regime, enhanced surcharge of 25% would not be levied on dividend income, STCG taxable u/s 111A and LTCG taxable u/s 112 and u/s 112A. In case the assessee exercises the option of shifting out of the default tax regime under section 115BAC, enhanced surcharge of 25% or 37% would not be levied on dividend income, STCG taxable u/s 111A and LTCG taxable u/s 112 and u/s 112A. © The Institute of Chartered Accountants of India  CAPITAL GAINS 3.363 Period of holding [Section 2(42A)] [In case transfer takes place before 23.7.2024] STCA, if held for Security (other than unit) listed in a recognized stock ≤ 12 months exchange LTCA, if held for Unit of equity oriented fund/unit of UTI > 12 months Zero Coupon bond STCA, if held for ≤ 24 months Unlisted shares LTCA, if held for Land or building or both > 24 months STCA, if held for ≤ 36 months Unlisted securities other than shares LTCA, if held for Other capital assets > 36 months [In case transfer takes place on or after 23.7.2024] STCA, if held for Security listed in a recognized stock exchange ≤ 12 months Unit of equity oriented fund/UTI LTCA, if held for Zero Coupon bond > 12 months STCA, if held for ≤ 24 months Other capital assets LTCA, if held for > 24 months Note – It is to be noted that as per section 50AA, capital gains arising from transfer of the following assets would always be capital gains arising from transfer of short- term capital assets irrespective of the period of holding of such assets: - units of a specified mutual fund acquired on or after 1.4.2023, - market linked debentures, - unlisted bond and unlisted debenture which is transferred or redeemed or matures on or after 23.7.2024. © The Institute of Chartered Accountants of India  3.364 INCOME TAX LAW 4.1 INTRODUCTION Section 45 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year will be chargeable to income-tax under the head ‘Capital Gains’. Such capital gains will be deemed to be the income of the previous year in which the transfer took place. In this charging section, two terms are important. One is “capital asset” and the other is “transfer”. Hence, in this unit on capital gains, we begin our discussion with the definition of “capital asset” and “transfer”. Thereafter, we will proceed to discuss the various circumstances under which capital gains tax is levied. There are certain transactions which are not to be regarded as transfer for the purposes of capital gains. These transactions have also been discussed in this chapter. There is a separate method of computation of capital gains in respect of depreciable assets. Also, there are exemptions in cases where capital gains are invested in specified assets. All these aspects are being discussed in this unit. 4.2 CAPITAL ASSET Definition: According to section 2(14), a capital asset means – (a) property of any kind held by an assessee, whether or not connected with his business or profession. (b) any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the SEBI regulations. (c) any unit linked insurance policy (ULIP) issued on or after 1.2.2021, to which exemption under section 10(10D) does not apply on account of premium payable exceeding ` 2,50,000 for any of the previous years during the term of such policy. In a case where premium is payable by a person for more than one ULIP issued on or after 1.2.2021 and the aggregate of premium payable on such ULIPs exceed ` 2,50,000 for any of the previous years during the term of any such ULIP(s), the exemption under section 10(10D) would be available in respect of any of those ULIPs (at the option of the assessee) whose aggregate premium payable does not exceed ` 2,50,000 for any of the previous years during their term. All other ULIPs would be capital assets. © The Institute of Chartered Accountants of India  CAPITAL GAINS 3.365 Note – Provisions relating to taxability or otherwise of ULIPs issued on or after 1.2.2021 are not being made applicable at Intermediate level. Accordingly, section 45(1B) has been excluded by way of Study Guidelines. Consequently, reference to such ULIPs has not been made in the discussion of section 10(10D) and in the definition of equity oriented fund for the purpose of section 111A and 112A in the Study Material. However, it does not include— (i) Stock-in trade: Any stock-in-trade [other than securities referred to in (b) above], consumable stores or raw materials held for the purpose of the business or profession of the assessee; Whether a particular asset is stock-in-trade or capital asset does not depend upon the nature of the item, but the manner in which the same is held. The item would be stock-in-trade in the hands of the assessee who deals or trades in that item; however, the same item would be capital asset for the assessee who holds it as an investment. Example: A dealer in real estate holds a piece of land as stock-in-trade. But the same will be capital asset for an assessee who holds it as an investment. The exclusion of stock-in-trade from the definition of capital asset is only in respect of sub-clause (a) above and not sub-clause (b). This implies that even if the nature of such security in the hands of the Foreign Portfolio Investor is stock in trade, the same would be treated as a capital asset and the profit on transfer would be taxable as capital gains. Further, the Explanatory Memorandum to the Finance (No.2) Bill, 2014 clarifies that the income arising from transfer of such security by a Foreign Portfolio Investor (FPI) would be in the nature of capital gain, irrespective of the presence or otherwise in India, of the Fund manager managing the investments of the assessee. (ii) Personal effects: Personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him. EXCLUSIONS: (a) jewellery; (b) archaeological collections; (c) drawings; © The Institute of Chartered Accountants of India  3.366 INCOME TAX LAW (d) paintings; (e) sculptures; or (f) any work of art. Definition of Jewellery- Jewellery is a capital asset and the profits or gains arising from the transfer of jewellery held for personal use are chargeable to tax under the head “capital gains”. For this purpose, the expression ‘jewellery’ includes the following: (i) Ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stones and whether or not worked or sewn into any wearing apparel; (ii) Precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel. (iii) Rural agricultural land in India i.e., agricultural land in India which is not situated in any specified area. As per the definition, only rural agricultural lands in India are excluded from the purview of the term ‘capital asset’. Hence urban agricultural lands constitute capital assets. Accordingly, the agricultural land described in (a) and (b) below, being land situated within the specified urban limits, would fall within the definition of “capital asset”, and transfer of such land would attract capital gains tax - (a) agricultural land situated in any area within the jurisdiction of a municipality or cantonment board having population of not less than ten thousand, or (b) agricultural land situated in any area within such distance, measured aerially, in relation to the range of population as shown hereunder - Shortest aerial distance Population according to the last from the local limits of a preceding census of which the municipality or relevant figures have been cantonment board published before the first day of the referred to in item (a) previous year. (i) ≤ 2 kms > 10,000 (ii) > 2 kms but ≤ 6 kms > 1,00,000 (iii) > 6 kms but ≤ 8 kms > 10,00,000 © The Institute of Chartered Accountants of India  CAPITAL GAINS 3.367 Example Area Shortest aerial Population according to Is the land distance from the last preceding situated in the local limits census of which the this area a of a municipality relevant figures have capital or cantonment been published before asset? board referred the first day of the to in item (a) previous year. (i) A 1 km 9,000 No (ii) B 1.5 kms 12,000 Yes (iii) C 2 kms 11,00,000 Yes (iv) D 3 kms 80,000 No (v) E 4 kms 3,00,000 Yes (v) F 5 kms 12,00,000 Yes (vi) G 6 kms 8,000 No (vii) H 7 kms 4,00,000 No (viii) I 8 kms 10,50,000 Yes (ix) J 9 kms 15,00,000 No Explanation regarding gains arising on the transfer of urban agricultural land – Explanation 1 to section 2(1A) clarifies that capital gains arising from transfer of any agricultural land situated in any non-rural area (as explained above) will not constitute agricultural revenue within the meaning of section 2(1A). In other words, the capital gains arising from the transfer of such urban agricultural land would not be treated as agricultural income for the purpose of exemption u/s 10(1). Hence, such gains would be subject to u/s 45. (iv) Specified Gold Bonds: 6½% Gold Bonds, 1977, or 7% Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government; (v) Special Bearer Bonds, 1991 issued by the Central Government; (vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2015 and Gold Monetisation Scheme, 2019 notified by the Central Government. Note – ‘Property’ includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever. © The Institute of Chartered Accountants of India  CAPITAL ASSET 4.368 [Section 2(14)] Property of any kind held by an Any securities held by a FII which has assessee, whether or not connected invested in such securities as per SEBI with his business or profession Regulations 3.368 EXCLUSIONS Stock-in-trade, Personal Effects Rural 6½ Gold Bonds, Gold Deposit Bonds © The Institute of Chartered Accountants of India consumable [i.e., movable Agricultural 1977, 7% Gold issued under Gold stores, raw property including Land Bonds, 1980, Deposit Scheme, 1999/ materials held wearing apparel and National Defence Deposit Certificates for business or furniture held for Gold Bonds, 1980, issued under Gold profession personal use by the Special Bearer Monetisation Scheme, assessee or his Bonds, 1991 issued 2015 /2018 notified by family] by the Central Govt. the Central Govt. INCOME TAX LAW EXCLUSIONS FROM PERSONAL EFFECTS Jewellery Archaeological Drawings Paintings or Any work of art collections Sculptures These assets are, hence, capital assets u/s 2(14)  CAPITAL GAINS 3.369 4.3 SHORT TERM AND LONG TERM CAPITAL ASSETS Definition: As per section 2(42A), short-term capital asset means a capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer. However, w.e.f. 23.7.2024, a capital asset will be a short-term capital asset if it is held by an assessee for not more than 24 months immediately preceding the date of its transfer. As per section 2(29A), long-term capital asset means a capital asset which is not a short-term capital asset. Accordingly, based on the period of holding capital assets would be classified as short-term or long-term capital asset as follows: Capital Asset STCG, if held for LTCG, if held for In case transfer takes place before 23.7.2024 Security (other than unit) listed in a recognized stock ≤ 12 months > 12 months exchange immediately immediately Unit of equity oriented preceding the date preceding the date fund/unit of UTI of its transfer of its transfer Zero Coupon bond Unlisted shares ≤ 24 months > 24 months Land or building or both immediately immediately preceding the date preceding the date of its transfer of its transfer Unlisted securities other ≤ 36 months > 36 months than shares immediately immediately Other capital assets preceding the date preceding the date of its transfer of its transfer In case transfer takes place on or after 23.7.2024 Security listed in a ≤ 12 months > 12 months recognized stock exchange immediately immediately Unit of equity-oriented preceding the date preceding the date fund/unit of UTI of its transfer of its transfer Zero Coupon bond © The Institute of Chartered Accountants of India  3.370 INCOME TAX LAW Other capital assets ≤ 24 months > 24 months immediately immediately preceding the date preceding the date of its transfer of its transfer Note – As per section 50AA, capital gains arising from transfer of the following assets would always be capital gains arising from transfer of short- term capital assets irrespective of the period of holding of such assets - - units of a specified mutual fund acquired on or after 1.4.2023, - market linked debentures, - unlisted bond and unlisted debenture which is transferred or redeemed or matures on or after 23.7.2024. Meaning of certain terms: Term Meaning Equity oriented A fund set up under a scheme of a mutual fund 2 fund and (i) in a case where the fund invested in the units of another fund which is traded on a recognised stock exchange – I. a minimum of 90% of the total proceeds of such fund is invested in the units of such other fund; and II. such other fund also invests a minimum of 90% of its total proceeds in the equity shares of domestic companies listed on a recognised stock exchange; and (ii) in any other case, a minimum of 65% of the total proceeds of such fund is invested in the equity shares of domestic companies listed on a recognised stock exchange. However, the percentage of equity shareholding or unit held in respect of the fund, as the case may be, shall be computed with reference to the annual average of the monthly averages of the opening and closing figures. 2 Specified under section 10(23D) © The Institute of Chartered Accountants of India  CAPITAL GAINS 3.371 Zero Coupon A bond Bond [Section - issued by any infrastructure capital company or 2(48)] infrastructure capital fund or infrastructure debt fund 3 or a public sector company or a scheduled bank on or after 1st June, 2005, - in respect of which no payment and benefit is received or receivable before maturity or redemption from such issuing entity and - which the Central Government may notify in this behalf. Note: The income from transfer of a zero-coupon bond (not being held as stock-in-trade) is to be treated as capital gains. Section 2(47)(iva) provides that maturity or redemption of a zero coupon bond shall be treated as a transfer for the purposes of capital gains tax. Determination of period of holding [Clause (i) of Explanation 1 to section 2(42A)]: In determining period of holding of any capital asset by the assessee in the circumstances stated in column (1), the period shall be determined by considering the period specified in Column (2). Determination of period of holding S. Circumstances Period of holding No. (Column 1) (Column 2) 1 Where shares held in a The period subsequent to the date of company in liquidation liquidation of company shall be excluded. 2 Where asset becomes the The period for which the capital asset property of an assessee by was held by the previous owner shall be virtue of section 49(1) included. 3 Where inventory of business is Period from the date of conversion or converted into or treated as a treatment as a capital asset shall be capital asset by the assesse considered. 4 Where share/s in the Indian The period for which the share(s) was company (amalgamated held by the assessee in the company), becomes the amalgamating company shall be property of an assessee in lieu of included. 3 Infrastructure debt fund notified by Central Government under section 10(47) © The Institute of Chartered Accountants of India  3.372 INCOME TAX LAW share/s held by him in the amalgamating company at the time of transfer referred under section 47(vii). 5 Where the share or any other Period from the date of allotment of security is subscribed by the such share or security shall be assessee on the basis of right to reckoned. subscribe to any share or security or by the person in whose favour such right is renounced by the assessee 6 Where the right to subscribe to Period from the date of offer of such any share or security is right by the company or institution shall renounced in favour of any other be reckoned person 7 Where any financial asset is Period from the date of allotment of allotted without any payment such financial asset shall be reckoned and on the basis of holding of any other financial asset 8 Where share/s in the Indian The period for which the share/s were company being a resulting held by the assessee in demerged company becomes the property company shall be included of an assessee in consideration of demerger 9 Where equity share in a The period for which the preference company becomes the property shares were held by the assesse shall be of the assessee by way of included conversion of preference shares into equity shares referred under section 47(xb) 10 (i) Where Electronic Gold The period for which such gold was Receipt is issued by a Vault held by the assessee prior to conversion Manager in respect of gold into the Electronic Gold Receipt deposited [Conversion of gold into Electronic Gold Receipt as referred to in section 47(viid)] © The Institute of Chartered Accountants of India  CAPITAL GAINS 3.373 (ii) Where gold is released in The period for which such Electronic respect of an Electronic Gold Gold Receipt was held by the assessee Receipt [Conversion of prior to its conversion into gold Electronic Gold Receipt into gold as referred to in section 47(viid)] 11 Where any specified security or Period from the date of allotment or sweat equity shares is allotted transfer of such specified security or or transferred, directly or sweat equity shares shall be reckoned indirectly, by the employer free of cost or at concessional rate to his employees (including former employees) “Sweat equity shares” means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called. Period of holding in respect of other capital assets - The period for which any capital asset is held by the assessee shall be determined in accordance with any rules made by the CBDT in this behalf. Accordingly, the CBDT has inserted Rule 8AA in the Income-tax Rules, 1962 to provide for method of determination of period of holding of capital assets, other than the capital assets mentioned in clause (i) of Explanation 1 to section 2(42A). Specifically, in the case of a capital asset, being a share or debenture of a company, which becomes the property of the assessee in the circumstances mentioned in section 47(x), there shall be included the period for which the bond, debenture, debenture-stock or deposit certificate, as the case may be, was held by the assessee prior to the conversion. Note: Section 47(x) provides that any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificates in any form, of a company into shares or debentures of that company shall not be regarded as transfer for the purposes of levy of capital gains tax. © The Institute of Chartered Accountants of India  3.374 INCOME TAX LAW 4.4 TRANSFER: WHAT IT MEANS? [SECTION 2(47)] Section 2(47) contains an inclusive definition of the term ‘transfer’. Accordingly, transfer in relation to a capital asset includes the following types of transactions— (i) the sale, exchange or relinquishment of the asset; or (ii) the extinguishment of any rights therein; or (iii) the compulsory acquisition thereof under any law; or Example: Acquisition of industrial undertaking under the Industries (Development and Regulation) Act, 1951. (iv) the owner of a capital asset may convert the same into the stock-in-trade of a business carried on by him. Such conversion is treated as transfer; or Example: Where an investor in shares starts a business of dealing in shares and treats existing investments as stock-in-trade of the newly set up business, such conversion shall be regarded as transfer for the purpose of capital gains. (v) the maturity or redemption of a zero-coupon bond; or (vi) Part-performance of the contract: Sometimes, possession of an immovable property is given in consideration of part-performance of a contract. Example: A enters into an agreement for the sale of his house. The purchaser gives the entire sale consideration to A. A hands over complete rights of possession to the purchaser since he has received the entire sale consideration. Under the Income-tax Act, the above transaction is considered as transfer. (vii) Lastly, there are certain types of transactions which have the effect of transferring or enabling the enjoyment of an immovable property. Example: A person may become a member of a co-operative society, company or other association of persons which may be building houses/flats. When he pays an agreed amount, the society etc. hands over possession of the house to the person concerned. No conveyance is registered. For the purpose of income- tax, the above transaction is a transfer. © The Institute of Chartered Accountants of India  CAPITAL GAINS 3.375 ILLUSTRATION 1 How will you calculate the period of holding in case of the following assets? (1) Shares held in a company in liquidation (2) Bonus shares (3) Flat in a co-operative society SOLUTION (1) Shares held in a company in liquidation - The period after the date on which the company goes into liquidation shall be excluded while calculating the period of holding. Therefore, the period of holding shall commence from the date of acquisition and end with the date on which the company goes into liquidation. (2) Bonus shares - The period of holding shall be reckoned from the date of allotment of bonus shares and will end with the date of transfer. (3) Flat in a co-operative society - The period of holding shall be reckoned from the date of allotment of shares in the society and will end with the date of transfer. Note – Any transaction whether by way of becoming a member of, or acquiring shares in, a co-operative society or by way of any agreement or any arrangement or in any other manner whatsoever which has the effect of transferring, or enabling enjoyment of, any immovable property is a transfer as per section 2(47)(vi). Hence, it is possible to take a view that any date from which such right is obtained may be taken as the date of acquisition. 4.5 SCOPE AND YEAR OF CHARGEABILITY [SECTION 45] (i) General Provision [Section 45(1)] Any profits or gains arising from the transfer of a capital asset effected in the previous year (other than exemptions covered under this chapter) shall be chargeable to income-tax under this head in the previous year in which the transfer took place. © The Institute of Chartered Accountants of India  3.376 INCOME TAX LAW Year of chargeability - Capital gains are chargeable as the income of the previous year in which the sale or transfer takes place. In other words, for determining the year of chargeability, the relevant date of transfer is not the date of the agreement to sell, but the actual date of sale i.e., the date on which the effect of transfer of title to the property as contemplated by the parties has taken place 4. However, as already noted, Income-tax Act has recognised certain transactions as transfer in spite of the fact that conveyance deed might not have been executed and registered. Power of Attorney sales as explained above or co-operative society transactions for acquisition of house are examples in this regard. (ii) Insurance Receipts [Section 45(1A)] Where any person receives any money or other assets under any insurance from an insurer on account of damage to or destruction of any capital asset, as a result of - flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature, - riot or civil disturbance, - accidental fire or explosion or - of action by an enemy or action taken in combating an enemy (whether with or without declaration of war), then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of such person for the previous year in which such money or other asset was received. Full value of consideration: In order to compute capital gains, the value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital assets. (iii) Conversion or treatment of a capital asset as stock-in-trade [Section 45(2)] A person who is the owner of a capital asset may convert the same or treat it as stock-in-trade of the business carried on by him. As noted above, the above transaction is a transfer. 4 Alapati Venkatramiah v. CIT 57 ITR 185 (SC) © The Institute of Chartered Accountants of India  CAPITAL GAINS 3.377 As per section 45(2), notwithstanding anything contained in section 45(1), being the charging section, the profits or gains arising from the above conversion or treatment will be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him. Full value of consideration: In order to compute the capital gains, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received as a result of the transfer of the capital asset. Components of income arising Manner of Computation of capital on sale of gains and business income stock-in-trade FMV on the date of conversion (-) Cost/Indexed Cost of acquisition/ improvement Capital Gains Conversion Indexation benefit would be considered of capital in relation to the year of conversion of asset into capital asset into stock-in-trade stock-in- trade Business Sale price of stock-in-trade (-) FMV on Income the date of conversion Note – Both Capital Gains and Business income are chargeable to tax in the year in which stock-in-trade is sold or otherwise transferred. ILLUSTRATION 2 A is the owner of a car. On 1-4-2024, he starts a business of purchase and sale of motor cars. He treats the above car as part of the stock-in-trade of his new business. He sells the same on 31-3-2025 and gets a profit of ` 1 lakh. Discuss the tax implication in his hands under the head “Capital gains”. SOLUTION Since car is a personal asset, conversion or treatment of the same as the stock-in- © The Institute of Chartered Accountants of India  3.378 INCOME TAX LAW trade of his business will not be trapped by the provisions of section 45(2). Hence, A is not liable to capital gains tax. ILLUSTRATION 3 X converts his capital asset (acquired on June 10, 2006 for ` 60,000) into stock-in-trade on March 10, 2024. The fair market value on the date of the above conversion was ` 5,50,000. He subsequently sells the stock-in-trade so converted for ` 6,00,000 on June 10, 2024. Discuss the year of chargeability of capital gain and business income. SOLUTION Since the capital asset is converted into stock-in-trade during the previous year 2023-24 relevant to the A.Y. 2024-25, it will be a transfer u/s 2(47) during the P.Y. 2023-24. However, the profits or gains arising from the above conversion will be chargeable to tax during the A.Y. 2025-26, since the stock-in-trade has been sold only on June 10, 2024. For this purpose, the fair market value on the date of such conversion (i.e. 10th March, 2024) will be the full value of consideration for computation of capital gains. The capital gains would be computed by reducing the indexed cost of acquisition therefrom, since the transfer (i.e., conversion of capital asset into stock in trade) took place during the P.Y. 2023-24. The business income of ` 50,000 (i.e., ` 6,00,000 (-) ` 5,50,000, being the fair market value on the date of conversion) would also be taxable in the A.Y.2025-26. Thus, both capital gains and business income would be chargeable to tax in the A.Y.2025-26. (iv) Compensation on compulsory acquisition [Section 45(5)] Sometimes, a building or some other capital asset belonging to a person is taken over by the Central Government by way of compulsory acquisition. In that case, the consideration for the transfer is determined by the Central Government of RBI. When the Central Government pays the above compensation, capital gains may arise. Such capital gains are chargeable as income of the previous year in which such compensation is received. Enhanced Compensation - Many times, persons whose capital assets have been taken over by the Central Government and who get compensation from the Government go to the Court of law for enhancement of compensation. If the court awards a compensation which is higher than the original compensation, the difference thereof will be chargeable to capital gains in the year in which the same is received from the government. Cost of acquisition in case of enhanced compensation - For this purpose, the cost of acquisition and cost of improvement shall be taken to be nil. © The Institute of Chartered Accountants of India  CAPITAL GAINS 3.379 Compensation received in pursuance of an interim order deemed as income chargeable to tax in the year of final order - In order to remove the uncertainty regarding the year in which the amount of compensation received in pursuance of an interim order of the Court, Tribunal or other authority is to be charged to tax, it is provided that such compensation shall be deemed to be income chargeable under the head ‘Capital gains’ in the previous year in which the final order of such Court, Tribunal or other authority is made. Reduction of enhanced compensation - Where capital gain has been charged on the compensation received by the assessee for the compulsory acquisition of any capital asset or enhanced compensation received by the assessee and subsequently such compensation is reduced by any Court, Tribunal or any authority, the assessed capital gain of that year shall be recomputed by taking into consideration the reduced amount. This re-computation shall be done by way of rectification 5. Death of the transferor - It is possible that the transferor may die before he receives the enhanced compensation. In that case, the enhanced compensation will be chargeable to tax in the hands of the person who receives the same. 4.6 CAPITAL GAINS ON DISTRIBUTION OF ASSETS BY COMPANIES IN LIQUIDATION [SECTION 46] (1) In the hands of liquidated company: Where the assets of a company are distributed to its shareholders on its liquidation, such distribution shall not be regarded as a transfer by the company for the purposes of section 45 [Section 46(1)]. The above section is restricted in its application to the circumstances mentioned therein i.e., the assets of the company must be distributed in specie to shareholders on the liquidation of the company. If, however, the liquidator sells the assets of the company resulting in a capital gain and distributes the funds so collected, the company will be liable to pay tax on such gains. 5 under section 155 © The Institute of Chartered Accountants of India  3.380 INCOME TAX LAW (2) In the hands of shareholders: Shareholders receive money or other assets from the company on its liquidation. They will be chargeable to income-tax under the head ‘capital gains’ in respect of the market value of the assets received on the date of distribution, or the moneys so received by them. The portion of the distribution which is attributable to the accumulated profits of the company is to be treated as dividend income under section 2(22)(c), which would be taxable in the hands of shareholders. The same will be deducted from the amount received/fair market value for the purpose of determining the consideration for computation of capital gains. Capital Gains on distribution of assets by companies in liquidation [Section 46] In the hands of In the hands of the company shareholders [Section 46(1)] [Section 46(2)] Distribution is not a transfer Distribution attributable to Money received (+) accumulated profits of the FMV of assets company distributed (-) deemed dividend u/s 2(22)(c) No capital gains tax liability Deemed dividend u/s 2(22)(c) Full value of consideration for the purpose of section 48 Taxable in the hands of To be considered for shareholders as “Income computing Capital from Other Sources” Gains in the hands of shareholders © The Institute of Chartered Accountants of India  CAPITAL GAINS 3.381 4.7 CAPITAL GAINS ON BUYBACK OF SHARES OR SPECIFIED SECURITIES [SECTION 46A] (1) In case of shares of a company other than a domestic company and specified securities: Any consideration received by a holder of specified securities (other than shares of a domestic company) from any company on purchase of its specified securities is chargeable to tax in the hands of the holder of specified securities. The difference between the cost of acquisition and the value of consideration received by the holder of securities is chargeable to tax as capital gains in his hands. The computation of capital gains shall be made in accordance with the provisions of section 48. Such capital gains shall be chargeable in the year in which such securities were purchased by the company. For this purpose, “specified securities” shall have the same meaning as given in Explanation to section 77A of the Companies Act, 1956 6. As far as shares are concerned, this provision would be attracted in the hands of the shareholder only if the shares are bought back by a company, other than a domestic company. (2) In case of buy back of shares effected before 1.10.2024 by domestic companies: In case of buyback of shares (whether listed or unlisted) before 1.10.2024 by a domestic company, additional income-tax@20% (plus surcharge @12% and cess@4%) is leviable in the hands of the company.Consequently, the income arising to the shareholders in respect of 7 such buyback of shares by the domestic company is exempt under section 10(34A), since the domestic company is liable to pay additional income-tax on the buyback of shares. (3) In case of buy back of shares effected on or after 1.10.2024 by domestic companies: In case of buyback of shares (whether listed or unlisted) on or after 1.10.2024 by a domestic company, the sum paid by a domestic company for purchase of its own shares would be treated as dividend and taxable under 6 Now section 68 of the Companies Act, 2013 7 Under section 115QA © The Institute of Chartered Accountants of India  3.382 INCOME TAX LAW the head “Income from Other Sources” in the hands of shareholders. No deduction for expenses would be available against such dividend income. Consequently, as per section 46A, value of consideration received by a shareholder on buy back of shares by a domestic company would be Nil and the difference between the cost of acquisition and the value of consideration received by the shareholder will result into capital loss. The same can be set off and carried forward as per the applicable set-off & carry forward provisions of the Act. If it is long-term capital loss, it can be set-off only against long-term capital gains. If it is a short-term capital loss, it can set-off against both long term capital gains and short term capital gains. For details, refer Chapter: 5: Aggregation of income, Set-off and Carry Forward of Losses. 4.8 TRANSACTIONS NOT REGARDED AS TRANSFER [SECTION 47] Section 47 specifies certain transactions which will not be regarded as transfer for the purpose of capital gains tax: (1) Total or partial partition of a HUF: Any distribution of capital assets on the total or partial partition of a HUF [Section 47(i)]. (2) A gift or will or an irrevocable trust by individual or HUF: Any transfer of a capital asset by an individual or HUF under a gift or will or an irrevocable trust [Section 47(iii)]. Note – Upto A.Y. 2024-25, transfer of a capital asset (other than shares, debentures or warrants allotted by a company under any ESOP) under a gift or will or irrevocable trust by any person was not considered as a transfer. (3) Transfer of capital asset by holding company to its wholly owned Indian subsidiary company: Any transfer of capital asset by a company to its subsidiary company [Section 47(iv)]. Conditions: (i) The parent company or its nominee must hold the whole of the shares of the subsidiary company; and (ii) The subsidiary company must be an Indian company. © The Institute of Chartered Accountants of India  CAPITAL GAINS 3.383 (4) Transfer of capital asset by a subsidiary company to its 100% holding company, being an Indian company: Any transfer of capital asset by a subsidiary company to the holding company [Section 47(v)]. Conditions: (i) The whole of shares of the subsidiary company must be held by the holding company; and (ii) The holding company must be an Indian company. Exception - The exemption mentioned in 3 or 4 above will not apply if a capital asset is transferred as stock-in-trade. (5) Transfer of capital asset by amalgamating company to amalgamated Indian company, in a scheme of amalgamation: Any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company if the amalgamated company is an Indian company [Section 47(vi)]. (6) Transfer of capital asset by the demerged company to the resulting Indian company, in a scheme of demerger: Any transfer in a demerger, of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company [Section 47(vib)]. (7) Transfer or issue of shares by a resulting company, in a scheme of demerger: Any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company, if the transfer is made in consideration of the demerger of the undertaking [Section 47(vid)]. (8) Transfer of shares by a shareholder in a scheme of amalgamation: Any transfer by a shareholder, in a scheme of amalgamation, of shares held by him in the amalgamating company [Section 47(vii)]. Conditions: (i) The transfer is made in consideration of the allotment to him of any share/s in the amalgamated company, except where the shareholder itself is the amalgamated company; (ii) The amalgamated company is an Indian company. © The Institute of Chartered Accountants of India  3.384 INCOME TAX LAW Example: Let us take a case where A Ltd., an Indian company, holds 60% of shares in B Ltd. B Ltd. amalgamates with A Ltd. Since A Ltd. itself is the shareholder of B Ltd., A Ltd., being the amalgamated company, cannot issue shares to itself. However, A Ltd. has to issue shares to the other shareholders of B Ltd. ILLUSTRATION 4 M held 2000 shares in a company ABC Ltd., an Indian company. This company amalgamated with another Indian company XYZ Ltd. during the previous year ending 31-3-2025. Under the scheme of amalgamation, M was allotted 1000 shares in the new company. The market value of shares allotted is higher by ` 50,000 than the value of holding in ABC Ltd. The Assessing Officer proposes to treat the transaction as an exchange and to tax ` 50,000 as capital gain. Is he justified? SOLUTION In the above example, the transaction is squarely covered by the exemption explained above and the proposal of the Assessing Officer to treat the transaction as a transfer is not justified. (9) Transfer of Government Security outside India by a non-resident to another non-resident: Any transfer of a capital asset, being a Government Security carrying a periodic payment of interest, made outside India through an intermediary dealing in settlement of securities, by a non- resident to another non-resident [Section 47(viib)] (10) Redemption of sovereign gold bonds by an Individual: Redemption by an individual of sovereign gold bonds issued by RBI under the Sovereign Gold Bond Scheme, 2015 [Section 47(viic)] (11) Conversion of gold into Electronic Gold Receipt or vice a versa: Any transfer of a capital asset, being conversion of gold into Electronic Gold Receipt issued by a Vault Manager, or conversion of Electronic Gold Receipt into gold [Section 47(viid)] (12) Transfer of specified capital asset to the Government or university etc.: Any transfer of any of the following capital asset to the Government or to the University or the National Museum, National Art Gallery, National Archives or any other public museum or institution notified by the Central © The Institute of Chartered Accountants of India  CAPITAL GAINS 3.385 Government to be of national importance or to be of renown throughout any State (i) work of art (ii) archaeological, scientific or art collection (iii) book (iv) manuscript (v) drawing (vi) painting (vii) photograph or (viii) print [Section 47(ix)]. (13) Transfer on conversion of bonds or debentures etc. into shares or debentures: Any transfer by way of conversion of bonds or debentures, debenture stock or deposit certificates in any form, of a company into shares or debentures of that company [Section 47(x)]. (14) Conversion of preference shares into equity shares: Any transfer by way of conversion of preference shares of a company into equity shares of that company [Section 47(xb)]. (15) Transfer of capital asset under Reverse Mortgage: Any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government [Section 47(xvi)]. The Reverse Mortgage scheme is for the benefit of senior citizens, who own a residential house property. In order to supplement their existing income, they can mortgage their house property with a scheduled bank or housing finance company, in return for a lump-sum amount or for a regular monthly/quarterly/annual income. The senior citizens can continue to live in the house and receive regular income, without the botheration of having to pay back the loan. The loan will be given up to, say, 60% of the value of residential house property mortgaged. Also, the bank/housing finance company would undertake a revaluation of the property once every 5 years. The borrower can use the loan amount for renovation and extension of residential property, family’s medical and emergency expenditure etc., amongst others However, he cannot use the amount for speculative or trading purposes. © The Institute of Chartered Accountants of India  3.386 INCOME TAX LAW The Reverse Mortgage Scheme, 2008, now includes within its scope, disbursement of loan by an approved lending institution, in part or in full, to the annuity sourcing institution, for the purposes of periodic payments by way of annuity to the reverse mortgagor. This would be an additional mode of disbursement i.e., in addition to direct disbursements by the approved lending institution to the Reverse Mortgagor by way of periodic payments or lump sum payment in one or more tranches. An annuity sourcing institution has been defined to mean Life Insurance Corporation of India or any other insurer registered with the Insurance Regulatory and Development Authority. Maximum Period of Reverse Mortgage Loan: Mode of disbursement Maximum period of loan (a) Where the loan is disbursed 20 years from the date of signing the directly to the Reverse agreement by the reverse mortgagor Mortgagor and the approved lending institution. (b) Where the loan is disbursed, The residual life time of the borrower. in part or in full, to the annuity sourcing institution for the purposes of periodic payments by way of annuity to the Reverse mortgagor The bank will recover the loan along with the accumulated interest by selling the house after the death of the borrower. The excess amount will be given to the legal heirs. However, before resorting to sale of the house, preference will be given to the legal heirs to repay the loan and interest and get the mortgaged property released. Therefore, section 47(xvi) clarifies that any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government would not amount to transfer for the purpose of capital gains. Exemption of income received in a transaction of reverse mortgage [Section 10(43)]: Section 10(43), further, provides that the amount received by the senior citizen as a loan, either in lump sum or in installments, in a transaction of reverse mortgage would be exempt from income-tax. © The Institute of Chartered Accountants of India  CAPITAL GAINS 3.387 ILLUSTRATION 5 In which of the following situations capital gains tax liability does not arise? (i) Mr. A purchased gold in 1970 for ` 25,000. In the P.Y. 2024-25, he gifted it to his son at the time of marriage. Fair market value (FMV) of the gold on the day the gift was made was ` 1,00,000. (ii) A house property is purchased by a Hindu undivided family in 1945 for ` 20,000. It is given to one of the family members in the P.Y. 2024-25 at the time of partition of the family. FMV on the date of partition was ` 12,00,000. (iii) Mr. B purchased 50 convertible debentures for ` 40,000 in 1995 which are converted into 500 shares worth ` 85,000 in November 2024 by the company. SOLUTION We know that capital gains arises only when we transfer a capital asset. The liability of capital gains tax in the situations given above is discussed as follows: (i) As per the provisions of section 47(iii), gift of a capital asset by an individual is not regarded as transfer for the purpose of capital gains. Therefore, capital gains tax liability does not arise in the given situation. (ii) As per the provisions of section 47(i), distribution of a capital asset (being in kind) on the total or partial partition of Hindu undivided family is not regarded as transfer for the purpose of capital gains. Therefore, capital gains tax liability does not arise in the given situation. (iii) As per the provisions of section 47(x), conversion of bonds or debentures, debenture stock or deposit certificates in any form of a company into shares or debentures of that company is not regarded as transfer for the purpose of capital gains. Therefore, capital gains tax liability does not arise in the given situation. ILLUSTRATION 6 Mr. Abhishek a senior citizen, mortgaged his residential house with a bank, under a notified reverse mortgage scheme. He was getting loan from bank in monthly installments. Mr. Abhishek did not repay the loan on maturity and hence gave possession of the house to the bank, to discharge his loan. How will the treatment of long-term capital gain be on such reverse mortgage transaction? © The Institute of Chartered Accountants of India  3.388 INCOME TAX LAW SOLUTION Section 47(xvi) provides that any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government shall not be considered as a transfer for the purpose of capital gain. Accordingly, the mortgaging of residential house with bank by Mr. Abhishek will not be regarded as a transfer. Therefore, no capital gain will be charged on such transaction. Further, section 10(43) provides that the amount received by the senior citizen as a loan, either in lump sum or in installment, in a transaction of reverse mortgage would be exempt from income-tax. Therefore, the monthly installment amounts received by Mr. Abhishek would not be taxable. ILLUSTRATION 7 Examine, with reasons, whether the following statements are True or False. (i) Alienation of a residential house in a transaction of reverse mortgage under a scheme made and notified by the Central Government is treated as "transfer" for the purpose of capital gains. (ii) Zero coupon bonds of eligible corporation, held for 14 months, will be long- term capital assets. (iii) Zero Coupon Bond means a bond on which no payment and benefits are received or receivable before maturity or redemption. SOLUTION (i) False: As per section 47(xvi), such alienation in a transaction of reverse mortgage under a scheme made and notified by the Central Government is not regarded as "transfer" for the purpose of capital gains. (ii) True: Section 2(42A) defines the term 'short-term capital asset'. Under the proviso to section 2(42A), zero coupon bond held for not more than 12 months will be treated as a short-term capital asset. Consequently, such bonds held for more than 12 months will be a long-term capital asset. (iii) True: As per section 2(48), ‘Zero Coupon Bond’ means a bond issued by any infrastructure capital company or infrastructure capital fund or infrastructure debt fund or a public sector company, or Scheduled Bank on or after 1st June 2005, in respect of which no payment and benefit is © The Institute of Chartered Accountants of India  CAPITAL GAINS 3.389 received or receivable before maturity or redemption from such issuing entity and which the Central Government may notify in this behalf. 4.9 IMPORTANT DEFINITIONS (a) Amalgamation [Section 2(1B)] - “Amalgamation”, in relation to companies, means - - the merger of one or more companies with another company or - the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that - (i) all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation; (ii) all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation; (iii) shareholders holding not less than three-fourth in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation, otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first mentioned company. (b) Demerger [Section 2(19AA)] - “Demerger”, in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 230 to 232 of the Companies Act, 2013, by a demerged company of its one or more undertaking to any resulting company in such a manner that - © The Institute of Chartered Accountants of India  3.390 INCOME TAX LAW (i) all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger; (ii) all the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger; (iii) the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger; However, this provision does not apply where, in compliance to the Indian Accounting Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules, 2015, the resulting company records the value of the property and the liabilities of the undertaking or undertakings at a value different from the value appearing in the books of account of the demerged company, immediately before the demerger. For the purpose of determining the value of the property, any change in the value of assets consequent to their revaluation shall be ignored. (iv) the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis; Note - If the resulting company is a shareholder of the demerged company, it cannot issue shares to itself. However, the resulting company has to issue shares to the other shareholders of the demerged company. (v) the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger, otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company; (vi) the transfer of the undertaking is on a going concern basis; © The Institute of Chartered Accountants of India  CAPITAL GAINS 3.391 (vii) the demerger is in accordance with the conditions, if any, notified 8 by the Central Government in this behalf. Reconstruction or splitting up of a public sector company into separate companies shall be deemed to be a demerger, if such reconstruction or splitting up has been made to transfer any asset of the demerged company to the resulting company and the resulting company – (a) is a public sector company on the appointed day indicated in such scheme as may be approved by the Central Government or any other body authorized under the Companies Act, 1956 or any other law for the time being in force governing such public sector companies; and (b) fulfils such other conditions as may be notified by the Central Government [Explanation 6]. (c) Demerged Company - Demerged company means the company whose undertaking is transferred, pursuant to a demerger, to a resulting company. (d) Resulting Company - Resulting company means one or more companies (including a wholly owned subsidiary thereof) to which the undertaking of the demerged company is transferred in a demerger and, the resulting company in consideration of such transfer of undertaking, issues shares to the shareholders of the demerged company and includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger. 4.10 MODE OF COMPUTATION OF CAPITAL GAINS [SECTION 48] (i) Computation of capital gains: The income chargeable under the head ‘Capital gains’ shall be computed by deducting the following items from the full value of the consideration received or accruing as a result of the transfer of the capital asset: (1) Expenditure incurred wholly and exclusively in connection with such transfer like brokerage, stamp duty, registration fee, legal expenses etc. 8 under sub-section (5) of section 72A © The Institute of Chartered Accountants of India  3.392 INCOME TAX LAW (2) The cost of acquisition and cost of any improvement thereto. However, the cost of acquisition of the asset or the cost of improvement thereto would not include the deductions claimed on interest u/s 24(b) or under the provisions of Chapter VI-A. Interest on loan taken for acquisition, construction, repairs, reconstruction of house property is allowable as deduction under section 24(b). Sections 80EE and 80EEA in Chapter VI-A provide for deduction of interest payable on loan taken for acquisition of house property, subject to fulfillment of certain conditions. The interest allowed as deduction under section 24(b) while computing income from house property and interest allowed as deduction under section 80EE or 80EEA of Chapter VI-A would not be included in the cost of acquisition or cost of improvement while computing capital gains on transfer of house property. (ii) No deduction in respect of STT: No deduction shall, however, be allowed in computing the income chargeable under the head “Capital Gains” in respect of any amount paid on account of securities transaction tax (STT) under Chapter VII of the Finance (No.2) Act, 2004. (iii) Cost inflation index: Under section 48, for computation of long-term capital gains arising from the transfer which takes place before 23.7.2024, the cost of acquisition and cost of improvement will be increased by applying the cost inflation index (CII). Once the cost inflation index is applied to the cost of acquisition and cost of improvement, it becomes indexed cost of acquisition and indexed cost of improvement. “Cost Inflation Index” in relation to a previous year means such index as may be notified by the Central Government having regard to 75% of average rise in the Consumer Price Index (Urban) for the immediately preceding previous year to such previous year. Indexed cost of acquisition means an amount which bears to the cost of acquisition, the same proportion as CII for the year in which the asset is transferred bears to the CII for the first year in which the asset was held by the assessee or for the year beginning on 1st April, 2001, whichever is later. Similarly, indexed cost of any improvement means an amount which bears to the cost of improvement, the same proportion as CII for the year in which © The Institute of Chartered Accountants of India  CAPITAL GAINS 3.393 the asset is transferred bears to the CII for the year in which the improvement to the asset took place. Below is the summary showing the indexation benefit available to different types of long-term capital assets which are transferred before 23.7.2024 - Long-term capital assets which are transferred Indexation before 23.7.2024 benefit Bonds or debentures No Capital indexed bonds issued by the Government Yes Sovereign Gold Bond issued by the RBI under the Sovereign Yes Gold Bond Scheme, 2015 Depreciable assets N.A. since it will Unit of a specified mutual fund acquired on or after be short term 1.4.2023 capital gain Marked linked debentures Equity share in a company on which STT is paid both at the No time of acquisition and transfer Unit of equity oriented fund or unit of business trust on No which STT is paid at the time of transfer Other long-term capital assets Yes Consequent to the amendment made by the Finance (No. 2) Act, 2024 in section 48, no indexation benefit is allowable on long-term capital gains arising on transfer of any capital assets taking place on or after 23.7.2024. Computation of tax on LTCG on transfer of land or building or both on or after 23.7.2024 [Section 112] A resident individual or HUF, while computing tax on LTCG on transfer of land or building or both, has the option to take the benefit of indexation under section 112 in respect of long-term capital gains arising on transfer of land or building or both which is acquired before 23.7.2024 and transferred on or after 23.7.2024. Accordingly, LTCG on transfer of such land or building or both are subject to lower of tax @12.5% (on LTCG computed without indexation benefit) or @20% (on LTCG computed with indexation benefit). It may be noted that this benefit to a resident individual or HUF is to be given only while computing tax on LTCG under section 112 on transfer of land or © The Institute of Chartered Accountants of India  3.394 INCOME TAX LAW building or both and not while computing Income under the head “Capital Gains” which would form part of gross total income/total income. Thus, for computing income under the head “Capital Gains” to be included in gross total income, indexation benefit is not to be given even in case of resident individual/HUF transferring land or building or both on or after 23.7.2024 which was acquired before 23.7.2024. The cost inflation indices for the financial years so far have been notified as under: Financial Year Cost Inflation Index 2001-02 100 2002-03 105 2003-04 109 2004-05 113 2005-06 117 2006-07 122 2007-08 129 2008-09 137 2009-10 148 2010-11 167 2011-12 184 2012-13 200 2013-14 220 2014-15 240 2015-16 254 2016-17 264 2017-18 272 2018-19 280 2019-20 289 2020-21 301 2021-22 317 2022-23 331 2023-24 348 2024-25 363 © The Institute of Chartered Accountants of India  CAPITAL GAINS 3.395 (iv) Full value of consideration of shares, debentures or warrants issued under ESOP in case of transfer under a gift etc. upto A.Y. 2024-25 - In case where shares, debentures or warrants allotted by a company directly or indirectly to its employees under the Employees' Stock Option Plan or Scheme in accordance with the guidelines issued in this behalf by the Central Government are transferred under a gift or irrecoverable trust upto A.Y. 2024- 25, then the market value on the date of such transfer shall be deemed to be the full value of consideration received or accruing as a result of transfer of such asset. (v) Special provision for non-residents – In case of non-residents who invest foreign exchange to acquire capital assets, capital gains arising from the transfer of shares or debentures of an Indian company is to be computed in the following manner: The cost of acquisition, the expenditure incurred wholly and exclusively in connection with the transfer and the full value of the consideration are to be converted into the same foreign currency with which such shares were acquired. The conversion has to be done at the average of Telegraphic Transfer Buying Rate (TTBR) and Telegraphic Transfer Selling Rate (TTSR) on the respective dates. The resulting capital gains shall be reconverted into Indian currency by applying the TTBR on the date of transfer. The aforesaid manner of computation of capital gains shall be applied for every purchase and sale of shares or debentures in an Indian company. This will provide relief from risk of foreign currency fluctuation to non-residents. Benefit of indexation will not be available in this case. On long-term capital gains arising from transfer of unlisted securities or shares of a company in which public are not substantially interested, non- residents and foreign companies are subject to tax at a concessional rate of 10% (without indexation benefit or currency conversion) if such transfer takes place before 23.7.2024 and @12.5% (without indexation benefit or currency conversion) if such transfer takes place on or after 23.7.2024 [Section 112]. © The Institute of Chartered Accountants of India  3.396 INCOME TAX LAW Note – The benefit of currency conversion would not be applicable to the long-term capital gains arising from the transfer of the following assets referred to in section 112A – (i) equity share in a company on which STT is paid both at the time of acquisition and transfer (ii) unit of equity oriented fund or unit of business trust on which STT is paid at the time of transfer. 4.11 ASCERTAINMENT OF COST IN SPECIFIED CIRCUMSTANCES [SECTION 49] A person becomes the owner of a capital asset not only by purchase but also by several other methods. Section 49 gives guidelines as to how to compute the cost under different circumstances. Section Circumstance Cost of acquisition 49(1) Where the capital asset became Cost for which the previous the property of the assessee: owner of the property acquired it. (i) on any distribution of assets Notes – on the total or partition of a Cost of improvement – To the HUF; cost of acquisition, the cost of (ii) under a gift or will by an improvement to the asset, individual or HUF (by any incurred by the previous owner or person upto 31.3.2024); the assessee on or after 1.4.2001 (iii) by succession, inheritance or must be added. devolution; Period of holding - It may be (iv) on any distribution of assets on noted that section 2(42A) provides the liquidation of a company; that in all such cases, for (v) under a transfer to revocable determining the period for which or an irrevocable trust; the capital asset is held by the transferee, the period of holding (vi) under any transfer of capital of the asset by the previous owner asset by a holding company to shall also be considered. its wholly owned subsidiary Indian company or by a Benefit of indexation - The subsidiary company to its Bombay High Court, in CIT v. 100% holding Indian company, Manjula J. Shah 16 Taxman 42, referred to in section 47(iv) held that the indexed cost of and 47(v), respectively; acquisition in case of gifted asset © The Institute of Chartered Accountants of India  CAPITAL GAINS 3.397 (vii) under any transfer referred to has to be computed with reference in section 47(vi) of a capital to the year in which the previous asset by amalgamating owner first held the asset and not company to the amalgamated the year in which the assessee Indian company, in a scheme became the owner of the asset. of amalgamation; As per the plain reading of the (viii) under any transfer referred to provisions of section 48, however, in section 47(vib), of a capital the indexed cost of acquisition asset by the demerged would be determined by taking CII company to the resulting for the year in which asset is first Indian company, in a scheme held by the assessee. of demerger; The benefit of indexation would be (ix) by conversion by an individual available for the capital assets of his separate property into a which are transferred before HUF property, by the mode 23.7.2024. referred to in section 64(2). 49(2) Where shares in an amalgamated The cost of acquisition to him of company which is an Indian the shares in the amalgamated company become the property of company shall be taken as the the assessee in consideration of cost of acquisition of the shares the transfer of shares referred to in in the amalgamating company. section 47(vii) held by him in the amalgamating company under a scheme of amalgamation. 49(2A) Where a person becomes the That part of the cost of owner of shares or debentures in a debentures, debenture stock, bond company during the process of or deposit certificate in relation to conversion of bonds or which such asset (shares or debentures, debenture stock or debentures) is acquired by that