CAPITAL GAINS

INTRODUCTION
• CAPITAL GAINS
“Any profit or gains arising from
the transfer of capital assets is
taxable under the head capital
gains in the previous year in which
the transfer has taken place.”
 There are certain conditions, which are
required to be satisfied for profits /
gains to be charged under the head
capital gains, they are:

• There should be a capital asset.

• The capital asset should be transferred by the assessee.
• Such transfer should take place during the previous
year.
• The profits or gains should arise as a result of this
transfer.
• Such profit or gain should not be exempted from tax
under sections 54, 54B, 54D, 54EC, 54F and 54G.
 DEFINITION OF CAPITAL
ASSETS

• Capital asset is defined to include property

of any kind, whether fixed or circulating,
movable or immovable, tangible or
intangible.
 EXCEPTIONS TO CAPITAL
ASSETS
a) Any stock-in-trade, consumable stores or raw
material held for the purposes of business or
profession.

b) Movable property of the assessee including

wearing apparel and furniture held for his
personal use or for the use of any member of
his family dependent on him. The exception to
this condition is jewellery, which is treated as
a capital asset, even though it is meant for
personal use.
 CONTD…….

a) Agricultural land in India provided it is not

situated in urban area.
b) 6 ½ % Gold Bonds, 7% Gold Bonds or National
Defence Gold Bonds, issued by the central
government.
c) Special Bearer Bonds, and
d) Gold Deposit bonds issued under Gold Deposit
Scheme of 1999.
 SHORT TERM AND LONG
TERM CAPITAL ASSETS
“Short term capital assets” means a capital asset held by
the assessee for not more than 36 months, immediately
prior to its date of transfer. However, the following assets
are treated as short term assets if they are held for not more
than 12 months, they are:
• Equity or preference shares in a company
• Securities like debentures, government securities listed in a
recognized stock exchange in India.
• Units of UTI and
• Units of mutual funds.
• An asset other than a short-term capital asset is regarded as
a “long term capital asset”.
 METHOD OF
DETERMINING PERIOD
OF HOLDING
• In the case of a share held in a company in liquidation, the
period subsequent to the date on which the company goes
into liquidation should be excluded while calculating the
time period.
• In case when the assessee acquires an asset as a gift or by a
will, the period for which the previous owner holds the
asset is also included.
• In the case of a share in an Indian company which
becomes the property of the assessee in a scheme of
amalgamation, the period for which the share is held by the
assessee in the amalgamating company should be included.
 TRANSFER OF CAPITAL ASSET
[Sec2(47)]
•Any transaction involving the allowing of the possession
of any movable property to be taken or retained in part of
performance
of a contract of the nature referred to in the sec53a of the
transfer of property act,1982
•Any transaction (whether by way of becoming a member
of, or acquiring shares in a co-operative society, company
association of person or by way of agreement or any
arrangement or in any other manner whatsoever) which
has the effect of transferring or enabling the enjoyment of
any immovable property
 WHAT IS INCLUDED IN
TRANSFER
• Transfer Includes Sale of Capital Asset [Sec 2(47)(i)]
• Transfer Includes Exchange [Sec118]
1. Lending
2. Exchange Vs Sale
• Partner Brings His Capital Asset Into Partnership as Capital
Contribution [Sec 45(30)]
• Transfer Includes Compulsory Acquisition of an
Asset[sec(47)(iii)]
• Transfer Includes Conversion of Capital Asset Into Stock in
Trade[sec(47)(iv)]
 CONTD…
•Transfer Includes Giving Possession of Immmovable Property
Under Part Performance of a Contract [Sec 2(47)(v)]

•Transfer Includes Any Transcation Which Has the Effect of

Trasferring an Immmovable Property [Sec 2(47)(vi)]

•Other Judicial Pronouncements

1. Auction Sale
2. Sale of Business
3. Temporary Transfer
 WHAT IS NOT INCLUDED IN
TRANSFER
•Distribution of Assets to Its Shareholder on Its Liquidation
[Sec46(1)]
•Distribution of Capital Assets in HUF to Its Member at the Time of
Total or Partial Partition [Sec 47(1)]
•Transfer of a Capital Asset Under a Will or an Irrevocable Trust or a
Gift [Sec 47(iii)]
• Transfer of a Capital Asset by a Company to Its Wholly Owned
Indian Subsidiary Company [Sec 47(iv)]
• Transfer of a Capital Asset by a Wholly Owned Subsidiary
Company to Its Indian Holding Company [Sec 47(v)]
 CONTD….
•Transfer in Case of Amalgamation Sec[47(vi)]
•Transfer in Case of Demerger Sec[47(vi B)]

•Transfer of Agricultural Land in India Effected Before March 1,

1970 [Sec 47(viii)]

• Transfer of a Capital Asset , Being Any Work of Art ,Scientific or

Art Collection, Book, Dreawing,painting,photograrh Etc [Sec47(ix)]

•Transfer by Way of Conversion of Bonds or Debenture of a

Company Into Shares or Debenture of That Company [ Sec 47(x)]
SHORT TERM CAPITAL
GAIN
1)Find full value of consideration
2)Deduct the followings.
a) Expenditure incurred wholly and exclusively
in connection with such tranfer.
b) Cost of acquisition.
c) Cost of improvement
3) From resulting sum deduct exemption provided
by u/s54 B, 54 D, 54 G.
4) The balancing amount is Short Term Capital
Gain.
 LONG TERM CAPITAL
GAIN
1) Find full value of consideration
2) Deduct the followings
a) Expenditure incurred wholly and exclusively
in connection with such transfer.
b) Indexed Cost of acquisition.
c) Indexed Cost of improvement.
3) From resulting sum deduct the exemption
provided by section 54, 54 B, 54 D,
54 EC, 54 ED, 54 F, 54 G.
The balancing amount is Long Term Capital
Gain/Loss.
 FULL VALUE OF
CONSIDERATION
Full value means whole price without any
deduction and consideration in which
transferor receives in lieu of asset he parts
with.

3) ESOP
4) Unacquired Position
 EXPENDITURE ON
TRANSFER
Expenditure incurred wholly and exclusively in
connection with transfer of capital asset is
deductible from full value of consideration. This
means expenditure incurred which is necessary to
effect the transfer like brokerage commission, cost
of stamp, registration fees and all
COST OF ACQUISITION
Cost of acquisition of an asset is the value
for which it is acquired by the assessee,
expenses of capital nature for acquiring
the title are include in cost of acquisition.
2) Ground rent
3) Interest
4) Litigation expenses
5) Estate duty
 NOTIONAL COST OF
ACQUISITION
Cost to previous owner is considered as cost of
acquisition to the assessee if that capital asset
become property in cases like.
a) Distribution of asset on partial or total partition
of Hindu Undivided Family.
b) Acquisition of property under gift and will.
c) Acquisition of property by a HUF where one of
its member has converted his self acquired
property into joint family property after Dec 31-
1969.
 COST OF IMPROVEMENT
- It means all expenses of capital nature
incurred in making any addition/
alteration to capital asset by assessee.
2) Expenditure after 31 mar 1981
3) Compromising of suit
4) Estate duty
 INDEXED COST OF
ACQUISITION OR
IMPROVEMENT
Cost Inflation Index.
Cost inflation Index for any year means such
index as the central government may , having
regard to 75% of average rise in consumer price
index for urban non manual employees of the
immediate preceding pervious year to such year,
by notifying in official gazette
 COMPUTATION OF
INDEXED COST.
Case1) Capital asset acquired before 1-4-1981
FMV or AC * CII in which asset is transferred

Cost Inflation Index for yr 1981-82

2) Capital asset acquired after 1-4-1981
3) Capital asset acquired by assesse before
1-4-1981 & originally acquired by previous owner
before 1-4-1981.
4) Capital asset acquired by assesse after
1-4-1981 & originally acquired by previous
owner before 1-4-1981.

5) Capital asset acquired by assesse before

1-4-1981 & originally acquired by previous
owner before 1-4-1981.
 INTRODUCTION OF A
CAPITAL ASSET AS CAPITAL
CONTRIBUTION

Section 45(3)
Taxable in the hands of the partner
Consideration: Amount recorded in
the books of accounts
 DISTRIBUTION OF CAPITAL
ASSETS ON A FIRMS DISSOLUTION

Section 45(4)
Chargeable in the hands of the firm
Consideration : fair market value as
on the date of transfer
 SLUMP SALE
SEC 50B
Slump sale means transfer of one or
more undertakings as a result of sale
for lump sum consideration without
values being assigned to individual
assets and liabilities in such sales –
Section 2(42C).
 SLUMP SALE

• Cost of acquisition : Net worth

– No indexation
– Short term/long term
– Value of assets : Depreciable/non-depreciable
– Value in the hands of purchaser.
PROVISIONS – NON RESIDENTS

Transactions relating to purchase and

sale of securities
No indexation benefit
Particulars Indian Conversion $
Rupee Rate
s
Consideration 10000 Avg 217.39
rate=46
Expenses 100 Avg rate 2.17

Cost 5000 Avg 200.00

Rate=25
Capital Gains Buying 15.22
715.34 rate=47
 Capital Gains on distribution of assets
by companies in liquidation [Sec. 46]
• TAX TREATMENT IN HANDS OF THE Co.:  
•         assets are distributed by the company.
• The assets are distributed at the time of liquidation; and
• The assets are distributed to the shareholders.

• The liquidator sells assets and distributes the cash realized from
such sale, to the shareholders, there would be capital gains.
 CAPITAL GAINS ON
DISTRIBUTION OF ASSETS BY
COMPANIES IN LIQUIDATION
[SEC. 46]
• TAX TREATMENT IN THE HANDS OF
SHAREHOLDERS :
 1)  Full  Consideration    =  {  Money  received  &  Mkt.  Value  of  other 
assets} – { Amt.Treated as dividend u/s 2(22) ( c)}.
       
          2)    Deduct  Cost  of  Acquisition  /Indexed    Cost  of  Acquisition, 
expenditure on sale, etc., to find out the capital gain.

• Any distribution by a Co. at the liquidation is treated

as dividend to the extent of accumulated profit of the
Co.
CAPITAL GAINS ON CONVERSION OF
DEBENTURES INTO SHARES [SEC
49(2A)]:
• 1) Any transfer by way of conversion of debentures,
debenture – stock, or deposit certificates in any form, of a
Co. into shares or debentures of that co. is not regarded as
a transfer giving rise to Capital gains.

• 2) Cost of Acquisition will be the cost of debentures,

debentures – stock or deposit certificates which has been
appropriated towards to shares or debentures in case there
is sale of above transferred assets giving rise to capital
gains.
 CAPITAL GAINS ON CONVERSION OF
DEBENTURES INTO SHARES
[SEC 49(2A)]:
In case of conversion of debentures into Shares:
1) Cost of Debentures will be the Cost of acquisition of
shares.
2) To find out whether or not shares are LTCA or STCA,
the period of holding shall be determined from date of
allotment of shares.
3) The indexation will start from the date of conversion
of debentures into shares.
4) Not applicable for preference shares converted into
equity shares.
 CAPITAL GAINS ON TRANSFER OF
SECURITY BY DEPOSITORY
[ SEC 45(2A) ]
1) Any beneficial will be chargeable to Income tax, if in PY
he has had
any profits or gains by virtue of transferring of any
securities through
depository or participant of such beneficial interest.
2) It shall not be income of the depository.
3) Cost of Acquisitions and the period of holding of any
securities shall be determined on the basis of the First – In
– First – Out (FIFO)
 Sec 45(2A)(contd.)
4)FIFO shall be applied only in respect of
dematerialized holdings, as physical form of
shares are still in possession of the investor when
there is sale of dematerialized shares.
5) FIFO shall be applied accountwise incase if there
are multiple depository accounts, as sale in
particular account shall not be construed as sale in
other accounts.
6) Date of entry is used for the basis of FIFO.
 Capital Gains in case of conversion of
Capital Asset into Stock – in – Trade [ Sec
45 (2)]
• Case : CIT Vs Bai Shirinbai K. Kooka

1/4/82 1/4/83 1/4/84

Purchase Conversion Sale
No Tax Market Value Capital Gains S.P.

• Amendment in 1984 – from A.Y. 1985 - 86

1/4/67 1/4/84 1/4/84

Purchase Conversion Sale
Price - 70000 Market Value S.P.
Fair Mkt Value on = 480000 = 730000
1/4/81 – 180000
Capital Gains Business Gains
 COMPUTATION OF CAPITAL GAINS IN
THE CASE OF SELF GENERATED
ASSETS.
Self Generated Sale Cost of Cost of Expenses on
Assets Consideration Acquisition Improvement transfer
1. Goodwill of a Actual Nil Nil Actual
Business

2. Tenancy Actual Nil Actual Actual

Rights, Route
Permits & loom
Hours
3.Rights to Actual Nil Nil Actual
manufacture,
Produce or
Process any
article
4. Trade mark Actual Nil Actual Actual
or brand name
associated with
a business
 CAPITAL GAINS IN CASE OF
BONUS SHARES
Original Shares Bonus Shares

Acquisition Cost of Acquisition Cost of

Acquisition Acquisition
Acquired before Actual Cost or Acquired before Fair Market Value
April1, 1981 Fair Market Value April1, 1981 on 1st April 1981
on 1st April 1981
whichever is more
Acquired before Actual Cost or Acquired after Nil
April1, 1981 Fair Market Value April1, 1981
on 1st April 1981
whichever is more
Acquired after Actual Cost Acquired after Nil
April1, 1981 April1, 1981
CAPITAL GAIN ON TRANSFER OF
RIGHTS SHARES
• For Original Shareholder ( Renouncer )
– Cost of Acquisition :
• Cost of acquiring original shares.
• Cost of aquiring Rights shares.
– Premium Received on renouncement – Short Term
Capital Gain.
• For the Renouncee
– Cost of Acquisition :
• Amount paid to Company
• Premium paid to the renouncer.
• A holds 1000 shares of X Ltd.
– Date of acquisition – 1978
– Cost of acquisition – 10000, Fair Mkt. Value on 1/4/81 – 16000.
• X Ltd. Offers rights shares on May 1, 2002 –
– 2000 shares to A @ Rs.10 per share + Premium Rs. 50 per share.
• A subscribes for 800 shares
• Renounces 1200 shares in favour of B –
– Total Consideration Rs. 4800.
• A sells 1800 shares on March 30, 2003 @ Rs. 70 per share
 Original Shares (1000 Rights Shares Premium on
Shares) (800 Shares) Renouncement

Sale Consideration 70 X 1000 70 X 800 4800

= 70000 = 56000

Cost / Ind. Cost of 16000 X 447/100 60 X 800 --

Acquisition = 71520 = 48000

Capital Gains (1520) = Long Term 8000 = Short 4800 = Short Term
Capital Loss Term Gain Gain
 CAPITAL GAINS IN CASE OF
COMPULSORY ACQUISITION OF
AN ASSET [SEC 45(5)]
• Applicability :
– Transfer of capital asset by way of compulsory
acquisition under any law.
– Capital asset is transferred (not by way of compulsory
acquisition), & consideration is approved or determined
by central Gov. or RBI.
• Chargeability :
– Initial Compensation is full value of consideration.
– Charged in the year in which Initial Compensation is
received
• Enhanced Compensation.
 INSURANCE CLAIM RECEIVED.
[SEC 45(1A)]
• Deemed Capital Gain
• Two conditions for applicability of this section :
A) Compensation is received because of damage or
destruction of capital assets.
B) Damage or destruction is as a result of Flood,
Cyclone, Earthquake, Riots, Civil Disturbance,
Accidental fire explosion or action of enemy.
• Example :
I II III
WDV(Plants A&B) 240000 240000 240000
Additions :
Plant C 60000 60000 60000
----------------------------------------------------
300000 300000 300000
Less :
Money Recd/ Receivable 10000 350000 350000
(10/02/03) (10/02/03) (15/04/03)
----------------------------------------------------
WDV 290000 -- --
Capital Gains -- 50000 50000
AY-03-04 AY-04-05
 OTHER SPECIAL
PROVISIONS
• Capital Gains in case of Depreciable Assets
( Sec 50 )
• Buy Back of Shares
• Transfer of Land & Bldg ( Sec 50 [c])
 EXEMPTION U/S 54
• Transfer of Residential House Property
• Individual / HUF
• Long Term Capital Asset
• Assessee should invest in another Residential House
Property within the specified time limit.
• Exemption available to the extent of the investment in the
new house property or capital gains whichever is less.
• Asset should not be transferred within 3 years of
acquisition, otherwise will be treated as a short term
capital gain.
• Capital gain account scheme deposit facility available.
 EXEMPTION U/S 54B
• Available if agricultural land transferred. The said land
should be used by the individual or his parents for
agricultural purposes during at least 2 years immediately
prior to transfer.
• Available only to an individual.
• Short term / Long term Capital Asset.
• Investment in agricultural land (rural or urban) within 2
years.
• The rules relating to exemption, transfer of asset and
facility of capital gain account scheme are the same as
under Sec 54.
 EXEMPTION U/S 54D
• Available if land or building forming part of an industrial
undertaking is compulsorily acquired by the govt and
which is used during 2 years for industrial purposes prior
to acquisition.
• Available to any person.
• Short term / Long term Capital Asset.
• Investment in land or building for industrial purposes
within 3 years.
• Capital gain chargeable from the date of receipt of
compensation.
• The rules relating to exemption, transfer of asset and
facility of capital gain account scheme are the same as
under Sec 54.
 EXEMPTION U/S 54EC
• Available if any long term capital asset is transferred after
31.3.2000.
• Available to any person.
• The asset should be a Long term capital asset.
• Investment within 6 months in bonds of NABARD, NHAI
or RECL(on or after 1/4/01) which are redeemable after 3
years.
• The rule relating to exemption is same as under Sec 54.
• If the new asset is transferred or is converted into money
or a loan is taken on security of the new asset within 3
years of acquisition, then the capital gain will be treated as
long term capital gains.
 EXEMPTION U/S 54ED
• Available if any long term capital asset being units, listed
shares, or securities are transferred.
• Available to any person.
• The asset should be a long term capital asset.
• Investment should be in specified equity shares within 6
months.
• The rule relating to exemption is same as u/s 54.
• If the asset is transferred within 1 year of its acquisition,
then the capital gain will be treated as long term capital
gain.
 EXEMPTION U/S 54F
• Available if any long term capital asset(other than a
residential house property) is transferred, provided on the
date of transfer the taxpayer does not own more than one
residential house property.
• Available to an individual / HUF.
• Investment should be made in a residential house property.
• Amount of exemption = Investment * Capital gains
Net sale consideration
 EXEMPTION U/S 54F
(CONTD.)
• If the asset is transferred within 3 years of its acquisition
or if another residential house property is purchased within
2 years of transfer of original asset or if another residential
house is constructed within 3 years of the transfer of
original asset, then the capital gains exempt earlier, will be
treated as long term capital gain.
• Capital gain account deposit scheme available.
 EXEMPTION U/S 54G
• Available if any land, building, plant or machinery is
transferred in order to shift an industrial undertaking from
urban to rural area.
• Available to any person.
• Asset may be short term / long term.
• Investment should be made in land, building or plant and
machinery to shift the undertaking in a rural area.
• The rules relating to exemption, transfer of asset and
facility of capital gain account scheme are the same as
under Sec 54.
 PROVISIONS OF SEC 112
• Section 112 provides an alternative option for charging
long term capital gains to tax, if the following conditions
are satisfied :
 The taxpayer is an individual, HUF, company or any
other person(may be resident or non resident)
 The asset is a long term capital asset
 The long term capital asset is :
- a security listed in any recognised stock exchange in
India or,
- a unit of UTI or a mutual fund(whether listed or not)
 Sec 112 (contd.)
• If the conditions are satisfied, then the other option is to
charge the capital gains at the rate of 10% without taking
the benefit of indexation in the cost of acquisition.
• The tax payable by the assessee will be lower of 20%(+
surcharge)on the capital gain calculated giving benefit of
indexation or @10% without the benefit of indexation,
whichever is lower.
• In the case of listed bonus shares, listed debentures and
listed bonds, Option u/s 112 will be better.
THANK YOU