Chapter 65: Rise of American Accounts. "Hollywood ".
BASIC CONCEPTS.
Gain or Loss on Transfer of capital assets affected during the course of previous year is taxable under this head.
Capital Assets.
Tax is to be levied on any profit or gain occurring on the transfer of a capital asset. Section 2(14) defines capital assets as :
(1) Property of any kind held by an assessee whether or not connected with his business or profession.
(2) Any security held by a Foreign Institutional Investor who has invested in such security in accordance with the regulations made under SEBI Act, 1992 ( w. e. f. A. Y. 2015-16 )
Any asset ( What we own) whether used for business or not, whether tangible or intangible. Assets includes land, building, Plant and Machinery, vehicles, shares, securities, Gold, Silver, jewellery, Goodwill, patent rights or any right in these assets.
Following asset are not capital assets :
(1) Stock-in-trade or other consumable raw material.
(2) All personal effects except jewelery The term personal effect means all movable goods used for personal purposes including household goods, clothes, utensils etc. In case any asset is partly used for business and partly for personal purposes, it will not be capital asset to the extent it is used for personal purposes. Jewelry means anything made of precious metal whether studded with or without precious stones etc.
W. e. f. assessment year 2007-08 personal effects like archaeological collections, drawings, painting, Sculptures or any other work of art has been excluded from the definition of a Capital asset.
The word ' 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.
(3) National Gold Bonds 1980 or Gold Deposit Bonds 1999.
(4) Special Bearer Bonds 1991.
(5) Rural Agricultural land, Land used for Agricultural purposes and which is not situated within Municipal limits and within 8kms of city limits, if so notified.
Types of Capital Assets.
Types of capital assets. For computing capital gains, assets have been divided into two categories :
(1) Short - term capital assets [ Section 2(42A) .Short-term capital asset is that which is held by an assessee for not more than 36 months immediately preceeding the date of its transfer.
In the case of listed shares (equity or preference) held in a company securities listed in any recognised stock exchange, units of U. T. I or units of equity oriented Mutual Funds specified u/s 10(23D) and zero coupon Bonds the period has been reduced to 12 months with effect from 1-4-88 i.e., assessment year 1988-89.
Thus, listed shares, the securities listed in any recognised stock exchange, units of U. T. I. or units of equity oriented Mutual Funds and zero Coupon Bonds shall be treated as Long Term capital assets if held for more than 12 months.
In case an assessee subscribes to right issue himself, or subscription is made by renouncee the period shall be counted from the date of allotment of such financial asset.
Increase in ' period of holding ' for unlisted shares and certain units of Mutual funds.
w. e. f. A. Y. 2015-16 ,unlisted shares and units of Mutual Funds ( other than equity oriented funds) shall be regarded as short term capital assets where the same are held for a period less than or equal to 36 months.
However, unlisted shares or units of Mutual Funds ( other than equity oriented funds) transfered during the period beginning on 1-4-2014 and ending on 10-7-2014 shall be regarded as short term capital asset if held for a period of 12 months or less before the date of transfer. [ Second provision to section 2(42A) ]
Transfer of unlisted shares and units of Mutual Funds ( other than equity oriented funds) during assessment year 2016-17 and onwards.
With effect from assessment year 2016-17 unlisted shares and units of Mutual Funds ( other than equity oriented funds) shall be treated as long term capital asset if held for more than 36 months and short term capital asset if held for less than or equal to 36 months.
In case subscription is made against the right being renounced in favour of any other person the period will be counted from the date on which offer is made by the company or financial institution.
Any gain or loss accruing to the assessee on such assets shall be known as short-term capital gain or loss.[ 2(42B) ]
(2) Long-term capital assets [ Section 2(29A) ] Assets which do not fall within the definition given in section 2(42) ,i.e., the assets which are held by the assessee for a period exceeding 36 months immediately preceding the date of transfer, are called ' long-term capital assets '.
Any gain or loss accruing on such asset shall be known as long-term capital gain or loss. [2(42B) ]
Types of Capital Gains.
(1) Short term capital gains. Any gain on transfer of short term capital asset is called Short term Capital gain.
(2) Long term Capital gain. Any gain on transfer of long term capital asset is called Long Term Capital Gain (LTCG) .
Transfer
Means change in ownership. It can take place in any of the following manners :
(a) by sale, exchange or relinquishment of any asset.
(b) Extinguishments of any right in the asset.
(c) Compulsory acquisition of any asset under any law.
(d) Transfer of asset u/s 53A of transfer of property act as consideration of part performance of contract.
(e) Transfer of share in cooperative society as a result of which transfer of immovable Property takes place.
(f) Maturity or redemption of a Zero Coupon Bonds.
Deemed Transfer
When a person converts his capital asset into stock in trade, it is deemed as transfer, difference between cost price and price at which converted into stock-in-trade is capital gain [w. e. f. 1-4-1984 ]
Transfer of Asset by a Person to a Firm, AOP or BOI.
When a person transfers his capital asset to a firm, AOP or BOI (body of individuals) and it is treated as his capital, it is deemed as its transfer. The difference between the price recorded in the books of Firm, AOP or BOI and cost shall be treated as capital gain.
Transfer of Asset by a Firm, AOP or BOI to a Person.
It also amounts to transfer. The price recorded in the books of firm AOP, BOI is its cost and market value on the date of transfer is its sale price.
Compulsory Acquisition of Asset.
Additional compensation received is deemed as income of the year in which it is received and not the year in which asset was taken over. With effect from 1.4.2004 in case asset is taken over under compulsory acquisition and assessment has been made on the basis of original compensation or enhanced compensation and later on such compensation is reduced by any authority, the assessment shall be rectified by taking the reduced compensation.
Re-purchase of Units acquired under Section 80CCB
Amount invested in such units is fully taxable under the head ' Other Sources ' but excess of amount realised over principal amount is capital gain. Provisions of section. 48(indexing) are not applicable in this case.
Capital Gain on Purchase by a company of its own shares or other securities [ Section 46A ]
In case of buy back of shares and securities by a company, the capital gain shall be computed by deducting indexed cost (U/S 48) of such shares and securities out of consideration received by the assessee from such company.
TRANSACTIONS NOT REGARDED AS TRANSFERS U/S 47.
Under Section 47, the following transactions are not regarded as transfer. Hence any gain arising from such transactions is also not taxable under the head ' Capital Gains '.
1. Any distribution of capital asset on the total or partial partition of Hindu Undivided Family. But this provision will not be applicable if the assets of the HUF are sold by Karta and cash is realised and after that the cash is distributed amongst the members. In this case HUF shall have to pay tax on any gain which has accrued to it on sale of assets.
2. Any transfer of assets under a gift or will or to an irrevocable trust but this section shall not be applicable on shares gifted by employer to employees under Stock option Scheme.
3. Any transfer of capital assets by a company to its subsidiary company, if :
(a) the parent company or its nominees hold the whole of share capital of the subsidiary, and
(b) the subsidiary company is an Indian company.
4. Any transfer of capital assets by a subsidiary company to the holding company, if :
(a) the whole of the share capital of the subsidiary company is held by the holding company, and
(b) the holding company is an Indian company.
5. The provisions of points (4) and (5) above shall not be applicable if an asset is converted into stock-in-trade before the expiry of 8 succeeding previous years. The relationship of 100% shareholding must continue for 8 succeeding previous years.
6. 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.
7. Any transfer, in a scheme of amalgamation of a banking company with a banking institution sanctioned and brought into force by the Central Government under sub-section (7) of section 45 of the Banking Regulation Act, 1949 of a capital asset by the banking company for the banking institution.
For the purposes of this clause :
(1) "banking company " shall have the same meaning assigned to it in section 5(c) of the Banking Regulation Act, 1949.
(2) " banking institution " shall have the same meaning assigned to it in section 45(15) of the Banking Regulation Act, 1949.
8. Any transfer of capital assets owned by a demerged company to the resulting Indian company under a scheme of demerger. [ Section 47(6b) ]
9. In case demerger of foreign companies is taking place and capital asset in the nature of shares of an Indian company held by such demerged company are transferred to resulting foreign company shall not be regarded as transfer if :
(a) The shareholders holding not less than 3/4th in value of shares remain shareholders of the resulting company.
(b) There is no tax on such capital gain in the country in which such foreign demerged company is incorporated. [ Section 47(6)(c) ]
9A. Any transfer of a capital asset being a Govt. 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.
10. Any transfer in a scheme of amalgamation, of a capital asset being a share or shares held in an Indian Company by the amalgamating foreign company to the amalgamated foreign company provided :
(1) At least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company, and
(2) Such transfer does not attract tax on capital gains in the country in which amalgamating company is incorporated.
12. Any transfer by a shareholder under scheme of amalgamation of share or shares held by him in the amalgamating company, if
(1) The transfer is made in consideration of the allotment to him of any share or shares in the amalgamating company, and
(2) The amalgamated company is an Indian company.
13. Any transfer of a capital asset being bonds or Global Depository Receipts referred to in u/s 115 AC(1) (units purchased in a foreign currency) shall not be regarded as transfer, if such transfer is made outside India by a non-resident to another non-resident.
14. Any transfer of agricultural land in India affected before 1st of March, 1970.
15. Any transfer of a capital asset, being any work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting photograph or print to the Government, or a university, or the National Museum, National Art Gallery, National Archives or any such other public museum, or institution as may be notified by the Central Govt. in Official Gazette to be of national importance or to be of renown throughout any State or States.
16. Any transfer by way of conversion of bonds, debentures, debenture stock or deposit certificates in any form, of a company into shares or debentures of that company.
17. Any transfer made on or before the 31st day of December 1998 by a person ( not being a company) of a capital asset being membership of a stock exchange of a recognised stock exchange to a company in exchange of shares allotted by that company to the transferor. The expression " membership of a recognised stock exchange " means the membership of a stock exchange in India which is recognised under the provisions of the Securities Contract (Regulation) Act 1956.
18. Any transfer of a capital asset, being land of a sick industrial company, under a scheme prepared and sanctioned under section 18 of the Sick Industrial Companies ( Special Provisions) Act 1985 where such Industrial company is being managed by its workers co-operative : Provided that such transfer is made during the period commencing from the previous year in which such has become a sick industrial company and ending, with the previous year in which the entire, net worth of such company becomes equal to OR exceeds the accumulated losses.
19. Any transfer of a capital asset or intangible asset by a private company or unlisted public company to a limited liability partnership (LLP) or any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into limited liability partnership under the provisions of section 56 or 57 of Limited Liability Partnership Act, 2008, shall not be regarded as transfer on fulfilment of the following conditions :
(a) All the assets and liabilities of the company immediately before the conversion become the assets and liability of the limited liability partnership.
(b) All the shareholders of the company immediately before the conversion become the partner of the limited liability partnership (LLP) and their capital distribution and profit sharing ratio in the LLP are in the same proportion as their shareholding in the company on the date of conversion.
(c) The shareholders of the company do not receive any consideration or benefit , directly or indirectly, in any form of manner, other than by way of share in profit and capital contribution in LLP.
(d) The aggregate of the profit sharing ratio of the shareholders of the company in the LLP shall not be less than 50% at any time during the period of 5 years from the date of conversion.
(e) The total sales, turnover or gross receipts in business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed Rs 60 lakhs, and
(f) No amount is paid, either directly or indirectly, to any partner out of balance of accumulated profits standing in the account of the company on the date of conversion for a period of 3 years from the date of conversion.
20. Any transfer of a capital intangible asset owned by a firm to a company which has succeeded the firm, shall not to be regarded as transfer if :
(a) all the assets and liabilities of the firm existing on the date of succession are taken over by the company.
(b) all the partners of the firm become, shareholders of the company in same proportion in which their capitals existed on the date of succession.
(c) the partners do not receive any other benefit except allotment of shares in such company, and
(d) the shareholding of all the partners of the firm in the succeeding company is not less than 50% of voting power on the date of succession and remains so for 5 succeeding years.
21. Any capital or intangible asset owned by a sole proprietory concern is transferred to a company which has succeeded the sole proprietory concern, shall not be regarded as transfer if :
(a) all the assets and liabilities of the sole proprietory concern existing on the date of succession are taken over by the company.
(b) Shareholding of the sole proprietor in the company is not less than 50% of voting power on the date of succession and remains so for 5 succeeding years, and
(c) the sole proprietor does not receive any other benefit except allotment of shares in such company.
22. In case there is transfer due to lending of securities by its holder under an agreement with the borrower and as per guidelines issued by Securities Exchange Board of India, shall not be deemed as transfer.
23. Any transfer of a capital asset in a transaction if reverse mortgage under a scheme made and notified by Central Government.
24. Any transfer of a capital asset, being share of a ' special purpose vehicle' to a business trust in exchange of units allotted by that trust to the transferor.
COMPUTATION OF CAPITAL GAIN.
Cost of Acquisition.
. Cost at which the asset was acquired.
. In case the asset was acquired without paying any price i.e., partition of HUF, will, succession or amalgamation, the cost of previous owner remains the cost of present owner.
. In case of shares received on amalgamation of a company, the cost of original shares remain the cost of new shares.
. The assessee has been given the option to adopt FMV as on 1-4-81 as his cost but only for those assets which were acquired before 1-4-81. For assets acquired after 1-4-81 the FMV on the date of its acquisition can be adopted only if its cost is not available.
. In case of depreciable assets it is always W. D. V. which is taken as cost u/s 50(2) ,as been claimed on , in case of assets on which depreciation has been claimed on straight line method, the W. D. V. of such assets shall be determined by adjusting the amount of deemed profit u/s 41(2) and adjusted W. D. V. shall be considered as cost for adjustment u/s 48 and 49.
. Cost of acquisition of goodwill
(a) If goodwill was purchased the price paid is its cost.
(b) if it was self created or where no price was paid, the cost is taken as NIL.
. Cost of shares on renunciation - Cost to renouncer shall be taken as nil.
. In case of conversion of debentures into shares or on any other conversion the cost of original assets remains the cost of new asset .
. Advance money received but forfeited - In case the asset was subject to sale agreement and advance money was received by present owner but is forfeited, it is deducted out of cost.
.Cost of bonus shares. The cost of bonus shares shall be taken as NIL. But in case bonus shares were received before 1-4-1981 , the Fair Market Value on 1-4-81 is taken as its cost.
.Cost of acquisition of the shares, debentures or warrants. [ Section 49(2AA) ].
With effect from assessment year 2001-2002 where the capital gain arises from the transfer of shares, debentures or warrants the value of which has been taken into account as perk under the head salary, the cost of such assets shall be taken as the value taken as perk.
.Contrary Views of High Courts regarding Base Year for Indexation Benefit, if asset is acquired u/s 49(1)
However, in the case of CIT vs Manjula J. Shah (2012) 16 Taxmann 42 ( Bombay) , the honourable Bombay High Court has held that while computing capital gains araising on transfer of a capital Asset acquired by an assessee under a gift, indexed cost of acquisition has to be computed with reference to the year in which previous owner first held the asset, and not from the year in which the assessee became owner of that asset.
Similar decision has been given by, the Honourable Delhi High Court, in the case of Arun Shungloo trust vs CIT (2012) 18 taxman 261 ( Delhi).
.Cases in which the Indexation of Cost is not to be done while Calculating long Term Capital Gain.
(1) Transfer of long term debentures or bonds other than capital indexed bonds issued by the Government. [ Provision 3 to section 48 ]
(2) Transfer of shares in or debentures of an Indian Company by a non-resident assessee [ Provision 2 to section 48 ]
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