ANALYSIS OF CAPITAL GAIN
‘Asset’ is defined in section 314(24) to mean (a) a business asset or (b) an investment asset. ‘Business asset’ is defined in section 314(38) to mean ‘business trading asset’ or ‘business capital asset’. ‘Business trading asset’ is defined in section 314(42) to mean stock-in-trade, consumable stores or raw materials held for the purpose of the business.
‘Business capital asset’ is defined in section 314(39) to mean a tangible, intangible or any other capital asset, other than land, which is used for the purpose of business. ‘Investment asset’ is defined in section 314(141) to mean (a) any capital asset which is not a business capital asset, (b) any security held by a FII or (c) any undertaking or division of a business. Any surplus on transfer of a business capital asset is to be treated as business income.
Computation of capital gains
Section 49 of the Code provides that the computation of capital gains on transfer of an investment asset shall be made by deducting from the full value of the consideration on transfer of such asset, the cost of acquisition of such asset. The gains (losses) arising from the transfer of investment assets will be treated as capital gains (losses).
The net gain will be included in the total income of the financial year in which the investment asset is transferred, irrespective of the year in which the consideration is actually received. However, in the case of compulsory acquisition of an asset, capital gains will be taxed in the year in which the compensation is actually received.
It may be noted that the word ‘Transfer’ is defined in section 314(267). This definition is very elaborate as compared to section 2(47) of the Income-tax Act (ITA).
The above definition provides that ‘Transfer’ in relation to a ‘Capital Asset’ includes the following:
· Sale, exchange or extinguishment of any asset or any rights in it;
· Compulsory acquisition under any law;
· Conversion of capital asset into stock-in trade;
· Buyback of shares u/s.77A of the Companies Act;
· Contribution of any asset towards capital in a company or unincorporated body;
· Distribution of assets on liquidation of a company or dissolution of unincorporated body;
· Any transaction allowing possession or enjoyment of an immovable property. This provision is more or less similar to section 2(47) (v) and (vi) of ITA with the only difference that if enjoyment of any immovable property is given to participant of unincorporated body it will be considered as a transfer under DTC;
· Amount received/receivable on maturity of Zero Coupon Bond, on slump sale or on damage/ destruction of any insured asset;
· Transfer of securities by a person having beneficial interest in the securities held by a depository as registered owner;
· Distribution of money or asset to a participant in an unincorporated body on his retirement;
· Any disposition, settlement, trust, covenant, agreement or arrangement.
Exemption from capital gains tax
Section 47 of the Code provides that certain transfers of investment assets will not be considered as a transfer and no capital gains tax will be payable. This section is on the same lines as existing section 47 of ITA. However, it is significant to note that clause (xiii) of existing section 47 of ITA which provides for exemption from tax when a partnership firm is converted into a company, subject to certain conditions, is absent in section 47 of the Code. This will mean that if the Code is enacted without this clause in section 47, a partnership firm which is converted into company after 1-4-2012 will not be entitled to claim this exemption. It may also be noted that section 47 (1)(J) of the Code provides for exemption from tax when a non-listed company converts itself into an LLP, on the same lines as provided in section 47 (xiii b) of ITA. Again, 47(1)(n) of the Code provides for exemption from tax when a sole proprietary concern is converted into a limited company. This provision is similar to section 47(xiv) of ITA.
Section 46 of the Code provides that the exemption granted u/s.47 of the Code in respect of certain transfers of investment assets and u/s.55 of the Code in respect of certain rollover of investment assets will become taxable in the F.Y. in which the conditions specified in section 47 or 55 are violated. This provision is on the same lines as in the existing sections 47A, 54, 54B, 54F, 54EC, etc. of ITA.
Section 48 of the Code explains about the F.Y. in which the income arising on non-compliance with the conditions laid down in section 47 will become taxable. This section also explains about the F.Y. in which enhanced additional compensation received on compulsory acquisition of property will be taxable. Further, the section also explains as to when an immovable property will be considered to have been transferred. These provisions are similar to sections 45(1), 45(4), 45(5) and 46 of ITA with some modifications.
It is significant to note that the existing section 45(4) of ITA provides that if any capital asset is transferred by way of distribution of capital assets to any partner or partners on dissolution of a firm or AOP or otherwise, the difference between the market value of the asset and its cost will be taxable as capital gains in the hands of the Firm or AOP. This position will continue under the Code in view of item 6(ii) of the table below section 48(1) & 50(2)(d) of the Code. However, in the case of retirement of a partner, the Courts have held that the word ‘otherwise’ in the existing section 45(4) applies when a partner retires from the Firm or AOP and takes away any asset of the Firm or AOP as part of the amount due on retirement. Now, section 48(2)(b) of the Code, read with item 7 of the table below section 48(1) and section 50(2) (f), provides that “Any money or asset received by a participant (Partner/Member) on account of his retirement from an unincorporated body (Firm, LLP, AOP, BOI) shall be deemed to be the income of the recipient of the F.Y. in which the money or asset is received”. This will mean that if the amount due to the retiring partner as per the books of the Firm, AOP or BOI is Rs.1.5crore but the amount received and market value of the asset received on his retirement is Rs.2.5crore, the retiring partner will have to pay tax on capital gains under the Code.
Under section 51(2) of the Code, in the case of equity shares of a company and units of equity-oriented fund of a M.F., held for more than one year, the capital gain will be exempt from tax if STT is paid. It may be noted that there is difference in the wording of section 51(2) and 51(3). U/s.51(2) the requirement is holding of shares, etc. for more than one year, whereas u/s.51(3) the period for holding other assets is at least one year after the end of the F.Y. in which the asset is acquired.
In the above case if the STT is paid and the shares/units are held for less than one year, 50% of the capital gain will be exempt and tax at normal rate will be payable on the balance of 50%.
It may be noted that under item No. 32 of Schedule 6 it is provided that the capital gain arising from transfer of the following assets will not be liable to tax under DTC:-
· Agricultural land in a rural area as defined in section 314(221) & 314 (284). This definition is similar to the definition in section 2(14)(iii) of ITA.
· Personal effects as defined in section 314 (190) which is similar to section 2(14)(ii) of ITA.
· Gold Deposit Bonds.
Full value of consideration
The provisions relating to computation of capital gains on transfer of an investment asset and determination of the full value of the consideration are contained in sections 49 and 50 of the Code. These provisions are similar to the provisions of sections 45(2), 45(3), 45(5), 48 and 50C of ITA with certain modifications. In the case of sale of land or building, section 50(2)(h) of the Code provides that stamp duty value of the asset will be considered as full value of the consideration. The term ‘Stamp duty value’ is defined in section 314(246) on the same lines as in section 50C of ITA with the exception that there is no provision for reference to valuation officer in the event such value is disputed by the Assessee. Further, section 50(2) & 314(267) and 314(93) of the Code provides that in respect of conversion of investment asset into stock-in-trade, distribution of assets to participants on dissolution of the unincorporated body or retirement of a participant, etc. the fair market value of the asset on the date of transfer will be determined according to the method prescribed by the CBDT.
It may be noted that u/s.45 (3) of the ITA it is provided that when the partner/member of a firm, LLP, AOP or BOI in which he becomes a partner/ member and contributes a capital asset as his capital contribution in the entity, the amount credited to this account in the entity will be considered as full value of the consideration and capital gain tax will be payable by him on this basis. This benefit is not available at present when a person becomes a shareholder in a company and he is allotted shares in the company against any transfer of any asset to the company. Now, section 50(2)(c) of the Code provides that the amount recorded in the books of the company or an unincorporated body as value of the investment asset contributed by the shareholder or participant will be the full value of the consideration and the capital gain will be computed in the hands of the transferor on that basis.
Cost of acquisition and indexation
Section 49 of the Code provides that capital gain on transfer of an investment asset is to be computed by deducting from the full value of the consideration, the cost of acquisition and the cost of improvement. The term ‘Cost of acquisition’ is defined in section 53 read with the 17th Schedule. The term ‘Cost of improvement’ is defined in section 54. These provisions are more or less on the same lines as sections 48, 49 and 55 of ITA. It may, however, be noted that when the investment asset is received by way of gift, will, inheritance, etc., it is provided that the cost will be the cost of acquisition in the hands of previous owner. However, the period during which the previous owner held the asset cannot be added in computing the total period for which the Assessee has held the asset, as there is no provision for this purpose corresponding to the provision in section 2(42A) of ITA. Existing section 55(3) of ITA provides that if the cost of the asset in the hands of the previous owner cannot be ascertained, the market value on the date on which the previous owner acquired the asset will be considered as his cost. Now, section 53(7)(c) of the Code provides that if the cost of investment asset in the hands of the previous owner cannot be determined or ascertained, the said cost will be taken as ‘nil’. Similarly, in the case of the Assessee if a self-generated asset or any other investment asset is acquired and the cost of such asset cannot be determined or ascertained for any reason, it shall be considered as ‘nil’.
Section 52 of the Code gives mode of computation of indexation of certain investment assets in specified cases. The method prescribed in this section is similar to the provision in the existing section 48 of ITA.
However, some modification in the scheme under the Code is made as under:-
· Under section 2(29A) & 2(42 A) of ITA, a capital asset which is held for more than three years is considered as a ‘long-term asset’. U/s.51(3) of the Code, it is provided that if the investment asset is held for more than one year from the end of the financial year in which the asset is acquired, the benefit of indexation of cost will be available. In other words, if the investment asset is acquired on 1-5-2010, it will be considered as long-term capital asset if it is sold on or after 1-4-2012 under the Code. In the following discussions such investment asset is referred to as a ‘long-term asset’.
· In the case of any investment asset, if it is a long-term asset as explained in (i) above, the Assessee will be entitled to deduct indexed cost of the asset as provided in section 52 of the Code from the full value of the consideration for computation of capital gain. The method for working out indexed cost is the same as in section 48 of ITA. However, the base date for determining the indexed cost will be 1-4-2000 under DTC instead of 1-4-1981 provided in ITA.
· At present, section 55(2)(b) of ITA provides that if a capital asset is acquired before 1-4-1981, the Assessee has an option to substitute the fair market value of the asset as on 1-4-1981 for its cost. Now, section 53(1)(b) of the Code provides that if the investment asset is acquired before 1-4-2000, the Assessee will have the option to substitute fair market value on 1-4-2000 for its cost.
Relief on reinvestment of consideration
Section 55 of the Code provides for relief for rollover of long-term investment asset in the case of an Individual or HUF.
This provision is similar to the existing provisions for relief on reinvestment of capital gains in sections 54, 54B and 54F of ITA with the following modifications:-
· At present, the exemption is available if ‘capital gain’ on sale of a capital asset is reinvested in the specified assets u/s.54, 54B or 54EC of ITA. In case of section 54F of ITA, the ‘Net consideration’ on sale is required to be reinvested. Now, u/s.55 of the Code, the benefit of exemption is available on reinvestment of ‘Net consideration’ in all the cases.
· The rollover relief is available for only two categories of long-term assets viz. (a) agricultural land, and (b) any other investment asset.
· In the case of agricultural land there is no distinction between rural and urban land. The only condition is that it is assessed to land revenue or local cess and used for agricultural purposes. Further, this land should be an agricultural land during two years prior to the F.Y. in which it is transferred and was acquired by the Assessee at least one year before the beginning of the F.Y. in which it is transferred. If these conditions are satisfied and the Assessee invests the net consideration on sale of such agricultural land for the purchase of one or more pieces of agricultural land within a period of three years from the end of the F.Y. in which the original agricultural land was sold, he will get exemption in proportion to the amount so invested.
· In the case of any other long-term investment asset, the above rollover benefit will be available, if the net consideration is invested in the purchase or construction of a residential house within a period of three years from the end of the F.Y. in which the original asset was sold.
For getting this benefit there are two conditions as under:
(a) The Assessee should not be the owner of more than one residential house (other than the residential house in which such investment is made) on the date of sale of original asset.
(b) The residential house in which the above investment is made to get rollover benefit should not be transferred within one year from the end of the F.Y. in which such investment is made.
(c) It is also provided in section 55 of the Code, that the above rollover benefit will be available if the investment in the new asset is made within a period of one year before the sale of the original asset.
(d) It is also provided in the above section that the net consideration on sale of the original asset should be reinvested for acquiring the new asset, as stated above, before the end of the F.Y. in which the original asset is sold or within six months from the date of such sale, whichever is later. If this is not done, the net consideration or balance thereof should be deposited with Capital Gains Deposit Scheme to be framed by the Government. The amount so deposited should be used within three years from the end of the F.Y. in which the original asset is sold. If it is not so used, the same will be taxable in F.Y. in which the period of three years expires.
(e) From the above, it will be evident that the present concession of investing the capital gain on sale of residential house for purchase of another residential house even if the Assessee is owner of more than one residential house u/s.54 of the ITA will not be available. Further, the benefit of investment in approved bonds up to Rs.50 lakh u/s.54EC of ITA will also not be available.