Capital gains under Income Tax Act 1961

Any Income derived from a Capital asset movable or immovable is taxable under the head Capital Gains under Income Tax Act 1961. The Capital Gains have been divided in two parts under Income Tax Act 1961. One is short term capital gain and other is long term capital gain.

1.Short Term Capital Gains : If any taxpayer has sold a Capital asset within 36 months and Shares or securities within 12 months of its purchase then the gain arising out of its sales after deducting therefrom the expenses of sale(Commission etc) and the cost of acquisition and improvement is treated as short term capital gain and is included in the income of the taxpayer.

The deduction u/s 80C to 80U can be taken from the income from short term capital gain apart from the short term capital gain u/s111A

Taxability of short term capital gains: Section 111A of the Income tax Act provides that those equity shares or equity oriented funds which have been sold in a stock exchange and securities transaction tax is chargeable on such transaction of sale then the short term capital gain arising from such transaction will be chargeable to tax @10% upto assessment year 2008-09 and 15% from assessment year 2009-10 onwards.

The short term capital gains other than those u/s 111A shall be added to the income of the assessee and no such benefit is available on short term capital gains arising in other cases and they will be taxed normally at slab rates applicable to the assessee.

If an assessee does the business of selling and purchasing shares he cannot take advantage of section 111A or section 10(38). In this case income will be treated as business income.

Capital gains in case of depreciable assets : According to section 50 of Income tax act if an assessee has sold a capital asset forming part of block of assets (building, machinery etc) on which the depreciation has been allowed under Income Tax Act, the income arising from such capital asset is treated as short term capital gain.

Where some assets are left in block of assets: If a part of such capital asset forming part of a block of asset has been sold and after deducting the net consideration received from sale of such asset from the written down value of the block of such asset the written down value comes to NIL then the gain arising shall be treated as short term capital gain and in such case where written down value has become NIL no depreciation shall be available on such block of asset even if some assets are physically left in the block of assets.

When no assets are left in block of assets: If the whole of the capital assets forming part of a block of assets have been sold during a year and the assessee has suffered a loss after deducting the net sale consideration from the written down value of the block of assets then such loss shall be treated as short term capital loss and no depreciation shall be allowed from such block of assets.

It was decided by Chandigarh tribunal in (2004) 3 S.O.T. 521/ 83 T.T.J. 1057 if the whole of capital assets in a block have been sold in a year and some gain arises after the sale such gain shall not be treated as short term capital gain if some new asset has been purchased within the same year in the same block of assets and the total value of new and old capital assets in the same block is more than the sale consideration of the assets sold, since the block of asset does not cease to exist in such case as is required u/s 50(2). This can be explained with an example as below:

Written down value of 5 Machinery
as on 01-04-2008 500000
5 machinery  sold on 01-05-2008 600000
New Machinery purchased on 01-06-2008 250000

now in above cases the difference between the w.d.v and sale value i.e Rs 100000 can not be treated as short term capital gain in the year 2008-09 since new machinery has been purchased in the same block of asset afterwards in the same year and the total of new and old machinery is more than the sale value of the machineries sold as a result the block of asset continue to exist.

Short term capital gain where land & building are sold together: Some times it happens that in a block of assets namely land & building, the whole of land & building is sold together. In such cases the capital gain on land and building should be calculated separately.

The Supreme Court has held in (1967) 65ITR 377 that depreciation is available on the value of building and not on the value of plot. Considering the above decision of Supreme Court, the Rajasthan High court in (1993)201 ITR 442 has held that Plot and building are different assets. If the assessee has purchased plot more than 3 years back and constructed building on it less than 3 years back then the gain arising on sale of plot shall be long term capital gain and the benefit of indexation shall be given on it whereas the gain arising on sale of building shall be short term capital gain and will be added to the income of the assessee. Therefore both should be calculated separately.

Where the plot has been purchased more than three years back and the building has been constructed on it less than 3 years back, it is advisable that in the sale deed the sale value of plot and building should be shown separately for more clarity and if the consolidated sale value of the Plot and building has been written in the sale deed then the valuation of plot and building should be done separately from a registered valuer.

Capital asset transferred by the partner to the partnership firm: As per section 45(3) of the Income Tax Act 1961 if any partner in a firm transfers his asset to the firm then the capital gain on such asset as arising to the partner shall be calculated by presuming the sale value of such asset as is shown in the books of accounts of the firm and not the market value of the asset.

whether such gain is treated as long term or short term will be decided as below:

a) If the depreciation has been claimed on the asset transferred to the firm then in view of section 50(2) the gain arising there from will be treated as short term capital gain.

b) If the partner has been the owner of the asset for more than 36 months and no depreciation has been claimed on it then the gain arising from such asset shall be treated as long term capital gain.

Capital gain in case of Dissolution of a Firm: As per section 45(4) of the Income Tax Act where any partnership firm or AOP or BOI is dissolved and the Capital assets of the such firm or AOP or BOI are transferred by way of distribution of assets to the partners at the time of Dissolution in such case the gain arising from such transfer to the partners will be treated as capital gain and the firm will be liable for paying tax on it in the year of distribution of the assets.

For the purpose of section 48 the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.

2. Long Term Capital Gain: A Capital Asset held for more than 36 months and 12 months in case of shares or securities is a long term capital asset and the gain arising therefrom is a long term capital gain. Long term capital gains are arrived at after deducting from the net sale consideration of the long term capital asset the indexed cost of acquisition and the indexed cost of improvement
of the asset.

The Central govt notifies cost inflation index for every year. The indexed cost of acquisition is calculated by multiplying the actual cost of acquisition with C.I.I of the year in which the capital asset is sold and divided by C.I.I of the year of purchase of capital asset. Similarly the indexed cost of improvement can be calculated by using the C.I.I of the year in which the capital asset is improved. Where the capital asset was acquired before the year 1981 then the cost of acquisition shall be the fair market value or the actual cost of its acquisition which ever is higher. The Fair market value of a capital asset can be known by the valuation of the registered valuer.

The cost inflation index table as notified is here below:

Cost Inflation Index Notified by the GOVT
Financial Year	(CII)	Financial Year	(CII)
1981-82	100	1995-96	281
1982-83	109	1996-97	305
1983-84	116	1997-98	331
1984-85	125	1998-99	351
1985-86	133	1999-2000	389
1986-87	140	2000-2001	406
1987-88	150	2001-2002	426
1988-89	161	2002-2003	447
1989-90	172	2003-2004	463
1990-91	182	2004-2005	480
1991-92	199	2005-2006	497
1992-93	223	2006-2007	519
1993-94	244	2007-2008	551
1994-95	259	2008-2009	582
2009-10		632

If a capital asset has been subjected to depreciation then no indexation benefit is allowed on sale of such capital asset in view of section 50(2) as discussed above.

Capital gain from Plot and building should be separately calculated: As discussed above plot and building are separate assets and the capital gain on above should be calculated separately. If the plot is purchased more than 3 years back and building has been constructed within 3 years the capital gain on plot will be considered as long term and the capital gain on building will be treated as short term capital gain.

Taxation of Long term capital gains: The long term capital gains are taxed @ 20% after the benefit of indexation as discussed above. No deduction is allowed from the long term capital gains from section 80C to 80U. But in case of individual and HUF where the income is below the basic exempted limit the shortage in basic exemption limit is adjusted against the long term capital gains.

Section 112(1) provides that any capital gain arising from a long term capital asset being the listed securities which are sold outside the stock exchange the long term capital gain shall be calculated on such securities as below:

a) Tax arrived at @ 20% on such long term capital gain after indexation u/s 48 or
b) Tax arrived at @ 10 % on such long term capital gain without indexation
Whichever is less.

The long term capital gain on equity shares or units of equity oriented mutual fund which are sold in the stock exchange and on which securities transaction tax is paid, is exempt u/s 10(38).

Section 50C: Section 50C has been introduced with effect from 01-04-2003 and is a very important section while calculating capital gain on land & building. Section 50C provides that Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by stamp valuation authority) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer.

It means that the capital gain will be calculated by considering the sale value of the capital asset as equal to the value adopted or assessed by the stamp valuation authority for that capital asset if the actual sale value is less than the value assessed by stamp valuation authority.

If the assessee claims that the value adopted by the stamp valuation authority exceeds the fair market value then the assessing officer may refer to the valuation officer for valuation of the fair market value of the asset. If the fair market value declared by the valuer is more than the value adopted or assessed or assessable by the stamp valuation authority, the value so adopted assessed or assessable by the stamp valuation authority will be taken as full value of consideration of the capital asset.

CBDT vide its circular No 8/2002 dt 27-08-2002 has declared that if the valuation officer has declared the fair market value of the capital asset less than the value adopted, assessed or assessable by the stamp valuation authority then the capital gain shall be calculated on the value so declared by the valuer.

After the adding of word assessable u/s 50C in 2009 now it has become clear that even those immovable properties in which no sale deed is entered into and which have been sold on a full and final agreement will be within the ambit of section 50C.

Exemptions from long term capital gain:

Section	Asset	Assessee	Holding Period of Original Assets	Whether Reinvestment Necessary —Time Limit	Other Conditions/ Incidents	Quantum
54	Residential House Property	Individual HUF	3 years	Yes — In Residential House, within 1 year before, or 2 years after the date of transfer (if purchased) or 3 years after the date of transfer (if constructed).**		The amount of gains, or the cost of new asset, whichever is lower
54B	Agricultural Land	Individual	Use for 2 years	Yes — In Agricultural Land, within 2 years after the date of transfer.	Must have been used by assessee or his parents for agricultural purposes See Notes 1, 2 and 10	As above
54D	Industrial Land or Building or any right therein	Any Assessee	Use for 2 years	Yes — In Industrial Land, Building, or any right therein within 3 years after the date of transfer.	Must have been compulsorily acquired	As above
54EC	Any Long-term Capital Asset (LTCA)	Any Assessee	Shares, Listed Securities, Units of UTI/Mutual Fund covered u/s. 10(23D) :1 year Others : 3 years	Yes — Whole or any part of capital gain in bonds redeemable after 3 years and issued on or after 1-4-2006 by NHAI or REC and notified by the Govt. – within 6 months from the date of transfer.		The amount of gain or the cost of new asset whichever is lower subject to Rs. 50,00,000 per assessee during any financial year for investments made on or after 1-4-2007. Also investment in bonds notified before 1-4-2007 would be subject to conditions laid down in notification including limiting condi- tions (i.e., Rs. 50 lakhs per assessee)
54ED	LTCA being listed securities or units	— do —	Listed Securities or units of UTI/Mutual Fund covered u/s. 10(23D) : 1 year	Yes — Within six months from the date of transfer in acquiring eligible issue of capital	exemption is available only in respect of the assets transferred before 1-4-2006	— do —
54F	Any Capital Asset (not being a residential house)	Individual HUF	Shares, Listed, Securities, Units of UTI/Mutual Fund covered u/s. 10(23D) : 1 year Others : 3 years	Yes — In Residential House, within 1 year before, or 2 years after the date of transfer (if purchased), or 3 years after the date of transfer (if constructed).**		If the cost of the specified asset is not less than Net Consideration of the original asset, the whole of the gains. If the cost of the specified asset is less than the Net Consider-ation, the proportionate amount of the gains.
54G	Industrial land or building or plant or machinery	Any Assessee	—	Yes— In similar assets and expenses on shifting of original asset, within 1 year before, or 3 years after the date of transfer.		The amount of gains, or the aggregate cost of new asset and shifting expenses, whichever is lower.
54GA	Industrial land or building or plant or machinery	Any Assessee	—	Yes — In similar assets and expenses on shifting of original assets to a Special Economic Zone – within 1 year before or 3 years after the date of transfer		The amount of gains, or the aggregate cost of new asset and shifting expenses, whichever is lower
115F	‘Foreign Exchange Asset’ (See Note	Non- Resident Indian	Shares, Listed Securities, Units of UTI/Mutual Fund covered u/s. 10(23D) : 1 year Others : 3 years	Yes— In ‘Specified Assets’ (See Note 9) or Specified Savings Certificates of Central Government, within 6 months after the date of transfer		Same as u/s. 54F above.

Author:

Amit Bajaj Advocate

Email: amitbajajadvocate@hotmail.com

M: 9815243335