UNDERSTANDING TAX ON CAPITAL GAINS WITH LATEST CASE LAWS:
PART - I
Taxation of Capital Gain is the most disputed subject amongst all major tax disputed subjects. Generally, the capital gain tax not comes to every assessee and it may come in his lifetime only once or twice, but the impact of the amount of tax will be substantial. Hence, it is very necessary to have the thorough knowledge of the taxation on capital gains. It had been found many times, that the situations comes are very unique in case of capital gains and hence it is very difficult for the tax practitioner to decide about the correct treatment of the situation. In the article below, we will discuss few such unique situations on taxation of capital gain with the help of the latest judicial pronouncements by various courts of the country.
1. Stock Exchange Card: A membership card of stock exchange which confers right on the member to trade in stock and shares in exchange being a property falls within the definition of ‘capital asset’, in section 2(14) and therefore, capital gains are chargeable on the sale of assessee’s membership card in auction by the stock exchange pursuant to default committed by assessee in terms of the rules of stock exchange. Refer, CD R. P. J. Mathew vs. ITO, 36 DTR 352.
2. Right to subscribe: Right to subscribe for additional shares/debentures is a distinct, independent and separate right, capable of being transferred independently of the existing shareholding, on the strength of which such Rights are offered. Refer, Navin Jindal, 228 CTR 478.
3. Oak Trees: Sale proceeds of silver oak trees (shade trees) standing in the coffee estate is taxable as capital gains and not exempt as agricultural income. Refer, C.Hanumantha Rao (Decd) & Anr. 25 DTR 108.
1. Forfeiture: Forfeited advance for breach of agreement of sale is capital receipts. Refer, S Zorastar anc Co V CIT, 22 ITR 35 Raj.
2. Enhanced Compensation: Enhanced compensation by the assessee for compulsory acquisition of waste lands and trees by the State Government under the Jagir Abolition Act is taxable as per the provisions of section 45(5)(b), therefore, the amount of enhanced compensation is chargeable to tax despite the fact that the cost of acquisition of the said capital asset is nil. Refer, Sajjansinh N. Chauhan vs. ITO, 38 DTR 155.
Further, The Supreme Court held that even in cases where pending appeal, the Court / Tribunal / authority permits the claimant to withdraw the disputed enhanced compensation against security or otherwise, the same is liable to be taxed u/s. 45(5). The Supreme Court further held that interest u/s. 28, additional amount u/s. 23(1A) and solatium u/s. 23(2) of the Land Acquisition Act, 1894 forms part of the enhanced compensation u/s. 45(5)(b). Refer, Ghanshyam, 26 DTR 129.
Enhanced compensation on compulsory acquisition of land can be taxed only after final disposal. Refer, New friends Co-operative House Building Society Limited v CIT, 327 ITR 39.
3. Unutilized TDR: Amount received by the society from the builder for permitting him to construct additional floors on existing building of the society by utilizing TDR FSI belonging to him is not chargeable to tax since there is no cost of acquisition. Consideration received for permission to use TDR / FSI not chargeable to tax as the cost of acquisition being nil. Refer, Om Shanti Co-op Hsg. Society Ltd., ITA No. 2550/Mum./2008. BCAJ January (2010) Vol. 41-B
The gain arising on transfer of FSI/TDR is chargeable to tax under the head capital “capital gain”, however as there is no cost of acquisition of the asset transferred; there will be no liability to capital gains. Refer, ITO v Shri Ram Kumar Malhotra, TIOL 512 ITAT –Mum. (2010) (October) BCAJ. P 22.
4. Agricultural land: Report of Tehsildar that land was beyond eight kilometer from municipal limits and hence No capital gain. Refer, CIT v Lal Singh, 325 ITR 588.
The assessee, a Chartered Accountant by profession, sold land with trees and claimed Rs. 14.92 lakhs as expenses from the sale consideration of Rs. 10 lakhs as exempt agricultural income. The Assessee contented that the vendee had paid a sum of Rs. 10 lacs towards the total reimbursements of sale proceeds of the trees, plants and other existing crops and horticulture and it was included in the total value. The Assessing Officer held that it was a composite sale along with the land. Hence, it could not be treated separately as agricultural income. He made addition of Rs. 10,03,814/-. CIT(A) confirmed the assessment order. The Tribunal held that, although this amount was part of sale deed under which the land was sold, the part of sale proceeds was not agricultural income. Deduction was allowed on entire indexed cost of acquisition. Refer, Abhinav Ajmera vs. ACIT, 6 ITR 482.
5. Cost is must: Liability to tax on capital gains would arise in respect of only those capital assets in acquisition of which an element of cost is either actually present or capable of being reckoned and not in respect of those assets in acquisition of which element of cost is altogether inconceivable. Burden is on revenue to prove that assessee had incurred cost for acquiring land. On the facts it was submitted that neither Peswas nor Scindias had incurred any cost for acquiring said land and, therefore, it fell outside, purview of charge of capital gains. Refer, HUF of H. H. Late Sir J. M. Scindia, 118 ITD 190.
Transfer of right to acquire property i.e. for giving up right to claim specific performance did not attract capital gains as no cost of acquisition was determinable. Refer, . Ramakrishnaiah vs. ITO, 46 DTR 406.
6. MOA: Amount introduced by financial institution in terms of memorandum of understanding to discharge liability of company , amount received by promoter of company repayment of loan and not part of sale consideration on equity shares. Assessing officer directed to accept the long term and short term capital loss as computed by the assessee. Refer, Voltas Ltd v Asst CIT, 4 ITR (Trib) 721 (Bom).
Business vs. Capital Gain
Share Trading: Assessee engaged in trading of shares as well as investment in shares profit on sale of investment shown as short term capital gains or long term investments is assessable as capital gains and not as business income. Refer, Paresh D. Shah vs. Jt. CIT, 2 ITR 311 (Mum.)(Trib.). In the case of Management Structure & Systems vs. ITO, ITAT decided the Principles to be applied while deciding whether sale of shares is capital gain or business income.
(a) As per the books of account, the assessee has treated the entire investment in shares as an “investment” and not as “stock-in-trade”;
(b) The assessee is not a share broker nor he is having a registration with any Stock Exchange;
(c) Almost 83% of the capital gain is from shares that were held for a long period of time;
(d) There were no derivative transactions by the assessee;
(e) There were no transactions without delivery;
(f) The assessee used his own surplus funds for investing in shares and not borrowed any money;
(g) In the preceding years, the assessee consistently declared the gain/profit on the sale of the shares as ‘Capital Gains’ and the same has been accepted by the A.O. Though the rule of res judicata is not applicable to income-tax proceedings, in the absence of change in facts, there should be consistency in the approach of the Revenue;
(h) The assessee received substantial dividend on the investments.
Similarly, When stock in trade is converted into capital asset, the holding period of capital asset for the purpose of computing capital gains is to be reckoned from the date of conversion of stock in trade into capital asset because prior to that date, the asset was not held as capital assets; after conversion of stock in trade of shares into capital assets, shares were not held for 12 months before sale and therefore exemption under section 10(38) was not allowable. Refer, Lohia Metals (P) Ltd. vs. ACIT, 40 DTR 246.
Again, where property in question was held by assessee for several years in capital account and was shown in balance sheet of assessee as “capital asset” profit earned by assessee on sale of property was to be assessed under head “capital gains” and not under head ‘income from other sources”. Refer, D.C.M. Ltd., 179 Taxman 295.
Assessee’s business being investment in shares and interest on capital borrowed for purposes of said investment having been claimed and allowed as deduction u/s. 36(1)(iii) assessee cannot at the same time, be allowed to return said profits as capital gains by taking benefit of indexation and the said profits have to be assessed as business income. Refer, Peninsular Investments Ltd, 120 TTJ 96 (Hyd.).
Assessee dealing in shares both as business as well as investment and inter alias, keeping separate accounts in respect of the two portfolios, profits from sale of shares in investment portfolio after holding them for two to four years were taxable as capital gains and not as business income. Refer, Saranath Infrastructure (P) Ltd., 120 TTJ 216.
When assessee is engaged in the trading of shares, it is on the assessee to prove that investment made is long term investment. Refer, Ankita Deposits and advances (P) Limited v CIT.
Assessee having entered into transactions of purchase and sale of shares and settled the same by delivery of shares through demat account, same cannot be regarded as speculative transactions and therefore, loss arising therefrom is not speculative loss, and it is to be treated as capital loss. Refer, Jahanganj Cold Storage v. Asst. CIT, 43 DTR 238.
Profit on sale of an asset which is acquired by assessee as investment is to be assessed under head capital gain and asset which has been acquired as trading asset or stock in trade is to be assesses as business income. Refer, Sar Investment (P) Limited b DCIT.
The assessee offered income by way of Long Term Capital Gain, Short Term Capital Gain, speculative profit and profit from future trading. In such a case, where shares are held for several years and so assessee had acted as investor and not trader, the said the gain shall be assessable as long term capital gain. In similar manner where there is no intra-day trading, shares are held for period of 2 to 5 months and there are no borrowings, the same shall be assessed as Long Term Capital Gain. Refer, ACIT vs. Naishadh V. Vachharajani (Mumbai ITAT).
It was held that a capital investment and resale does not lose its capital nature merely because the resale was foreseen and contemplated when the investment was made and the possibility of enhanced values motivated the investment. Merely because shares are purchased by taking loan at high interest does not mean gains are taxable as business profits. Refer, CIT vs. Niraj Amidhar Surti,
Profit from sale of shares in parts which were purchased in a similar manner and held as investment for less that or more than one year would be chargeable to tax in hands of assessee under the head Capital Gains and not as business income. Refer, ACIT v Mrs. Sheela Chiniwala.
Intention: Assessee having purchased land jointly with his wife and son applied for sanction for converting the same in to housing plots soon thereafter and sold all the plots some years after obtaining the sanction, the obvious intention behind the purchase of land was to sell the same at a profit and therefore though an isolated transaction, it was an adventure in the nature of trade and the income there from has to be treated as business income. Refer, Cherukuri Ramesh vs. ACIT, 36 DTR 269.
Assessee developing land and gets some portion of land as consideration. Since not a real estate hence capital gain
Agricultural Land: Assessee had purchased a small piece of agricultural land and carried on agricultural operations on it. Assessee held the said land for more than 40 years which showed that they did not intend to trade in the land. It was held that mere fact that the assessee obtained permission from the authorities for developing residential sites cannot lead to the conclusion that this was an adventure in the nature of trade. Refer, D.N. Krishnappa, 21 DTR 11. However, Solitary transaction of purchase and sale of land made by the assessee company after retaining it for about ten years without undertaking any steps towards development of property or treating it as stock in trade cannot be regarded as business activity and, therefore, the gain arising on the sale of land is assessable as capital gains. Refer, Baguio Investment (P) Ltd., 33 DTR 457.
Where the assessee sold its agricultural land which was used by it for carrying out agricultural activities after holding the same for more than two decades, gain arising out of sale of such land was held to be assessable as ‘Capital gain’ and not ‘Profits and gain of business or profession’. Refer, S.K. Kaintal, 23 DTR 68.
Computation provision: The banking undertaking, inter alias, included intangible assets like goodwill, tenancy rights, man power and value of banking license. It was not possible to earmark the compensation received by the assessee item wise, therefore, it was not possible to compute the capital gains and the sum of Rs.10.20 crores was not taxable u/s. 45 of the Act, This was a case where the computation provisions could not apply. Refer, PNB Finance Ltd., 307 ITR 75 (SC).
Tenancy Rights: Assessee dealing in real estate, tenancy right in respect of a building occupied by it for a long time constituted capital asset in its hands, notwithstanding that it was shown as stock in trade in its books of accounts and receipts from surrender thereof in favour of the owner gave rise to capital gains/loss. Refer, Hitashi Estates Ltd., 18 DTR 206.
Non-Compete fees: The amount received for not competing with the purchaser company in future in the suburbs could not be made taxable under the heading “capital gains”. Refer, Amol Narendra Dalal, 318 ITR 429.
Cost of Acquisition
Interest: Interest payable is to be includable in the cost of acquisition of property for computing capital gains on the sale of property, though such interest was not paid till the time the. Refer, CIT vs. Sri Hariram Hotels (P) Ltd., 229 CTR 455 (Kar.).
When interest bearing funds are utilized for making an application for allotment of shares and the number of shares allotted is less than the number of shares applied for, the entire interest is to be treated as cost of acquisition of shares allotted. Refer, Neera Jain (Smt.) vs. ACIT, ITAT ‘B’ Bench, Mumbai, ITA No. 1861/Mum./2009, decided on 22-2-2010 (BCAJ 42-A, June 2010 pg. 347).
Further, Interest was paid because installments could not be paid in time and same had become part of cost of acquisition, hence the interest capitalised has to be considered as part of cost of acquisition. Refer, Ajmal Fragrances & Fashions (P) Ltd., 34 SOT 57 (Mum).
Any capital gain on sale of land where the land purchased out of borrowed funds, the registration charges and interest paid on borrowings is eligible for deduction and exaction. Refer, Ishtiaque Ahmed, ITAT ‘C’ Bench, New Delhi. ITA No. 863/D/2009.
Inheritance: Assessee having inherited the property purchased by the previous owner, in the year 1974, cost of acquisition for the purpose of computing capital gains on sale of such property had to be computed by applying cost of inflation index of financial year 1981-82 and not financial year 1989-90 i.e. the year of inheritance by the assessee. Refer, M. Siva Parvavathi & Ors. vs. ITO, 37 DTR 124 (Visakha.)(Trib.).
Family settlement is analogous to partition attracting s. 49(1) hence, in case of property acquired by way of family settlement dt. 1st September, 1997 effective from 31st July 1992, for purposes of computing capital gains, diction has to be allowed on indexed cost of acquisition by taking in to account its fair market value as on 1st April, 1981, the property having been acquired by previous owner in 1966. Refer, Baldev Raj Charla & Ors., ) 121 TTJ 366.
Assessees are Directors in a company AG. By way of family arrangement half of the land owned by company came to the share of the present assessees and other half went to the share of another family group. Assessees sold their share of land for an amount of Rs 2.9 crores. Assessees computed the capital gains by applying the provision of section 49(1). The Assessing Officer held that assets in question are not the property of HUF but it was owned by company AG and there was no distribution of its assets, because there was no liquidation of the company. Consequently, the said capital asset continued to be owned by AG and did not became the property of the assessees hands therefore section 49(1) would not apply. The Court directed the Assessing Officer to compute the capital gains in the said company and give credit of taxes paid by assessee. Refer, CIT vs. Shashi Charla, 51 DTR 232 / CIT vs. Atul Charla / Baldev Charla / Jyoti Chrala (2011) 51 DTR 232 (Delhi High Court).
ESOP: Assessee having made no payment for exercising the right to purchase shares under ESOP, there was no cost of acquisition of such shares to the assessee and therefore, amount received on sale of said shares is not taxable as capital gains, further date of exercise of option and date of sale being the same, there is no difference between the deemed cost of acquisition and actual price realized by the assessee and therefore, no amount is chargeable to tax as capital gains. Refer, Bomi S. Billimoria, 124 TTJ 960.
Tenancy Rights: There is an important distinction between asset not having cost of acquisition and asset whose cost of acquisition cannot be determined. Asset sold by the assessee the property which was given to him on surrender of tenancy right. Cost of this asset is the market value of the tenancy right as on the point of time when it was surrendered. Refer, Balmukund P. Acharya vs. ITO, 45 DTR 281.
Assessee was in lawful possession of flat till issue of notice of eviction and statutory tenant after termination of tenancy right. Cost of acquisition of tenancy to be taken at nil. Refer, Praful Chandra R. Shah (Late) vs. ACIT, 5 ITR 598.
Cost of Development: Amount spent for rectifying defects in title to a property and removing encumbrance to transfer, is expenditure incurred in connection with transfer for purpose of computation of capital gains as per section 48. Refer, V Lakshmi Reddy v ITO.
Any payments towards perfection of title or possession of an asset cannot be held to be expenditure incurred wholly & exclusively in connection with transfer of asset subsequently. Refer, Maradia Wire Roads Limited v ITO.
Expenditure incurred for maintenance of property cannot be taken as cost of improvement. Refer, Mrs Kiran Bansal v ACIT.
Land & Building: Though the assessee had sold land by second sale deed after dismantling the building, the fair market value for the purpose of computation of capital gain should be taken, of the land as well as the construction thereon since as on 1st April 1981, building was existing over the plot . Assessing Officer was not justified in taking the fair market value of land only. Refer, Subash Chand Kapoor vs. ITO, 46 DTR 314.
Bonus Shares: Where assessee sold shares of original acquisation & bonus shares together. Method of spreading over cost of acquisition from original shares on both original & bonus shares is the only proper method of determining value of original shares for working capital gains in respect of disposal of both shares. Refer, M B & Company v ACIT.
1. Relinquishment: Forfeiture of convertible warrants results in extinguishment of right of the assessee to obtain a share in the company and results in loss under the head “capital gains”. Refer, CIT vs. Chand Ratan Bagri, 36 DTR 244 (Del.). tips – in case you have capital gain, then write off few obsolete shares. Further, Assessee is entitled to claim capital loss that had arisen due to transfer of right issue to partly convertible debentures. Refer, CIT V New Ambadi Investments (P) Limited, 188 Taxmann 67 Mad. Again, Forfeiture - Cancellation of allotment of shares on failure to deposit call money is “transfer” within the meaning of s. 2(47) and consequent forfeiture of earnest money mounted to short term capital loss. Refer, BPL Sanyo Finance Ltd, 223 CTR 461.
Where the assessee claims to have renounced the right to subscribe right shares in favour of unknown persons by forgoing the right, to subscribe to right issue of shares, and that to for no consideration, there is no transfer and hence the notional loss on account of diminution in the value of its shares cannot be allowed. Refer, CIT vs. United Breweries Ltd, 236 CTR 160.
2. Right to develop: Transferring development right to developer in Asst. Year 2000-01 would accrue capital gains and sale of flat in the Asst. Year 2005-06 will be long term capital gain which is eligible for exemption under section 54EC. Refer, ITO vs. Vikash Behal, 36 DTR 385 (Kol.)(Trib.).
Once assessee had handed over possession of property to developer against payment of share of sale consideration then property is deemed to have been transferred as per Deeming Provisions of Section 2(47). Refer, Arif Akhtar Hussain v ITO.
3. Dissolution: Distribution of assets among the partners at the time of dissolution of the firm is to be assessed under section 45(4) and the same is not covered by section 50(1). Assessing Officer was free to refer the assets for valuation under section 55A, as the transfer value shown in the book value which cannot be accepted as the fair market value of the assets i.e. Land and Building. Refer, CIT vs. Kumazha Tourist Home. 38 DTR 166 (Ker.).
Though strictly speaking the capital gain on sale of the shop allotted to the assessee partner on dissolution of the firm can be computed only by taking the fair market value of the shop on the date of dissolution ie.10th Sept, 1990 as cost of acquisition , assessee having computed the capital gains on the basis of fair market value as on 1st April 1981 , on which the assessee had only tenancy rights and the department having appealed against the order of CIT (A), upholding the assesse’s computation of capital gains , no direction can be given to rework the capital gain by taking the cost of acquisition as on 10th Sept. 1990, so as to place the revenue in worse off situation . Order of the CIT (A), directing the AO to accept the capital gain declared in the return is confirmed. Refer, Dy CIT v Leelavati S .Mehta, 44 DTR 34.
The expression “distribution of capital assets on the dissolution of a firm or Other association of capital assets on the dissolution of a firm or other association of persons or body of individuals or otherwise” cannot be extrapolated to bring retirement of one partner in to ambit of section 45 (4).Even otherwise as there was family arrangement, provisions of section 45 (4), cannot be applicable. Refer, Asstt .CITv Goyal Dresses, 126 ITD 131.
Assets taken over by a partner on dissolution of firm. Expression “otherwise” appearing in sub–section(4) of section 45 has not to be read “ejusdem generies” with the expression “dissolution of a firm or other AOP” .It has to be read with the words “transfer of a capital asset by way of distribution of capital asset”. Therefore capital gain is chargeable to tax on takeover of a capital asset by a partner on dissolution of firm. Refer, ITO vs. International Rubber & Plastics, 48 DTR 219.
Land was transferred in the name of the partners by book entries, the assessee contended that as no registration is done, the immoveable property was not legally transferred and also contended that as there was no dissolution, section 45(4) cannot be applied. The Tribunal held that the provision of section 45(4) were applicable. The word “otherwise” covers the transfer other than the dissolution also. Refer, New Gujarat Tin Printing Works vs. ITO, 128 ITD 182.
It is not correct to segregate value of stock in trade from assets that is given to a retiring partner to arrive at capital gain that firm derives on retirement & settling accounts of retiring partner. Refer, New Kamlesh Jewellers v ITO.
4. Unauthorised Possession: Where buyer could not acquire any right of ownership, use or possession in corpus of property or income arising there from due to unauthorized occupants provisions of section 2(47)(v), would not be attracted. Refer, ITO vs. Satyawati Devi Verma, 124 ITD 467 (Delhi).
5. Face Value: Transfer of shares being at face value and it is also not the case of the department that over and above that assessee has received any amount, no capital gains chargeable to tax accrued to the assessee. Refer, Reliance Communications Infrastructure Ltd. vs. CIT, 40 DTR 186.
6. Insurance: Expenditure incurred by the assessee on repairs of building damaged tanks and terminals being more than the insurance receipts resulting in to no profits or gains, the provisions of s. 43(6)(c)(I) or 45(IA) or 50 were not applicable. Refer, J.R. Enterprises, 24 DTR 311.
7. Family Settlement: Surrender of shares of a company by the assessee, as a daughter of her paternal family in terms of an arbitration award to settle the disputes between two family groups was transfer in the course of family arrangement and did not result in any capital gain. Editorial Note:- See the judgment of Apex Court in Manish Mohan Sharma v/s. Thakkar 131 Company Cases 149 (SC) / (2006) 4 STC 416. Refer, Sheela, 17 DTR 415.
8. Transfer of Property Act: When the title of the property always remained with the assessee so also possession, there is no basis for the finding of the AO that there was any part performance of the contract within the meaning of section 53A of the transfer of property Act, 1982 and thereby a transfer of asset within the meaning of section 2 (47) especially when the agreement to sell had never culminated in to a contract of sale and the sale deed was never executed as proposed transfer of capital asset was aborted. Refer, Asst CIT v Hotel Harbour View, 44 DTR 41.
The assessee had given possession and received the sale consideration in pursuance of the agreement dated march 1993.As the provisions of section 53A, of transfer of Property Act is attracted ,the capital gains would accrue in the year of possession. Refer, D.Kasturi (Smt) v CIT, 42 DTR 288.
A right to obtain conveyance of property is clearly property within meaning of section 2-14 & consideration received for surrender of such right is assessable as capital gains. Refer, Gautam R Patel v ACIT.
9. Definition: If a Transaction falls with ambit of definition of transfer u/s 2(47), then irrespective of fact whether that transaction is a transfer of property act, 1881 or not, income accrued on such transaction is chargeable to income tax u/s 45(4). Refer, New Gujarat Tin Printing works v ITO.
10. Going Concern: Sale of entire business, including all assets and liabilities, as a going concern, not possible to bifurcate consideration received on account of transfer. Transfer does not give rise to capital gains. Refer, ACIT vs. Patel Specific Family Trust, 330 ITR 397.
1. Converted to stock: When stock in trade is converted into capital asset, the holding period of capital asset for the purpose of computing capital gains is to be reckoned from the date of conversion of stock in trade into capital asset because prior to that date, the asset was not held as capital assets; after conversion of stock in trade of shares into capital assets, shares were not held for 12 months before sale and therefore exemption under section 10(38) was not allowable. Refer, Lohia Metals (P) Ltd. vs. ACIT, 40 DTR 246.
2. Transfer to partner: Mumbai ITAT in the case of Shantilal J. Jain decided that Where the property purchased by firm and transferred to partners at latter date, for computing the period of holding to be computed from the date of allotment to partner and not from the date of acquisition by the firm.
1. Firm to Company: No capital gains accrued or arose at the time of conversion of erstwhile partnership firm in to private limited company under part IX of the Companies Act, 1956, as the partners of the firm became the shareholders of the said company having shareholdings identical to the profit–sharing ratio and by reason of transfer of shares to the applicant before five years, the company is not liable to pay tax on capital gains. Refer, Umicore Finance Luxembourg, In Re, 36 DTR 249 (AAR). Further, Shares allotted to partners of an extinct firm consequential to registration of that firm as a company would not give rise to any profit or gain. Refer, Umicore Finance Luxemborg In re, AAR No. 797 of 2009 dated 12-3-2010.
Again, S. 45 (4) would not apply in case of transfer at book value of assets and liabilities of a firm to a company and allotment of shares to erstwhile partners in proportionate to their capital. No transfer by way of distribution of capital assets from the credit in partners’ capital account, the resultant capital gain is nil and nothing is chargeable. Refer, Aum Chemicals, 20 DTR 502.
2. Retirement: S. 45(4) has no application in the case of retirement of one partner. Capital gain is not chargeable to tax on the facts of the case also for the reason that the transfer of property to the retiring partner was necessitated on account of family arrangement to avoid a possible dispute. Refer, Goyal Dresses, 30 DTR 75. Similarly, amount received on retirement of partnership firm is capital gain, Refer, Sudhakar M Shetty v ACIT.
3. Proprietor to Partnership: Assessee having converted his proprietary concern in to a partnership, firm revalued the assets and credited the capital accounts of the partners by the revalued figure at the end of the same previous yea, s. 45(3), is applicable and the said value has to be taken to be the full value of consideration and not the amount credited to the capital account of assessee. When capital gain is charged there is no deemed gift u/s. 4(1)(a), of Gift tax Act. Refer, Dharmshibhai B. Shah, 32 DTR 106.
4. US -64: Conversion of US -64 into UTI 6.75% is not a transfer. Refer, ACIT v ABC Bearings Limited.
Special rate of tax
1. Bonus Share: Benefit of lower tax rate under Proviso to s. 112 is available to bonus shares despite no indexation. Refer, CIT vs. Anuj A. Sheth (HUF), 38 DTR 26 (Bom).
2. Foreign institutional investor: Foreign institutional investor is assessable as per section 1115AD, and is not entitled to the benefit of indexation on the transactions resulting in long term capital gain/loss. Refer, Advantage Advisors Inc. vs. Dy. CIT, 39 DTR 217 (Mum.)(Trib.).
Development agreement: Assessee had sold land to the builder–developer. Only the cost of construction of proposed building allotted to the assessee in the ultimately constructed area and not the market value of such share of constructed area, has to be reckoned as consideration for the purpose of computation of capital gains. Refer, Dy. Director of IT vs. G. Rahguram, 46 DTR 136.
Year of Capital gain
1. Enhanced Compensation: Enhanced compensation for acquisition of land is taxable in the year of receipt and cannot be taxed in different years in which it accrued. Refer, Roop Singh, (2010) 127 TTJ 377. Same was also confirmed in the case of CIT v Smt Burfi, 331 ITR 1.
2. Transfer: As per the provisions of s. 45(1) of the Act, for charging capital gains tax, the previous year in which the transfer takes place is most crucial. As in the present case the transfer had taken place in the A.Y. 1995-96 and not in the A.Y. 1998-99, the capital gains would be chargeable in the A.Y. 1995-96. Refer, Vemanna Reddy (HUF), 30 SOT 11 (Bang.).
On 3-1-1992, assessee entered in to an agreement with ATCL a group concern of assessee, for sale of shares of ARL. Assessee applied for necessary permission to Central Government under section 372 of Companies Act, 1956.On 9-7-1992, Central Government granted approval for transfer of shares of ARL by assessee to ATCL. On 20-11-1992, ATCL acquired entire shareholding of assessee company. Thereafter, on 22-12-1992, assessee effected transfer of shares of ARL to ATCL and received consideration for transfer. The Tribunal held that transaction of transfer of shares is complete only when share certificates together with transfer deed duly signed are delivered and payment received by seller. In the instant case transfer of shares took place on 22-12-1992, i.e. on a date when assessee had already became wholly subsidiary of ATCL and therefore , capital gain arising on sale of shares was not taxable in assessee’s hands by virtue of provisions of section 47(v). Refer, Anusandhan Investments Ltd v ITO, 40 SOT 205.
3. Possession: Capital gain on sale of immovable property was chargeable to tax in the year in which actual physical possession of the property is given to the purchaser even though the agreement is entered into in earlier year. Refer, Geetadevi Pasari, 17 DTR 280.
1. Undisclosed Source: Assessee having submitted copies of contract notes, bills, share certificates along with details of demand draft issued from the account of the broker to substantiate the sale of shares made by her, and the AO having failed to establish that the assessee had introduced her own unaccounted money in the shape of sale proceeds of shares, the transaction of sale of shares cannot be treated as non genuine for the reason that the broker made contradictory statements and the assessee was not allowed cross examination and therefore the sale consideration declared by the assessee is assessable as capital gain and not as income from undisclosed sources. Refer, ITO v Bibi Rani Bansal, 43 DTR 279.
2. Reference to DVO: Under section 45 the full value of consideration is to be adopted for computing the capital gains. Under section 50C, fair market value estimated by the registering authority is deemed to be full value of consideration, however, there is no provision in the Act under which the fair value market value assessed by the DVO is to be taken as full value of consideration, hence the Assessing Officer was not justified in adopting the fair value determined by the DVO as the full value of consideration for computing the income from capital gains. Refer, ITO vs. Mohinder Nath Sehgal & Sons, 46 DTR 238.
3. Colorable device: Assessee transferring the shares to another group of companies at prevailing market rate, to reduce its taxable income, cannot be dubbed as colourable device to evade taxes. Refer, CIT vs. Pivet Finance Ltd., 46 DTR 339.
4. Composite Sale: Capital gain arising to the assessee on the sale of lease hold land with incomplete building is to be bifurcated into gain arising out of sale of leasehold interest in land and sale of building. In the absence of perversity in the finding of the Tribunal estimating the value of the building at Rs. 2.15 crores as against the construction cost of Rs. 1.85 crore, the gain arising on the sale of land is to be treated as a long term capital gain where as the gain of Rs. 30 lakhs arising on the sale of incomplete building is to be treated as short term capital gain. Refer, CIT vs. Hindustan Hotels Ltd., 237 CTR 32.
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