Capital Gains Profits & gains arising from the transfer of capital assets during the previous year

Capital Assets Property of any kind held by the assessee Whether or not connected with his business or profession Excludes 1. Stock in trade 2. Assessees personal effects 3. Rural agricultural land 4. Gold Bonds 5. National defense gold bonds 6. Gold deposit bonds 7. Special bearer bonds Personal Effects means moveable property of any kind held for personal use by the assessee or any dependent member of his family including furniture & wearing apparel & excludes 1. Jewellery includes a. Ornaments made of gold, silver, platinum or any other precious metal or any alloy of 1 or more such metals. They may or may not contain precious or semiprecious stones. They can also be worked or sewn into any wearing apparel. b. Precious or semi-precious stones set in any furniture, utensil or any other article. They can also be worked or sewn into any wearing apparel 2. Archaeological collections 3. Drawings, Paintings, sculptures or any other work of art.

Rural agricultural land 1. Situated outside the territorial jurisdiction of a municipality or cantonment board with a population of more than 10,000 2. Situated in notified area

Short term capital asset Capital asset held for less than 36 months immediately preceding the date of transfer. In the case of financial assets, the holding period is 12 months. Financial assets 1. Equity or preference shares may or may not be quoted 2. Other Securities quoted on a recognized stock exchange 3. UTI units may or may not be quoted 4. 10 (23D) mutual funds May or may not be quoted 5. Zero Coupon bonds may or may not be quoted Period of Holding Shares purchased primary market Shares purchased secondary market from from the Date of allotment of such shares the

(a) Transactions through Share brokers (b) Transactions between parties directly Shares acquired in different lots at different points of time Shares held in depository system Rights shares Bonus Shares Right Entitlements

(a) Date of Brokers note (b) Date of the contract for sale FIFO method in cases where the date of purchase & sale of specified scrips cannot be correlated FIFO method

Date of allotment of rights shares Date of allotment of Bonus shares Date of offer to subscribe to the shares till the date when such entitlement is renounced Shares allotted in amalgamated Period for which the shares are held in the amalgamating co co in lieu of shares in is also taken into account amalgamating co Shares allotted in the resulting Period for which the shares are held in the demerged co in lieu of shares in the company is also taken into account demerged company

Chargeability of capital gains It is taxable as income of the previous year in which the transfer takes place. Exceptions 1. Conversion of capital asset into stock in trade Taxable in the year in which the converted asset is sold or otherwise disposed off 2. Compulsory acquisition of any asset Year in which the compensation is actually received 3. Insurance compensation received on damage or destruction of capital assets Taxable in the year in which the compensation is received Transfer 1. Sale 2. Exchange means transfer of property by one person to another and reciprocally the transfer of property by that other person to the first other. 3. Relinquishment Extinguishment of rights. Interest in a property is given up, abandoned or surrendered. The property exists and continues to be owned by some other person or persons. 4. Other kinds of transfers a. Redemption of preference shares transfer b. Redemption of zero coupon bonds transfer c. Reduction of share capital extinguishment of rights transfer d. Conversion of capital asset into stock in trade e. Compulsory acquisition of a capital asset f. Insurance claim received on account of damage or destruction of property of a contract u/s 53A h. Transaction which has the effect of transferring an immoveable property i. Transferor Member of a co-operative society/Company/Association of persons ii. By virtue of membership he was or will be allotted an immoveable property iii. Transfer of membership has the effect of transferring or enabling the enjoyment of the immoveable property g. Transactions giving possession of an immoveable property in part performance

Exceptions to Transfer 1 2 3 4 5 Transfer of a capital asset by holding co to its subsidiary Wholly Owned subsidiary Transfer of a capital asset by subsidiary co to holding co Wholly owned subsidiary Transfer of capital assets by amalgamating Co to amalgamated co Amalgamated co is an Indian Co Transfer of capital assets by demerged company to the resulting co Resulting Co is an Indian Co Share transfer by the shareholders of the amalgamating co as consideration for Amalgamated Co is an Indian Co the shares in the amalgamated co If the consideration consists of something more than shares, this exemption is not available Share issue by the resulting company to the shareholders of the demerged The issue is made in consideration of the company demerger Transfer of shares held in an Indian co by an amalgamating foreign company to (1) 25% of the shareholders of the the amalgamated foreign company amalgamating foreign company continue to remain as shareholders of the amalgamated foreign company (2) Such transfer is exempted from capital gains tax in the country in which the amalgamating company is incorporated Transfer of shares held in an Indian company by the demerged foreign company to the resulting foreign company (1) 25% of the shareholders of the demerged company continue to remain as shareholders of the resulting foreign company (2) Such transfer is exempted from capital gains tax in the country in which the demerged foreign company is incorporated (1) All the assets / liabilities of the firm concern become the assets / liabilities

6 7

Business Reorganization

Conversion of a partnership firm / sole proprietary concern into a company

of the company (2) The partners hold the share capital in the same ratio as their capital balances stood in the firms books (3) The consideration is discharged by way of shares only (4) The partners hold not less than 50% of the total voting power for a period of 5 consecutive years.

10 Conversion of Bonds, debentures, debenture stock and deposit certificates in any form into shares and debentures of that company 11 Transfer of membership rights of a recognized stock exchange 12 Transfer of a capital asset by a banking company to a banking institution in a The scheme is sanctioned by the central scheme of amalgamation government 13 Transfer of a capital asset by predecessor cooperative bank to successor cooperative bank in a scheme of business reorganization 14 Transfer of a capital asset under a gift or will or irrevocable trust Applies to capital assets other than shares, debentures or warrants allotted directly or indirectly under ESOP 15 Distribution of capital asset on total or partial partition of HUF 16 Transfer of archaeological collections, drawings, paintings, sculptures or works of art, books, manuscriptsetc. to government, university, museums, art galleryetc. 17 Transfer of capital asset under reverse mortgage scheme

Computation of Capital gain in special cases Conversion of Capital asset into Stock in trade 1. Year of Transfer Year in which the transfer takes place 2. Year of taxability Year in which the stock in trade is sold 3. Cost of acquisition Amount actually paid to purchase the capital asset 4. Holding period Date of acquisition to date of conversion 5. Capital Gains Fair market value on the date of acquisition LESS Indexed cost of acquisition 6. Business Income Sale Consideration LESS Fair market value on the date of acquisition Compulsory acquisition by government 1. Year of transfer Year of compulsory acquisition by government 2. Year of taxability Year in which compensation is first received. The whole of the compensation is taxable even if only a part of the amount is first received. 3. Cost of acquisition - Amount actually paid to purchase the capital asset 4. Holding period Date of acquisition to date of compulsory acquisition by government 5. Capital gain Whole of the normal compensation LESS Indexed cost of acquisition Enhanced Compensation 1. Year of taxability Year in which enhanced compensation is received 2. Cost of acquisition NIL; therefore holding period is irrelevant. (Holding period is required to calculate indexed cost of acquisition) 3. Capital gain = Enhanced Compensation LESS expenses to receive the compensation

Transfer of capital asset by partner / member to firm / AOP 1. Year of transfer Year in which the transfer takes place 2. Year of taxability Year in which the transfer takes place 3. Cost of acquisition Amount actually paid to purchase the capital asset 4. Holding period Date of acquisition to date of transfer 5. Capital gains Amount at which the capital asset is recorded in the firms books LESS Indexed cost of acquisition

Distribution of capital assets on dissolution of firm 1. Year of transfer Year in which the transfer takes place 2. Year of taxability Year in which the transfer takes place 3. Cost of acquisition (to firm) Amount actually paid for the capital asset 4. Holding period Date of acquisition to the date of transfer 5. Capital gains Fair market value (as on the date of transfer) LESS Indexed cost of acquisition 6. Cost of acquisition (to transferee) Agreed sale consideration between Firm and the transferee Distribution of capital assets on liquidation of Companies 1. Taxable in the hands of the company If the liquidator sells assets, and cash is distributed to the shareholders, the capital gains will be taxed in the hands of the company 2. Taxable in the hands of the shareholders If the capital assets are distributed in specie among the shareholders, it will be taxable in the hands of the shareholder Capital gains = (Fair market value of the asset and amount received in cash less deemed dividend u/s 2(22) Cost of acquisition / indexed cost of acquisition Capital gain on the sale of an undertaking as a going concern 1. Slump sale is the sale of the undertaking for a lump sum consideration without assigning values to individual assets and liabilities 2. Determination of asset values for the purpose of registration or stamp duty is regarded as assigning values to the individual assets 3. Computation of capital gains a. Undertaking owned by the assesse for more than 36 months Long term capital gains; For less than 36 months Short term capital gains b. Total value of assets taken over Depreciable assets WDV as per section 43(6); Other assets Book value c. Net worth = Total value of assets taken over reduced by the value of liabilities taken over d. Capital gains = Consideration Net worth e. Indexation benefit is not available Insurance claim received for damage or destruction of capital assets

1. Compensation is received on account of damage to or destruction of property 2. The damage or destruction is caused by a. Convulsion of nature b. Riot or civil disturbance c. Accidental fire explosion d. Enemy action or action taken in combating an enemy 3. The compensation may be receipt of money or other assets from the insurer 4. The compensation is taxable in the year of receipt 5. Damage or destruction due to other causes Capital receipt For example A road accident takes place in which vehicles & machinery are damaged. Revenue receipt For example Compensation for theft of stock in trade Receipt of compensation is not chargeable to tax

The receipt may be taxable as a trading receipt under the head profits & gains of business or profession

Capital gains on sale of property at less than market value 1. Nature of asset Land or building 2. Sale consideration is less than the value adopted by the stamp duty authority Assessee accepts the value of the stamp duty authority Assessee disputes the value adopted by the stamp duty authority Assessee claims that the value adopted by the authority exceeds the fair market value of the asset Value adopted by the stamp duty authority Value as finally accepted for the stamp duty purpose Assessing officer makes a reference to the valuation officer Least of the following 1. Stamp duty valuation 2. Fair market value as determined by the valuation officer

Cost of acquisition / Cost of improvement Benefit of indexation is not available in the following cases

1. 80 CCB units 2. Slump sale 3. Debentures / Bonds 4. Depreciable assets

Determination of actual cost

Original shares Rights Shares Rights entitlement Bonus shares Sweat equity shares / Employee stock options

Amount actually paid by the assesse Amount actually paid by the assesse NIL NIL After April 1 2007 Fair market value on the date on which the option vests with the employee Amalgamation Shares allotted by Cost of acquisition of shares held in the amalgamated company amalgamating company Demerger Shares allotted by the resulting Cost of acquisition of shares held in the company demerged company Conversion of debentures into shares That part of the cost of debentures now appropriated towards the cost of shares Undertaking acquired by way of slump sale Net worth of the undertaking Additional compensation in the case of NIL compulsory acquisition Depreciable assets covered by section 50 Opening balance of block of assets + Actual cost of the assets acquired during the year which fall within the same block of assets Depreciable assets of a power generating unit WDV of the asset (terminal depreciation + covered by section 50A Balancing charge)

Distribution of assets on total or partial partition of HUF Distribution of assets on liquidation of the company Distribution of assets on dissolution of a firm / BOI / AOP Acquisition of property under a gift or a will Acquisition of property through succession, inheritance or devolution Acquisition of property by HUF on conversion of self acquired property into joint family property Transfer of a capital asset under a revocable or irrevocable trust Transfer of a capital asset by holding co to wholly owned Indian subsidiary & vice versa Transfer of a capital asset by amalgamating company to amalgamated company

Cost to the previous owner is deemed as the cost of acquisition If cost to previous owner cannot be ascertained cost of acquisition is the fair market value on the date on which the asset becomes the property of the previous owner Period of holding of previous owner is also considered to determine whether the capital asset is long term or short term Benefit of indexation is available from the first year in which the asset is held by the current owner

Assessee acquires capital asset before April 1 1981 Assessee acquires capital asset after April 1 1981 Previous owner acquires capital asset before 01/04/1981 Assessee acquires capital asset before 01/04/1981 Previous owner acquires capital asset before 01/04/1981 Assessee acquires capital asset after 01/04/1981 Previous owner / Assessee acquire the capital asset after 01/04/1981

fair market value as on April 1 1981 Cost of acquisition to assesse Cost of acquisition to previous owner or fair market value as on April 1 1981 which ever is higher Cost of acquisition to previous owner or fair market value as on April 1 1981 which ever is higher Cost of acquisition to the previous owner

Goodwill / right to manufacture, produce or process any article or thing Particulars Acquisition cost Self generated by the assessee NIL Self generated by the previous owner NIL Acquired / Purchased by the assessee Cost to assessee Acquired / Purchased by the previous owner Cost to the previous owner

Improvement cost NIL NIL NIL NIL

Trade marks / Brand names / Tenancy rights / route permits / Loom hours Particulars Acquisition cost Improvement cost Self generated by the assessee NIL Actual expenses incurred by the assessee Self generated by the previous owner NIL Actual expenses incurred by the assessee Acquired / Purchased by the assessee Cost to the assessee Actual expenses incurred by the assessee Acquired / Purchased by the previous owner Cost to the previous Actual expenses owner incurred by the assessee