COMPLICATIONS RELATING TO INCOME FROM CAPITAL GAINS...

CHAPTER–5

COMPLICATIONS RELATING TO INCOME FROM CAPITAL GAINS AND SUGGESTIONS TO OVERCOME

THEM

5.1 ACCRUAL OF INCOME FROM CAPITAL GAINS

As per section 45(1) of the Act, any profits or gains arising from the transfer of a

capital asset effected in the previous year shall, save as otherwise provided in sections 54,

54B, 54D, 54EC, 54F, 54G and 54GA, be chargeable to income-tax under the head "Capital

Gains", and shall be deemed to be the income of the previous year in which the transfer took

place. Thus, when as assessee transfers a capital asset during the previous year, the amount

of profit or gain arising as a result of transfer is chargeable as income from capital gains if it

is not exempted under the specified sections.

5.1.1 Which assets are treated as capital assets–

"Capital asset" as per section 2(14) of the Act means property of any kind held by an

assessee, whether or not connected with his business or profession except the following six

assets :

(i) Any stock-in-trade, consumable stores or raw materials held for the purposes of

business or profession by the assessee. Any surplus arising on transfer of stock-in-

trade, consumable stores or raw material is chargeable to tax as income from

business.

(ii) Personal effects, that is to say, movable property held for personal use by the assessee

or any member of his family dependent on him which include wearing apparel and

furniture but does not include :

(a) jewellery;

(b) archaeological collections;

(c) drawings;

(d) paintings;

(e) sculptures; or

(f) any work of art

This means that income from transfer of the assets stated under (a) to (f) above is

chargeable to tax as income from Capital gains and are, thus, not excluded from the

expression "Capital Assets". As per the Explanation to section 2(14), "Jewellery"

includes–

(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy

containing one or more of such precious metals, whether or not containing any

precious or semi-precious stone, and whether or not worked or sewn into any wearing

apparel; and

(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other

article or worked or sewn into any wearing apparel.

A property intended for personal or household use is always a "personal effects" may

it be only for ceremonial occasions. Clothes meant for use at weddings or formal

occasions are not used daily but are stitched for personal use of the wearer. Therefore,

they would form a part of his personal effects1. Similarly, the Supreme Court has held

that gold and silver coins and bars used for pooja of deities as a matter of pride or

ornamentation and normally not intended for personal or household use are not

"Personal effects" and are treated as capital assets2. The Supreme Court observed that

the legislature intended only those articles to be included in "personal effects" which

are intimately and commonly used by the assessee. In view of this observation

personal effects may be taken to include a conveyance be it a scooter, car or

aeroplane. Therefore, surplus arising on transfer of a conveyance used for personal

purposes is not taxable as income from capital gains.

Personal effects include Car, Cycle, Scooter, Motor-cycle owned and used by

the taxpayer. Furniture can be said to be movables held for personal use. But, a

foreign stamp collection, securities, loose diamonds held by an assessee and holding

of goats by an assessee for procuring their wastes as natural manure to increase the

agricultural production are not "personal effects".

(iii) Agricultural land situated in a rural area, that is, which is not situated–

(a) in any area within the territorial jurisdiction of a municipality or a cantonment board

having a population of 10,000 or more according to the last preceding census; or

(b) in any notified area, that is, an area within such distance, not being more than eight

kilometres, from the local limits of any municipality, or cantonment board as stated

above, as the Central Govt. may, having regard to the extent of, and scope for,

urbanisation of that area and other relevant considerations, specify in this behalf.

If agricultural land is situated in a village which comes within a municipality

then population of the municipality shall be considered and not that of the village. If

population of the municipality exceeds 10,000, then agricultural land is a capital

asset, even if population of the village is less than 10,0001.

(iv) Gold bonds issued by the Central Govt. which are–

6.5% Gold Bonds, 1977;

7% Gold Bonds, 1980;

National Defence Gold Bonds, 1980. It is not necessary that the assessee should be

the initial subscriber to the Gold Bonds.

(v) Special Bearer Bonds, 1991 issued by the Central Govt. It is not necessary that the

assessee should be the initial subscriber of these bonds.

(vi) Gold Deposit Bonds which are issued under the Gold Deposit Scheme, 1999 notified

by the Central Govt.

Thus, except the above six assets, capital asset means property of every description-

tangible or intangible, movable or immovable, incorporeal rights and chooses in

action. The Supreme Court has, in this context, held that the term "property" is a term

of the widest import and subject to any limitation which the context may require, it

signifies every possible interest which a person can closely hold and enjoy1.

5.1.2 What does "transfer" of a capital asset mean–

The definition of "transfer" in relation to a capital asset, contained in section 2(47) of

the Act is only inclusive and is thus not exhaustive. According to section 2(47), "transfer"

includes–

(i) the sale, exchange or relinquishment of the asset; or

(ii) the extinguishment of any rights therein; or

(iii) the compulsory acquisition thereof under any law; or

(iv) in a case where the asset is converted by the owner thereof into, or is treated by him

as, stock-in-trade of a business carried on by him, such conversion or treatment; or

(v) the maturity or redemption of a zero coupon bond; or

(vi) any transaction involving the allowing of the possession of any immovable property

to be taken or retained in part performance of a contract of the nature referred to in

section 53A of the Transfer of Property Act, 1882; or

(vii) any transaction (whether by way of becoming a member of, or acquiring shares in a

co-operative society, company or other association of persons or by way of any

agreement or any arrangement or in any other manner whatsoever) which has the

effect of transferring, or enabling the enjoyment of, any immovable property.

The Supreme Court has held that this definition of "transfer" which contains the

above noted seven modes of transfer. Thus, transfer of tenancy right is a "transfer"

does not exhaust other kinds of transfer1.

5.1.2.1 Sale, exchange and relinquishment of an asset–'Sale' is a mode of transfer

of the absolute or general property by a seller to a buyer for money consideration by way of

mutual agreement. 'Exchange' is a mutual transfer of ownership of one thing for the

ownership of another. Thus, conversion of preference shares into ordinary shares is a

transaction of 'exchange'. However, as per circular No. 751, dated Feb. 10, 1997, the

transaction of lending shares of same distinctive numbers and receiving back of some other

numbers is not 'exchange'. 'Relinquishment' of property takes place when the owner

withdraws himself from the property and abandons his rights thereto; the property continues

to exist and it continues to be owned by some person or persons.

5.1.2.2. 'Extinguishment' of rights in property–'Extinguishment' means to put a

total end to or to blot out of existence. Thus, 'extinguishment', refers to putting an end to the

rights of a holder of an asset. When there is a reduction of share capital by a company by

paying a part of capital to its shareholders, it would result in 'extinguishment' of

proportionate right in shares held by shareholders and it would be chargeable to capital gains

tax in the hands of shareholders2. Similarly, redemption of preference shares by a company

comes within the phrase 'sale, exchange or relinquishment of the asset and consequently, it is

treated as transfer3.

5.1.2.3 'Compulsory acquisition' of an asset–The Govt. is empowered under the

constitution of India to acquire property being land or land and building of any person

keeping in view the development of a particular area in the national interest; right to property

is no longer a fundamental right. The Govt. has to make payment by way of compensation to

the person whose property is acquired by it which is computed on the basis of market price

prevailing in the area on the date of acquisition. Thus, acquisition of property is one of the

modes of transfer of capital asset. The income accruing to the person whose property is

acquired by the Govt. is chargeable to capital gains tax.

5.1.2.4 Conversion of capital asset into stock-in-trade–Conversion of investment

into stock-in-trade of a new business or an existing business carried on by a taxpayer is

treated as transfer under section 2(47) with effect from the assessment year 1985-86. The

notional profit arising from transfer by way of conversion of capital asset into stock-in-trade

is chargeable to tax in the year in which stock-in-trade is sold. For the purposes of computing

the capital gain in such cases, the fair market value of the capital asset on the date on which it

was converted or treated as stock-in-trade shall be deemed to be the full value of the

consideration received or accruing as a result of the transfer of the capital asset. If stock-in-

trade is sold in parts in different years, tax on capital gain on conversion of capital asset into

stock-in-trade as per section 45(2), can be said to arise in parts in different years and not in

one year in which last of stock-in-trade is sold1.

5.1.2.5 Maturity or redemption of a zero coupon bond–"Zero coupon bond"

according to section 2(48), means a bond–

(a) issued by any infrastructure capital company or infrastructure capital fund or public

sector company or scheduled bank on or after June 1, 2005;

(b) in respect of which no payment and benefit is received or receivable before maturity

or redemption from infrastructure capital company, or fund, public sector company or

scheduled bank; and

(c) which the Central Govt. may, by notification in the official Gazette, specify in this

behalf.

Since no payment or benefit is received or receivable before maturity or

redemption of these bonds, these bonds are known as zero coupon bonds.

The life of zero coupon bond should not be less than 10 years and should not be more

than 20 years. Maturity or redemption of these bonds will amount to "transfer" under section

2(47) (iva) with effect from the assessment year 2006-07.

5.1.2.6 Possession of immovable property in part performance of a contract u/s

53A of Transfer of Property Act–With effect from the assessment year 1988-89, any

transaction involving the allowing of the possession of any immovable property to be taken

or retained in part performance of a contract referred to in section 53A of the Transfer of

Property Act, 1882 is treated as 'transfer'. Under section 53A of the Transfer of Property Act,

following three conditions require to be fulfilled–

(a) There should be an agreement in writing between the purchaser and seller.

(b) The purchaser has paid the consideration or he is ready to pay the consideration.

(c) The purchaser has taken the possession of the property.

The purchaser becomes the deemed owner of the property by fulfilling these

conditions even if he is not the registered owner of the property. Thus, if Mr. X enters into a

written agreement to purchase a property from Mr. Y for Rs. 10 lac.He has taken the

possession but has not paid the amount. The sale deed is yet to be registered. For the purpose

of paying tax on rental income from the property Mr. X becomes deemed "owner" of the

property though he is not the registered owner of the property.

5.1.2.7 Transaction which has the effect of transferring an immovable property–

when a member of a co-operative society, company or association of persons is allotted an

immovable property or he will be allotted an immovable property by virtue of his

membership and he transfers the membership right. As a result of this act of the transfer or

the immovable property will be deemed to have been transferred to the person to whom the

membership right is transferred.

5.2 CATEGORIES OF CAPITAL GAINS :

Income from capital gains may be divided into two categories–short term capital

gains and long term capital gains. Income accruing to an assessee from the transfer of 'short

term capital asset' is known as short term capital gains while income accruing from transfer

of 'long term capital asset' is known as long term capital gains. 'Short term capital asset'

means a capital asset held by an assessee for not more than 36 months, immediately prior to

its date of transfer. 'Long term capital asset' means a capital asset held by an assessee for

more than 36 months, immediately prior to its date of transfer.

However, in the case of the following five capital assets the period of '12 months' is

substituted in place of the period of '36 months' for determining whether the gain from

transfer of a capital asset is 'short term' or 'long term'–

(i) Shares in a company–equity and preference both, whether listed at a recognized stock

exchange in India or not.

(ii) Securities which are listed at a recognized stock exchange in India.

(iii) Units of Unit Trust of India whether listed at a recognized stock exchange in India or

not.

(iv) Units of a mutual fund registered under the SEBI Act 1992 and other mutual fund set

up by a public sector bank or a public financial institution authorised by the RBI and

notified by the Central Govt. in the Official Gazette whether listed at a recognized

stock exchange in India or not.

(v) Zero coupon bonds issued by any infrastructure capital company, infrastructure

capital fund, public sector company or scheduled bank whether listed at a recognized

stock exchange in India or not.

In the case of above stated five capital assets, if any asset is held for more than 12

months immediately prior to its transfer, the amount of capital gains thus accruing is known

as long term capital asset. On the other hand if transfer of a capital asset in these five cases is

effected within 12 months of its holding, the amount of capital gains thus accruing from the

capital asset is known as short term capital gains.

Short term capital gains is taxed like any other income and so the rate of tax may go

upto 30% in its case. On the other hand long term capital asset is taxed at a lower rate. Also,

the number of exemptions from capital gains tax is more in the case of long term capital

gains than the exemptions available in the case of short term capital gains.

5.3 'PERIOD OF HOLDING' OF A CAPITAL ASSET

Period for which a capital asset is held by an assessee before its transfer helps in the

determination of whether the amount of capital gain accruing from the transfer is short term

or long term. The period of holding is reckoned from the date of acquisition of the asset by

the assessee and upto the date of its transfer by him. However, when the assessee did not

himself acquire the asset but the asset devolved on him under any of the circumstances

mentioned u/s 49(1) of the Act from the previous owner, the date of acquisition by the

previous owner will be taken to be the date of acquisition by the assessee. Under section

49(1) the asset may devolve on the assessee under any of the following modes :

1. On distribution of assets by an HUF among its members on its total or partial

partition.

2. Under gift or will.

3. By succession, inheritance or devolution.

4. On distribution of assets on the dissolution of a firm, body of individuals or

association of persons where such dissolution had taken place at any time before

April 1, 1987.

5. On distribution of assets on the liquidation of a company.

6. Under a transfer to a trust whether revocable or irrevocable.

7. On transfer by a wholly-owned Indian subsidiary company from its holding company.

8. On transfer by an Indian holding company from its wholly owned subsidiary

company.

9. On transfer, in a scheme of amalgamation, by the amalgamated company from the

amalgamating company under any of the following three conditions–

(a) 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;

(b) 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, if–

(i) at least 25% of the shareholders of the amalgamating foreign company

continue to remain shareholders of the amalgamated foreign company and

(ii) such transfer does not attract tax on capital gains in the country in which the

amalgamating company is incorporated; and

(c) any transfer, in a scheme of amalgamation of a banking company with a banking

institution sanctioned by the Central Govt., of a capital asset by the banking

company to the banking institution.

10. Acquisition of property by a HUF where one of its members has converted his self-

acquired property into joint family property after Dec.31, 1969.

The provisions of section 49(1) have a two-fold effect :

1. The provisions have a decisive impact on the question of determination of

whether the amount of capital gains accruing on transfer of a capital asset is

'short term' or 'long term'. When the person on whom a capital asset devolved in

any of the circumstances u/s 49(1) which are stated above transfers the asset, the

date of acquisition of the asset to the previous owner is deemed to be the date of

acquisition for the transferor. This provision is beneficial to the transferor

because the period for which the asset was held by the previous owner is

considered as being the period of holding by the transferor on whom the asset

devolved from the previous owner. It will help is making the amount of capital

gains accruing on its transfer to be 'long term' capital gain; the incidence of tax

will be lower.

2. While computing amount of capital gains in the hands of the transferor, cost of

acquisition of the capital asset to the previous owner is deemed to be the cost of

acquisition to the transferor; this is again beneficial to the transferor in view of

the fact that he did not pay anything to the previous owner at the time the asset

devolved on him u/s 49(1). Of course, where the previous owner has acquired

the asset in any of the above cited instances u/s 49(1), the 'previous owner' of

the asset means the last previous owner who acquired the property by means

other than those stated above. Cost of any improvement of the asset borne by

the previous owner will be added to such cost. By virtue of section 55(3), where

the cost for which the previous owner acquired the property cannot be

ascertained, the cost of acquisition to the previous owner means the fair market

value on the date on which the capital asset became the property of the previous

owner.

When the property devolves on an assessee under any of the instances stated u/s

49(1), the transaction is not treated as 'transfer' and no capital gain is said to accrue at that

time. When the assessee transfers such asset, then he is liable to pay tax on entire amount of

capital gains accruing on the date of transfer; it includes the share of capital gains upto the

date of devolvement of the asset on the assessee which represents the share of capital gains to

the previous owner and also the share of capital gains to the assessee from the date of

devolvement of the asset on him and upto the date of transfer by him.

However, in the case of transfer of a depreciable asset, capital gain is taken as short

term capital gain irrespective of the period of its holding by the assessee. This rule does not

apply in the case of assets used by a power generating unit which are eligible for depreciation

on straight line basis. Assets used in business of an assessee on which depreciation is

provided on diminishing balance method are covered under 'depreciable assets'.

5.4 PROCEDURE OF COMPUTING INCOME FROM CAPITAL GAINS

5.4.1 Computation of short term capital gains

Income by way of short term capital gains is arrived at by subtracting the sum of the

following three amounts from the full amount of sales consideration received or receivable

by the transferor in respect of the asset transferred by him –

(i) Expenditure which is incurred wholly and exclusively in connection with the transfer;

(ii) Cost of acquisition of the Capital asset; and

(iii) Cost of improvement; if any.

5.4.1.1 Full value of consideration–As per section 48 of the Act, the expression "full

value" means the entire price agreed as the sales consideration by the transferor and the

transferee without any deduction whatsoever. Sales consideration may be received in cash or

in kind or partly in cash and partly in kind. When it is received in kind, then fair market

value of such assets is taken as full value of consideration. Section 48 does not show that

only consideration shown in sale deed is to be regarded as full value of consideration

received; there is nothing in the section, which precludes Assessing Officer from substituting

actual sale consideration for sale consideration shown in the sale deeds, if there is evidence

to show that assessee had indeed received higher amount1.

It is important to note that it makes no difference whether or not full value of

consideration is received during the previous year. Even if the full value of consideration is

received in instalments in different years, the entire value of consideration has to be taken

into account for computing the amount of capital gains, which become chargeable in the year

of transfer.

The decision of the Karnataka High Court seems to be quite logical when it held the

compensation received for injurious affection of unacquired portion of a larger plot to be a

part of full value of consideration where a portion of a larger plot is acquired which

injuriously affects the value of the unacquired portion1.

Cases when "full value of consideration" is determined on notional basis

In the following cases "full value of consideration" is determined on notional basis

according to different provisions given in the Act–

(1) Money or other asset received under any insurance from an insurer due to damage or

destruction of a capital assets–As per section 45(1A) of the Act when compensation is

received from an insurer because of 'damage to' or 'destruction of' any capital asset

which is a result of (i) flood, typhoon, hurricane, cyclone, earthquake or other

convulsion of nature; or (ii) riot or civil disturbance or (iii) accidental fire explosion;

or (iv) action by an enemy or action taken in combating an enemy, then the value of

any money or the fair market value of the asset on the date of its receipt shall be

deemed to be full value of the consideration received or accruing as a result of

transfer of such asset. Any profits or gains arising from receipt of such money or

other assets shall be chargeable to capital gains tax. Also, it shall be deemed to be the

income of such person for the previous year in which such money or other asset is

received.

(2) Conversion of capital asset into stock-in-trade–The fair market value of the capital

asset on the date on which it was converted or treated as stock-in-trade of the business

of the assessee shall be deemed to be the amount of full value of the consideration

received or accruing as a result of the transfer of the capital asset. As per section

45(2), the notional profit arising from transfer by way of conversion of capital asset

into stock-in-trade is chargeable to tax in the year in which stock-in-trade is sold

though it accrues in the year in which the capital asset is converted into stock-in-

trade.

This is clear with the help of the following example.

Example 5.1

Mr. X converts his capital asset into stock-in-trade on April 1, 1984 when its fair

market value is Rs. 10 lac. He acquired the asset on June 1,1977 for Rs. 1 lac and its fair

market value on April 1, 1981 was Rs. 2 lac. He sells the stock-in-trade so converted for Rs.

18 lac on July 1, 2008. The cost inflation indices for the year 1981-82, 1984-85 and 2008-09

were 100, 125 and 582 respectively. What shall be the amount of taxable income?

Solution :

Computation of Total Income of Mr. X

for the assessment year 2009-10

Particulars Amount (Rs.)

Computation of business income :

Sales consideration 18,00,000

Less : Fair market value of the stock-in-trade on its date of

conversation 10,00,00

Income from Business 8,00,000

Computation of long term Capital gains :

Full value of consideration

(i.e., fair market value on the date of conversion) 10,00,000

Less : Cost of acquisition (i.e., fair market value on April 1,1981)

(2,00,000x125/100) 2,50,000

Long Term Capital gains 7,50,000

Total Income (Rs. 8,00,000 + 7,50,000) 15,50,000

Note : Long term Capital gains will be taxable for the assessment year 2009-10 i.e.,

relevant to the previous year in which stock-in-trade is transferred though it accrued during

the assessment year 1985-86 when the capital asset was converted into stock-in-trade.

(3) Transfer of capital asset by a partner or member to a firm or AOP or BOI as his

capital contribution–As per section 45(3) when a person is or becomes a partner or

member in a firm/AOP/BOI and transfers a capital asset by way of his capital

contribution or otherwise, the amount recorded in the books of account of the

firm/AOP/BOI as the value of the capital asset shall be taken as full value of

consideration received as a result of the transfer.

The capital asset so transferred may be short term/long term, depreciable/non-

depreciable. Thus, if a personal car is transferred, section 45(3) will not apply because

personal car is not a capital asset. The capital gain accruing as a result of the transfer

is chargeable to tax in the previous year in which such transfer takes place. This rule

is not applicable when a member transfers a capital asset to a company or a co-

operative society. In such a case, the amount in books of account of the

firm/AOP/BOI/as value of the capital asset is taken as sales consideration. For

example, if A joins a firm of two partners X and Y by transferring a capital asset to

the firm whose market value is Rs. 5 Lac but in the books of the firm it is recorded at

Rs. 4 lac, then Rs. 4 lac is taken as sales consideration.

(4) Distribution of capital asset by a firm/AOP/BOI to its partners or members on its

dissolution–As per section 45(4) when a firm/AOP/BOI transfers capital assets by

way of distribution of capital assets on the dissolution of the firm/AOP/BOI, the fair

market value of the capital asset on the date of transfer is treated as the full value of

sales consideration. The Capital asset so transferred may be short term/long term,

depreciable/non-depreciable. Thus, if rural agricultural land is transferred, section

45(4) will not apply because rural agricultural land is not a 'capital asset'. The agreed

consideration between the firm/AOP/BOI and partners/members and as also the

amount recorded in the books will not be treated as full value of consideration at all.

The fair market value of the asset on the date of transfer shall be taken as full value of

consideration for the firm/AOP/BOI. If a firm/AOP/BOI distributes a depreciable

asset, the capital gain/loss shall always be short term capital gain/loss. However, in

the hands of the partners/members, cost of the capital asset shall be treated as the

agreed amount of consideration. The capital gain accruing as a result of the transfer is

chargeable to tax in the hands of the firm/AOP/BOI as income of the year in which

the transfer takes place. This rule is not applicable when an asset is transferred by a

company or a co-operative society.

(5) Money or other assets received by shareholders at the time of liquidation of a

company–

As per section 46(2), when a shareholder receives money or other assets at the

time of liquidation of the company in which he is a shareholder, the difference

between the amounts stated under (a) and (b) below is treated as full value of

consideration received by the shareholder on transfer of shares–

(a) Money received and the market value of other "assets" on the date of

distribution. As per the decision of the Supreme Court, the word "asset" means

"Capital Asset" or any other asset1.

(b) Any distribution by a company at the time of liquidation made to the

shareholders to the extent to which the distribution is attributable to the

accumulated profits of the company immediately before its liquidation whether

capitalised or not; as per section 2(22) (c) the amount is treated as dividend.

From the amount of full value of consideration, the amount of transfer expenses

and cost of acquisition/indexed cost of acquisition will be subtracted to find out

the amount of capital gains.

When a distribution is made by the liquidator, the distribution is deemed to

take place in same proportion in which share capital and accumulated profits stood in

the accounts of the company immediately before the distribution; that part of the

receipt which is attributable to the accumulated profit is treated as dividend2. When

money is received from liquidator in instalments, then the cost of acquisition has to be

deducted from earlier payments and once the cost of acquisition is wiped off, any sum

received thereafter will be capital gain.

6. Shares etc., allotted by an employer to an employee under notified ESOP/ESOS and

such shares etc., are gifted by the concerned employee to any person–As per the

fourth provision to section 48 when an assessee who is an employee of a company is

allotted, directly or indirectly, shares/debentures/warrants by the company under a

notified Employee's Stock Option Plan/Scheme in accordance with the guidelines

issued by the Central Govt. and the shares/debentures/warrants are gifted by the

employee to any person, the gift will be treated as 'transfer' and market value of the

shares, etc., at the time of the gift will be treated to be the full value of sales

consideration. The provision acts as an exception to the rule prescribed u/s 47(iii)

where transfer of a capital asset in Rind by way of gift, etc., is not treated as 'transfer'.

This can be explained with the help of the following example.

Example 5.2

Mr. A is an employee of P. Ltd. on July 5, 2008, P. Ltd., has given an option to each

employee to get 1000 shares in the company at a price of Rs. 12 per share under a

Notified Employees' Stock Option Plan. So, Mr. A was allotted 1000 shares @ Rs. 12

per share on July 15, 2008 on which date the market price per share is Rs. 100/- On

October 1, 2008, Mr. A gifts ESOP shares to a friend when the market price per share

is Rs. 220. What shall be the amount of capital gain chargeable to tax ?

Solution :

The vesting of shares of Mr. A is a perquisite which is exempt in the hands of Mr. A

and the company will pay fringe benefit tax on Rs. [100-12]x1000 or Rs. 88,000. Gift

of ESOP shares by Mr. A will be treated as 'transfer' and he will have to pay tax on

short-term capital gain of Rs. [220-100]x1000 or Rs. 1,20,000/-.

(7) Transfer of land or building whereby the sales consideration shown in the conveyance

deed is less than the value adopted by stamp valuation authority–As per section 50C,

if there is a transfer of land, building or both which may be short term/long term,

depreciable/non-depreciable and the sale consideration is less than the value adopted

or assessed by any authority of a State Govt. for the purpose of payment of stamp

duty in respect of such transfer, the value adopted by stamp duty authority shall be

taken as full value of consideration for the purpose of computation of capital gains. If

the assessee accepts the value adopted by the stamp duty authority, it is taken as full

value of consideration. If the assessee has disputed the value adopted by the stamp

duty authority, the stamp duty valuation as finally accepted for stamp duty purpose is

treated as full value of consideration. If the assessee claims that value adopted by

stamp duty authority is greater than the fair market value but he has not disputed such

valuation in stamp duty proceedings and the fair market value determined by the

valuation officer is less than the stamp duty valuation, such fair market value is taken

as full value of consideration; if the fair market value determined by the valuation

officer is more than the stamp duty valuation then stamp duty valuation is taken as

full value of consideration.

5.4.1.2 Transfer expenses–Such expenses as are necessarily to be met by the

transferror of a capital asset at the time of its transfer are treated as expenses incurred wholly

and exclusively in connection with the transfer.

Such expenses include–

(i) brokerage or commission;

(ii) registration fee if borne by the transferror;

(iii) cost of stamps if borne by the vendor;

(iv) travelling expenses including reasonable amount on refreshment incurred by the

transferror for himself and his witnesses; and

(v) legal expenses incurred to effect enhancement in the amount of compensation in

connection with the compulsory acquisition of asset by the Govt.

5.4.1.3 Cost of acquisition–Cost of acquisition of an asset is the value for which it

was acquired by the assessee. Expenses of capital nature for completing or acquiring the title

to the property are includible in the cost of acquisition. Cost to the previous owner is deemed

to be the cost of acquisition to the assessee in cases where capital asset became the property

of the assessee under any mode of transfer specified u/s 49(1) which have been described

above.

Substitution of fair market value as on April 1, 1981 in place of actual cost of acquisition :

In the case of non-depreciable asset, as per section 55 (2) (b), the assessee may take at

his option either actual cost or the fair market value of the asset as on April 1, 1981 as cost of

acquisition in the following two cases–

(i) where the assessee acquired the property before April 1, 1981; and

(ii) Where the property devolved on the assessee under any of the modes specified u/s

49(1) from the previous owner and the previous owner acquired it before April 1,

1981.

This provision is beneficial to an assessee because he can choose higher of (a) actual

cost of acquisition and (b) market value on April 1, 1981 to be the cost of acquisition; the

higher the cost of acquisition the lower will be the amount of income from capital gains and

consequently the lower will be the amount of tax payable.

The option of substituting market value as on April 1, 1981 is not available in respect

of goodwill of business, trade mark or brand name associated with business, or right to

manufacture, produce or process any article or thing or right to carry on a business, tenancy

rights, stage carriage permits or loom hours whether such assets are self-generated or

purchased by the assessee. This option is, however, available in the case of bonus shares

allotted to an assessee before April 1, 1981. The option of choosing fair market value as on

April 1, 1981 to be the cost of acquisition is not available in the case of depreciable assets.

Cost of acquisition in the case of advance money received

As per section 51, where any capital asset was subject to negotiations for its transfer

on any previous occasion, in computing cost of acquisition any advance or other money

received and forfeited by the assessee is to be deducted from the cost for which the asset was

acquired or from the written down value or fair market value, as the case may be. However,

the amount forfeited by the previous owner shall not be considered. The Supreme Court has,

in this connection, held that the money received on the previous occasions and retained by

the vendor i.e., the assessee cannot, therefore, be treated as a revenue receipt1.

5.4.1.4 Cost of improvement–Cost of improvement, as per section 55 of the Act, is

capital expenditure incurred by an assessee in making additions or improvement to the

capital asset. It includes expenditure incurred to protect or complete the title to the capital

assets or to cure such title. Thus, any expenditure incurred to increase the value of the capital

asset is known as cost of improvement.

Cost of improvement includes expenditure on improvement incurred by the assessee

or the previous owner or by both which is incurred only on or after April 1, 1981. This

provision has been incorporated in the Act due to the introduction of the concept of

indexation with effect from the previous year 1981-82. Cost of improvement incurred before

April 1, 1981 is treated as part of cost of acquisition of the asset.

Cost of improvement does not include any expenditure which is deductible in

computing the income chargeable under the heads "Interest on securities" This used to be one

of the heads of income earlier which has now been merged with the head "Income from other

sources" with effect from April 1, 1989. "Income from house property", "Profit's and gains of

business or profession" and "Income from other sources". Cost of any improvement, as per

section 55(1)(b) in relation to a capital asset being goodwill of a business or a right to

manufacture, produce or process any article or thing or right to carry on any business shall be

taken to be nil. Cost of any improvement in relation to any other capital asset where it

became the property of the previous owner or the assessee before April 1, 1981, means all

expenditure of a capital nature incurred in making any additions or alterations to the capital

asset on or after April 1, 1981 by the previous owner or the assessee; in any other case,

means all expenditure of a capital nature incurred by the previous owner and the assessee

both.

It may be noted that there can be cost of improvement even in the case of an

intangible asset1. Likewise, the expenditure in the shape of betterment charges paid under

the town planning scheme for acquiring an enduring benefit are in the nature of capital

expenditure and go to improve the value of the land2.

The computation of income from short term capital gains can be understood with the

help of the following examples :

Example 5.3

Mr. X a member of an HUF is allotted a residential house by the HUF on its partition

on December 15, 2006. The HUF acquired the house for Rs. 5 lac on May 1, 2006. Mr. X

incurs Rs. 1 lac on constructing two rooms to the house in April 2007 and sells the house for

Rs. 12 lac on Feb. 15, 2009. What shall be the taxable amount of capital gains in the hands of

Mr. X if he paid Rs. 12,000 to the dealer by way of brokerage ?

Solution :

Computation of Short Term Capital gains of Mr. X




Less : Transfer expenses 12,000

Cost of acquisition (being cost to the previous owner) 5,00,000

Cost of improvement 1,00,000 6,12,000

Taxable amount of short term Capital Gains 5,88,000

Example 5.4

Mr. X gifts the debentures to his friend on July 15, 2006 which he purchased on Jan. 9, 2006 for Rs. 35,000. The debentures are transferred to Mr. Y on April 15, 2007 on the death of Mr. X; Mr. Y is the son of Mr. X who had written a will in this regard. Mr. Y sold these debenture on Aug. 20, 2008 for Rs. 65,000. The debentures are not listed at a recognized stock exchange in India. What shall be the taxable amount of capital gains for Mr. Y if the market value of the debentures on July 15, 2006 and April 15, 2007 was Rs. 45,000 and Rs. 55,000 respectively.

Solution :

Computation of short term Capital Gains of Mr. Y for the assessment year 2009-10


Sales Consideration 65,000 Less : Cost of acquisition (being the cost to the previous owner) 35,000 Taxable amount of short term Capital Gains 30,000

Note : (1) When as asset devolves on the transferor in one of the circumstances mentioned u/s 49 (1), the market value before April 1, 1981 is irrelevant.

(2) The debentures are unlisted. So, the capital gains would be short term because transfer is effected within 36 months of then holding.

However, where the assessee had paid an amount to improve his title by compromising a suit filed by a disputant claiming title to the property, it was held that this was not cost of improvement to the asset and could not be deducted for computation of capital gains1.

In the case of depreciable assets, the amount of capital gains on their transfer is always treated as short term irrespective of the period of their holding by the assessee; amount of capital gain in respect of such assets is computed after writing off the amount of depreciation which is computed as per the procedure discussed in Chapter 4 under Section 4.4. The computation of amount of short term capital gains can be understood with the help of the following example.

Example 5.5

On April 1, 2008 X Ltd. owns three plants–P, Q & R which belong to the block

having 15% as rate of depreciation; the written down values of these assets on this date were

Rs. 2 lac, Rs. 5 lac and Rs. 7 lac respectively. The company acquired plant S for Rs. 50,000

on Sep. 10, 2008; Plants also belonged to this block and was not eligible for additional

depreciation. On March 20, 2009 the company sold plants P, Q, R and S for Rs. 1,60,000,

Rs. 8,50,000, Rs. 5,50,000 and Rs. 45,000 respectively. The company incurred Rs. 20,000 in

respect of the transfer of Plants P and S. What is the amount of Capital gains for the

assessment year 2009-10 ?

Solution :

Computation of amount of depreciation

Particulars Amount (Rs.) Written down value of the block on April 1, 2008 of Plants P, Q&R (Rs. 2 lac + Rs. 5 lac + Rs. 7 lac) 14,00,000 Add : Cost of Plant S acquired during the previous year 2008-09 50,000 14,50,000 Less : Sale consideration of plants P, Q, R & S but subject to a maximum of Rs. 14,50,000 14,50,000 Written down value of the block on March 31, 2009 Nil Depreciation for the previous year 2008-09 Nil

Computation of amount of short term Capital gains of X Ltd.



Sales consideration of Plant P, Q, R & S (Rs. 1,60,000+Rs. 8,50,000+Rs. 5,50,000+Rs. 45,000) 16,05,000 Less : Cost of acquisition W.D.V. of the block on April 1, 2008 14,00,000 Cost of Plant S acquired during the year 50,000 14,50,000 1,55,000

Less : Expenses on Transfer 20,000 Taxable amount of short term Capital Gains 1,35,000

5.4.2 Computation of income from long term Capital gains

Income by way of long term capital gains is arrived at by substracting the sum of the

following three amounts from the full value of sales consideration received or receivable by

the transferor in respect of the long term asset transferred by him–

(i) Expenditure which is incurred wholly and exclusively in connection with the transfer;

(ii) indexed cost of acquisition of the capital asset; and

(iii) indexed cost of improvement; if any.

The expressions 'full value of sales consideration' and 'transfer expenses' have the

same meaning as have been given above under 5.4.1.1 and 5.4.1.2 respectively.

5.4.2.1 Indexed cost of acquisition–As per explanation (iii) of section 48 "indexed

cost of acquisition" means an amount which bears to the cost of acquisition the same

proportion as Cost Inflation Index for the year in which the asset is transferred bears to the

Cost Inflation Index for the first year in which the asset was held by the assessee or for the

year beginning on the April 1, 1981, whichever is later.

As per Explanation (v) to section 48, "Cost Inflation Index", in relation to a previous

year, means such Index as the Central Govt. may, having regard to 75% of average rise in the

Consumer Price Index for urban non-manual employees for the immediately preceding

previous year to such previous year, by notification in the Official Gazette, specify, in this

behalf. The Central Govt. has notified the cost inflation index for different years with effect

from the previous year 1981-82 and upto the current previous year 2008-09; it was, for

example. 100 for the previous year 1981-82; 199 for the previous year 1991-92; 426 for the

year 2001-02 and 582 for the year 2008-09.

These provisions can be understood easily with the help of the following example.

Example 5.6

Mr. A acquired a piece of land in Ghaziabad on Jan. 9,1985 at a cost of Rs. 20,000

but the Stamp Duty Authority adopted its value of Rs. 50,000. Mr. A sold this plot on March

9, 2009 at Rs. 5 lac. What shall be the taxable amount of capital gains in the following

situations :

(a) The value adopted by Stamp Duty Authority is Rs. 7 lac and Mr. A does not dispute

it.

(b) The value adopted by the Stamp Duty Authority is Rs. 7,50,000. Mr. A files an appeal

under the Stamp Act and the High Court reduces the stamp duty valuation to Rs.

6,50,000.

(c) The value adopted by the Stamp Duty Authority is Rs. 7,25,000. Mr. A does not

challenge it under the Stamp Act but he claims before the Assessing Officer that the

value of Rs. 7,25,000 is more than the fair market value of the land. On reference by

the Assessing Officer, the valuation officer-determines Rs. 7,10,000 as fair market

value.

(d) In situation (c) above, suppose the value determined by the valuation officer is Rs.

7,50,000.

The cost inflation index for the year 1984-85 is 125 and for the year 2008-09 is 582.

Solution :

Computation of income from Capital gains of Mr. A


Particulars S i t u a t i o n s

(a) (b) (c) (d)

Rs. Rs. Rs. Rs.

Full value of consideration 7,00,000 6,50,000 7,10,000 7,25,000

Less : Indexed cost of

acquisition

[20000x582/125] 93,120 93,120 93,120 93,120

Long term capital gains 6,06,880 5,56,880 6,16,880 6,31,880

Notes : (1) Value adopted by the Stamp duty authority at the time of acquisition is not

treated as cost of acquisition.

(2) The expression 'indexed cost of acquisition' is explained in Section 5.4.2.1.

Indexed cost of acquisition may be required to be computed under any of the

following five situations :

(a) Capital asset is acquired by the assessee himself before April 1, 1981.

(b) Capital asset is acquired by the assessee himself on or after April 1, 1981.

(c) The Capital asset devolved on the assessee from the previous owner before April 1,

1981 u/s 49(1) and the previous owner acquired the asset originally before April 1,

1981.

(d) The Capital asset devolved on the assessee from the previous owner on or after April

1,1981 u/s 49(1) and the previous owner acquired it originally before April 1, 1981.

(e) The capital asset devolved on the assessee from the previous owner on or after April

1, 1981 u/s 49(1) and the previous owner also acquired it originally on or after April

1, 1981.

For computing the indexed cost of acquisition relating to the above situations, the

following five formulae will be applicable :

(1) Fair market value of the Cost inflation index (CII) asset on April 1, 1981 or of the year in which cost of acquisition, whichever the asset is transferred is higher

Cost inflation index for the year 1981-82

(2) Cost of acquisition CII of the year in which the asset is transferred

CII of the year in which the asset is acquired

(3) F.M.V. of the asset on April 1, CII of the year 1981 or cost of of acquisition in which the asset is

to the previous owner, which- transferred ever is higher

CII of the year 1981-82 (4) F.M.V. of the asset on April CII of the year in which 1, 1981 or cost of acquisition the asset is transferred of the previous owner, whichever is higher

CII for the year 1981-92

(5) Cost of acquisition to the CII of the year in which the previous owner asset is transferred

CII of the year in which the asset was first held by the assessee

5.4.2.2 Indexed Cost of improvement–As per Explanation (iv) to section 48,

"indexed cost of any improvement" means an amount which bears to the cost of

improvement the same proportion as Cost Inflation Index for the year in which the asset is

transferred bears to the Cost Inflation Index for the year in which the improvement to the

asset took place. Indexed cost of improvement is also required to be computed under any of

the five above stated situations. The formulae for computing indexed cost of improvement in

respect of these five situations are as follows :

(1) Cost of improvement incurred CII of the year in which the on or after April 1, 1981 asset is transferred

CII of the year in which the improvement took place (2) Cost of improvement CII of the year in which the transfer took place

CII of the year in which the improvement took place (3) Cost of improvement incurred CII of the year in which the by the assessee on or after April asset is transferred 1, 1981

CII of the year in which the improvement took place (4) Cost of improvement incurred CII of the year in which by the assessee and the previous the asset is transferred owner on or after April 1, 1981

CII of the year in which the improvement took place (5) Cost of improvement incurred CII of the year in which the by the assessee and the asset is transferred previous owner

CII of the year in which the improvement took place

5.4.3 Examples illustrating the application of the formula for computation of indexed cost of acquisition and indexed cost of improvement–

The application of the formulae given under 5.4.2.1 and 5.4.2.2 above can be

understood with the help of the following examples :

Example 5.7

Mr. X acquired a house for Rs. 1 lac in 1978 and constructed first floor in 1979 at a

cost of Rs. 1 lac. Fair market value of the house on April 1, 1981 was Rs. 4 lac. Mr. X

incurred Rs. 5 lac in 2004-05 for constructing second floor to the house. He sold the house

on Jan. 9, 2009 for Rs. 50 lac. He paid Rs. 50,000 by way of brokerage to the dealer. What

shall be the taxable income from long term capital gains by using 100, 480 and 582 to be the

cost inflation index for the previous years 1981-82, 2004-05 and 2008-09 respectively ?

Solution :

Computation of income from long term capital gains of Mr. X





Indexed Cost of acquisition [4,00,000x582/100] 23,28,000

Indexed cost of improvement [5,00,000x582/480] 6,06,250 29,84,250

Income from long term capital gains 20,15,750

Note : Since fair market value as on April 1,1981 is higher than actual cost of

acquisition, the fair market value will be taken to be the cost of acquisition.

Example 5.8 :

Mr. X sold a house on Dec. 15, 2008 for Rs. 25 lac. which he purchased in 2004-05

for Rs. 10 lac. He incurred Rs. 4 lac in the year 2005-06 on improvement of the house and

Rs. 25000 on transfer expenses. Taking 480, 497 and 582 to be the CII for the years 2004-05,

2005-06 and 2008-09 respectively what shall be the amount of long term capital gains for the

assessment year 2009-10 ?

Solution :

Computation of income from long term capital gains of Mr. X





Indexed cost of acquisition [10,00,000x582/480] 12,12,500


Income from long term Capital Gains 7,94,090

Example 5.9 :

Mr. X dies on Jan. 9, 1981 and the house which he purchased for Rs. 1 lac in 1970 is transferred to his wife by the will be wrote in her favour.

Mrs. X spent Rs. 2 lac in 2004-05 for reconstruction of the house. Mrs. X sold the house on Feb. 15, 2009 for Rs. 30 lac and paid Rs. 30,000 by way of brokerage. The fair market value of the house on April 1, 1981 was Rs. 3 lac. The cost inflation index for the year 1981-82, 2004-05 and 2008-09 are 100,480 and 582 respectively. What is the amount of long term capital gains in respect of the house for the assessment year 2009-10 ?

Solution :

Computation of income from long term capital gains of Mrs. X



Sales consideration 30,00,000 Less : Transfer expenses 30,000

Indexed cost of acquisition [3,00,000x582/100] 17,46,000 Indexed cost of improvement [2,00,000x582/480] 2,42,500 20,18,500 Income from long term capital gains 9,81,500

Notes : (1) Transfer of the house on death of Mr. X to Mrs. X will not attract capital

gains tax because it will not be treated as transfer u/s 49(1).

(2) Cost of the previous owner i.e., Rs. 1 lac or fair market value on April 1, 1981 i.e.

Rs. 3 lac, whichever is higher i.e., Rs. 3 lac will be treated to be the cost of acquisition.

Example 5.10 :

Mr. X constructed a house in 1978 at a cost of Rs. 2 lac. He gifted the house to his

relative Mr. A on Jan. 9, 1990. Mr. X added two rooms to the house during the year 1984-85

and incurred Rs. 60,000 by way of expenditure. Mr. A spent Rs. 2 lac on addition of the first

floor to the building in 2004-05 and sold the building on Sep.10, 2008 for Rs. 40 lac. and

spent Rs. 40,000 by way of transfer expenses. The cost inflation index for the year 1981-82,

1984-85, 1989-90, 2004-05 and 2008-09 are 100, 125, 172, 480 and 582 respectively.

What is the amount of long term capital gains when the fair market value of the house

on April 1, 1981 was Rs. 3 lac ?

Solution :

Computation of income from long term capital gains of Mr. A






Indexed cost of improvement incurred by Mr. X

[60,000x582/125] 2,79,360

Indexed cost of improvement incurred by Mr. A

[2,00,000x582/480] 2,42,500 23,07,860

Income from long term Capital gains 16,92,140

Example 5.11 :

X Ltd. acquired non-listed shares in a company on Feb. 10, 2006 for Rs. 2 lac. The

shares are transferred by X Ltd. to its wholly owned Indian subsidiary company K Ltd. on

April 1, 2007. K Ltd. transferred these shares on July 18, 2008 for Rs. 3,50,000. The cost

inflation index for the year 2007-08 is 551 and for the year 2008-09 is 582. What is the

amount of long term Capital gains for the assessment year 2009-10, when the company spent

Rs.1000 for transfer expenses ?

Solution :

Computation of income from long term capital gains of K.Ltd.





Indexed cost of acquisition [2,00,000x582/551] 2,11,252 2,12,252

Income from long term capital gains 1,37,748

5.5 EXEMPTIONS FROM CAPITAL GAINS TAX

Income from capital gains will be exempt from tax if the amount of capital gains or

the amount of net sales consideration as the case may be, is invested in notified assets over a

certain period of time. Exemption from tax in respect of short term capital gains is available

under section 54B, 54D, 54G and 54GA and in respect of long term capital gains, it is

available under section 54, 54B, 54D, 54EC, 54F, 54G and 54GA. The provisions under

these sections are discussed below :

5.5.1 Exemption in respect of long term capital gains from transfer of a residential house property–

As per section 54, the benefit of exemption in respect of long term capital gains from

transfer of a residential house property is available to an assessee who is either an individual

or an HUF. If an assessee transfers a long term house property during a previous year and

invests the amount of capital gains towards the acquisition of another residential

house/houses within the prescribed period, the amount of capital gains so invested will be

exempt from tax. The prescribed period in respect of purchase of a ready built house is one

year before or two years after the date of transfer of the original house. In case another

house/houses is/are constructed by the assessee, the prescribed period is three years from the

date of transfer of the original house; date of commencement of construction is immaterial in

this connection.

An essential condition associated with the availability of this exemption is that the

assessee should not transfer 'another' house/houses before the expiry of three years from the

date of its/their acquisition; otherwise, the exemption will be forfeited. While computing the

amount of short term capital gains accruing on transfer of the 'another' house/houses, the

amount of exemption availed in respect of transfer of the original house will be subtracted

from cost of acquisition of the 'another' property. Also, if the assessee does not want to

acquire 'another' house property during the previous year itself in which the original house is

transferred, he can still avail the benefit of exemption during the same assessment year by

depositing the amount of capital gain in 'Capital gains deposit account scheme' upto the last

date of filing of return of income. The last date for filing the return of income in the case of

companies and other assesses whose accounts are required to be audited in Sep. 30 after the

end of the previous year and in respect of all other assesses, it is July 31 after the end of the

previous year. However, the assessee will have to utilise the amount so deposited towards the

acquisition of another house property within the prescribed time period. If the assessee fails

to do so, the amount of capital gains not so utilised will be chargeable to tax after the expiry

of three years from the date of transfer of the original house; the amount so taxable will be

taxable as long term capital gains.

The application of provisions relating to this exemption can be understood with the

help of the following example.

Example 5.12

Mr. X sells his house on Aug. 20, 2008 for Rs. 25 lac and incurred Rs. 25000 by way

of transfer expenses. He purchased this house on Aug. 10, 1984 for Rs. 2 lac. He constructed

four rooms in the house in the year 2004-05 at a cost of Rs. 2 lac. Mr. X purchases another

residential house on July 18, 2009 for Rs. 10 lac. What is the taxable amount of capital gains

when the cost inflation index for the year 1984-85, 2004-05 and 2008-09 are 125, 480 and

582 respectively ?

Solution :

Computation of income from capital gains of Mr. X





Indexed Cost of acquisition [2,00,000x582/125] 9,31,200

Indexed Cost of improvement [2,00,000x582/480] 2,42,500 11,98,700

Long Term Capital Gains 13,01,300

Less : Exemption u/s 54 10,00,000

Taxable amount of long term Capital Gains 3,01,300

5.5.2 Exemption in respect of short term & long term capital gains from Transfer of agricultural land :

As per section 54B, the benefit of exemption in respect of both types of capital gains–

short term and long term, from transfer of agricultural land situated in an urban area is

available to an individual if he or his parents was or were using it for at last two years for

agricultural purposes before the date of its transfer. The exemption is available in respect of

the utilisation of the amount of capital gains thus accruing towards the purchase of another

agricultural land within a period of two years from the date of transfer of the original

agricultural land.

The essential condition for availability of this exemption is that the assessee should

not transfer the 'another' agricultural land within a period of three years from the date of its

acquisition; otherwise the exemption will be forfeited. While computing the amount of short

term capital gains accruing on transfer of the 'another' agricultural land, the amount of

exemption availed in respect of transfer of the original agricultural land will be subtracted

from cost of acquisition of the 'another' agricultural land. Thus, the amount of short term

capital gains with respect to 'another' land will automatically go-up exactly by the amount of

exemption availed on transfer of the original agricultural land.

Also, if the assessee does not want to purchase the new agricultural land during the

previous year in which the original agricultural land is transferred, he can still avail the

benefit of this exemption by depositing the amount of capital gains in the 'Capital gains

deposit account scheme' upto the last date of filing of return of income. However, the

assessee will have to utilise the amount of deposit towards the purchase of new agricultural

land within a period of two years from the date of transfer of the original agricultural land. If

he fails to do so, the exemption availed due to the amount of the deposit will be forfeited and

will become taxable in the year when the two year period elapses; the amount of capital gains

will be taxable either as short term or long term capital gains, as the case may be.

The application of provision relating to this exemption can be understood with the


Example 5.13

Mr. X was using a piece of agricultural land, situated within the jurisdiction of a

municipality, as a tenant for two years which he purchased on Sep. 15,1992 for Rs. 4 lac. He

sold this land on Sep. 18, 2008 for Rs. 18 lac and incurred Rs. 20,000 by way of transfer

expenses. On June 30, 2009 he purchased another agricultural land for Rs. 6 lac. What is the

taxable amount of long term capital gains if the cost inflation index for the years 1992-93 and

2008-09 are 223 and 582 respectively ?

Solution :

Computation of income from Capital gains of Mr. X





Indexed cost of acquisition [4,00,000x582x223] 10,43,946 10,63,949

Long term Capital gains 7,36,054

Less : Exemption u/s 54B 6,00,000

Taxable amount of long term Capital gains 1,36,054

5.5.3 Exemption in respect of short term & long term capital gains on compulsory acquisition of land and building used for industrial purposes :

As per section 54D, the benefit of exemption from tax in respect of both types of

capital gains–short term and long term, is available to all assessees accruing on transfer by

way of compulsory acquisition of land or building which forms a part of an industrial

undertaking belonging to them. The land or building should have been used by the assessee

for the purpose of industrial undertaking for at least two years preceding the date of

compulsory acquisition either as owner or otherwise. The exemption is available if the

assessee invests the amount of capital gain towards the purchase of any land or building

within a period of three years from the date of receipt of compensation from the Govt. or

constructed a building within such period for the purpose of shifting or re-establishing the

old undertaking or for establishing some new undertaking.

It is essential that the assessee does not transfer the new land and building before the

expiry of three years from the date of its acquisition; otherwise the exemption availed earlier

will be forfeited. At the time of computing short term capital gains from the transfer of new

land and building, the amount of exemption availed earlier will be substracted from the cost

of its acquisition; the amount of short term capital gains thus accruing will increase exactly

by the amount of capital gains exempted earlier. Further, if the assessee does not want to

acquire new land and building in the previous year in which the Govt. acquires the land and

building and he still wants to avail the benefit of exemption during the previous year itself,

he can do so by depositing the amount of capital gains in "Capital gains deposit account

scheme" upto the last date of filing of return of income. However, the assessee will have to

withdraw money from the deposit account for acquiring new land and building within the

stipulated period; Otherwise, the exemption availed will be forfeited and will become taxable

in the year when the three year period elapses; the amount of capital gains will be taxable

either as short term or long term capital gains, as the case may be.



Example 5.14

BTC Ltd. purchased a building for running an industry on June 20, 1996 for Rs. 20

lac. The Govt. acquired this building on Oct. 20, 2008 and paid a compensation of Rs. 80 lac

on March 20, 2009. The company purchased another building on Aug. 20, 2009 for Rs. 40

lac and re-established the old industry, what is the taxable amount of capital gains for the

assessment year 2009-10 if the cost inflation indices for the years 1996-97 and 2008-09 are

305 and 582 respectively ?

Solution :

Computation of income from Capital gains of BTC Ltd.



Sales consideration being amount of compensation 80,00,000

Less : Indexed cost of acquisition [20,00,000x582/305] 38,16,393

Long Term Capital gains 41,83,607

Less : Exemption u/s 54D 40,00,000

Taxable amount of Long Term Capital Gains 1,83,607

5.5.4 Exemption in respect of long term capital gains on transfer of any capital asset when gain is invested in specified bonds :

As per section 54EC, the benefit of exemption from tax in respect of long term capital

gains accruing from transfer of any long term capital asset is available to all assessees. The

exemption is available when the assessee invests the amount of capital gains towards the

purchase of bonds of National Highways Authority of India and/or Rural Electrification

Corporation Ltd. within a period of six months from the date of transfer of the long term

capital asset. The amount of exemption will be equal to the amount of Capital gains so

invested.

It is essential for the availability of this exemption that the assessee does not transfer

the bonds within a period of three years from the date of their acquisition. If the assessee

transfers the bonds within three years of their purchase, the exemption availed by the

assessee will be forfeited. While calculating the amount of capital gains from transfer of

these bonds, their cost of acquisition will be reduced by the amount of exemption availed by

the assessee; the taxable amount of capital gains will increase exactly by the amount of

exemption availed earlier.

However, with effect from April 1, 2007, the maximum amount eligible for

exemption under this section is Rs. 50 lac. in a financial year. Also, cost of acquisition of the

specified bonds which is considered for the purposes of exemption under this section shall

not be eligible for tax rebate under section 88 or for deduction under section 80C.



Example 5.15

Mr. X sold a house property on Dec. 15, 2008 for Rs. 20 lac; he paid Rs. 40,000 by

way of brokerage. He purchased this house for Rs. 2 lac in May 2002 and spent Rs. 2 lac in

constructing four rooms in the year 2004-05. Mr. X purchased specified bonds of NHAI on

Jan. 15,2009 for Rs. 15 lac. What is the taxable amount of capital gains for the assessment

year 2009-10 if the cost inflation indices for the years 2002-03, 2004-05 & 2008-09 are 447,

480 and 582 respectively ?

Solution :

Computation of income from Capital gains of Mr. X








Less : Exemption u/s 54 EC subject to a maximum of the

amount of long term Capital gains 14,57,097

Taxable amount of Long Term Capital Gains Nil

5.5.5. Exemption in respect of long term capital gains on transfer of any capital asset other than a residential house when the net consideration is invested in acquisition of a residential house.

As per section 54F, the benefit of exemption from tax in respect of long term capital

gains accruing from transfer of any capital asset other than a residential house is available to

an assessee who is either an individual or an HUF. The exemption is available if the assessee

invests the amount of net sale consideration i.e., sale consideration minus the amount of

transfer expenses, towards the acquisition of a residential house property. The exemption will

be in proportion to the amount of net consideration invested in acquisition of the house. In

the event of purchase of the residential house the purchase should be effected within one year

before or two years after the transfer of the original asset; in the case of construction, the

construction should be completed within three years from the date of transfer of the original

asset. Date of commencement of construction is not relevant. The time limit of one year, two

years or three years as stated above in the case of compulsory acquisition by the Govt. shall

be determined from the date of receipt of compensation from the Govt.

It is note worthy that this exemption is available only if on the date of transfer of the

original asset, the assessee does not own more than one residential house other than the new

house. Also, the assessee should not purchase within a period of two years after such date or

complete the construction within a period of three years after such date any residential house

other than the new house, otherwise, the exempted amount will become taxable as long term

capital gains of the year in which another house is acquired. The essential condition for the

availability of this exemption is that the assessee should not transfer the residential house so

acquired within three years from the date of its acquisition; otherwise, the exemption availed

will be forfeited. Capital gain which arises on the transfer of the new house will be taken as

short term capital gain. Also, the amount of capital gain exempted u/s 54F shall be treated as

long term capital gain of the year in which the new house is transferred.

If the assessee wants to avail the benefit of this exemption during the previous year in

which the original capital asset is transferred without investing the amount of net

consideration towards acquisition of one residential house during the previous year itself, he

can do so by depositing the amount of net sale consideration in the "Capital gains deposit

account scheme" upto the last date of filing of return of income. However, the assessee will

have to withdraw the amount of deposit within the stipulated time for acquisition of the

residential house, as stated above. If he fails to do so, he will be liable to pay tax on the

proportionate amount of capital gains in respect of the amount of net sale consideration not

so invested as income from long term capital gains as income of the year in which the three

year period from the date of transfer of the original asset expires.

The provisions relating to availability of this exemption can be understood with the


Example 5.16

Mr. X sells a plot of land for Rs. 18 lac on July 10, 2008; he purchased it in December

2000 for Rs. 2 lac. He incurred Rs. 20000 by way of transfer expenses. He deposits Rs.

8,90,000 on June 10, 2009 in Capital Gains Deposit Account Scheme. He withdraws Rs. 8

lac from the deposit account of June 20, 2010 and purchases a residential house. What is the

taxable amount of capital gains for the assessment year 2009-10 if the cost inflation indices

for the years 2000-01 and 2008-09 are 406 and 582 respectively ?

Solution :

Computation of income from capital gains of Mr. X




Less : Transfer Expenses 20,000

Net Sale Consideration 17,80,000

Less : Indexed Cost of acquisition [2,00,000x582/406] 2,86,700


Less : Exemption u/s 54 F [14,93,300x8,90,000/17,80,000] 7,46,650

Taxable amount of long term Capital Gains 7,46,650

Note : Mr. X did not fully utilise the amount of deposit towards acquisition of the

residential house. Therefore, a part of the exemption availed will be forfeited which will be

equal to :

Original amount of unutilised amount of capital gain deposit

Net Sale Consideration

= Rs. 14,93,300 x (8,90,000-8,00,000)/17,80,000 = Rs. 76,066/-

Hence, actual amount of exemption available to the assessee u/s 54F = Rs. 746650 –

Rs. 76066 = Rs. 6,70,584/-. The forfeited amount of exemption which is Rs. 76,066 will be

taxable as long term capital gains after the expiry of three years from the date of transfer of

the plot i.e. July 9, 2011. The unutilised amount of the deposit i.e., Rs. 90,000 can be

withdrawn by the assessee at any time after July 9, 2011.

5.5.6 Exemption in respect of short term and long term capital gains arising on transfer of assets on shifting of industrial undertaking

from urban area to rural area.

As per section 54G, the benefit of exemption from tax in respect of short term and

long term capital gains arising on transfer of assets being plant, machinery, land and building

on shifting of industrial undertaking from urban area to rural area is available to all assessees.

The exemption is available if the assessee invests the amount of capital gains towards the

purchase of plant, machinery and land and towards the purchase/construction of building to

be used in the business which is shifted to rural area. The Govt. may specify certain other

expenses which may qualify for this exemption. The investment in acquiring the 'new' assets

should be made within a period of one year before or three years after the date on which the

original asset is transferred.

For availability of the exemption it is essential that the assessee should not transfer

the 'new' assets before the expiry of three years from the date of their acquisition; otherwise,

the exemption availed will be forfeited. At the time of computing short term capital gains

from the transfer of 'new' assets, the amount of exemption availed earlier will be substracted

from the cost of their acquisition; this will increase the amount of short term capital gains

exactly by the amounts of exemption availed.

The assessee can avail the benefit of this exemption during the previous year itself in

which the original assets are transferred without investment in 'new' assets during the

previous year by depositing the amount of capital gains in the "capital gains deposit account

scheme" upto the last date of filing of return of income. However, the assessee will have to

invest the amount of deposit towards the acquisition of 'new' assets within the specified time

period; otherwise, the exemption will be forfeited. The amount of deposit not so utilised shall

be chargeable as capital gains of the previous year in which the period of three years from

the date of transfer of the original asset expires; it will be chargeable as short term or long

term capital gain depending on the type of original amount of capital gain.

It is noteworthy in this connection that the exemption is not available in respect of the

investment in furniture at the place where the undertaking is shifted.

The application of the provisions relating to this exemption can be understood with

the help of the following example.

Example 5.17

PQR Ltd. has set up a business in Faridabad in the year 1985. The industrial unit is

proposed to be shifted to a rural area. The details of the assets acquired and sold are as

follows :

Plant and Particulars Machinery Land Building

Cost of acquisition in July 1985 - 1,00,000 -

Written down value on April 1,2008 12,00,000 - 22,00,000

Sales Consideration on Aug. 10, 2008 60,00,000 50,00,000 90,00,000

Cost of acquisition of assets for shifting business to rural area 40,00,000 10,00,000 50,00,000

The business of the undertaking is shifted by March 31, 2009. What is the taxable

amount of capital gains for the assessment year 2009-10 if the cost inflation indices for the

year 1985-86 and 2008-09 are 133 and 582 respectively ?

Solution :

Computation of income from Capital gains of PQR Ltd.


Plant and Particulars Machinery Land Building

Sales consideration 60,00,000 50,00,000 90,00,000

Less : Indexed cost of acquisition of Land [1,00,000x582/133] - 4,37,594 -

Cost of acquisition [written down value on April 1, 2008] 12,00,000 - 22,00,000 Long term Capital gains - 45,62,406 -

Short term Capital gains 48,00,000 - 68,00,000

Less : Exemption u/s 54G [Proportion- ately in the ratio of 48 : 68] 41,37,931 - 58,62,069

Taxable amount of long term Capital Gains - 45,62,406 -

Taxable amount of short term Capital gains 6,62,069 - 9,37,931

Note : Since the total amount of capital gain accrued during the previous year is more

than Rs. 1 Crore viz., the cost of acquisition of assets as regards shifting of the industry to

rural area, exemption would first be available as regards short term capital gains because tax

incidence is higher in respect of the short term capital gains. Exemption relating to long term

capital gains would be available when investment exceeds the amount of short term capital

gains which is not the case in this example.

5.5.7 Exemption in respect of short term and long term capital gains arising on transfer of assets on shifting of industrial undertaking from urban area to Special Economic Zone.

As per section 54GA, the benefit of exemption from tax in respect of short term and

long term capital gains arising on transfer of assets being plant, machinery, land and building

on shifting of industrial undertaking from urban area to Special Economic Zone (SEZ) is

available to all assessees. The exemption is available if the assessee invests the amount of

capital gains towards the purchase of plant, machinery and land and towards the acquisition

(i.e., purchase as well as construction) of building at the SEZ to be used for the industry

which is shifted to SEZ. The investment in acquiring the 'new' assets should be made within

a period of one year before or three years after the date on which the original asset is

transferred.

It is essential that the assessee should not transfer the 'new' assets before the expiry of three years from the date of their acquisition; otherwise, the exemption availed will be forfeited. At the time of computing short term capital gains from the transfer of 'new' assets, the amount of exemption availed earlier will be deducted from the cost of their acquisition; this will result in enhancement of the amount of short term Capital gains exactly by the amount of exemption availed.

The assessee can avail the benefit of this exemption during the previous year in which

the original assets are transferred without investment in new assets during the previous year

itself by depositing the amount of capital gains in the "Capital gains deposit account scheme"

upto the last date of filing of return of income. However, the assessee will have to invest the

amount of deposit towards the acquisition of 'new' assets within the specified time period;

otherwise, the exemption availed will be forfeited. The amount of deposit not so used shall

be chargeable as capital gains of the previous year in which the period of three years from

the date of transfer of the original asset expires; it will be chargeable as short term or long

term capital gain depending on the type of original amount of capital gain.

It is noteworthy in this connection that the exemption is not available in respect of

investment in furniture at the place where the undertaking is shifted. It is also noteworthy, in

this connection, that the provisions relating to section 54G are similar to the provisions

relating to section 54 GA.

5.6 EXTENSION OF TIME LIMIT FOR ACQUIRING NEW ASSET

In the event of compulsory acquisition of assets of an assessee by the Govt., the time

limit for acquiring new assets for availing exemption under section 54, 54B, 54D, 54EC and

54F starts from the year in which the amount of initial compensation is received by the

assessee from the Govt. Also, when amount of compensation is received in parts then the

time limit for acquisition of new assets will be applicable separately for each part received by

the assessee. Further, in the event of enhancement in the amount of compensation, the time

limit for acquisition of new assets will start from the date of receipt of enhanced amount of

compensation.

5.7 COMPLICATIONS RELATING TO COMPUTATION OF INCOME FROM CAPITAL GAINS AND SUGGESTIONS TO OVERCOME THEM

The process of computing income from capital gains is found to be complicated on

the basis of the following facts :

5.7.1 Complications relating to determination of 'period of holding'

The expression 'period of holding' occupies a pivotal position in regard to

determination of income from capital gains. If an asset is held for more than 36 months (in

the case of five assets for more than 12 months), on the date of its transfer, the capital gain

thus accruing is treated as long term capital gain which is chargeable to tax at a lower rate

than the short term capital gains. Also, number of exemptions in respect to long term capital

gains is more than those available in respect of short term capital gains. But 'period of

holding' is not as simple to determine as it seems to be, the period of holding has to be

determined differently in as many as 11 situations as given below :

(1) In respect of capital asset which becomes the property of the assessee in the

circumstances mentioned in section 49(1) read with section 2(42A) while determining

the period of holding by the assessee, the period for which the asset was held by the

previous owner has to be included.

(2) In respect of shares held by an assessee in a company in liquidation–While

determining the period of holding by the assessee on the date of transfer, the period

subsequent to the date on which the company goes into liquidation shall be excluded.

(3) In respect of shares allotted in amalgamated Indian company in lieu of shares held in

amalgamating company–The period of holding shall be counted from the date of

acquisition of shares in the amalgamating company.

(4) In respect of bonus shares, right shares and sweat equity shares, the period of holding

is counted from the date of allotment of such shares.

(5) In respect of right entitlement, the period of holding is considered from the date of

offer to subscribe the shares to the date when such right entitlement is renounced by

the concerned person.

(6) In respect of issue of shares, in a scheme of demerger, by the resulting company to the

shareholders of the demerged company, the period of holding shall be counted from

the date of acquisition of shares in the demerged company.

(7) In respect of transactions in shares and securities through stock exchanges other than

the above, the date of purchase shall be the date of purchase by broker on behalf of

the investor in shares and securities.

(8) In respect of transactions in shares and securities through stock exchange, other than

the above first 6 transactions, date of transfer shall be the date of broker's note

provided such transactions are followed up by delivery of shares and also the transfer

deeds.

(9) In respect of transactions in shares and securities without stock exchanges, other than

the above, date of purchase/transfer of shares/securities shall be the date of contract of

sale declared by the parties if it is followed up by actual delivery of shares and

securities and the transfer deeds.

(10) In respect of transactions in shares and securities purchased in several lots at different

points of time and delivery taken subsequently for being sold in parts, where the dates

of purchase and sale cannot be correlated through specific number of the scrips, the

FIFO method shall be adopted to calculate the period of holding of the

shares/securities. Thus, the assets acquired last will be taken to be remaining with the

assessee and assets acquired first will be treated as sold.

(11) In respect of transfer of a security by a depository through demat account, the period

of holding shall be determined on the basis of first-in-first-out (i.e. FIFO) method.

The CBDT vide its Circular No. 768, dated June 24, 1998 has issued the following

clarifications on FIFO system :

(a) FIFO method will be applied only in respect of the dematerilised holding because in

case of sale of dematerialised securities, the securities held in physical form cannot be

construed to have been sold as they continue to remain in possession of the investor

and are identified separately.

(b) In the depository system, the investor can open and hold multiple accounts. In such a

case, where an investor has more than one security account FIFO method will be

applied account wise. This is because in case where a particular account of an

investor is debited for sale of securities, the securities lying in his other account

cannot be construed to have been sold as they continue to remain in that account.

(c) If in an existing account of dematerialised stock, old physical stock is dematerialised

and entered at a later date, under the FIFO method, the basis for determining the

movement out of the account is the date of entry into the account.

5.7.1.1. Suggestions to remove the complications–It is humbly submitted that the

complications regarding the determination of "period of holding" as discussed above in

Section 5.7.1 and regarding the meaning of "transfer" and determination of "cost of

acquisition" as discussed below under sections 5.7.2 and 5.7.3 need to be addressed seriously

in right earnest. The complications inherent in these provisions make it difficult to

understand the law in its right spirit. In view of the fact that "period of holding" is

determined in as many as 11 situations; meaning of "transfer" varies in as many as 26

situations and "cost of acquisition" is determined differently in as many as 17 situations, it

becomes all the more essential and necessary that "once for all" solution of the problems

needs to be devised rather than introducing "ad-hoc" solution. The related tax law requires to

be recast to make it simple so that people understand it in its right spirit; it should become

crystal clear and devoid of ambiguity.

The view of the respondents could not be synthesised as their opinions were found to

be diversified. No concrete solution could be made out while analysing their suggestions.

The answers of some respondents were incomplete, some could not appreciate the problem at

hand and the replies of certain others were found to be evasive.

To this end, it is proposed that a Committee/Commission be set up by the

Government which would recast the related tax law to make it logical, simple and easy to

comprehend. The proposed committee/commission should keep in mind the objective of

voluntary tax compliance by the assessees on the one hand and the objective of reducing the

incidence of litigation on the other.

5.7.2 Meaning of 'transfer' is sometimes impracticable and difficult to comprehend especially in the light of provisions given under different clause of section 47

The Supreme Court has held that the definition of 'transfer' under section 2(47) is

merely inclusive and, thus, it does not exhaust other kinds of transfer1. Therefore, if a

particular situation has not been contemplated specifically in the section but is otherwise

understood as transfer in common parlance, it ought to be covered within the definition of

'transfer'. Moreover, the definition is not applicable in respect of asset other than capital

asset. For the purpose of section 45, the following transactions are not regarded as transfer;

therefore, any profit or gain arising on the following transactions is not chargeable under the

head "Capital gains" and, thus, any loss arising therefrom is not liable to be set off against

other income of the assessee :

(1) Distribution of asset in kind by a company to its shareholders at the time of

liquidation–As per section 46(1), if capital assets are distributed in kind by a company

to its shareholders on its liquidation, such a distribution is not treated as transfer.

(2) Distribution of Capital asset on total or partial partition of HUF–As per section 47(1),

any distribution of capital asset in kind by an HUF on total or partial partition of the

family is not treated as a 'transfer'.

(3) Transfer of capital asset under a gift or will or an irrevocable trust–As per section

47(iii), transfer of a capital asset in kind under gift, will or an irrevocable transfer is

not treated as 'transfer'. However, the gift of shares/debentures/warrants will be

treated as 'transfer' when these are gifted by an employee of a company who has been

allotted these by his employer company under a notified Employee's Stock Option

Plan/Scheme in accordance with the guidelines issued by the Central Govt.

(4) Transfer of a capital asset by a company to its wholly owned subsidiary company–As

per section 47(iv), transfer of capital asset by a holding company or its nominee to a

wholly owned Indian subsidiary company is not treated as 'transfer'. However, this

rule is not applicable with effect from March 1, 1988 in the case of a capital asset

which is transferred as stock-in-trade.

(5) Transfer of a capital asset by a wholly owned subsidiary company to its holding

company–As per section 47(v), transfer of capital asset by a wholly owned subsidiary

company to its Indian holding company is not treated as "transfer". However, transfer

of capital asset as stock-in-trade with effect from March 1, 1988 is treated as

"transfer".

(6) Transfer of capital assets in a scheme of amalgamation–As per section 47(vi), transfer

of capital asset in a scheme of amalgamation by amalgamating company to the Indian

amalgamated company is not treated as "transfer".

(7) Transfer of shares in an Indian company held by a foreign company to another foreign

company under a scheme of amalgamation of the two foreign companies–As per

47(via), the transaction of transfer of shares in a scheme of amalgamation, in an

Indian company which are held by a foreign amalgamating company to another

foreign amalgamated company does not attract tax on capital gains in the country in

which the amalgamating company is incorporated. The transaction in such a case is

not regarded as "transfer" if persons holding at least 25% (in value) shares in the

amalgamating foreign company become shareholders in the amalgamated foreign

company.

(8) Transfer of capital assets in a scheme of amalgamation of a banking company with a

banking institution–As per section 47 (VI a a), any transfer of a capital asset by a

banking company to a banking institution in a scheme of amalgamation of such

banking company with such banking institution is not treated as "transfer".

(9) Transfer, in a demerger, of a capital asset by the demerged company to resulting

company–As per section 47 (VI b), the transaction of transfer of capital asset by

demerged company to the resulting Indian company is not treated as "transfer".

(10) Transfer of shares held in an Indian company by a demerged foreign company to the

resulting foreign company–As per section 47(VI c), the transaction of transfer of

shares held by a demerged foreign company in an Indian Company, in a scheme of

demerger, to the resulting foreign company is not treated as "transfer" in the country

in which the demerged company is incorporated when persons holding at least 75%

(in value) shares in the demerged foreign company become shareholders in the

resulting foreign company. The transaction, thus, does not attract capital gains tax.

(11) Transfer of a capital asset, in a business reorganisation, by the predecessor co-

operative bank to the successor co-operation bank–As per section 47 (VI c a), any

transfer, in a business reorganisation, of a capital asset by the predecessor co-

operative bank to the successor co-operative bank is not treated as "transfer" with

effect from April 1, 2008.

(12) Transfer of a capital asset by a shareholder, in a business reorganisation, held in the

predecessor co-operative bank in consideration of share in the successor co-operative

bank.

As per section 47 (VI c b), any transfer, in a business reorganisation, of a

capital asset being a share or shares held by him in the predecessor co-operative bank

when the transfer is made in consideration of the allotment to him of any share or

shares in the successor co-operative bank is not treated as "transfer" with effect from

April 1, 2008.

(13) Transfer of shares by the resulting company, in a scheme of demerger, to the share

holders of the demerged company–As per section 47 (VI d), when shares are issued

by the resulting company to the shareholders of the demerged company, in a scheme

of demerger, in consideration of demerger of the undertaking, the transaction is not

treated as "transfer".

(14) Allotment of shares in amalgamated company in lieu of shares held in amalgamating

company–As per section 47 (vii), allotment of shares in amalgamated Indian company

to the shareholders of the amalgamating company in consideration of surrender of

shares in the amalgamating company is not regarded as "transfer".

(15) Transfer of a capital asset being foreign currency convertible bonds or GDR by a non-

resident to another non-resident–As per section 47(vii a), a transaction in which a

capital asset being foreign currency convertible bonds or Global Depository Receipts

which is held by a non-resident is transferred outside India to another non-resident is

not regarded as "transfer".

(16) Transfer of agricultural land in India before March 1, 1970–As per section 47(viii), a

transaction involving transfer of agricultural land situated in India before March 1,

1970, is not regarded as "transfer".

(17) Transfer of a capital asset being work of art, manuscript, etc., to Govt., University,

etc.,–As per section 47(ix), any transaction involving transfer of a capital asset, being

any work of art, archaeological, scientific or art collection, book, manuscript,

drawing, painting, photograph or print, to the Govt. or a University or the National

Museum, National Art Gallery, National Archives or any such other public museum

or notified institution to be of national importance or to be of renown throughout any

state or states shall not be treated as "transfer".

(18) Transfer by way of conversion of bonds or debentures into shares–As per section

47(x), any transaction involving transfer by way of conversion of bonds or

debentures, debenture stock or deposit certificates in any form, of a company into

shares or debentures of that company shall not be treated as "transfer".

(19) Transfer by way of conversion of bonds of an Indian company issued in accordance

with the specified scheme of the Central Govt. or bonds of a public sector company

into shares or debentures of any company–As per section 47 (xa), any transaction

involving conversion of bonds of an Indian company issued in accordance with the

scheme of the Central Govt. notified in this regard or on bonds of a public sector

company sold by the Govt. and purchased by him in foreign currency, into shares or

debentures of any company shall not be regarded as transfer.

(20) Transfer by way of exchange of a capital asset being membership of a recognized

stock exchange for shares of a company–As per section 47 (xi), a transaction

involving the transfer of 'capital asset being membership of a recognized stock

exchange by a non-company assessee to a company in exchange of shares allotted by

that company to the transferor on or before Dec., 31,1998, shall not be treated as

"transfer".

(21) Transfer of land by a sick industrial company which is managed by its workers' co-

operative–As per section 47 (xii), a transaction involving the transfer of a capital asset

being land of a sick industrial company, which is managed by its worker's co-

operative, under a scheme prepared and sanctioned under section 18 of Sick Industrial

Companies (Special Provisions) Act, 1985 which is made during the period

commencing from the previous year in which the said company has become sick

industrial company and ending with the previous year during which the entire net

worth of such company becomes equal to or exceeds the accumulated losses shall not

be regarded as "transfer". "Net worth" for this purpose is paid up share capital and

free reserve. "Free reserves" for this purpose means all reserves credited out of the

profits and share premium account but does not include reserves credited out of re-

evaluation of assets, write back of depreciation provisions and amalgamation.

(22) Transfer of a capital asset by a firm to a company in the case of conversion of firm

into company–As per section 47 (xiii), transfer of capital asset by way of conversion

of a partnership firm into a company or by way of demutualisation or corporatisation,

which is approved by SEBI, of a recognized stock exchange in India as a result of

which AOP/BOI owning the stock exchange is converted into a company, shall not be

treated as "transfer" when the following conditions are fulfilled :

(a) All the business assets and liabilities of the firm/AOP/BOI immediately before

conversion are takeover by the company.

(b) All the partners of the firm immediately before conversion become the

shareholders of the company.

(c) The partners of the firm do not receive any consideration or benefit, directly or

indirectly, in any other form other than by way of allotment of shares, equity and

preference both, in the company.

(d) The partners of firm become shareholders in the company in the same proportion

in which their capital accounts stood in the books of the firm on the date of the

conversion.

(e) The aggregate of the shareholding in the company of the partners of the firm is

not less than 50% of the total voting power in the company and then share

holding continues to be as such for a period of 5 years from the date of

succession.

(23) Transfer of a capital asset being a membership right held by a member of a

recognized stock exchange in India–As per section 47 (xiii a), the process of

demutualisation and corporatisation of stock exchanges have been made tax neutral.

To this end, when capital asset which is membership right held by a member of a

recognized stock exchange in India is transferred for acquiring shares and

trading/clearing right in the stock exchange in accordance with a scheme, approved

by SEBI, for demutualisation or corporatisation of the stock exchange, it is not treated

as "transfer".

In the membership card of a stock exchange two rights–right of trading and

undivided interest in the ownership of the stock exchange, are available. The process

of demutualisation of the stock exchange involves regregation of these two rights into

two independent rights–

(a) the right to participate in the ownership of assets of the stock exchange by

issuance of shares in the new corporate body; and

(b) the right to trade on stock exchanges. In this way, the membership card is

exchanged for the shares and the right to trade on the stock exchange.

(24) Transfer of a capital asset to a company in case of conversion of proprietary concern

into a company–As per section 47(XIV), when a sole proprietary concern is converted

into a company whereby all its business assets and liabilities immediately before

conversion are taken over by the company and it does not receive any consideration

directly or indirectly in any form or manner other than by way of allotment of shares

in the company and its share holding in the company is not less than 50% of the total

voting power in the company which will continue to remain so for a period of 5 years

from the date of succession, the transaction is not treated as "transfer".

(25) Transfer involved in a scheme of lending of securities–As per section 47 (XV), any

transfer involved in a scheme for lending of any securities under an agreement or

arrangement subject to the guidelines issued by SEBI or RBI in this regard, which the

assessee has entered into with the borrower of such securities is not treated as

"transfer".

(26) Transfer of a capital asset in a transaction of reverse mortgage made under a scheme

notified by the Govt.–As per section 47(xvi), a transaction involving the transfer of a

capital asset in a transaction of reverse mortgage under a scheme made and notified

by the Govt. is not treated as "transfer".

5.7.3 Difficulties relating to determination of 'cost of acquisition'

'Cost of acquisition' is determined differently in different situations which makes the

process complicated. The expression 'cost of acquisition' carries following notions according

to different situations :

(1) Fair market value–As per section 46(2), when a shareholder of a company gets assets

from the company at the time of its liquidation, fair market value of such assets on the

date of their distribution by the company to the shareholders will be treated at 'cost of

acquisition' in the hands of such shareholder at the time of determining the amount of

capital gains when such assets are transferred by the shareholders. It is noteworthy in

this connection that, as per section 46(1), capital gain is not chargeable in the hands of

the company at the time assets are distributed to shareholders at the time of its

liquidation because such distribution, is not regarded as 'transfer'.

(2) Actual payment or fair market value–As per section 49 (2AA)/(2AB), in the case of

allotment of shares/securities by a company to its employees under Employee's Stock

Option Plan/Scheme which is approved by the Central Govt., Cost of acquisition will

be different depending on the year of their allotment as follows :

(a) If shares are allotted during the previous year 1999-2000, market value of

shares/securities on the date of exercise of option;

(b) If the option is exercised in any other year upto March 31, 2007, amount actually

paid by the employee to acquire the shares/securities; and

(c) If the option is exercised on or after April 1, 2007, fair market value of

shares/securities on the date of vesting of the option with the employee; purchase

price paid to the employer or FBT paid to employer shall not be considered.

(3) Cost of acquisition of shares–As per section 49(2), cost of acquisition of shares of the

amalgamating company in respect of allotment of shares in an amalgamated Indian

company to the shareholders of amalgamating company in a scheme of amalgamation

of the two companies shall be the cost of shares of the amalgamated company.

(4) Appropriated part of cost–As per the section 49(2A), in the case of conversion of

debentures/debenture stock/deposit certificates of a company into shares or

debentures of that company, cost of acquisition shall be the part of the cost of

debentures etc. which has been appropriated towards the shares or debentures.

(5) Proportionate net book value of assets–As per section 49(2C) in respect of allotment

of shares in Indian resulting company to the shareholders of demerged company

before demerger, cost of acquisition of the shares in the resulting company shall be

the amount which bears to the cost of acquisition of shares held by the assessee in the

demerged company the same proportion as the net book value of the assets transferred

in a demerger bears to the net worth of the demerged company immediately before

such demerger. For this purpose, "net worth" shall mean the aggregate of the paid up

share capital and general reserves as appearing in the books of account of the

demerged company immediately before its demerger. In other words, cost of

acquisition in such a case will be :

Cost of acquisition of shares in Net book value of assets transferred demerged company in demerger

Net worth of the demerged company immediately before demerger

(6) Cost of acquisition minus the proportionate amount of net book value of assets–As

per section 49(2D), cost of acquisition of original shares held by the shareholder in

the demerged company after demerger shall be deemed to have been reduced by the

amount as so arrived at under section 49 (2C) as stated above.

(7) Written down value on first day of the previous year plus actual cost of the assets

acquired during the year–As per section 50, cost of acquisition in the case of

depreciable assets, other than those used in a power generating unit, is equal to the

sum of the written down value of the block of assets at the beginning of the previous

year and the actual cost of any asset falling within the block of assets acquired at any

time during the previous year.

(8) Written down value of the asset minus terminal depreciation plus balancing charge–

As per section 50A, in respect of depreciable assets of a power generating unit which

can have only straight line method of computing depreciation in respect of tangible

assets acquired after March 31, 1997, for tangible assets acquired before April 1,

1997, a power generating unit can use only written down value basis for computing

depreciation, cost of acquisition is arrived at by adding the amount of balancing

charge to the written down value of the asset and then by substracting the amount of

terminal depreciation from the amount so arrived at. The terms 'terminal depreciation'

and 'balancing charge' have already been explained in chapter 4.

(9) Net worth of an undertaking–As per section 50B, in respect of an undertaking or

division which is acquired by way of slump sale, the "net worth" of the

undertaking/division shall be taken at cost of acquisition and cost of improvement.

"Net worth" for this purpose is the aggregate value of total assets of the undertaking

or division as reduced by the value of liabilities of such undertaking or division as

appearing in the books of account. Any change in the value of assets on account of

revaluation of assets shall be ignored for the purpose of computing the net worth. In

the case of non-depreciable assets, the aggregate of total assets shall be the book

value of such assets. In the case of depreciable assets the aggregate of total assets

shall be the written down value of block of assets determined in accordance with the

provisions contained in sub-item (c) of section 43(b) (c) (i). "Slump sale", as per

section 2 (42C) means the transfer of one or more undertakings as a result of the sale

for a lump sum consideration without values being assigned to the individual assets

and liabilities in such sales.

(10) Actual cost of acquisition minus the amount of exemption claimed–As per section 54,

54B, 54D, 54G and 54GA, if the new asset acquired for claiming exemption u/s 54,

54B, 54D, 54G and/or 54GA is transferred within three years of its acquisition, cost

of acquisition of such asset will be equal to the actual cost of its acquisition minus the

amount of exemption claimed under these sections in respect of transfer of the

original asset.

(11) Cost of acquisition to the previous owner/Actual cost of acquisition/zero–In the case

of the following assets cost of acquisition is determined differently under different

situations–

(a) goodwill of business;

(b) trade mark;

(c) brand name associated with business;

(d) right to manufacture, produce or process any article or thing;

(e) right to carry on any business;

(f) tenancy right;

(g) stage permits; and

(h) loom hours.

If these assets are acquired by gift, will, etc., under section 49(1) and the previous

owner had purchased these assets, cost of acquisition in the hands of the present

assessee will be equal to the cost of acquisition of the asset to the previous owner. If

the assessee himself acquired these assets, actual cost of acquisition incurred by the

assessee will be taken to be the cost of acquisition for the assessee. If these assets are

generated by the assessee himself without acquiring from any other person, cost of

acquisition to the assessee will be taken to be zero.

(12) Amount actually paid/zero–In the case of right shares and right entitlement, cost of

acquisition is determined differently under different situations as stated below :

(i) In respect of original shares on the basis of which the taxpayer becomes entitled

to right shares, cost of acquisition will be the amount actually paid for acquiring

the shares;

(ii) In respect of right entitlement which is renounced by the assessee in favour of a

person, cost of acquisition will be taken to be zero;

(iii) In respect of right shares acquired by the taxpayer by exercising his rights

entitlement, cost of acquisition will be taken to be the amount actually paid by

the taxpayer for acquiring the asset; and

(iv) In respect of rights shares purchased by the person in whose favour the rights

entitlement has been renounced, cost of acquisition will be taken to be the

purchase price paid to renouncer of rights entitlement plus amount paid to the

company which has allotted the rights shares.

(13) Fair market value on April 1, 1981/Zero–In the case of bonus shares allotted to an

assessee before April 1, 1981, cost of acquisition shall be the fair market value on

April 1, 1981. If bonus shares are allotted on or after April 1, 1981, cost of acquisition

shall be taken to be zero. As per section 94(8), when an assessee transfers original

units within a period of 9 months after the record date and continues to hold the bonus

units, the amount of loss arising on account of purchase and sale of the original units

shall be ignored for the purpose of computing his taxable income and the amount of

such loss shall be deemed to be the cost of purchase/acquisition of bonus shares held

on the date of such transfer or sale.

(14) Cost of acquisition of original membership of the stock exchange/zero–As per section

55(2) (ab), when a stock exchange is converted into company and member of the

stock exchange are allotted equity shares in newly formed stock exchange, cost of

acquisition of such shares shall be taken to be the cost of acquisition of membership

ticket in the old stock exchange. In such a situation when member of the old exchange

are allotted right to trade in the newly formed stock exchange as a corporate entity,

cost of acquisition of the rights shall be taken to be nil.

(15) Cost of acquisition of stock or shares–In the event of stock or shares becoming

property of the assessee on consolidation or conversion, cost of acquisition of such

stock or shares shall be taken to be the cost of acquisition of stock of shares from

which such asset is derived.

(16) Zero Cost–As per section 45(5), in respect of the additional compensation in the cast

of compulsory acquisition of a capital asset under any low, if any compensation is

enhanced by a court, tribunal or any authority, the cost of acquisition (and also the

cost of improvement) shall be taken to be zero.

(17) Cost of acquisition to the previous owner or fair market value on April 1, 1981,

whichever is higher/cost to the previous owner/actual cost of acquisition– In respect

of capital asset other than the one involved in any of the above 16 cases, if it became

the property of the assessee before April 1, 1981 by gift, will, etc. in any of the modes

specified in section 49(1), cost of acquisition will be taken to be the amount of cost of

acquisition to the previous owner or fair market value as on April 1, 1981, whichever

is higher. If the assessee himself acquired it before April 1, 1981, cost of acquisition

shall be taken to be the actual cost of acquisition or fair market value as on April 1,

1981, whichever is more. If it became the property of the assessee after April 1, 1981

by gift, will, etc., in modes specified in section 49(1), cost of acquisition to the

assessee will be taken to be the cost of acquisition to the previous owner. If the

assessee himself acquired it on or after April 1, 1981, cost of acquisition will be taken

to be the actual amount incurred by the assessee as cost of acquisition.

5.7.4 Difficulties relating to determination of 'cost of improvement'

In relation to the three capital assets–(i) goodwill of a business; (ii) a right to

manufacture, produce or process any article or thing; and (iii) right to carry on any business,

cost of improvement is always taken to be nil whether these assets are self-generated by the

assessee or these are purchased by the assessee and whether these are acquired by the

assessee by gift, will, etc., under the provisions of section49(i) from the previous owner or

otherwise. This leads to confusion; the provision becomes difficult to comprehend. This is

corroborated by the decision of the Madras High Court1 whereby it was held that there can be

cost of improvement even in the case of an intangible asset.

In view of the fact that there can be cost of improvement even in the case of an

intengible asset, the provisions being applied as per the existing law will be come more

logical if the cost incurred on improvement of intangible assets is taken into consideration as

the cost of improvement which at present is always treated as nil. The decision of the Madras

High Court in S. Villiammai's case as given above requires to be made the law.

5.7.4.1 Suggestion to overcome the difficulty–Incurring cost of improvement is

possible with respect to these assets by the assessee as well as by the previous owner both.

Also, cost of improvement can be incurred in both the cases–When the assessee purchases

these assets and when these assets are self generated by him. So, there does not seem to be

any point in ignoring cost of improvement incurred in relation to these assets. Cost of

improvement in relation to these assets should be treated to be alike the way it is dealt with in

relation to capital assets other than these. Seventy six percent of respondents have suggested

that, the distinction between (i) goodwill of a business,(ii) right to manufacture, produce or

process any article/thing, and (iii) right to carry on any business on the one hand and other

capital assets on the other, requires to be done away with. This will simplify the law; as also,

the law, on this point, will become more logical.

5.7.5 Difficulties relating to indexation of 'cost of acquisition and 'cost of

improvement'

The formula for computing the indexed cost of acquisition under the fourth situation

i.e., where capital asset is acquired by the assessee on or after April 1, 1981 in any of the

modes specified under section 49(1) but it was originally acquired by the previous owner

before April 1, 1981, does not seem to be logical. When the assessee is allowed the option of

choosing either the fair market value of the asset on April 1, 1981 or cost of acquisition to

the previous owner, whichever is higher to be the cost of acquisition then the denominator in

the formula should not have been restricted to what it is at present viz., "cost inflation index

for the year in which the asset was first held by the assessee".

Also, the computation of "cost inflation index", in itself, is not always logical for its

being based on 75% of average rise in the Consumer Price Index for urban non-manual

employees of the immediately preceding previous year to the previous year in question.

Moreover, as has been held by the Mumbai High Court1. That in case a property is acquired

by making payments by instalments, the benefit of indexation is available from the date of

acquisition of the property.

5.7.5.1 Suggestions to remove the difficulties relating to indexation–Firstly, it,

would be in the fitness of things that the denominator in the formula for indexation of cost of

acqrisition in the fourth situation should be replaced by "cost inflation index for 1981-82

(i.e., 100)" instead of what it is in force today i.e., "cost inflation index for the year in which

asset was first held by the assessee". The denominator which is force goes against the

interests of the assessee; the amount of indexed cost of acquisition as a result of the use of

this denominator is abnormally reduced and is not reasonable. When the assessee is allowed

the option of choosing between the two–(i) fair market value on April 1, 1981 and (ii) cost of

acquisition to the previous owner, it would be more logical if the denominator in the formula

is changed to "cost inflation indexed for 1981-82 (i.e., 100). Eight-two percent of the

respondents have so desired it to be.

Secondly, in case a property is acquired by making instalments, the benefit of

indexation should be made available from the date of payment of various instalments and not

from the date of acquisition of the property which is what is being applied today. It is humbly

submitted that the decision of the Mumbai High Court in the case of Charanbir Singh Jolly,

as stated above, needs to be amended. The Govt. should introduce the required amendment.

5.7.6 Difficulties in computation of capital gains in the case of compulsory acquisition of capital asset–

In the case of compulsory acquisition of a capital asset and on the transfer of a capital

asset not by way of compulsory acquisition whereby the consideration is determined or

approved by the Central Govt. or the RBI, initial compensation is taken as full value of sale

consideration as per section 45(5). Capital gain in such a case is not taxable in the year in

which capital asset is transferred but it is taxable in the first year in which initial

compensation or part thereof is first received. Now the unreasonable law involved in this

provision is that the numerator used in the formula for computing indexed cost of acquisition

is the cost inflation index of the year in which the capital asset is transferred or it is acquired

by the Govt. this acts against the interests of the assessee because the assessee is not allowed

to use the cost inflation index of the year in which the initial compensation is paid by the

Govt. as the numerator in the formula for computing the indexed cost of acquisition. Thus,

the assessee looses the amount in regard to rise in the cost inflation index between the year of

transfer of the asset and the year in which initial compensation is paid to the assessee. This

does not seem to be fair because the assessee is penalised for no fault of his. Likewise,

enhanced compensation is taxable in the previous year in which it is received by the assessee

and, in this case, the cost of acquisition and the cost of improvement are taken to be nil. This,

again, does not seem to be justified because for getting the amount of compensation

enhanced the assessee has to incur the litigation expenses–which required to be deductible.

Even if enhanced compensation is subject matter of dispute by the Govt., such compensation

is considered to be the sales consideration of the year in which it is received for calculating

the amount of capital gains of that year.

5.7.6.1 Suggestions to remove the short comings–To make the law logical, it is

humbly suggested that the cost inflation index of the year in which initial compensation is

paid by the Govt. should be used as numerator in the formula for computing the indexed cost

of acquisition while calculating long term capital gains in the event of compulsory

acquisition of a capital asset by the Govt. as against the cost inflation index of the year in

which the asset is transferred by way of compulsory acquisition or otherwise. This cannot be

justified that asset is acquired in one year and payment is made after, say, six years and the

assessee is deprived of the benefit of inflation for the period of six years. Ninety-two percent

of the respondent's have so proposed it. Also, litigation expenses for getting the

compensation enhanced should be made deductible as expenses on transfer as has been held

by the Hyderabad High Court1 It is humbly submitted that the decision of the High court is

upheld by amending the present law on this point which forbids deduction of cost of

acquisition and the cost of improvement in respect of the enhanced compensation.

5.7.7. Difficulty in determining the time limit for acquiring the new asset while availing exemptions from capital gains tax

Total/partial exemption from capital gains tax is available under sections 54, 54B,

54D, 54EC, 54F, 54G and 54GA on account of investment made by an assessee within the

specified time limit for acquiring the new asset. Five types of time periods are applicable in

respect of the different exemptions as given below :

(1) For purchasing a new house and for constructing a new house–Under section 54 and

54F, the investment for purchasing a new residential house should be made within

one year before or within two years after, the date of transfer of the original long term

capital asset (house property as per section 54 and any other capital asset as per

section 54F). As regarding constructing a new residential property, the construction

should be completed within 3 years from the date of transfer of the original asset. In

the case of capital gain arising on the compulsory acquisition by the Govt., the time

limit of 1 year, 2 year or 3 year shall be determined from the date of receipt of

compensation whether initial or additional.

In case of construction of house property, date of commencement of

construction is irrelevent; it may commence even before the transfer of house.

(2) In the case of shifting of industrial undertaking from urban area–Under section 54G

and 54GA, the time limit for investment in new assets for claiming exemption is one

year before or 3 years after the date on which the transfer of the original assets took

place. Under section 54G, the industrial undertaking is shifted from urban area to

non-urban area and under section 54GA, the industrial undertaking is shifted from

urban area to Special Economics Zone. Exemption is available in respect of capital

gains accruing on transfer of plant, machinery, land or building or any right in land or

building in connection with the shifting of the industrial undertaking. The investment

for claiming exemption is made towards the purchase of new plant or machinery,

towards the acquisition of land or building, towards shifting the original asset and

towards incurring the expenses in respect of the specified purposes in the scheme

framed by the Central Govt. in this regard.

(3) In respect of purchase of new agricultural land in lieu of transfer of original

agricultural land–The time limit for investment towards the purchase of new

agricultural land under section 54B is 2 years from the date of transfer of the original

agricultural land. In case of compulsory acquisition of agricultural land by the Govt.,

the time limit of 2 years shall apply from the date of receipt of compensation from the

Govt. whether initial or additional.

(4) In respect of acquisition of new land or building on compulsory acquisition of

original land or building by the Govt.–The time limit of investment towards the

purchase/construction of any other land or building as per section 54D, is 3 years

from the date of receipt of compensation from the Govt. in respect to the compulsory

acquisition of land and buildings forming part of industrial undertaking belonging to

the assessee. The new land or building should be used for the purpose of shifting or

re-establishing the original undertaking or for setting up another industrial

undertaking.

(5) In respect of investment in long term bonds in regards to capital gains accruing on

transfer of a long term capital asset–The time limit for investment in bonds of

National Highway Authority of India and Rural Electrification Corporation with

regard to long term capital gains on transfer of long term capital asset, as per section

54EC, is 6 months from the date of transfer of the original asset. The exemption is

available if such bonds are redeemable after 3 years.

The applicability of so many time limits for acquiring the new asset for

availing the different exemptions, adds to complications which make the related tax

provision difficult to comprehend and apply.

5.7.7.1 Suggestions to overcome the difficulty–Actually the time limits can be

reduced to just two; it will not only simplify the tax law, it will also make it prove to

voluntary compliance.

In cases (1) and (2) above, the time limit for availing exemption u/s 54, 54F, 54G and

54GA could be made uniform; it is proposed that the time limit for investment in acquiring

(purchase and construction both) new asset should be allowed to be made within one year

before or within three years after, the date of transfer of the original asset. And in cases (3),

(4) and (5) as stated above, the time limit for availing exemption u/s 54B, 54D and 54EC

could be made uniform; it is proposed that the time limit for investment in acquiring the new

asset should be allowed to be made within 2 years after the date of transfer of the original

asset. Seventy-eight percent of the respondents have so proposed in this regard. These

suggestions, if implemented, will make the tax law easy to comprehend and it will, also, not

jeopardise the interests of Revenue in any way.

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COMPLICATIONS RELATING TO INCOME FROM CAPITAL GAINS...

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