Capital Gain Study

Mr. Sateesh K Nayak Mrs. Harshitha S Nayak

Capital Gain Taxation on Transfer of Commercial Property BVC & CO Chartered Accountants

Facts: Nature of the Capital Asset

Land and Building

Nature of the building

Commercial

Nature of ownership

Joint Ownership

Owner 1

Mr. Sateesh K Nayak

Owner 2

Mrs. Harshitha S Nayak

PAN of Mr. Sateesh

AALPN3687R

PAN of Mrs. Harshitha

ACHPN0428N

Address of the building

No.11, 12 & 13, Jalaram Industrial Estate, Arekere, Bannerghatta Road, Bengaluru – 560076

Date of Acquisition of the Site No. 11

02/07/1999

Cost of Acquisition of Site No. 11

Rs. 1,67,500/-

Date of Acquisition of the Site No. 12 & 13

02/11/1998

Cost of Acquisition of Site No. 12 & 13

Rs. 4,72,000/-

Cost of Construction

Rs. 62,57,950/-

Year of Construction of the building

FY 2006-07

Other Properties in the name of Mr. Sateesh

NIL

Other Properties in the name of Mrs. Harshitha

i)Flat at Prestige Pinewood ii)Flat #B7-1801, South City, Arekere Mico Layout, B’lore

Proposed Selling date

31/08/2021

Proposed sale amount

Land Building Total

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: Rs. 4 Crores : Rs. 2 Crores : Rs. 6 Crores

Points to be considered: 1) When will Capital Gain Arise?

As per Section 45 of the Income Tax Act, 1961, any profits or gains arising from the transfer of a capital asset effected in the previous year shall 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.

We shall check if there is a transfer of a capital asset in the present case.

2) What is Transfer?

Section 2(47) of the Income Tax Act, 1961 defines the term “Transfer” which is as follows: "Transfer", in relation to a capital asset, 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 (4 of 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.

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In the present case, since the owners are entering into a Sale Agreement to sell the land and building, the same will be considered as “transfer” by virtue of Clause (i) of Section 2(47).

3) Whether the asset is a Capital Asset?

Section 2(14) of the Income Tax Act, 1961 defines the term “Transfer” which is as follows:

"capital asset" means—

(a) property of any kind held by an assessee, whether or not connected with his business or profession;

(b) any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992);

(c) any unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof

In the present case, since the owners are selling the land and building, the same will be considered as “capital asset” by virtue of Clause (i) of Section 2(14) i.e.

Property.

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4) Period of holding Period of holding will be calculated from the date of Acquisition of the Asset till the date of sale.

In the present case, there are 3 separate cost of acquisitions for the land and building. Hence, the period of holding is calculated as follows: Period of holding in case of Site No. 11:

Date of Acquisition Date of Sale

: 02/07/1999 : 31/08/2021

Period of Holding

: 265 Months

Period of holding in case of Site No. 12 & 13:

Date of Acquisition Date of Sale

: 02/11/1998 : 31/08/2021

Period of Holding

: 273 Months

Period of holding in case of the building:

Date of Construction Date of Sale

: 14/03/2009 : 31/08/2021

Period of Holding

: 149 Months

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5) Is the asset short-term or long-term?

Section 2(42A) defines short-term capital asset as follows:

"Short-term capital asset" means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer.

Third Proviso to the Section: Provided also that in the case of a share of a company (not being a share listed in a recognized stock exchange in India), or an immovable property, being land or building or both, the provisions of this clause shall have effect as if for the words "thirty-six months", the words "twenty-four months" had been substituted.

Section 2(29AA) defines long-term capital asset as follows:

"Long-term capital asset" means a capital asset which is not a short-term capital asset

In the Present case, the capital asset is an immovable property and the period of holding in all the cases is more than 24 months. Therefore, the asset is LongTerm Capital Asset.

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6) What is the rate of tax on long-term capital gains?

Section 112 of the Income Tax Act, 1961, deals with tax on Long-term Capital Gains. As per Section 112 –

(1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head "Capital gains", the tax payable by the assessee on the total income shall be the aggregate of—

(a) in the case of an individual or a Hindu undivided family, being a resident—

(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income; and

(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent:

Hence, tax will be calculated at normal slab rates on other heads of income and Capital Gains will be subjected to tax at the rate of 20% + Surcharge (if applicable) + Cess at 4%.

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7) Mode of Computation Section 48 of the Income Tax Act, 1961, deals with the Mode of Computation.

The extracts of the sections are produced below:

The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, the following amounts, namely: —

(i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement thereto;

The Second Proviso to Section 48 of the Income Tax Act, 1961, says that:

Where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words "cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and "indexed cost of any improvement" had respectively been substituted

Hence while computing the Capital Gains, we will deduct cost of acquisition and cost of improvement from the sale consideration. However, as per Second Proviso to Section 48, since the assessee is not a non-resident and the capital asset is neither shares nor debentures, we will deduct Indexed Cost of Acquisition and Indexed Cost of Improvement from the Sale Consideration.

8) Indexed Cost of Acquisition 7|Page PRIVATE AND CONFIDENTIAL

Explanation (iii) and (iv) to section 48 is as follows: (iii) "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 1st day of April, 2001, whichever is later;

(iv) "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;

Hence, we will convert the actual Cost of Acquisition into Indexed Cost of Acquisition by multiplying it with the ratio of Present Cost Inflation Index to the Cost Inflation Index of the year of acquisition.

9) Computation of Taxable Capital Gain and Tax thereon:

Particulars

Amount (Rs)

Sale Value Less: Indexed Cost of Acquisition [FY 2001-02] Less: Indexed Cost of Improvement [FY 2006-07] Total Capital Gain

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6,00,00,000/-

[6,39,500*317/100] [62,57,950*317/122]

20,27,215/1,62,60,410/-

4,17,12,375/-

10) Is there any exemption available from Capital Gain arising on sale of Commercial Property?

The assessee needs to satisfy the following conditions in order to avail exemption under section 54F of the Income Tax Act – 1.

An exemption under section 54F is available only to an individual or a Hindu Undivided Family (HUF).

2.

An exemption is available towards the capital gain arisen on the transfer of any long term capital asset other than a residential house.

3.

The ‘net consideration’ arisen on the transfer of long term capital asset is invested in either of the following manners –

a. The amount is invested to purchase one residential house in India. It is compulsory that such investment is made within a period of 1 year before or 2 years after the date of transfer; or b. The amount is invested, within a period of three years, to construct one residential house in India.

Understanding the term ‘Net Consideration’ – The assessee is required to re-invest the ‘net consideration’, in order to avail exemption under section 54F of the Income Tax Act. The term ‘net consideration’ is defined under the Explanation to section 54F. Accordingly, net consideration means the full value of the consideration received on account of the transfer of long term capital assets reduced by any expenditure exclusively incurred in connection with the transfer.

Net consideration = Full value of consideration (-) Expenditure.

Amount of exemption available under section 54F – Section 54F of the Income Tax Act provides exemption as under – Particulars

Amount of exemption

When full net consideration is invested

The full amount of long term capital gain is exempt

When proportionate consideration is invested

Exemption = Long term capital gain * Amount reinvested / Net consideration

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net

In the present case, there are no other house properties in the name of Mr. Sateesh K Nayak and he is eligible for exemption u/s 54F, the quantum of exemption will be limited to assessees share in amount invested in new residential house subject to maximum deduction to the extent of taxable capital gain.

Mrs. Harshitha S Nayak is already owned two residential house properties and hence not eligible for exemption u/s 54F.

11) Can Mr. Sateesh & Mrs. Harshitha can claim any other Exemption from Taxable Capital Gain?

To claim exemption from capital gain u/s 54EC ie: Capital gains not chargeable on investment in certain bonds, assessee has to make investment in Long-term specified assets within 6 months from the date of transfer.

The long-term specified asset means specified bonds, redeemable after 3 years, issued by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation Limited (RECL).

The Quantum of exemption will be limited to the amount of capital gain or amount invested in specified bonds, whichever is lower. Maximum Rs. 50 Lakhs each can invested in such bonds in a financial year.

In case of transfer or conversion of such bonds or availing loan or advance on security of such bonds before the expiry of 3 years, the capital gain exempted earlier shall be taxed as long-term capital gain in the year of violation of condition.

In the present case Mr. Sateesh & Mrs. Harshitha are eligible for exemption u/s 54EC, the quantum of exemption will be limited the amount of capital gain or amount invested in specified bonds, whichever is lower.

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12)

Computation of share in Taxable Capital Gain and Tax thereon:

Particulars Share in Capital Gains

Mr. Sateesh Nayak Amount (Rs)

Harshita Nayak Amount (Rs)

2,08,56,188/-

2,08,56,188/-

50,00,000/-

50,00,000/-

1,58,56,188/-

1,58,56,188/-

Not opted

-Not Available-

Taxable Capital Gains

1,58,56,188/-

1,58,56,188/-

Tax on Capital Gain @ 20%

31,71,238/-

31,71,238/-

Less: Exemption u/s 54EC (50 Lakhs each) Balance Capital Gain Less: Exemption u/s 54F (Proposed New residential house, can opt if required)

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