Contents PAGE
Preface About the Authors
v vi
UNIT 1 : INCOME-TAX
1
Basic concepts that one must know
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.
What is an assessment year What is a previous year Who are included in person Who is regarded as assessee How to charge tax on income What is regarded as income under the Income-tax Act What is gross total income What is total income and how is it computed What is agricultural income What is difference between exemption and deduction What are capital and revenue receipts What is capital and revenue expenditure How far method of accounting is relevant in computing income Problems on basic concepts
2
Residential status and its effect on tax incidence
17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29.
What is relevance of residential status What one must know for deciding residential status How to determine residential status of an individual How to find out residential status of a Hindu undivided family How to determine residential status of firm and association of persons How to find out residential status of a company How to determine residential status of every other person What is the relationship between residential status and incidence of tax Connotation of receipt of income - How is it understood What is accrual of income What is income deemed to accrue or arise in India Problems on incidence of tax Other problems
vii
1 1 3 4 4 5 9 10 15 15 15 16 16 16
24 24 25 32 33 34 34 35 37 38 38 40 45
Contents
viii PAGE
3 32. 33. 34. 35. 36. 37. 37A. 38.
4 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54.
Income that is exempt from tax
What income is exempted under section 10 What are special provisions in respect of newly-established undertakings in free trade zone, etc. What are special provisions in respect of newly established hundred per cent export-oriented undertakings What are the special provisions in respect of profit from export of artistic hand-made wooden articles How to claim exemption in respect of income from property held for charity How can a political party claim exemption Exemption to electoral trust Problems on income exempt from tax
48 59 61 61 61 71 72 72
Income under the head Salaries and its computation
What do you understand by expression salary What is basis of charge of salary income Different forms of salary - How taxed Different forms of allowances - How taxed Perquisite - When taxable/not taxable Perquisites - How valued for tax purposes What are permissible deductions from salary income What is tax treatment of provident fund What is the tax treatment of approved superannuation fund What is special tax treatment of salary income of non-resident technicians What is the extent of exemption available to other foreign citizens in respect of salary income Deduction under section 80C - How to find out Is salaried employee entitled to relief in respect of salary in arrears, advance, etc. What are important points which one should remember to solve practical problems under the head Salaries Problems on computation of salary income Theoretical problems on computation of salary income
5
Income under the head Income from house property and its computation
66. 67. 68. 69. 70. 71. 72. 73.
What is the basis of charge When property income is not charged to tax What is the basis of computing income from a let out house property How to compute taxable income from self-occupied property What are special provisions when unrealised rent is realised subsequently What is mode of taxation of arrears of rent Problems on computation of property income Theoretical problems on computation of property income
6
Income under the head Profits and gains of business or profession and its computation
77. 78. 79. 80. 81.
What is the basis of charge What are the basic principles for arriving at business income Method of accounting - How far relevant for computing business income What is the scheme of business deductions/allowances What are specific deductions under the Act
74 75 78 91 98 101 127 128 132 132 132 133 138 139 140 166
176 180 180 187 194 195 195 206
208 209 211 211 213
ix
Contents PAGE
82. 83. 84. 85. 86. 87. 88. 89. 90. 91.
What are the specific disallowances under the Act What are the deemed profits and how they are charged to tax How and when undisclosed income/investments are taxed When maintenance of books of account becomes compulsory When audit of accounts by certain persons is compulsory What are special provisions for computation of business income What are the special provisions for computing income on estimated basis under sections 44AD, 44ADA and 44AE What are permissible methods of valuation of closing stock Problems on computation of income from business/profession Theoretical problems on business/profession income
7
Income under the head Capital gains and its computation
92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106.
What is the basis of charge What is included in and excluded from capital asset What is transfer of capital asset Capital gains - How computed What is full value of consideration How to find out expenditure on transfer What is cost of acquisition What is cost of improvement How to convert cost of acquisition/improvement into Indexed cost of acquisition/improvement Capital gain in special cases - How to find out Valuation of capital asset - When can be referred to Valuation Officer Capital gains - When and to what extent exempt from tax How to find out tax on short-term/long-term capital gain Problems on computation of capital gains Theoretical problems on capital gains
8
Income under the head Income from other sources and its computation
107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 116A. 116B. 116C. 117. 118. 119.
What is basis of charge Relevance of method of accountancy What is regarded as dividend and how is it charged to tax Winnings from lotteries, crossword puzzles, horse races and card games, etc. - How to compute What is regarded as interest on securities How to find out income from machinery, plant or furniture let on hire How to find out income from composite letting of building, machinery, plant or furniture Money/property received without consideration or for inadequate consideration - How to find out income Share premium in excess of fair market value - How to find out income Advance money received in course of negotiations for transfer of a capital asset - When chargeable to tax Sum received by a unitholder from a business trust - When income chargeable to tax Sum received under a life insurance policy - How chargeable to tax How to find out interest on deep discount bonds What deductions are permissible from income from other sources What are other provisions Problems on computation of income from other sources
259 275 277 278 278 279 281 285 285 308
311 311 314 316 317 317 318 318 318 318 339 340 355 366 375
382 384 384 386 387 388 388 389 398 398 398 398 402 402 403 404
Contents
x PAGE
9 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130.
10 132. 133. 134. 135. 136. 137.
11 137A. 138. 139. 140. 141. 142. 142A. 142B. 143. 144. 145. 146. 146A. 146B. 146C. 147. 148. 149.
Clubbing of income
Transfer of income without transfer of asset - When income therefrom is regarded as that of transferor Revocable transfer of assets - When income therefrom is regarded as that of transferor When an individual is assessable in respect of remuneration of spouse When an individual is assessable in respect of income from assets transferred to spouse When an individual is assessable in respect of income from assets transferred to son s wife When an individual is assessable in respect of income from assets transferred to a person for the benefit of spouse When an individual is assessable in respect of income from assets transferred to a person for the benefit of son s wife When an individual is assessable in respect of income of his minor child What is tax implication of conversion of self-acquired property into joint family property and subsequent partition Other points Problems on clubbing of income
413 413 414 416 419 420 420 421 422 423 424
Set off and carry forward of losses
What is the mode of set off and carry forward Inter-source adjustment - How made Inter-head adjustment - How made Carry forward of loss - How to set off Carry forward and set-off of business loss and depreciation - When permissible in the hands of amalgamated and demerged company or co-operative bank Problems on set off and carry forward of losses
428 428 429 430 436 437
Permissible deductions from gross total income
What are the basic rules governing deductions under sections 80C to 80U Deduction in respect of life insurance premia, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, etc. Deduction in respect of National Savings Scheme - To what extent available Equity Linked Savings Scheme - When deduction is available Deduction in respect of pension fund - When available Deduction in respect of contribution to a National Pension System (NPS) Deduction in respect of investment made under any equity saving scheme Deduction in respect of contribution to Agnipath Scheme - When available Deduction in respect of medical insurance premia - When and to what extent available Deduction in respect of maintenance including medical treatment of a dependent being a person with disability - When and to what extent available Deduction in respect of medical treatment, etc. - To what extent available Deduction in respect of payment of interest on loan taken for higher education - When and to what extent available Deduction in respect of interest on loan taken for residential house property Deduction in respect of interest on loan taken for certain house property - When available Deduction in respect of interest on loan taken for purchase of electric vehicle - When available Deduction in respect of donations to certain funds, charitable institutions, etc. - How arrived at Deduction in respect of rent paid - To whom and to what extent available Deduction in respect of certain donations for scientific research or rural development - When eligible
447 448 451 451 451 452 454 454 454 456 458 460 460 461 461 461 466 468
xi
Contents PAGE
150. 151. 152. 153. 153A. 154. 154A. 155. 156. 157. 158. 159. 160. 160A. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170.
12 185. 186. 187. 188.
13 192. 193. 194. 195.
14 201. 202. 203. 204. 205.
Deduction in respect of contributions given to political parties or electoral trust - To what extent deductible Deduction in respect of earnings in convertible foreign exchange - How to find out Deduction in respect of profits and gains from industrial undertaking or enterprises engaged in infrastructure development, etc. - How to find out Deduction in respect of profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone Deduction in respect of eligible start-up Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings - How to avail Deduction in respect of profits from housing projects Deduction in respect of profits and gains of certain undertakings in certain special category of States - How to find out Deduction in respect of profits and gains from business of hotel/convention centre in NCR How to find out Deduction in respect of certain undertakings in North-Eastern States - How to determine Deduction in respect of business of processing of bio-degradable waste - How to determine Deduction in respect of Employment of new Employees Deduction in respect of certain income of Offshore Banking Units and International Financial Services Centre - To what extent available Deduction in respect of Inter-Corporate Investment - To what extent available Deduction in respect of income of a co-operative society - To what extent available Deduction in respect of certain income of producer companies - To what extent available Deduction in respect of royalty income of authors - To what extent available Deduction in respect of royalty on patents - To what extent available Deduction in respect of interest on deposits in savings accounts - When available Deduction in respect of interest on deposits in case of senior citizens - To what extent available Deduction in the case of a person with disability - To what extent available Deductions from tax liability - How to determine Rebate for resident individuals - How to find out Problems on computation of total income
469 469 469 471 471 472 473 474 474 474 475 475 477 477 478 479 479 480 481 482 482 483 484 487
Meaning of agricultural income and its tax treatment
What is agricultural income What are instances of income held to be agricultural/non-agricultural income What is the tax treatment of income which is partly agricultural and partly from business What is the scheme of partial integration of non-agricultural income with agricultural income
497 499 500 501
Individuals - Computation of taxable income
What is included in income of an individual Taxable income - How computed Tax liability - How calculated Problems on computation of taxable income
507 507 508 519
Hindu undivided families - Computation of taxable income
What is understood by Hindu undivided family What are the basic conditions for assessment of Hindu undivided family What is the basis of computation of taxable income of HUF What is tax implication of partition of a Hindu undivided family Problems on computation of taxable income of HUF
541 541 542 542 543
Contents
xii PAGE
15 212. 213. 214. 215. 216. 217. 218. 219. 220. 221. 222. 223. 224.
16 240. 241. 242. 243. 244. 245. 246. 247. 248. 249. 250. 251. 252. 253. 254. 255. 256. 257. 258. 259. 260. 261.
17 266. 267. 268. 268A.
18 269. 270. 270A. 271.
Firms and associations of persons - Computation of taxable income
What is partnership What is the scheme of taxation of firms When remuneration/interest paid or payable to partners is deductible What are the conditions a firm should fulfil under section 184 What are the conditions for claiming deduction of remuneration of partners under section 40(b) What are the conditions for claiming deduction of interest to partners under section 40(b) Carry forward and set off of loss in the case of change in the constitution of firm How to find out income of a firm How to find out tax liability of firm How to find out taxable income of partners Problems on computation of taxable income of a firm and partners How to find out income and tax of AOP/BOI and members Problems on firms and partners
547 547 547 548 548 552 552 553 553 553 554 557 561
Return of income
Who has to submit his/its return of income on voluntary basis as a statutory obligation When return of loss should be filed Can return be filed beyond time Can revised return be filed What is updated return What is a defective or incomplete return What is modified return What is Permanent Account Number (PAN) When and how aadhaar number is to be quoted What is Scheme to facilitate submission of returns through Tax Return Preparers Return by whom to be verified What is self-assessment What is inquiry before assessment under section 142 or 142A What is summary assessment without calling the assessee What is scrutiny assessment under section 143(3) What is best judgment assessment What is income escaping assessment When can mistake be rectified What is time-limit for completion of assessment/reassessment Who is under an obligation to furnish statement of financial transaction What is the requirement of submission of statement by a non-resident having liaison office in India Problem on return of income and assessment
564 567 567 568 568 570 571 571 572 573 573 574 575 575 576 576 577 578 578 579 579 579
Advance payment of tax
When a person becomes liable to pay advance tax When advance tax payment becomes due How advance tax is computed What are the consequences when advance tax is not paid
582 583 583 586
Deduction and collection of tax at source
What is the scheme of tax deduction at source (TDS) When and how tax is to be deducted at source from salary When and how tax is to be deducted at source from withdrawal from employees provident fund scheme When and how tax is to be deducted at source from interest on securities
587 589 591 591
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Contents PAGE
272. 273. 274. 274A. 275. 276. 277. 277A. 278.
When and how tax is to be deducted at source from dividends When and how tax is to be deducted at source from interest other than interest on securities When and how tax is to be deducted at source from winnings from lotteries or crossword puzzles When and how tax is to be deducted from winnings from online games When and how tax is to be deducted at source from winnings from horse races When and how tax is to be deducted at source from payments to contractors or sub-contractors When and how tax is to be deducted at source from insurance commission When and how tax to be deducted at source from payment of life insurance policy When and how tax is deductible at source from payment to non-resident sportsmen or sports associations 279. When and how tax is deductible from payments in respect of National Savings Scheme 280. When and how tax is deductible on payments on account of repurchase of units of Mutual Funds or UTI 281. When tax is deductible from commission, etc., on sale of lottery tickets 282. When and how to deduct tax at source from commission or brokerage 283. When and how tax is deductible from rent 283A. When and how tax is deductible from payment on transfer of certain immovable properties under section 194-IA 283B. When and how tax is deductible from rent by certain individuals/HUFs under section 194-IB 283C. When and how tax is deductible from payment under joint development agreement under section 194-IC 284. When tax is deductible at source on fees for professional or technical services 284A. When tax is deductible at source in respect of income from units 284B. When and how to deduct tax at source from payment of compensation on acquisition of certain immovable property 284C. When and how tax is to be deducted at source from interest payable on infrastructure debt fund 284D. When and how tax is to be deducted at source from income from units of business trust 284E. When and how tax is deductible from income in respect of units of investment fund 284F. When and how tax is deductible from income in respect of investment in securitization fund 284G. When and how tax is to be deducted by an Indian company from interest to a non-resident/ Foreign Citizen 284H. When and how tax is to be deducted from interest on bonds/Government securities under section 194LD 284-I. When and how tax is deductible on certain payments by individual/HUF 284J. When and how tax is deductible on payment of certain amounts in cash 284K. When tax is deductible at source in respect of payment by e-commerce operator to e-commerce participants 284L. When and how tax is to be deducted in the case of specified senior citizen 284M. When and how tax is to be deducted on payment for purchase of goods 284N. When and how tax is deductible on benefit/perquisite pertaining to business/profession 284-O. When and how tax is deductible from payment on transfer of virtual digital asset 284-Q. When and how tax is deductible by firms from payment of remuneration/interest to partners 285. When and how tax is to be deducted at source from other sums 285A. When tax is deductible at source from any income payable to non-resident unitholders 286. When and how tax is deductible from units or long-term capital gain under section 196B 287. When tax is deductible from income or long-term capital gain from foreign currency bonds/Global Depository Receipts 288. When tax is deductible at source from income of Foreign Institutional Investors from securities 289. What are other points for consideration 290. Tax collection at source
19
Interest payable by assessee/Government
296. 297. 298. 299.
When interest becomes payable by assessee Interest payable to assessee Procedure to be followed in calculation of interest Is it possible to reduce/waive interest
592 592 594 594 595 595 597 597 598 598 598 599 599 599 600 600 601 601 603 603 603 604 604 604 605 605 606 606 607 608 608 609 611 612 612 613 613 614 614 614 620
625 636 636 636
Contents
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300. 301. 302.
Is it possible for Chief Commissioner/Director General (Investigation) to reduce penal interest in certain cases Can Central Board of Direct Taxes make relaxation Writ petition - Is it maintainable against levy of interest
637 637 637
UNIT 2 : GST
20 401. 402. 403. 404. 405.
21 410. 411. 412. 413. 414. 415. 416. 417. 418. 419.
22 425. 426. 427. 428. 429.
23 435. 436. 437. 438.
24 444. 445. 446. 447. 448. 449. 450.
Basic concepts of GST
What is the difference between direct tax and indirect tax What was pre-GST indirect tax structure in India What are different abbreviations used in the book What one should know before beginning study of law regulating GST What are relevant definitions which a beginner should know
638 638 639 639 645
Concept of Supply
What is taxable event What is supply What is the significance of consideration What are activities or transactions which are treated as supply under Schedule II What are activities which are treated as supply under Schedule I even if consideration is absent What are activities given in negative list (neither supply of goods nor supply of services) What is the significance of expression supply made in the course or furtherance of business What is relevant to attract GST - Supply by a person or supply by a taxable person What are different types of supply Problems on supply
649 650 652 654 660 663 665 665 665 668
Levy of GST
What is the basis of charge of GST How GST is levied in the case of inter-State supply How GST is levied in the case of intra-State supply What are GST rates notified for supply of various goods What are GST rates notified for supply of various services
674 674 675 676 678
Exemptions from GST
Power to grant exemption - How to exercise What are exempted goods under exemption notification What are services given in exemption notification Problems on exemption notifications
691 691 694 711
Place of supply
Why one should find out location of supplier and place of supply Location of supplier of goods - How to find out Location of supplier of services - How to find out Location of recipient of services - How to find out How to find out place of supply of goods How to find out place of supply of services Problems on place of supply
727 727 727 728 728 729 738
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Contents PAGE
25 455. 456. 457. 458.
26 464. 465. 466. 467. 468. 469. 470. 471. 472. 473. 474. 475. 476.
27 481. 482. 483. 484.
28 492. 493. 494. 495. 496. 497. 498. 499. 500. 501.
29 511. 512. 513. 514. 515. 516. 517.
Time of supply
Time of supply - How to determine and its significance What are the rules for determination of time of supply of goods What are the rules for determination of time of supply of services How to find out time of supply in case of change in GST rate
742 743 747 750
Value of taxable supply
What are different methods of calculation of value of taxable supply When value of supply shall be the transaction value How to determine value of supply when valuation under aforesaid provisions is not possible How to determine value of supply where the consideration is not wholly in money How to determine value of supply between distinct persons or related person How to determine value of supply of goods made or received through an agent How to determine value of supply of goods/services based on cost What is mode for determination of value of supply under rule 31 How to determine value of certain supplies given under rule 32 How to determine value of supply of services in the case of pure agent What are other modes of determination of value of taxable supply Rate of exchange of currency - How to determine Value of supply inclusive of GST - How to determine taxable value
754 755 758 758 759 760 761 761 761 764 765 766 766
Reverse charge mechanism
What is reverse charge mechanism When reverse charge mechanism is applicable When reverse charge mechanism is applicable on supply by unregistered person to registered person Problems on reverse charge mechanism
768 768 771 772
Input tax credit
What one should know before beginning study of input tax credit provisions What are conditions for taking input tax credit How input tax credit is allowed for payment of CGST, SGST, UTGST and IGST Apportionment of credit - How to determine What is the mode of computation of input tax credit pertaining to capital goods and reversal thereof What is the mode of distribution of credit by Input Service Distributor (ISD) What is the mode of claiming input tax credit by a banking company What is the mode of availability of credit in special circumstances under section 18 How to take input tax credit in respect of inputs/capital goods sent for job work Problems on input tax credit
777 778 786 789 790 791 792 792 796 797
Composition Scheme and Alternative Composition Scheme
Is there any threshold limit for small taxpayers What is composition levy What are the conditions which one has to satisfy What are specified GST rates under Composition Scheme What are other relevant considerations which one has to keep in mind Problems on Composition Scheme What is Alternative Composition Scheme for small service providers
808 808 808 811 813 814 817
Contents
xvi PAGE
518. 519.
30
What are salient features of Alternative Composition Scheme What are special features for GST payments under Alternative Composition Scheme Registration
521. 522. 523.
What is the significance of registration Who is liable for registration under GST What is the procedure for registration
31
Tax invoice, credit and debit notes
531. 532. 533. 534. 535. 536. 537. 538. 539. 540. 541. 542. 543. 544.
32 551. 552. 553. 554. 555. 556. 557. 558. 559. 560. 561. 562. 563. 564.
33 570. 571. 572. 573.
817 819
What is invoice under GST What is importance of tax invoice under GST When tax invoice/bill of supply be issued by a registered person What are the contents of tax invoice What are the contents of bill of supply What are the contents of receipt voucher What are the contents of refund voucher What are the contents of payment voucher What are the contents of revised tax invoice What are the provisions regarding tax invoice in special cases given under rule 54 What are provisions of transportation of goods without issue of invoice What are provisions pertaining to collection of tax and its indication in invoice What are credit and debit notes Problems on tax invoice, credit and debit notes
822 822 828
838 838 838 840 844 844 845 845 845 846 847 848 848 849
Returns, tax payment and interest
What are the basic features of GST returns mechanism What are different GST returns What is matching, reversal and reclaim of input tax credit What is electronic liability ledger What is electronic credit ledger What is electronic cash ledger What are different assessments under GST When interest and late fee are applicable under GST When a person is liable for penalty under GST What is the significance of national anti-profiteering authority in GST What are the provisions regulating e-way bill in GST What are the provisions regulating e-commerce What is the mechanism of tax deduction at source (TDS) under GST What are provisions regulating audit in GST
853 856 860 860 861 862 863 865 867 868 870 875 878 880
Provisions governing Real Estate Services
What one should know before beginning study of GST law pertaining to real estate services What are important definitions What are GST provisions regulating real estate projects with effect from April 1, 2019 What is GST on transfer of development rights (TDR), FSI, upfront amount in real estate transactions
882 883 884 891
xvii
Contents PAGE
34
Problems on GST
581.
Problems on GST
1
APPENDIX
Tax rates
2
927
APPENDIX
Depreciation rates for power generating units
4
907
APPENDIX
Questions set for CA (Intermediate) Examinations and Answers
3
894
1023
APPENDIX
Answers to unsolved exercises
1024
CHAPTER 7
Income under the head Capital gains and its computation
A
ny gain arising on the transfer [except such transfers as are given in sections 46 and 47] of a capital asset [sec. 2(14)] is chargeable to tax under section 45, if it is not eligible for exemption under sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA, 54GB and 54H. Incidence of tax on capital gains, however, depends upon whether capital gain is a short-term capital gain or a long-term capital gain [sec. 2(42A)]. All the provisions of the Act regulating tax incidence on capital gains are discussed in this chapter. For the assessment year 2025-26, this book calculates capital gains based on the assumption that the capital asset is transferred on or after July 23, 2024, unless otherwise specified. nn WHAT IS THE BASIS OF CHARGE [SEC. 45] 92. Any gain arising from the transfer of a capital asset during a previous year is chargeable to tax under the head Capital gains in the immediately following assessment year, if it is not eligible for exemption under sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA and 54GB1. In other words, capital gain s tax liability arises only when the following conditions are satisfied : Condition 1 Condition 2 Condition 3 Condition 4 Condition 5
There should be a capital asset. The capital asset is transferred by the assessee. Such transfer takes place during the previous year. Any profit or gains arises as a result of transfer. Such profit or gains is not exempt from tax under sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA and 54GB1.
See para 93. For meaning of transfer, see para 94. See para 94.2. For computation of capital gain, see para 95. See para 103.
If the aforesaid conditions are satisfied, then capital gain is taxable in the assessment year relevant to the previous year in which the capital asset is transferred. However, in a few cases different rules are applicable. These cases are narrated briefly in para 101.
nn WHAT IS INCLUDED IN AND EXCLUDED FROM CAPITAL ASSET 93. Capital asset is defined by section 2(14). p Positive list - Capital asset means property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible. Besides, it includes the following 1. Any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever. 2. Property of any kind held by an assessee (whether or not connected with his business or profession). 3. Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the SEBI Act. 4. Any unit linked insurance plan (ULIP policy) issued on or after February 1, 2021 to which exemption under section 10(10D) does not apply (i.e., if insurance premium payable in any previous year during the term of such policy exceeds Rs. 2.50 lakh). p Negative list - The following assets are excluded from the definition of capital assets 1. Stock-in-trade (other than securities referred to in point 3 above). 2. Personal effects (movable assets). 1. Exemption under these sections can be claimed even by an assessee who pays tax under the alternative tax regime.
311
Para 93
Income under the head ‘Capital gains’ and its computation
312
3. Agricultural land in a rural area in India. 4. A few gold bonds and special bearer bonds (this point does not have any practical utility). 5. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2015. p Stock-in-trade is not a capital asset - Any stock-in-trade, (not being securities held by a Foreign Institutional Investor), consumable stores or raw material held for the purpose of business or profession, is not a capital asset. This is because of the fact that any surplus arising on sale or transfer of stock-in-trade, consumable stores or raw material is chargeable to tax as business income under section 28. What shall be included in the term stock-intrade must always be dependent upon the nature of the business of the taxpayer. For instance, if the taxpayer deals in house properties, then such properties are stock-in-trade and, consequently, they are not capital asset. If a dealer in properties transfers his stock-in-trade (i.e., house properties), the resulting profit is business income not capital gains. Conversely, if a doctor transfers a house property, the resulting income is taxable under the head Capital gains . p Personal effects (being movable assets) are not capital assets - Any movable property (including wearing apparel and furniture) held for personal use of the owner or for the use of any member of his family dependent upon him, is not a capital asset for the purpose of income under the head Capital gains . However, the following are not personal effects (in other words, the following are capital assets ) even if these are for personal use jewellery, archaeological collections, drawings, paintings, sculptures, or any work of art. Provisions illustrated Consider the following cases 1. X purchased a computer for his personal use at his residence for Rs. 34,000 during 2022-23. He recently sells it for Rs. 44,000. Personal computer is treated as personal effects . Consequently, it is not a capital asset. Surplus of Rs. 10,000 cannot be taxed under the head Capital gains . Since it is capital profit, it cannot be taxed under any other head of income (this income of Rs. 10,000 will not be chargeable to tax at all). This rule is applicable on transfer of any other movable personal effects (not being jewellery, archaeological collections, drawings, paintings, sculptures, or any work of art). For instance, on transfer of personal car, personal garments, personal furniture, personal household goods, nothing is chargeable to tax. 2. Personal jewellery/house property/immovable asset/archaeological collections, drawings, paintings, sculptures or any work of art are capital assets. Suppose, an individual purchases jewellery/house property/immovable asset/archaeological collections, drawings, paintings, sculptures or any work of art for his personal use or for the use of his family members. Although these are purchased for personal purposes, these are not taken as personal effects (by default such items are not taken as personal effects). Consequently, these are capital asset. Any surplus, which arises on transfer of such capital asset, is taxable under section 45 under the head Capital gains .
Agricultural land situated in rural area is not a capital asset - Agricultural land in India in a rural area2 is not capital asset. p
Provisions illustrated Consider the following cases 1. X, a farmer, transfers a piece of agricultural land situated in a village (population : 6,000) in Madhya Pradesh. Since this agricultural land is situated in a rural area, any surplus on its transfer cannot be taxed under the head Capital gains . Nor can it be taxed under any other head of income. It will be a tax-free income. 2. The above rule is equally applicable if X is not a farmer, but the land which is transferred is used for agricultural purposes either by X or by any other person authorized by X. 3. If agricultural land is situated in a village which comes within a municipality, then population of the municipality shall be considered (and not of village). In such a case if population of the municipality exceeds 10,000, then agricultural land is a capital asset, even if population of the village is less than 10,000.
93.1 Short-term/long-term capital asset - There are two categories of capital assets: short-term and long-term. Effective July 23, 2024, a holding period of more than 24 months is required for an asset to be classified as long2. Rural area for the above purpose is any area which is outside the jurisdiction of a municipality or cantonment board having a population of 10,000 or more and also which does not fall within distance (to be measured aerially) given below 2 kilometers from the local limits of municipality/cantonment board
If the population of the municipality/cantonment board is more than 10,000 but not more than 1 lakh
6 kilometers from the local limits of municipality/cantonment board
If the population of the municipality/cantonment board is more than 1 lakh but not more than 10 lakh
8 kilometers from the local limits of municipality/cantonment board
If the population of the municipality/cantonment board is more than 10 lakh.
For the above purpose, population means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year.
313
Short-term/long-term capital assets
Para 93.1
term capital asset. However, the holding period is reduced to 12 months for the following assets (to become longterm capital assets) - Securities2a (i.e., shares, debentures and bonds) listed on a recognized stock exchange in India. -
Units of an equity-oriented mutual fund, whether listed or unlisted. Units of a debt-oriented mutual fund listed on a recognized stock exchange in India. Zero coupon bonds, whether listed or unlisted
93.1-1 POSITION PRIOR TO JULY 23, 2024 - Generally, holding period should be more than 36 months to become a longterm capital asset. However, in a few cases, the period of holding is 24 months/12 months2b. 93.1-2 HOW TO DETERMINE PERIOD OF HOLDING - Specific rules are provided by the Income-tax Act to determine period of holding of a capital asset in a few cases. 93.1-3 WHY CAPITAL ASSETS ARE DIVIDED IN SHORT/LONG-TERM ASSETS - The tax incidence under the head Capital gains depends upon whether the capital gain is short-term or long-term. Long-term capital gain is generally taxable at a lower rate. If the asset transferred is a short-term capital asset, capital gain will be short-term capital gain. Conversely, long-term capital gain arises on transfer of a long-term capital asset. p In the case of transfer of a depreciable asset (other than an asset used by a power generating unit eligible for depreciation on straight line basis), capital gain (if any) is taken as short-term capital gain, irrespective of period of holding. Problems 93.1-P1 State, giving reason, whether the asset is short-term or long-term in the cases given below 1. X purchases a house property on March 10, 2023 and transfers it on June 6, 2024. 2. Y purchases listed shares in an Indian company on May 10, 2023 and transfers it on August 6, 2024. 3. Z acquires units of an equity oriental mutual fund on August 7, 2023 and he transfers these units on August 10, 2024. 4. A purchases diamonds on September 12, 2022 and gifts the same to his friend B on December 31, 2022. B transfers the asset on October 20, 2024. 5. C purchases unlisted shares in a company on November 21, 2022; the company transfers shares in the name of C : January 5, 2023). These shares are transferred by C on December 20, 2024. Solution : Taxpayer
Asset
Minimum period to become longterm capital asset
Period of holding
Short-term or long-term
X
House property
24 months +
Short-term
Y Z
12 months + 12 months +
B
Listed Shares Units of a equity oriented mutual fund Diamonds
March 10, 2023 to June 6, 2024 (i.e., 14 months and 27 days) 14 months and 27 days 12 months and 3 days
24 months +
Long-term
C
Unlisted shares
24 months +
September 12, 2022 to October 20, 2024 November 21, 2022 to December 20, 2024
Long-term Long-term
Long-term
Notes 1. If an asset is acquired by gift, will, etc. [i.e., circumstances mentioned under section 49(1) see para 101.1], then the period of holding of the previous owner is also taken into consideration. 2. In the case of shares, the purchase date by the broker is taken as the date of acquisition. 93.1-E1 State, giving reasons, whether the asset is short/long-term capital asset in the cases given below 1. X purchases preference shares in a foreign company on January 20, 2022 which are transferred by him on January 18, 2025. Shares are not listed on any recognised stock exchange in India. 2. Y purchases debentures of a company on March 10, 2023 which are transferred on January 5, 2025. Debentures are not listed on any recognised stock exchange in India. 2a. Securities for this purpose include shares, bonds, debentures, debenture stock (or other marketable securities of a like manner), derivatives, units, Government securities or rights/interests in securities. 2b. 12 months - In the case of securities2a listed in a recognised stock exchange in India, units of UTI (whether listed or not), units of equity oriented mutual fund (whether listed or not), and zero coupon bonds (whether listed or not). 24 months - Unlisted shares in a company and immovable property.
Para 94
Income under the head ‘Capital gains’ and its computation
314
3. In 2 supra, suppose debentures are listed on the Cochin Stock Exchange with effect from January 1, 2025. 4. Z purchases Government securities on March 6, 2023 which are transferred by Mrs. Z on March 31, 2025 after his death (Z dies on February 20, 2025).
nn WHAT IS TRANSFER OF CAPITAL ASSET 94. Transfer, in relation to a capital asset, includes sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law [sec. 2(47)]3. p For detailed discussion, see problem 106-P1. 94.1 Certain transactions not included in transfer - For the purpose of section 45, the following transactions are not regarded as transfers (in other words, in the following cases4, there is no capital gain) 1. Distribution of assets in kind by a company to its shareholders on its liquidation. 2. Any distribution of capital assets in kind by a Hindu undivided family to its members at the time of total or partial partition. 3. Any transfer of a capital asset by an individual/HUF under a gift or a will or an irrevocable trust (exception gift of ESOP5-6 shares is chargeable to tax). 4. Transfer of capital asset between holding company and its 100 per cent subsidiary company, if the transfereecompany is an Indian company. 5. Transfer of capital asset in the scheme of amalgamation/demerger, if the transferee-company is an Indian company. 6. Transfer of shares in amalgamating company/demerged company in lieu of allotment of shares in amalgamated company/resulting company in the above case. 7. Transfer of capital asset in a scheme of amalgamation of a banking company with a banking institution. 8. Any transfer in a business reorganization, of a capital asset by the predecessor co-operative bank to the successor co-operative bank or the converted banking company. 9. Transfer of shares in an Indian company held by a foreign company to another foreign company in a scheme of amalgamation/demerger of the two foreign companies, if a few conditions are satisfied. 10. Transfer of a capital asset by a non-resident of foreign currency convertible bonds or Global Depository Receipts to another non-resident if the transfer is made outside India and if a few conditions are satisfied. 11. Transfer by an individual of Sovereign Gold Bond (issued by RBI under the Sovereign Gold Bond Scheme, 2015) by way of redemption. 12. Transfer of a capital asset, being conversion of gold into Electronic Gold Receipt issued by a Vault Manager, or conversion of Electronic Gold Receipt into gold. 13. Transfer of any work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting, photograph or print, to the Government or a University or the National Museum, National Art Gallery, National Archives or any other notified public museum or institution. 14. Any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificate in any form, of a company into shares or debentures of that company. 15. Transfer by way of conversion of preference shares of a company into equity shares of that company. 16. Land transferred by a sick industrial company, if a few conditions are satisfied. 17. Transfer of a capital asset by a private company/unlisted public company to a limited liability partnership in the case of conversion of company into LLP, if a few conditions are satisfied. 18. Transfer of capital assets at the time of conversion of a firm/sole proprietary concern in a company, if a few conditions are satisfied. 19. Any transfer involved in a scheme for lending of any securities, if a few conditions are satisfied. 20. Any transfer of capital asset in a reverse mortgage. 21. Transfer of a capital asset (being a Government security carrying periodic payment of interest) made outside India through an intermediary dealing in settlement of securities by a non-resident to another nonresident. 22. Transfer of a capital asset (being share of a special purpose vehicle) to a business trust in exchange of units allotted by that trust to the transferor. 23. Any transfer by a unitholder of units held by him in the consolidating scheme of a mutual fund, made in consideration of the allotment to him of units in the consolidated scheme of the mutual fund, if the consolidation 3. The definition of transfer under section 2(47) shall also apply for the purpose of computation of tax under section 115BBH pertaining to income from transfer of any virtual digital asset (whether capital asset or not). 4. Provisions of sections 46 and 47 are given in brief (keeping in view the requirement of undergraduate/IPC students). 5-6. In the case of gift of ESOP shares, fair market value on the date of gift is taken as full value of consideration.
315
Transfer when complete and effective
Para 94.2
is of two or more schemes of equity oriented fund or of two or more schemes of a fund other than equity oriented fund. 24. Transfer by a unitholder of units held by him in the consolidating plan of a mutual fund scheme, made in consideration of the allotment to him of units, in the consolidated plan of that scheme of the mutual fund. 25. Transfer, made outside India, of a capital asset being rupee denominated bond of an Indian company issued outside India, by a non-resident to another non-resident. 26. Transfer of capital asset [being bonds/GDR referred to in section 115AC(1) or rupee denominated bond of an Indian company or derivative or (notified) securities] made by a non-resident on a recognised stock exchange located in any International Financial Services Centre and where the consideration is paid/payable in foreign currency. 27. Transfer of a capital asset (being an interest in a joint venture) held by a public sector company, in exchange of shares of a company incorporated outside India by the Government of a foreign State, in accordance with the laws of that foreign State. If the aforesaid conditions are satisfied, then the transaction is not treated as transfer . Problems 94.1-P1 State, giving reasons, whether the capital gain is taxable in the following cases 1. A house property is purchased by a Hindu undivided family in 1950 for Rs. 40,000. It is given to one of the family members in 2024-25 at the time of partition of the family. 2. Y purchases gold in 1974 for Rs. 10,000. In 2024-25, it is gifted to his son at the time of his marriage. 3. Z purchases 10 convertible debentures in 1987 which are converted into 100 shares in 2024 by the company. 4. A Ltd. is 100 per cent holding company of B Ltd. A Ltd. transfers a capital asset (acquired in 1987 for Rs. 50,000) to B Ltd. on June 16, 2024 for Rs. 2,70,000. B Ltd. is an Indian company, while A Ltd. is a foreign company. The capital asset is transferred as capital asset. 5. Suppose in 4, the capital asset is transferred as stock-in-trade. Solution : 1. Distribution of a capital asset by a Hindu undivided family to its members at the time of partition is not treated as transfer . As the element of transfer is missing, capital gain is not chargeable to tax [see, however, para 101.1]. 2. Transfer by way of gift is not treated as transfer . Therefore, no capital gain tax liability arises in the case of gift [see, however, para 101.1]. 3. No capital gain tax liability will arise in the case of conversion of bonds into shares as such conversion is not treated as transfer [see, however, para 101.13]. 4. Any transfer between a holding company and 100% subsidiary company is not treated as transfer if the transfereecompany is an Indian company. In this case, therefore, the element of transfer is missing, and hence capital gains tax liability does not arise. 5. The rule stated in 4 supra is not applicable if a capital is transferred as a stock-in-trade. Therefore, in this case, capital gain is chargeable to tax. 94.1-E1 State, giving reasons, whether the following are treated as transfer 1. X Ltd. is a foreign company. It holds shares in A Ltd., an Indian company. Y Ltd., a foreign company, takes over the business of X Ltd. in a scheme of amalgamation of X Ltd. and Y Ltd. Shareholders holding 75 per cent shares in X Ltd. become shareholders in Y Ltd. Consequently, shares in A Ltd. owned by X Ltd. are transferred to Y Ltd. On this transaction, there is no foreign tax liability. 2. At the time of liquidation, capital assets are distributed by a company to its members. 3. X gifts his house property to his daughter-in-law. 4. Y, Finance Head in A Ltd., gets 2,000 equity shares in A Ltd. under ESOP from A Ltd. at a pre-determined price of Rs. 2 per share (fair market value: Rs. 900 per share). On March 2, 2025, X gifts these shares to his daughter-in-law (fair market value : Rs. 1,200 per share).
94.2 Transfer when complete and effective - Generally, capital gain is taxable in the year in which capital asset is transferred. Different rules are applicable in case of movable/immovable assets to find out when a capital asset is transferred . 1. Immovable property when documents are registered - Title to immovable assets will not pass till the conveyance deed is executed or registered. 2. Immovable property when documents are not registered - Even if the documents are not registered but the following conditions of section 53A of the Transfer of Property Act are satisfied, ownership in an immovable property is transferred a. there should be an agreement to sell (registered); b. the transferee has paid consideration or is willing to perform his part of the contract; and c. the transferee should have taken possession of the property. When these conditions are satisfied, the transaction will constitute transfer for the purpose of capital gains.
Para 95
Income under the head ‘Capital gains’ and its computation
316
3. Movable property - Title to a movable property passes at the time when property is delivered pursuant to a contract to sell. Entries in the books of account are not relevant for determining date of transfer. Problems 94.2-P1 State, giving reasons, the assessment year for which capital gain is chargeable to tax in the cases given below 1. X sells a house property to Y as per sale deed dated March 30, 2025. The documents are, however, registered on April 6, 2025. 2. Z sells a house property to A as per agreement to sale dated May 6, 2024. A pays the consideration on the same day. The possession is given on June 1, 2024. The sale deed is yet to be registered. 3. B sells shares to C on March 1, 2025. Transfer deed is signed on the same day. Share certificates are delivered at the time of signing the transfer deed. Shares are, however, transferred in the name of C in the records of the company on May 10, 2025. Solution : 1. In the case of immovable property, ownership is transferred when sale deed is registered. In such a case, transfer takes effect from the date of execution of the sale deed (and not from the date of registration) CIT v. Ghaziabad Engg. Co. (P.) Ltd. [2001] 116 Taxman 268 (Delhi). Therefore, in this case transfer takes place during the previous year 2024-25 and, consequently, capital gain is taxable for the assessment year 2025-26. 2. Even if sale deed is not registered, an immovable property is transferred when the three conditions of section 53A of the Transfer of Property Act [see para 94.2] are satisfied. The three conditions are satisfied on June 1, 2024. Therefore, capital gain is taxable for the assessment year 2025-26. 3. When a movable property is delivered pursuant to a contract to sell, the ownership is transferred. In this case, ownership is transferred on March 1, 2025 and, consequently, capital gain is taxable for the assessment year 2025-26. 94.2-E1 State, giving reasons, the assessment year for which capital gain is chargeable to tax in the cases given below 1. X sells a house property to Y as per sale deed dated March 1, 2025. The documents are registered on April 1, 2025. As per the contract, sale consideration is paid on April 1, 2025. 2. Z sells a commercial property to A as per agreement to sell dated March 11, 2025. The possession is given on April 1, 2025 after receiving the entire consideration on March 31, 2025. The documents are not registered.
nn CAPITAL GAINS - HOW COMPUTED [SEC. 48] 95. Computation of capital gain depends upon the nature of capital asset transferred, viz., short-term capital asset or long-term capital asset. Capital gain arising on transfer of a short-term capital asset is short-term capital gain, whereas transfer of long-term capital asset generates long-term capital gain. The tax incidence is generally higher in the case of short-term capital gain as compared to long-term capital gain. The method of computation of short-term and long-term capital gain is as follows : Computation of short-term capital gain
Computation of long-term capital gain
1. Find out full value of consideration [see para 96] 2. Deduct the following : a. expenditure incurred wholly and exclusively in connection with such transfer [see para 97]; b. cost of acquisition [see para 98]; and c. cost of improvement [see para 99]. 3. From the resulting sum deduct the exemption8 provided by sections 54B, 54D, 54G and 54GA [see para 103]
1. Find out full value of consideration [see para 96] 2. Deduct the following : a. expenditure incurred wholly and exclusively in connection with such transfer [see para 97]; b. cost of acquisition7; and c. cost of improvement7. 3. From the resulting sum deduct the exemption8 provided by sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA and 54GB [see para 103]
4. The balance amount is short-term capital gain.
4. The balance amount is long-term capital gain.
Notes 1. Securities transaction tax is not deductible while computing income under the head Capital gains . 2. From the assessment year 2021-22, amount chargeable to tax under section 45(4) in the hands of specified entity (which is attributable to the capital asset being transferred by the specified entity) (calculated as per rule 8AB) shall be deducted to compute long-term or short-term capital gains [see para 101.7 and problem 101.7-P3].
95.1 Capital gains exempt from tax - In the cases given below, capital gains are not chargeable to tax by virtue of section 10. Conversely, in the cases given below if assets are transferred at a loss, such capital loss is not taken into consideration. 7. The indexed cost of acquisition and the indexed cost of improvement are deductible if a long-term capital asset is transferred before July 23, 2024. Conversely, if the long-term capital asset is transferred on or after July 23, 2024, the indexation benefit is not available, except for the one exception mentioned in section 112 [for the exception, see para 104.1-3]. The method for computing the indexed cost of acquisition and the indexed cost of improvement is discussed in Annex 1 of this chapter. 8. Exemption under these sections can be claimed even by an assessee who pays tax under the alternative tax regime.
317
How to find out expenditure on transfer
Para 97
95.1-1 CAPITAL GAIN IN THE CASE OF INSURANCE POLICY [SEC. 10(10D)] - See paras 32.3, 101.24 and 116B. 95.1-2 CAPITAL GAIN ON TRANSFER OF US64 [Sec. 10(33)] - Any income arising from the transfer of a capital asset being a unit of US 64 is not chargeable to tax where the transfer of such assets takes place on or after April 1, 2002. This rule is applicable whether the capital asset (US64) is long-term capital asset or short-term capital asset. 95.1-3 LONG-TERM CAPITAL GAIN ON TRANSFER OF BSE-500 EQUITY SHARES [Sec. 10(36)] - This exemption is available if the following conditions are satisfied 1. Capital gain arises on transfer of long-term equity shares (being shares in a BSE-500 Index of the Bombay Stock Exchange, as on March 1, 2003). 2. These shares were purchased on or after March 1, 2003 but before March 1, 2004. 3. Capital gain arises on transfer of these shares in a recognized stock exchange. 95.1-4 CAPITAL GAIN ON COMPULSORY ACQUISITION OF URBAN AGRICULTURE LAND [SEC. 10(37)] - Section 10(37) is applicable if the following conditions are satisfied 1. The assessee is an individual or a Hindu undivided family. 2. He or it owns an agriculture land situated in urban area mentioned in section 2(14)(iii)(a)/(b). 3. There is transfer of the agriculture land by way of compulsory acquisition or the consideration for transfer is approved or determined by the Central Government (not by a State Government) or RBI. 4. The agriculture land was used by the assessee (and/or his parents if the land was owned by an individual) for agricultural purposes during 2 years immediately prior to the date of transfer. 5. The asset may be long-term capital asset or short-term capital asset. 6. Capital gain arises from compensation (and/or additional compensation) or consideration which is received by the assessee after March 31, 2004. p If the above conditions are satisfied, capital gain (short-term or long-term) is exempt from tax. 95.1-5 CAPITAL GAIN ARISING UNDER LAND POOLING SCHEME OF ANDHRA PRADESH GOVERNMENT [SEC. 10(37A)] - See para 101.23. 95.1-6 COMPENSATION UNDER SECTION 96 OF RFCTLARR ACT, 2013 - Capital gain arising out of any award/agreement under Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, is exempt from tax. 95.1-7 CAPITAL GAIN EXEMPTION UNDER SECTION 115JG(1) - Under section 115JG(1) capital gains which arise on conversion of an Indian branch of a foreign bank into an Indian subsidiary, is not chargeable to tax. The exemption is available only if the conversion takes place in accordance with the scheme framed by RBI and subject to the conditions notified by the Central Government.
nn WHAT IS FULL VALUE OF CONSIDERATION [SEC. 48] 96. Full value of consideration is the consideration received or receivable by the transferor in lieu of assets, which he has transferred. Such consideration may be received in cash or in kind. If it is received in kind, then fair market value of such assets is taken as full value of consideration. Full value of consideration does not mean market value of that asset which is transferred. p Adequacy of consideration - Adequacy or inadequacy of consideration is not a relevant factor for the purpose of determining full value consideration. However, in the case of transfer of land or building (or both), if stamp duty value is more than 110 per cent of sale consideration, the stamp duty value is taken as full value of consideration. p Receipt of consideration - It makes no difference whether (or not) full value of consideration is received during the previous year. Even if consideration is not received, capital gain is chargeable to tax in the year of transfer. p If consideration is not determinable - Where in the case of a transfer, consideration for the transfer of a capital asset(s) is not determinable, then for the purpose of computing capital gains, the fair market value of the asset shall be taken to be the full market value of consideration [sec. 50D].
nn HOW TO FIND OUT EXPENDITURE ON TRANSFER 97. Expenditure incurred wholly and exclusively in connection with transfer of capital asset is deductible from full value of consideration. The expression expenditure incurred wholly and exclusively in connection with such transfer means expenditure incurred which is necessary to effect the transfer. Examples of such expenses are : brokerage or commission paid for securing a purchaser, cost of stamp, registration fees borne by the vendor, travelling expenses incurred in connection with transfer, litigation expenditure for claiming enhancement of compensation awarded in the case of compulsory acquisition of assets.
Para 98
Income under the head ‘Capital gains’ and its computation
318
nn WHAT IS COST OF ACQUISITION 98. 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. Interest on money borrowed to purchase asset is part of actual cost of asset. The amount paid for discharge of a mortgage is part of cost of acquisition , if the mortgage was not created by the transferor. For instance, on June 1, 2019, X took a loan of Rs. 5 lakh by mortgaging his house property. X could not repay the loan during his lifetime and after his death on July 2, 2021, the property (with mortgage) is transferred to Mrs. X. Mrs. X transfers the property on May 2, 2023 and before transfer, a sum of Rs. 7.2 lakh is paid to clear the mortgage. Rs. 7.2 lakh will be deductible as part of cost of acquisition of the property while calculating capital gains in the hands of Mrs. X. If, however, loan is taken by Mrs. X, then repayment of loan will not be deductible as part of cost of acquisition of the property while calculating capital gains in the hands of Mrs. X. p Cost of acquisition shall not include the deductions claimed on the amount of interest under section 24(b) or under the provisions of Chapter VI-A.
nn WHAT IS COST OF IMPROVEMENT 99. Cost of improvement is capital expenditure incurred by an assessee in making any additions/improvement to the capital asset. It also includes any expenditure incurred to protect or complete the title to the capital assets or to cure such title. Any expenditure incurred to increase the value of the capital asset is treated as cost of improvement. p Improvement cost incurred before April 1, 2001 - Cost of improvement incurred before April 1, 2001 is never taken into consideration. This rule does not have any exception. p Double deduction not possible - Cost of improvement shall not include the deductions claimed on the amount of interest under section 24(b) or under the provisions of Chapter VI-A.
nn HOW TO CONVERT COST OF ACQUISITION/IMPROVEMENT INTO INDEXED COST OF ACQUISITION/IMPROVEMENT 100. Indexed cost of acquisition and indexed cost of improvement are deductible if a long-term capital asset is transferred before July 23, 2024. Conversely, if the long-term capital asset is transferred on or after July 23, 2024, the indexation benefit is not available, except for the one exception mentioned in section 112 [for the exception, see para 104.1-3]. The method for computing the indexed cost of acquisition and the indexed cost of improvement is discussed in Annex 1 of this chapter.
nn CAPITAL GAIN IN SPECIAL CASES - HOW TO FIND OUT 101. In the following cases, the method of computation is different from what is discussed in the above paras 101.1 Cost to the previous owner [Sec. 49(1)] - If a person has acquired a capital asset in the circumstances specified under section 49(1), then to calculate capital gain at the time of transfer of such asset cost to the previous owner is taken as cost of acquisition. This rule is always applicable and does not have any exception. Circumstances specified by section 49(1) are as follows a. acquisition of property on any distribution of assets on the total or partial partition of a Hindu undivided family; b. acquisition of property under a gift or will ; c. acquisition of property i. by succession, inheritance or devolution, or ii. on any distribution of assets on the dissolution of a firm, body of individuals or other association of persons where such dissolution had taken place before April 1, 1987, or iii. on any distribution of assets on the liquidation of a company, or iv. under a transfer to a revocable or an irrevocable trust, or v. by a wholly-owned Indian subsidiary company from its holding company, or *The number given in brackets represents a similar solved Problem No. of another book entitled Students Guide to Income-tax - Problems & Solutions , November 2024 edition. This book includes many more solved problems focusing on contemporary issues.
319
Cost of acquisition being fair market value
Para 101.2
vi. by an Indian holding company from its wholly-owned subsidiary company, or vii. under a scheme of amalgamation, or viii. under a scheme of demerger; or ix. under a scheme of conversion of private company/unlisted company into LLP; x. on any transfer in the case of conversion of firm/sole-proprietary concern into company; or xi. on any transfer, in relocation, of a capital asset by the original fund to the resulting fund which comes under section 47(viiac)/(viiad), or xii. on any transfer which comes under section 47(viiae)/(viiaf); or d. acquisition of property, by a Hindu undivided family where one of its members has converted his selfacquired property into joint family property after December 31, 1969. p Other points - The following points should be duly considered 1. No option - If a capital asset was acquired in any one of the modes given above, then cost to the previous owner shall be taken as cost of acquisition for the purpose of calculating capital gain at the time of its transfer. There is no option in this regard. 2. Last previous owner - Where the previous owner has acquired the property in the aforesaid manner, the previous owner of the property means the last previous owner who had acquired the property by means other than those discussed above. Cost of any improvement of the asset borne by the previous owner, or the assessee, will be added to such cost. Provisions illustrated X purchases a capital asset in November 2018 for Rs. 40,000. He transfers this asset to his friend Y by gift during December 2023. Y dies during March 2024 and the asset is transferred by his Will to Mrs. Y. Mrs. Y transfers this property during August 2024 for a consideration of Rs. 90,000. To calculate capital gain in the hands of Mrs. Y, cost of acquisition of the capital asset to X (i.e., Rs. 40,000) will be considered and capital gain will be Rs. 50,000.
3. Period of holding of previous owner - In order to find out whether the capital asset is short-term or long-term in the above cases, the period of holding of the previous owner shall be taken into consideration. 4. Indexation - The benefit of indexation is available (if transfer takes place before July 23, 2024) from the year in which the asset was first held by the previous owner9. 101.2 Cost of acquisition being the fair market value as on April 1, 2001 - In the following cases, the assessee may take, at his option, either actual cost or the fair market value of the asset as on April 1, 2001 as cost of acquisition : a. where the capital asset became the property of the assessee before April 1, 2001; or b. where the capital asset became the property of the assessee by any mode referred to in section 49(1) and the capital asset became the property of the previous owner before April 1, 2001. Provisions illustrated Suppose X purchases preference shares on April 30, 1990 @ Rs. 40 per share. Fair market value on April 1, 2001 is Rs. 90 per share. If he sells the shares in 2024-25 at the rate of Rs. 200 per share, he has an option. He can either take the actual cost of Rs. 40 per share as cost or, fair market value on April 1, 2001, i.e., Rs. 90 per share. As the fair market value on April 1, 2001 is higher, the resulting capital gain will be lower if it is taken as the cost of acquisition.
The following points should be duly considered 1. In the case of land and building, fair market value on April 1, 2001 cannot exceed stamp duty value (wherever available) of such assets on April 1, 2001. 2. Adopting fair market value on April 1, 2001 (in place of actual cost of acquisition) is optional. An assessee may (or may not) opt for it. 3. The option is available only when an asset was acquired by the assessee [or by the previous owner in case section 49(1) is applicable] before April 1, 2001. 4. When option is available, the cost of the asset or fair market value as on April 1, 2001, whichever is higher, is taken as the cost of acquisition. 5. The option is not available in the case of depreciable assets.
p
9. Conversely, if the long-term capital asset is transferred on or after July 23, 2024, the indexation benefit is not available, except for the one exception mentioned in section 112 [for the exception, see para 104.1-3]. The method for computing the indexed cost of acquisition and the indexed cost of improvement is discussed in Annex 1 of this chapter.
Para 101.3
Income under the head ‘Capital gains’ and its computation
320
6. Further option is not available in respect of transfer of a capital asset being goodwill of a business; trade mark/ brand name associated with a business; right to manufacture, produce or process any article or thing; right to carry on business/profession; tenancy right; route permits or loom hours (whether self-generated or otherwise). Problems 101.2-P1 Find out capital gain chargeable to tax in the following cases Date of acquisition Date of transfer Sale consideration Stamp duty value Cost of acquisition Fair market value on April 1, 2001 Cost of construction of first floor (in 1999-00) Cost of construction of second floor (in 2014-15)
House May 20, 1989 October 29, 2024 Rs. 14,00,000 16,50,000 95,000 90,000 18,000 40,000
Silver March 10, 1999 August 10, 2024 Rs. 8,00,000 58,000 60,000
Diamond May 1, 2003 August 12, 2024 Rs. 8,10,000 70,000 84,000
Solution : House
Silver
Diamond
Whether option of using fair market value on April 1, 2001 is available Yes Yes No Whether fair market value on April 1, 2001 is more than actual cost of acquisition and should it be adopted No Yes Full value of consideration (stamp duty value is taken in the case of house, as it exceeds 110% of sale consideration) 16,50,000 8,00,000 8,10,000 Less: Cost of acquisition 95,000 60,000 70,000 Cost of improvement 40,000 Long-term capital income 15,15,000 7,40,000 7,40,000 Notes 1. Cost of acquisition of house - Fair market value on April 1, 2001 is less than actual cost of acquisition. It should not be taken as cost of acquisition. Consequently, cost of acquisition of Rs. 95,000 is taken. 2. Cost of improvement of house - Any cost of improvement which is incurred prior to April 1, 2001 is never taken into consideration. Cost of improvement incurred during 1999-00 will be ignored. 3. Cost of acquisition of silver- Fair market value on April 1, 2001 is more than actual cost of acquisition. It should be taken as cost of acquisition. Consequently, cost of acquisition of Rs. 60,000 is taken. 4. Cost of acquisition of diamond - Fair market value on April 1, 2001 cannot be adopted, as diamond was acquired on or after April 1, 2001. 101.2-E1 X purchases a plot of land on March 1, 1997 for Rs. 45,000. He transfers the plot to his nephew Y on July 20, 2022 for Rs. 55,00,000. Y transfers the plot on September 6, 2024 for Rs. 61,00,000. Expenditure incurred on transfer by Y is Rs. 10,000. However, it is reimbursed by the purchaser. The fair market value of the plot on April 1, 2001 was Rs. 2,30,000. Find out the amount of capital gain chargeable to tax in the hands of Y.
101.3 Capital gain in the case of transfer of depreciable assets [Sec. 50] - The following rules10 are applicable Capital gain arises only in two cases - If a depreciable asset is transferred, capital gain (or loss) will arise only in the following two cases 1. When on the last day of the previous year written down value of the block of assets is zero [sec. 50(1)]. 2. When the block of assets is empty on the last day of the previous year [sec. 50(2)]. In no other case capital gain is chargeable to tax, when a depreciable asset is transferred. This rule is equally applicable whether depreciation is allowed in the current year (or any of earlier years).
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10. These rules are not applicable in the case of transfer of assets by a power generating unit which claims depreciation on straight line basis.