STUDY NOTE 8

CAPITAL GAINS
This Study includes Note

Meaning of Capital Asset Meaning of Transfer Various Provisions of the Income Tax Act for computation of income under the head Capital Gain Exemptions for Capital Gain

INTRODUCTION Capital Gain means any profit arising from the transfer of a capital asset. Certain exemptions from tax have been provided for income form Capital Gain. To understand the topic, it is necessary to study (i) Meaning of Capital Asset (ii) What is Transfer, (iii) Computation of Capital Gain and (iv) What exemptions are prescribed? THE PROVISIONS RELATING TO COMPUTATION OF CAPITAL GAINS AND ITS CHARGEABILITY ARE BROADLY CLASSIFIED AS UNDER Section s 2(14), 2(47), 2(22B), 2(29A), 2(29B), 2(42A), 2(42B),

Definitions

2(42C) Computation of capital gains, Cost of Acquisition & Full Value consideration 48, 49, 50,50A, 50B, 50C, 51, 55 Exemption from capital gains Special provisions Chargeability 54 to 54H 47, 47A, 55A, 112 45, 46, 46A

8.1 CAPITAL ASSET

[Sec. 2(14)]

Transfer of Capital Asset gives rise to capital gain. If property transferred is not a capital asset, capital gain cannot result.

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Capital Gains Capital asset means property of any kind except the following: (a) Stock-in-trade, consumable stores or raw-materials held for the purpose of Business or Profession. (b) Personal effects like wearing apparel, furniture, motor vehicles etc., held for personal use of the tax payer or any member of his family. However, jewellery, even if it is for personal use, is a capital asset.

(c) Agricultural land in India other than the following: (i) Land situated in any area within the jurisdiction of municipality, municipal corpora- tion, town area committee, town committee, or a cantonment board which has popu- lation of not less than 10,000 according to the figures published before the first day of the previous year based on the last preceding census. (ii) Land situated in any area around the above referred bodies up to a distance of 8 kms. from the local limits of such bodies as notified by the Central Government.

(d) 6 per cent Gold Bonds, 1977, 7 per cent Gold Bonds, 1980, National Defense Gold Bonds, 1980 and Special Bearer Bonds, 1991 issued by the Central Government. (e) Gold deposit bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government. Though there is no definition of property in the Income-tax Act, it has been judicially held that a property is a bundle of rights which the owner can lawfully exercise to the exclusion of all others and is entitled to use and enjoy as he pleases provided he does not infringe any law of the State. Property can be movable (gold, jewellery, furniture, car) or Immovable (land, building, house). It can be tangible (gold, jewellery, furniture, car, land, buildings) or intan- gible (goodwill, brand, copyrights. It can be corporal or incorporeal. All the properties are assets, if it does not fall in the aforesaid exceptions stated in clause (a) to (e), above. Thus, if an assessee sells his household furniture or utensils, the difference in sales price and cost will not be regarded as capital gain because these are personal effects and are not covered in the defini- tion of capital asset. Similarly, sale of stock does not result into capital gain, but as one is aware it results into profits or gains from business. Case Law : Under the charging section, the crucial requirements are that there must be a transfer and the transfer must be of a capital asset. The implication is that at the time of the transfer the subject of the transfer must be a capital asset. - M. Venkatesan v. CIT 144 ITR 886 (Mad.). A contract for sale of land is capable of specific performance. It is also assignable. A right to obtain conveyance of immovable property is clearly property as contemplated by section 2(14) - CIT v. Tata Services Ltd. 122 ITR 594 (Bom.).

A business as a going concern would constitute a capital asset within the meaning of section 45 - CIT v. F.X. Periera & Sons (Travancore)(P.) Ltd. 184 ITR 461 (Ker.). Route permits are capital assets - Route permits for plying buses issued by authorities under the Motor Vehicles Act are property for the deprivation of which compensation is payable to the permit holder and, hence, such route permits are capital assets in the hands of the assesseeApplied Direct Taxation

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transport company - Addl. CIT v. Ganapathi Raju Jegi, Sanyasi Raju 119 ITR 715 (AP) Only those effects can legitimately be said to be personal which pertain to the assessee person. In other words, an intimate connection between the effects and the person of the assessee must be shown to exist to render them personal effects. The enumeration of articles like wearing apparel, jewellery and furniture mentioned by way of illustrations in the definition of per- sonal effects also shows that the Legislature intended only those articles to be included in the definition which were intimately and commonly used by the assessee - H.H. Maharaja Rana Hemant Singhji v. CIT 103 ITR 61. Where certain land was situated in the most important and busiest thoroughfare in city and land was surrounded on all sides by industrial and commercial buildings, and no agricultural operations were being carried on any land nearby, the mere fact that vegetables were being raised thereon at the time of the sale or for some years prior thereto, could not change the nature and character of the land from non-agricultural to agricultural - CIT v. Gemini Pictures Circuit (P.) Ltd. 85 Taxman 594/220 ITR 43. TYPES OF CAPITAL ASSETS AND GAINS CAPITAL

For the purpose of taxation assets are divided into two categories viz. (i) Long Term Capital asset and (ii) Short Term Capital asset. (a) Long Term Capital Asset [Sec. 2(29A)]: It is defined as a capital asset which is not a short- term capital asset. If capital asset is held by the assessee for more than thirty-six months it becomes a Long-term capital asset. In the case of shares in a company, securities listed in a recognised stock exchange in India, units of Unit Trust of India or units of Mutual Fund specified u/s. 10(23D) as the case may be, such an asset will be treated as a long term capital asset if it is held for more than twelve months. (b) Short Term Capital asset [Sec. 2(42A)]: If capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer is known as short term capital asset. However, the following assets shall be treated as short term capital asset if they are held for not more than 12 months preceding the date of transfer. (i) Equity or preference shares held in a company. (ii) Securities listed in a recognised stock exchange in India. (iii) Units of the Unit Trust of India or units of a Mutual Fund specified u/s. 10(23D). PERIOD CASES OF HOLDING IN CERTAIN

Normally the period is counted from the date of acquisition to the date of transfer. However, it has the following exceptions: in the case of a share held in a company on liquidation the period subsequent to the date on which the company goes into liquidation would not be considered. (ii) where the cost of acquisition is to be taken as the cost to the previous owner [Sec. 49(1) e.g. gift, will, succession, merger, etc.], the period of holding by (i)

the previous owner should also be considered.

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Capital Gains (iii) where the capital asset is the shares of an amalgamated company acquired in lieu of the shares of the amalgamating company, the period of holding of the shares of the amalgam- ating company should also be considered. (iv) where the capital asset is the shares or any other security subscribed by the assessee in a right issue, or subscribed to by the person in whose favour the assessee renounces his right, the period should be considered from the date of allotment of such asset. (v) where the capital asset is the right to subscribe to a rights offer and it is renounced, the date of offer of the rights should be taken as the date of acquisition.

(vi) where the capital asset is share(s) in an Indian company which has become the property of the assessee in consideration of a demerger, the period for which the share(s) of the demerged company were held should also be considered. (vii) where the capital asset is the financial asset acquired without any payment (e.g. bonus shares), the period should be considered from the date of allotment of such asset. (viii) in the case of a capital asset, being any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees), the period shall be reckoned from the date of allotment or transfer of such specified security or sweat equity shares. In respect of capital assets other than those mentioned above, the period for which any capital asset is held by the assessee shall be determined subject to any rules which the CBDT may make in this behalf. Case Law : Bonus shares issued by a company are acquired by a shareholder when they are issued and they must be taken to be held by shareholder from the date of their issue and not from the date when the original shares, in respect of which they are issued, were acquired by the shareholder - Executive of the Will of Late Shri Manecklal Premchand v. CIT 48 Taxman 310/Manecklal Premchand v. CIT 186 ITR 554. A member of a housing society becomes owner of flat on date on which he acquires shares in society and question as to whether flat is a long-term capital asset has to be decided by taking that date into consideration rather than date of possession of flat - CIT v. Anilaben Upendra Shah 262 ITR 657134 Taxman 522. (c) Long Term Capital Gain [Sec. 2(29B)]: Gains arising due to transfer of long term capital asset, as defined above, are called as long term capital gain. Any asset on which depreciation is allowed under the Income-tax Act, it is held as short term capital gain (Section 50). In respect of long term capital gain, certain concessions like exemption, lower tax rate, deduc- tion of indexed cost of acquisition are available. (d) Short Term Capital Gain [Sec. 2(42B)]: Gains arising due to transfer of short term capital asset, as defined above, are called as short term capital gain.

Short term capital gain is included in taxable total income of the assessee and normal tax rate is applicable, for income-tax payment..
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8.2 TRANSFER
2(47)]

[Sec.

Transfer is defined in a much wider sense than as is commonly understood. A layman loosely calls it sale. In order to attract capital gains tax, transfer should take place. Meaning of trans- fer includes sale, but it includes many more category of transactions. Transfer, in relation to capital asset, includes the following: (i) Sale, exchange or relinquishment of a capital asset. A sale takes place when title in the property is transferred for a price. The sale need not be voluntary. An involuntary sale like that by a Court of a property of judgment debtor at the instance of a decree holder is also transfer of a capital asset. An exchange of capital asset takes place when the title in one property is passed in consider- ation of the title in another property. Relinquishment of a capital asset arises when the owner surrenders his rights in property in favour of another person. For example, the transfer of rights to subscribe the shares in a com- pany under any Rights Issue, to a third person. (ii) Extinguishment of any rights in a capital asset. This covers every possible transaction which results in destruction, termination, cessation or cancellation of all or any bundle of rights in a capital asset. For example, termination of a lease or and of a mortgagees inter- est in a property. Compulsory acquisition of the capital asset under any law. Acquisition of immovable properties under the Land acquisition Act, acquisition of industrial undertaking under the Industries (Development and Regulation) Act or preemptive purchase of immovable properties by the Income-tax Department are some of the examples of compulsory acqui- sition of a capital asset.

(iii)

(iv) Conversion of a capital asset into stock-in-trade. Normally, there can be no transfer if the ownership in an asset remains with the same person. However, the Income-tax Act provides an exception for the purpose of capital gains. When a person converts any capi- tal asset owned by him into stock-intrade of a business carried on by him, it is regarded as a transfer. For example, where an investor in shares starts a business of dealing in shares and treats his existing investments as the stock-in-trade of the new business, such conver- sion arises and is regarded as a transfer. (v) Contract of the nature of Part performance. Normally transfer of an immovable property worth Rs. 100 or more is not complete without execution and registration of a conveyance deed. However, section 53A of the Transfer of Property Act envisages situations where under a contract for transfer of an immovable property, the purchaser has paid the price and has taken possession of the property, but the conveyance is either not executed or if executed is not registered. In such cases the transferor is debarred from agitating his title to the property against the purchaser.

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Capital Gains (vi) Transfer of rights in immovable properties through the medium of cooperative societ- ies, companies etc. Usually flats in a building and in group housing schemes are regis- tered in the name of a co-operative society constituted by a number of members. A Com- pany may be formed with an object of owning a building and shareholders are entitled to enjoy occupancy of certain tenement. In such circumstances transfer of rights to use and enjoy the flat is effected by changing the membership of cooperative society or by trans- ferring the shares in the company. (vii) Transfer by a person to a firm or other Association of Persons (AOP) or Body of Indi- viduals (BOI). Normally, firm/AOP/BOI is not considered a distinct legal entity from its partners or members and so transfer of a capital asset from the partners to the firm/AOP/ BOI is not considered as Transfer. However, under the Capital gains, it is specifically provided that if any capital asset is transferred by a partner to a firm/AOP/BOI by way of capital contribution or otherwise, the same would be construed as transfer. (viii) Distribution of money or other assets by Company on Liquidation. If a shareholder receives any money or other assets from a Company in liquidation, the shareholder is liable to pay capital gains as the same would have been received in lieu of the shares held by him in the company. However, if the assets of a company are distributed to the share- holders on its liquidation, such distribution shall not be regarded as transfer by the company.[ Sec. 46(2)]. (ix) the maturity or redemption of a zero coupon bond. Case Law : The definition of transfer under section 2(47) is merely inclusive and does not exhaust other kinds of transfer Sunil Siddharthbhai v. CIT 156 ITR 509 (SC). A transfer of a capital asset takes place when the investiture of title takes place under a law relating to compulsory acquisition of property Mangalore Electric Supply Co. Ltd. v. CIT 113 ITR 655 (SC). Transaction of reduction of share capital by company and pro rata distribution of amount/ assets to shareholders amounts to transfer within meaning of section 2(47) - CIT v. G. Narasimhan 102 Taxman 66/236 ITR 327 (SC). Redemption of preference shares involves transfer - Redemption of preference shares by the company will squarely come within the phrase sale, exchange or relinquishment of the asset - Anarkali Sarabhai v. CIT 90 Taxman 509/224 ITR 422 (SC). An exchange involves the transfer of property by one person to another and reciprocally the transfer of property by the other to the first person. There must be a mutual transfer of owner- ship of one thing for the ownership of another - CIT v. Rasiklal Maneklal (HUF) 177 ITR 198/ 43 Taxman 259. A relinquishment takes place when the owner withdraws himself from the property and aban- dons his rights thereto; it presumes that the property

continues to exist after the relinquish- ment - CIT v. Rasiklal Maneklal (HUF) 177 ITR 198/43 Taxman 259.

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TRANSACTIONS NOT REGARDED AS TRANSFER [Sec. 46(1), 47] Under the Act, certain transactions are expressly excluded from being considered as transfer. When any person undertakes transactions of the nature which are nor regarded as transfer, capital gain does not arise and no tax becomes payable. The following are categories of such transactions: (a) Distributions of assets by companies in liquidation to the shareholders of a company. [Sec. 46(1)] (b) (i) distribution of capital assets on the total or partial partition of a HUF. (ii) transfer of a capital asset under a gift or will or an irrevocable trust except transfer under a gift or an irrevocable trust, of shares, debentures or warrants allotted by a company to its employees under Employees Stock Option Plan or Scheme; (iii) transfer of a capital asset by a company to is subsidiary company, if : (a) the parent company or its nominees hold the whole of the share capital of a subsidiary company,

(b) the subsidiary company is an Indian company, (c) the capital asset is not transferred as stock-in-trade, (d) the subsidiary company does not convert such capital asset into stock-in-trade for a period of 8 years from the date of transfer, and (e) the parent company or its nominees continue to hold the whole of the share capital of the subsidiary company for 8 years from the date of transfer. (iv) transfer of a capital asset by a subsidiary company to the holding company, if (a) the whole of the share capital of the subsidiary company is held by the holding company,

(b) the holding company is an Indian Company, (c) the capital asset is not transferred as stock-in-trade, (d) the holding company does not convert such capital asset into stockin-trade for a period of 8 years from the date of transfer, and (e) the holding company or its nominees continue or hold the whole of the share capital of the subsidiary company for 8 years from the date of transfer. (v) in a scheme of amalgamation, transfer of a capital asset by the amalgamating company to the amalgamated company if the amalgamated company is an Indian company. (vi) transfer of shares of an amalgamating company, if : (a) the transfer is made in consideration of the allotment of share or shares in the amalgamated company, and

(b) the amalgamated company is an Indian company. [Sec. 47(vii)] (c) any transfer in a business reorganisation, of a capital asset by the predecessor co- operative bank to the successor co-operative bank
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Capital Gains d) any transfer by a capital asset being co-operative bank allotment to him of bank shareholder, in a business reorganisation, of a a share or shares held by him in the predecessor if the transfer is made in consideration of the any share or shares in the successor co-operative

(vii) transfer of shares of an Indian Company, by an amalgamating foreign company to the amalgamated foreign company, if : (a) at least twenty-five per cent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company and such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated. [Sec. 47(via)]

(b)

(c) Sec. 47(viaa): Amalgamation of banking company with the banking institutions. Any transfer of a capital asset by banking company to banking institution in a scheme of amalgamation of such banking company with such banking institution sanctioned and brought into force by the Central Government u/s 45(7) of the Banking Regulation Act, 1949. (viii) in a demerger : (a) (b) transfer of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company; transfer of share or shares held in an Indian company by the demerged foreign company to the resulting foreign company if :

(i) the share holders holding not less than three fourths in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company; and (ii) such transfer does not attract tax on capital gains in the country, in which the demerged foreign company is incorporated. (c) transfer or issue of shares, in consideration of demerger of the undertaking by, the resulting company to the shareholders of the demerged company. [Sec. 47(vib), (vic), (vid)] (ix) transfer of bonds or Global Depository Receipts, purchased in foreign currency, by a non-resident to another non-resident outside India. [Sec. 47(viii)] transfer of any work of art, manuscript, drawing, to the Government or a University or the National Museum, or any such other public museum or institution notified by the Central Government in the Official Gazette to be of national importance. [Sec. 47(ix)]

(x)

(xi) 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.

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(xii) transfer of membership of a recognised stock exchange made by a person (other than company) on or before 31.12.1998, to a company in exchange of shares allotted by that company. However, if the shares of the company are transferred within 3 years of their acquisition, the gains not charged to tax by treating their acquisition as not transfer would be taxed as capital gains in the year of transfer of the shares. [Sec. 47(x)] (xiii) transfer of land of a sick industrial company, made under a scheme prepared and sanction under the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) where such sick industrial company is being managed by its workers cooperative and such transfer is made during the period commencing from the previous year in which the said company has become a sick industrial company u/ s. 17(1) of that Act and ending with the previous year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses. [Sec. 47(xii)] (xiv) (i) transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm; or transfer of a capital asset to a company in the course of Corporation of a recognised stock exchange in India as a result of which AOP/BOI is succeeded in such company, if all the liabilities of the AOP or BOI relating to the business immediately before the succession become the assets and liabilities of the company, all the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of succession,

(ii) (a)

(b)

(c) the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the Company and (d) the aggregate of the shareholding in the company of the partners of the firm is not less than fifty per cent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of succession. If the conditions laid down above are not complied with, then the amount of profits arising from the above transfer would be deemed to be the Profits and gains of the successor company for the pervious year during which the above conditions are not complied with. (e) W.e.f. Assessment Year 2002-2003, the corporatisation of recognised stock exchange in India is carried out in accordance with a scheme approved by SEBI. [Sec. 47(iii)]. (xv) Where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers and capital asset or intangible asset to the company, if :

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Capital Gains (a) (b) all the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company. the shareholding of the sole proprietor in the company is not less than fifty percent of the total voting power in the company and his shareholding continues to so remain as such for a period of five years from the date of the succession and

(c) the sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company [Sec. 47(xiv)]. (xvi) Transfer in a scheme of lending of any securities under an arrangement subject to the guidelines of Securities and Exchanges Board of India (SEBI).With effect from assessment year 2003-04 securities which are subject to guide lines issued by RBI is also included for this purpose. (xvii) any transfer in a business reorganisation, of a capital asset by the predecessor co-operative bank to the successor co-operative bank. (xviii) any transfer by a shareholder, in a business reorganisation, of a capital asset being a share or shares held by him in the predecessor cooperative bank if the transfer is made in consideration of the allotment to him of any share or shares in the successor co-operative bank. Case Law : When a proprietary business is converted into a partnership business by the induction of partners, there is a transfer of part of the assets at least by the assessee in favour of the inducted partners. Since the transfer did not result in yielding any profit or gain to the assessee, no gains should be subjected to tax under section 45 - CIT v. H. Rajan & H. Kannan 236 ITR 42 . The date of sale or transfer is the date when the sale or transfer takes place, and for the purpose of determining such a date, entries in the account books are irrelevant - Alapati Venkataramiah v. CIT 57 ITR 185 . THE CENTRAL GOVERNMENT OF DIRECT TAXES ISSUED THE FOLLOWING CIRCULARS IN REGARD TO DETERMINATION OF DATE OF TRANSFER/PERIOD OF HOLDING ETC. OF CAPITAL ASSET. Circular No. (i) If securities are transacted through stock exchanges, the date of brokers note should be treated as the date of transfer provided the transaction is followed up by delivery of shares and also the transfer deeds. Similarly, in respect of the purchase of the securities, the holding period shall be reck- oned from the dated of the brokers note for purchase on behalf of the investors. In case the transactions take place directly between the parties and not through stock exchanges, the Board has clarified that the date of contract of

(ii)

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sale as declared by the parties shall be treated as the date of transfer provided it is followed up by actual delivery of shares and the transfer of deeds. (iii) In cases where the shares are purchased in several lots at different points of time and are taken delivery of in one lot and are subsequently sold in parts, in the absence of correlation of the dates of purchase and sale through spe- cific numbers of the scrips, it is difficult to determine the period of holding of the shares which are sold in parts. In this retgard, Board has clarified that First-in-first-out (FIFO) method shall be adopted to reckon the period of holding. Therefore, the shares acquired first will always be treated as sold first and the shares acquired last will be taken to be remaining with the assessee. (iv) The FIFO method will be applied only in respect of the dematerialised hold- ings because in the case of sale of dematerialised securities, the securities held in physical form cannot be construed to have been sold as they con- tinue to remain in the possession of the investor and are identified sepa- rately.

(v) 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, the FIFO method will be applied account wise. This is because in case where a particular account of an investor in debited for sale securities, the securities lying in his other account cannot be construed to have been sold as they continue to remain in that account. (vi) If in an existing account of dematerialized stock, old physical stock is dematerialised and entered at a later date, under the FIFO method, the ba- sis for determining the movement out of the account is the date of entry into the account.

8.3 VARIOUS PROVISIONS OF THE INCOME TAX ACT FOR COMPUTATION OF INCOME UNDER THE HEAD CAPITAL GAIN
CAPITAL GAIN Capital gain arises from transfer of a capital asset. Charge over capital gain is created by section 45 r.w.s. 2(24) [defining income] of the Act. Unless expressly exempt under the Act, capital gain is liable to tax. Section 45 provides as under: (1) 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.

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Capital Gains (1A) Apart anything contained in sub-section (1), when any person receives during any previ- ous year any money under an insurance from an insurer on account of damage to, any capital asset, as a result of (i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or (ii) riot or civil disturbance; or (iii) accidental fire or explosion; or (iv) action by an enemy or action taken in combating an enemy. then, any profits arising from receipt of such money shall be chargeable to income-tax under the head Capital gains and shall be deemed to be the income of such person of the previous year in which such money or other asset was received. (2) Apart anything contained in sub-section (1), the profits arising from the transfer by way of conversion by the owner of a capital asset into stock-intrade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him. The fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received.

(2A) Where any person has had at any time during previous year any beneficial interest in any securities, then, any profits arising from transfer made by the depository of such benefi- cial interest in respect of securities shall be chargeable to income-tax as the income of the beneficial owner of the previous year in which such transfer took place and shall not be regarded as income of the depository who is deemed to be the registered owner of securities. The cost of acquisition and the period of holding of any securities shall be determined on the basis of the first-in-first-out method (3) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of indi- viduals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, of the previous year in which the said transfer takes place and. The fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received. Apart anything contained in sub-section (1), where the capital gain arises from the trans- fer of a capital asset, being a transfer by way of compulsory acquisition under any law, or a transfer the consideration for which was determined or approved by the Central Gov- ernment or the Reserve Bank of India, and the consideration for such transfer is enhanced or further enhanced by authority, the capital gain shall be dealt with in the following manner, namely: (a) the capital gain computed with reference to the compensation awarded in the first instance or by the Central Government or the Reserve Bank of India shall be charge- able as income under the head Capital gains of the previous year in which such compensation or part thereof, was first received and (b) the amount by which the consideration is enhanced by any other authority shall be deemed to be income chargeable under the head Capital gains of the previous year in which such amount is received by

(4)

the assessee;
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(c) where in the assessment for any year, the capital gain arising from the transfer of a capital asset is computed by taking the consideration referred to in clause (a) or, as the case may be, enhanced consideration referred to in clause (b), and subsequently such consideration is reduced by any authority, such assessed capital gain of that year shall be recomputed by taking the consideration as so reduced by authority to be the full value of the consideration. Explanation.For the purposes of this subsection, (i) in relation to the amount referred to in clause (b), the cost of acquisition and the cost of improvement shall be taken to be nil; (ii) the provisions of this sub-section shall apply also in a case where the transfer took place prior to the 1st day of April, 1988;

(iii) where by reason of the death of the person who made the transfer, or for any other reason, the enhanced compensation or consideration is received by any other person, the amount referred to in clause (b) shall be deemed to be the income, chargeable to tax under the head Capital gains, of such other person. (6) The difference between the repurchase price of the units referred to in subsection (2) of section 80CCB and the capital value of such units shall be deemed to be the capital gains arising to the assessee in the previous year in which such repurchase takes place or the plan referred to in that section is terminated and shall be taxed accordingly.

CHARGEABILITY [Sec. 45, 46, 46A] Any profits or gains arising from the transfer of capital asset effected in the previous year shall be chargeable to Income-tax under the head capital gains. Chargeability of capital gains are analyzed as under:(i) Sec. 45
Sec. Mode of transfer consideration 45(1) Transfer of a capital asset Year of chargeability Value of

45(2) Conversion of a capital asset into which stock-in-trade stock -in-trade. is sold. year in 45(2A Transfer of securities Previous ) made by the depository which transfer takes place on FIFO method 45(3) Transfer of a capital Previous year in asset partner/member which recorded to a firm/AOP/BOI as capital contribution or otherwise.

Previous year in which transfer takes place Previous year in

Consideration for the transfer Fair market value as on the date of conversion. Consideration for the transfer and chargeable in case of beneficial The value of the asset by transfer takes place.

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Capital Gains
Sec. Mode of transfer consideration 45(4 Transfer of a capital ) asset by way of distribution on dissolution or otherwise of a firm or association of persons. of a capital 45(5 Transfer asset by way of ) compulsory acquisition under any law. 45(6 Repurchase of units of refer to in sec. 80CCB. ) Year of chargeability Value of

Previous year in which transfer takes place.

Fair market as on the date of transfer.

Previous year in which compensation is received. Previous year in which repurchase takes place or the scheme terminates. In the year assets are received from the liquidator.

The initial compensation or enhanced compensation if any. Repurchase price.

46(2 Shareholders receiving ) assets from the liquidator from the liquidation of the company. 46A

Money receipt or market value of the assets on the date of distribution by the liquidator reduced by the dividend Purchase by a company Previous year in whichdeemed Consideration for of its own shares or such shares or other the purchase of other securities are purchased. shares. securities.

Case Laws : The fact that capital gains are connected with the capital assets of a business will not make them the profits of the business - CIT v. Express Newspapers Ltd. 53 ITR 250. Where business is sold as a going concern valuing plant and machinery, etc., surplus arising over and above difference between written down value and actual cost has to be taxed under section 45 - CIT v. Artex Mfg. Co. 93 Taxman 357/227 ITR 260. Any surplus arising from the transfer of a going concern from a firm to a company in which all the erstwhile partners of the firm became shareholders of the company was liable to be as- sessed to capital gains in the status of body of individuals and not in the status of association of persons - Artex Mfg. Co. v. CIT [1981] 131 ITR 559 (Guj.). Surplus arising on sale of shares by an investment company is capital gain, and not business profit - CIT v. Sugar Dealers [1975] 100 ITR 424 (All.). The word otherwise used in section 45(4) takes into its sweep not only the cases of dissolution but also the cases of subsisting partners of a partnership, transferring assets in favour of a retiring partner - CIT v. A.N. Naik Associates [2004] 136 Taxman 107 (Bom.).

122

Appli ed Direc t Taxat ion

COMPUTATION OF CAPITAL GAIN In order to ascertain or compute the capital gain, it is necessary it bifurcate the gain into the following categories: 1. 2. Capital gain from Depreciable Asset Capital gain from other than Depreciable Asset (i) Short Term Capital gain (ii) Long Term Capital gain 3. 4. Computation of Capital Gain in case of Compulsory Acquisition of Property. Capital Gain in Case of a Slump Sale

Computing capital gain in all cases stated above is summarized in the following table: A DEPRECIABLE ASSET Full Value of consideration RUPEES XXXXXXXX REMARKS From Sale of One or More or All the Assets In The Block

Less: Expenses in connection with the transfer = Net consideration Less: Opening Written Down value of Block of Assets Less: Additions in the Block During the Year = Gross capital gains Less: Exemption u/s. 54, 54D, 54EC, 54ED, 54F = Net capital gains

XXX XXXXXX XXXX XXXX XXXXXX XXXXX XXXXX

Block To Which Asset Belong s

Deemed To Be Short Term OF DEPRECIABLE

COMPUTATION OF ASSET [Sec 50]:

CAPITAL

GAINS

IN

CASE

In case of asset on which depreciation has been claimed and allowed for the purpose of in- come-tax, called depreciable assets, there will be no indexation or the capital gains is deemed to be Short-term Capital Gains. Section 50 provides for the computation of capital gains in case of depreciable assets. It Kindly note that where the capital asset is a depreciable asset forming part of a block of assets, section 50 has an overriding effect. This is in spite of anything contained in section 2(42A) which de- fines a short- term capital asset. Section 50provides that where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed, the provi- sions of sections 48 and 49 shall be subject to the following modifications :
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Capital Gains A. Where the full value of consideration received or accruing for the transfer of the asset plus the full value of such consideration for the transfer of any other capital asset falling with the block of assets during previous year exceeds the aggregate of the following amounts namely: (1) expenditure incurred wholly and exclusively in connection with such transfer; (2) WDV of the block of assets at the beginning of the previous year; (3) the actual cost of any asset falling within the block of assets acquired during the pre- vious year such excess shall be deemed to be the capital gains arising from the trans- fer of short-term capital assets.

B.

Where all assets in a block are transferred during the previous year, the block itself will cease to exist. In such a situation, the difference between the sale value of the assets and the WDV of the block of assets at the beginning of the previous year together with the actual cost of any asset falling within that block of assets acquired by the assessee during the previous year will be deemed to be the capital gains arising from the transfer of short- term capital assets. discuss each of ingredient of

Now, let us Computation :

Full Value consideration :

Simply stated it is the price or compensation for which transfer has taken place. This means in the case of sales, the consideration bargained for CIT v. Gillanders Arbuthnot & Co. 87 ITR 407 (SC). The compensation paid in pursuance of a contract of insurance cannot be considered as consid- eration - C. Leo Machodo v. CIT 172 ITR 744 (Mad.) Interest received on unpaid sale price cannot be treated as profits and gains arising from the transfer of capital asset under section 45, but just a revenue receipt - Mount Stuart Tea Estate and Amar Coffee Plantation v. CIT 239 ITR 489 (Mad.). In a case capital gain is received in foreign currency, for conversion of amount received into Indian currency, uniform rate of exchange should be adopted for determining value of acqui- sition and consideration received for transfer of capital asset - Jayakumari & Dilharkumari v. CIT 189 ITR 99 (Kar.). The expression full value of consideration cannot be construed as the market value but as the price bargained for by the parties to the sale. The expression full value means the whole price without any deduction whatsoever and it cannot refer to the adequacy or inadequacy of the price bargained for - CIT v. George Henderson & Co. Ltd. 66 ITR 622. Immovable [Sec. 50C]. Property

In the case of transfer of land or building, if the sale consideration received is less than the value determined by the stamp duty authorities, then such value would be deemed to be the Full Value of the Consideration for computation of capital gains.

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However, if the assessee contains that such stamp duty value is higher than Fair Market Value of the property transferred and the assessee has not disputed such determination of value in any appeal, revision or reference, then the assessing officer may refer the matter to the Valua- tion Officer. If the Fair Market Value determined by the Valuation Officer is less than the value determined by stamp duty authorities, the assessing officer may take such Fair Market Value to be the Full Value of the consideration. However, if the Fair Market Value is more than the value deter- mined by stamp duty authorities then the stamp duty value would be deemed to be the Full Value of Consideration for computation of capital gains. Consideration Installments in

If the Full Value of Consideration agreed upon is received in installments, the entire value of consideration has to be considered in computation of capital gain in the year the capital asset is transferred. Advance [Sec 51] Money Received

An assessee may receive some advance in respect of the transfer of capital asset. Due to the break-down of the negotiation, the assessee might have confiscated and retained the advance. Section 51 provides that while calculating capital gains, the above advance retained by the assessee must go to reduce the cost of acquisition. Expenses in connection with the Transfer Expenses like commission or brokerage for sale, advertisement, lawyers fees for transaction are deductible as transaction costs. The words in connection with used in section 48(i) are very wide in their ambit and hence there is no warrant for importing a restriction that to qualify for deduction the expenditure must necessarily have been incurred prior to the passing of title. It is immaterial whether the expenditure was incurred prior to subsequent to the passing of title - CIT v. Dr. P. Rajendran [1981] 127 ITR 810 (Ker.). Legal expenses incurred for obtaining compensation in compulsory acquisition cases are de- ductible - CIT v. R. Ranga Setty (supra). Also, see CIT v. Dr. P. Rajendran [1981] 127 ITR 810 (Ker.)/ CIT v. Smt. M. Subaida Beevi [1986] 160 ITR 557 (Ker.)/ V.A. Vasumathi v. CIT [1980] 123 ITR 94 (Ker.). Expenditure incurred by the assessee towards amounts paid to tenants for vacating the pre- mises which is sold has nexus with the transaction of sale, since without the tenants vacating the premises the building cannot be sold. The said expenditure would hence be allowable as deduction in the computation of capital gains - Naozar Chenoy v. CIT [1998] 234 ITR 95 (AP). Where the assessee paid a certain sum to his son who had instituted a suit seeking injunction restraining the assessee from selling a property, so as to remove the encumbrance prior to selling that property, the said sum was

deductible - CIT v. Abrar Alvi [2001] 247 ITR 312 (Bom.).

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Capital Gains Written Value Down

The asset sold belongs to certain Block of Assets. The written down value of such block of assets at the beginning of the previous year in which transfer took place is considered. This WDV is deducted from the net consideration. It is possible that the opening WDV of such block of assets at the beginning of the previous year may be Nil. Additions During the Year There of one or more assets in the block of assets acquired during the previous year to which the asset sold belongs. Cost of such assets is deductible. Case Law: The cost of acquisition of the depreciable asset is bound to be computed in accordance with section 50. In other words, section 55(2) is applicable only in respect of sections 48 and 49 of the Act and it has no application to section 50 of the Act - CIT v. Peirce Leslie & Co. Ltd. 227 ITR 759. On block of assets on which depreciation is allowed on cost method [S. 50A] Where the capital asset is used in an undertaking engaged in generation or generation and distribution of power on which depreciation is allowed at a certain percentage on actual cost u/s. 32(1)(i) in any previous year, then for the purpose of computing capital gains on such asset, the written down value of the asset as adjusted shall be taken as the cost of acquisition of the asset. Short Term Capital Gain The excess net consideration from sale of depreciable asset over opening WDV and additions during the year represents capital gain from sale of depreciable asset/s. Irrespective of period of holding of the depreciable asset; such a capital gain is deemed to be from Short Term Capital Asset (sec. 50). However, if the depreciable asset is held for more than thirty-six months i.e. is a long term capital asset, exemption under the relevant sections available for can be availed. Note: - Short term capital loss may arise only when the block of asset ceases to exist i.e. only assets in the block are transferred. [Sec. 50(2)]

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OTHER THAN DEPRECIABLE ASSET - SHORT TERM Full Value of consideration Less: Expenses in connection with the transfer = Net consideration Less: Cost of acquisition Less: Cost of Improvement = Gross capital gains Less: Exemption u/s. 54G if applicable = Net capital gains 54B, 54D and XXXXXXXX XXX XXXXXX XXXX XXX XXXXX XXXX

XXXXXXX

Let us discuss each ingredient of Computation, which is not discussed above : COST OF ACQUISITION [Sec 55] Stated simply, cost of acquisition means the cost for which the asset is purchased or acquired by the assessee. With respect to certain assets special provisions have been made, which decide the cost of acquisition. These are as follows: (i) Goodwill of a business or a trademark or brand name associated with a business or a right to manufacture, produce or process any article or thing, or right to carry on any business, tenancy rights, stage carriage permits and loom hours - In the case of the above capital assets, if the assessee has purchased them from a previous owner, the cost of acqui- sition means the amount of the purchase price. (ii) Self-generated assets - There are circumstances where it is not possible to ascertain cost of acquisition. For example, suppose a doctor starts his profession. With the passage of time, the doctor acquires lot of reputation. He opens a clinic and runs it for 5 years. After 5 years he sells the clinic to another doctor for Rs.10 lacs which includes Rs.2 lacs for his reputa- tion or goodwill. Now a question arises as to how to find out the profit in respect of good- will. It is obvious that the goodwill is self-generated and hence it is difficult to calculate the cost of its acquisition. However, it is certainly a capital asset.

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Capital Gains The Supreme Court in CIT v/s. B.C. Srinivasa Shetty [1981] 128 ITR 294 (SC) held that in order to bring the gains on sale of capital assets to charge under section 45, it is necessary that the provisions dealing with the levy of capital gains tax must be read as a whole. Section 48 deals with the mode of computing the capital gains. Unless the cost of acquisition is correctly ascertainable, it is not possible to apply the provisions of section 48. Self-generated goodwill is such a type of capital asset where it is not possible to visualise cost of acquisition. Once section 48 cannot be applied, the gains thereon cannot be brought to charge. This decision of the Su- preme Court was applicable not only to self-generated goodwill of a business but also to other self-generated assets like tenancy rights, stage carriage permits, loom hours etc. In order to supersede the decision of the Supreme Court cited above, section 55 was amended. Accord- ingly, in case of self-generated assets namely, goodwill of a business or a trademark or brand name associated with a business or a right to manufacture, produce or process any article or thing, or right to carry on any business, tenancy rights, stage carriage permits, or loom hours, the cost of acquisition will be taken to be nil. However, it is significant to note that the above amendment does not cover selfgenerated goodwill of a profession. So, in respect of self-gener- ated goodwill of a profession and other self-generated assets not specifically covered by the amended provisions of section 55, the decision of the Supreme Court in B. C. Srinivasa Settys case will still apply. (iii) Other assets - In the following cases, cost of acquisition shall not be nil, but will be deemed to be the cost for which the previous owner of the property acquired it: Where the capital asset became the property of the assessee (1) (2) (3) On any distribution of assets on the total or partial partition of a Hindu undivided family. Under a gift or will. By succession, inheritance or devolution.

(4) On any distribution of assets on the liquidation of a company. (5) Under a transfer to a revocable or an irrevocable trust. (6) Under any such transfer referred to in sections 47(iv), (v), (vi), (via) or (viaa). (7) Where the assessee is a Hindu undivided family, by the mode referred to in section 64(2). (iv) Financial assets - Many times persons who own shares or other securities become entitled to subscribe to any additional shares or securities. Further, they are also allotted addi- tional shares or securities without any payment. Such shares or securities are referred to as financial assets in Income-tax Act. Section 55 provides the basis for ascertaining the cost of acquisition of such financial assets. (1) In relation to the original financial asset on the basis of which the assessee becomes entitled to any additional financial assets, cost of acquisition means the amount actu- ally paid for acquiring the original financial assets.

(2)

In relation to any right to renounce the said entitlement to subscribe to the financial asset, when such a right is renounced by the assessee in favour of any person, cost of acquisition shall be taken to be nil in the case of such assessee.
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(3)

In relation to the financial asset, to which the assessee has subscribed on the basis of the said entitlement, cost of acquisition means the amount actually paid by him for acquiring such asset. In relation to the financial asset allotted to the assessee without any payment and on the basis of holding of any other financial assets, cost of acquisition shall be taken to be nil in the case of such assessee. In other words, where bonus shares are allotted without any payment on the basis of holding of original shares, the cost of such bo- nus shares will be nil in the hands of the original shareholder. In the case of any financial asset purchased by the person in whose favour the right to subscribe to such assets has been renounced, cost of acquisition means the aggregate of the amount of the purchase price paid by him to the person renouncing such right and the amount paid by him to the company or institution for acquiring such finan- cial asset. In relation to equity shares allotted to a shareholder of a recognised stock exchange in India under a scheme for demutualisation or corporatisation approved by SEBI, the cost of acquisition shall be the cost of acquiring his original membership of the ex- change. The cost of a capital asset, being trading or clearing rights of a recognised stock exchange acquired by a shareholder (who has been allotted equity share or shares under such scheme of demutualisation or corporatisation), shall be deemed to be nil. Where the capital asset become the property of the assessee before 14-1981 cost of acquisition means the cost of acquisition of the asset to the assessee or the fair market value of the asset on 1-4-1981 at the option of the assessee. Where the capital asset became the property of the assessee by any of the modes specified in section 49(1), it is clear that the cost of acquisition to the assessee will be the cost of acquisition to the previous owner. Even in such cases, where the capital asset became the property of the previous owner before 1-4-1981, the assessee has got a right to opt for the fair market value as on 1-4-1981. Where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to capital gains in respect of that asset under section 46, the cost of acquisition means the fair market value of the asset on the date of distribution. A share or a stock of a company may become the property of an assessee under the following circumstances : (a) the consolidation and division of all or any of the share capital of the company into shares of larger amount than its existing shares. (b) the conversion of any shares of the company into stock, (c) the re-conversion of any stock of the company into shares,

(4)

(5)

(6)

(7)

(v)

Any other capital asset (1)

(2)

(3)

(4)

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129

Capital Gains (d) the sub-division of any of the shares of the company into shares of smaller amount, or (e) the conversion of one kind of shares of the company into another kind. In the above circumstances the cost of acquisition to the assessee will mean the cost of acquisi- tion of the asset calculated with reference to the cost of acquisition of the shares or stock from which such asset is derived. Not e: Fair Market Value in relation to a capital asset, means (i) The price which the capital asset would ordinarily fetch on sale in the open market on the relevant date; and (ii) Where the price referred to in sub-clause (i) is not ascertainable, such price as may be determined in accordance with the rule made under this Act. [SEC. 2(22B)] (vi) Where the cost for which the previous owner acquired the property cannot be ascer- tained, 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.

Cost of Acquisition for Nonresidents In order to give protection to non-residents who invest foreign exchange to acquire capital assets, section 48 contains a proviso. Accordingly, in the case of non-residents, cost of acquisi- tion, etc. of shares or debentures of an Indian company is to be computed as follows: The cost of acquisition, the expenditure incurred wholly and exclusively in connection with the transfer and the full value of the consideration are to be converted into the same foreign currency with which such shares were acquired. The resulting capital gains shall be recon- verted into Indian currency. The aforesaid manner of computation of capital gains shall be applied for every purchase and sale of shares or debentures in an Indian company. Rule 115A is relevant for this purpose. Case Law: The interest paid on borrowings for the acquisition of a capital asset must fall for deduction under section 48. But, if the same sum is already the subject-matter of deduction under other heads like those under section 57, it cannot find a place again for the purpose of computation under section 48 - CIT v. Maithreyi Pai [1985] 152 ITR 247 (Kar.). COST OF IMPROVEMENT [Sec 55] When an asset is acquired, before it is sold, it is possible that certain improvements are made. For example, leveling and fencing of land, loft or partition is constructed in building acquired, accessories like CD player, career

may be added to a car, etc. costs incurred on such improve- ments are also deductible while computing capital gain.

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Section 55 provides improvement, (1)

that

cost

of

any

in relation to a capital asset being goodwill of a business or a right to manufacture, pro- duce or process any article or thing or right to carry on any business shall be taken to be nil; and

(2) in relation to any other capital asset: (i) where the capital asset became the property of the previous owner or the assessee before the 1st day of April, 1981 means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after the said date by the previous owner or the assessee, and (ii) in any other case, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his prop- erty, and, where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, by the previous owner.

However, such a cost of improvement does not include any expenditure which is deductible in computing the income chargeable under the head Interest on securities, Income from house property, Profits and gains of business or profession, or Income from other sources.
C OTHER THAN DEPRECIABLE ASSET - LONG TERM Full Value of consideration Less: Expenses in connection with the transfer = Net consideration Less :Indexed Cost of acquisition Less: :Indexed Cost of Improvement = Gross capital gains Less: Exemption u/s. 54, 54B, 54D, 54EC, 54ED, 54F and 54G, if applicable = Net capital gains

XXXXXX XXX XXXX XXX XXX XXXX XXX XXXXXX

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Capital Gains Let us discuss each ingredient of Computation, which is not discussed above: INDEXED COST OF ACQUISITION AND IMPROVEMENT [Sec 48] Section 48 provides that where long-term capital gain arises from the transfer of a long-term capital asset, deduction will be made of indexed cost of acquisition and indexed cost of any improvement and not of cost of acquisition and cost of any improvement. However, provisions of indexation are not allowed for capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company acquired in foreign cur- rency. 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, 1981, whichever is later; 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; Cost Inflation Index, in relation to a previous year, means such Index as the Central Govern- ment may, having regard to seventy-five per cent of average rise in the Consumer Price Index for urban non-manual employees for the immediately preceding previous year to such previ- ous year, by notification in the Official Gazette, specify, in this behalf. Cost Inflation Index for the year 1981-82 (base year) is 100 and for the year 2007-08 is 551. COST INFLATION INDEX Cost of Inflation Index has been notified by the Central Government Year wise, commencing from Financial Year, 1981-82 as the base year, having regard to 75% of average rise in the Consumer Price Index for urban non-manual employees for the immediately preceding previ- ous year to the previous year for which it is to be taken. The cost of acquisition and cost of improvement will thus be adjusted with reference to the rate applicable for the relevant year, which are given as follows: Table of Cost Inflation Index Financi al 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 Cost Inflation 10 0 10 9 11 6 12 5 13 3 14 0 15 0 16 1 17 2 18 2 Financi al 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2003-04 2004-05 Cost Inflation Index 25 9 28 1 30 5 33 1 35 1 38 9 40 6 42 6 46 3 48 0

1991-92 1992-93 1993-94 132

19 9 22 3 24 4

2005-06 2006-07 2007-08

49 7 51 9 55 1
Applied Direct Taxation

INDEXATION WHEN NOT APPLICABLE FOR COMPUTATION OF LONG TERM CAPI- TAL GAINS (i) Transfer of Bond and debentures other than capital indexed bonds issued by the Govern- ment (ii) Transfer of shares or debentures acquired by a non-resident in foreign currency. (iii) Transfer of depreciable asset. [Sec. 50] (iv) Transfer of undertaking or division in a slump sale. [Sec. 50B] (v) Transfer units of UTI or Mutual fund [referred to in sec. 10(23D)] purchased in foreign currency by overseas financial organisation. [Sec. 115AB]

(vi) Transfer of Global depository receipt or bonds of an Indian company or share or bonds of Public Sector Company sold by the Government and purchased in foreign currency by a non-resident. [Sec. 115AC] (vii) Transfer of Global depository receipt purchased in foreign currency by an individual resi- dent in India and employee of an Indian company. [Sec.115ACA] (viii) Transfer of securities by Foreign Institutional Investors. [Sec. 115AD] (ix) Transfer of foreign exchange asset by a nonresident. [Sec. 115D] CAPITAL GAINS IN RESPECT OF SLUMP SALES [Sec 50B] Slump Sale 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. [Sec. 2(42C)] Provisions for computation of capital gain are as follows: (i) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place. However, if such transfer is of one or more undertakings held by the assessee for not more than thirtysix months any profits and gains arising from shall be deemed to be shortterm capital gains. [Sub-section (1)] (ii) The net worth of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of computation of capital gain. [Sub-section (2)] (iii) Every assessee in the case of slump sale shall furnish in the prescribed form along with the return of income, a report of an accountant indicating the computation of net worth of the undertaking or division, as the case may be, and certifying that the net worth of the under- taking or division has been correctly arrived at in accordance with the provisions of this section. [Subsection (3)] Explanation 1 to the section defines the expression net worth as 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. However, any change in the value of assets on account of revaluation of assets shall not be considered for this purpose.

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Capital Gains Explanation 2 provides that the aggregate value of total assets of such undertaking or division shall be as follows: (i) In the case of depreciable assets: the written down value of block of assets determined in accordance with the provisions contained in sub-item (C) of item (i) of section 43(6)(c) and (ii) the book value for all other assets.

8.4 EXEMPTIONS
(a) Transfer of a residential house and investment in residential house [Sec. 54]. If an individual or HUF having LTCG from transfer of a residential unit makes investment to purchase or construct a residential unit, the amount invested in the new residential unit is allowed as a deduction from the LTCG. The new residential unit can be constructed within 3 years from the date of transfer or can be purchased one year before or two years after the date of transfer. To claim this deduction, the assessee, after taking into consideration the amount that he has already invested for construction or purchase of the new residential unit upto the due date of filing of return of income in his case, should deposit the remaining amount which he intends to use for purchasing or constructing the new residential unit in a Capital Gains Deposit Account on or before the due date for filing of the return and enclose proof of investment in construc- tion or purchase and proof of making such deposit into the capital gains account along with the return of income. Based on this he would be allowed the deduction from the LTCT for that assessment year. The amount which is deposited in the Capital Gains Deposit Account has to be utilised by him within two/three years from the date of transfer for the purpose of purchase/construction of the new residential unit. In case he fails to utilise this amount either wholly or partly for the above purpose within this period the amount remaining unutilised would be taxed as Capital gains in the year in which the above mentioned period is over. The cost of the new residential unit purchased/constructed would be reduced by the amount of deduction allowed from LTCG if the new house purchased or constructed is transferred within a period of 3 years from its date of purchase/construction. Case Law : (i) Capital gains account scheme - For transfer of deposit under Capital Gains Accounts Scheme, 1988 from Account B to Account A, clearance of Assessing Officer is not re- quired - Sadula Janardhan (HUF) v. State Bank of Hyderabad 286 ITR 291 (b) Transfer of Agricultural lands [Sec. 54B]. If LTCG is arising from transfer of land which is being used by the assessee for agricultural purposes for at least 2 years prior to the date of transfer, then, the assessee can invest in pur- chasing any other land for being used for the purpose of agriculture within 2 years from the date of transfer of the original agricultural land and the amount invested by him for purchase of a new agricultural land

would be allowed as a deduction from the LTCG.

134

Case Law : (i) Land need not be agricultural land - The exemption under section 54B is available to the seller of a capital asset being land. It does not restrict the benefit to agricultural land only. However, the land against which the benefit is sought must have been used by the asses- see or his parent for agricultural purpose in the two years immediately preceding the date of sale - CIT v. Smt. Savita Rani 133 Taxman 712/ 270 ITR 40. (c) Compulsory Acquisition Undertakings [Sec. 54D]. of Land and Buildings of Industrial

This deduction is available to all categories of tax payers. The conditions for claiming this deduction are as under: (i) the asset transferred is land or building or any right in land or building which forms part of new industrial undertaking belonging to the tax payer. (ii) asset in question is transferred by way of compulsory acquisition under any law. (iii) the asset in question was used for the purpose of industrial undertaking at least for two years immediately before the date of compulsory acquisition. The deduction is available if within 3 years of the date of compulsory acquisition, the taxpayer for the purposes of shifting or re-establishing the old industrial undertaking or setting up a new industrial undertaking. (a) purchases any other land, building or any right in any other land or building, or (b) constructs any other building. Deduction from the LTCG is given to the extent of above investment. If the new asset is not acquired by the due date from furnishing the return of income for the relevant assessment year, the unutilized amount of capital gains must be deposited in a Capital Gains Deposit Account. The cost of acquisition of the new asset would be reduced by the amount of deduction allowed from Capital Gains if the new asset purchased/constructed is transferred within a period of 3 years of its purchase or construction LTCG for a period of 3 years from its date of acquisi- tion. Case Law : (i) Meaning of industrial undertaking - The words industrial undertaking should be un- derstood to have been used in section 54D in a wide sense, taking in its fold any project or business a person may undertake. Thus, the running of a lodge can be said to be an industrial undertaking within the meaning of section 54D - P. Alikunju M.A. Nazeer Cashew Industries v. CIT 166 ITR 804. d) Capital gain on transfer of capital assets not to be charged in certain cases [Sec. 54E] (1) Where the capital gain arises from the transfer of a long-term capital asset before the 1st day of April, 1992, (the capital asset so transferred being

hereafter in this section referred to as the original asset) and the assessee has, within a period of six months after the date of such transfer, invested or deposited the whole or any part of the net consideration in any

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Capital Gains specified asset (such specified asset being hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say, (a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45; if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the new asset bears to the net consideration] shall not be charged under section 45:

(b)

Provided that in a case where the original asset is transferred after the 28th day of February, 1983, the provisions of this sub-section shall not apply unless the assessee has invested or deposited the whole or, as the case may be, any part of the net consideration in the new asset by initially subscribing to such new asset Provided further that in a case where the transfer of the original asset is by way of compulsory acquisition under any law and the full amount of compensation awarded for such acquisition is not received by the assessee on the date of such transfer, the period of six months referred to in this sub-section shall, in relation to so much of such compensation as is not received on the date of the transfer, be reckoned from the date immediately following the date on which such compensation is received by the assessee or the 31st day of March, 1992, whichever is earlier (1A) Where the assessee deposits after the 27th day of April, 1978, the whole or any part of the net consideration in respect] of the original asset in any new asset, being a deposit referred to in sub-clause (vi) of clause (a)of Explanation 1 below sub-section (1), the cost of such new asset shall not be taken into account for the purposes of that sub-section unless the following condi- tions are fulfilled, namely (a) the assessee furnishes, along with the deposit, a declaration in writing, to the bank or the co-operative society referred to in the said sub-clause (vi) with which such deposit is made, to the effect that the assessee will not take any loan or advance on the security of such deposit during a period of three years from the date on which the deposit is made; the assessee furnishes, along with the return of income for the assessment year relevant to the previous year in which the transfer of the original asset was effected or within such further time as may be allowed by the Assessing Officer, a copy of the declaration referred to in clause (a) duly attested by an officer not below the rank of sub-agent, agent or man- ager of such bank or an officer of corresponding rank of such co-operative society.

(b)

(1B) Where on the fulfilment of the conditions specified in sub-section (1A), the cost of the new asset referred to in that sub-section is taken into account for the purposes of sub-section (1), the assessee shall, within a period of ninety days from the expiry of the period of three years reckoned from the date of

such deposit, furnish to the Assessing Officer a certificate from the officer referred to in clause (b) of sub-section (1A) to the effect that the assessee has not taken any loan or advance on the security of such deposit during the said period of three years.

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(1C) Notwithstanding anything contained in sub-section (1), where the capital gain arises from the transfer of the original asset, made after the 31st day of March, 1992, in respect of which the assessee had received any amount by way of advance on or before the 29th day of February, 1992 and had invested or deposited the whole or any part of such amount in the new asset on or before the later date, then, the provisions of clauses (a) and (b) of subsection (1) shall apply in the case of such investment or deposit as they apply in the case of investment or deposit under that sub-section (2) Where the new asset is transferred, or converted (otherwise than by transfer) into money, within a period of three years from the date of its acquisition, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause (a) or, as the case may be, clause (b), of sub- section (1) shall be deemed to be income chargeable under the head Capital gains relat- ing to long-term capital assets] of the previous year in which the new asset is transferred or converted (otherwise than by transfer) into money.

(3) Where the cost of the equity shares referred to in sub-clause (va) of clause (a) of Explanation 1 below sub-section (1) is taken into account for the purposes of clause (a) or clause (b) of sub-section (1) a deduction with reference to such cost shall not be allowed under section 80CC. Case Law: (i) Benefit under section 54E is available only if there is a transfer of capital asset - For the purpose of benefit under section 54E, transfer is a condition precedent and when a trans- action is not treated as a transfer, the assessee is not entitled to the benefit of section 54E. Thus, since the distribution of assets to shareholders on liquidation of a company is not treated as a transfer under section 46(1), benefit of section 54E cannot be availed on the consideration received from such distribution - CIT v. Ruby Trading Co. (P.) Ltd. 124 Taxman 186 . (e) Capital gain on transfer of long-term capital assets not to be charged in the case of invest ment in specified securities [Sec. 54EA]. (1) Where the capital gain arises from the transfer of a long-term capital asset before the 1st day of April, 2000 (the capital asset so transferred being hereafter in this section referred to as the original asset) and the assessee has, at any time within a period of six months after the date of such transfer, invested the whole or any part of the net consideration in any of the bonds, debentures, shares of a public company or units of any mutual fund referred to in clause (23D) of section 10 specified by the Board in this behalf by notification in the Official Gazette (such assets hereafter in this section referred to as the specified securities), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say, (a) if the cost of the specified securities] is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45; (b) if the cost of the specified securities is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of

the specified securities bears to the net

137

Capital Gains consideration shall not be charged under section 45. (2) Where the specified securities] are transferred or converted (otherwise than by transfer) into money at any time within a period of three years from the date of their acquisition, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such specified securities as provided in clause (a) or clause (b) of sub-section (1) shall be deemed to be the income chargeable under the head Capital gains relating to long-term capital assets of the previous year in which the speci- fied securities are transferred or converted (otherwise than by transfer) into money.

However in a case where the original asset is transferred and the assessee invests the whole or any part of the net consideration in respect of the original asset in any specified securities and such assessee takes any loan or advance on the security of such specified securities, he shall be deemed to have converted (otherwise than by transfer) such specified securities into money on the date on which such loan or advance is taken. (3) Where the cost of the specified securities] has been taken into account for the purposes of clause (a) or clause (b) of sub-section (1), a rebate with reference to such cost shall not be allowed under section 88.

(f) Capital gain on transfer of long-term capital assets not to be charged in certain cases [Sec. 54EB] (1) Where the capital gain arises from the transfer of a long-term capital asset before the 1st day of April, 2000] (the capital asset so transferred being hereafter in this section referred to as the original asset), and the assessee has, at any time within a period of six months after the date of such transfer invested the whole or any part of capital gains, in any of the assets specified by the Board in this behalf by notification in the Official Gazette (such assets hereafter in this section referred to as the long-term specified assets), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say, (a) if the cost of the long-term specified asset is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain shall not be charged under section 45 ; if the cost of the long-term specified asset is less than the capital gain arising from the transfer of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the long-term specified asset bears to the whole of the capital gain, shall not be charged under section 45.

(b)

(2)

Where the long-term specified asset is transferred or converted (otherwise than by trans- fer) into money at any time within a period of seven years from the date of its acquisition, the amount of capital gains arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such long-term specified asset as provided in clause (a), or as the case may be, clause (b) of sub-section (1) shall be deemed to be the income chargeable under the head Capital gains relating to long-term capital assets of the previous year in which the long-term specified asset is transferred or converted (other- wise than by transfer) into money.

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Explanation.In a case where the original asset is transferred and the assessee invests the whole or any part of the capital gain received or accrued as a result of transfer of the original asset in any long-term specified asset and such assessee takes any loan or advance on the secu- rity of such specified asset, he shall be deemed to have converted (otherwise than by transfer) such specified asset into money on the date on which such loan or advance is taken. (3) Where the cost of the long-term specified asset has been taken into account for the purposes of clause (a) or clause (b) of sub-section (1), a deduction from the amount of income-tax with reference to such cost shall not be allowed under section 88. g) Investment in certain bonds [Sec. 54EC]. If an assessee having LTCG invests in any of the following assets, the amount invested is eligible for deduction up to a maximum of the LTCG (a) bonds redeemable after three years issued on or after 01.04.2007 by National Highway Authority of India (NHAI). (b) bonds redeemable after three years issued on or after 01.04.2007 by Rural Electrification Corporation Ltd. (RECL). The investment is to be made within six months from the date of transfer of the original capital asset. The bonds should not be transferred or converted into money for a period of three years from the date of acquisition. In case the bonds are transferred within 3 years from the date of their acquisition, the deduction allowed for investment earlier would be taxed in the year of such transfer as capital gains. For this purpose it would be considered as transfer even if the assessee takes any loan or advance on the security of the specified securities. For the invest- ment in the bonds rebate u/s. 88 will not be available. Amount exemption: (a) of

if the cost of the long-term specified asset is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain but does not exceeding Rs. fifty lakh shall not be charged under section 45; if the cost of the long-term specified asset is less than the capital gain arising from the transfer of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the long-term specified asset bears to the whole of the capital gain, shall not be charged under section 45.

(b)

(h) Investment in equity shares [Sec. 54ED] If an assessee has LTCG from transfer of listed securities before the 1st day of April, 2006 [secu- rities as defined in Securities, Contracts (Regulation) Act and listed in any recognised Stock Exchange in India] or unit and invests in acquiring equity shares satisfying the following con- ditions, the amount invested is eligible for deduction up to a maximum of the LTCG. (a) the issue is made by a public company formed and registered in India. (b) the shares forming part of the issue are offered for subscription to the public.

The investment has to be made within six months from the date of the transfer of the listed security or unit.

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Capital Gains The equity shares should not be sold or otherwise transferred within a period of one year from the date of their acquisition. In case they are transferred within one year the deduction allowed in investment would be taxed in the year of such transfer as LTCG. For the investment in the equity shares rebate u/s. 88 will not be available. Amount Exemption : (a) of

if the cost of the specified equity shares is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain shall not be charged under section 45; if the cost of the specified equity shares is less than the capital gain arising from the trans- fer of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the specified equity shares acquired bears to the whole of the capital gain shall not be charged under section 45.

(b)

(i) Transfer asset and investment in residential income [Sec. 54F]. If an individual or a HUF having LTCG arising out of sale of capital asset other than a residen- tial house and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, the capital gain shall be dealt with in accordance with the following provisions of this section, (a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45 ; if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45 :

(b)

where, net consideration = full value of consideration cost of transfer. In this case, however, cost of the new asset is not changed. But the assessee should not own more than one residential house in which he has invested as on the date of transfer and also, he should not purchase/construct any other residential house for a period of 1/3 years from the date of transfer. In case he owns more than one residential house as on the date of transfer he is not eligible for this deduction. In case he purchases/constructs a house within 1/3 years from the date of transfer after getting this deduction, the amount allowed as deduction would be taxed as capital gains in the year of such purchase/construction. Case Laws : (i) Provision is not ultra vires the constitution - Provision of section 54F as

applicable to assessment year 2000-01 and which applies to one residential house, cannot be said to be discriminatory and violative of fundamental rights on ground that in subsequent years exemption under section 54F was extended to two residential houses - Abdul Gaffar v. ITO 154 Taxman 416

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(ii)

Exemption is not allowable if existing house is extended - Section 54F emphasizes on con- struction of residential house. The said construction must be real one. It should not be a symbolic construction. A mere extension of the existing building would not give benefit to the assessee as contemplated under section 54F. Mere construction by way of extension of the old existing house would not mean constructing a residential house as contemplated under section 54F - CIT v. V. Pradeep Kumar 53 Taxman 138

(j) Transfer of fixed asset of industrial undertaking effected to shift it from urban area [Sec. 54G] The deduction is available to all categories of tax payers. The conditions for claiming the de- duction are as under : (i) the transfer is effected in the course of or in consequence of shifting the undertaking from an urban area to any area other than an urban area. (ii) asset transferred is machinery, plant, building, land or any right in building or land used for the business of industrial undertaking in an urban area. (iii) the capital gain is utilised within one year before or 3 years after the date of transfer (a) for purchasing new machinery or plant or building or land for tax payers business in that new area; or (b) shifting of the old undertaking and its establishment to the new area; or (c) incurring of expenditure on such other purposes as specified in the scheme notified for the purpose. Deduction from LTCG is given to the extent of the outlay for aforesaid asset and activities. The unutilized amount of capital gains as on the date on which return of income for the relevant Assessment year is due; must be deposited in a Capital Gains Deposit account and failure to utilize the amount within the stipulated period it shall be chargeable as capital gains (long/short term). The cost of acquisition of the new asset is reduced by the amount of exemption allowed from capital gains if the new asset is transferred within a period of three year of its purchase or construction for the purpose of computation of capital gains in respect of the transfer of the new asset. (k) Extension of time limit available for acquiring new asset To claim exemption u/s 54, 54B, 54D, 54EC and 54F as the case may be or under capital gains scheme, the period of investment will begin from the date when the compensation is received. Where the compensation is received in instalment, the period of investment in the specified asset/deposit in capital gains scheme will be considered for each instalment separately. If en- hanced compensation is received, the period of investment shall be reckoned from the date when the enhanced compensation is received. Exemption of capital gains on transfer of assets in cases of shifting of industrial undertak- ing from urban area to any SEZ The deduction is available to all categories of tax payers for of shifting of industrial undertak- ing from urban area to any Special Economic Zone.

The conditions for claiming the deduction are as under :

141

Capital Gains (i) the transfer is effected in the course of or in consequence of shifting the undertaking from an urban area to any Special Economic Zone. (ii) asset transferred is machinery, plant, building, land or any right in building or land used for the business of industrial undertaking in an urban area. (iii) the capital gain is utilised within one year before or 3 years after the date of transfer (a) for purchasing new machinery or plant or building or land for tax payers business in the SEZ; or (b) shifting of the old undertaking and its establishment to the SEZ; or (c) incur- ring of expenditure on such other purposes as specified in the scheme notified for the purpose. Deduction from LTCG is given to the extent of the outlay for aforesaid asset and activities. The unutilized amount of capital gains as on the date on which return of income for the rel- evant Assessment year is due; must be deposited in a Capital Gains Deposit account and fail- ure to utilize the amount within the stipulated period it shall be chargeable as capital gains (long/short term). The cost of acquisition of the new asset is reduced by the amount of exemption allowed from capital gains if the new asset is transferred within a period of three year of its purchase or construction for the purpose of computation of capital gains in respect of the transfer of the new asset. (h) Extension of time limit available for acquiring new asset To claim exemption u/s 54, 54B, 54D, 54EC and 54F as the case may be or under capital gains scheme, the period of investment will begin from the date when the compensation is received. Where the compensation is received in installment, the period of investment in the specified asset/deposit in capital gains scheme will be considered for each installment separately. If enhanced compensation is received, the period of investment shall be reckoned from the date when the enhanced compensation is received. (i) Investment Not Made before Due Date for Filing of the Return of Income: The amount of the capital gain which is not invested by the assessee for the purpose stated in Section 54, 54B, 54D, 54F, 54G and 54GA before the date of furnishing the return of income under section 139, the following provisions apply: (i) The amount intended to be applied under the exemption section shall be deposited by him before furnishing such return, such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139, in an account in any such bank or institution as may be specified in, and

(ii)

utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and

(iii) such return shall be accompanied by proof of such deposit; and, for the purposes of sub- section (1), the amount, if any, already utilised by the assessee for the purchase or con- struction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset : It is further provided that if the amount deposited as aforesaid is not utilised wholly or partly

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for the purpose of investment, then, (i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and (ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid. EXEMPTION LONG TERM CAPITAL GAINS TO NON-RESIDENT [Sec. 115 F] In the case of an assessee being a non-resident Indian transfers any long term foreign exchange asset, gains arises on such transfer is exempt if the net consideration is invested within a period of six months after the date of transfer in the specified foreign exchange asset. If the net consid- eration is invested partly in the specified foreign exchange asset within the stipulated time, the exemption is available which is equal to: Long term capital gains Amount invested Net consideration Where the new asset is transferred or converted into money within a period of three years from the date of its acquisition, the exemption granted shall be deemed to be the income chargeable under the head long term capital gains of the pervious year in which the new asset is trans- ferred or converted into money. A non-resident Indian may elect not to be governed by the provisions of section 115F for any assessment year, by submitting his return of income for that assessment year y/s 139 and de- claring therein that the provisions of section 115F shall not apply to him for that assessment year. In such a case the income and tax of the non-resident shall be computed like other normal cases for the assessment year [ sec. 115-I]. WITHDRAWAL OF EXEMPTIONS [Sec. 47A] Following are the cases where exemptions are allowed by virtue of sec. 47 may be withdrawn for failure to fulfill certain conditions:(i) Where the capital gains arising on the transfer of the capital asset from the holding com- pany to the subsidiary company or vice-versa was exempt from capital gains by virtue of sec. 47(iv) and 47(v) and if at any time before the expiry of 8 years from the date of transfer the capital asset so transferred is converted into stock-in-trade by the transferee company or the parent company ceases to hold the whole of capital of the subsidiary company, the amount of capital gains so exempted shall be deemed to be income of the transferor com- pany in the year in which such transfer took place. [Sec. 47A(1)] (ii) Where the capital gains arising on transfer of a capital asset in nature of membership of a recognised stock exchange was exempt by virtue of section 47(xi), shall be chargeable to tax in the previous year in which it was so transferred, provided the shares allotted to the transferor are transferred within a period of 3 years. [Sec. 47A(2)] (iii) Where a firm is succeeded by a company in the business carried on by it as a result of which the firm sells or otherwise transfer any capital asset or intangible asset to the com- pany is exempt from capital gains tax. on

fulfillment of certain conditions u/s. 47(xiii). If any of the conditions laid down in sec. 47(xiii) is not complied with the capital gains not taxed on such transfer, shall be deemed as Profits and gains of the successor company for the previous year in which the condition is not complied with. [Sec. 47A(3)]
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