Capital Gain PDF

CS EXECUTIVE DIRECT TAX NOTES
6. CAPITAL GAINS
WINSPIRE EDUCATION | U 5 SHUBH LAXI COMPLEX OPP BANK OF BARODA CITYLIGHT SURAT | 9016621382
BASIS OF CHARGE - SECTION 45

1. There should be a Capital Asset.
2. It should be transferred by the assessee.
3. Such transfer should take place during the PY.
4. Any Profit/Gains should arise from such transfer.
5. Such Capital Gain should NOT be exempted u/s 54 series.
If all the above conditions are satisfied, Capital Gain shall arise & shall be deemed to be the income of the
PY in which transfer took place & taxed accordingly.
DEFINITION OF CAPITAL ASSET - SECTION 2(14)

Capital Asset means:
(a) Any Property (Movable/immovable), connected with assessee’s business/profession ot not.
(b) Any Securities held by FIIs (invested as per SEBI regulations) [Always CA → Even if held as SIT]
(c) Any Rights in Indian Company including Right of Management or control.
EXCEPTIONS: [Following are NOT CAPITAL ASSETS]

1 SIT/RM/Consumables stores held for business/profession; (Except Securities held by FIIs as SIT).
Note: Securities held by FIIs will be Capital Asset even if they are held as SIT.
2 Movable Personal effects (including wearing apparel & furniture) held for his/his family member’s
personal use but excludes ↓
(a) Jewellery,
(b) Archaeological collections;
(c) Drawings;
Capital Assets even if held for personal use
(d) Paints;
(e) Sculptures
(f) Any other work of Art
Note: To constitute Personal Effect, Asset should be used by the assessee. Daily use is not necessary.
 Jewellery: Jewellery is a capital asset & the profits/gains arising from the transfer of jewellery
held for personal use are taxable u/h “capital gains”.
 If Precious stones/metals are sewn/worked/set into Wearing Apparel/ furniture, it is classified

into the category of jewellery & thus it is a Capital Asset.
Ex: Throne made of Gold/Platinum/Diamonds; Shirt with diamond buttons sewn into it.
3 Rural Agricultural Land in INDIA [Urban Agricultural land → Capital Asset]

 Rural Land means land outside the following Specified limits:
Population Distance from Municipality/Cantonment Board
≤ 10,000 0 Kms
> 10,000 & ≤ 1,00,000 2 Kms
> 1,00,000 & ≤10,00,000 6 Kms
Above 10,00,000 8 Kms
 Agricultural Land: Land must be used for agricultural purposes for 2 yrs prior to transfer.
 Capital Gain on Urban Agricultural Land → Not treated as Agricultural Income & thus it is
not exempt u/s 10(1). Capital Gains arising from such transfer would be taxable u/s 45.
4 Gold Deposit bonds/Certificates issued under Gold Monetisation Scheme, 2015.
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CQ1. Discuss the Tax treatment in the following cases: [CA - Capital Asset & SIT - Stock in Trade]
Cases Whether CA ?
Sale of Flats by a construction company Not a CA since flat is a SIT for construction company.
Sale of Flats held by Mr. X as an investment CA since Mr. X has held it as an investment.
Sale of Securities in Indian Company held by FIIs CA since specifically included in definition of Capital Asset u/s
as investment sec 2(14).
Sale of Securities in Indian Company held by FIIs CA since specifically included in definition of Capital Asset u/s
as SIT sec 2(14) even if held as SIT.
Sale of car by Mr. AC for Rs 10 lacs which was used CA used for business is not excluded u/s 2(14) & thus it is a CA.
for his business purpose
Sale of Personal Jewels (Diamond) for Rs 3 cr CA since it is included u/s 2(14) even if movable PE.
Sale of Painting by Miss Jacqueline for Rs 10 cr CA since it is included u/s 2(14) even if movable PE.
House property used for personal purpose CA since PE does not include immovable property.
Agricultural Land situated in Urban Area Capital Asset
Non-Agricultural Land situated in Rural Area Capital Asset
Agricultural Land situated in Rural Area used for Capital Asset
non-agricultural purpose permanently
Rural Agricultural land used permanently for Capital Asset since situated Outside India.
agricultural purpose situated in Europe
CQ2. Determine which of the lands will be Capital Assets:

Land Population Shortest aerial Distance Rural Land? CA?
A 9,000 1 km Yes No
B 12,000 1.5 kms No Yes
C 11,00,000 2 kms No Yes
D 80,000 3 kms Yes No
E 3,00,000 4 kms No Yes
F 12,00,000 5 kms No Yes
G 8,000 6 kms Yes No
H 4,00,000 7 kms Yes No
I 10,50,000 8 kms No Yes
J 15,00,000 9 kms Yes No
CQ3. Mrs. X contends that sale of a work of art held by her is not liable to capital gains. Is she correct?
Answer: “Personal effects” excludes any work of art. As a result, any work of art will be considered as a capital asset & thus
sale will attract capital gains tax. Thus Mrs. X is not correct.
CQ4. State whether the capital gains will arise in following independent cases for AY 2019-20.
Profit on Sale of jewellery by Mr. A, a jewellery dealer. No
Profit on Sale of personal furniture/car/bike by Mr. B. No
Profit on Sale of Residential house Yes
Profit on Sale of drawings & paintings made by a painter. Yes
Profit on Sale of drawings & paintings by Mr, PC to a National Musuem No*
Profit on Sale of Gold Deposit Bonds No
* However transfer of a capital asset to National Museum is exempt u/s 47.
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TYPES OF CAPITAL ASSET – SECTION 2(42A)
1. STCA: If Period of Holding (POH) of Asset ≤ 36 months immediately before the date of transfer.
2. LTCA: If Period of Holding (POH) of Asset >36 months immediately before the date of transfer.
Exceptions: Following assets become LTCA if POH is more than 12/24 Months.
A. LTCG if POH > 12 Months

(i) Listed Equity/Preference shares in a company.
(ii) Listed Securities (Debentures/bonds) other than units.
(iii) Units of UTI/ Equity oriented mutual fund.
(iv) Zero Coupon Bonds.
B. LTCG if POH > 24 Months

(i) Unlisted Equity or Preference shares. [Shares in private/unlisted public companies].
(ii) Immovable property, being Land or Building or both.
Ex: State the period required for the Capital Asset to become LTCA.
Nature of Asset Minimum Period to become LTCA
Units of Equity Oriented Mutual Fund 12 Months
Units of Debt Oriented Mutual Fund 36 Months
Units of UTI 12 Months
Zero Coupon Bonds 12 Months
Listed Debentures / Bonds / Govt Securities 12 Months
Unlisted Debentures / Bonds/ Govt Securities 36 Months
Listed shares in a company 12 Months
Unlisted shares in a company 24 Months
Land or building 24 Months
Other Assets 36 Months
Why CAPITAL ASSETS are divided into STCA & LTCA? [To be read once]
 Tax incidence under Capital Gains depends upon whether asset is LTCA or STCA.
 If asset is STCA, capital gain will be Short- term capital gains.
 If asset is LTCA, capital gain will be Long- term capital gains.
 In case of DEPRECIABLE ASSET, always STCG will arise irrespective of POH.
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DEFINITION OF TRANSFER OF CAPITAL ASSET [SEC 2(47)]

1. Sale, exchange or relinquishment of the asset.
2. Extinguishment of any rights in the asset.
3. Compulsory Acquisition of any Capital Asset under any law.
4. Conversion of Capital Asset into Stock in trade.
5. Maturity/Redemption of ZCB.
6. Giving possession of IMMOVABLE PROPERTY under Part performance of a contract.
Ex: A enters into an agreement for the sale of his house. The purchaser gives the entire sale consideration to A.
‘A’ hand over complete rights of possession to the purchaser since he has realised the entire sale consideration.
However, some legal formalities are left to be done.
Under Income Tax Act, the above transaction is considered as transfer by applying ‘substance over form’.
7. Transactions which have the effect of transferring the enjoyment of Immovable property.
Ex: A person may become a member of a co-operative society which may be a house/flat. When he pays an agreed
amount, the society etc. hands over possession of the house to the person concerned. No conveyance is
registered. Such transaction is a transfer under Income Tax Act.
Even power of attorney transactions are regarded as transfer.
DATE OF COMPLETION OF TRANSFER

MOVABLE  Date on which property is delivered after the contract of sell.
PROPERTY
 Entries in Books of A/c → Irrelevant for determining date of transfer.
IMMOVABLE (i) Documents are registered → Date on which deed is executed or registered.
PROPERTY
(ii) Documents are not registered → If the following conditions are satisfied:
 There should be a contract in writing;
 Transferee has paid consideration/is willing to perform his part of the contract;
 Transferee should have taken the possession of the property.
HOW TO COMPUTE CAPITAL GAINS – SECTION 48

Full Value of Consideration (Sec 50C may be applicable for L&B) Xxx
Less: Expenses of Transfer (xxx)
Less: Cost of Acquisition (Indexation available if Capital Asset is LTCA) (xxx)

(xxx)
Less: Cost of Improvement (Indexation available if Capital Asset is LTCA) (xxx)
SHORT/LONG TERM CAPITAL GAIN XXX
Note: STT levied on purchase/sale of Equity shares & units of EOMF → Not deductible u/h CG.
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FULL VALUE OF CONSIDERATION (FVC) [SECTION 48]

 Meaning: Consideration received/receivable by the transferor for the transferred capital asset.
 It may be in cash/ kind. [If consideration is received in kind, then FMV = Full value of consideration].
 Adequacy of Consideration & Receipt of Consideration → IRRELEVANT for determining FVC.
EXPENSES OF TRANSFER
 Expenditure incurred wholly & exclusively in connection with transfer of capital asset.
 Such expenses of transfer are deductible from FVC.
Ex: Brokerage, stamp fees, registration fees, legal expenses, commission paid for securing a purchaser, cost
of stamp, litigation expenditure etc.
Note: STT paid on purchase/sale of Equity shares & units of EOMF → Not deductible u/h CG.
COST OF ACQUISITION
 The value for which the asset was acquired by the assessee.
 Only capital expenditures for completing/acquiring title to the property are includible in COA.
 Any Revenue expenditure incurred → will not form part of COA.
 Amount paid for discharge of mortgage is part of ‘COA’ if mortgage was not created by transferor.
INDEXATION
 Sale consideration is the price at which the asset is sold in the PY. However, asset may be purchased
in some earlier year. Money spent years before & sale consideration received in PY cannot be compared.
 Thus deducting the cost of acquisition that has been incurred many years earlier from the sale
consideration that has been received in this PY is unfair for the assessee.
 Thus Indexation is given for the Long-term capital assets.
 Thus Indexation of COA means bringing into line COA with that of Sale Consideration.
Meaning of Indexed COA:

 As per Section 48, COA will be increased by applying the cost inflation Index (CII).
 Once the Cost Inflation Index is applied to COA, it becomes Indexed COA.
Steps to Calculate Indexed COA:

1. Find out the type of asset on the basis of POH (whether the asset is STCA/LTCA)
2. Apply Indexation to Cost of Acquisition only if asset is Long Term Capital Asset.
INDEXED COST OF ACQUISITION
Cost of acquisition
X CII of year of Transfer of Asset
CII of the year in which asset was first held by Assessee ∗∗
𝐎𝐑 CII of 2001 − 2002 (whichever is Later)
** Note: CII of year of acquisition of asset by Previous owner [For Transfer u/s 49(1).
COST INFLATION INDEX for Different FYs

PY CII PY CII PY CII PY CII PY CII
2001-02 100 2005-06 117 2009-10 148 2013-14 220 2017-18 272
2002-03 105 2006-07 122 2010-11 167 2014-15 240 2018-19 280
2003-04 109 2007-08 129 2011-12 184 2015-16 254 2019-20 289
2004-05 113 2008-09 137 2012-13 200 2016-17 264
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NO INDEXATION IS AVAILABLE IN FOLLOWING CASES [EVEN IF ASSETS ARE LTCA]

1. Zero Coupon Bonds
2. Debentures/ Bonds [Except Capital Indexed Bonds/ Soverign Gold Bonds issues by RBI]
3. Slump Sale [Section 50B]
4. Depreciable Assets [Since capital gain arising on depreciable asset is always STCG]
5. Share/Debentures acquired by NR in foreign currency in Indian company. (1st Proviso to sec 48)
6. Long term capital assets specified u/s 112A. [AY 2019-20].
COST OF IMPROVEMENT
 Capital expenditure incurred in making any additions/improvements/protect capital asset.
 Routine expenditure on repairs or maintenance will NOT be included in Cost of improvement.
Points to Remember:
1. In case of Goodwill of Business (whether Self-generated/Purchased) → COI = Nil.
2. COI → Considered only if incurred on/after 1.4.2001.
3. COI incurred by Previous Owner → Considered if incurred on/after 1.4.2001.
INDEXED COST OF IMPROVEMENT

Cost of Improvement
X CII of year of transfer of Asset
CII of the year of Improvement
Q. How to decide whether to take Indexation of Cost of Improvement or not?

 It should be decided from the nature of the asset.
 If Asset is LTCA→ Take Indexed COI &
 If Asset is STCA → Take COI (without Indexation).
Note: Year in which Improvement is done in the Asset → Not Relevant.
OPTION TO TAKE FMV ON 1.4.2001 AS COST OF ACQUISITION

 If Capital Asset is acquired before 1.4.2001 → Assessee have the option to take FMV of the Asset on
1.4.2001 as COA of the Asset. [Exercised when FMV on 1.4.2001 > Original COA of asset].
 This option is not available in case of Depreciable Assets; Goodwill of Business/other like assets
CQ5. During PY 2019-2020, Mr. Ramesh sells the following capital assets:
Capital Assets Sale proceeds COA Date of Acquistion FMV on 1.4.2001
Land 40,00,000 10,00,000 31.5.1997 14,00,000
Gold 9,86,000 2,40,000 1.4.2007 NA
Listed debentures 1,57,000 75,000 12.9.1995 40,000
Compute the Capital Gains for AY 2020-2021. [CII: FY 2007-08: 129; FY 2019-20: 289]
Solution:
Particulars Land Gold Listed Debentures
Full Value of Consideration 40,00,000 9,86,000 1,57,000
Less: COA/Indexed COA (40,46,000) (5,37,674) (75,000)
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[14L × 289/100] (Note 1) [2.4L × 289/129] (Note 2)

LTCG/LTCL (46,000) 4,48,326 82,000
Note:
(1) Since FMV on 1.4.2001 > Original COA, FMV is taken as COA for computing Capital Gain.
(2) No indexation is allowed in case of debentures. Since COA > FMV on 1.4.2001, option will not be exercised.
CQ6. Mr. PC purchases a house property for Rs. 1,06,000 on 15th May 1995. The following expenses are incurred by
him for making addition/alternation to the house property:
Cost of construction of first floor in 1997-98 Rs. 3,10,000
Cost of construction of second floor in 2002-03 Rs. 7,35,000
Reconstruction of the property in PY 2018-19 Rs. 5,50,000
FMV of the property on 1.4.2001 is Rs. 8,50,000. House property is sold by Mr. C on 10th August 2019 for Rs. 68 lacs.
Expenses incurred on transfer: Rs. 50,000. Compute Capital Gain for AY 2020-2021.
[CII: FY 2002-03: 105; 2017-18: 272; FY 2019-20: 289]
Solution: Computation of capital gain of Mr. C for AY 2020-2021
Particulars Rs. Rs.
Gross sale consideration 68,00,000
Less: Expenses on transfer (50,000)
Net sale consideration 67,50,000
Less: Indexed cost of Acquisition [Rs. 8,50,000 × 289/100] (24,56,500)
Less: Indexed cost of Improvement
(i) Construction of 1st Floor in 1997-98 → Ignored Since incurred before 1.4.2001 (Nil)
(ii) Construction of 2nd floor in 2002-03 (Rs. 7,35,000 × 289/105) (20,23,000)
(iii) Alternation/reconstruction in 2018-19 (Rs. 5,50,000 × 289/280) (5,67,679) (25,90,679)
Long Term Capital Gain 17,02,821
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FVC IN CASE OF TRANSFER OF LAND & BUILDING HELD AS CAPITAL ASSET [SEC 50C]
Circumstances Full value of consideration
A. If Actual Sale Consideration > Stamp Duty value Actual Sale Consideration
B. If Actual Sale Consideration < Stamp Duty value Stamp Duty value
But, If SDV ≤ 105% of Actual sale consideration → FVC = Actual Sale Consideration.
SDV WHEN DATE OF AGREEMENT (DoA) & DATE OF REGISTRATION (DoR) ARE NOT SAME:
(a) If Payment (Full/Part) has been received by A/c payee cheque/draft/Netbanking on/before DoA →
FVC = SDV on Date of Agreement.
(b) If NO Payment is received by A/c payee cheque/draft/Netbanking on/before DoA → FVC = SDV on
Date of Registration.
PC Note:
Example:
Transfer SC SDV on DOA SDV on DOR FVC
1.5.2019 100 Lacs (10 Lac received by cheque on 1.9.2018) 120 (1.9.18) 210 (1.5.19) 120
1.5.2019 100 Lacs (10 Lacs received by cash on 1.9.2018) 120 (1.9.18) 210 (1.5.19) 210
31.3.2020 100 Lacs (Full amount received on DOR) 120 (1.5.18) 210 (31.3.20) 210
VALUATION BY VALUATION OFFICER

Circumstances Full value of consideration
(I) Value by VO > SDV Stamp Duty Value
(II) Value by VO > Actual Sale Consideration but < SDV Value by Valuation officer
Example:
SN Actual SC SDV Value by VO Full Value of Consideration
1 50 45 - 50
2 50 75 - 75
3 50 75 85 75
4 50 75 55 55
5 50 75 45 50
REFERENCE TO VALUATION OFFICER [SEC 55A]

AO may refer valuation officer with a view to ascertain FMV of a capital asset in following cases:
(i) Where the value of the asset claimed by the assessee is in accordance with valuation made by the
registered valuer, but AO is of the opinion that value so claimed is less than FMV of the Asset.
 AO can make a reference to VO in cases where FMV is taken to be sale consideration.
 If FMV on 1.4.2001 is taken as COA, AO can make a reference to VO if he is of the view that there
is any variation between FMV on 1.4.2001 claimed by assessee & FMV on that date.
(ii) Where the AO is of the opinion that FMV of the asset exceeds the value claimed by
 More than 15% of the value claimed by the assessee or Rs. 25,000 (whichever is less).
(iii) Where AO thinks that it is necessary to do so having regards to the nature of asset & relevant
circumstances.
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CQ7. Miss Mohini transferred a house to her friend Ms. Ragini for Rs. 35 lacs on 1.10.2019. The sub-registrar valued
the land @ Rs. 48 Lacs. Miss Mohini contested the valuation and the matter was referred to divisional revenue officer
who valued the house @ Rs. 41 lacs. Ms. Mohini had purchased the house on 15 May, 2011 for Rs. 25 lacs & registration
expenses were Rs 1,50,000. [CII: FY 2011-12: 184; FY 2019-20: 289]
Solution: Computation of Capital Gain in the hands of Miss Mohini for AY 2019-20
Full Value of Consideration [Refer Note Below] 41,00,000
Less: Cost of acquisition [(25 L + 1.5 L) × 289/184] (41,62,228)
Long Term Capital Loss (62,228)
Note: If Value by VO > Actual Sale Consideration but < SDV, then FVC = Value by Valuation officer.
2. Registration expenses paid at the time of purchase shall be added to cost of acquisition of asset.
FVC ON TRANSFER OF UNLISTED SHARES [SEC 50CA]

 If Sale consideration < FMV of such share, FMV shall be deemed to be full value of consideration.
FMV → Deemed to be Full Value of Consideration – [Section 50D]

 If Consideration is not determinable → FVC = FMV of the capital asset on the date of transfer.
TAX TREATMENT OF ADVANCE MONEY FORFEITED [Sec 51]

1 Advance Money Forfeited Before 1.4.2014 Reduce from Original COA.
2 Advance Money Forfeited on/After 1.4.2014 Taxable u/h IFOS u/s 56(2)(ix).
Points to Remember:
(i) Forfeited Advance shall be reduced from original COA before Indexation & NOT after Indexation.
(ii) Date of Forfeiture of Advance should be considered & NOT the date of Receipt of Advance.
(iii) Amount Received & Forfeited by Previous owner → Not to be considered.
Examples:
SN Date of Receipt of Advance Date of Adv. Forfeited Taxable Treatment
1 15.06.2012 10.08.2013 AY 14-15 Reduce from COA of asset
2 20.05.2014 30.09.2014 AY 15-16 IFOS
3 08.03.2011 05.04.2014 AY 15-16 IFOS
CQ8. A house was purchased on 1.05.2001 for Rs. 2 Lacs & was used as a residence by the owner. The owner had
contracted to sell this property in june 2012 for Rs. 8 lacs & he had received an advance of Rs. 50,000 towards sale.
The deal was not finalized & hence the amount was forfeited on August 2012. He again contracted to sell this property
& received an advance on 24.02.2015. However, this deal was also not finalized & hence the amount was forfeited on
30.04.2015. The property was sold in June 2019 to another buyer for Rs. 10 Lacs. Owner paid 2% brokerage on sale of
the house. Find the capital gain. [CII: FY 2001-02: 100; FY 2019-20: 289]
Solution: Computation of Capital Gain in the hands of owner for AY 2020-21
Full Value of consideration 10,00,000
Less: Expenses on transfer [Brokerage @ 2% of Sale Value] (20,000)
Net Sale Consideration 9,80,000
Less: (Cost of acquisition - Forfeited Advance) = [(2L – 50,000) × 289/100] (4,33,500)
Long- Term Capital Gain 5,46,500
Note: Advance forfeited on or after 1.4.2001 shall be taxed u/h “IFOS” u/s 56(2)(ix).
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A. CAPITAL GAINS IN CASE OF DEEMED SALE

DESTRUCTION OF CAPITAL ASSET [SPECIAL CHARGING SECTION [SEC 45(1A)]
Circumstances for (i) Natural activities/causes. (ii) Riot/civil disturbances.
Destruction of (iii) Accidental fire/explosion (iv) Action of Enemy (war/without war)
Capital Asset
Sale Consideration Insurance Compensation (Money + FMV of replaced Asset).
Year of Taxability Capital Gain is taxable in PY of Receipt of Insurance Money.
Period of Holding From Date of Acquisition till the Date of Destruction.
Indexation Indexation is available till PY of destruction & not till receipt of Compensation.
CQ9. Mr. X owns a House which was purchased by him on 1.5.1999 for Rs 3 lacs. The said house was destroyed by
fire on 3.4.2019 & Mr. X received Rs. 48 lacs on 5.5.2020 from the Insurance Company. FMV of the property on
1.4.2001 was Rs. 4 lacs. The Stamp Duty Value was Rs. 60 lacs. Find Capital Gain of Mr. X for AY 2020-21.
Solution: POH: 1.5.1999 – 3.4.2019 > 24 Months & Thus LTCA & Indexation will be Available.
Sale Consideration [Insurance compensation as per section 45(1A)] 48,00,000
Less: Indexed cost of acquisition [4,00,000 × 289/100] 11,56,000
Long-term Capital Gain 36,44,000
Note: Sale Consideration = Insurance compensation & Capital Gain is chargeable to tax in the PY in which
Insurance money is received. Indexation of COI will be done till the year of destruction.
CAPITAL GAIN ON CONVERSION OF CAPITAL ASSET INTO SIT [SEC 45(2)]
Sale Consideration FMV of the asset on the date of conversion.
Year of Taxability Year in which SIT is sold/ transferred & not in year of conversion into SIT.
Period of Holding From Date of Acquisition till the Date of conversion into SIT.
Indexation Only till the PY in which conversion took place.

CQ10. X purchased Gold ornaments of Rs. 1 Lac on 4.1.2009 for Investment. On 12.1.2015 he started a business
of dealing in Jewellery & converts the gold into SIT. FMV of the gold ornaments on the date of conversion was
Rs. 5 Lacs. These gold ornaments were sold in PY 2019-20 for Rs. 6 Lacs. (a) Compute Capital Gain & Business
Income. (b) What would be the answer if the gold ornaments are held by the assessee till 31.3.2020?
Solution:
(a) Conversion of Capital Asset into SIT is treated as a transfer u/s 2(47). In this case, conversion took place
on 12.1.2015. Therefore, it will be treated as transfer of PY 2014-15. But Capital Gain will be taxable in PY
in which such asset is sold i.e. PY 2019-20.
Capital Gain of AY 2020-2021
Full Value of Consideration Rs. 5,00,000
Less: Indexed cost of acquisition [1,00,000 × 240/137] Rs. (1,75,180)
Long-term capital gain Rs. 3,24,820
Business Income for AY 2020-2021
Sale Price Rs. 6,00,000
Less: FMV on the date of conversion Rs. (5,00,000)
Business Income Rs. 1,00,000
(b) There will neither be business income nor capital gain because converted asset has not yet been sold.
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CAPITAL GAIN ON TRANSFER OF CAPITAL ASSET

Section → 45(3) 45(4)
By way of → Capital Contribution On Dissolution/Retirement of partners
From  Partners → Firm  Firm → Partners
 Members → AOP/BOI  AOP/BOI → Members
Sale consideration Value recorded in books of firm FMV of the asset on the date of transfer
Taxed in PY of Transfer
POH From PY of Acquisition till PY of transfer.
CQ11. A & B formed a partnership firm during PY 2019-2020. ‘A’ brings following assets as his capital contribution.
Particulars Gold Building
FMV on the date of transfer 4,40,000 12,00,000
Amount recorded in the books of the firm 6,00,000 9,50000
Actual cost 80,000 2,40,000
Year of acquisition PY 2000-01 PY 2010-11
FMV on 1.4.2001 1,50,000 2,50,000
Solution: Computation of Capital Gain in the hands of Mr. A
Gold Sale consideration [Value recorded in the books of firm] 6,00,000
Less: Indexed COA [1,50,000 × 289/100] (4,33,000)
LTCG 166,000
Building Sale Price [Value recorded in the books of firm] 9,50,000
Less: Indexed COA [2,40,000 × 289/167] (4,15,330)
Long Term Capital Gains 5,34,670
CQ12. XYZ & Company is a partnership firm, consisting of 3 partners X, Y & Z. The firm is dissolved on 31.3.2020.
The assets of the firm were distributed to the partners on distribution as follows:
Particulars Block of P&M (Given to X) Stock (Given to Y) LAND (Given to Z)
Year of Acquisition 2009-10 2011-12 1997-98
Cost of Acquisition 7,20,000 4 Lacs 1,10,000
Fair Market value on 31.3.2020 5 Lacs 5 Lacs 5 Lacs
WDV as on 31.3.2020 4,40,000 - -
Value at which given to partners 3 Lacs 4,10,000 3 Lacs
Fair Market value as on 1.4.2001 - - 1,70,000
(i) Compute income taxable in the hands of the firm. (ii) What shall be COA of such assets to the partners of the firm.
Solution:
(i) Income Taxable in the hands of the Firm
Capital Gain on the Block of P&M [Depreciable Asset & thus STCG always]
Sale Consideration [FMV on the date of Transfer] 5,00,000
Less: Cost of Acquisition (WDV of block) (4,40,000)
Short Term Capital Gain 60,000
Capital Gain on Land
Sale consideration [FMV on the date of Transfer] 5,00,000
Less: Indexed cost of acquisition [1,70,000 × 289/100] (4,91,300)
Long Term Capital Gain 8700
Business Income on transfer of stock = Market value – Cost of Stock = 5 Lacs – 4 Lacs = 1 Lac.
(ii) COA of assets in the hands of Partners
(a) Mr. X = Rs. 3 Lacs for block of machinery; (b) Mr. Y = Rs. 4,10,000 for stock (c) Mr. Z = Rs. 3 Lacs for land.
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COMPULSORY ACQUISITION OF CAPITAL ASSET [SEC 45(5)]

 Given provisions are applicable when the asset has been compulsorily acquired by government.
 However, these rules are also applicable when consideration is approved by RBI/CG (Even if there is no
compulsory acquisition).
INITIAL COMPENSATION
SC Amount of Initial Compensation
Taxed in PY of Receipt of Initial Compensation (either Whole/Part)

 If compensation is received in Instalments, ENTIRE Capital gain on Total
Compensation is taxable in PY of receipt of 1st Instalment.
POH From: Date of Acquisition of asset.

Till: Date of Compulsory Acquisition.
Indexation Upto the year of Compulsory Acquisition of the Asset & NOT till the year of payment.
ENHANCED COMPENSATION
SC Amount of Enhanced Compensation.
Taxed in Enhanced compensation is taxable in PY of Receipt.

 Enhanced Compensation is received in Instalments → only Proportionate Capital
Gain to the amount of Instalment received during PY, shall be taxable in that PY.
Note: Enhanced compensation received under interim order will be taxable in the PY
in which final order of court is passed.
COA/COI Nil. However Litigation expenses are allowed as deduction.
Reduction of Enhanced Compensation: Where capital gain has been charged on compensation received
by the assessee & subsequently such compensation is reduced by any court, tribunal etc, the assessed
capital gain of that year shall be recomputed by taking into consideration the reduced amount.
Points to Remember:
1. Interest on compensation will be taxable in PY of Receipt irrespective of the year for which it has been
paid. Such interest is deductible to the extent of 50% of amount received u/s 57.
2. Enhanced Compensation is taxable in the hands of recipient → If assessee is dead on date of receipt of
enhanced compensation, such compensation received by his legal heir shall be taxable in their hands.
CQ13. X acquired a house for Rs. 20,000 in 1997-98. On his death in October 2006, the house was acquired by his son
Y. FMV of the house on 1.4.2001 was Rs. 80,000. This house was acquired by the Government on 15.3.2010 for Rs. 3
Lacs & a compensation of Rs. 2,20,000 is paid to him on 25.03.2020 & the balance Rs. 80,000 on 15.04.2021. Y filed a
suit against the Government challenging the quantum of compensation & the court ordered additional compensation
of Rs. 1 Lacs. He incurred an expenditure of Rs. 2,000. Half of the enhanced compensation is received on 14.2.2022 &
other half is received in PY 2023-24. Compute Capital Gains in the hands of Mr. X.
Solution: (i) Capital gain on Initial Compensation [Taxable in AY 2020-21 (for PY 2019-20)] during which part of the
compensation was actually received by him, although the balance of Rs. 80,000 was received in PY 2020-21.
 POH (Including POH of previous owner): PY 1997-98 to PY 2009-10. Indexation only upto PY 2009-10
Sale Consideration [Total Initial Compensation] Rs. 3,00,000
Less: Indexed cost of acquisition: [ 80,000 × 148/100] Rs. (1,18,400)
Long-term capital loss Rs. 1,81,600
149
Capital Gain for AY 2022-23 as half of enhanced compensation was received on 14.2.2022
Sale Consideration Rs. 1,00,000
Less: Expenses of transfer i.e., Litigation Expenses Rs. (2,000)
Long-term capital Gain Rs. 98,000
Note: In AY 2022-23, Capital gain tax on half of enhanced compensation only shall be payable. Remaining tax shall be
payable in AY 2024-25 when the other half is received.
CAPITAL GAINS IN CASE OF SPECIFIED AGREEMENT [SECTION 45(5A)]

Applicability Individual & HUF.
Transaction Capital Gain on Transfer of Land & Building or Both under Specified Agreement.
Year of Taxability CG arising from such transfer shall be taxable as income of PY in which Completion
Certificate for the whole/part of the project is issued by the competent authority.
Sale Stamp Duty Value of his share (being land or building or both) in the project on the
Consideration date of issue of certificate of completion + Consideration received in cash.
Meaning of Registered agreement in which a person owing land/building or both agrees to allow
Specified another person to develop a real estate project on such land/building in
Agreement consideration of a share, being land/building or both in such project with/without
payment of part of the consideration in cash.
Consequences of Transfer before Date of Issue of Completion Certificate:

 Benefit u/s 45(5A) is Not available if assessee transfers his share in the project on/before issue of
completion certificate to any person. In such case, CG shall arise in the year of such transfer.
 In such case, section 45(5A) will not apply for determining full value of consideration.
 Thus, Higher of (i) SDV on the date of transfer of his share or (ii) Actual consideration shall be full value
of consideration.
CAPITAL GAINS ON BUYBACK OF SHARES/SPECIFIED SECURITIES [SEC 46(A)]

Sale Consideration Amount given by the company to Shareholder on buy-back of shares/securities.
COA Amount at which shares were Purchased by the shareholder.
Tax Treatment
Taxability Buyback of shares by Buyback of shares by a Buyback of specified
in the domestic companies company, other than a securities by any
hands of domestic company company
Shareholder Taxable @ 23.296% Not taxable Not taxable

Company Exempt u/s 10(34A) Taxable as CG u/s 46A Taxable as CG u/s 46A.
Meaning of Specified Securities: As per Section 68 of CA, 2013, ‘specified securities’ includes employees'
stock option or other securities as may be notified by the Central Government from time to time.
CQ14. Mr. X has acquired 10,000 equity share of ABC Ltd on 1.04.2007 @ 300 per share. The company buybacks
10,000 shares on 30.1.2020 @ 750 per share. Compute the capital gain taxable in his hands.
Solution: Capital Gains on buyback in the hands of Mr. X
Sale Consideration [Buyback price] (10,000 × 750 per share] 75,00,000
Less: Indexed COA [10,000 × 300 × 289/129] (67,20,930)
Long Term Capital Gain 779070
150
B. COST OF ACQUISITION IN SPECIAL CASES
GOODWILL/TRADEMARK/BRAND NAME etc. [SEC 55(2)(A)]
Nature of (i) Goodwill of a business/ Tenancy Rights;

Assets
(ii) Trademark or Brand name associated with a business;
(iii) Right to manufacture/produce any article or thing;
(iv) Right to carry any business.
Cost of 1. Self-Generated Assets: Nil

Acquisition 2. Purchased: Actual COA (purchase price)
Points to Remember:
1. Option to take FMV on 1.4.2001→ Not Available in case of Above Assets.
2. If COA of asset is NOT Ascertainable → No TAX. [Ex: Self-generated Goodwill of a profession].
3. In case of Goodwill of a business (whether Self-generated/Purchased) → COI will always be Nil.
CQ15.
(a) P commenced a business on 15.4.2002. The said business is sold by P on 18.4.2019 & he received Rs. 9 Lacs
towards goodwill.
(b) What if P had acquired the goodwill for this business for a consideration of Rs. 2 Lacs.
Solution:
(a) Capital Gain of AY 2020-21
Sale Consideration 9,00,000
Less: Indexed cost of acquisition (Self – Generated) Nil
Long-term capital gain 9,00,000
(b)
Less: Indexed cost of acquisition (Purchased) [2,00,000 × 289/105] (5,50,476)
CQ16. R purchased tenancy right on 1.04.1999 for Rs. 1,60,000. The same was sold by him on 14.8.2019 for Rs. 15
Lacs. FMV of tenancy right as on 1.4.2001 was Rs. 2,50,000. Compute the Capital Gain for AY 2020-21.
Solution:
Less: Indexed cost of acquisition (Purchased) [1,60,000 × 289/100] (4,62,400)
Note: In case of tenancy right, option to take FMV on 1.4.2001 as COA is not available.
CQ17. On 31 January 2019, Mr. A has transferred self-generated goodwill of his profession for Rs. 70,000 & incurred
expenses of Rs. 5,000 for such transfer. Compute Capital Gain taxable in the hands of Mr. A for AY 2020-21.
Solution:
 COA of Self-Generated Goodwill is NOT Ascertainable.
 Thus Transfer of Self-Generated Goodwill of Profession is not taxable. [CIT vs. B.C. Srinivasa Shetty].
151
RIGHT SHARES/BONUS SHARES [SEC 55(2)(aa)]

Particulars Cost of Acquisition
1. Bonus Shares
 If Bonus shares acquired before 1.4.2001 FMV as on 1.4.2001
 If Bonus shares acquired on/after 1.4.2001 Nil since no option is available
2. Right Shares
 Purchased by Original Shareholder Issue Price
 Purchased by Purchaser of Right Issue price + Cost of Right
3. Right Always Nil & always STCG
Indexation: Indexation is available from date of allotment of Right/Bonus Shares.
CQ18. X purchased 1200 listed shares of Rs. 10 each on 15.4.2005 for Rs. 60,000. Company declared a right issue in
the ratio of 2:1 at Rs. 30 per share in October, 2019. He was allotted bonus shares on 1st January 2020 in the ratio of
1:1. He sold the right for 300 shares against Rs. 20 per share & remaining 300 shares were purchased by him which
were allotted on 5.11.2019. He sold all the shares @ Rs. 90 each on 15.3.2020 through RSE. Compute taxable capital
gains for AY 2020-21.
Solution: Mr. X is allotted 600 shares in October 2019. Bonus shares = 1200 + 600 = 1800 shares.
Capital Gain on Sale of “Right of 300 shares”
Full Value of Consideration [300 × 20] 6,000
Less: Cost of acquisition Nil
Short-term capital gain 6,000
Capital Gain on Sale of “300 Right Shares”
Full Value of Consideration [300 × 90] 27,000
Less: Cost of acquisition [300 × 20] 6,000
Short-term capital gain 21,000
Capital gain on Sale of Original Shares
Full Value of Consideration [1200 × 90] 1,08,000
Less: Indexed cost of acquisition [60,000 × 289/117) (1,48,205)
Long term capital loss (40,205)
Capital Gain on sale of “1800 Bonus shares”
Sale Consideration [1800 × 90] 1,62,000
Less: Indexed cost of acquisition Nil
Long term Capital Gain 1,62,000
SWEAT EQUITY SHARES/ ESOP [SEC 49(2AA)]

Sale Consideration Amount received on sale of shares.
COA FMV on the date of exercising ESOP option.
Class Note:
152
C. MISCELLANEOUS CASES OF COMPUTING CAPITAL GAIN
CAPITAL GAINS ON TRANSFER OF DEPRECIABLE ASSET [SECTION 50]

 Capital gain arising on depreciable asset will always be STCG irrespective of POH.
Conditions for Claiming Depreciation u/s 32

1. There must be at least one asset in the block.
2. There must be some WDV for the block on which prescribed rate of Depreciation can be applied.
If any of the two conditions are not satisfied, Sec 32 ceases to apply & automatically Section 50 becomes
applicable resulting in STCG.
Section 50: Capital Gain on Depreciable Assets will arise only in the following two cases:
(1) WDV of block is ZERO on the last day of the PY
(2) Block is Empty on the last day of PY (Even if there is WDV in the block).
1. STCG  If Sale Consideration received on transfer of one or more capital asset > WDV of Block,
WDV of the block will be Zero & therefore no Depreciation can be claimed.
 In such case, STCG = Sale consideration – WDV of the block.
2. STCL  If all the assets in the block are sold, Block is empty & thus no depreciation can be
claimed even if there is WDV left in the block.
 In such case, Short term capital loss will arise to the extent of remaining WDV.
If SC of all the assets in Block < WDV of the Block, STCL = SC of all the assets – WDV of the block.
CQ19. Singhania & Co., a sole proprietorship owns 6 machines, put in use for business in March 2019. Rate of
Depreciation is 15%. WDV of these machines as on 1st April 2019 was Rs. 8,50,000. Three of the old machines were
sold on 10th June 2019 for Rs. 11,00,000. A second-hand plant was bought for Rs. 8,50,000 on 30th November 2019.
You are required to: (i) Determine depreciation for AY 2020-21; (ii) Compute Capital Gains for AY 2020-21.
(iii) If 3 machines are sold in June 2019 for Rs. 21 lacs, will there be any difference in your above workings?
Solution:
(i) Computation of depreciation for AY 2020-21
Particulars Rs.
W.D.V. of the block as on 1.4.2019 8,50,000
Add: Purchase of second-hand plant during the year 8,50,000
Less: Sale consideration of old machinery during the year 11,00,000
W.D.V of the block as on 31.03.2020 6,00,000
Note: Since, Second-hand machinery was put to use for less than 180 days, depreciation is restricted to 50% of
15%. Therefore, depreciation for the year = Rs. 45,000, being 7.5 % of Rs. 6,00,000. [Refer PGBP if required]
(ii) Section 50 on Capital Gains in case of depreciable assets is applicable only in the following circumstances:
(a) When one or some of the assets in the block are sold for consideration more than the value of the block.
(b) When all the assets are transferred for a consideration more than the value of the block.
(c) When all the assets are transferred for a consideration less than the value of the block.
In (a) & (b), SC > WDV of the block, STCG would arise. In (c), Since SC < WDV of block, STCL would arise.
In the given case, capital gains will not arise as the block of asset continues to exist, and some of the assets are
sold for a price which is lesser than WDV of the block.
(iii) If 3 machines are sold in June 2019 for Rs. 21,00,000, STCG would arise since SC > aggregate of opening WDV
of the block + Additions made during the year.
Particulars Rs. Rs.
Sale consideration 21,00,000
Less: WDV of the machines as on 1.4.2019 8,50,000
Less: Purchase of second plant during the year 8,50,000 (17,00,000)
Short term capital gains 4,00,000
153
CAPITAL GAIN IN CASE OF POWER GENERATING UNDERTAKINGS [SEC 50A]

Applicability Only for undertakings engaged in Generation/Generation & distribution of power.
Option Such undertakings have option to use SLM method for depreciation.
COA COA of the asset shall be WDV of Asset as appropriately adjusted.
TABLE FOR COMPUTATION

Conditions Treatment
1. SC < WDV  Terminal Depreciation (Loss) = WDV – SC.
 It is Deductible u/s 32 u/h PGBP.
2. SC > WDV but < Original COA  Balancing Charge (Profit) = SC – WDV.
 It is Taxable u/s 41(2) u.h PGBP.
3. SC > Original COA  Capital Gain = SC - Original COA.
 Balancing Charge (Profit) = SC- WDV.
 It is Taxable u/s 41(2) u/h PGBP.
Note: Question on the same provision has been given in PGBP. [Question starting with Bijli Ltd].
CAPITAL GAIN IN CASE OF SLUMP SALE [SECTION 50B]

MEANING Sale of whole undertaking/ unit for lumpsum consideration. In slump sale, whole
undertaking/division is transferred for the lumpsum consideration. Individual assets are
not transferred & thus sale consideration for the individual assets is not known.
Therefore Sale consideration of whole undertaking/division is compared with the NET
WORTH of the undertaking to find out the Capital gain.
COA & COI  COA & COI = Net worth of the undertaking/ division.
 Net worth shall be calculated as follow:
Total value of All Assets of an undertaking/ division [Note 1]
Less: Total value of All Liabilities of such undertaking/division. [Note 2]
 Any change in the value of assets on account of REVALUATION of Assets shall NOT be
considered for this purpose.
INDEXATION No Indexation shall be allowed on COA/COI.
Nature of  If POH of the undertaking/division ≤ 36 Months → STCG would arise.

Capital Gains  If POH of the undertaking/division > 36 Months → LTCG would arise.
Note:
1. Aggregate value of total assets shall be calculated as follows:
 Depreciable Assets: WDV of block of assets determined in accordance with sec 43(6)
 Sec 35AD Assets: Nil
 All other Assets: Book value.
2. All Liabilities should be assumed to be paid off in full unless otherwise specified.
154
CQ20. X Ltd. has several undertakings carrying on several businesses. During PY 2019-20, company sold one of its
undertakings (as it was continuously generating loss since last 5 years) for a lump sum value of Rs. 300 lacs without
assigning value to individual asset & liabilities. Brokerage on transfer paid @ 5%. Compute t\axable capital gain.
Book value of sundry assets & liabilities of the undertaking as on the date of sale is as under:
Items Book Value FMV
LAND Rs. 50 lacs (Stamp duty Value = Rs.7000000) Rs. 100 lacs
Machinery Rs. 30 lacs (WDV as per IT Act Rs.60 lacs) Rs. 100 lacs
Furniture Rs. 50 lacs (WDV as per IT Act Rs.90 lacs) Rs. 75 lacs
Stock Rs. 30 lacs Rs. 35 lacs
Debtors Rs. 40 lacs Rs. 40 lacs
Creditors Rs. 50 lacs -
Solution: Since the undertaking is owned by the company for > 3 years, LTCG shall arise.
Calculation of Net Worth
A. Value of Assets taken over:

B. Value of liabilities taken over:
Asset Value Basis (i) Creditors = Rs. 50 Lacs – Basis of Book Value.
Land Rs. 50 Lacs Book Value
Machinery Rs. 60 Lacs WDV
Furniture Rs. 90 Lacs WDV NET WORTH =
Stock Rs. 30 Lacs Book Value Assets – Liabilities = A - B = Rs. 270 Lacs – Rs. 50
Debtors Rs. 40 Lacs Book Value Lacs = Rs. 220 Lacs
TOTAL Rs. 270 lacs
Computation of capital gains in the hands of X Ltd. for AY 2020-21

Sale consideration Rs. 300 lacs
Less: Expenses on transfer = (5% of Rs.300 lacs) (Rs. 15 Lacs)
Net sale consideration Rs. 285 lacs
Less: Cost of acquisition i.e. Net Worth: Calculated above (Rs. 220 lacs)
Less: Cost of improvement (Rs. Nil)
Long Term Capital Gain Rs. 65 Lacs
CAPITAL GAINS ON SHARES & DEBENTURES ACQUIRED IN FOREIGN

CURRENCY BY A NON-RESIDENT [1st Proviso to Sec 48]
 If a NR acquires Shares or debentures of an Indian Company by utilizing foreign Currency, then the
capital gain shall be computed in same foreign currency. After calculating capital gains in foreign
currency, it will be converted into Indian Currency.
 Benefit of INDEXATION is NOT AVAILABLE.
STEPS TO COMPUTE CAPITAL GAINS

1. Sale Consideration, Expenses of Transfer & Cost of Acquisition will be given in Rupees in the question
as the shares/debentures were acquired by utilizing foreign currency.
2. So we need to convert them into Foreign Currency by using AVERAGE BUYING RATE on the date of
TRANSFER/ ACQUISITION.
3. Calculate CAPITAL GAINS in FOREIGN CURRENCY.
4. Capital Gain in Foreign Currency shall be Re-converted into INDIAN CURRENCY by applying BUYING
Rate on the date of transfer.
155
CQ21. R, a NRI, remits US$ 40,000 to India on 16.9.2009. The amount is partly utilized on 3.10.2009 for purchasing
10,000 shares in A Ltd., an Indian company at the rate of Rs.12 per share. These shares are sold for Rs. 36 per share on
30.3.2020. The telegraphic transfer buying & selling rate of US dollars adopted by the State Bank of India is:
Date TT Buying Rate TT Selling Rate Average TT Rate [ Buying + Selling]/2
16.9.2009 18 20 19.5
3.10.2009 19 21 20
30.3.2020 44 46 45
Compute capital gain chargeable to tax for the AY 2020-21 on the assumption that:
(a) These shares have not been sold through RSE. (b) These shares have been sold through RSE & STT was paid.
Solution: (a) Where shares are not sold through recognised stock exchange
Sale consideration (Rs. 3,60,000/45) US$ 8,000
Less: Cost of acquisition (Rs. 1,20,000/20) (US$ 6,000)
Long-term capital gain US$ 2,000
Long term Capital gain covered into Rupees (US$ 2,000 x Rs. 44/US$) Rs. 88,000
(b) Where shares are sold through a RSE: Entire LTCG is exempt since it is < 10 Lacs.
TRANSFER OF SECURITIES HELD IN DEMAT FORM- [SEC 45(2A)]

COA & POH  Determine using FIFO Method on the basis of Date of Entry in DEMAT A/C.
CONVERSION OF OLD PHYSICAL STOCK INTO DEMATERIALISED FORM

In case of conversion of shares (originally held in physical form) into DEMAT form:
 For SALE: Date of Entry in DEMAT A/C should be considered.
 For POH: Original Date of acquisition should be considered.
 Where an investor has more than one account, FIFO will be applied account wise.
CQ22. Raju acquired & transferred the shares of X ltd in his Demat a/c as given below. Compute Capital Gains.
Details of DEMAT A/c
Acquisitions:
Date of Entry in Demat A/c No of shares Cost
1.1.2007 1000 share 120 per share
1.12.2009 3000 share 136 per share
1.4.2013 (Acquired on 1.1.2002) 5000 share 45 per share
Transfers:
Date of transfer No of shares Sale consideration
1.04.2011 2,500 shares 189 per share
1.08.2015 5,000 shares 260 per share
1.10.2019 1,500 shares 340 per share
Solution:
Capital Gain on Transfer of 2,500 shares on 1.4.2011
Sale Consideration (2500 × 189) 4,72,500
Less: Indexed COA: (1000 × 120 × 184/122) (1,80,980)
(1500 × 136 × 184/148) (2,53,620) (4,34,600)
Long term Capital gain 37,900
Capital Gain on Transfer of 5,000 shares on 1.8.2015
Sale Consideration (5,000 × 260) 13,00,0000
Less: Indexed COA: (1500 × 136 × 254/148) (3,50,110)
(3500 × 45 × 254/100) (1,57,500) (5,07,610)
Long term Capital gain 7,92,390
Capital Gain on Transfer of 1500 shares on 1.10.2019
Sale Consideration (1500 × 340) 5,10,000
Less: Indexed COA: (1500 × 45 × 289/100) (1,95,075)
Long term Capital gain 3,14,925
156
ASCERTAINMENT OF COST IN SPECIFIED CIRCUMSTANCES [SEC 49(1)]

 In following cases, cost of acquisition of the asset shall be deemed to be cost for which the previous
owner of the property has acquired it.
 To this cost, CoI to the asset incurred by previous owner or the assessee must be added:
Where the capital asset became the property of the assessee:
(a) on any distribution of assets on the total or partition of a HUF;
(b) under a gift or will;
(c) by succession, inheritance or devolution;
(d) on any distribution of assets on the liquidation of a company;
(e) under a transfer to revocable or an irrevocable trust;
(f) under any transfer of capital asset by a holding company to its WOS Indian company or by a subsidiary
company to its 100% holding Indian company, referred to in section 47(iv) & 47(v) respectively;
(g) under any transfer referred to in section 47(vi) of a capital asset by amalgamating company to
amalgamated Indian company, in a scheme of amalgamation;
(h) under any transfer referred to in section 47(vib), of a capital asset by the demerged company to the
resulting Indian company, in a scheme of demerger;
(i) Conversion by an individual of his separate property into HUF property [by mode referred in sec. 64(2)].
Case Law: Bombay High Court in CIT v. Manjula J. Shah 16 Taxman 42 (Bom.)
 Bombay HC held that Indexed CoA in case of gifted asset has to be computed w.r.t the year in which the
previous owner first held the asset & not the year in which the assessee became the owner of the asset.
 Section 2(42A) provides that in all such cases, for determining the period for which the capital asset is
held by the transferee, the period of holding of the asset by the previous owner shall also be considered.
Note: In case of mode of acquisition of asset specified u/s 49(1), Period of holding of the previous owner
shall also be considered for the purpose of taking Indexation of Cost of Acquisition.
DETERMINATION OF PERIOD OF HOLDING IN SPECIAL CIRCUMSTANCES

Circumstances Period of holding
Shares held in a company in liquidation Exclude the period subsequent to
the date of liquidation
Asset becomes property of the assessee by virtue of sec 49(1). Include POH of previous owner
Allotment of shares in the scheme of amalgamation/Demerger Include POH of shares in
Amalgamating/Demerged Co.
Right shares / securities, Bonus shares From the date of allotment of such
share or security
Right to subscribe to any share or security From the date of offer of right.
Units become property of assessee in consideration of transfer of Include POH of units in
units in consolidated scheme of MF referred u/s 47(xviii). consolidating scheme of MF.
Where share/s of a company is acquired by NR assesee on Period from the date on which
redemption of GDRs held by such assessee redemption request was made.
Equity share becomes property of the assessee by way of conversion Include POH of preference shares.
of preference shares into equity shares u/s 47(xb)
Units become property of the assessee in consideration of transfer of Include POH of units in the
units in the consolidated plan referred u/s 47(xix). consolidating plan of MF.
ESOP or sweat equity shares allotted by employer free/@ Period from the date of allotment or
concessional rate to his employees/ former employees. transfer.
157
D. TRANSACTIONS NOT TREATED AS TRANSFER [SEC 46 & 47]

 In the following cases, No Capital Gain would arise since they are NOT treated as Transfer.
 Thus NO TAX will be payable on such transfer by the transferee.
CAPITAL GAIN ARISING ON “DISTRIBUTION OF ASSETS IN KIND BY COMPANY

TO ITS SHAREHOLDERS ON LIQUIDATION [SECTION 46]
Distributes Assets in Kind

COMPANY Shareholder
Give up their Right in the Shares of the Company
FOR COMPANY IN LIQUIDATION

 Any Asset distributed in kind by the company to its shareholders on liquidation → shall NOT be
regarded as a transfer by the company.
 Thus No Capital Gain shall arise to company on distribution of such Assets.
 However, if liquidator sells the assets of company & distributes funds so collected, capital gain shall
arise on such transfer.
FOR SHAREHOLDERS
 Capital Gain shall arise in the hands of Shareholders on transfer of such shares to the company.
 Sale Consideration = FMV of Assets received in Kind – Deemed Dividend u/s 2(22)(c).
 Deemed dividend u/s 2(22)(c) → Distribution of Accumulated Profits by the company on liquidation
is treated as deemed dividend u/s 2(22)(c) & DDT u/s 115 shall be payable by the company & thus
such dividend shall NOT be taxable in the hands of shareholders & therefore it is deducted from SC.
CAPITAL GAIN ON TRANSFER OF ASSETS RECEIVED IN KIND BY THE SHAREHOLDERS
 When the asset received in kind is transferred by the shareholder later, Capital Gain will arise.
 COA of such asset = FMV of such asset on date of distribution by the company.
 POH shall be reckoned from the date of receipt of asset on liquidation.
CQ23. Mr. PC purchased 10,000 equity shares of XYZ Co. Pvt. Ltd on 28.2.2007 for Rs. 1,20,000. The company was
wound up on 31.7.2019. The following is the summarized financial position of the company as on 31.7.2019.
Liabilities Rs. Assets Rs.
60,000 Equity shares 6,00,000 Agricultural lands 42,00,000
General Reserve 40,00,000 Cash at bank 6,50,000
Provision for taxation 2,50,000
48,50,000 48,50,000
Tax liability (towards DDT) was ascertained at Rs. 3 Lacs, after considering refund due to the company.
The remaining assets were distributed to the shareholders in the proportion of their shareholding.
The market value of the 6 acres of the agriculture land (in an urban area) as on 31.7.2019 is Rs. 10 Lacs per acre. The
agriculture land received above was sold by Mr. PC on 29.2.2020 for Rs. 15 Lacs. Discuss tax treatment.
158
Solution:
1. CG arising in hands of company on distribution of asset in kind to shareholders on liquidation is exempt u/s 46.
2. Computation of CG in the hands of Mr. PC
Sale consideration [refer note 1] 4,00,000
Long term capital gain 1,15,738
3. CG arising on Sale of URBAN Agricultural land received in the hands Mr. PC
Sale consideration Rs. 15 Lacs
Less: COA [deemed to be FMV on date of distribution] Rs. 10 Lacs
Short term capital gain Rs. 5 Lacs
Working Note:
1. Calculation of Sale Consideration of Shares: Mr. PC holds 1/6th of shareholding of the company, so
Agriculture land received (60 Lacs/6) Rs. 10,00,000
Cash at bank (6,50,000 – 3 Lacs)/6 Rs. 58,333
Less: Deemed dividend u/s 2 (22)(c) (40 Lacs - 50,000)/6 ---- Exempt u/s 10(34) (6,58,333)
Sale consideration Rs. 4,00,000
2. Dividend u/s 2 (22)(c) i.e. Rs. 6,58,333 will be exempt.
3. Tax liability has been ascertained at Rs. 3 Lacs as against the provision of Rs. 2,50,000. Therefore Rs. 50,000 (Rs. 3
Lacs - Rs. 2,50,000) has to be reduced from general reserve for calculating deemed dividend u/s 2(22)(c).
DISTRIBUTION OF CAPITAL ASSET ON TOTAL/PARTIAL PARTITION OF HUF

 Distribution of Capital Asset by HUF to its members on partition of HUF is NOT treated as Transfer &
thus NO Capital Gain shall arise in the hands of HUF.
 However, Capital Gain shall arise when the asset received on partition, is sold by member.
 For computing capital gain in the hands of member on the transfer of said asset ↓
COA in the hands of member of HUF Cost of Asset to HUF
Period of Holding From the date of Acquisition of Asset by HUF
CQ24. On 18.8.2005, Ramu acquired 1000 debentures of X Ltd. & house on partition of its HUF. House was acquired
by HUF on 1.4.1995 for Rs. 3 lacs & Debentures were acquired on 1.4.2002 for Rs. 2 lacs. FMV of the house on
1.4.2001 is Rs. 4 lacs. COI incurred by HUF on 15.3.2002 was Rs. 2 lacs. On 17.7.2019, Ramu sold the house for Rs.
20 lacs & its debentures are taken by the company at Rs. 2,50,000. Compute capital gain of Ramu for AY 2020-21.
Solution: Computation of capital gain in the hands of Ramu for the AY 2020-21
I. HOUSE → POH: 1.4.1995 – 17.7.2019
Less: Indexed cost of improvement [2,00,000 × 289/100] (5,78,000)
II. Debenture → POH: 1.4.2002 – 17.7.2019
Less: cost of acquisition [No indexation is available] 2,00,000
Long-term capital gain 50,000
Note: COA = Cost to Previous owner in case of Gift.
159
TRANSFER OF CAPITAL ASSET BY WAY OF GIFT/UNDER A WILL OR TRUST

 Transfer of capital asset under a gift or will or irrevocable trust is NOT treated as transfer & thus NO
CAPITAL GAIN shall arise in the hands of transferor.
 However, Capital Gain will arise in the hands of Recipient when he transfers such capital asset.
 For computing capital gain in the hands of recipient of gifts/will/irrevocable trust.
COA in the hands of Recipient Cost to previous owner
Period of Holding/Indexation  Includes Period of Holding of previous owner;
 Indexation will be taken from DoA of Asset by Previous owner
Note: If assets received as gift is made taxable u/s 56 (2)(vii)/(viia), then COA of such assets shall be the
value taken into accounts for the purpose of sec 56(2)(vii) or (viia).
In such case the POH of previous owner shall not be included. [To be Studies with IFOS]
CQ25. Mr. A purchased gold in 1970 for Rs. 25,000. FMV on 1.4.2001 was Rs. 1,30,000. In PY 2017-18, he gifted it
to his son. FMV on the date of receipt of gift was Rs. 2,00,000. His son sold it PY 2019-20 for Rs. 5,00,000. Discuss
the tax implications in the hands of Mr. A & his son.
Solution: Gift is exempt by virtue of Section 47 & thus NO capital gain arises in the hands of Mr. A.
Computation of Capital Gains in the hands of Son of Mr. A
Less: Indexed cost of acquisition [1,30,000 × 289/100] 3,75,700
Note: COA = Cost to Previous owner in case of Gift.
TRANSFER OF CAPITAL ASSET BY HOLDING COMPANY TO WOS COMPANY

COA in the hands of WOS Cost to Holding company (Previous owner)
POH of Holding company Includes POH of Holding company (Previous owner)
TRANSFER OF CAPITAL ASSET BY WOS COMPANY TO HOLDING COMPANY

COA in the hands of Holding company Cost to Holding company (Previous owner)
POH of Wholly owned subsidiary Includes POH of WOS company (Previous owner)
Note: For transfers between HC & SC,

(a) Recipient Company (company receiving capital asset) shall be Indian Company.
(b) Exemption will NOT apply if a Capital Asset is transferred as SIT.
6. TRANSFER OF CAPITAL ASSET IN SCHEME OF AMALGAMATION BY

AMALGAMATING COMPANY TO AMALGAMATED (INDIAN) COMPANY
Transfers Asset
Amalgamating Company Amalgamated Company
COA to Amalgamated Company Cost to Amalgamating company (Previous owner)

POH Include POH of Amalgamating company (Previous owner)
Indexation From DoA of capital asset by amalgamating company
160
TRANSFER OF CAPITAL ASSET IN THE SCHEME OF DEMERGER BY DEMERGED

COMPANY TO RESULTING INDIAN COMPANY
Transfers Asset
Demerged Company Resulting Indian Company
COA to Resulting company Cost to Demarged company (Previous owner)

POH Include POH of demerged company (Previous owner)
Indexation From DoA of capital asset by demerged company
ALLOTMENT (ISSUE) OF SHARES BY AMALGAMATED COMPANY IN LIEU OF

SHARES HELD IN AMALGAMATING COMPANY
(Transfers) Shares in Amalgamating Co.

Mr. X Company
(Receives) Shares in Amalgamated Indian Co.
COA of shares in Amalgamated company COA of shares in Amalgamating Company

POH of shares in Amalgamating company Include POH of shares in Amalgamating Company.
Note: In this case, shares in amalgamated company are allotted to the shareholders (of amalgamating
company) in exchange of their shares in the amalgamating company, except where the shareholder
itself is amalgamated company.
Ex: A Ltd., an Indian company, holds 60% of shares in B Ltd. B Ltd. amalgamates with A Ltd. Since A Ltd. itself is the
shareholder of B Ltd., A Ltd., being the amalgamated company, cannot issue shares to itself. However, A Ltd. has to
issue shares to the other shareholders of B Ltd.
Note: Same provision would apply in case of conversion of company into LLP – [Sec 47(xiiic)]
 Cost of share in LLP = COA of Shares in the company immediately before its conversion.
ALLOTMENT OF SHARES BY RESULTING COMPANY TO SHAREHOLDERS OF

DEMERGED COMPANY
Shares in Cost of Acquisition
Resulting Net BV of Asset in demerged company 𝐚𝐟𝐭𝐞𝐫 demerger

COA of shares in Demerged Company ×
Company Net BV of Asset in demerged company 𝐛𝐞𝐟𝐨𝐫𝐞 demerger
Demerged
COA of share in Demerged Co. ─ Cost apportioned to shares of Resulting Co.
Company
Note: For determining POH of Shares in Resulting Co. → Includes POH of Shares in demerged Co.
CQ26. Mr A. acquired 1000 shares in XY ltd of Rs. 20,000. XY Ltd. was demerged on 25.09.2019 & the net book value
of the asset transferred to Y Ltd (the resulting company) was 30 Lacs. Compute the cost of acquisition of shares of
Mr. A in demerged company as well as resulting company assuming the paid up capital & general reserve of XY Ltd
before demerger were 1 crore.
Solution: COA of Shares in
Resulting COA of shares in Demerged Co. ×
Net BV of Asset in demerged co. 𝐚𝐟𝐭𝐞𝐫 demerger
= 20,000 ×
30
= Rs. 6,000.
Company Net BV of Asset in demerged co. 𝐛𝐞𝐟𝐨𝐫𝐞 demerger 1 crore
Demerged COA of share in Demerged Co. ─ Cost apportioned to shares of Resulting Co. = Rs. 20,000 – Rs. 6,000 = Rs.
Company 14,000.
161
TRANSFER OF GOVERNMENT SECURITY BY A NR TO ANOTHER NR OUTSIDE

INDIA THROUGH INTERMEDIARY (SEC 47(VIIB)
Government securities (Periodic interest)

Mr. X (Non-Resident) Mr. Y (Non-Resident)
TRANSFER OF CAPITAL ASSET BEING ANY WORK OF ART, Archaeological, Scientific

or Art Collection, Book, Manuscript, Drawing, Painting, Photograph or Print to Government,
University, National Museum, National Art Gallery, other Public Museum or Institution of National
Importance → Exempt.
TRANSFER BY WAY OF CONVERSION OF BONDS/DEBENTURES INTO SHARES

Transfers Debentures
Mr. X Company
Receives Shares
COA of Shares received Cost of Bonds/Debenture given up

POH of Shares Include POH of Debentures given up
CQ27. Mr. B purchased convertible debentures for Rs. 5,00,000 during August 2001. The debentures were
converted into shares in September 2012. These shares were sold for Rs. 15,00,000 in August 2019. The brokerage
expenses are Rs. 50,000. You are required to compute the CG in case of Mr. B for AY 2020-21.
Solution: Computation of Capital Gains of Mr. B for AY 2020-21
Particulars Rs.
Less: Expenses on transfer (Brokerage paid) (50,000)
Net sale consideration 14,50,000
Less: Indexed cost of acquisition (Rs. 5,00,000 × 289/100) 14,45,000
Long term capital gain 5000
TRANSFER OF UNITS OF MF IN THE SCHEME OF CONSOLIDATION OF MF
Transfers units in Consolidating scheme

Mr. X Company
Receives units in consolidated scheme
COA of unit in Consolidated scheme COA of units in Consolidating Scheme

POH of unit in consolidating scheme Includes POH of units in consolidating scheme for
determining POH of units in consolidated scheme
Note: Consolidation should be of 2 or more schemes of equity-oriented fund or of 2 or more scheme of a

fund other than equity-oriented fund.
SOME OTHER TRANSACTIONS WHICH ARE NOT TREATED AS TRANSFER

Transfer of Rupee denominated bond of Indian company issued outside India by NR to another NR -
[Section 47(viiaa)].
Redemption of Sovereign Gold Bonds by Individual issued under Sovereign Gold Bond Scheme, 2015
[Section 47(viic)].
17. Conversion of Preference shares into Equity shares: Any transfer by way of conversion of preference
shares of a company into equity shares of that company [Section 47(xb)].
162
TRANSFER OF CAPITAL ASSET IN SCHEME OF REVERSE MORTGAGE

 Any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified
by the Central Government would not amount to a transfer. [Section 47(xvi)]
Morgages House
Senior citizen Bank
Receives Loan
Note: Sec 10(43) exempts any lumpsum amounts or instalments received as a loan under a scheme of
reverse mortgage from the bank by senior citizens.
Meaning  Reverse Mortgage scheme is for the benefit of senior citizens who own residential house.
 Senior citizens can mortgage their house property with scheduled bank/housing finance
company for lumpsum amount or a regular monthly/quarterly/annual income.
Scheme  Senior citizens can mortgage their house & get the contracted amount.
 They can continue to live in their house & receive regular income without having to pay
back the loan.
 Borrower can use the loan amount for renovation & extension of residential property,
family’s medical and emergency expenditure etc., amongst others.
 However, he cannot use the amount for speculative or trading purposes.
 Bank/housing finance company would revalue the property once every 5 years.
Recovery  Bank will recover loan with interest by selling house after the death of the borrower.
 The excess amount will be given to the legal heirs.
 However before selling the house, preference will be given to the legal heirs to repay the
loan and interest and get the mortgaged property released.
Taxation  Transfer of capital asset in a transaction of reverse mortgage under a scheme made &
notified by CG would not amount to a transfer - Section 47(xvi).
 Amount received by the senior citizen as a loan (Lump sum/Instalments) in a transaction of
reverse mortgage would be exempt from income-tax- Section 10(43).
 Capital gains would arise in the hands of senior citizen only when the mortgaged property is
sold by the bank/housing finance company for the purposes of recovering the loan.
CQ28. Mr. X a senior citizen, pledged his residential house with a bank, under a notified reverse mortgage scheme. He was
getting loan from bank in monthly instalments. Mr. X did not repay the loan on maturity and hence gave possession of the
house to the bank to discharge his loan. How will the treatment of LTCG be on such reverse mortgage transaction?
Answer:
 Section 47(xvi) provides that any transfer of a capital asset in a transaction of reverse mortgage under a scheme
made & notified by CG shall not be considered as a transfer for the purpose of capital gain.
 Accordingly pledging of residential house with bank by Mr. X will not be regarded as a transfer. Therefore, no
capital gain will be charged on such transaction.
 Further, section 10(43) provides that the amount received by the senior citizen as a loan, either in lump sum or in
instalment, in a transaction of reverse mortgage would be exempt from income-tax. Therefore, the monthly
instalment amounts received by Mr. X would not be taxable.
 However, capital gains tax liability would be attracted at the stage of alienation of the mortgaged property by the
bank for the purposes of recovering the loan.
163
EXEMPTION FROM CAPITAL GAINS

Exemption from Capital Gains is available in two categories:
A. Exemption  These exemptions are available on Transfer of Notified Capital Assets.

u/s 10
 No Investment in any new capital asset is required to avail these Exemption.
B. Exemption  These exemptions are available only if the Specified (New) Capital Asset is Acquired
u/s 54 or Constructed.
A. EXEMPTIONS U/S 10:

1. Capital Gain on transfer of a Units of Unit Scheme, 1964 (US 64) [Section 10(33)]
 Such transfer should take place on/after 1.4.2002.
2. Capital Gain arising to Individual/HUF on Compulsory Acquisition of Urban Agricultural Land

[Section 10(37)]
 Exemption is available only if compensation is received on/after 1.4.2004.
3. Capital Gain arising on Buy-back of Unlisted shares of Domestic Company [Sec 10(33)]
CQ29. Mr. Kumar has agricultural land (costing Rs. 6 lacs) in Lucknow & has been using it for agricultural purposes
since 1.4.2000 till 1.8.2011 when the Government took over compulsory acquisition of this land. Compensation of Rs.
10 lacs was settled. The compensation was received by Mr. Kumar on 1.7.2019. Compute the amount of capital gains
taxable in the hands of Mr. Kumar for AY 2020-21.
Solution:
 Compulsory acquisition of an urban agricultural land has taken place & the compensation is received after 1.4.2004.
This land had also been used for at least 2 years by the assessee himself for agricultural purposes.
 Thus, as per section 10(37), entire capital gains arising on such compulsory acquisition will be fully exempt &
nothing is taxable in the hands of Mr. Kumar in the year of receipt of compensation i.e. AY 2020-21.
CQ30. Will your answer be any different if Mr. Kumar had by his own will sold this land to his friend Mr. Sharma?
Solution:
 As per section 10(37), exemption is available if compulsory acquisition of urban agricultural land takes place.
 Since the sale is out of own will & desire, the provisions of this section are not attracted & the capital gains arising on
such sale will be taxable in the hands of Mr. Kumar.
CQ31. Will your answer be different if Mr. Kumar had not used this land for agricultural activities? Explain.
Solution:
 As per section 10(37), exemption is available only when such land has been used for agricultural purposes during
the preceding two years by such individual or a parent of his or by such HUF.
 Since the assessee has not used it for agricultural activities, the provisions of this section are not attracted & the
capital gains arising on such compulsory acquisition will be taxable in the hands of Mr. Kumar.
CQ32. Will your answer be different if the land belonged to ABC Ltd. & not Mr. Kumar & compensation on compulsory
acquisition was received by the company? Explain.
Solution:
 Section 10(37) exempts capital gains arising to an individual or a HUF from transfer of agricultural land by way of
compulsory acquisition.
 If the land belongs to ABC Ltd., a company, the provisions of this section are not attracted & the capital gains arising
on such compulsory acquisition will be taxable in the hands of ABC Ltd.
164
B. EXEMPTION U/S 54
CAPITAL GAINS ON TRANSFER OF RESIDENTIAL HOUSE PROPERTY (SEC 54)
Eligible Assessee Individual or HUF
Which Asset must Residential House Property (LTCA)

be transferred Income from such house should be chargeable u/h “Income from HP”.
Which asset must If Capital gains > Rs. 2 crores → ONE If Capital gains ≤ Rs. 2 crores → TWO
be acquired Residential House in India Residential House in India
Note: If in any AY, assessee has exercised the option to purchase or construct 2 residential houses in
India, he shall not be subsequently entitled to exercise the option for same AY or any other AY.
Ex: If an assessee has availed the option of claiming benefit of section 54 i.r.o purchase of 2 residential houses in
Jaipur & Jodhpur i.r.o capital gains of Rs. 1.50 crores arising from transfer of residential house at Bombay in PY
2019-20 then, he will not be entitled to avail the benefit of section 54 again in respect of purchase of 2 residential
houses in Pune & Baroda, i.r.o capital gains of Rs. 1.20 crores arising from transfer of residential house in Jaipur in
PY 2023-24, even though capital gains arising on transfer of residential house at Jaipur < Rs. 2 crores.
Time limit for Purchase → Within 1 yr before transfer or within 2 years after transfer.
acquiring new asset Construct → Within 3 years after the date of transfer.
Quantum of (a) Investment in New House or Houses or

Exemption (b) Capital Gain (whichever is lower)
Consequences of Exemption granted will be taken back.

transfer of Newly For computing STCG on transfer of new asset:
acquired asset
within 3 years. Cost of New House = (Cost of acquisition- Capital gains exempted earlier).
Example 1. CG = Rs. 7 lacs & Cost of New house= Rs. 9 lacs; Exemption = Rs. 7 lacs.
2. CG = Rs. 7 lacs & Cost of New house=Rs. 5 lacs; Exemption = Rs. 5 lacs.
Continuing Ex, if the new house was sold after 2 years for Rs. 12 lacs, then STCG =
Particulars Rs. Rs.
Net Consideration 1200000
Cost of acquisition 9,00,000
Less: CG exempt earlier u/s 54 (7,00,000) (200000)
Taxable STCG 1000000
Points to Remember:
 Date of completion of construction is relevant. Date of commencement of construction is irrelevant.
Construction may be commenced even before the transfer of house.
 Allotment of Flat under Self-financing scheme is treated as construction of house for Section 54.
 Holding of Legal Title → Not Necessary. If the taxpayer pays whole/part of consideration & gets the
possession of new house, exemption available u/s 54 is available.
 Investment → Includes Cost of Purchase of House + Cost incurred to make habitable.
 A person may Sell 2 Houses & Purchase 1 House for the purpose of availing exemption u/s 54.
CQ33. Mr. Cee purchased a residential house on July 20, 2018 for Rs. 10,00,000 & made some additions to the house
incurring Rs. 2,00,000 in August 2018. He sold the house property in April 2019 for Rs. 20,00,000. Out of the sale proceeds,
he spent Rs. 5,00,000 to purchase another house property in September 2019. Find the amount of capital gains taxable in
the hands of Mr. Cee for AY 2020-21?
165
Solution: The house is sold before 24 months from the date of purchase. Hence, the house is a STCA.
Particulars Rs.
Less: Cost of acquisition (10,00,000)
Less: Cost of improvement (2,00,000)
Short-term capital gains 8,00,000
Note: The exemption of capital gains u/s 54 is available only in case of LTCA. As the house is STCA. Mr. Cee cannot claim
exemption u/s 54. Thus, the amount of taxable STCA is Rs. 8,00,000.
CAPITAL GAIN ON TRANSFER OF AGRICULTURAL LAND [SEC 54B]
Eligible Assessee Individual or HUF
Which asset shall be Urban Agricultural land (LT/ST).

transferred
Such land must have been used by Assessee or his parents/HUF for
agricultural purposes for 2 yrs immediately preceding date of transfer.
Which asset is acquired Agricultural Land (Rural/Urban)
Time limit for Within 2 years from the date of transfer.

acquiring new asset
Quantum of Exemption Same as Section 54.
Consequences of Same as Section 54. However, if new agricultural land is a rural agricultural
transfer within 3 years land, there would be no CG on transfer of such land.
CAPITAL GAIN ON COMPULSORY ACQUISITION OF INDUSTRIAL L & B [SEC 54D]
Eligible Assessee Any Assessee.
Which asset shall be Industrial Land or Building (STCA/LTCA)

transferred
Such Land/building should have been used by assessee for Industrial
undertaking for 2 years immediately preceding the date of transfer.
Which asset is Land or Building for Industrial purpose

acquired
Time limit for Within 3 years from the date of Receipt of compensation.
acquiring new asset
Quantum of Same as Section 54.

Exemption
Consequences of Same as Section 54

transfer within 3 years
166
CAPITAL GAIN ON TRANSFER OF ANY LONG-TERM CAPITAL ASSET ON THE

BASIS OF INVESTMENT IN CERTAIN BONDS [SECTION 54EC]
Eligible Assessee Any Assessee
Which asset shall be Long-term Capital Asset being Land or Building or both
transferred (Even a depreciable asset held for more than 36 months is a LTCA even if they
are always regarded as STCA under other sections of the act)
Which asset is acquired Bonds of National Highways Authority of India (NHAI) & Rural Electrification
Corporation Ltd (RECL) redeemable after 5 years.
Bonds issued by Power Finance Corporation Limited on/after 15.06.17 &
Bonds issued by Indian Railway Finance Corporation Limited on/after 8.8.17
& redeemable after 3 years.
Time limit Within 6 months from the date of transfer.
Quantum of Exemption Capital Gain or Amount Invested in Bonds (whichever is Lower).

Note: Maximum Investment that can be made in bonds of NHAI & RECL
from CG arising from the transfer of one/more LTCA during the PY of transfer
& in subsequent FY cannot exceed Rs. 50 lacs.
Lock-in-period Bonds should not be transferred for a period of 5 Years.

Assessee should not transfer/convert or avail loan on security of such bonds
for 5 years from the date of acquisition of such bonds. Otherwise exemption
granted earlier shall be taken back.
Note: Receipt of money on liquidation of company is taxable in the hands of shareholders [Section 46(2)].
In such case there is no transfer of capital asset & thus exemption u/s 54EC is not available.
CQ34. Capital gain of Rs. 75 lacs arising from transfer of LTCA on 1.5.2019 will be exempt from tax if such capital gain is
invested in the bonds redeemable after 5 years, issued by NHAI u/s 54EC. Comment whether true or false.
Answer: False: The exemption u/s 54EC has been restricted by limiting the maximum investment in long term specified
assets (i.e. bonds of NHAI or RECL redeemable after 3 years) to Rs. 50 lacs whether such investment is made during the
relevant PY or subsequent PY or both. Therefore, in this case, the exemption u/s 54EC can be availed only to the extent of
Rs. 50 lacs provided the investment is made before 1.11.2019 (i.e., within 6 months from the date of transfer).
CAPITAL GAIN ON TRANSFER OF ANY LONG-TERM CAPITAL ASSET ON THE

BASIS OF INVESTMENT IN NOTIFIED UNITS OF SPECIFIED FUND – [SEC 54EE]
Eligible Assessee Any Assessee
Which asset shall Any Long-term capital asset.

be transferred (Even a depreciable asset held for more than 36 months is a LTCA even if they
are always regarded as STCA under other sections of the act)
Which asset shall be Long Term specified asset to be notified by central government to Finance Start-
acquired ups (On or after 1.4.2016).
Time limit Within 6 months from the date of transfer.
Quantum of Capital gains or amount invested in units (whichever is lower).

Exemption Maximum investment that can be made in specified units, out of capital gains
arising from transfer of one or more LTCA during the PY of transfer & in
subsequent FY cannot exceed Rs. 50 lacs in aggregate.
Lock-in-period Units should not be transferred for a period of 3 years.
Note: Assessee should not transfer or convert or avail loan on the security of such bonds for a period of 3
years from the date of acquisition of such bonds. Otherwise exemption grant earlier shall be taken back.
167
CAPITAL GAIN ON TRANSFER OF ANY LONG-TERM CAPITAL ASSET OTHER THAN

RESIDENTIAL HOUSE PROPERTY [SECTION 54F]
Eligible assessee Individual & HUF
Which asset Transfer of LTCA other than Residential House Property.

shall be
Thus, Transfer of Vanact Plot of Land → Eligible for Exemption.
transferred
Provided that assessee should not own more than 1 Residential House on the date
of transfer (except the newly acquired house property).
Which asset is ONE Residential House Property in India

acquired
Time limit for The assessee should either

acquiring New  Purchase: Within 1 year before transfer or within 2 years after transfer.
asset
 Construct: Within 3 years from the date of transfer.
Quantum of Proportionate Exemption. Thus to get the exemption of amount of capital gains,
Exemption the whole amount of sale consideration shall be invested.
𝐀𝐦𝐨𝐮𝐧𝐭 𝐢𝐧𝐯𝐞𝐬𝐭𝐞𝐝 𝐢𝐧 𝐧𝐞𝐰 𝐫𝐞𝐬𝐢𝐝𝐞𝐧𝐭𝐢𝐚𝐥 𝐡𝐨𝐮𝐬𝐞
= LTCG x
𝐍𝐞𝐭 𝐬𝐚𝐥𝐞 𝐜𝐨𝐧𝐬𝐢𝐝𝐞𝐫𝐚𝐭𝐢𝐨𝐧
Withdrawal of  If the new house is transferred within 3 years from the date of acquisition.
Exemption
 If assessee purchases another residential house within 2 years from the date of
transfer of original asset.
 If assessee completes construction of another residential house in India/ outside
India within 3 years from the date of transfer of original asset.
CQ35. Compute the taxable capital gains of Mr. D for AY 2020-21. CII are as follows: FY 2004-05: 113
Cost of jewellery [Purchased in FY 2001-2002] Rs. 5,00,000
Sale price of jewellery sold in January 2020 Rs. 15,15,000
Expenses on transfer Rs. 15,000
Residential house purchased in March 2020 Rs. 5,00,000
Solution: Computation of taxable capital gains for AY 2020-21
Particulars Rs.
Gross consideration Rs. 15,15,000
Less: Expenses on transfer (Rs. 15,000)
Net consideration Rs. 15,00,000
Less: Indexed cost of acquisition (Rs. 5,00,000 × 289/100) (Rs. 14,45,000)
Long term Capital Gains Rs. 55,000
Less: Exemption u/s 54F (Rs. 55,000 × Rs. 5,00,000/ Rs. 15,00,000) (Rs. 18,333)
Taxable capital gains Rs. 36,667
CQ36. R submits you the following particulars:

Capital asset DOA COA FMV as on 1.4.2001 Date of sale Sale Price
Urban Agricultural land 5.6.1999 90,000 1,80,000 16.8.2019 30,00,000
Rural Agricultural land 5.5.2002 1,80,000 - 17.10.2019 21,60,000
Listed Shares 6.8.2018 1,08,000 - 5.7.2019 1,44,000
Gold 7.9.1995 90,000 81,000 6.3.2020 12,00,000
168
Residential House 9.7.1984 54,000 10,80,000 1.3.2020 32,00,000

He deposited Rs. 9,20,000 on 25.6.2019 in CGAS as he intends to buy Agricultural Land later. Out of sale proceeds of
gold, he purchased residential house property of Rs. 6,00,000 on 15.5.2019. Compute capital gain for AY 2020-21.
Solution:
Urban Agri land Rural Agri Land Listed Share Gold House Property
Sale Consideration 30,00,000 Not a Cap. Asset 1,44,000 12,00,000 32,00,000
Less: Indexed COA (5,20,200) NA (1,08,000) (2,60,100) (31,21,200)
/COA [1.8L × 289/100] [90,000 × 289/100] [10.8L × 289/100]
LTCG 24,79,800 Exempt - 9,39,900 78,800
STCG - - 36,000 - -
Less: Capital Gain Exempt u/s 54 Series
U/s 54B (9,20,000) - - - -
U/s 54F - - - (4,69,950) -
Taxable LTCG 15,59,800 NA - 4,69,950 78,800
STCG u/s 111A - - 36,000 - -
Note: Exemption u/s 54F = Rs. 9,39,900 x 6L/12L] = Rs. 4,69,950.
CAPITAL GAINS ACCOUNT SCHEME (CGAS)
Scheme of  For Section 54, 54B, 54D, 54F, Capital Gain is exempt to the extent of Investment of
deposit “capital gains/Net Sale Consideration” (for 54F) in specified assets within specified time
limit.
 If such Investment is not made before DD of filing of ROI, then Capital Gain/Net sale
consideration (for 54F) has to be deposited under the CGAS to get exemption.
Time limit for  Such deposit in CGAS should be made before filing ROI or before DD of filing ROI,
acquiring new whichever is earlier.
asset
 Proof of such deposit should be attached with the return.
 Deposit can be withdrawn for the specified purposes.
Consequences  If the amount deposited is not utilized for specified purpose within stipulated period,
of non- then unutilized amount shall be charged as capital gain of the PY in which specified
utilization period expires. For Sec 54F, Proportionate Amount will be Taxable.
 If Individual dies before the stipulated period, unutilized amount is not taxable in
the hands of legal heirs of deceased individual because such unutilized amount is not
income but is a part of the estate devolving upon them.
EXTENSION OF TIME FOR ACQUIRING NEW ASSET OR MAKING DEPOSIT IN CAPITAL

GAIN ACCOUNT SCHEME [SEC 54H]
 In case of compulsory acquisition of original asset, time limit for acquiring new asset/making deposit in
CGAS is considered from date of receipt of compensation & not from date of transfer.
 For Determination of Year of Chargeability of Capital Gain: Whole Capital gain is taxable in the PY in
which 1st Instalment of Compensation is received.
But for Determining Time Limit for Acquiring the Asset, Dates of Receipt of different Instalments shall be
considered.
169
RATE OF TAX ON CAPITAL GAINS
STCG LTCG
111A @ 15% Others 112A Others

Slab Rate 10% 20%
A. SHORT- TERM CAPITAL GAINS [STCG]

1. STCG u/s 111A: Taxable @ 15%
 STCG on transfer of Equity shares/units of EOMF on which STT is paid → Taxed @ 15%
 Benefit of UNEXHAUSTED BEL will be available for Resident Individual/HUF.
 No deduction under Chapter VI-A against STCG taxable u/s 111A.
 STCG arising on transactions undertaken in foreign currency on RSE located in International
Financial Services Centre is taxable @ 15% even if STT is not leviable on such transactions.
2. Other STCG
 STCG other than Section 111A are treated as Normal Income & will be taxed @ Slab Rate
along with Other Incomes.
B. LONG - TERM CAPITAL GAINS [LTCG]
1. LTCG u/s 112A: Taxable @ 10% on LTCG exceeding Rs. 1,00,000

 LTCG on transfer of Equity shares/units of EOMF on which STT is paid → Taxed @ 15%
 Benefit of UNEXHAUSTED BEL will be available for Resident Individual/HUF.
 No deduction under Chapter VI-A against STCG taxable u/s 112A.
 Rebate u/s 87A → Not Available against LTCG taxable u/s 112A.
 LTCG arising on transactions undertaken in foreign currency on RSE located in International
Financial Services Centre is taxable @ 10% even if STT is not leviable on such transactions.
Note:
1. Equity share → STT is to be paid on acquisition & transfer of such capital asset.
2. Units of EOMF/Business Trust → STT is to be paid on transfer of such capital asset.
However, CG may specify the nature of acquisition of equity share on which STT is not payable
on acquisition.
2. OTHER LTCG: Taxable @ 20%

 No deduction under Chapter VI-A is available against LTCG.
 Resident Individual & HUF → 20%. Benefit of Unexhausted BEL is available.
 Other Person & Domestic Company → 20%. No Benefit of Unexhausted BEL.
 Foreign company/ Non-corporate Non-Resident:
LTCG on unlisted securities/Shares in 10% without Indexation & currency
Private company fluctuations under 1st proviso to sec 48.
Other Assets 20%
170
 LTCG arising from transfer of listed securities (other than units) & ZCBs
 Assessee will have the option to pay tax @ 10% without Indexation or 20% with Indexation.
 What about Debt-oriented MF or unlisted securities?

 LTCG on transfer of units of debt-oriented MF & unlisted Securities are not eligible for concessional
rate of 10% (without indexation benefit). Thus taxable @ 20% with indexation.
Benefit of UNEXHAUSTED BEL from LTCG & STCG u/s 111A to Resident Individual/HUF
 We know that entire LTCG is taxable @ 20% & STCG u/s 111A @ 15% without any exemption.
 But in case of Resident Individual/HUF, benefit of BEL is available if BEL is unexhausted.
 Unexhausted BEL means: taxable income (excluding LTCG) is less than the BEL.
 In such case, the shortfall* shall be deducted from LTCG/STCG u/s 111A as the case may be.
 Shortfall = BEL – (Taxable income – LTCG).
CQ37. Calculate the Income Tax Liability for AY 2020-21 in following cases:
Particulars A (Age 45) B (Age 62) C (Age 81) D (Age 82)
Status Resident NR Resident NR
Income other than LTCG 2,40,000 2,80,000 5,90,000 4,80,000
LTCG 15,000 [Sale of 10,000 [Sale of listed 60,000 [Sale of Rural Nil
Vacant site] Shares (STT paid)] Agricultural land]
Solution: Computation of Income Tax Liability for the AY 2020-21
Particulars A (Age 45) B (Age 62) C (Age 81) D (Age 82)
Residential Status Resident NR Resident NR
BEL Rs. 2,50,000 Rs. 2,50,000 Rs. 5,00,000 Rs. 2,50,000
Asset sold Vacant site Listed shares Rural Agro. land -
LTCG Rs. 15,000 Rs. 10,000 Rs. 60,000 -
[Taxable @ 20%] Exempt since < 1 L [Exempt – Not CA]
Other income Rs. 2,40,000 Rs. 2,80,000 Rs. 5,90,000 Rs. 4,80,000
Tax on LTCG (After Rs. 1,000 - - -
Adjusting BEL) (15,000 – 10,000) × 20%
On Other Income Nil Rs. 1,500 Rs. 18,000 Rs.11,500
Less: Rebate u/s 87A Rs. 1,000 NA (since NR) - NA (since NR)
Tax Payable Nil Rs. 1,500 Rs. 18,000 Rs. 11,500
Add: HEC @ 4% Nil Rs. 60 Rs. 720 Rs. 460
Total Tax Liability Nil Rs. 1,560 Rs. 18,720 Rs. 11,960
Notes:
1. Since Mrs. B and Mr. D are non-residents, they cannot avail the higher basic exemption limit of Rs. 3,00,000 and Rs.
5,00,000 for persons over the age of 60 years and 80 years, respectively.
2. Since Mr. A is a resident whose total income does not exceed Rs. 3,50,000, he is eligible for rebate of Rs. 2,500 or
the actual tax payable, whichever is lower, u/s 87A.
CAPITAL GAIN ON CONVERSION OF LLP INTO GENERAL PARTNERSHIP

 Since the tax treatment of LLP & general partnership is same, conversion from a general Partnership firm
to LLP will have no tax implications if the rights & obligations of the partners remain same after conversion
and if there is no transfer of any asset or liability after conversion.
 However, if there is a change in rights and obligations of partners or there is a transfer of asset or liability
after conversion, then the provisions of section 45 would get attracted.
171
SOME CLARIFICATION REGARDING SECTION 112A

Q1. What is the point of chargeability of the tax?
Answer: Tax will be levied only upon transfer of specified LTCA on or after 1st April 2018.
*Q2. How do we determine the cost of acquisition for assets acquired on or before 31st Jan 2018?
Answer: COA of LTCA specified u/s 112A acquired before 1st Feb 2018 shall be Higher of (a) or (b)
(a) Cost of Acquisition or
(b) Lower of (i) FMV of such asset or (ii) Actual Sale consideration.
Alternative Explanation as given in study material [Answer will be same]
 Cost of acquisition for specified LTCA acquired on/before 31st Jan 2018 → Actual cost.
 But if Actual cost < FMV of such asset on 31st Jan 2018 → FMV on 31st Jan 2018 = COA.
 Further, if FVC on transfer < FMV, then Higher of (i) FVC or (ii) Actual COA will be deemed as COA.
Ex: An equity share is acquired on 1st of Jan 2017 at Rs.100; its FMV is Rs. 200 on 31st Jan 2018 & it is sold on 1st April
2018 at Rs. 250. As the actual cost of acquisition < FMV on 31 st Jan 2018, FMV of Rs. 200 will be taken as the cost of
acquisition and the long-term capital gain will be Rs. 50 (Rs. 250 – Rs. 200).
Ex: An equity share is acquired on 1st Jan 2017 at Rs. 100, its FMV is Rs. 200 on 31st Jan 2018 & it is sold on 1st April
2018 at Rs. 150. In this case, actual cost of acquisition < FMV on 31st Jan 2018. However, sale value is also < FMV on
31st Jan 2018. Thus sale value of Rs. 150 will be taken as cost of acquisition & LTCG = NIL (Rs.150 – Rs.150).
2018 at Rs. 150. In this case, FMV on 31st Jan 2018 < Actual cost of acquisition & thus actual cost of Rs. 100 will be
taken as actual cost of acquisition and LTCG will be Rs. 50 (Rs. 150 – Rs. 100).
2018 at Rs. 50. In this case, actual cost of acquisition < FMV on 31 st Jan 2018. Sale value < FMV on 31st Jan 2018 and
also the actual cost of acquisition. Therefore, the actual cost of Rs. 100 will be taken as the cost of acquisition in this
case. Hence, the long-term capital loss will be Rs. 50 (Rs. 50 – Rs. 100) in this case.
Q3. Whether the cost of acquisition will be inflation indexed?

Answer: No Indexation of Cost of acquisition.
Q4. What will be the tax treatment of transfer made on or after 1st April 2018?
Answer: LTCG > Rs. 1 Lacs arising from transfer of these assets made on after 1st April, 2018 will be taxed at 10%.
However, there will be no tax on gains accrued upto 31st January, 2018.
Q5. What is the date from which the holding period will be counted?
Answer: The holding period will be counted from the date of acquisition.
Q6. Whether tax will be deducted at source in case of gains by resident tax payer?
Answer: No. There will be no deduction of tax at source from the payment of LTCG to a resident tax payer.
Q7. What will be the cost of acquisition in the case of bonus shares acquired before 1st February 2018?
Answer: CoA of bonus shares acquired before 31st January, 2018 will be determined as per section 55(2)(ac).
Therefore, FMV of bonus shares as on 31st January, 2018 will be taken as cost of acquisition (except in some typical
situations explained in Ans 5), and hence, the gains accrued upto 31st January, 2018 will continue to be exempt.
Q8. What will be the cost of acquisition in the case of right share acquired before 1st February 2018?
Answer: CoA of right share acquired before 31st January, 2018 will be determined as per section 55(2)(ac). Therefore,
FMV of right share as on 31st Jan 2018 will be taken as cost of acquisition (except in some typical situations explained
in Ans 5), and hence, the gains accrued upto 31st January, 2018 will continue to be exempt.
Q9. What will be the treatment of long-term capital loss arising from transfer made on or after 1st April, 2018?
Answer: LTCL arising from transfer made on or after 1st April, 2018 will be allowed to be set-off and carried forward
in accordance with existing provisions of the Act. Therefore, it can be set-off against any other LTCG and unabsorbed
loss can be carried forward to subsequent eight years for set-off against LTCG.
172
QUESTION BANK
PQ1. Compute capital gains of Mr. X in the following Individual situations for AY 2020-21
Asset Gold Land Residential House
Date of purchase 1.7.1990 1.4.1992 1.7.1994
Cost price 4,00,000 6,00,000 8,00,000
Cost of improvement 1,00,000 2,00,000 4,00,000
Year of improvement 1999-2000 2000-01 2005-06
Fair market value on 1.4.2001 30,00,000 60,00,000 5,00,000
Date of Sale 1.1.2020 1.1.2020 1.1.2020
Full value of consideration 95 Lacs 190 Lacs 50 Lacs
Solution:
Asset Gold Land Residential House
Full value of consideration 95 Lacs 190 Lacs 50 Lacs
Less: Indexed cost of acquisition 86,70,000 1,73,40,000 (23,12,000)
(30 L x 289/100) (60L x 289/100) (8L x 289/100)
Less: Indexed cost of improvement - - 9,88,034
(4 L x 289/117)
Long term capital gain 8,30,000 16,60,000 16,99,966
PQ2. Mr. X owns a plot of land acquired on 1.6.2002 for Rs. 2 Lacs. He enters into an agreement to sell the property on
15.3.2020 for Rs. 20 Lacs. In part performance of the contract, he handed over the possession of land on 21.03.2020 on which
date he received the full consideration. As on 31 st March 2020, the sale was not registered. Discuss the liability to capital gain
for AY 2020-21.
Solution: Transfer includes Giving possession of IMMOVABLE PROPERTY under Part performance of a contract. Thus it is
treated as transfer in PY 2019-20 & capital gain will be attracted.
Computation of Capital Gains for AY 2020-21
Full value of consideration Rs. 20,00,000
Less: Indexed cost of acquisition [2,00,000 x 289/105] (Rs. 5,50,476)
Long Term Capital Gain Rs. 14,49,524
PQ3. Mr. X purchased one house on 1.7.2002 for Rs. 3,50,000. He constructed its first floor on 1.10.2011 by incurring Rs. 4
lacs & constructed its second floor on 1.10.2012 by incurring Rs. 6,00,000 & third floor on 1.10.2014 by incurring Rs.
7,00,000. Finally, sold the building on 1.1.2019 for Rs. 120 Lacs & selling expenses were 2% of the sale price. Compute taxable
capital gains for AY 2020-21.
Solution: Computation of Capital Gains
Full value of consideration 120 Lacs
Less: Selling Expenses = 2% of Rs. 120,00,000 (2,40,000)
Net Sale Consideration 1,17,60,000
Less: Indexed cost of acquisition [3,50,000 x 289/105] (9,63,333)
Less: Indexed COI - Cost of constructing 1st floor [4,00,000 x 289/184] (6,28,260)
Less: Indexed COI - Cost of constructing 2nd floor [6,00,000 x 289/200] (8,67,000)
Less: Indexed COI - Cost of constructing third floor [7,00,000 x 289/240] (8,42,917)
PQ4. Mr. Y bought a vacant Land for Rs. 80 Lacs in May 2004. Registration & other expenses were 10% of cost of land. He
constructed a residential building on the said land for Rs. 100 Lacs during FY 2006-07.
He entered into an agreement for sale of the above said residential house with Mr. John (not a relative) in April 2016.
Sale consideration was fixed at Rs. 700 Lacs & on 23.4.2016, Mr. Y received 20 lacs as advance.
Sale deed was executed & registered on 14.1.2020 for agreed consideration. However, Stamp Duty authority had revised the
values; hence value of property for stamp duty purposes was Rs. 770 Lacs. Mr. Y paid 1% as brokerage on sale consideration
received. Subsequent to sale, Mr. Y made following investments:
(i) Acquired a residential house at Delhi for Rs. 110 Lacs. (ii) Acquired a residential house at London for Rs. 190 Lacs.
(iii) Subscribed to NHAI capital gains bond for Rs. 45 Lacs on 29-3-2020 & for 50 Lacs on 12-5-2020.
Compute the income chargeable u/h ‘Capital Gains'. CII: FY 2004-05 = 113; FY 2006-07 = 122; FY 2019-20 = 289
Solution: Computation of Capital Gains of Mr. Y for AY 2020-21
Full value of consideration 770,00,000
Less: Brokerage (7,00,000)
173
Net Sale consideration 7,63,00,000

Less: Indexed cost of acquisition
Indexed cost of land (88,00,000 x 289/113) (2,25,06,195)
Indexed cost of building (100,00,000 x 289/122) (2,36,88,525)
Long term capital gain 3,01,05,280
Less: Investment in house property section 54 (110,00,000)
Less: Investment in NHAI section 54EC (assumed redeemable after 5 years) (50,00,000)
Long Term Capital Gains 1,41,05,280
Note:
1. Registration & other expenses paid at the time of purchase shall be part of the cost.
2. SDV on date of actual sale shall be taken as consideration as per section 50C because advance was paid in cash.
3. Maximum Deduction allowed u/s 54EC during a particular previous year shall be Rs. 50,00,000.
4. Residential house purchased in India is eligible for exemption u/s 54. (Residential house purchased outside India is not
eligible for exemption u/s 54.)
PQ5. Examine, with reasons, whether the following statements are True or False:
(i) Alienation of a residential house in a transaction of reverse mortgage under a scheme made & notified by the Central
Government is treated as “transfer” for the purpose of capital gains.
(ii) ZCBs means a bond on which no payment & benefits are received or receivable before maturity or redemption.
(iii) Zero coupon bonds of eligible corporation, held for more than 12 months, will be LTCAs.
(iv) Where an urban agricultural land owned by an individual, continuously used by him for agricultural purposes for a
period of two years prior to the date of transfer, is compulsorily acquired under law & the compensation is fixed by the
State Government, resultant capital gain is exempt.
Answer:
(i) False: As per section 47(xvi), such alienation in a transaction of reverse mortgage under a scheme made & notified by
the Central Government is not regarded as “transfer” for the purpose of capital gains.
(ii) True: As per section 2(48), ‘Zero Coupon Bond’ means a bond issued by any infrastructure capital company or
infrastructure capital fund or a public sector company, or Scheduled Bank on or after 1st June 2005, in respect of which
no payment & benefit is received or receivable before maturity or redemption from such issuing entity & which the
Central Government may notify in this behalf.
(iii) True: Section 2(42A) defines the term ‘short-term capital asset’. Under the proviso to section 2(42A), zero coupon
bond held for not more than 12 months will be treated as a short-term capital asset. Consequently, such bond held for
more than 12 months will be a LTCA.
(iv) False: As per section 10(37), where an individual owns urban agricultural land which has been used for agricultural
purposes for a period of two years immediately preceding the date of transfer, & the same is compulsorily acquired
under any law & the compensation is determined or approved by the Central Government or the Reserve Bank of India,
resultant capital gain will be exempt.
PQ6. Mrs. Padmini owned two motor-cars, which were mainly used for business purposes. WDV on 1.4.2019 of the Block of
Assets comprising of only these two cars, both of which were purchased in May 2008 was Rs. 1,81,000. These two cars were
sold in June 2019, for Rs. 1,50,000. In Feb. 2020, she sold 1,000 Shares in X Ltd (unlisted), an Indian Company, for Rs.
3,50,000. She had purchased the same during Jan. 2017 for Rs. 2,44,000. A House Plot purchased by her in March 2008 for
Rs.2,73,000 was sold by her for Rs. 6,50,000 on 18.01.2020. Compute Capital Gains for AY 2020-21. [Nov 93]
Solution: Computation of Capital Gain on Sale of Assets
Particulars Motor cars Share in X Ltd. House plot
Sale Consideration 1,50,000 3,50,000 6,50,000
Less: Expenses on Transfer Nil Nil Nil
Net Sale Consideration 1,50,000 3,50,000 6,50,000
Less: WDV/Indexed CoA (1,81,000) (2,67,106) (5,33,088)
(2,44,000 x 289/264) (2,73,000 × 289/148)
LTCG/STCG/(Loss) (31,000) 82,894 1,16,912
Net Taxable LTCG = Rs. 1,68,806
Notes:
1. Gain/Loss on Sale of Depreciable Assets will be treated as Short Term Capital Gain/Loss Only.
2. Shares in X Ltd, a Financial Asset, is held for more than 24 months & hence is a LTCA.
3.Current Year Short Term Capital Loss can be adjusted against any Capital Gain. (Sec. 70)
174
PQ7. Mr. X (age 55) owned a Residential House in Ghaziabad. It was acquired by Mr. X on 10.10.2006 for 6 lacs. He sold it for
53 lacs on 4.11.2019. Stamp valuation authority of the state fixed value of the property at 70 Lacs. Assessee paid 2% of the
sale consideration as brokerage on the sale of the said property.
Mr. X Acquired a Residential House property at Kolkata on 10.12.2019 for Rs. 10,00,000 & deposited Rs. 4,00,000 on
10.4.2020 & Rs. 5,00,000 on 15.6.2020 in capital gains bonds of RECL Ltd. He deposited 4 lacs on 6.7.2020 & 3 lacs on
1.11.2020 in capital gain deposit scheme in Nationalized Bank for construction of additional floor on house property in
Kolkata. Compute Capital Gain for AY 2020-21. [CII for FY 2006-07 = 122] [MAY-2014]
Solution: Computation of Capital Gains in the hands of Mr. X for AY 2019-20
Full value of Consideration 70,00,000
Less: Brokerage @ 2% (1,06,000)
Less: Indexed cost of acquisition [ Rs. 6,00,000 x 289/122] (14,21,311)
Less: Exemption u/s 54 - Acquisition of residential house property at Kolkata (10,00,000)
Amount deposited in capital gains accounts scheme (4,00,000)
Exemption u/s 54EC: Amount deposited in capital gains bonds of RECL on 10.04.2020 (4,00,000)
Total Income (rounded off u/s 288A) 36,72,689
Note:
 As per the decision of Gauhati High Court in CIT vs Rajesh Kumar Jalan (2006) & Punjab & Haryana High Court in CIT vs
Jagriti Aggarwal (2011), exemption u/s 54 is allowable even if the amount of capital gain is deposited in CGAS after due
date specified u/s 139(1) but before DD for filing a belated return u/s 139(4).
 If we apply the above interpretation in this case, Mr. X would be eligible for exemption u/s 54 in respect of Rs. 3,00,000
deposited in Capital Gains Accounts Scheme on 01.11.2020 also, since the said date falls within the time specified u/s
139(4). On the basis of this interpretation, taxable LTCG in hands of Mr. X = 33,72,689
PQ8. Mr. X, a resident individual, aged 55 years, purchased 10 Plots in FY 2003-04 for Rs. 12 Lac. On 1.4.2004, he started a
business of property dealing & converted all 10 plots into SIT of his business & recorded Rs. 40 Lac in his books being FMV
the said date.
On 31st March 2011, he sold all 10 Plots for Rs. 55 Lacs & purchased a residential house property for Rs. 50 Lacs. He has
constructed 2 rooms in this residential house in June 2011 & has spent 8 Lacs.
He sold the above residential house on 5.2.2020 for 80 Lacs. Stamp duty value was 105 Lacs. On the request of Mr. X, AO
made a reference to valuation officer. Valuation Officer determined the value at 108 Lac.
Mr. X paid brokerage 1% of sale consideration. Compute Capital gains of Mr. X for AY 2020-21.
(CII: 2003-04: 109; 2004-05: 113; 2010-11: 167; 2011-12: 184; 2019-20: 289) [NOV-2016]
Solution: Computation of capital gains of Mr. X for AY 2020-21
Capital Gains on sale of residential house property
Full value of consideration [Note 1] 105,00,000
Less: Brokerage @ 1% of sale consideration (80,000)
Less: Indexed cost of acquisition (Rs. 50,00,000 x 289/167) (86,52,695)
Less: Indexed cost of improvement (Rs. 8,00,000 x 289/184) (12,56,522)
Note: If SC < SDV & SDV < Value by VO, SDV shall be taken as full value of consideration.
PQ9. Mr. Sunil entered into an agreement with Mr. Dhaval to sell his residential house located at Navi Mumbai on 16.8.2019
for Rs. 80,00,000. The sale proceeds was to be paid in the following manner:
(i) 20% through account payee bank draft on the date of agreement. (ii) 60% on the date of the possession of the property.
(iii) Balance after the completion of the registration of the title of the property.
Mr. Dhaval was handed over the possession of property on 15.12.2019 & registration process was completed on 14.01.2020.
He paid the sale proceeds as per the sale agreement.
SDV on 16.08.2019 was Rs. 90,00,000 whereas SDV on 14.1.2020 was Rs. 91,50,000.
Mr. Sunil had acquired the property on 1.4.2001 for Rs. 10,00,000. After recovering the sale proceeds from Dhaval, he
purchased another residential house property for Rs. 35,00,000.
Compute the income u/h “Capital Gains” for AY 2020-21. [CIIs: FY 2001-02: 100 FY 2019-20: 289] [NOV 2017]
Solution:
 As per section 50C, if sale consideration < SDV, then FVC shall be taken to be Stamp duty value.
 If Doa & DoR are different & 20% amount was paid on date of agreement through A/c payee bank draft, SDV on DoA shall
be considered.
175
Computation of Capital Gains u/s 48

Full value of consideration 90,00,000.00
Less: Indexed cost of acquisition (10,00,000 x 289/100) (28,90,000)
Long term capital gain 61,10,000
Less: Exemption u/s 54 - Investment in House Property (35,00,000)
Long Term Capital Gains 26,10,000
PQ10. Mr. Rakesh purchased a House Property on 14.4.1996 for 2,50,000. He entered into an agreement with Mr. B for sale
of house on 15.9.1999 & received an Advance of 25,000. However, since Mr. B did not remit the balance amount, Mr. Rakesh
forfeited the advance. Later on, he gifted the House Property to his friend Mr. A on 15.6.2001. Following renovations were
carried out by Mr. Rakesh & Mr. A to the House Property:
Particulars Amount
By Mr. Rakesh during FY 1996-1997 1,00,000
By Mr. A during FY 2005-2006 1,00,000
By Mr. A during FY 2009-2010 2,50,000
FMV of the Property on 1.4.2001 is Rs. 2,50,000. Mr. A entered into an agreement with Mr. C for sale of the House on 1st June
2015 & received an Advance of Rs. 1,00,000. The said amount was forfeited by Mr. A, since Mr. C could not fulfil the terms of
the agreement. Finally, the House was sold by Mr. A to Mr. Sanjay on 2nd Jan 2019 for Rs. 15 lacs. Compute taxable Capital
Gains in hands of Mr. A for AY 2020-21. [May 2011]
Solution: Computation of Capital Gain
Particulars Rs.
Sale Consideration Rs. 15,00,000
Less: Indexed Cost of Acquisition = (2,50,000 x 289/100) (Rs. 7,22,500)
Less: Indexed Cost of Improvement [(1,00,000 x 289/117) + (2,50,000x 289/148)] (Rs. 7,35,184)
Long Term Capital Gain Rs. 42,316
Income from Other Sources: Advance Forfeited [Sec. 56(2)(ix)] Rs. 1,00,000
Notes:
1. As per Sec. 51, any Advance Money or any other sum received & retained by the Assessee will be treated as Income from
other Sources. The Cost of Acquisition shall not be reduced by that amount.
2. Advance Money received & forfeited by the Previous Owner shall not be considered u/s 51.
3. Improvement done by the previous owner is also considered if it is done after 1.4.2001.
PQ11. Mr. A is an Individual carrying on business. His stock & machinery were damaged & destroyed in a fire accident.
The value of stock lost (totally damaged) was Rs. 6,50,000. Certain portion of the Machinery could be salvaged. Opening WDV
of the Block as on 1.4.2019 was Rs. 10,80,000.
During the process of safeguarding machinery & in fire fighting operations, Mr. A lost his gold chain & a diamond ring, which
he had purchased in April 2012 for Rs. 1,20,000. Market Value of these two items on the date of fire accident was Rs. 1,80,000.
Mr. A received the following amounts from the Insurance Company:
(a) Towards Loss of Stock: Rs. 4,80,000; (b) Towards Damage of Machinery: Rs. 6,00,000
(c) Towards Gold Chain & Diamond Ring: Rs. 1,80,000.
Comment on the tax treatment of the above three items under the provisions of the Income Tax Act, 1961. [NOV 2006]
Answer:
Loss of  Loss of Stock-in-Trade used for the purpose of business is a Business Loss.
Stock  It is a loss incurred during the course of business & allowable u/s 37.
 Loss in excess of the Insurance Compensation will be allowable as a deduction u/s 37.
 So, the amount of Rs. 1,70,000 (Insurance Compensation Rs. 4,80,000 – Loss of Stock Rs. 6,50,000) is an
allowable business expenditure u/s 37.
ICAI Answer: Any compensation received from the insurance company towards loss/damage to SIT is to be construed as
a trading receipt. Hence, Rs. 4,80,000 received as insurance claim for loss of stock has to be assessed u/h ‘PGBP’. Assessee
can claim the value of stock destroyed by fire as revenue loss, eligible for deduction while computing income u/h ‘PGBP’.
Machinery  Machinery is a Capital Asset u/s 2(14) on which depreciation has been claimed.
 Compensation received from Insurance Company on destruction of Machinery by fire is taxable u/s 45(1
A), subject to Sec. 50.
 Since part of the Machinery is salvaged, compensation received from the Insurers shall be reduced from
WDV of the Block.
ICAI Answer: The question does not mention whether the salvaged machinery is taken over by Insurance company or
whether there was any replacement of machinery during the year. Assuming that the salvaged machinery is taken over
by the Insurance company, and there was no fresh addition of machinery during the year, block of machinery will cease
176
to exist. Therefore, Rs. 4,80,000 being the excess of WDV (i.e. Rs. 10,80,000) over insurance compensation (i.e. Rs. 6 Lacs)
will be assessable as STCL.
Note: If new machinery is purchased in next year, it will constitute the new block of machinery, on which depreciation
can be claimed for that year.
Gold  Jewellery is a Capital Asset u/s 2(14).
Chain &  Sec. 45(1A) provides for tax consequences of compensation received from Insurers on account of damage
Diamond or destruction of Capital Assets due to accidental fire or explosion.
Ring  However, damage or destruction does not include loss of assets other than accidents by way of fire or
explosion. So, the gains on account of compensation received from Insurers in this case, shall not be
brought to tax under the head Capital Gains u/s 45(1 A).
 Such compensation being a Capital Receipt is not chargeable to tax.
ICAI Answer: Gold chain and diamond ring are capital assets as envisaged by section 2(14). They are not “personal
effects”, which alone are to be excluded. If any profit or gain arises in a previous year owing to receipt of insurance claim,
the same shall be chargeable to tax as capital gains. Capital gains has to be computed by reducing the indexed cost of
acquisition of jewellery from the insurance compensation of Rs. 1,80,000.
PQ12. Ms. Gunjan purchased a Land at Rs. 50 Lacs in PY 2008-09 & held the same as her capital asset till 31st Aug 2014. She
started her Real Estate Business on 1 st Sep 2014 & converted the said Land into SIT of her business on the said date when
FMV of the Land was Rs. 320 Lacs. She constructed 8 Flats of equal size, quality & dimension. Cost of Construction of each
Flat is Rs. 36 Lacs. Construction was completed in January 2018. She sold 5 Flats at Rs. 90 Lacs per Flat in April 2019.
She invested Rs. 50 Lacs in Bonds issued by National Highways Authority of India on 31st May 2019. She also invested another
Rs. 50 lakhs in bonds of Rural Electrification Corporation Ltd. in June, 2020.
Compute Capital Gains & Business Income arising from the above transactions in the hands of Ms. Gunjan for AY 2020-21.
[CII: FY 2008-09: 137; FY 2014-15: 240; FY 2015-16: 254; FY 2019: 289] [RTP + ICAI Ex Q3 (Similar)]
Solution: Computation of Capital Gain & business income of Ms. Gunjan
Full Value of Consideration [FMV of Land on date of conversion] 320 Lacs
Less: Indexed Cost of Acquisition [Rs. 50,00,000 x 240/137] (87,59,124)
Capital Gains 2,32,40,876
Proportionate LTCG taxable in AY 2020-21 [Rs. 2,32,40,876 × 5/8] 1,45,25,548
Less: Exemption u/s 54EC (restricted to Rs. 50 Lacs) (50 Lacs)
Taxable LTCG 95,25,548
Business Income
Sale Price of Flats (5x Rs.90 Lacs) 450 Lacs
Less: Cost of Flats: (a) FMV of Land on the date of conversion (Rs. 3,20 Lacs x 5/8) (200 Lacs)
(b) Cost of Construction of Flats (5 × Rs. 36 Lacs) (180 Lacs)
Business Income 70 Lacs
Note:
1. Conversion of Capital Asset into SIT is a transfer u/s 2(47). It would be treated as a transfer in PY in which Capital Asset
is converted into SIT. But Capital Gains will be taxable only in the PY in which SIT is sold.
2. Indexation is available only upto the year of conversion of Capital Asset to SIT & not upto year of sale of SIT
3. 5 flats out of 8 Flats is sold in PY 2019-20. So, only proportionate Capital Gains (5/8th) is taxable in AY 2020-21.
4. In case of conversion of Capital Asset into SIT & subsequent sale of SIT, period of 6 months, for the purpose of exemption
u/s 54EC, is to be reckoned from the date of sale of SIT. In this case, since investment in bonds of NHAI has been made
within 6 months of sale of flats, exemption u/s 54EC is available.
5. W.r.t LTCG arising on land or building or both in any FY, maximum deduction u/s 54EC would be Rs. 50 lacs, whether the
investment in bonds of NHAI or RECL are made in same FY or next FY.
Therefore, even though investment of Rs. 50 lacs have been made in bonds of NHAI during the PY 2019-20 & investment
of Rs. 50 lacs have been made in bonds of RECL during the P.Y.2020-21, both within the stipulated six-month period,
maximum deduction allowable for AY 2020-21 i.r.o LTCG arising on sale of LTCA(s) during PY 2019-20 is only Rs. 50 lacs.
PQ13. Mr. X purchased 100 equity shares in ABC Ltd. on 1.10.1996 @ Rs. 10 per share. The company has issued 100 bonus
shares on 1.10.1999 & FMV of the shares on 1.4.2001 was Rs. 7 per share. The company has again issued 100 bonus shares
on 1.10.2013. The company has offered 100 right shares on 1.4.2019 @ Rs. 140 per share though FMV is Rs. 250 per share.
Mr. X purchased half of the shares & remaining half were renounced by him in favour of his friend Mr. Y. He has charged Rs.
20 per share from Mr. Y for renouncing the right. All the shares were sold by Mr. X & Mr. Y @ Rs. 300 per share on 1.1.2020
& STT has been paid. Compute Capital gains of Mr. X for AY 2020-21.
177
Solution: Computation of Capital Gains Mr. X

Original Shares
Full value of consideration (100 x 300) Rs. 30,000
Less: Cost of Acquisition (100 x 10) (Rs. 1,000)
Long Term Capital Gain u/s 112A Rs. 29,000
1st Bonus Shares 2nd Bonus Shares
Full value of consideration (100 x 300) 30,000 Full value of consideration (100 x 300) 30,000
Less: Cost of Acquisition (100 x 7) (700) Less: Cost of Acquisition [After 1.4.2001] Nil
Long Term Capital Gain u/s 112A 29,300 Long Term Capital Gain u/s 112A 30,000
Right shares Sale of Rights
Full value of consideration (50 x 300) 15,000 Full value of consideration 1,000
Less: Cost of Acquisition (50 x 140) (7,000) Less: Cost of Acquisition Nil
Short Term Capital Gain u/s 111A 8,000 STCG (Taxable @ slab rate) 1,000
Note: No Indexation is available for LTCG u/s 112A.
PQ14. Star Enterprises has transferred its unit R to A Ltd by way of slump sale on 23rd Feb 2020. Compute the Capital Gains
arising from slump sale of Unit R for AY 2020-21.
Liabilities Amount (Rs. in Lacs) Assets Amount (in Lacs)
Own Capital 1,750 Fixed Assets:
Accumulated P & L Balance 670 (i) Unit P 200
Liabilities: (ii) Unit Q 150
(i) Unit P 90 (iii) Unit R 600
(ii) Unit Q 160 Other Assets:
(iii) Unit R 140 (i) Unit P 570
(ii) Unit Q 850
(iii) Unit R 440
 Slump Sale consideration on transfer of Unit R was Rs. 930 Lacs.
 Fixed Assets of Unit R includes land which was purchased at Rs. 110 Lacs in 2009 & was revalued at 140 Lacs.
 Other Fixed Assets are reflected at Rs. 460 Lacs, (i.e. Rs. 600 Lacs less value of land) which represents WDV of those assets
as per books. The written down value of these asset is Rs. 430 Lacs.
 Unit R was set up by Star Enterprises in 2007. [CII for FY 2007-08 & FY 2019-20 are 129 & 289 respectively. [MAY 18]
Answer: Computation of Capital Gains
Particulars (In Lacs)
Consideration 930
Less: Expenses on transfer (Nil)
Net consideration 930
Less: Net Worth [Refer Note below] (840)
Long term Capital Gain 90
Note: Computation of Net Worth
Particulars (in Lacs)
Fixed Assets [Cost of land Rs.110 + Other depreciable assets @ WDV as per IT Act Rs. 430] 540
Other Assets 440
Total Assets taken over 980
Less: Liabilities of Unit R (140)
Net Worth 840
Notes: No Indexation is available on Slump Sale transaction.
2. Revaluation effect shall be ignored for the purpose of computing Cost of Acquisition u/s 50B.
PQ15. Mr. C inherited from his father 8 plots of Land in 1999. His father had purchased the plots in 1986 for 5 Lacs. FMV of
the Plots as on 1.4.2001 was Rs. 16 Lacs. (Rs. 2 Lac for each plot). On 1.6.2005, C started a Business of dealer in plots &
converted 8 plots as SIT of his business. He recorded the plots in his books at 64 Lacs being the FMV on the date. In June
2009, C sold the 8 plots for Rs. 75 Lacs.
In the same PY, he acquired a Residential House Property for Rs. 50 Lacs. He invested an amount of Rs. 5 Lacs in construction
of one more floor in his house in June 2010. The house was sold by him in June 2019 for Rs. 80 lacs. SDV was Rs. 98,50,000.
As per Assessee's request, AO made a reference to a Valuation Officer. Value determined by Valuation Officer was Rs.
99,20,000. Brokerage of 1% of Sale Consideration was paid by C.
[CII: FY 2002-2003: 105; FY 2005-2006: 117; FY 2009- 10: 148; FY 2010-11: 167;PY 2019-20: 289 [NOV 2012 + NOV 2016]
178
Solution:
1. Transfer: Conversion of a Capital Asset into SIT is treated as a transfer.
2. PY of Taxation: Capital Gains shall be taxable as Income of the PY in which the converted SIT is sold.
3. Indexation: Indexation shall available till the PY of concersion of CA into SIT only.
4. Indexed COA = Higher of Original Cost to Previous Assessee or FMV on 1.4.2001. Thus COA = 16 lacs (for 8 flats).
5. CII should be based on the year in which the Asset is first held by the Previous Owner & not the Assessee.
PY 2009-10
(i) Business Income on Sale of Stock: Sale Value - FMV on the date of conversion = 75 lacs – 64 lacs Rs. 11 lacs
(ii) Income u/h Capital Gains
Full Value of consideration [Section 50C is not applicable in case of deemed sale u/s 45(2)] 64,00,000
Less: Indexed Cost of Acquisition (Rs. 16,00,000 x 117/100) (18,72,000)
Long Term Capital Gain taxable in PY 2009-10 45,28,000
Less: Exemption u/s 54: Lower of (i) Amount invested or (ii) Capital Gain (45,28,000)
Taxable Long-Term Capital Gain Nil
Gross Total Income 11,00,000
PY 2019-20
Particulars Amount
Sale Consideration (Note) 98,50,000
Less: Expenses (Brokerage at 1% on 80,00,000) (80,000)
Net Consideration 97,70,000
Less: (a) Indexed Cost of Acquisition: [50,00,000 × 289/148] (97,63,514)
(b) Indexed Cost of Improvement: [5,00,000 × 289/167] (8,65,269)
Long Term Capital Loss (8,58,783)
Note: ASC = Rs. 80 Lacs; SDV = Rs. 98.5 Lacs; Value by VO = Rs. 100 Lacs. Thus FVC = SDV since SDV < Value by VO but > ASC.
PQ16. Mr. Raj purchases 2,500 (non-listed) Shares in ABC Ltd on 16th August 2006 for Rs. 10,000. On 17th May 2008, he gets
500 Bonus Shares. On 20th October 2014, he acquires 1500 Right Shares @ Rs. 15 per Share. He sells all the shares (unlisted)
Shares in ABC Ltd on 12th Feb 2020 at Rs. 150 per Share (Brokerage on Sale is 2%). He owns one Residential House. He
purchases a Residential House on 29th June 2020 for Rs. 3,50,000. Compute taxable Capital Gains for AY 2020-21.
Solution:
Particulars Original shares Bonus share Right shares
(2500 shares) (500 shares) (1500 shares)
Sale Consideration (Rs. 150 per Share) 3,75,000 75,000 2,25,000
Less: Expenses on Transfer (2%) 7,500 1,500 4,500
Net Sale Consideration [A] 3,67,500 73,500 2,20,500
Less: Indexed CoA (23,689) Nil (27,094)
(10,000 x 289/122) (22500 × 289/240)
Long term capital gains [B] 3,43,811 73,500 1,93,406
[(LTCG/NSC) x 100] [B/A] 93.55% 100% 87.71%
Rank of Claiming Exemption u/s 54F (Note) II I III
Amount of Investment in House Property out of 2,76,500 73,500 Nil
sale proceeds (3,50,000 – 73,500)
Less: Exemption u/s 54F = LTCG x
𝐴𝑚𝑜𝑢𝑛𝑡 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑
2,59,232 73,500 Nil
𝑁𝑆𝐶
Taxable LTCG 17,628 NIL 1,94,250
Note: Since exemption u/s 54F is given in the proportion of the LTCG to Net Sale Consideration, larger the proportion, higher
the exemption amount. Hence, ranks are allotted based on ratio of LTCG to Net Consideration.
Firstly, investment shall be apportioned to the highest ranked alternative. Thus we have allotted Rs. 73,500 on the capital
gains arising on transfer of bouns shares.
Now, the balance amount of investment (i.e Rs. 3,50,000 – Rs. 73,500) Rs. 2,76,500 shall be apportioned to next highest
ranked alternative (i.e original shares in this case).
Since we do not have any balance of investment left, the exemption will be restricted to (II) & (I).
179
PQ17. Mr. X (age 82) purchased urban agricultural land on 1.10.2001 for Rs. 3 Lacs & it was being used for agricultural
purposes by him. It was sold on 1.1.2020 for Rs. 58.67 Lacs. Assessee has purchased 1 agricultural land in rural area on
10.1.2020 for Rs. 10 Lacs & this land was sold by him on 11.2.2020 for Rs. 11 Lacs & has invested Rs. 30,000 in NSC. Compute
taxable Capital gains for AY 2020-21. (b) What if the land was purchased in urban area instead of rural area.
Solution:
(a) Computation of Capital Gains
Full value of consideration 58,67,000
Less: Indexed cost of acquisition [3,00,000 x 289/100] (8,67,000)
Less: Exemption u/s 54B (10,00,000)
Note: If land is purchased in rural area, exemption will be allowed u/s 54B. On sale of Rural agricultural land, no capital
gains will arise since rural agricultural land is not a capital asset as defined u/s 2(14).
(b) If the newly acquired land is a urban land & it has been sold, exemption granted u/s 54B will be withdrawn.
In such case, assessee will have 2 options. Option 1: Not to take exemption u/s 54B; Option 2: Take exemption u/s 54B.
Option I: Exemption is not availed LTCG = Rs. 50,00,000;
STCG on sale of urban agri. Land = Rs. 11 Lacs – Rs. 10 Lacs = Rs. 1 Lac.
Option II: Exemption is availed LTCG = Rs. 40,00,000;
STCG on sale of urban agri. Land = Rs. 11 Lacs – Rs. 0 Lacs = Rs. 11 Lacs.
Hence the assessee should opt for option I & his tax liability shall be 7,84,160.
PQ18. Mr. X owns several assets but does not own any residential house. He sells the following assets & requests you to
compute his tax liability for the AY 2020-21.
1. Shares (non-listed) purchased in April 2007 for Rs. 1,30,000 sold on 19.07.2019 for Rs. 12,00,000.
2. He sold jewellery on 15.8.2019 for Rs. 18 lac purchased in 1996 for Rs. 1,80,000. FMV on 1.4.2001 was Rs. 3. Lacs.
3. Debentures (unlisted) purchased in April 2018 for Rs. 80,000 sold on 31.12.2018 for Rs. 1,40,000.
4. Sold his motor car purchased in August 2007 for Rs. 1,50,000 on 15.03.2019 for Rs. 18,000.
5. He purchased equity shares of ABC Limited on 1.11.2018 for Rs. 2,00,000 & sold all the shares on 1.6.2019 for Rs. 10 Lacs
& has paid STT @ 0.25% of sale price. Compute his income tax liability.
Additional Information:
In December 2019, he also purchased a small residential house for Rs. 2,00,000. He has deposited Rs. 1,60,000 on 20.01.2020
in CGAS for construction of the house which he has purchased in Dec. 2019.
On 15.01.2020, he invested Rs. 2,50,000 in bonds issued by NHAI which are redeemable after 5 years.
Solution: Computation of capital gains in the hands of Mr. X
Particulars Non – Listed Shares Jewellery Debentures Equity shares in ABC Ltd
Sale Consideration [A] 12,00,000 18,00,000 1,40,000 10,00,000
Less: Indexed COA (2,91,240) (10,11,500) (80,000) (2,00,000)
[1,30,000 x 289/129] [3,50,000 x 289/100]
LTCG/STCG [B] LTCG = 9,08,760 LTCG = 7,88,500 STCG = 60,000 STCG = 8,00,000
Rate of Tax 20% u/s 112 20% u/s 112 Slab Rate 15% u/s 111A
Ranking [B/A] [I] 75.73% [II] 43.80% NA NA
Exmeption u/s 54F (2,72,628) - - -
Taxable LTCG 6,36,132 LTCG = 7,88,500 STCG = 60,000 STCG = 8,00,000
Analysis for exemption u/s 54F:

 Investment in Residential house of Rs. 2 Lacs + Deposit in CGAS of Rs. 1,60,000 is eligible for exemption u/s 54F.
 Exemption of Section 54F is proportionate & is available only on LTCG.
 So we have to rank capital gains on Non-Listed shares & jewellery on the basis of LTCG/NSC.
 Since ratio of LTCG/NSC is more for Non-Listed shares, we will take exemption of section 54F from Non-Listed share.
 Exemption u/s 54F = 3,60,000 x 9,08,760/12L = 2,72,628.
Note: Motor car is covered under the personal movable effects, hence, no capital gains shall be computed.
Note: Exemption u/s 54EC is available only if sold asset is immovable property being land or building or both.
180

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CS EXECUTIVE DIRECT TAX NOTES

BASIS OF CHARGE - SECTION 45

DEFINITION OF CAPITAL ASSET - SECTION 2(14)

EXCEPTIONS: [Following are NOT CAPITAL ASSETS]

 If Precious stones/metals are sewn/worked/set into Wearing Apparel/ furniture, it is classified

3 Rural Agricultural Land in INDIA [Urban Agricultural land → Capital Asset]

4 Gold Deposit bonds/Certificates issued under Gold Monetisation Scheme, 2015.

CQ2. Determine which of the lands will be Capital Assets:

* However transfer of a capital asset to National Museum is exempt u/s 47.

TYPES OF CAPITAL ASSET – SECTION 2(42A)

A. LTCG if POH > 12 Months

B. LTCG if POH > 24 Months

Units of Equity Oriented Mutual Fund 12 Months

Units of Debt Oriented Mutual Fund 36 Months

Units of UTI 12 Months

Zero Coupon Bonds 12 Months

Listed Debentures / Bonds / Govt Securities 12 Months

Unlisted Debentures / Bonds/ Govt Securities 36 Months

Listed shares in a company 12 Months

Unlisted shares in a company 24 Months

Land or building 24 Months

Other Assets 36 Months

DEFINITION OF TRANSFER OF CAPITAL ASSET [SEC 2(47)]

2. Extinguishment of any rights in the asset.

3. Compulsory Acquisition of any Capital Asset under any law.

4. Conversion of Capital Asset into Stock in trade.

6. Giving possession of IMMOVABLE PROPERTY under Part performance of a contract.

DATE OF COMPLETION OF TRANSFER

HOW TO COMPUTE CAPITAL GAINS – SECTION 48

Less: Expenses of Transfer (xxx)

Less: Cost of Acquisition (Indexation available if Capital Asset is LTCA) (xxx)

SHORT/LONG TERM CAPITAL GAIN XXX

FULL VALUE OF CONSIDERATION (FVC) [SECTION 48]

Meaning of Indexed COA:

Steps to Calculate Indexed COA:

INDEXED COST OF ACQUISITION

COST INFLATION INDEX for Different FYs

NO INDEXATION IS AVAILABLE IN FOLLOWING CASES [EVEN IF ASSETS ARE LTCA]

INDEXED COST OF IMPROVEMENT

Q. How to decide whether to take Indexation of Cost of Improvement or not?

Note: Year in which Improvement is done in the Asset → Not Relevant.

OPTION TO TAKE FMV ON 1.4.2001 AS COST OF ACQUISITION

[14L × 289/100] (Note 1) [2.4L × 289/129] (Note 2)

VALUATION BY VALUATION OFFICER

REFERENCE TO VALUATION OFFICER [SEC 55A]

FVC ON TRANSFER OF UNLISTED SHARES [SEC 50CA]

FMV → Deemed to be Full Value of Consideration – [Section 50D]

TAX TREATMENT OF ADVANCE MONEY FORFEITED [Sec 51]

A. CAPITAL GAINS IN CASE OF DEEMED SALE

Sale Consideration Insurance Compensation (Money + FMV of replaced Asset).

Year of Taxability Capital Gain is taxable in PY of Receipt of Insurance Money.

Period of Holding From Date of Acquisition till the Date of Destruction.

CAPITAL GAIN ON CONVERSION OF CAPITAL ASSET INTO SIT [SEC 45(2)]

Sale Consideration FMV of the asset on the date of conversion.

Indexation Only till the PY in which conversion took place.

CAPITAL GAIN ON TRANSFER OF CAPITAL ASSET

COMPULSORY ACQUISITION OF CAPITAL ASSET [SEC 45(5)]

SC Amount of Initial Compensation

Taxed in PY of Receipt of Initial Compensation (either Whole/Part)