Corporate Taxation

By Anup K Suchak

Capital & Revenue Receipts

Capital Receipts
(a) Receipts derived from activities which are not part of the normal trading activities of the business

Revenue Receipts

(a) Receipts related to NORMAL ACTIVITIES of the business

(b) Appears as capital or liabilities in the (b) Credited as revenue to Trading and Balance Sheet Profit & Loss Account (c) Examples: receipts from sales of goods and services, rent, commission and interest on bank deposits received by the business.

(c) Examples: receipts of cash brought in by partners, shareholders, debenture holders and bank loans

Capital Gains
Basis of Charge: [ 45 (1) ]

Any profits or gains arising out of the transfer of a capital asset effected in the previous year shall be chargeable to income-tax under the head Capital Gains and shall be deemed to be the income of the previous year.. Unless it is exempt under section 54, 54B, 54D, 54EC, 54F, 54G and 54GA.

Capital Assets
Capital Asset however does not include
Stock in Trade personal effect such as movable property except

jewelry agricultural land in India Gold Deposit Bonds issued under the Gold Deposit Scheme 1999.

However, capital asset includes property of every kind whether tangible or intangible..

Types of Capital Assets

Short Term Capital Assets Long Term Capital Assets

Short Term Capital Asset as per section 2(42A) is a capital asset held by an assessee for not more than 36 months. However, in case of a) Equity or Preference shares held in the Company b) Any listed security. 3) Units of UTI or Mutual Fund Units under Section 10 (23D) , the assets held for less than 12 months will be Short Term Capital Assets.. The Capital assets not fulfilling the above criteria will be treated as Long Term Capital Assets.. 2(29A).

Transfer includes.
1) Sale

2) Exchange
3) Relinquishment of the asset 4) extinguishment of rights in an asset 5) compulsory acquisition thereof under any law 6) when Capital Asset is converted into stock in

Trade. 7) when possession of property is foregone in discharge of any collateral contract under transfer of property Act.

Transfer does not include.

Where the assets are distributed to the shareholders on

liquidation, such transfer will not be regarded as transfer in the hands of the Company. Any transfer by the company to its 100% subsidiary company provided the later is an Indian Company. Any transfer in the scheme of amalgamation of a capital asset by the amalgamating company to the amalgamated company. Any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificates in any form, of a company into shares or debentures of that company. Any transfer under the security Lending Scheme,1997 for lending of any securities under an agreement or arrangement,which the assessee has entered into with the borrower of such securities and which is subject to the guidelines issued by SEBI or RBI in this regard. Here , we are dealing only with taxation of corporate assessees therefore, aspects of Non-Corporate Taxation have been deleted from the material

Computation of Short Term Capital Gain

Sr. No. 1 2 Particulars Full Value of Consideration (Less) a) Expenditure incurred wholly and exclusively in Connection with such a transfer. (b) Cost of Acquisition (c) Cost of Improvement 3 4 5 Gross Short term Capital Gain (Less) Exemption, if available u/s 54B, 54D, 54G and 54GA Taxable Short Term Capital Gain Rs. xxx xxx xxx xxx xxx xxx xxx

Computation of Long Term Capital Gains

Sr. No. 1 2 Particulars Full Value of Consideration (Less) a) Expenditure incurred wholly and exclusively in Connection with such a transfer. (b) Indexed Cost of Acquisition (c) Indexed Cost of Improvement 3 4 5 Gross Long Term Capital Gain (Less) Exemption, if available u/s 54, 54B, 54D, 54EC, 54F, 54G and 54GA Taxable Long Term Capital Gain Rs. xxx xxx xxx xxx xxx xxx xxx

Cost of Acquisition
Cost of acquisition of an asset is the value for

which it was acquired by the assessee. Expenses of capital nature for completing or acquiring the title to the property are includible in the cost of acquisition.

Indexed Cost of Acquisition ( Sec. 48)

In the case of long-term capital gain, indexed cost

of acquisition and indexed cost of improvement are deducted. Indexed Cost of Acquisition means an amount which bears to the cost of acquisition, the same proportion as cost inflation index for the year in which the asset is transferred bears to the cost inflation Index for the first year in which the asset was held by the assessee or for the year beginning on 01-04-1981 whichever is later.

Cost Inflation Index

Financial Year 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 CII 100 109 116 125 133 140 150 161 172 182 199 223 244 259 281 305 331 Financial Year 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 CII 351 389 406 426 447 463 480 497 519 551 582 632

Calculation of Indexed Cost of Acquisition

Fair Market Value of the asset on April 1, 1981 or cost of acquisition, which ever is more X
Cost inflation index Cost Inflation index for the year in which the asset is transferred

Calculation of Indexed Cost of improvement

Cost of improvement (ignoring any cost of improvement incurring prior to April 1, 1981) X Cost inflation index for the year in which improvement took place

Cost inflation index for the year in

which the asset is transferred

Example 1
X purchases a house property for Rs. 76,000 on June

30, 1967. The following expenses are incurred by him for making addition/alteration to the house property: Cost of Construction of first floor in 1975-76 Rs. 1,10,000. Cost of Construction of Second floor in 1982-83 Rs. 4,40,000. Alteration/reconstruction of the property in 1989-90 Rs. 2,90,000. Fair value of the property on April 1, 1981 is Rs. 6,50,000. The house property is sold by X on June 15, 2009 for Rs. 75,00,000 (expenses incurred on transfer Rs. 50,000)

Example 2
X sells the following capital assets during the

previous year 2009-10

Particulars Shares Self Generated Goodwill 15,00,000 N.A. --House property

Sale Consideration Year of Acquisition Cost of Acquisition Cost of improvement on 1989-90

9,50,000 1991-92 2,90,000 --

3,15,700 1983-84 18,000 10,000

Example 3
X purchase a house property for Rs. 26,000 on

May 10, 1962. He gets the first floor of the house constructed in 1967-68 by spending Rs. 40,000. he dies on september 12, 1978. The property is transferred to Mrs. X by his will. Mrs. X spends Rs. 30,000 and Rs. 36,700 during 1979-80 and 1984-85 respectively for renewal/ reconstruction of the property. Mrs. X sell the house property for Rs. 24,50,000 on March 15,2010 (brokerage paid by Mrs. X Rs. 24,500). The fair market value of the house on April 1, 1981 is Rs. 2,68,000. Compute long term capital gain.

Example 4
X purchases a property on April 1, 1976 for Rs. 95,000. He enters intro

agreement for sale of the property to A on November 1, 1982 and receives Rs. 10,000 as advance. A could not, however, keep his promise and the advance of Rs. 10,000 given by him is forfeited by X. Later on he gifts the property to his friend Y on May 15, 1984. The following expenses are incurred by X for renewals of the property:
Addition of two rooms by X during 1978-79 Rs. 35,000. Addition of first floor by X during 1982-83 Rs. 45,000. Addition of Second floor by Y during 1989-90 Rs. 1,25,000. Fair market value of the property on April 1, 1981 is Rs. 2,45,000.

Y enters into an agreement to sell the property for Rs. 8,50,000 to B on April 1, 1994 after receiving an advance of Rs. 50,000. B could not pay the balance within the stipulated time of two months and Y forfeits the advance of Rs. 50,000 as per agreement with B. Y ultimately finds a buyer in C to whom property is transferred for Rs. 23,75,000 on December 1, 2009. Compute the capital gain chargeable to tax in the hands of Y for the assessment year 2010-11.

Example 5
X ltd. Owns the following assets:Particulars Cost of acquisition Date of acquisition Goodwill Self-Generated -Shares (non-listed) Rs. 1,38,600 March 10, 2007 House property Rs. 96,000 March 10, 2007

These capital assets are transferred by X ltd. to its whollyowned Indian subsidiary company S ltd. on April 1, 2008. On July 7, 2009, these assets are transferred by S ltd. for consideration of Rs. 10,50,000 (i.e. Goodwill Rs. 6,00,000, Shares Rs. 2,15,700 and house property Rs. 2,34,800). Compute the capital gain chargeable to tax in the case of S ltd. For the assessment year 2009-10.

Example 6
X, Y and Z are three partners of a firm. On March 10, 2010 the firm is

dissolved. The following assets are distributed to partners:

Particulars Fair Market value on March 10, 2010 Agreed value as per dissolution deed Residential House to X 22,90,000 12,70,000 Non-listed shares to Y 60,000 66,000 Land to Z 42,000 42,000

Cost of acquisition
Year of acquisition Fair Market value on April 1, 1981

50,000
1949-50 3,20,000

15,000
1992-93 N.A.

8,000
1984-85 N.A.

Determine the amount of chargeable capital gains of the firm for the assessment year 2010-11

Example 7
X converts his capital assets (acquired on June

10, 1967 for Rs. 70,000, fair market value on April 1, 1981: Rs. 1,80,000) into stock in trade on April 1, 1984 (fair market value: Rs. 4,80,000) and, subsequently, sells the stock in trade so converted for Rs. 7,30,000 on June 10, 2009. Determine the amount of Capital Gains and assessable profits.

Example 8
The Central Government acquires a house property

owned by X on October 17, 1995. This property was purchased on April 10,1976 for Rs. 76,000 (Cost of improvement incurred during 1986-87: Rs. 40,000 and fair market value of the property on April 1, 1981 was Rs. 1,42,000). The Government awards Rs. 5,77,000 as compensation which is received partly (Rs. 77,000) on May 13, 2009 and partly (Rs. 5,00,000) on April 1, 2010. Being aggrieved against the award, X files an appeal. The Court, as per order dated August 12, 2011, enhanced the compensation from Rs. 5,77,000 to Rs. 9,50,000 (legal expenses incurred by X: Rs. 20,000). X receives the additional compensation of Rs. 3,73,000 on April 15, 2012. Compute the income of X under the head Capital Gains. Does it make any difference if the additional compensation is received by his sons A and B (share of each being 50%) on April 15, 2012 after the death