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CAPITAL GAINS
INTRODUCTION
Capital Gain means any profit arising from the transfer of a capital asset. Certain exemptions from tax
have been provided for income form Capital Gain. To understand the topic, it is necessary to study (i)
Meaning of ‘Capital Asset’ (ii) What is ‘Transfer’, (iii) Computation of Capital Gain and (iv) What
exemptions are prescribed?
Sections
Definitions 2(14), 2(47), 2(22B), 2(29A), 2(29B), 2(42A), 2(42B),
2(42C)
Computation of capital gains, Cost of
Acquisition & Full Value consideration 48, 49, 50,50A, 50B, 50C, 51, 55
Exemption from capital gains 54 to 54H
Special provisions 47, 47A, 55A, 112
Chargeability 45, 46, 46A
Transfer of ‘Capital Asset’ gives rise to capital gain. If property transferred is not a capital
asset, capital gain cannot result.
(iii) where the capital asset is the shares of an amalgamated company acquired in lieu of the
shares of the amalgamating company, the period of holding of the shares of the amalgam-
ating company should also be considered.
(iv) where the capital asset is the shares or any other security subscribed by the assessee in a
right issue, or subscribed to by the person in whose favour the assessee renounces his
right, the period should be considered from the date of allotment of such asset.
(v) where the capital asset is the right to subscribe to a rights offer and it is renounced, the
date of offer of the rights should be taken as the date of acquisition.
(vi) where the capital asset is share(s) in an Indian company which has become the property of
the assessee in consideration of a demerger, the period for which the share(s) of the
demerged company were held should also be considered.
(vii) where the capital asset is the financial asset acquired without any payment (e.g. bonus
shares), the period should be considered from the date of allotment of such asset.
(viii) in the case of a capital asset, being any specified security or sweat equity shares allotted
or transferred, directly or indirectly, by the employer free of cost or at concessional rate to
his employees (including former employee or employees), the period shall be reckoned
from the date of allotment or transfer of such specified security or sweat equity shares.
In respect of capital assets other than those mentioned above, the period for which any capital
asset is held by the assessee shall be determined subject to any rules which the CBDT may
make in this behalf.
Case Law :
Bonus shares issued by a company are acquired by a shareholder when they are issued and
they must be taken to be held by shareholder from the date of their issue and not from the date
when the original shares, in respect of which they are issued, were acquired by the shareholder
- Executive of the Will of Late Shri Manecklal Premchand v. CIT 48 Taxman 310/Manecklal
Premchand v. CIT 186 ITR 554.
A member of a housing society becomes owner of flat on date on which he acquires shares in
society and question as to whether flat is a long-term capital asset has to be decided by taking
that date into consideration rather than date of possession of flat - CIT v. Anilaben Upendra
Shah 262 ITR 657134 Taxman 522.
(c) Long Term Capital Gain [Sec. 2(29B)]: Gains arising due to transfer of long term capital
asset, as defined above, are called as long term capital gain.
Any asset on which depreciation is allowed under the Income-tax Act, it is held as short term
capital gain (Section 50).
In respect of long term capital gain, certain concessions like exemption, lower tax rate, deduc-
tion of indexed cost of acquisition are available.
(d) Short Term Capital Gain [Sec. 2(42B)]: Gains arising due to transfer of short term capital
asset, as defined above, are called as short term capital gain.
Short term capital gain is included in taxable total income of the assessee and normal tax rate is
applicable, for income-tax payment..
Transfer is defined in a much wider sense than as is commonly understood. A layman loosely
calls it ‘sale’. In order to attract capital gains tax, ‘transfer should take place. Meaning of ‘trans-
fer’ includes sale, but it includes many more category of transactions.
‘Transfer’, in relation to capital asset, includes the following:
(i) Sale, exchange or relinquishment of a capital asset. A sale takes place when title in the
property is transferred for a price. The sale need not be voluntary. An involuntary sale like
that by a Court of a property of judgment debtor at the instance of a decree holder is also
transfer of a capital asset.
An exchange of capital asset takes place when the title in one property is passed in consider-
ation of the title in another property.
Relinquishment of a capital asset arises when the owner surrenders his rights in property in
favour of another person. For example, the transfer of rights to subscribe the shares in a com-
pany under any ‘Rights Issue’, to a third person.
(ii) Extinguishment of any rights in a capital asset. This covers every possible transaction
which results in destruction, termination, cessation or cancellation of all or any bundle of
rights in a capital asset. For example, termination of a lease or and of a mortgagee’s inter-
est in a property.
(iii) Compulsory acquisition of the capital asset under any law. Acquisition of immovable
properties under the Land acquisition Act, acquisition of industrial undertaking under
the Industries (Development and Regulation) Act or preemptive purchase of immovable
properties by the Income-tax Department are some of the examples of compulsory acqui-
sition of a capital asset.
(iv) Conversion of a capital asset into stock-in-trade. Normally, there can be no transfer if
the ownership in an asset remains with the same person. However, the Income-tax Act
provides an exception for the purpose of capital gains. When a person converts any capi-
tal asset owned by him into stock-in-trade of a business carried on by him, it is regarded as
a transfer. For example, where an investor in shares starts a business of dealing in shares
and treats his existing investments as the stock-in-trade of the new business, such conver-
sion arises and is regarded as a transfer.
(v) Contract of the nature of Part performance. Normally transfer of an immovable property
worth Rs. 100 or more is not complete without execution and registration of a conveyance
deed. However, section 53A of the Transfer of Property Act envisages situations where
under a contract for transfer of an immovable property, the purchaser has paid the price
and has taken possession of the property, but the conveyance is either not executed or if
executed is not registered. In such cases the transferor is debarred from agitating his title
to the property against the purchaser.
(vi) Transfer of rights in immovable properties through the medium of cooperative societ-
ies, companies etc. Usually flats in a building and in group housing schemes are regis-
tered in the name of a co-operative society constituted by a number of members. A Com-
pany may be formed with an object of owning a building and shareholders are entitled to
enjoy occupancy of certain tenement. In such circumstances transfer of rights to use and
enjoy the flat is effected by changing the membership of cooperative society or by trans-
ferring the shares in the company.
(vii) Transfer by a person to a firm or other Association of Persons (AOP) or Body of Indi-
viduals (BOI). Normally, firm/AOP/BOI is not considered a distinct legal entity from its
partners or members and so transfer of a capital asset from the partners to the firm/AOP/
BOI is not considered as ‘Transfer’. However, under the Capital gains, it is specifically
provided that if any capital asset is transferred by a partner to a firm/AOP/BOI by way of
capital contribution or otherwise, the same would be construed as transfer.
(viii) Distribution of money or other assets by Company on Liquidation. If a shareholder
receives any money or other assets from a Company in liquidation, the shareholder is
liable to pay capital gains as the same would have been received in lieu of the shares held
by him in the company. However, if the assets of a company are distributed to the share-
holders on its liquidation, such distribution shall not be regarded as transfer by the com-
pany.[ Sec. 46(2)].
(ix) the maturity or redemption of a zero coupon bond.
Case Law :
The definition of ‘transfer’ under section 2(47) is merely inclusive and does not exhaust other
kinds of transfer Sunil Siddharthbhai v. CIT 156 ITR 509 (SC).
A ‘transfer’ of a capital asset takes place when the investiture of title takes place under a law
relating to compulsory acquisition of property Mangalore Electric Supply Co. Ltd. v. CIT 113
ITR 655 (SC).
Transaction of reduction of share capital by company and pro rata distribution of amount/
assets to shareholders amounts to ‘transfer’ within meaning of section 2(47) - CIT v. G.
Narasimhan 102 Taxman 66/236 ITR 327 (SC).
Redemption of preference shares involves ‘transfer’ - Redemption of preference shares by the
company will squarely come within the phrase ‘sale, exchange or relinquishment of the asset’
- Anarkali Sarabhai v. CIT 90 Taxman 509/224 ITR 422 (SC).
An exchange involves the transfer of property by one person to another and reciprocally the
transfer of property by the other to the first person. There must be a mutual transfer of owner-
ship of one thing for the ownership of another - CIT v. Rasiklal Maneklal (HUF) 177 ITR 198/
43 Taxman 259.
A relinquishment takes place when the owner withdraws himself from the property and aban-
dons his rights thereto; it presumes that the property continues to exist after the relinquish-
ment - CIT v. Rasiklal Maneklal (HUF) 177 ITR 198/43 Taxman 259.
(a) all the assets and liabilities of the sole proprietary concern relating to the business
immediately before the succession become the assets and liabilities of the
company.
(b) the shareholding of the sole proprietor in the company is not less than fifty percent
of the total voting power in the company and his shareholding continues to so
remain as such for a period of five years from the date of the succession and
(c) the sole proprietor does not receive any consideration or benefit, directly or
indirectly, in any form or manner, other than by way of allotment of shares in the
company [Sec. 47(xiv)].
(xvi) Transfer in a scheme of lending of any securities under an arrangement subject to the
guidelines of Securities and Exchanges Board of India (SEBI).With effect from
assessment year 2003-04 securities which are subject to guide lines issued by RBI is
also included for this purpose.
(xvii) any transfer in a business reorganisation, of a capital asset by the predecessor
co-operative bank to the successor co-operative bank.
(xviii) any transfer by a shareholder, in a business reorganisation, of a capital asset being a
share or shares held by him in the predecessor co-operative bank if the transfer is
made in consideration of the allotment to him of any share or shares in the successor
co-operative bank.
Case Law :
When a proprietary business is converted into a partnership business by the induction of
partners, there is a transfer of part of the assets at least by the assessee in favour of the
inducted partners. Since the transfer did not result in yielding any profit or gain to the
assessee, no gains should be subjected to tax under section 45 - CIT v. H. Rajan & H. Kannan
236 ITR 42 .
The date of sale or transfer is the date when the sale or transfer takes place, and for the purpose
of determining such a date, entries in the account books are irrelevant - Alapati Venkataramiah
v. CIT 57 ITR 185 .
THE CENTRAL GOVERNMENT OF DIRECT TAXES ISSUED THE FOLLOWING
CIRCULARS IN REGARD TO DETERMINATION OF DATE OF TRANSFER/PERIOD OF
HOLDING ETC. OF CAPITAL ASSET.
Circular No. (i) If securities are transacted through stock exchanges, the date of broker’s
note should be treated as the date of transfer provided the transaction is
followed up by delivery of shares and also the transfer deeds. Similarly, in
respect of the purchase of the securities, the holding period shall be reck-
oned from the dated of the broker’s note for purchase on behalf of the in-
vestors.
(ii) In case the transactions take place directly between the parties and not
through stock exchanges, the Board has clarified that the date of contract of
CAPITAL GAIN
Capital gain arises from transfer of a capital asset. Charge over ‘capital gain’ is created by
section 45 r.w.s. 2(24) [defining income] of the Act. Unless expressly exempt under the Act,
capital gain is liable to tax.
Section 45 provides as under:
(1) Any profits or gains arising from the transfer of a capital asset effected in the previous
year shall, be chargeable to income-tax under the head ‘Capital gains’, and shall be deemed
to be the income of the previous year in which the transfer took place.
(1A) Apart anything contained in sub-section (1), when any person receives during any previ-
ous year any money under an insurance from an insurer on account of damage to, any
capital asset, as a result of—
(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
(ii) riot or civil disturbance; or
(iii) accidental fire or explosion; or
(iv) action by an enemy or action taken in combating an enemy.
then, any profits arising from receipt of such money shall be chargeable to income-tax under
the head ‘Capital gains’ and shall be deemed to be the income of such person of the previous
year in which such money or other asset was received.
(2) Apart anything contained in sub-section (1), the profits arising from the transfer by way of
conversion by the owner of a capital asset into stock-in-trade of a business carried on by
him shall be chargeable to income-tax as his income of the previous year in which such
stock-in-trade is sold or otherwise transferred by him. The fair market value of the asset
on the date of such conversion or treatment shall be deemed to be the full value of the
consideration received.
(2A) Where any person has had at any time during previous year any beneficial interest in any
securities, then, any profits arising from transfer made by the depository of such benefi-
cial interest in respect of securities shall be chargeable to income-tax as the income of the
beneficial owner of the previous year in which such transfer took place and shall not be
regarded as income of the depository who is deemed to be the registered owner of securi-
ties. The cost of acquisition and the period of holding of any securities shall be determined
on the basis of the first-in-first-out method
(3) The profits or gains arising from the transfer of a capital asset by way of distribution of
capital assets on the dissolution of a firm or other association of persons or body of indi-
viduals (not being a company or a co-operative society) or otherwise, shall be chargeable
to tax as the income of the firm, of the previous year in which the said transfer takes place
and. The fair market value of the asset on the date of such transfer shall be deemed to be
the full value of the consideration received.
(4) Apart anything contained in sub-section (1), where the capital gain arises from the trans-
fer of a capital asset, being a transfer by way of compulsory acquisition under any law, or
a transfer the consideration for which was determined or approved by the Central Gov-
ernment or the Reserve Bank of India, and the consideration for such transfer is enhanced
or further enhanced by authority, the capital gain shall be dealt with in the following
manner, namely:—
(a) the capital gain computed with reference to the compensation awarded in the first
instance or by the Central Government or the Reserve Bank of India shall be charge-
able as income under the head ‘Capital gains’ of the previous year in which such
compensation or part thereof, was first received and
(b) the amount by which the consideration is enhanced by any other authority shall be
deemed to be income chargeable under the head ‘Capital gains’ of the previous year
in which such amount is received by the assessee;
(6) The difference between the repurchase price of the units referred to in sub-section (2) of
section 80CCB and the capital value of such units shall be deemed to be the capital gains
arising to the assessee in the previous year in which such repurchase takes place or the
plan referred to in that section is terminated and shall be taxed accordingly.
Any profits or gains arising from the transfer of capital asset effected in the previous year shall
be chargeable to Income-tax under the head ‘capital gains’. Chargeability of capital gains are
analyzed as under:-
(i) Sec. 45
45(1) Transfer of a capital asset Previous year in which Consideration for the
transfer takes place transfer
45(2) Conversion of a capital Previous year in which Fair market value as on the
asset into stock -in-trade. stock-in-trade is sold. date of conversion.
45(2A) Transfer of securities made Previous year in which Consideration for the
by the depository transfer takes place on transfer and chargeable
FIFO method in case of beneficial owner.
45(3) Transfer of a capital asset Previous year in which The value of the asset by
partner/member to a recorded transfer takes place.
firm/AOP/BOI as capital
contribution or otherwise.
45(4) Transfer of a capital asset Previous year in which Fair market as on the
by way of distribution on transfer takes place. date of transfer.
dissolution or otherwise of
a firm or association of
persons.
45(5) Transfer of a capital asset Previous year in which The initial compensation or
by way of compulsory compensation is received. enhanced compensation if
acquisition under any law. any.
45(6) Repurchase of units of refer Previous year in which Repurchase price.
to in sec. 80CCB. repurchase takes place or
the scheme terminates.
46(2) Shareholders receiving In the year assets are Money receipt or market
assets from the liquidator received from the value of the assets on the
from the liquidation of liquidator. date of distribution
the company. by the liquidator
reduced by the deemed
dividend u/s. 2(22) (e).
46A Purchase by a company Previous year in which such Consideration for the
of its own shares or other shares or other securities are purchase of shares.
securities. purchased.
Case Laws :
The fact that capital gains are connected with the capital assets of a business will not make
them the profits of the business - CIT v. Express Newspapers Ltd. 53 ITR 250.
Where business is sold as a going concern valuing plant and machinery, etc., surplus arising
over and above difference between written down value and actual cost has to be taxed under
section 45 - CIT v. Artex Mfg. Co. 93 Taxman 357/227 ITR 260.
Any surplus arising from the transfer of a going concern from a firm to a company in which all
the erstwhile partners of the firm became shareholders of the company was liable to be as-
sessed to capital gains in the status of body of individuals and not in the status of association of
persons - Artex Mfg. Co. v. CIT [1981] 131 ITR 559 (Guj.).
Surplus arising on sale of shares by an investment company is capital gain, and not business
profit - CIT v. Sugar Dealers [1975] 100 ITR 424 (All.).
The word ‘otherwise’ used in section 45(4) takes into its sweep not only the cases of dissolution
but also the cases of subsisting partners of a partnership, transferring assets in favour of a
retiring partner - CIT v. A.N. Naik Associates [2004] 136 Taxman 107 (Bom.).
A. Where the full value of consideration received or accruing for the transfer of the asset plus
the full value of such consideration for the transfer of any other capital asset falling with
the block of assets during previous year exceeds the aggregate of the following amounts
namely:
(1) expenditure incurred wholly and exclusively in connection with such transfer;
(2) WDV of the block of assets at the beginning of the previous year;
(3) the actual cost of any asset falling within the block of assets acquired during the pre-
vious year such excess shall be deemed to be the capital gains arising from the trans-
fer of short-term capital assets.
B. Where all assets in a block are transferred during the previous year, the block itself will
cease to exist. In such a situation, the difference between the sale value of the assets and
the WDV of the block of assets at the beginning of the previous year together with the
actual cost of any asset falling within that block of assets acquired by the assessee during
the previous year will be deemed to be the capital gains arising from the transfer of short-
term capital assets.
Now, let us discuss each ingredient of Computation :
Full Value of consideration :
Simply stated it is the price or compensation for which transfer has taken place.
This means in the case of sales, the consideration bargained for CIT v. Gillanders Arbuthnot &
Co. 87 ITR 407 (SC).
The compensation paid in pursuance of a contract of insurance cannot be considered as consid-
eration - C. Leo Machodo v. CIT 172 ITR 744 (Mad.)
Interest received on unpaid sale price cannot be treated as ‘profits and gains’ arising from the
transfer of capital asset under section 45, but just a revenue receipt - Mount Stuart Tea Estate
and Amar Coffee Plantation v. CIT 239 ITR 489 (Mad.).
In a case capital gain is received in foreign currency, for conversion of amount received into
Indian currency, uniform rate of exchange should be adopted for determining value of acqui-
sition and consideration received for transfer of capital asset - Jayakumari & Dilharkumari v.
CIT 189 ITR 99 (Kar.).
The expression ‘full value of consideration’ cannot be construed as the market value but as the
price bargained for by the parties to the sale. The expression ‘full value’ means the whole price
without any deduction whatsoever and it cannot refer to the adequacy or inadequacy of the
price bargained for - CIT v. George Henderson & Co. Ltd. 66 ITR 622.
(ii) Self-generated assets - There are circumstances where it is not possible to ascertain cost of
acquisition. For example, suppose a doctor starts his profession. With the passage of time,
the doctor acquires lot of reputation. He opens a clinic and runs it for 5 years. After 5 years
he sells the clinic to another doctor for Rs.10 lacs which includes Rs.2 lacs for his reputa-
tion or goodwill. Now a question arises as to how to find out the profit in respect of good-
will. It is obvious that the goodwill is self-generated and hence it is difficult to calculate
the cost of its acquisition. However, it is certainly a capital asset.
The Supreme Court in CIT v/s. B.C. Srinivasa Shetty [1981] 128 ITR 294 (SC) held that in order
to bring the gains on sale of capital assets to charge under section 45, it is necessary that the
provisions dealing with the levy of capital gains tax must be read as a whole. Section 48 deals
with the mode of computing the capital gains. Unless the cost of acquisition is correctly
ascertainable, it is not possible to apply the provisions of section 48. Self-generated goodwill is
such a type of capital asset where it is not possible to visualise cost of acquisition. Once section
48 cannot be applied, the gains thereon cannot be brought to charge. This decision of the Su-
preme Court was applicable not only to self-generated goodwill of a business but also to other
self-generated assets like tenancy rights, stage carriage permits, loom hours etc. In order to
supersede the decision of the Supreme Court cited above, section 55 was amended. Accord-
ingly, in case of self-generated assets namely, goodwill of a business or a trademark or brand
name associated with a business or a right to manufacture, produce or process any article or
thing, or right to carry on any business, tenancy rights, stage carriage permits, or loom hours,
the cost of acquisition will be taken to be nil. However, it is significant to note that the above
amendment does not cover self-generated goodwill of a profession. So, in respect of self-gener-
ated goodwill of a profession and other self-generated assets not specifically covered by the
amended provisions of section 55, the decision of the Supreme Court in B. C. Srinivasa Setty’s
case will still apply.
(iii) Other assets - In the following cases, cost of acquisition shall not be nil, but will be deemed
to be the cost for which the previous owner of the property acquired it:
Where the capital asset became the property of the assessee—
(1) On any distribution of assets on the total or partial partition of a Hindu undivided
family.
(2) Under a gift or will.
(3) By succession, inheritance or devolution.
(4) On any distribution of assets on the liquidation of a company.
(5) Under a transfer to a revocable or an irrevocable trust.
(6) Under any such transfer referred to in sections 47(iv), (v), (vi), (via) or (viaa).
(7) Where the assessee is a Hindu undivided family, by the mode referred to in section 64(2).
(iv) Financial assets - Many times persons who own shares or other securities become entitled
to subscribe to any additional shares or securities. Further, they are also allotted addi-
tional shares or securities without any payment. Such shares or securities are referred to as
financial assets in Income-tax Act. Section 55 provides the basis for ascertaining the cost of
acquisition of such financial assets.
(1) In relation to the original financial asset on the basis of which the assessee becomes
entitled to any additional financial assets, cost of acquisition means the amount actu-
ally paid for acquiring the original financial assets.
(2) In relation to any right to renounce the said entitlement to subscribe to the financial
asset, when such a right is renounced by the assessee in favour of any person, cost of
acquisition shall be taken to be nil in the case of such assessee.
(d) the sub-division of any of the shares of the company into shares of smaller
amount, or
(e) the conversion of one kind of shares of the company into another kind.
In the above circumstances the cost of acquisition to the assessee will mean the cost of acquisi-
tion of the asset calculated with reference to the cost of acquisition of the shares or stock from
which such asset is derived.
Note:
‘Fair Market Value’ in relation to a capital asset, means—
(i) The price which the capital asset would ordinarily fetch on sale in the open market on the
relevant date; and
(ii) Where the price referred to in sub-clause (i) is not ascertainable, such price as may be
determined in accordance with the rule made under this Act.
[SEC. 2(22B)]
(vi) Where the cost for which the previous owner acquired the property cannot be ascer-
tained, the cost of acquisition to the previous owner means the fair market value on the
date on which the capital asset became the property of the previous owner.
Case Law:
The interest paid on borrowings for the acquisition of a capital asset must fall for deduction
under section 48. But, if the same sum is already the subject-matter of deduction under other
heads like those under section 57, it cannot find a place again for the purpose of computation
under section 48 - CIT v. Maithreyi Pai [1985] 152 ITR 247 (Kar.).
COST OF IMPROVEMENT [Sec 55]
When an asset is acquired, before it is sold, it is possible that certain improvements are made.
For example, leveling and fencing of land, loft or partition is constructed in building acquired,
accessories like CD player, career may be added to a car, etc. costs incurred on such improve-
ments are also deductible while computing capital gain.
(1) in relation to a capital asset being goodwill of a business or a right to manufacture, pro-
duce or process any article or thing or right to carry on any business shall be taken to be
nil; and
However, such a cost of improvement does not include any expenditure which is deductible in
computing the income chargeable under the head “Interest on securities”, “Income from house
property”, “Profits and gains of business or profession”, or “Income from other sources”.
Explanation 2 provides that the aggregate value of total assets of such undertaking or division
shall be as follows:
(i) In the case of depreciable assets: the written down value of block of assets determined in
accordance with the provisions contained in sub-item (C) of item (i) of section 43(6)(c) and
(ii) the book value for all other assets.
8.4 EXEMPTIONS
(a) Transfer of a residential house and investment in residential house [Sec. 54].
If an individual or HUF having LTCG from transfer of a residential unit makes investment to
purchase or construct a residential unit, the amount invested in the new residential unit is
allowed as a deduction from the LTCG. The new residential unit can be constructed within 3
years from the date of transfer or can be purchased one year before or two years after the date
of transfer.
To claim this deduction, the assessee, after taking into consideration the amount that he has
already invested for construction or purchase of the new residential unit upto the due date of
filing of return of income in his case, should deposit the remaining amount which he intends to
use for purchasing or constructing the new residential unit in a Capital Gains Deposit Account
on or before the due date for filing of the return and enclose proof of investment in construc-
tion or purchase and proof of making such deposit into the capital gains account along with
the return of income. Based on this he would be allowed the deduction from the LTCT for that
assessment year.
The amount which is deposited in the Capital Gains Deposit Account has to be utilised by him
within two/three years from the date of transfer for the purpose of purchase/construction of
the new residential unit. In case he fails to utilise this amount either wholly or partly for the
above purpose within this period the amount remaining unutilised would be taxed as Capital
gains in the year in which the above mentioned period is over.
The cost of the new residential unit purchased/constructed would be reduced by the amount
of deduction allowed from LTCG if the new house purchased or constructed is transferred
within a period of 3 years from its date of purchase/construction.
Case Law :
(i) Capital gains account scheme - For transfer of deposit under Capital Gains Accounts
Scheme, 1988 from Account ‘B’ to Account ‘A’, clearance of Assessing Officer is not re-
quired - Sadula Janardhan (HUF) v. State Bank of Hyderabad 286 ITR 291
(b) Transfer of Agricultural lands [Sec. 54B].
If LTCG is arising from transfer of land which is being used by the assessee for agricultural
purposes for at least 2 years prior to the date of transfer, then, the assessee can invest in pur-
chasing any other land for being used for the purpose of agriculture within 2 years from the
date of transfer of the original agricultural land and the amount invested by him for purchase
of a new agricultural land would be allowed as a deduction from the LTCG.
(i) Meaning of ‘industrial undertaking’ - The words ‘industrial undertaking’ should be un-
derstood to have been used in section 54D in a wide sense, taking in its fold any project or
business a person may undertake. Thus, the ‘running of a lodge’ can be said to be an
‘industrial undertaking’ within the meaning of section 54D - P. Alikunju M.A. Nazeer Cashew
Industries v. CIT 166 ITR 804.
d) Capital gain on transfer of capital assets not to be charged in certain cases [Sec. 54E]
(1) Where the capital gain arises from the transfer of a long-term capital asset before the 1st
day of April, 1992, (the capital asset so transferred being hereafter in this section referred
to as the original asset) and the assessee has, within a period of six months after the date of
such transfer, invested or deposited the whole or any part of the net consideration in any
specified asset (such specified asset being hereafter in this section referred to as the new
asset), the capital gain shall be dealt with in accordance with the following provisions of
this section, that is to say,—
(a) if the cost of the new asset is not less than the net consideration in respect of the
original asset, the whole of such capital gain shall not be charged under section 45;
(b) if the cost of the new asset is less than the net consideration in respect of the original
asset, so much of the capital gain as bears to the whole of the capital gain the same
proportion as the cost of acquisition of the new asset bears to the net consideration]
shall not be charged under section 45:
Provided that in a case where the original asset is transferred after the 28th day of February,
1983, the provisions of this sub-section shall not apply unless the assessee has invested or
deposited the whole or, as the case may be, any part of the net consideration in the new asset by
initially subscribing to such new asset
Provided further that in a case where the transfer of the original asset is by way of compulsory
acquisition under any law and the full amount of compensation awarded for such acquisition
is not received by the assessee on the date of such transfer, the period of six months referred to
in this sub-section shall, in relation to so much of such compensation as is not received on the
date of the transfer, be reckoned from the date immediately following the date on which such
compensation is received by the assessee or the 31st day of March, 1992, whichever is earlier
(1A) Where the assessee deposits after the 27th day of April, 1978, the whole or any part of the
net consideration in respect] of the original asset in any new asset, being a deposit referred to in
sub-clause (vi) of clause (a)of Explanation 1 below sub-section (1), the cost of such new asset
shall not be taken into account for the purposes of that sub-section unless the following condi-
tions are fulfilled, namely
(a) the assessee furnishes, along with the deposit, a declaration in writing, to the bank or the
co-operative society referred to in the said sub-clause (vi) with which such deposit is made,
to the effect that the assessee will not take any loan or advance on the security of such
deposit during a period of three years from the date on which the deposit is made;
(b) the assessee furnishes, along with the return of income for the assessment year relevant to
the previous year in which the transfer of the original asset was effected or within such
further time as may be allowed by the Assessing Officer, a copy of the declaration referred
to in clause (a) duly attested by an officer not below the rank of sub-agent, agent or man-
ager of such bank or an officer of corresponding rank of such co-operative society.
(1B) Where on the fulfilment of the conditions specified in sub-section (1A), the cost of the new
asset referred to in that sub-section is taken into account for the purposes of sub-section
(1), the assessee shall, within a period of ninety days from the expiry of the period of three
years reckoned from the date of such deposit, furnish to the Assessing Officer a certificate
from the officer referred to in clause (b) of sub-section (1A) to the effect that the assessee
has not taken any loan or advance on the security of such deposit during the said period of
three years.
(a) the issue is made by a public company formed and registered in India.
(b) the shares forming part of the issue are offered for subscription to the public.
The investment has to be made within six months from the date of the transfer of the listed
security or unit.
The equity shares should not be sold or otherwise transferred within a period of one year from
the date of their acquisition. In case they are transferred within one year the deduction allowed
in investment would be taxed in the year of such transfer as LTCG.
For the investment in the equity shares rebate u/s. 88 will not be available.
Amount of Exemption :
(a) if the cost of the specified equity shares is not less than the capital gain arising from
the transfer of the original asset, the whole of such capital gain shall not be charged under
section 45;
(b) if the cost of the specified equity shares is less than the capital gain arising from the trans-
fer of the original asset, so much of the capital gain as bears to the whole of the capital gain
the same proportion as the cost of the specified equity shares acquired bears to the whole
of the capital gain shall not be charged under section 45.
(i) Transfer asset and investment in residential income [Sec. 54F].
If an individual or a HUF having LTCG arising out of sale of capital asset other than a residen-
tial house and the assessee has, within a period of one year before or two years after the date on
which the transfer took place purchased, or has within a period of three years after that date
constructed, a residential house, the capital gain shall be dealt with in accordance with the
following provisions of this section,
(a) if the cost of the new asset is not less than the net consideration in respect of the original
asset, the whole of such capital gain shall not be charged under section 45 ;
(b) if the cost of the new asset is less than the net consideration in respect of the original asset,
so much of the capital gain as bears to the whole of the capital gain the same proportion as
the cost of the new asset bears to the net consideration, shall not be charged under section
45:
where, net consideration = full value of consideration – cost of transfer.
In this case, however, cost of the new asset is not changed. But the assessee should not own
more than one residential house in which he has invested as on the date of transfer and also, he
should not purchase/construct any other residential house for a period of 1/3 years from the
date of transfer. In case he owns more than one residential house as on the date of transfer he is
not eligible for this deduction. In case he purchases/constructs a house within 1/3 years from
the date of transfer after getting this deduction, the amount allowed as deduction would be
taxed as capital gains in the year of such purchase/construction.
Case Laws :
(i) Provision is not ultra vires the constitution - Provision of section 54F as applicable to
assessment year 2000-01 and which applies to one residential house, cannot be said to be
discriminatory and violative of fundamental rights on ground that in subsequent years
exemption under section 54F was extended to two residential houses - Abdul Gaffar v.
ITO 154 Taxman 416
The cost of acquisition of the new asset is reduced by the amount of exemption allowed from
capital gains if the new asset is transferred within a period of three year of its purchase or
construction for the purpose of computation of capital gains in respect of the transfer of the
new asset.
(k) Extension of time limit available for acquiring new asset
To claim exemption u/s 54, 54B, 54D, 54EC and 54F as the case may be or under capital gains
scheme, the period of investment will begin from the date when the compensation is received.
Where the compensation is received in instalment, the period of investment in the specified
asset/deposit in capital gains scheme will be considered for each instalment separately. If en-
hanced compensation is received, the period of investment shall be reckoned from the date
when the enhanced compensation is received.
Exemption of capital gains on transfer of assets in cases of shifting of industrial undertak-
ing from urban area to any SEZ
The deduction is available to all categories of tax payers for of shifting of industrial undertak-
ing from urban area to any Special Economic Zone. The conditions for claiming the deduction
are as under :
(i) the transfer is effected in the course of or in consequence of shifting the undertaking from
an urban area to any Special Economic Zone.
(ii) asset transferred is machinery, plant, building, land or any right in building or land used
for the business of industrial undertaking in an urban area.
(iii) the capital gain is utilised within one year before or 3 years after the date of transfer (a) for
purchasing new machinery or plant or building or land for tax payer’s business in the
SEZ; or (b) shifting of the old undertaking and its establishment to the SEZ; or (c) incur-
ring of expenditure on such other purposes as specified in the scheme notified for the
purpose.
Deduction from LTCG is given to the extent of the outlay for aforesaid asset and activities.
The unutilized amount of capital gains as on the date on which return of income for the rel-
evant Assessment year is due; must be deposited in a Capital Gains Deposit account and fail-
ure to utilize the amount within the stipulated period it shall be chargeable as capital gains
(long/short term).
The cost of acquisition of the new asset is reduced by the amount of exemption allowed from
capital gains if the new asset is transferred within a period of three year of its purchase or
construction for the purpose of computation of capital gains in respect of the transfer of the
new asset.
(h) Extension of time limit available for acquiring new asset
To claim exemption u/s 54, 54B, 54D, 54EC and 54F as the case may be or under capital gains
scheme, the period of investment will begin from the date when the compensation is received.
Where the compensation is received in installment, the period of investment in the specified
asset/deposit in capital gains scheme will be considered for each installment separately. If
enhanced compensation is received, the period of investment shall be reckoned from the date
when the enhanced compensation is received.
(i) Investment Not Made before Due Date for Filing of the Return of Income:
The amount of the capital gain which is not invested by the assessee for the purpose stated in
Section 54, 54B, 54D, 54F, 54G and 54GA before the date of furnishing the return of income
under section 139, the following provisions apply:
(i) The amount intended to be applied under the exemption section shall be deposited by
him before furnishing such return, such deposit being made in any case not later than the
due date applicable in the case of the assessee for furnishing the return of income under
sub-section (1) of section 139, in an account in any such bank or institution as may be
specified in, and
(ii) utilised in accordance with, any scheme which the Central Government may, by
notification in the Official Gazette, frame in this behalf and
(iii) such return shall be accompanied by proof of such deposit; and, for the purposes of sub-
section (1), the amount, if any, already utilised by the assessee for the purchase or con-
struction of the new asset together with the amount so deposited shall be deemed to be the
cost of the new asset :
It is further provided that if the amount deposited as aforesaid is not utilised wholly or partly