TAXATION- Concept Book

Less: Depreciation u/s 32 10% of Rs.30 lakh, being ( Rs.50 lakh – Rs.30 lakh + Rs.10 lakh) 3 28 Income chargeable under “Profits and gains from business or profession” Computation of income/loss from specified business u/s 35AD Particulars Food Sugar Total Grains Profits from the specified business of (A) setting up a warehousing facility (before 16 14 30 providing deduction u/s 35A Less: Deduction u/s 35ADD) Capital expenditure incurred prior to 1.4.2019 (i.e., prior to commencement of business) and capitalized in the books (B) of account as on 1.4.2019 (excluding the 30 20 50 expenditure incurred on acquisition of land) = Rs.30 lakh ( Rs.80 lakh – Rs.50 lakh) and Rs.20 lakh ( Rs.60 lakh– Rs.40 lakh) (C) Capital expenditure incurred during 20 15 35 the P.Y.2019-20 (D) Total capital expenditure (B + C) 50 35 85 (E) Deduction u/s 35AD 150% of capital expenditure (food grains) 75 100% of capital expenditure (sugar) 35 CFP Level 2 - Module 2 – Taxation - India Page 295

Total deduction u/s 35AD for A.Y. 20-21 75 35 110 -21 -80 Loss from the specified business of setting up and operating a warehousing facility (F) (after providing for deduction u/s 35AD) to be carried forward as per section 73A (A-E) -59 Notes: (1) Weighted deduction@150% of the capital expenditure is available u/s 35AD for A.Y.2020-21 in respect of specified business of setting up and operating a warehousing facility for storage of agricultural produce which commences operation on or after 01.04.2019. Food grains constitute agricultural produce and therefore, the capital expenditure incurred for setting up a warehousing facility for storage of food grains is eligible for weighted deduction@150% u/s 35AD. (2) Deduction of 100% of the capital expenditure is available u/s 35AD for A.Y.2020-21 in respect of specified business of setting up and operating a warehousing facility for storage of sugar, where operations are commenced on or after 01.04.2019. (3) However, since setting up and operating a warehousing facility for storage of edible oils is not a specified business, Mr. A is not eligible for deduction u/s 35AD in respect of capital expenditure incurred in respect of such business. (4) However, Mr. A can claim depreciation @ 10% u/s 32 in respect of the capital expenditure incurred on buildings. It is presumed that the buildings were put to use for more than 180 days during the P.Y.2019-20. (5) Loss from a specified business can be set-off only against profits from another specified business. Therefore, the loss of Rs.80 lakh from the specified businesses of setting up and operating a warehousing facility for storage of food grains and sugar cannot be set- off against the profits of Rs.28 lakh from the business of setting and operating a warehousing facility for storage of edible oils, since the same is not a specified business. Such loss can, however, be carried forward indefinitely for set-off against profits of the same or any other specified business. CFP Level 2 - Module 2 – Taxation - India Page 296

(9) Investment in New plant or Machinery – Section 32AC 1. Assessee – Company 2. Business – manufacture/production of any article or thing 3. Acquires & installs new assets during PY 2015-14 & PY 2016-17 aggregating >Rs.100 crores w.e.f. Py 16-17 : 25 crore 4. Deduction u/h PGBP = 15% of actual cost of new assets (one time deduction) 5. If investment in new assets in PY 2015-14 >Rs.100 crores, then deduction in PY 2015-14 = 15% of investment made in PY 2015-14, and deduction in PY 2016-17 = 15% of investment made in PY 2016-17. 6. If investment in new assets in PY 2015-14 ≤ Rs.100 crores but investment in PY 2015-14 + PY 2016-17>Rs.100 crores, then no deduction in PY 2015-14, but deduction in PY 2016-17 = 15% of investment in PY 2015-14 + PY 2016-17. 7. Acquires & installs new assets during the previous year aggregating >Rs.25 crores, then there shall be deduction u/h PGBP = 15% of actual cost of new assets (one time deduction) in that previous year. 8. No deduction is available from PY 2017-18 onwards. i.e. point no. 7 is applicable for 3 previous years only viz.; PY 2016-17 to PY 2017-18. 9. Company claiming benefit of section 32AC in PY 2016-17 because of old provision cannot claim benefit of section 32AC under new provision in PY 2016-17, but can claim benefit in remaining two years. 10. If any asset is sold within next 5 years from the date of its installation, then deduction on account of such asset shall be deemed to be income of the PY u/h PGBP in which asset is sold. Gains, if any, on sale of such asset shall be taxable separately. 11. Deduction u/s 32AC shall be in addition to depreciation (or additional depreciation). Further this deduction shall not be counted for the purpose of computing opening WDV of next year. 12. New asset means any new plant & machinery, except: (a) second hand P&M (b) installed in office premises/residential accommodation/guest house (c) office appliances including computers or computer software (d) vehicle, ship or aircraft CFP Level 2 - Module 2 – Taxation - India Page 297

2.3.4. Tax Shelter and Tax Holidays Tax Shelter After receiving much attention in the news in recent years, the term \"tax shelter\" has a negative connotation relating to deceptive and illegal schemes to evade income tax. However, this is not always the case. A tax shelter is also any legal strategy you employ to reduce the amount of income taxes you owe. Sheltering your Income with Deductions Claiming deductions is a perfectly legal way to reduce the amount of income tax you pay to the Irs. You can easily accomplish this tax shelter by choosing to spend your income on expenses that can lead to a deduction. For example, it’s perfectly legal and reasonable to pay college tuition expenses with a student loan rather than a credit card for no reason other than to take advantage of the student loan interest deduction. If you prefer to make a large number of charitable donations during the year with the sole purpose of reducing your income tax bill, the IRS (Internal / Indian Revenue Service) will never challenge your charitable deduction as long as you satisfy all requirements of the deduction. Tax Shelters using Investments In addition to claiming deductions, you can also shelter income from tax by choosing investments that provide the maximum tax savings. The IRS encourages taxpayers to save for retirement by allowing them to deduct a certain amount of contributions to a traditional IRA (Individual Retirement account). In addition, you achieve tax deferral on all investment income and gains in the IRA since the IRS will not impose an income tax on those earnings until you retire and start making withdrawals. Illegal Tax Shelters When evaluating an investment, the IRS encourages you to consider the doctrine of \"substance over form.\" What this means is that if a tax strategy is illegal, it doesn’t become legal just because you call it something else. CFP Level 2 - Module 2 – Taxation - India Page 298

For example, the federal tax law prohibits you from assigning income you earn to another taxpayer who is subject to lower tax rates. If you earn $200,000 during the year as an independent contractor, you are responsible for paying all of the income tax on it. Setting up a corporation to receive your income and adding a family member to the payroll doesn’t transform your strategy into a legal tax shelter. If you are solely responsible for earning the income, then even with a corporation, you should be solely receiving a salary. Effectively, there is no substance to adding your family member to the payroll. However, many taxpayers enter into these types of transactions only because it appears easier to hide it from the I Rs. Penalties for Illegal Tax Shelters The penalties for entering into illegal tax shelters are clear, but also severe. The IRS treats illegal tax shelters as fraudulent activity and can charge you a penalty that is 75 percent of the tax you underpay as a result of your illegal tax scheme. In addition, taxpayers run the risk of criminal prosecution and the possibility of a prison sentence. Tax Holidays A temporary period, during which time the government removes certain taxes (usually sales tax) on certain items, in order to encourage the consumption or purchase of these items. The most common application of this is a tax-free weekend, which most states hold shortly before school begins in the fall, during which time sales tax is removed on clothing, school supplies, and/or other similar items. Not all areas engage in tax holidays; it is up to the government of that area. Fiscal policy measure often found in developing countries. A tax holiday offers a period of exemption from income tax for new industries in order to develop or diversify domestic industries. A government incentive program that offers a tax reduction or elimination to businesses. Tax holidays are often used to reduce sales taxes by local governments, but they are also commonly used by governments in developing countries to help stimulate foreign investment. Used in the hopes of increasing the gross domestic product (GDP) in developing countries, tax holidays are a way in which governments attract foreign investors. Tax holidays are often put in place in particular industries to help promote growth. CFP Level 2 - Module 2 – Taxation - India Page 299

SUMMARY Depreciation – Section 32 1. Block of assets method. 2. Depreciation on WDV. WDV = Opening WDV + purchases – actual sales price. 3. Depreciation rates – Building 10%, Furniture 10%, P&M 15%. No day to day calculations. 4. If asset put to use < 180 days, then half depreciation. 5. If assessee’s business is of manufacturing/production, then additional depreciation @ 20% on new P&M installed in factory premises. 6. If actual sales price > opening WDV + purchases; or whole block is transferred, then STCG/STCL as per section 50. Scientific Research – Section 35 1. Revenue expenditure or capital expenditure (except land) for scientific research related to his business allowed as expense equal to 100%. 2. Donations to various research organisations allowed as expense varying from 100% to 150% of donations made. Other Expenses Allowed 1. Employees’ health insurance premium (except in cash) 2. Bad debts (provision for bad debts not allowed. Recovery of bad debts taxable u/h PGBP. 3. Interest on borrowed capital 4. Any expense in the nature of revenue Expenses Not Allowed 1. Section 40(a)(ia) – 30% of any expense on which TDS is not deducted on or before 31/3 or after deduction not deposited on or before due date of ROI. 2. Income-tax & wealth-tax. 3. Section 40A(2) – payment of expense to relatives more than reasonable – excess shall only be disallowed CFP Level 2 - Module 2 – Taxation - India Page 300

4. Section 40A(3) – payment in cash in a single day >Rs.10,000. Whole expense shall be disallowed 5. Section 43B – Any, interest of banks, bonus or commission or leave salary to employees allowed as an expense only if paid on or before due date of ROI. Other Provisions 1. Method of accounting – mercantile or cash 2. Section 44AD – If turnover does not exceedsRs.2 crore, then Income u/h PGBP = 8% of total turnover. 6%in case of payment received in electronic mode of cheque/DD/ 3. Section 44AE –transportation business – vehicles ≤ 10. Income u/h PGBP = Rs.7,500pm per vehicle. 4. Section 44AB – audit required if business turnover >Rs.2 crore, profession receipts >Rs.50 lacs, or section 44AD/44AE is not followed. 5. Section 35AD – in case of specified businesses like cold chain facility, warehousing facility, deduction @ 100% or 150% of capital expenses allowed. But depreciation shall not be allowed in that case. 6. Section 32AC – if investment in new P&M in factory premises by a company doing manufacturing/production business is >Rs.100 crores in PY 2015-14 + PY 2016-17 or is >Rs.25 crores in a year, then 15% investment allowance is provided as business expense. CFP Level 2 - Module 2 – Taxation - India Page 301

PRACTICE QUESTIONS Question-1 A newly qualified Chartered Accountant Mr. Dhaval, commenced practice and has acquired the following assets in his office during F.Y. 2019-20 at the cost shown against each item. Calculate the amount of depreciation that can be claimed from his professional income for A.Y. 2020-21: S. No. Description Date of Date when Amount ( Rs.) acquisition put to use 1 Computer 27 Sept., 19 2 Oct., 19 35,000 2 Computer software 2 Oct., 19 4 Oct., 19 8,500 3 Computer printer 2 Oct., 19 3 Oct., 19 12,500 4 Books (of which books 1 Apr., 19 1 Apr., 19 13,000 being annual publications are of Rs.12,000) 5 Officefurniture(Acquired 1 Apr., 19 1 Apr., 19 3,00,000 from practising C.A.) 26 Sep., 19 4 Oct., 19 43,000 6 Laptop 1 Apr., 19 2,500 No 7 Fire extinguisher instance arose to use during FY 2019- 20 8 Purchased practising CA's office in April 18 who had run it for 4 years, for Rs.5 lacs which includes Rs.2 lacs for goodwill and Rs.3 lacs for cost of furniture (included in 5 above) Note: Depreciation is to be provided at the applicable rates. Question-2 Mr. B. A. Patel, a non-resident, operates an aircraft between London to Ahmadabad. For the Financial year ended on 31st March, 2020, he received the amounts as under: CFP Level 2 - Module 2 – Taxation - India Page 302

(I) For carrying passengers from Ahmadabad Rs.50 lacs. (ii) For carrying passengers from London Rs.75 lacs received in India. (iii) For carrying of goods from Ahmadabad Rs.25 lacs. The total expenditure incurred by Mr. B. A. Patel for the purposes of the business for the financial year 2019-20 was Rs.1.4 crores. Compute the income of Mr. B. A. Patel under the head “Profits and Gains from business or profession” for the financial year ended on 31st March 2018relevant to assessment year 2020-21. Question-3 Gopi chand Industries furnishes you the following information: ( Rs.) 01.04.2018 Block I Plant and machinery (consisting of 10 looms) 5,00,000 Rate of depreciation 15% WDV Block II Buildings (consisting of 3 buildings) 12,50,000 Rate of depreciation 10% WDV Acquired on 5.07.19 5 looms for 4,00,000 Sold on 7-12-19 15 looms for 10,00,000 Acquired on 10-01-20 2 looms for 3,00,000 CFP Level 2 - Module 2 – Taxation - India Page 303

Compute depreciation claim for the Assessment year 2020-21. Question-4 Dr. Krishna furnishes you the following information: Income and Expenditure Account for the year ended 31st March 2020 To Medicines consumed Rs. Rs. To Staff salary 2,42,000 By Fee receipts 8,47,500 To Hospital consumables 1,65,000 By Rent 27,000 Indian To Rent paid By Dividend from To Administrative expenses 47,500 companies 9,000 To Net Income 60,000 1,23,000 8,83,500 2,46,000 8,83,500 (i) Rent paid includes rent for his residential accommodation of Rs.30,000 (paid by cheque). (ii) Hospital equipments (eligible for depreciation @ 15%) 01.04.2019 Opening WDV Rs.5,00,000 07.12.2019 Acquired (Cost) Rs.2,00,000 (iii) Medicines consumed include medicines (cost) Rs.10,000 used for Dr. Krishna’s family. (iv) Rent received – relates to a property situated at Mysore (Gross Annual Value).The municipal tax of Rs.2,000 paid in December, 2019 has been included in the “administrative expenses”. (v) He received Rs.5,000 per month as salary from Full Cure Hospital. This has not been included in the “fee receipts” credited to income and expenditure account. (vi) He sold a vacant site in July, 2019 for Rs.5,29,190. It was inherited by him from his father in January, 2009. The site was acquired by his father in December, 2008 for Rs.1,63,767. Compute Dr. Krishna’s taxable income for the year ended 31.03.2020. CFP Level 2 - Module 2 – Taxation - India Page 304

Question-5 From the following particulars furnished by Kiran for the previous year ending 31.03.2020 compute the taxable income for assessment year 2020-2021. (i) He owns a house property at a metro city. The FRV pa is Rs.27,000 and the municipal value Rs.24,000. (ii) The house was let out from 1.4.2019 to 31.8.2019 at a monthly rent of Rs.2,100. From 1.9.2019 Kiran occupies for his residence (self). (iii) Expenditure incurred on property and paid: (a) Municipal tax Rs.4,000 (b) Fire insurance Rs.2,500 (c) Land revenue Rs.4,600 (d) Repairs Rs.1,000 (iv) Interest paid on borrowings for construction: (a) for the year Rs.21,600 (b) Proportionate pre-construction interest Rs.12,960. (v) Income from firm (PF A/c) as partner Salary 25,000 Interest on capital 20,000 Share income 35,000 Question-6 Kishore Industries owned six machines which were in use in its business in March, 2019. Depreciation on these machines was available as “plant”. The written down value of these machines at the end of previous year relevant to assessment year 2019-20 was Rs.6,50,000. A new plant was bought for Rs.6,50,000 on 30th November, 2019. Three of the old machines were sold on 10th June, 2019 for Rs.9,00,000. Required: (i) Compute the claim to depreciation for assessment year 2020-2021; (ii) Capital gains liable to tax for the same assessment year; (iii) If Kishore Industries had sold the three machines in June, 2019 for Rs.14,00,000, will there be any difference in your above working? Explain. CFP Level 2 - Module 2 – Taxation - India Page 305

ANSWERS Answer-1 Computation of depreciation allowable for A.Y. 2020-21 Asset Rate Depreciation 10% 30,000 Block 1 Furniture Block 2 Plant (Computer, computer software, laptop & 40% 29,300 Block 3 printer) 40% 400 Plant (Books) Block 4 Plant (Books) 40% 4,800 Block 5 Plant (Fire Extinguisher) 15% 375 Total depreciation 64,875 allowable Rs. Notes: 30,000 1. Computation of depreciation Block of Assets Block 1: Furniture – rate 10% Put to use for more than 180 days [ Rs.3,00,000@10%] CFP Level 2 - Module 2 – Taxation - India Page 306

Block 2: Plant – rate 40% 14,000 Computer (put to use for more than 180 days) [35,000 @ 40%] Laptop (put to use for less than 180 days) [43,000 @ 20%] 8,600 Computer printer (Put to use for 180 days) [12,500 @40%] 5,000 Computer Software (put to use for less than 180 days) [8,500 @ 1,700 20%] 29,300 400 Block 3: Plant – Rate 40% Books (other than annual publications) (Put to use for more than 4,800 180 days) [1,000 @ 40%] 375 Block 4: Plant – Rate 40% Books (being annual publications) put to use for more than 180 days [12,000 @40%] Block 5: Plant – Rate 15% Fire extinguisher [2,500 @ 15%] Answer-2 U/s 44BBA, in case of an assessee, being a non-resident, engaged in the business of operation of aircraft, a sum equal to 5% of the aggregate of the following amounts shall be deemed to be his business income: (a) the amount paid or payable, whether in or out of India, to the assessee on account of carriage of passengers, goods etc. from any place in India; and (b) the amount received or deemed to be received in India by the assessee on account of carriage of passengers, goods etc. from any place outside India. Hence, the income of Mr. B. A. Patel chargeable to tax in India under the head “Profits and Gains of business or profession” is determined as under: CFP Level 2 - Module 2 – Taxation - India Page 307

Particulars Rs. For carrying passengers from Ahmadabad 50,00,000 For carrying passengers from London, amount received in India 75,00,000 For carrying goods from Ahmadabad 25,00,000 1,50,00,000 Total: Hence, income from business computed on presumptive basis as per section 44BBA is Rs.7,50,000, being 5% of Rs.1,50,00,000. Note: No deduction is allowable in respect of any expenditure incurred for the purpose of the business. Answer-3 Computation of depreciation for Gopi chand Industries for A.Y.2020-21 Particulars Rs. Rs. Block 1: Plant & machinery (Rate of depreciation – 15%) WDV as on 1st April (10 looms) 5,00,000 Add: Additions during the year: 5 looms acquired on 5th July 4,00,000 2 looms acquired on 10th January 3,00,000 12,00,000 Less: Assets sold during the year 15 looms sold on 7th December 10,00,000 W.D.V. as on 31st March (2 looms) 2,00,000 Depreciation on Rs.2 lakhs @ 15% (limited to 50%) 15,000 Additional depreciation (See Note 2) 20,000 Block II: Buildings (Rate of depreciation – 10%) WDV as on 1st April (3 buildings) 12,50,000 Depreciation on Rs.12,50,000 @ 10% 1,25,000 Total depreciation for the year 1,60,000 CFP Level 2 - Module 2 – Taxation - India Page 308

Notes: 1. Closing balance of Block 1: Plant and machinery represents the looms acquired on 10th January. These looms have been put to use for less than 180 days during the previous year, and therefore, only 50% of normal depreciation is permissible. 2. Additional depreciation @ 20% of the cost of plant and machinery is available u/s 32(1)(iia). In this case, the assessee is eligible for additional depreciation if it is engaged in the business of manufacture or production of any article or thing and satisfies other conditions contained in the provision. The quantum of additional depreciation allowable would be: Rs.2,00,000 x 20% x 50% (Put to use for less than 180 days) = Rs.20,000 Answer-4 Computation of taxable income of Dr. Krishna for the previous year ended 31.03.2020. Particulars Rs. Rs. Income from Salaries 60,000 Salary received @ Rs.5,000 per month 27,000 Income from house property 2,000 17,500 Gross annual value 25,000 Less: Municipal tax 7,500 Net annual value Less: Deduction u/s 24 @ 30% Income from business or profession Net income as per income & expenditure account 2,46,000 Add: Rent paid to residence 30,000 Medicines consumed – personal use 10,000 Municipal tax relating to let out property included in 2,000 administrative expenses – disallowed 2,88,000 90,000 Depreciation (See working note 2) 27,000 Rent credited to income & expenditure account Dividend from Indian companies [Exempt u/s.10(34)] 9,000 1,62,000 CFP Level 2 - Module 2 – Taxation - India Page 309

Capital Gains (Long term capital gains) 5,29,190 1,83,726 Sale consideration 3,45,464 4,23,226 Less: Indexed cost acquisition [1,63,767 x 289/137] Gross Total income Less: Deduction under chapter VIA – Section 80GG U/s 80GG, rent paid would be allowable as a deduction to the extent of the least of the following 25% of total income = 25% of Rs.2,39,500 59,875 Excess of rent paid over 10% of total income (30,000 - 23,950) 6,050 Rs.5,000 per month 60,000 Least of the above Total Income 6,050 Total Income (R/o) 4,17,176 4,17,180 Notes: 1. Deduction u/s 80GG is to be made from Gross Total Income. Gross Total Income as defined u/s 80B(5) means the total income computed in accordance with the provisions of this Act, before making any deduction under Chapter VI-A.U/s 112(2), Long term capital gains have to be reduced from Gross Total Income and Chapter VI-A deductions should be allowed as if the Gross Total income so reduced were the Gross Total Income of the assessee. Therefore, in this case, for the purpose of allowing deduction u/s 80GG, Gross Total Income = 4,43,546 – 2,04,046 = 2,39,500. 2. Depreciation on plant & machinery CFP Level 2 - Module 2 – Taxation - India Page 310

Rs. On opening WDV of Rs.5,00,000 @ 15% 75,000 On equipment acquired Rs.2,00,000 @ 15% (50% thereon, since acquired in December) 15,000 90,000 3. Since the property was acquired by Dr. Krishna through inheritance, the cost of acquisition to him will be the cost to the previous owner. However, indexation will be from the year 2008-09. 4. It is assumed that Krishna resides outside Mysore. Hence, rent paid for his residence is eligible for deduction u/s 80GG.If he remains in Mysore where he owns a property (let out) then he is not eligible for deduction u/s 80GG towards rent paid. Also, solution can be prepared without allowing deduction u/s 80GG. Answer-5 Computation of total income Income from house property (Schedule A) (18,460) Income from business (schedule B) 45,000 Total income 26,540 Schedule ‘A’ - Income from house property: 24,000 Annual value 27,000 Municipal value 10,500 Fair rent Actual rent (2100 X 5) Since the house property was let out for part of the year and self- occupied for part of the year, actual rent or fair rent, whichever is CFP Level 2 - Module 2 – Taxation - India Page 311

higher is taken as annual value. 6,900 27,000 Less: Municipal tax paid 21,600 4,000 Balance 12,960 23,000 Less: Deductions u/s 24 @ 30% 41,460 Interest on borrowed capital (18,460) Pre-construction period paid during the year Income from house property Schedule ‘B’ - Income from business (partner in Firm) 25,000 Salary income from the firm (Taxable u/s 28 of the Act) 20,000 Interest income from the firm (Taxable u/s 28 of the Act) Share income (exempt u/s10 of the Act) Nil 45,000 Answer-6 Calculation of depreciation and capital gains in the hands of M/s. Kishore Industries: (i) Calculation of depreciation Depreciation is admissible on the basis of block of assets. Therefore to ascertain the amount of depreciation, the written down value and rate of depreciation should be ascertained. Written down value arrived at: 6,50,000 WDV as on March 31, 2019 97,500 Depreciation for AY 2019-20 @15% 5,52,500 Opening written down value of the block as on April 1, 2019 6,50,000 Add: Additions during the year CFP Level 2 - Module 2 – Taxation - India Page 312

Block after additions 12,02,500 Deduct: Sale consideration of 3 machines 9,00,000 Written down value of block at the end of the year 3,02,500 The asset in the given case shall fall within the block of asset “Plant”. Hence depreciation shall be allowed @ 15% for the assessment year 2020-21. The depreciation has to be calculated on the block of Rs.3,02,500 @ ½ of 15% as the asset entered into the block was purchased in the month of November and was used for less than 180 days ( Rs.3,02,500 X 15%) X 50% = Rs.45,375 (ii) There is no capital gain as per the provisions of Section 50(1) of the Act, when the written down value of the block was not wiped out or not reduced to zero and there still remains value in the block on which depreciation has to be charged in the ensuing assessment year. Though the acquisition of the new asset took place after the sale of the old machinery which might result in a temporary surplus, calculations are to be made only at the end of previous year. (iii) If the sale consideration of three machines were Rs.14.00 lakhs, there shall arise short term capital gain as per the provisions of Section 50(2) of the Act, since the written down value of the block ceased to exist on which depreciation can be charged, and hence (a) there would be no depreciation chargeable for the year and (b) there would be short term capital gain as shown hereunder: Written down value of block, after additions as shown above 12,02,500 Less: Sale consideration 14,00,000 Short term capital gain 1,97,500 Note: The issue of additional depreciation has not been considered in the above working. CFP Level 2 - Module 2 – Taxation - India Page 313

Sub-Section–2.4: Capital Gains Learning Objectives After studying this unit, you would be able to understand –  what is the scope of income chargeable under this head  the year in which the capital gains is chargeable to tax  which assets are “capital assets” for the purposes of chargeability under this head  the meaning of short-term capital asset and long-term capital asset  how to compute the period of holding for determining whether an asset is a short-term capital asset or long-term capital asset  the meaning of transfer for the purpose of capital gains  which are the transactions not regarded as transfer  the mode of computation of capital gains  when cost to previous owner is to be taken as cost of acquisition  how to compute capital gains in case of slump sale  what are the exemptions available in respect of capital gains  what is the tax treatment of short-term and long-term capital gains in respect of sale of equity shares/ units of an equity oriented fund  what is the rate of tax on long-term capital gains 2.4.1. Nature of Capital Gain (1) Capital Gains (Charging Section) – Section 45(1) Capital Gains head shall be applicable only if following two conditions have been fulfilled: (a) There is a capital asset, and (b) There is a transfer. If above said conditions are fulfilled, then capital gains shall be taxable in the year in which transfer took place. Date of receipt of money shall have no relevance. Exceptions: This provision is subject to some exceptions, where capital gains are chargeable in the year in which consideration is actually received by the assessee. e.g. (a) Compulsory acquisition CFP Level 2 - Module 2 – Taxation - India Page 314

(b) Insurance claim (c) Conversion of capital asset into stock-in-trade (d) Liquidation of company (2) Capital Asset – Section 2 (14) “Capital asset” means  property of any kind  held by an assessee,  whether or not connected with his business or profession,  but does not include – (i) stock-in-trade; (ii) personal effects, (movable property held for personal use), but excludes - (a) jewellery; (b) archaeological collections; (c) drawings; (d) paintings; (e) sculptures; or (f) any work of art. ANALYSIS 1. House property for personal residence is a capital asset, being immovable property. 2. Jewellery for personal use is not a personal effect and hence a capital asset. (iii) Rural agricultural land in India ANALYSIS Distance shall be measured aerially. Municipality Population Municipality itself – Area adjoining municipality urban/rural which shall be treated as urban < 10,000 Rural 0 kms = 10,000 Urban 0 kms > 10,000 ≤ 1,00,000 Urban 2 kms > 1,00,000 ≤ 10,00,000 Urban 6 kms > 10,00,000 Urban 8 kms CFP Level 2 - Module 2 – Taxation - India Page 315

o or any securities held (whether as capital asset or stock-in-trade) by a Foreign Institutional Investor (also called Foreign Portfolio Investor) o 6 ½ % gold bonds, 1977, 7% Gold bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government. (Not exists now) o Special Bearer Bonds,1991, issued by the Central Government.(Not exist now) o Gold Deposit Bonds issued under the Gold Deposit Scheme,1999 or deposit certificates issued under Gold Monetisation Scheme,2015 notified by the Central Government (3) Types of Capital Asset – Section 2(42A) Long-term Capital Asset: If a capital asset is held by the assessee for more than 36 months (excluding the date of transfer), then the same shall be long-term capital asset. (duration for which capital asset is held by the assessee is also called period of holding) In case of listed securities and units of an equity oriented fund, if period of holding is more than 12 months, then same shall become long-term capital asset. In case of unlisted shares and immovable property if period of holing is more than 24 months, it is LTCA. Short-term Capital Asset: Capital assets other than long-term capital assets are short-term capital assets. Illustration-1 Determine whether following are long-term capital assets or short-term capital assets: Asset DoP DoT PoH LTCA/STCA Land 30.08.2017 12.01.2020 Building 15.09.2017 16.09.2019 02Y 03M 13D LTCA Building held by a real estate agent 12.05.1999 03.04.2019 02Y 00M 01D LTCA Listed equity shares 02.06.2017 11.12.2019 Not a capital asset 02Y 06M 09D LTCA CFP Level 2 - Module 2 – Taxation - India Page 316

Jewellery 20.02.2017 20.02.2020 03Y 00M 00D STCA Unlisted Shares 21.1.17 25.4.19 02Y 00M 4D LTCA Taxability of Listed Shares Particulars Listed Shares and unit of Equity Mutual fund Holding Period to qualify for Transferred in Physical long term Transferred in Demat form Form Method of Computation Tax on long term capital Gain More than 12 months More than 12 months If STT paid at the time of buy FIFO method and sale Specific Identification Method Any other case 10% on amount of Capital Tax on Short term capital gain gains exceeding Rs.1 lakh If STT is paid at the time of transfer of shares 20% with Indexation or Any other case 20% with Indexation or 10% 10% without indexation, without indexation, whichever is beneficial whichever is beneficial 15% As per Slab As per Slab Tax on Short term capital gain 15% If STT is paid at the time of transfer of shares Unlisted Shares CFP Level 2 - Module 2 – Taxation - India Page 317

In case of unlisted shares the period of holding is 24 months for long term capital gain. Tax rate is 20% after indexation or 10 % without indexation. Short term capital gains are taxed at slab rate. For nonresident tax rate for LTCG is 10% without indexation and as per slab for STCG. Taxability of Bonds and Debentures Particulars Listed Bonds Unlisted Bonds POH for LTCG 12 months 36 months Tax Rate LTCG-10% flat, STCG-Slab LTCG- Flat 20%, STCG-Slab rate rate Taxability of Mutual funds Concept of Grandfathering The grandfathered concept implies that all the gains on mutual funds/ equity until January 31 will be exempt from taxation. This only means that the income tax will not be implied with retrospective effect, but with prospective effect. The income, accruing on the long term capital gains (LTCG) on listed equities/mutual funds has been grandfathered for the residents, and for the non-resident assesses. The grandfathering clause exemption will also cover foreign institutional investors (FIIs). Any gains prior to January 31 are grandfathered. This means the capital gains will be zero if the sale price of equity/ mutual funds is more than the cost of acquisition but less than the value on January 31. CFP Level 2 - Module 2 – Taxation - India Page 318

The concept of grandfathering in the case of LTCG on sale of equity investments works as follows A method of determining the Cost of Acquisition (COA) of such investments has been specifically laid down as per the COA of such investments shall be deemed to be the higher of: A. The actual COA of such investments; and B. The lower of- 1. Fair Market Value (‘FMV’) of such investments; and 2. The Full Value of Consideration received or accruing as a result of the transfer of the capital asset i.e. the Sale Price Further, the FMV would be the highest price quoted on the recognised stock exchange on 31 January 2018. In case there is no trading of the said asset in such stock exchange, the highest price on a day immediately preceding 31 January 2018 shall be considered to be the FMV. In effect, the taxpayer can claim the highest price quoted on the recognised stock exchange on 31 January 2018 as the COA and claim the deduction for the same. Example 1 Mr X bought equity shares on 15/Dec/2016 for Rs. 10,000. FMV of the shares was Rs. 12,000 as on 31/Jan/18. He sold the shares on 10/May/2018 for Rs. 15,000. What will be the long-term capital gain/ loss? Cost of Acquisition (COA) Higher of – Original COA i.e. Rs. 10,000, and Lower of – FMV on 31.1.18 i.e. Rs. 12,000, and Sale Price i.e. Rs. 15,000 Hence, COA = Higher of (Rs. 10,000 or Rs. 12,000) = Rs. 12,000 Capital Gain/ (Loss) Sale Price – Cost of Acquisition = Rs. 15,000 – Rs. 12,000 = Rs. 3,000 CFP Level 2 - Module 2 – Taxation - India Page 319

Asset Duration of the Long Term Tax Rate Long Term Asset Short Term Immovable More than 2 20.8% with Property e.g. Short Term year Income Tax Indexation Slab rate House Less than 2 year More than 3 property year Income Tax 20.8% with Movable Less than 3 year Slab rate Indexation Property e.g. Gold/Jewellery 2.4.2 Computation of Capital Gains (1) Mode of Computation – Section 48 Short-term Capital Gains– taxable at normal rates of tax Rs. Rs. Particulars xxx xxx xxx Full Value of Consideration (i.e. Sale Consideration) xxx xxxx Less: Expenditure incurred in connection with such transfer Net Consideration (or Net Sale Consideration) xxxx Less: Cost of Acquisition (i.e. CoA) xxxx Cost of Improvement (i.e. CoI) Rs. Short-term capital gains/loss xxx xxx Long-term Capital Gains– taxable at 20% flat rate of tax for all assessees xxxx Particulars Rs. xxxx Full Value of Consideration (i.e. Sale Consideration) xxxx Less: Expenditure incurred in connection with such transfer xxx Net Consideration (or Net Sale Consideration) xxx Page 320 Less: Indexed Cost of Acquisition (i.e. ICoA) Indexed Cost of Improvement (i.e. ICoI) Short-term capital gains/loss CFP Level 2 - Module 2 – Taxation - India

ICoA = CII of the year of transfer CoA x CII of year in which asset was first held by the assessee or FY 2001-02, whichever is later ICoI = CII of the year of transfer CoI x CII of the year in which the improvement to the asset took place Note: There shall be no indexation in case of bonds or debentures, except capital indexed bonds issued by the Government. (2) Cost Inflation Index FY CII FY CII 2001-02 100 2010-11 167 2002-03 105 2011-12 184 2003-04 109 2012-13 200 2004-05 113 2013-14 220 2005-06 117 2014-15 240 2006-07 122 2015-16 254 2007-08 129 2016-17 264 2008-09 137 2017-18 272 2009-10 148 2018-19 280 2019-20 289 Illustration-2 Compute capital gains in the following cases: Asset DoA CoA DoI CoI DoI CoI DoS SP Exp. on Tfr. Land 15.6.16 2,00,000 12.4.16 1,00,000 - - 20.8.17 5,30,000 25,000 Listed 15.9.15 50,000 - - - - 12.3.18 85,000 2,000 Shares 20,000 Building 12.3.05 20,000 23.8.09 70,000 4.4. 40,000 6.11.17 4,35,000 15 5,000 Motor car - - - - 23.3.17 2,00,000 of 23.3.11 4,00,000 individual. CFP Level 2 - Module 2 – Taxation - India Page 321

Solution: Particulars Land Listed Shares Building LTCA/STCA STCA LTCA LTCA FVC 5,30,000 85,000 Less: Expenses 25,000 2,000 4,35,000 Less: CoA/ICoA 2,00,000 20,000 Less: CoI/ICoI 1,00,000 50,000 x 272 / 254 20,000 x 272 / 113 Less: CoI/ICoI - 70,000 x 272 / 148 LTCG/STCG/(LTCL)/(STCL) - - 40,000 x 272 / 254 2,05,000 1,26,898 31,457 Note: Motor Car is not a capital asset (3) Other Provisions Meaning of “cost of improvement” and “cost of acquisition” – Section 55 Asset was acquired by the assessee before 01/04/2001: 1. In this case CoA shall be actual CoA or FMV as on 01/04/2001, whichever is higher. 2. CoI incurred before 01/04/2001 shall be ignored totally. Illustration-3 What shall be the CoA in the following cases for the purposes of computing capital gains, assuming asset was acquired before 01/04/2001 and even improvements were made before 01/04/2001: Case Actual CoA Actual CoI FMV – 01/04/2001 CoA A 2,00,000 --- 3,00,000 3,00,000 B 2,00,000 --- 1,60,000 2,00,000 C 2,00,000 1,00,000 3,70,000 3,70,000 D 2,00,000 1,00,000 2,60,000 2,60,000 E 2,00,000 1,00,000 1,80,000 2,00,000 CFP Level 2 - Module 2 – Taxation - India Page 322

Shares & other securities: Nature of share CoA (subject to above PoH provision) Original share From date of Actual payment allotment/purchase Bonus share From date of allotment Right share Nil From date of allotment Right offer Actual payment From date of offer Right share for other than Nil From date of allotment offered Price for offer + actual payment to co. Note: STT paid on sale and/or purchase of securities shall not be allowed while computing income u/h Capital Gains, neither as part of CoA nor as part of expenses on transfer. Illustration-4 Mrs. Securi applied for listed shares (face valueRs.10) of M/s ABC Pvt. Ltd. On 01.01.2009 by paying application money of Rs..10. She was allotted 1,200 shares on 04.04.2009. She sold the same on 15.7.2019 forRs.45/share off market. Compute taxable capital gains in the hands of Mrs. Securi for AY 2020-21. Solution: Particulars 54,000 AY 2020-21 - Nature: 04.04.2009 – 15.07.2019: LTCA FVC (1200 x 45) 23,432 Less: Expenses (31,568) Less: IcoA (1200 x 10 x 289 / 148) LTCG/(LTCL) CFP Level 2 - Module 2 – Taxation - India Page 323

Illustration-5 What shall be your answer in case Mrs. Securi had purchased the shares from open market on 01.01.09 instead of applying to M/s ABC Pvt. Ltd.? Solution: Particulars 54,000 AY 2020-21 - Nature: 01.01.2009 – 15.07.2019: LTCA FVC (1200 x 45) 25,314 Less: Expenses (28,686) Less: ICoA (1200 x 10 x 289 / 137) LTCG Illustration-6 Mrs. Securi applied for shares (face valueRs.10) of M/s ABC Pvt. Ltd. on 01.01.09 by paying application money of Rs..10. She was allotted 1,200 shares on 04.04.09. She sold 700 shares on 05.06.13 forRs.35/share and the balance on 15.7.19 forRs.45/share. Compute taxable capital gains in the hands of Mrs. Securi for various assessment years. Solution: Particulars 24,500 AY 2014-15 - Nature: 04.04.2009 – 05.06.2013: LTCA FVC (700 x 35) 34,674 Less: Expenses (10,174) Less: ICoA (700 x 10 x 220 / 148) LTCG/(LTCL) CFP Level 2 - Module 2 – Taxation - India Page 324

AY 2020-21 22,500 Nature: 04.04.2009 – 15.07.2019: LTCA - FVC (500 x 45) Less: Expenses 9,763 Less: ICoA (500 x 10 x 289 / 148) (12,737) LTCG/(LTCL) Illustration-7 Ms. Sweety purchased 200 shares of a Listed Company from open market on 13.3.1995 for Rs.10/share. On 17.8.2010 she was allotted 1 bonus share for every 2 shares held. She sold all the shares on 12.12.19 for Rs.180/share. Compute capital gains assuming FMV of shares on 01.04.01 was Rs.10.30/share and brokerage on sale is 5%. (Sale prices given above are gross prices and are before deducting any brokerage). Solution: Particulars Original Bonus Shares – Shares – AY 2020-21 Nature: 13.03.1995 – 12.12.2019; 17.08.2010 – 200 100 12.12.2019 FVC (200 x 180); (100 x 180) LTCA LTCA Less: Expenses Less: ICoA (200 x 10.30 x 289 / 100); ICoA (100 x 0 x 272 / 36,000 18,000 167) 1,800 900 LTCG/(LTCL) 5,953 - 28,247 17,100 Illustration-8 What shall be your answer in case Ms. Sweety was allotted bonus shares on (i) 14.02.2019 (ii) 15.06.99? CFP Level 2 - Module 2 – Taxation - India Page 325

(Note- If bonus shares were allotted before April 1, 2001, cost of acquisition is the fair market value on April 1, 2001. If bonus shares are allotted after April 1, 2001, cost of acquisition is taken as zero.) Solution: Particulars Original Bonus Shares Shares – 200 – 100 AY 2018-19 Nature: 13.03.1995 – 12.12.2019; 15.06.1999 – LTCA LTCA 12.12.2019 FVC (200 x 180); (100 x 180) 36,000 18,000 Less: Expenses 1,800 900 Less: ICoA (200 x 10.30 x 289 / 100); ICoA (100 x 5,603 2,976 10.30 x 289 / 100) LTCG/(LTCL) 28,247 14,124 Illustration-9 Mr. Handsome is holding 300 shares (face value beingRs.10/share) of Reliance Ltd. since 1989 which were allotted @Rs.9/share. On 22.09.08 he was offered 2 right shares for every 3 shares held @ 20/share on which date FMV wasRs.50/share. He applied for all the shares on 25.09.08 and was allotted on 05.11.08. FMV of such shares on 01.04.01 wasRs.8/share. He sold all the shares on 29.05.19 forRs.250/share. Compute capital gains in the hands of Mr. Handsome for various assessment years. Solution: Particulars Original Right Shares – 300 Shares – AY 2020-21 Nature: 1989 – 29.05.2019; 05.11.2008 – 29.05.2019 200 FVC (300 x 250); (200 x 250) Less: Expenses LTCA LTCA 75,000 50,000 CFP Level 2 - Module 2 – Taxation - India - - Page 326

Less: ICoA (300 x 9 x 289 / 100); ICoA (200 x 20 x 279 / 7,803 8,146 137) 67,197 41,845 LTCG/(LTCL) Illustration-10 Will it make any difference had Mr. Handsome not applied at all for right shares? Solution: Particulars Original Shares – 300 AY 2020-21 Nature: 1989 – 29.05.2019 LTCA FVC (300 x 250) 75,000 Less: Expenses Less: ICoA (300 x 9 x 279 / 100) - LTCG/(LTCL) 7,533 67,467 Illustration-11 What shall be your answer in case Mr. Handsome, instead of applying himself for right shares, had renounced such offer in the favour of Mr. Ugly at the price of Rs.11/ share on 27.09.08? Solution: Particulars Original Right Offer – Shares – 300 200 Assessment Year Nature: 1969 – 29.05.2019; 22.09.2008 – 27.09.2008 2020-21 2009-10 FVC (300 x 250); (200 x 11) LTCA STCA Less: Expenses 75,000 2,200 Less: ICoA (300 x 9 x 289 / 100); CoA (200 x 0) - - LTCG/STCG/(LTCL)/(STCL) 7,803 - 67,197 2,200 CFP Level 2 - Module 2 – Taxation - India Page 327

Goodwill, tenancy rights, stage carriage permits, trade mark, brand name, etc.: Purchased Self-generated CoA Purchase price Nil CoI PoH Always nil Indexation From the date of purchase From the date of commencement FMV as on of business 01.04.1981 From the year of purchase -NA- as CoA is nil Not available Advance Money Received – Section 51 Advance money received and forfeited by the assessee on or before 31/03/2014 shall be deducted from the  Actual cost of acquisition, or  Fair market value in computing the cost of acquisition. CFP Level 2 - Module 2 – Taxation - India Page 328

ANALYSIS 1. Advance money retained shall be deducted even if retained before 01/04/1981, but in that case shall be deducted from CoA or FMV, whichever is higher. 2. Indexation of CoA shall be done only after subtracting the advance money from CoA. 3. Advance money retained in excess of CoA shall be a capital receipt and such excess shall have no tax treatment and CoA shall be Nil then. In any case it cannot be subtracted from Cost of Improvement. 4. Advance money received & forfeited on or after 01/04/2014 shall be treated as income u/h IOS of the year in which such money is forfeited, irrespective of the amount may be. Illustration-12 What shall be the CoA & CoI in the following cases for the purposes of computing capital gains: Case CoA CoI FMV – Advance money CoA CoI 01/04/ forfeited 2001 Date Amount Date Amount Date Amount A 08/05/2008 2,00,000 05/06/2 1,00,000 --- 08/11/ 40,000 1,60,000 1,00,00 015 2011 0 B 08/05/2008 2,00,000 05/06/2 1,00,000 --- 08/11/ 2,20,000 - 1,00,00 015 2010 0 C 05/07/1998 2,00,000 24/02/1 1,00,000 3,30,0 25/06/ 40,000 2,90,000 - 999 00 2011 D 05/07/1998 2,00,000 24/02/2 1,00,000 1,80,0 25/06/ 2,20,000 - 1,00,00 006 00 2013 0 Illustration-13 Mr. Chacha purchased jewellery for his personal use for Rs.2,00,000 on 15.11.18. He forfeited advance money of Rs..30,000 from Mr. Chaudhary on 14.01.19. Later on 23/03/2019 he forfeited advance money of Rs..40,000 from Mr. Gopu. On 28.11.19 he sold the jewellery to Mr. Saabu for Rs.6,00,000. Compute taxable capital gains for Mr. Chacha. CFP Level 2 - Module 2 – Taxation - India Page 329

Solution: Rs. Particulars STCA AY 2020-21 6,00,000 Nature: 15.11.2018 – 28.11.2019 FVC - Less: Expenses 2,00,000 Less: CoA (2,00,00) 4,00,000 STCG/(STCL) Illustration-14 What will be your answer in case jewellery was purchased by Mr. Chacha on 15.11.09 instead of 15.11.18? Solution: Particulars Rs. AY 2018-19 Nature: 15.11.2009 – 28.11.2019 LTCA FVC 6,00,000 Less: Expenses Less: ICoA (2,00,00) x 289 / 148 - LTCG/(LTCL) 3,90,540 2,09,460 Illustration-15 Mr. H has acquired a residential house property in Delhi on 1st April, 2001 for Rs.22,00,000 and decided to sell the same on 3rd May, 2004 to Mrs. P and an advance of Rs..70,000 was taken from her. The balance money was not paid by Mrs. P and hence, Mr. H has forfeited the entire advance sum. In April, 2017, he once again entered into negotiations for sale of the said property to Mr. Y, and received Rs.2 lakh as advance, but the transfer did not materialize and hence, the advance was forfeited. On 3rd March, 2018, he finally sold this house to Mr. S for Rs.95,00,000. In the meantime, on 4th February, 2018, he had purchased a CFP Level 2 - Module 2 – Taxation - India Page 330

residential house in Faridabad for Rs.28,00,000 and made full payment for the same. However, Mr. H does not possess any legal title till 31st March, 2018, as such transfer was not registered with the registration authority. Mr.H had purchased another old house in Madurai on 14th October, 2017 from Mr. X, an Indian resident, by paying Rs.25,00,000 and the purchase was registered with the appropriate authority. Determine the taxable capital gain arising from above transactions in the hands of Mr. H for AY 2018-19. Solution: Particulars Rs. AY 2018-19 Nature: 01/04/2001 – 03/03/2018 LTCA FVC 95,00,000 Less: Expenses Less: ICoA (22,00,00 – 70,000) x 272 / 100 - LTCG/(LTCL) 57,93,600 Less: Exempt u/s 54 37,06,400 LTCG/(LTCL) 28,00,000 9,06,400 Special provision for full value of consideration in certain cases – Section 50C 1. In case capital asset being immovable property (i.e. land &/or building) is transferred below the stamp duty value (in short SDV, also called area rates or circle rates), then SDV on the date of transfer shall be deemed to be the FVC. 2. But assessee may challenge before the AO that the FMV is less than the SDV, and in that case AO shall refer the case to VO (valuation officer). In case VO says that the FMV is less than the SDV, then the FMV as computed by VO shall be the FVC. 3. It may be noted that, CoA in the hands of purchaser shall be the actual purchase price. CFP Level 2 - Module 2 – Taxation - India Page 331

Illustration-16 Assessee sold a house property forRs.10,00,000. But “stamp valuation authority” levied stamp duty on the value of Rs..14,00,000. What shall be the full value of consideration in the hands of assessee? Solution: 14,00,000 Illustration-17 What shall be your answer in case AO, on claim by the assessee, has referred the valuation of property with Valuation Officer and the valuation officer valued the property at (i)Rs.11,00,000 (ii) Rs.17,00,000? Solution: 11,00,000/14,00,000 Illustration-18 Mr. X purchased a House Property on 1.1.89 for Rs.2,00,000. He constructed a room on the same on 1.1.98 for Rs.50,000. He forfeited advance money of Rs..10,000 on 1.1.07. He got constructed another room for Rs.65,000 on 1.1.12. He forfeited advance money of Rs.14,000 on 1.1.09. On 1.1.2018 he sold the same for Rs.20,00,000 on which date FMV wasRs.24,00,000. Buyer paid stamp duty of Rs..1,50,000 at the rate of 6%. FMV on 1.4.2001 was Rs.2,40,000. Compute capital gains for AY 2020-21. Solution: Particulars Rs. AY 2020-21 Nature: 01/01/1989 – 01/01/2020 LTCA FVC 25,00,000 Less: Expenses Less: ICoA (2,40,000 – 10,000 – 14,000) x 289 / 100 - Less: ICoI (65,000 x 289 / 184) 6,24,240 LTCG/(LTCL) 1,02,092 (17,73,668) CFP Level 2 - Module 2 – Taxation - India Page 332

Special provision for full value of consideration for transfer of assets other than capital assets in certain cases – Section 43CA 1. If immovable property is SIT (stock in trade for the seller (i.e. business of real estate), then section 50C shall not apply but section 43CA shall apply 2. In case immovable property is transferred below the SDV, then SDV on the date of transfer shall be deemed to be the sale consideration u/h PGBP 3. But assessee may challenge before the AO that the FMV is less than the SDV, and in that case AO shall refer the case to VO. In case VO says that the FMV is less than the SDV, then the FMV as computed by VO shall be the sale consideration u/h PGBP 4. Here one more option is provided to the assessee. Assessee may claim that SDV on the date of agreement may be considered for the purpose, if part consideration has been received by him on or before the date of agreement by any mode other than cash. Note: Such option is not available in case of section 50C. Illustration-19 Case Date of Tfr. of Actual Consideration SDV on the SDV on the FVC land/bldg. held date of date of regn. as SIT 120 agreement 210 210 (01/05/2017) 210 1 01/05/2017 100 120 100 ( Rs.10 lacs recd. by 210 cheque on 31/08/2015) (01/09/2015) (01/05/2017) 2 01/05/2017 100 120 210 ( Rs.10 lacs recd. by cash (31/03/2017) on 31/08/2015) (01/09/2015) 210 100 120 (01/05/2017) 3 31/03/2017 (Full amt. recd. on the (01/05/2017) date of regn.) 4 01/05/2017 100 90 ( Rs.10 lacs recd. by cheque on 31/08/2015) (01/09/2015) CFP Level 2 - Module 2 – Taxation - India Page 333

TAXATION OF GIFTS Relevant Provisions u/h Capital Gains Section 47 – Transactions not regarded as transfer Gift made by any person to any person shall not be regarded as transfer whether made between relatives or not. Further gift implies nil consideration. In this case no capital gains shall be computed in the hands of transferor. Section 55 read with section 49 – Cost of Acquisition in the hands of person receiving the gift CoA to the assessee shall be the CoA to the previous owner. If previous owner has acquired the property before 01/04/2001, then CoA to the assessee shall be the CoA to the previous owner or FMV as on 01/04/2001 whichever is higher. While computing the CoA, advance money forfeited by the previous owner shall not be subtracted from CoA/FMV. Section 55 – Cost of Improvement CoI incurred by previous owner can be claimed by the assessee while computing capital gains. But CoI incurred before 01/04/2001 shall be ignored totally. Section 2(42A) – Period of holding In determining POH for the purposes of LTCA/STCA, POH of previous owner shall also be included. Section 48 – Indexation of CoA & CoI ICoA = CoA x CII of the year of transfer CII of year in which asset was first held by the assessee or FY 2001-02, whichever is later Indexation of CoA, as determined above, shall be from the date first held by the assessee, and not from the date first held by the previous owner. (Debatable issue, as per recent high court decision, indexation shall be done from the back date i.e. first held by the previous owner) CFP Level 2 - Module 2 – Taxation - India Page 334

ICoI = CoI x CII of the year of transfer CII of the year in which the improvement to the asset took place Indexation of CoI shall be from the date of improvement, even if incurred by previous owner. Relevant provisions u/h Income from Other Sources and corresponding provisions u/h Capital Gains Section 56(2)(vii) If an individual or a HUF receives from any person or persons - (a) money aggregating more than Rs.50,000, then whole of the amount shall be treated as income u/h IOS. (b) specified movable property (shares and securities; jewellery; archaeological collections; drawings; paintings; sculptures; any work of art; or bullion) (i) Without consideration, whose aggregate FMV is more than Rs.50,000, then whole of the FMV shall be treated as income u/h IOS. (ii) At less than FMV, and the aggregate difference between FMV & acquisition price is more than Rs.50,000, then such difference shall be treated as income u/h IOS. (c) immovable property- (i) Without consideration, whose SDV is more than Rs.50,000, then the SDV shall be treated as income u/h IOS. (ii) At less than SDV, and the difference between SDV & acquisition price is more thanRs.50,000, then such difference shall be treated as income u/h IOS. Notes: 1. In case of immovable property, if receiver/purchaser claims that the FMV is less than the SDV, AO shall refer the case to the VO. In case VO says that the FMV is less than the SDV, then such FMV shall be considered for the purposes of calculation of income u/s 56(2)(vii). 2. Further, assessee may claim that SDV on the date of agreement shall be considered for the purpose, if part consideration has been paid by him on or before the date of agreement by any mode other than cash. 3. Gift of movable & immovable property shall be taxable in the hands of receiver only if same has been received as capital asset by the receiver. If the same is SIT for the receiver, then there shall be no treatment u/h IOS. CFP Level 2 - Module 2 – Taxation - India Page 335

4. Nothing shall be taxable u/s 56(2)(vii), if money/property received (a) from any relative; or (b) on the occasion of the marriage of the individual; or (c) under a will or by way of inheritance; or (d) in contemplation of death of the donor; or (e) from any local authority, university, educational institution, hospital or medical institution; or (f) from any religious trust or charitable trust registered u/s 12AA. 5. Relative means: (i) in case of an individual – (A) spouse; (B) brother or sister; (C) brother or sister of the spouse; (D) brother or sister of either of the parents; (E) lineal ascendant or descendant; (F) lineal ascendant of the spouse; (G) spouse of the person referred to in items (B) to (F); and (ii) in case of a HUF, any member of HUF; Consequences u/h Capital Gains: In case any property gift becomes taxable u/s 56(2)(vii) u/h IOS, then following consequences will follow for the receiver of the asset: 1. CoA shall be the FMV/SDV considered as above. 2. CoI of previous owner shall not be considered. 3. POH shall be counted from the date of gift only. 4. Indexation of CoA shall be from the date of gift only. Illustration-20 Mr. Gain acquired a house property on 12.7.88 forRs.2,00,000. He gifted the same to his son Mr. Cain on 13.4.06. Mr. Cain constructed a further floor costingRs.1,50,000, construction of which was completed on 11.12.2010. Throughout the period, Mr. Cain used the same for his residential purposes. On 13.1.20 he sold the same for Rs.20,00,000. For transfer purposes, he incurred expenses amounting toRs.45,000. Compute the Income u/h capital gains for AY 2020- 21 in the hands of Mr. Cain assuming FMV of house property wasRs.4,00,000 on 01.04.2001. CFP Level 2 - Module 2 – Taxation - India Page 336

Solution: Rs. Particulars LTCA AY 2020-21 20,00,000 Nature: 12.07.1988 – 13.01.2018 FVC 45,000 Less: Expenses 10,88,000 Less: ICoA (4,00,000 x 289 / 100) 2,44,311 Less: ICoI (1,50,000 x 289 / 167) (6,22,689) LTCG/(LTCL) Illustration-21 What shall be your answer in Question above in case property was gifted on (i) 13.4.2000 (ii) 02.05.16? Assume improvements were made by previous owner, if required. Solution: Same Illustration-22 Mr. Jaj purchased a residential house property on 04/04/1982 for Rs.6,00,000. Later on he incurred expense of Rs..3,00,000 on 05/05/1994 on account of improvement. He further incurred Rs.4,00,000 on 06/06/2006 as improvement. He forfeited advance money of Rs.40,000 in the month of July 2009. Later on (07/07/2015), he gifted the same to his son Mr. Baj on which date FMV was Rs.30,00,000. Mr. Baj, following the footsteps of his father, incurred Rs.5,00,000 on improvement on 08/08/2009 and forfeited advance money of Rs..70,000 on 09/09/2013. At last (on 11/11/2019), while shifting to America, Mr. Baj sold the property for Rs.2,00,00,000 to Mrs. Saj on which date SDV wasRs.2,25,00,000. For the purposes of transfer, Mr. Baj incurred expenses of Rs..2,00,000. Compute income u/h capital gains in the hands of Mr. Jaj & Mr. Baj for various assessment years assuming FMV of the property on 01/04/2001 was Rs.8,00,000. Solution: Mr. Jaj – no tax implications CFP Level 2 - Module 2 – Taxation - India Page 337

Mr. Baj Particulars Rs. AY 2020-21 Nature: 04.04.1982 – 11.11.2019 LTCA FVC 2,25,00,000 Less: Expenses Less: ICoA (8,00,000 – 70,000 x 289 / 100) 2,00,000 Less: ICoI (4,00,000 x 289 / 122) 21,09,700 Less: ICoI (5,00,000 x 289 / 148) 9,47,540 LTCG/(LTCL) 9,76,351 1,82,66,409 Illustration-23 Mr. Hari, a property dealer, sold a building in the course of his business to his friend Rajesh, who is a dealer in automobile spare parts, for Rs.90 lakh on 1.1.2020, when the stamp duty value wasRs.150 lakh. The agreement was, however, entered into on 1.7.2019 when the stamp duty value was Rs.140 lakh. Mr. Hari had received a down payment of Rs..15 lakh by cheque from Rajesh on the date of agreement. Discuss the tax implications in the hands of Hari and Rajesh, assuming that Mr. Hari has purchased the building for Rs.75 lakh on 12th July, 2018. Would your answer be different if Hari was a share broker instead of a property dealer? Solution: Mr. Hari – Property Dealer PGBP – 140 lakhs less 75 lakhs = 65 lakhs Mr. Hari – Share Broker Capital Gains – STCG – 150 lakhs less 75 lakhs = 75 lakhs Mr. Rajesh IOS – 140 lakhs less 90 lakhs = 50 lakhs Taxation of Gift in the Hands of firm/company – Section 56(2)(viia) Provision applicable upto AY 2017-18 CFP Level 2 - Module 2 – Taxation - India Page 338

If a firm or a closely held company (e.g. private limited company) receives shares of closely held company from any person or persons: (i) Without consideration, whose aggregate FMV is more than Rs.50,000, then whole of the FMV shall be treated as income u/h IOS. (ii) At less than FMV, and the aggregate difference between FMV & acquisition price is more than Rs.50,000, then such difference shall be treated as income u/h IOS. The above section 56(2) (viia) has been substituted by section 56(2)(x)- which is applicable w.e.f. AY 2018-19 both for movable and immovable properties instead of shares only. Section 56 (2)(x) in brief provides as under: In order to prevent the practice of receiving the sum of money or the property without consideration or for inadequate consideration, the Act has stated the section 56 (2)(vii) and Section 56(2) (viia) shall be applicable for receiving the sum of money or the property or shares without consideration or for inadequate consideration prior to 1.4.2017 (i.e upto AY 2017-18). W.e.f. A.Y 2018-19, it has inserted a new clause (x) in sub-section (2) or Section 56 which provides as under: Where any person receives, in any previous year , from any person or persons on or after the 1st day of April 2017- a. any sum of money, without consideration, the aggregate value of which exceeds Rs.50, 000, the whole or the aggregate value of such sum; b. any immovable property,- (A) without consideration, the stamp duty value of which exceeds Rs.50000, the stamp duty value of such property; (B) for a consideration which is less than the stamp duty value of the property by an amount exceeding Rs.50000, the stamp duty value of such property as exceeds as such consideration: (C) any property, other than immovable property, - (D) without consideration, the aggregate fair market value of which exceeds Rs.50000, the whole of the aggregate fair market value of such property; (E) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding Rs.50000, the aggregate fair market value of such property as exceeds such consideration: It shall be taxable under the head “income from other sources” CFP Level 2 - Module 2 – Taxation - India Page 339

Taxation of Issue of Shares in the Hands of Company – Section 56(2)(viib) If a closely held company issues shares to resident at issue price more than face value of the shares, then difference between issue price & FMV shall be treated as income u/h IOS for issuing company. Illustration-24 The following are the details of the shares issued by Ray (P) Ltd. Discuss the applicability of provisions of section 56(2)(viib) in the hands of the company: Case Face Value FMV Issue Price IOS A 100 120 150 30 B 100 120 110 - C 100 80 120 40 D 100 40 90 - Insurance Claim – Section 45(1A) 1. In case of insurance claim, date of destruction shall be treated as date of transfer (i.e. indexation & POH shall be done till this date only). 2. Claim received by the assessee shall be treated as FVC (if claim is received in the form of assets, then FMV of such assets shall be treated as FVC). 3. But capital gains shall be taxable in the year in which claim is actually received. 4. If there is no insurance or no insurance claim is received from the insurer, then loss on account of damage or destruction shall be a dead loss which shall have no tax treatment. Illustration-25 Mr. A purchased a Jewellery on 12.3.2009 for Rs.2,00,000. Said jewellery was destroyed by fire on 13.3.2020 and he received insurance claim of Rs..5,00,000 on 29.3.20. Compute taxable capital gains for various assessment years. What shall be your answer in case insurance claim was received on 4.4.20? CFP Level 2 - Module 2 – Taxation - India Page 340

Solution: Particulars Rs. AY 2020-21 Nature: 12.03.2009 – 13.03.2020 LTCA FVC 5,00,000 Less: Expenses Less: ICoA (2,00,000 x 289 / 137) - LTCG/(LTCL) 4,21,898 *It claim is received on 4/4/20, answer will be same but LTCG shall be 78,102 Taxable in AY 2021-22 *It claim is received on 4/4/20, answer will be same but LTCG shall be Taxable in AY 2021-22 Transfer by Way of Compulsory Acquisition – Section 45(5) 1. Act of compulsory acquisition shall be treated as transfer (i.e. indexation & POH shall be done till this date only). 2. Compensation fixed by the Government shall be treated as FVC. (also called initial compensation) 3. Capital gains shall be taxable in the year in which first instalment of initial compensation is actually received by the assessee. FVC shall be the whole amount of compensation whether received or not in full. 4. Compensation enhanced by the court shall be taxable in the year of actual receipt (if it is received in instalments, then shall be taxable in instalments). Nature of such enhanced compensation shall be the nature of initial compensation. CoA & CoI shall be nil for such compensation. Legal expenses incurred to obtain such compensation shall be allowed from such compensation. 5. Interest, if any, received on initial &/or enhanced compensation shall be taxable u/h IOS in the year of actual receipt. From such interest, a flat deduction of 50% shall be allowed. 6. Compensation received in pursuance of interim order shall be treated as income of the PY in which final order is made by such court. CFP Level 2 - Module 2 – Taxation - India Page 341

Illustration-26 Mr. Dukhi purchased a residential self-occupied house property comprising of four floors on 10.12.2007 for Rs.10,00,000. On 11.12.2010 Govt. compulsory acquired the property and fixed compensation at Rs.14,00,000 whereas FMV on that date was Rs.30,00,000. He received Rs.9,00,000 on 4.4.11 and the balance on 5.5.12. On appeal for the same (paid Rs.1,50,000 to a lawyer), Court enhanced the compensation by Rs.8,00,000 on 2.1.14. He received Rs.5,00,000 on 8.5.16 and the balance on 9.6.17. Compute taxable capital gains for various assessment years. Solution: Particulars Rs. AY 2012-13 Nature: 10.12.2007 – 11.12.2010 LTCA FVC 14,00,000 Less: Expenses Less: ICoA (10,00,000 x 167 / 127) - LTCG/(LTCL) 12,94,574 1,05,426 AY 2013-14 Nil AY 2017-18 LTCA Nature 8,00,000 FVC 1,50,000 Less: Expenses Less: ICoA Nil LTCG/(LTCL) 6,50,000 Conversion of Capital Asset into Stock-in-trade – Section 45(2) 1. In case capital asset is converted by the assessee into SIT of his business, then FMV on the date of conversion shall be treated as FVC. CFP Level 2 - Module 2 – Taxation - India Page 342

2. Act of conversion shall be treated as transfer, but capital gains shall be taxable in the year in which transfer of SIT takes place. (i.e. indexation & POH shall be done till this date only) 3. It means that in year of sale of SIT, there will be two profits viz., capital gains & PGBP. Illustration-27 Mr. Prakash Chand, owner of P C Jewellers, purchased a diamond ring for his personal use on 15.7.2016 forRs.50,000. On 15.3.19, he brought the same into his business as stock-in-trade and recorded the same atRs.4,00,000. On the said date FMV of ring wasRs.3,70,000. On 11.11.2019 he sold the ring forRs.5,00,000. Compute the impact of above transaction for various assessment years. Solution: Particulars Rs. AY 2020-21 Nature: 15.07.2016 – 15.03.2019 STCA FVC 3,70,000 Less: Expenses Less: CoA - STCG/(STCL) 50,000 PGBP (5,00,000 – 3,70,000) 3,20,000 1,30,000 Illustration-28 What shall be your answer in case he had purchased the ring on (i) 15.7.2008 (ii) 15.7.98 and FMV of ring as on 01.04.2001 wasRs.55,000? Solution: Particulars Rs. AY 2020-21 Nature: 15.07.2008 – 15.03.2019 LTCA FVC 3,70,000 Less: Expenses - CFP Level 2 - Module 2 – Taxation - India Page 343

Less: ICoA (50,000 x 280 / 137) 1,02,190 LTCG/(LTCL) 2,67,810 PGBP (5,00,000 – 3,70,000) 1,30,000 Capital Gains on Transfer Listed Equity Shares &Units of Equity Oriented Fund Following provisions are applicable on sale of listed equity shares and units of equity oriented fund, provided sale is made through stock exchange and at the time of sale STT is paid. LTCG (Section 10(38)) – fully exempt for all assessees. (Abolished in Finance Act 2018) Amendment in Finance Act 2018 The Finance Act, 2018 has withdrawn the exemption under section 10(38) of the Income-tax Act, 1961 and has introduced a new section 112A in order to levy long term capital gain tax on the transfer of a long term capital asset being an equity share in a company or a unit of an equity oriented funds or unit of a business trust w.e.f A.Y 2019-20 and onwards. STCG (Section 111A) – taxable at 15% flat rate of tax for all assessees. Notes: 1. No deduction under chapter VI-A is allowed from LTCG taxable @ 20% and STCG u/s 111A taxable @ 15%. 2. Further, while calculating tax liability on total income, slab rates shall be applied on other incomes excluding such 2 incomes. 3. In case other incomes fall short of maximum amount which is not chargeable to tax (i.e.Rs.2,50,000 orRs.3,00,000 orRs.5,00,000), then in case of Resident Individual and Resident HUF, such shortfall may be adjusted from such 2 incomes. In case of other assessees, this adjustment is not allowed. Illustration-29 Ms. Priyanka purchased 10,000 equity shares of JP Ltd. @Rs.130/share on 12.2.19 and paid STT of Rs.0.50/share. She sold 6,000 shares on 11.12.19 through recognized stock exchange forRs.180/share and paid STT of Rs.0.60/share. She sold balance 4,000 shares on 20.3.20 through recognized stock exchange forRs.200/share and paid STT of Rs.0.65/share. Compute capital gains taxable in the hands of Ms. Priyanka. CFP Level 2 - Module 2 – Taxation - India Page 344