TAXATION- Concept Book

Solution: 6000 4000 Particulars STCA LTCA Assessment Year 2020-21 6000 x 180 = 10,80,000 4000 x 200= 8,00,000 Nature FVC - 4000x130 Less: Expenses 6000 x 130 = 7,80,000 5,20,000 Less: CoA/ICoA 2,80,000 3,00,000 STCG/LTCG Illustration-30 What will be your answer in case asset has been preference shares instead of equity shares? Solution: Particulars 6000 4000 Assessment Year 2020-21 Nature STCA LTCA FVC 6000 x 180 = 10,80,000 4000 x 200 = 8,00,000 Less: Expenses Less: CoA/ICoA - - 6000 x 130 = 7,80,000 4000 x 130 x 289 / / 280 = STCG/LTCG 3,00,000 5,36,714 2,63,286 Illustration-30 Compute tax liability in both the Questions above assuming her income u/h PGBP isRs.4,20,000/Rs.2,20,000/Rs.27,000 and she contributedRs.45,000 towards PPF during the year. CFP Level 2 - Module 2 – Taxation - India Page 345

Solution: Rs. Rs. Rs. 4,20,000 2,20,000 27,000 Particulars 3,00,000 3,00,000 3,00,000 Income u/h PGBP 280,000 2,80,000 2,80,000 STCG u/s 111A 10,00,000 8,00,000 6,07,000 LTCG 45,000 45,000 27,000 GTI 9,55,000 7,55,000 5,80,000 Less: Deduction u/s 80C TI 6,250 - - 45,000 33,750 7,500 Tax on normal income 18,000 18,000 18,000 Tax on STCG u/s 111A @ 15% 69,250 51,750 25,500 Tax on LTCG u/s 112A @ 10% - 51,750 25,500 Less: Rebate u/s 87A 69,250 2,070 1,020 2,770 53,820 26,520 Add: Cess @ 4% 72,020 Total tax payable Particulars Rs. Rs. Rs. Income u/h PGBP 4,20,000 2,20,000 27,000 STCG 3,00,000 3,00,000 3,00,000 LTCG 2,63,286 2,63,286 2,63,286 GTI 9,84,242 7,84,242 5,91,242 Less: Deduction u/s 80C 45,000 45,000 45,000 TI 9,39,242 7,39,242 5,46,242 TI (R/o) 9,39,240 7,39,240 5,46,240 Tax on normal income 47,500 11,250 1,600 Tax on LTCG @ 20% 52,657 52,657 52,657 CFP Level 2 - Module 2 – Taxation - India Page 346

Less: Rebate u/s 87A 1,00,157 63,907 54,257 - - - Add: Cess @ 4% Total tax payable 1,00,157 63,907 54,257 Rounded off 4,006 2,556 2,170 66,463 56,427 1,04,163 66,460 56,430 1,04,160 Transactions Not Regarded as Transfer – Section 47 Following transactions shall not be regarded as transfer:(i.e. in following cases capital gains shall not be computed) 1. Partition of HUF 2. Gift 3. Will 4. Inheritance 5. Transfer by holding company to subsidiary company or vice-versa, if (i) Subsidiary company is wholly owned subsidiary (ii) Transferee company is an Indian Company 6. Transfer by amalgamating company to amalgamated company in case of amalgamation, provided amalgamated company is an Indian company 7. Transfer by a shareholder of shares held in amalgamating company in lieu of shares of amalgamated company, provided amalgamated company is an Indian Company. Notes: (a) In this case CoA of shares of amalgamated company shall be equal to CoA of shares of amalgamating company. (b) Further, old POH shall also be counted for the purpose of determining LTCA/STCA. (c) But indexation shall be done from the date of allotment of shares of amalgamated company. 8. Transfer of work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting, photograph or print, to the Government or a University or the National Museum, National Art Gallery, National Archives or any such other public museum. CFP Level 2 - Module 2 – Taxation - India Page 347

9. Conversion of sole-proprietorship into company Following conditions need to be fulfilled: (a) All the assets & liabilities of the sole-proprietorship become assets & liabilities of the company. (b) Sole-proprietor does not receive any consideration from the company except shares of that company. (c) His voting power shall be atleast 50% and shall continue as such for next 5 years. 10. Conversion of partnership firm into company Following conditions need to be fulfilled: (a) All the assets & liabilities of the partnership firm become assets & liabilities of the company. (b) All the partners shall become shareholders of the company in the same ratio as that of their capital account balance in the partnership firm. (c) All the partners do not receive any consideration from the company except shares of that company. (d) Their cumulative voting power shall be atleast 50% and shall continue as such for next 5 years. 11. Conversion of private limited company or unlisted company into LLP; and transfer of shares by shareholder of such company Following conditions need to be fulfilled: (a) All the assets & liabilities of the company become assets & liabilities of the LLP. (b) All the shareholders shall become partners of the LLP. Their capital contribution ratio & profit sharing ratio shall be in the same ratio as that of their shareholding in the company. (c) All the shareholders do not receive any consideration from the LLP except capital contribution and profit sharing ratio. (d) Their cumulative profit sharing ratio shall be atleast 50% and shall continue as such for next 5 years. (e) Turnover of the company in the preceding 3 years shall not exceed Rs.60,00,000pa. (f) LLP shall not distribute accumulated profits of the company amongst partners in next 3 years. Note: In all the above cases, provisions of taxability of gift regarding CoA, POH, shall apply equally & in the same manner. CFP Level 2 - Module 2 – Taxation - India Page 348

12. Transfer of capital asset in a scheme of reverse mortgage. o Transaction of reverse mortgage shall have no implication under the Income-tax Act. o Reverse mortgage is a kind of mortgage in which loan is taken by mortgaging house property. A transaction of loan is not treated as income. o Money received by the individual shall not be treated as income. o Property mortgaged to the bank shall not be treated as transfer. 13. Transfer of Government Security carrying a periodic payment of interest, (a) made outside India through an intermediary dealing in settlement of securities, (b) by a non-resident to another non-resident Same has been provided to facilitate listing & trading of Govt. Securities outside India 14. Any transfer, made outside India, of a capital asset being rupee dominated bond of an Indian company issued outside India, by a non-redident to another non-resident 15. Any transfer of bonds or GDR referred to in Section 115AC(1) i.e bonds/GDR/shares of a public sector company purchased in foreign currency, made outside India by a non- resident to another non-resident 16. Any transfer of SGB issued by the RBI under the Sovereign Gold Bond Scheme, 2015, by way of redemption, by an assessee being an individual. 17. Any transfer by way of conversion of bonds or debentures, debentres-stock or deposit certificates in any form , of a company into shares or debentures of that company [section 47(x) ] 18. Any transfer by way of conversion of preference shares of a company into equity shares of that company [section 47(xb)] Fair market value deemed to be full value of consideration in certain cases – Section 50D In case FVC is not ascertainable or determinable, then FMV on the date of transfer shall be deemed to be the FVC. e.g. purchaser agreed to provide taxi services for next 10 years without any charges and without any limitations, instead of any consideration on the date of purchase. Transfer of securities through depositories – Section 45(2A) In case securities are transferred through depositories (i.e. demat account), then FIFO method shall be applied to identify the securities which are transferred. CFP Level 2 - Module 2 – Taxation - India Page 349

Illustration-31 Compute capital gains from the following DEMAT account assuming all the sales were made privately: Date of entry Particulars No. of shares 04/08/2008 Acquired shares directly in Demat form @ Rs.25/share 1,000 20/06/2009 Acquired shares in physical form on 08/11/1986 2,000 @ Rs.6/shareFmv on 01-04-2001; Rs.50/ share 3,000 18/12/2010 Acquired shares directly in Demat form @ Rs.55/share 4,000 15/03/2015 Acquired shares in physical form on 24/10/1968 1,400 @ Rs.2/share. FMV as on 01/04/2001 was Rs. Rs.50/share 4,800 20/05/2017 Sale @ Rs.200/share 18/08/2017 Sale @ Rs.225/share Solution: Particulars 1400 shares 4800 shares POH 1000 400 1600 3000 200 Nature FVC 04/08/2008 – 08/11/1986 08/11/1986 – 18/12/2010 24/10/1968 – Less: ICoA 20/05/2017 – 18/08/2017 – 18/08/2017 LTCG 20/05/2017 18/08/2017 LTCA LTCA LTCA LTCA LTCA 1000 x 200 = 400 x 200 = 1600 x 225 = 3000 x 225 200 x 225 = 2,00,000 80,000 3,60,000 = 6,75,000 45,000 1000 x 25 x 400 x 50 x 1600 x 50 x 3000 x 55 x 200 x 50 x 272 272/ 137 = 272 / 100 = 272 / 100 = 272 / 167 = / 100 = 27,200 49,635 54,400 2,17,600 2,68,743 1,50,365 25,600 1,42,400 4,06,257 17,800 CFP Level 2 - Module 2 – Taxation - India Page 350

Slump Sale – Section 50B Slump sale means transfer of an undertaking by an assessee for a lump sum consideration in which individual values are not being assigned to each & every asset separately. Computation of capital gains in case of slump sale 1. Capital gains shall be computed assuming undertaking as a single capital asset instead of calculating capital gains on every asset separately. 2. POH = for determining long-term or short-term, period of holding of undertaking shall be considered. If it is more than 36 months, then it shall be LTCA, otherwise it shall be STCA. 3. In case of LTCA, benefit of indexation shall not be allowed. 4. CoA & CoI shall be the net worth of the undertaking. 5. Net Worth = value of assets appearing in books (including debtors, SIT, bank balance, etc.) less: value of liabilities appearing in books (including creditors, bank loan, etc.) 6. Value of assets & liabilities  Depreciable assets - WDV as per Income-tax Act  Other assets - Book value  Liabilities - Book value 7. In case WDV as per Income-tax is not available in examination, then consider book value for the purposes of net worth. 8. Any revaluation made in books shall be totally ignored for the purpose. Illustration-32 Mr. A is a proprietor of Akash Enterprises having 2 units. He transferred on 01-04-2017 his unit 1 by way of slump sale for a total consideration of Rs..25 lacs. The expenses incurred for this transfer wereRs.28,000. His balance Sheet as on 31-03-2017 is as under: Liabilities Total Assets Unit 1 Unit 2 Total Rs. Rs. Rs. Rs. Own Capital 15,00,000 Building 12,00,000 2,00,000 14,00,000 3,00,000 1,00,000 4,00,000 Revaluation Reserve (for 3,00,000 Machinery bldg. of unit 1) Bank loan (70% for unit 1) 2,00,000 Debtors 1,00,000 40,000 1,40,000 CFP Level 2 - Module 2 – Taxation - India Page 351

Trade creditors (25% for unit 1,50,000 Other assets 1,50,000 60,000 2,10,000 1) 4,00,000 21,50,000 Total 21,50,000 Total 17,50,000 Other information: (i) Revaluation reserve is created by revising upward the value of the building of unit 1. (ii) No individual value of any assets is considered in the transfer deed. (iii) Other assets of unit 1 include patents acquired on 01-07-2015 for 50,000 on which no depreciation has been charged. Solution: Particulars Rs. Rs. FVC 25,00,000 Less: Expenses 28,000 Less: CoA (net worth – working note) 12,50,625 Capital Gains 12,21,375 Net Worth 9,00,000 14,28,125 Assets: 3,00,000 Building 1,00,000 1,77,500 Machinery 28,125 12,50,625 Debtors 1,00,000 Patents (50,000 less 2 year depreciation) Others 1,40,000 Liabilities: 37,500 Bank Loan Trade Creditors 2.4.3. Netting Rules and Carry Forward of Capital Losses CFP Level 2 - Module 2 – Taxation - India Page 352

Discussed in detail along with sub-section 5. 2.4.4. Exemptions in Capital Gains Section 54 54B 54EC 54EE Assessee Individual or HUF Individual or HUF Any assessee Any assessee Transfer of Residential House Urban Any capital asset Any LTCA Property Agricultural Land Nature of Long-term Short-term or Long-term Long Term Capital Long-term Gains New Asset One Residential Agricultural Land Subscription to Long Term House Property in bonds of NHAI or specified Asset India, two in case RECL OR IRFC CG upto 2cr Other  Purchase –  Old  Subscription  6 Months conditions within 1 year agricultural must be made 50 lakh Exemption before or 2 land has been within 6 Amount of Investment years after the used by the months from date of assessee or the date of transfer of old his parents or transfer of old asset HUF for last 2 asset  Construction – years for  Exemption shall completed within 3 years agricultural be maximum  purposes Rs.50 lacs after the date  Purchase – of transfer of New asset old asset purchased within 2 years from the date of transfer of old asset Amount of Amount of Amount of investment in new investment in investment in bonds house new agricultural land CGAS Yes Yes Not available NA option CFP Level 2 - Module 2 – Taxation - India Page 353

Any If new asset is If new land is  If bonds  Asset Acquised should not be violation in transferred within transferred within transferred transferred within 3 years future & 3 years from the 3 years from the within 3 years impact date of acquisition date of from the date thereof of new asset, then acquisition of of acquisition, CoA of new asset new land, then then capital gains exempted (for computing CoA of new land earlier shall be capital gains on (for computing deemed to be new asset) shall capital gains on the income be reduced by the new land) shall be (LTCG) of the amount of reduced by the previous year exemption. amount of in which such Capital Gains of exemption. transfer took place. It shall such asset shall Capital Gains of be in addition always be short- such land shall to capital gains term (because always be short- arising on transferred within term (because transfer of 3 years) transferred within bonds (LTCG or 3 years) STCG)  If bonds mortgaged within 3 years from the date of acquisition of bonds, then capital gains exempted earlier shall be deemed to be the income (LTCG) of the previous year in which such mortgage took place. Amendment made in Finance Act, 2019 The Finance Act, 2019 has inserted a proviso under Section 54 (1) to provide as under: CFP Level 2 - Module 2 – Taxation - India Page 354

Where the amount of the capital gain does not exceeds Rs.2 Cr, the assessee, may at his option, purchase or construct two residential houses in India, and where such an option has been exercised, - (a) the provision of this sub- section shall have effect as if for the words “one residential house in India” , the words” two residential houses in India “had been substituted; (b) any reference in this sub –section and sub-section (2) to “new asset” shall be construed as reference to the two residential houses in India. Further, where during any assessment year, the assessee has exercised the option referred to in the 1st proviso; he shall not be subsequently entitled to exercise the option for the same or any other assessment year. Therefore, now the exemption can be claimed for purchase – construction of two residential houses instead of one. This benefit is available only when the capital gain does not exceed Rs.2 Cr. Further, this benefit is available only once in a life time. Capital Gains Account Scheme (CGAS) In case assessee is not able to investment the desired amount in the new asset on or before the due date of return of income for the year in which capital gains are taxable, he may deposit the same in CGAS by such due date of return of income. In that case, in this year he will be eligible for exemption. In case, later on, he utilises the money within the time limits prescribed, then no consequence shall follow. In case he is not able to utilise the whole amount within the time limits, then capital gains in relation to such unutilised amount shall be deemed to the income of the previous year in which such time limit expires. Nature of such income shall be either LTCG or STCG, depending upon the nature it had before deposit in CGAS. Exemptions in Case of Compulsory Acquisition – Section 54H In case of capital gains arises on account of compulsory acquisition, time period prescribed under various sections shall start from the date of receipt of money and not from the date of compulsory acquisition. CFP Level 2 - Module 2 – Taxation - India Page 355

Similar provision shall apply in case of conversion of capital asset into SIT i.e. time period shall start from the date of transfer of SIT and not from the date of conversion. Illustration-33 Mr. X purchased a residential house forRs.11,24,000 on 1.1.2007. He made an addition of a floor on 1.1.2009 by incurring expenditure of Rs..3,51,000. On 1.1.2015 he further constructed a floor incurringRs.78,500. On 1.1.2020, he sold the house forRs.65,00,000. Expenses on transfer wereRs.1,00,000. He investedRs.10,00,000 on purchase of a new residential house on 20.2.20. Compute capital gains taxable for various assessment years. Solution: Particulars Rs. AY 2020-21 Nature LTCA FVC 65,00,000 Less: Expenses 1,00,000 Less: ICoA (11,24,000 x 289 / 122) 26,62,590 Less: ICoI (3,51,000 x 289 / 137) 7,40,430 Less: ICoI (78,500 x 289 / 240) LTCG/(LTCL) 94,527 Less: Exempt u/s 54 29,02,453 LTCG/(LTCL) 10,00,000 19,02,453 Illustration-34 What shall be your answer in case: (a) Mr. X had purchased the old house on 13.5.2018 (ignore improvements prior to this date) and he purchased a new house for 10 lakh. Solution: Particulars Rs. AY 2020-21 Page 356 CFP Level 2 - Module 2 – Taxation - India

Nature STCA FVC 65,00,000 Less: Expenses 1,00,000 Less: CoA/ICoA 11,24,000 Less: CoI/ICoI Less: CoI/ICoI - STCG - Less: Exempt u/s 54 52,76,000 STCG/LTCG - 52,76,000 Illustration-35 Ms. Y sold a residential house for Rs.28,00,000 on 5.5.18 which was purchased for Rs.4,63,000 on 02.02.08. She deposited the desired amount in capital gains accounts scheme on or before due date of return for relevant previous year. She constructed residential house, construction expenses being Rs.12,00,000 (whole amount withdrawn from scheme), construction completed on 30.9.2019. She sold the new house on 27.11.19 for Rs.18,00,000. Compute capital gains taxable for AY 2020-21 in the hands of Ms. Y. Solution: Particulars Rs. AY 2020-21 Nature STCA FVC 18,00,000 Less: Expenses Less: CoA (12,00,000 – 12,00,000) - STCG - 18,00,000 Working Note: 28,00,000 AY 2019-20 10,04,961 FVC 17,95,039 Less: ICoA (4,63,000 x 280 / 129) LTCG Page 357 CFP Level 2 - Module 2 – Taxation - India

Less: Exempt u/s 54 12,00,000 LTCG 5,95,039 AY 2019-20 12,00,000 Deposit in CGAS 12,00,000 Less: Utilised LTCG NIL Section 54F 54G/54GA Assessee Individual or HUF Any assessee having industrial undertaking Transfer of Any capital asset other than Land, Building, Plant & residential house property Machinery, Furniture of industrial undertaking Nature of Capital Long-term Short-term or Long-term Gains New Asset Residential House Property Land, Building, Plant & Machinery, Furniture for industrial undertaking Other conditions  Purchase – within 1 year before or  Section 54G – Shifting of 2 years after the date of transfer industrial undertaking  of old house from urban area to rural  area Construction – completed within 3 years after the date of transfer  Section 54GA – Shifting of industrial undertaking Assessee does not own more than from urban area to SEZ 1 house property on the date of Purchase or construction – within 1 year before or transfer of old asset  3 years after the date of transfer of old assets Exemption Proportionate capital gains – in Amount of investment in new proportion to amount invested vs. net asset + expenditure incurred sale consideration on shifting the industry CGAS option Yes Yes Any violation in  If new house is transferred within If new asset is transferred 3 years from the date of CFP Level 2 - Module 2 – Taxation - India Page 358

future & impact acquisition of new house, then within 3 years from the date thereof capital gains exempted earlier of acquisition of new asset, shall be deemed to be the income then CoA of new asset (for (LTCG) of the previous year in which such transfer took place. It computing capital gains on shall be in addition to capital gains new asset) shall be reduced arising on transfer of new house by the amount of exemption. (STCG) Capital Gains of such asset  If one more house is acquired shall always be short-term within the period specified above, (because transferred within 3 then capital gains exempted years) earlier shall be deemed to be the income (LTCG) of the previous year in which such transfer took place. Illustration-36 Sumit purchases 2,500 (non–listed) shares in Amit Ltd. on August 16, 2004 for Rs.16,632. On May 17, 2007, he gets 500 bonus shares. On October 20, 2014, he acquires 1,500 right shares at the rate of Rs..17.48 per share. He sells 4,500 (non-listed) shares in Amit Ltd. on February 12, 2020 at the rate of Rs..150 per share (brokerage on sale: 2 per cent). He owns one residential house property. He purchases a residential house on June 29, 2020 forRs.3,50,000. Ascertain the amount of capital gains chargeable to tax for the assessment year 2020-21. Solution: Particulars 2500 500 bonus 1500 right original shares shares shares Gross Sale consideration @ Rs.150 per share 3,75,000 75,000 2,25,000 Less: Expenses on transfer (Brokerage @ 2%) 7,500 1,500 4,500 Net Sale consideration 3,67,500 73,500 2,20,500 Less: Indexed cost of acquisition (Note 1) 42,537 Nil 31,573 Long-term capital gain 3,24,963 73,500 1,88,927 Long-term capital gain as percentage of net sale consideration 88.42% 100% 85.68% CFP Level 2 - Module 2 – Taxation - India Page 359

Order of preference for claiming exemption u/s 54F 2 1 3 Exemption u/s 54F (Note 2) 2,44,495 73,500 Nil Long term capital gain 80,468 1,88,927 Taxable Long Term Capital Gain Nil 2,69,395 Notes: Rs.42,537 Rs.31,573 1. Indexed cost of acquisition is computed as follows: Original Shares (Non-Listed) = Rs.16,632 x 289/113 Right Shares (Non-Listed) = Rs.1,500 x 17.48 x 289/240 2. The amount of exemption is determined as under – Particulars Investment utilized for Exemption claiming exemption 73,500 Bonus shares [ Rs.73,500 x Rs.73,500 / Rs.73,500] 73,500 2,44,495 Original shares [ Rs.2,76,500 x 3,24,963/ 3,67,500] 2,76,500 3,22,582 Total [any other order of preference will give 3,50,000 lower exemption] Illustration-37 Mrs. Malini Hari shifted her industrial undertaking located in corporation limits of Faridabad, to a Special Economic Zone (SEZ) on 1.12.2019: The following particulars are available: Rs. 4,83,915 (a) Land: Purchased on 20.01.2006 23,85,000 Sold for 8,20,000 (b) Building [Construction completed on 14.03.2010] 11,39,000 WDV of building as on 01.04.2019 Sold for CFP Level 2 - Module 2 – Taxation - India Page 360

(c) WDV of cars as on 01.04.2019 7,40,000 Sold for 6,00,000 1,15,000 (d) Expenses on shifting the undertaking (e) Assets acquired for the undertaking in the SEZ (on or before 25.06.2020): 3,00,000 4,00,000 (i) Land 1,00,000 (ii) Building 3,20,000 (iii) Computers 2,00,000 (iv) Car 50,000 (v) Machinery (Second hand) (vi) Furniture There is no intention of investing in any other asset in this undertaking. Compute the exemption available u/s 54GA for the assessment year 2020-21. Solution: Where an assessee shifts an existing undertaking from an urban area to a SEZ and incurs expenses for shifting and acquires new assets for the undertaking in the SEZ, section 54GA comes into play. The capital gain, short-term or long-term, arising from transfer of land, building, plant and machinery in the existing undertaking would be exempt u/s 54GA if the assessee, within a period of one year before or three years after the date on which the transfer took place, (i) acquires plant and machinery for use in the undertaking in the SEZ; (ii) acquires land or building or constructs building for the business of the undertaking in the SEZ; (iii) incurs expenses on shifting of the undertaking. Computation of capital gain: 23,85,000 (a) Land: 11,95,310 Sale price Less: Indexed cost of acquisition 4,83,915 x 289/117 CFP Level 2 - Module 2 – Taxation - India Page 361

Long-term capital gain 11,89,690 (b) Building: 11,39,000 Sale value 8,20,000 Less: Opening WDV 3,19,000 Short-term capital gain u/s 50 (c) Plant: Car 6,00,000 Sale value 7,40,000 Less: Opening WDV (-)1,40,000 Short term capital loss u/s 50 1,79,000 Net short term capital gain ( Rs.3,19,000 – Rs.1,40,000) 13,68,690 Total capital gain (LTCG+STCG) i.e. Rs.11,89,690 + Rs.1,79,000 Exemption u/s 54GA is available in respect of the following assets acquired and expenses incurred: Land Rs. Building 3,00,000 Plant: 4,00,000 Computers Car 1,00,000 Machinery 3,20,000 Expenses of shifting 2,00,000 Total Exemption 1,15,000 14,35,000 Notes: 1. The total exemption available u/s 54GA is the lower of capital gains of Rs.13,68,690 or the amount of investment which is Rs.14,35,000. Hence, the amount of exemption available u/s 54GA is Rs.13,68,690. 2. Furniture purchased is not eligible for exemption u/s 54GA. CFP Level 2 - Module 2 – Taxation - India Page 362

3. There is no restriction regarding purchase of second hand machinery. 4. Computers and car would constitute Plant. Section 54GB Assessee Individual or HUF Transfer of Residential property (house or plot of land) Nature of Long-term Capital Gains Conditions 1. Invests net consideration in subscription of equity shares of eligible company on or before due date of Return of income (ROI) u/s 139(1) 2. Company in turn uses such net consideration for purchase of new asset within 1 year from the date of subscription. Exemption Proportionate capital gains – in proportion to amount ultimately invested in new assets vs. net consideration CGAS Option If company is not able to invest net consideration for purchase of new asset before the due date of ROI of assessee, then it may deposit under CGAS. If this amount not utilised within period of 1 year, amount exempted earlier shall become taxable in year in which 1 year expires in the hands of the assessee and nature shall be LTCG. Any violation in If shares/new asset is sold within next 5 years from the date of acquisition, future & then capital gains exempt shall become taxable in the year of default in the impact thereof hands of assessee (nature – LT). Capital gains on transfer of shares/new asset shall be separately chargeable to tax in the hands of assessee/company (nature – LT/ST). Eligible company – (i) Company is incorporated between 1st April of the PY in which capital gain arises and due date of ROI of the assessee. (ii) It is engaged in the business of manufacture of an article or a thing; (iii) Assessee must have voting rights > 50% after subscription (iv) Company qualifies to be a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006 CFP Level 2 - Module 2 – Taxation - India Page 363

\"new asset\" means new plant and machinery but does not include - (i) Second hand plant & machinery; (ii) P&M installed in office premises or residential accommodation; (iii) any office appliances including computers or computer software; (iv) any vehicle. Amendment made by Finance Act, 2019 [W.e.f A.y. 2020-21] The Finance Act, 2019 has amended section 54 GB so as to relax the condition in case of eligible start ups, restricting transfer of new asset being computer software from the current five years to three years (for other companies it shall remain same) The exemption will be available in case of any transfer of residential property made on or before 31.3.2019 (extended to 31.3.2021 by the Finance Act,2019) in case of an investment in eligible start up instead of eligible small and medium enterprise. Illustration-38 Mr. Akash sold his residential property on 2nd February, 2019 forRs.90 lakh and paid brokerage@1% of sale price. He had purchased the said property in May 2002 for Rs.26,05,698. In June, 2018, he invested Rs.75 lakh in equity of A (P) Ltd., a newly incorporated SME manufacturing company, which constituted 63% of share capital of the said company. A (P) Ltd. utilized the said sum for the following purposes – (a) Purchase of new plant and machinery during July 2018 –Rs.65 lakh (b) Included in (a) above areRs.6 lakh for purchase of computers andRs.8 lakh for purchase of cars. (c) Air-conditioners purchased forRs.1 lakh, included in the (a) above, were installed at the residence of Mr. Akash. (d) Amount deposited in specified bank on 28.9.2020 –Rs.10 lakh Compute the chargeable capital gain for the A.Y.2020-21. Assume that Mr. Akash is liable to file his return of income on or before 30th September, 2020 and he files his return on 29.09.2020. CFP Level 2 - Module 2 – Taxation - India Page 364

Solution: Particulars Rs. Gross consideration 90,00,000 Less: Expenses on transfer (1% of the gross consideration) Net consideration 90,000 Less: Indexed cost of acquisition ( Rs.26,05,698 × 289/105) 89,10,000 71,71,873 Less: Exemption u/s 54GB ( Rs.60,00,000 × Rs.21,60,000/ Rs.89,10,000) 17,38,127 Taxable capital gains 11,70,455 5,67,672 Deemed cost of new plant and machinery for exemption u/s 54GB Particulars Rs. Rs. 65,00,000 (1) Purchase cost of new plant and machinery acquired in July, 2016 15,00,000 50,00,000 Less: Cost of office appliances, i.e., computers 6,00,000 10,00,000 60,00,000 Cost of vehicles, i.e., cars 8,00,000 Cost of air-conditioners installed at the residence of Mr. 1,00,000 Akash (2) Amount deposited in the specified bank before the due date of filing of return Deemed cost of new plant and machinery for exemption u/s 54GB CFP Level 2 - Module 2 – Taxation - India Page 365

SUMMARY 1. Section 45 – charging section – there must be capital asset and there must be transfer. 2. Section 2(14) – Capital Asset means property of any kind except stock-in-trade, personal effects and rural agricultural in India. But jewellery, drawings, paintings, sculptures, etc. are capital asset although they are personal effects. 3. Section 47 – in some circumstances, like gift, etc., capital asset is not treated as transfer, in which cases, CoA & POH shall be taken of that of previous owner. 4. Capital gains are chargeable in the year in which transfer took place. But in case of conversion of capital asset into stock-in-trade, insurance claim and compulsory acquisition, capital gains are chargeable in the year in which money if actually received. 5. Long-term capital asset (LTCA) if period of holding > 36 months, otherwise it shall be short-term capital asset (STCA). In case of listed securities & units of equity oriented fund, period of holding is > 12 months to make them LTCA. In case of un listed shares and Immovable property if Poh>24 months –LTCA. 6. Section 50C – In case of sale of land/building, stamp duty value shall be the full value of consideration if it is more than actual sales price. Similar provision is applicable u/h PGBP if land/building held as stock-in-trade – Section 43CA. 7. CoA of goodwill shall be nil in case of self-generated goodwill. 8. In case of LTCA, Cost of Acquisition shall be indexed from the year first held by assessee or FY 81-82, whichever is later. But in case of gift, etc. indexation shall be from the year asset held by current owner, and not from the year held by previous owner. 9. In case of LTCA, CoI shall be indexed from the date of improvement whether by current owner or previous owner. CoI incurred prior to 01/04/2001 shall be ignored. 10. If asset is acquired before 01/04/2001, then CoA shall be Actual CoA or FMV as on 01/04/2001, whichever is higher. 11. Advance money forfeited by current owner (& not by previous owner) shall be subtracted from CoA or FMV, and balance CoA shall be indexed. W.e.f. 01/04/2014, any advance money forfeited shall be treated as IOS. 12. Section 111A – if shares or units of equity oriented fund are transferred and STT is paid at the time of transfer, then STCG is taxable @ 15%. 13. Section 10(38) is abolished and Section 112A inserted in Finance Act,2018, where LTCG from Equity or Equity related MF above 1 lakh is taxable @10% if STT is paid. CFP Level 2 - Module 2 – Taxation - India Page 366

Taxation of Gifts 1. Following gifts received by an Individual or a HUF is taxable u/h IOS (a) Money without consideration aggregating >Rs.50,000 (b) Specified movable property less purchase price >Rs.50,000 (c) Immovable property Stamp Duty Value less purchase price >Rs.50,000 2. If received from relatives, on occasion of marriage, etc. then nothing shall be taxable. 3. In case gift becomes taxable u/h IOS, then CoA in the hands of receiver shall be the FMV or SDV. POH shall start from the date of gift received. CFP Level 2 - Module 2 – Taxation - India Page 367

PRACTICE QUESTIONS Question-1 Mr. X’ furnishes the following data for the previous year ending 31.3.2020. a) Equity Shares of AB Ltd., 10,000 in number were sold on 31.5.2019, at Rs.350 for each share. b) The above shares of 10,000 were acquired by X’ in the following manner: (i) Received as gift from his father on 1.6.1999 (5,000 shares) the market price on 1.4.2001 Rs.206.80 per share. (ii) Bonus shares received from AB Ltd. on 21.7.2003 (2,000 shares). (iii) Purchased on 1.2.2012 at the price of Rs..208.48 per share (3,000 shares). c) Purchased one residential house at Rs.14,87,500, on 1.9.2020 from the sale proceeds of shares. d) ‘X’ is already owning a residential house, even before the purchase of above house. You are required to compute the taxable capital gain. He has no other source of income chargeable to tax. Question-2 Mr. Sunder furnishes the following particulars for the previous year ending 31.3.2020 and requests you to compute the taxable capital gain: (i) He had a residential house, inherited from father in 2002-03, the fair market value of which as on 1.4.2001 is Rs.5 lakhs. (ii) In the year 2003-04, further construction and improvements costingRs.6 lakhs. (iii) On 10.5.2019 the house was sold forRs.50 lakhs. Expenditure in connection with transferRs.50,000. (iv) On 20.12.2019, he purchased a residential house forRs.15 lakhs. Question-3 Arjun furnishes the following particulars and requests your advice as to the liability to capital gains for the assessment year 2020-2021. (i) Jewellery purchased by him on 10.03.2007 for Rs.1,15,000 was sold by him for a consideration of Rs..2,85,000 on 2.11.2019. (ii) He incurred expenses: a) At the time of purchase Rs.750 CFP Level 2 - Module 2 – Taxation - India Page 368

b) At the time of sale (for brokerage) Rs.4,000 (iii) He investedRs.1,20,000 in bonds with National Highway Authority of India out of sale consideration. On these facts: a) Compute the capital gains chargeable to tax. b) Whether Arjun would be entitled to any exemption? Question-4 A is a shareholder of X & Co. Ltd. holding 1,000 shares of the face value of Rs..10 each, allotted at the time of the company’s incorporation in May, 2003. The company made a right issue in the ratio of 1:1 on 15.7.17 at a premium of Rs.40 per share. Instead of taking up the right, he renounced it in favour of Rs. B’ at a price of Rs.10 per share. What is the capital gain chargeable in the hands of Rs. A’? What will be the cost of the shares in the hands of Rs. B’? Question-5 In April, 2010, S subscribed to the first issue of equity capital of a public limited company (face value of each share was Rs.100) to the extent of Rs..25,000.In 2013, the company converted the face value of its shares fromRs.100 to Rs.10 each. Half of the holding of the shares held by S was sold by him in October, 2019 for Rs.50,000.S had to pay a brokerage of 2% on sale. What is the nature of gains realised and compute the same assuming share are listed but are sold outside the stock exchange. Question-6 Arjun was holding 3000 shares in White Light Limited purchased by him on 8th August, 2010 at Rs.60 per share. He gifted these shares to his girlfriend Chitrangada on 10th February, 2011. Arjun married Chitrangada on 1st March, 2012.Chitrangada was allotted bonus shares by the company at the rate of one share for every three shares held on 10th September, 2019.Chitrangada sold all the shares including the bonus shares on 31st March, 2020 atRs.150 per share. State in whose hands capital gains on sale of shares is taxable. Also compute the capital gains. CFP Level 2 - Module 2 – Taxation - India Page 369

Question-7 Amin is the holder of 1,000 debentures of Amin Ltd. having a face value of Rs.1,000 each. The company has offered an option to the debenture-holders either to redeem the debentures at Rs.1,200 each or to convert the debentures into equity shares of equivalent value. The market value of the shares on the date of exercising the option is Rs.1,200 per share (face value Rs.1,000).What will be the tax consequences of the two options in the hands of the debenture-holder Amin? Question-8 Mr. A. sold shares of a public limited company forRs.5,00,000 on 1.10.2019, which had been acquired by him in October, 2006 forRs.50,000. He wants to utilize the said amount of sale consideration for purchase or construction of a new residential house. He already owns one residential house at the time of sale of the shares i.e., on 1.10.2019. He has deposited Rs.4,00,000 under the Capital Gains Deposit Account scheme with a specified bank on 30.4.2018. Ascertain the capital gain taxable in A’s hands for Assessment Year 2020-2021 and advise him as to what further action he has to take to avail of the exemption. Question-9 Smt. Asha purchases 1,000 equity shares in Right Ltd. at a cost of Rs.20 per share (brokerage @ 1%) in January, 1998. She gets 200 bonus shares in August, 2000. She again gets 500 bonus shares by virtue of her holding on February, 2008. Fair market value of the shares of Right Ltd. on April 1, 2001 is Rs.30. In January 2020, she transfers all her shares @Rs.150 per share (brokerage @ 2%). Compute the capital gains taxable in the hands of Smt. Asha for the assessment year 2020-21 assuming: a) Right Ltd. is an unlisted company & securities transaction tax was not applicable at the time of sale. b) Right Ltd. is a listed company and the shares are sold in a recognized stock exchange and Securities transaction tax was paid at the time of sale. Question-10 Nakul acquired a plot of land on 8.7.2007 forRs.8,00,000, which was sold 28.2.2020 forRs.40,00,000. The expenses of transfer wereRs.85,000. CFP Level 2 - Module 2 – Taxation - India Page 370

Nakul made the following investments on 10.3.2020 from the proceeds of the above plot: (1) Bonds of National Highways Authority of India redeemable after a period of 5 yearsRs.6,00,000. (2) Deposits under Capital Gain Scheme for purchase of a residential house as he does not own any house Rs.15,00,000. Compute the capital gain chargeable to tax for assessment year 2020-21. Question-11 Following are the details of income provided by Mr. Ramaswamy for the year ending 31.3.2020: (i) Rental income from property at Chennai -Rs.5,00,000, Municipal Value – Rs.4,00,000; Standard Rent -Rs.3,50,000, Fair Rent –Rs.3,00,000. (ii) Municipal tax paid to Municipality, Current year –Rs.40,000, Arrears – Rs.1,60,000. (iii) Interest on loan borrowed towards major repairs to the property –Rs.1,40,000. (iv) Arrears of rent from property at Hyderabad which was sold on 10.04.2015 – Rs.25,000. Mr. Ramaswamy furnishes the following additional information regarding sale of a property in Delhi: (i) Mr. Ramaswamy’s father acquired a property in April 2003 forRs.73,906. Mr. Ramaswamy acquired this property by inheritance on 1st December 2003 after the demise of his father. (ii) Fair Market Value as on 01.04.20011 was Rs.75,000. (iii) Fair Market Value as on 1.12.2003 was Rs.90,000. (iv) Sale consideration received is Rs.40,00,000. (v) Stamp duty value; 50,07,213. (vi) Mr. Ramaswamy has invested the sale consideration in a residential flat for Rs.25 lakhs out of the sale proceeds. A sum of Rs..20 lakhs was invested in Capital Gains Bonds issued by NHAI and Rural Electrification Corporation Limited. Compute the total income of Mr. Ramaswamy for the A.Y. 2020-21. Question-12 Ganesh sold a residential house on 30-9-2019 forRs.20,00,000. He had purchased this house on 15-11- 2003 for Rs.2,00,000 and had spent Rs.50,000 on improvement of the house during the year 2004-05. He purchased a new house on 1-12-2019 for Rs.5,00,000. He sold this house on 16-8-2020 for Rs. 8,00,000. He purchased another house on 1-12-2020 forRs.10,00,000. Compute his capital gains for the assessment years 2020-21 and 2021-22. CFP Level 2 - Module 2 – Taxation - India Page 371

Question-13 The house property of Charu is compulsorily acquired by the government for Rs.15,00,000 vide Notification issued on 12-3-2014. Charu had purchased the house in 2003-04 for Rs.5,00,000. The compensation is received on 15-4-2019. The compensation is further enhanced by an order of the court on 15-5-2020 and a sum of Rs.4,00,000 is received as enhanced compensation on 21-10-2018. A wants to claim full exemption of the capital gains. Advise Charu in this respect. Compute the capital gain and determine the year in which it is taxable. Also specify the period upto which the investment in the new house should be made by the assessee. CFP Level 2 - Module 2 – Taxation - India Page 372

ANSWERS Answer-1 Shares 5,000 shares 2,000 shares 3,000 shares Sale consideration (a) 17,50,000 7,00,000 10,50,000 Less: Indexed Cost of Acquisition (5,000 x 350) (2,000 x 350) (3,000 x 350) 29,88,260 NIL 9,82,349 Long-term Capital Gain / (Loss) (b) Ratio (b x 100 / a) (5,000 x 206.80 x 7,00,000 (3,000 x 208.48 x Ranking 289/ 100) 100% 289/ 184) (12,38,260) I 67,440 Exemption u/s 54F -NA- 6.4% -NA- 7,00,000 II Taxable long-term capital gains -NA- 50,580 Total NIL (12,38,260) (67,440x 7,87,500/ 10,50,000) 16,860 (12,21,400) Note: Exemption u/s 54F can be availed by the assessee subject to fulfilment of the following conditions – (a) The assessee should not own more than one residential house on the date of transfer of the long-term capital asset; (b) The assessee should purchase a residential house within a period of 1 year before or 2 years after the date of transfer or construct a residential house within a period of 3 years from the date of transfer of the long-term capital asset. In this case, the assessee has fulfilled the two conditions mentioned above. Therefore, he is entitled to exemption u/s 54F. Answer-2 Computation of taxable capital gains of Mr. Sunder for A.Y.2020-21 CFP Level 2 - Module 2 – Taxation - India Page 373

Net Sale consideration Sale price 50,00,000 Less: Expenses on sale 50,000 49,50,000 Less: Indexed cost of acquisition (5,00,000 x 289/ 100) 14,45,000 30,35,825 19,14,175 Indexed cost of improvement (6,00,000 x 289/ 109) 15,90,825 15,00,000 Long term capital gain 4,14,175 Less: Exemption u/s 54 (Cost of purchase of new residential house) Taxable long term capital gain Note: As per section 49(1)(iii)(a) read with section 55(3), the cost of acquisition of an asset which is inherited shall be the cost for which the previous owner acquired it. Where the cost to the previous owner is not known the fair market value on the date on which the previous owner acquired it shall be taken as the cost. In the given question, in the absence of the above information, it is assumed that the previous owner acquired it before 1.4.2001 and the cost of acquisition is taken to be the FMV on 1.4.2001 i.e.Rs.5 lakhs Answer-3 Computation of capital gains chargeable to tax Particulars Rs. 2,85,000 Sale consideration of jewellery Deduct: Expenses on transfer 4,000 2,81,000 Less: Indexed cost of acquisition (1,15,750 х 289/122) 2,74,194 Long term capital gain Less: Investment u/s 54EC of the Act Rs.1,20,000. Deduction limited to 6,806 Capital gains chargeable to tax 6,806 Nil CFP Level 2 - Module 2 – Taxation - India Page 374

Note 1: It is assumed that Arjun has investedRs.1,20,000 in bonds with NHAI within the specified time u/s 54EC i.e. within 6 months from the date of transfer. Note 2: Expenditures incurred at the time of purchase is included in the indexed cost of acquisition. Answer-4 ‘A’ was offered 1,000 shares of X & Co. Ltd at a cost of Rs..50 per share (face valueRs.10 plus premium of Rs.40).He renounced the rights at a price of Rs.10 per share in favour of Rs. B’. The cost of acquisition of the right, in terms of section 55(2)(aa)(ii), will be Nil. Therefore, the entire amount of Rs..10,000 received from B will be charged to capital gains tax. As the period of holding is less than 36 months, in respect of ‘right to subscribe for right shares’, it will be treated as short-term capital gain. The cost of acquisition of shares in the hands of ‘B’ will be as under: Particulars Rs. Amount paid to ‘A’ for acquiring right to subscribe for right shares 10,000 Amount paid to X & Co Ltd @ Rs.50 per share for 1000 shares 50,000 Cost of acquisition of 1000 shares 60,000 Answer-5 It is assumed that the sale of shares is not exempt u/s 10(38). Asset held by the investor for more than 12 months. Hence, character of asset is a long term capital asset and any excess realisation will yield long term capital gains. In calculating such gains, the assessee will be entitled to refix the cost of acquisition by utilizing the cost inflation index. Cost of purchase Rs.25,000 Face Value Rs.100 Hence no. of shares purchased 250 CFP Level 2 - Module 2 – Taxation - India Page 375

Conversion resulted in the face value being reduced fromRs.100 to Rs.10 per share; hence the assessee’s holdings of shares would have become 2500 shares of Rs..10 each, since there has been no change in actual cost. Sale of half the holdings means, the investor had sold 1250 shares in October, 2017. Particulars Rs. Sale proceeds realised 50,000 Less: Brokerage paid at 2% 1,000 Net realisation 49,000 Cost of acquisition: 12,500 х 272/ 220 15,455 Capital gains - Long term 33,545 Tax rate on long term capital gain - 20% 6,910 The assessee may compute capital gain without indexation and it would beRs.36,500 in the above case. Tax thereon would be at 10% [Section 112(1)] Answer-6 Assuming the shares gifted by Arjun to Chitrangada are listed shares and the transfer is made by Chitrangada through recognized stock exchange and securities transaction tax is paid on such transfer, the entire capital gain is exempt u/s 10(38). Hence, the taxability of the gain does not arise. If the shares are not listed and do not satisfy the conditions of section 10(38), then the computation of capital gain has to be made. As per section 64(1)(iv) of the Income-tax Act in computing the total income of any individual, there shall be included all such income as arises directly or indirectly to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart.For applying this clubbing provision the marital status must exist-both at the time of transfer of asset and at the time of accrual of income. This view was taken by the Supreme Court in the case of Philip Johan Plasket Thomas v. CIT 49 ITR 97. Arjun gifted the shares to Chitrangada before marriage.Hence, section 64(1)(iv) shall not apply and capital gain on sale of shares is taxable in the hands of Chitrangada. CFP Level 2 - Module 2 – Taxation - India Page 376

Computation of Capital Gains Long-term Capital Gains (Original Shares) 3000 original shares are long-term capital assets, as they were held for a period exceeding 12 months before sale.Since shares were acquired by way of gift by Chitrangada, the period of holding of shares by Arjun shall be included in computing the period of holding of shares before sale by Chitrangada as per section 2(42A). Sale proceeds of 3000 shares 4,50,000 Cost of acquisition - 1,80,000 [Cost to Arjun shall be treated as cost to Chitrangada as per Sec 49(1)] 3,11,497 Indexed cost of acquisition (1,80,000 х 289/ 167) 1,38,503 Long term capital gain Short term capital gain (For Bonus Shares) As bonus shares were held for a period not exceeding 12 months before sale by Chitrangada, they are short term capital assets. Sale proceeds of 1000 bonus shares 1,50,000 Cost of bonus shares (Cost shall be deemed to be ‘Nil’ as per section Nil 55(2)(aa)(iiia)) Short term capital gain 1,50,000 Total capital gain 2,65,670 Answer-7 The first option is redemption of debentures. The second option is conversion of debentures into equity shares of the company. CFP Level 2 - Module 2 – Taxation - India Page 377

If the first option is exercised, it would result in the levy of capital gains tax. Redemption has not been defined under the Companies Act but in common parlance, it means buy back, recover or convert into cash. Debentures are capital assets within the meaning of section 2(14). The question for consideration is whether redemption results in “transfer” as defined in section 2(47). Courts have held in the context of redemption of shares that it results in a transfer. Even if redemption is not considered as a sale, it will still result in the extinguishments of a right. The right in the debentures comes to an end on redemption. Hence there will be a capital appreciation of Rs..2 lakhs which can be appropriately indexed for cost and the capital gains arrived at. By the second option, there will be no capital gain as section 47(x) covers conversion of debenture into shares as ‘not to be regarded as transfer’. Answer-8 (a) Since Mr. A sold shares of public limited company, it would have been sold through stock exchange in India and securities transaction tax would have been paid on such transaction. In which case, the capital gain is exempt from tax u/s 10(38) of the Act .In such case, no further explanation / advise is required to be given to the assessee. (b) Assuming the assessee had not transferred the shares in a manner that securities transaction tax is paid / payable on such transaction and it is not exempt u/s 10(38), the following can be the basis for advise to the assessee. Computation of capital gains Sale consideration 5,00,000 Less: Indexed cost of acquisition ( Rs.50,000 x 289/122) 1,18,442 Amount of long term capital gain 3,81,558 Less: Exemption u/s 54F (4,00,000 x 3,88,525/ 5,00,000) 3,05,246 Taxable long term capital gain 76,312 Section 54F of the Income-tax Act, 1961 relates to capital gains arising from transfer of any long term capital asset, not being a residential house (called original asset) if the sale proceeds are utilized for purchase/construction of a residential house (called new asset) within the prescribed period and subject to fulfillment of conditions prescribed in the said section. CFP Level 2 - Module 2 – Taxation - India Page 378

The proviso to sub-section (1) of the section provides that the said exemption will be available in a case where the assessee owns only one residential house, other than the new asset, on the date of transfer of the original asset and does not acquire within one year or constructs within three years any residential house other than the new asset. The assessee in the present case will, therefore, be entitled to get deduction u/s 54F of the Act. However, Mr. A should note that he should utilize the amount deposited in Capital Gains Accounts Scheme for purchase/construction of residential house before expiry of 3 years from the date of transfer of shares, failing which, tax on capital gains attributable to the unutilized amount will be charged to tax in the year in which the three year period expires. Answer-9 Computation of Capital Gains for the AY 2020-21 (a) Right Ltd. is an unlisted company: Particulars Rs. Rs. 1000 original shares 60,300 Sale proceeds (1000 x Rs.150) 1,50,000 Less: Brokerage paid (2% of Rs.1,50,000) 3,000 Net Sale consideration Less: Indexed cost of acquisition ( Rs.30 x 1000 x 289/ 100) 1,47,000 Long term Capital Gain 86,700 200 bonus shares 30,000 Sale proceeds (200 x Rs.150) 600 Less: Brokerage paid (2% of Rs.30,000) Net Sale consideration 29,400 Less: Indexed cost of acquisition ( Rs.30 x 200 x 289/ 100) (Note) 17,340 Long term Capital Loss 12,060 500 bonus shares Page 379 CFP Level 2 - Module 2 – Taxation - India

Sale proceeds (500 x Rs.150) 75,000 Less: Brokerage paid (2% of Rs.75,000) 1,500 Net sale consideration 73,500 Less: Cost of acquisition Long term Capital Gain Nil Long term Capital Gains 73,500 (1,45,860) Note: The assessee is allowed to opt for FMV as on 1.4.2001 for bonus shares allotted before 1.4.2001 but for bonus shares allotted after 31.3.2001 the cost of acquisition is NIL. (b) Right Ltd. is a listed company The Long-term Capital Gains on transfer of equity shares through a recognized stock exchange on which securities transaction tax is paid is tax u/s 112A. Hence upto one lakh LTCG is exempt and above that 10% plus 4% cess. Answer-10 Computation of capital gain chargeable to tax for A.Y.2020-21 Particulars Rs. Rs. Gross sale consideration 40,00,000 Less: Expenses of transfer Net sale consideration 85,000 Less: Indexed cost of acquisition ( Rs.8,00,000 x 289/ 129) 39,15,000 17,92,248 Less: Exemption u/s 54EC [Investment in bonds of National 21,22,752 Highways Authority of India] 6,00,000 14,53,709 6,69,044 Exemption u/s 54F for purchase of residential house [Capital gain × Amount invested / Net sale consideration] 8,53,708 (22,28,178 x 15,00,000 / 39,15,000) Taxable long-term capital gain CFP Level 2 - Module 2 – Taxation - India Page 380

Answer-11 Computation of Total income of Mr. Ramaswamy for the A.Y. 2020-21 Particulars Amount Amount ( Rs.) ( Rs.) Income from House Property 5,00,000 2,00,000 Computation of Gross Annual Value (GAV) 3,00,000 ALV for the year = Higher of Municipal Value (MV) and Fair Rent (FR), 2,30,000 70,000 but restricted to Standard Rent (SR) 3,50,000 Actual rent received or receivable for the period 5,00,000 GAV is the higher of the ALV and Actual rent received or receivable 5,00,000 Gross Annual Value (GAV) Less: Municipal taxes paid (Current year + Arrears) Net Annual Value (NAV) Less: Deduction u/s 24 (i) 30% of NAV i.e. 30% of Rs.3,00,000 90,000 (ii) Interest on loan borrowed 1,40,000 Arrears of rent received from property in Hyderabad 25,000 17,500 Less: Deduction u/s 24B – 30% of Arrears of rent 7,500 87,500 Income from House Property Capital Gains 50,07,213 Sale consideration as per section 50C (Note1) 1,95,952 Less: Indexed cost of acquisition (Note 2) 48,11,261 Long Term Capital Gains Less: Exemptions u/s 54 & 54EC Page 381 CFP Level 2 - Module 2 – Taxation - India

- u/s 54 – Residential Flat 25,00,000 - u/s 54EC – NHAI & RECL bonds 20,00,000 Long term Capital Gains Total Income 3,11,261 Total Income (R/o) 3,98,761 3,98,760 Notes: 1. As per section 50C, where the consideration received or accruing as a result of transfer of a capital asset, being land or building or both, is less than the valuation by the stamp valuation authority, such value adopted or assessed by the stamp valuation authority shall be deemed to be the full value of consideration. Hence, the value of house property sold by an individual shall be higher of (i) actual sale consideration & (ii) value applied for stamp duty. (a) Actual sale consideration =Rs.40,00,000 (b) Value for stamp duty =Rs.50,07,213 Therefore, the value for stamp duty i.e.Rs.50,07,213 shall be taken as the sale consideration for the purpose of capital gain as per section 50C. 2. Indexed cost of acquisition =Rs.73,906 x 272/109 =Rs.1,95,952 Answer-12 Computation of Capital gains of Mr. Ganesh for the A.Y.2020-21 Particulars Rs. Rs. Full value of consideration 20,00,000 Less: Indexed cost of acquisition (2,00,000 x 289/ 109) 5,30,275 1,27,876 6,58,151 Indexed cost of improvement (50,000 x 289/ 113) 13,41,849 Long-term capital gain 5,00,000 Less: Exemption u/s 54 – Amount invested Rs.5,00,000 8,41,849 Taxable Long-term capital gain CFP Level 2 - Module 2 – Taxation - India Page 382

Computation of Capital gains of Mr. Ganesh for the A.Y. 2021-22 Rs. 8,00,000 Particulars Full value of consideration Nil Less: Cost of acquisition (5,00,000–Capital gain exempt u/s 54 i.e., 5,00,000) 8,00,000 Short-term capital gain Note: Exemption u/s 54 cannot be claimed in respect of house purchased on 1.12.16, since this exemption can be availed only in respect of long term capital gains. Answer-13 Although the house property is compulsorily acquired on 12-3-2014 the capital gain will arise in the previous year in which full or part of the compensation is first received i.e. previous year 2019-20. However, indexation will be done till the year of compulsory acquisition. Computation of Capital Gains for the Assessment year 2020 -21 Full value of consideration Rs. Less: Indexed cost of acquisition – Rs.5,00,000 x 220/ 109 15,00,000 Long term capital gain 10,09,174 4,90,826 The assessee should either invest at leastRs.4,90,826 for the purchase/construction of a residential house property on or before 31-7-2020 (relevant due date) and/or deposit the amount under the capital gain scheme on or before 31-7-2020, to be utilised for purchase of house property by 14-4-2021 and/or construction of the house property by 14-4-2022. CFP Level 2 - Module 2 – Taxation - India Page 383

Computation of Capital Gains for the Assessment year 2021-22 Rs. 4,00,000 Enhanced compensation Less: Cost/Indexed cost of acquisition Nil Long-term Capital Gain 4,00,000 The assessee should either invest at leastRs.4,00,000 for the additional construction of the residential house property already acquired for claiming u/s 54 on or before 31-7-2021 (relevant due date) and/ or deposit the amount under the capital gain scheme on or before 31-7-2021 to be utilised for additional construction of the house property by 20-10-2022. Alternatively, in case of both the capital gains, he may invest whole of the capital gains in the bonds specified u/s 54EC within 6 months from the date of receipt of compensation. CFP Level 2 - Module 2 – Taxation - India Page 384

Sub-Section 2.5: Income from Residuary Sources and Tax Calculation Rules Learning Objectives After studying this unit, you would be able to understand –  which are the income chargeable under the head “Income from other sources”  what is the rate of tax applicable on casual income  what are the admissible deductions while computing income under this head  what are the inadmissible deductions while computing income under this head  when clubbing provisions are attracted  when income of the spouse is clubbed with the income of the individual  when income of son’s wife is clubbed in the hands of the individual.  that minor’s income has to be clubbed in the hands of the parent  the nature of income of minor, in respect of which clubbing provisions are not attracted  when income of HUF is clubbed in the hands of a member of the HUF.  the methodology of set-off / carry-forward and set-off of losses  about inter-source adjustments and the cases where inter-source adjustment is not permitted  about inter-head adjustments and the cases where inter-head adjustment is not permitted  the conditions to be satisfied for carry forward and set-off of loss from house property  the conditions to be satisfied for carry forward and set-off of business loss and speculation business loss  the conditions to be satisfied for carry forward and set-off of business loss and unabsorbed depreciation in certain cases of amalgamation, demerger etc.  the manner of inter-source and inter-head set-off in case of capital losses  the maximum period for which different losses can be carried forward  treatment of unabsorbed depreciation and business loss, where there is a change in the constitution of the firm  treatment of unabsorbed depreciation and business loss in the case of closely held companies  the order of set-off of losses  the types of deductions allowable from gross total income  what are the permissible deductions in respect of payments  what are the permissible deductions in respect of incomes  what is the deduction allowable in the case of a person with disability CFP Level 2 - Module 2 – Taxation - India Page 385

 Comprehend as to what is meant by total income  Identify the income earned in different capacities by an individual which are to be considered while computing his total income  Understand the steps involved in computation of total income and tax liability of an individual. 2.5.1. Income from Other Sources (1) Income from other sources (charging section) – Section 56(1) Income of every kind, which is not taxable under any of the other heads, shall be taxable under head IOS. (2) Winnings from lotteries, etc. 1. Following winnings shall be taxable u/h IOS: (a) Lotteries (b) Crossword puzzles (c) Races including horse races (d) Card games & other games (includes game show like KBC) (e) Gambling or betting 2. Such winnings are taxable at special rate of tax @ 30% - Section 115BB. 3. Gross amount of winnings is taxable. No expenditure is allowed from such income, even expenditure of lottery ticket on which assessee has won the winnings. 4. No loss can be set-off against such winnings. 5. Deductions u/c VI-A (Sections 80C to 80U) shall not be subtracted from such winnings. 6. Slab rates of Rs..2,50,000, etc. cannot be adjusted from such incomes in case other incomes fall short of such limit. 7. In nutshell, if assessee has won (e.g.)Rs.10,000, in any case he has to pay tax of Rs..3,000 (± surcharge/rebate + cess). 8. There are TDS provisions on winnings from lotteries, etc. u/s 194B & 194BB, according to which TDS on such winnings shall be deducted @ 30%. While calculating IOS on account of such winnings, amount received by assessee net of TDS shall be gross up to get Income from winnings. CFP Level 2 - Module 2 – Taxation - India Page 386

Illustration-1 Mr. X won a lottery and received (i)Rs.70,000 (ii)Rs.7,70,000 net of TDS. Compute his income from winnings from lotteries. Solution: 1,00,000 11,00,000 Illustration-2 Mrs. A participated in KBC and receivedRs.2,80,000 (net of TDS). Her other incomes are Rs.(i) 3,15,000 (ii)Rs.1,10,000 (iii)Rs.40,000. Compute her total income and net tax liability assuming she paid LIC premium of Rs..55,000 for her life during the year. Solution: Other incomes 3,15,000 1,10,000 40,000 Winnings 4,00,000 4,00,000 4,00,000 GTI 7,15,000 5,10,000 4,40,000 Less: Deductions 55,000 55,000 40,000 TI 6,60,000 4,55,000 4,00,000 Tax on winnings 1,20,000 1,20,000 1,20,000 Tax on other incomes 500 - - Less: rebate u/s 87A 1,20,500 1,20,000 1,20,000 - 12,500- 12,500 Add: Cess @ 4% 1,07,500 1,07,500 1,20,500 4,300 4,300 Less: TDS 4,820 1,11,800 1,11,800 Tax payable/(refundable) 120000 120000 1,25,350 8,200 8,200 1,20,000 5,350 CFP Level 2 - Module 2 – Taxation - India Page 387

(3) Dividend – Section 2(22) Dividend includes:  Final Dividend (to equity or preference shareholders)  Interim Dividend (to equity or preference shareholders)  Distribution of assets (to equity or preference shareholders) – Section 2(22)(a)  Distribution of debentures (to equity or preference shareholders) or bonus shares (to preference shareholders) – Section 2(22)(b)  Distribution at the time of liquidation (to equity shareholders) – Section 2(22)(c)  Distribution on reduction of share capital (to equity shareholders) – Section 2(22)(d) Notes: 1. On abovesaid dividends, company (widely held or closely held) is required to pay Corporate Dividend Tax (CDT) @ 15%. Also called Dividend Distribution Tax (DDT) or tax on distributed profits – Section 115-O. CDT rate of 15% shall be applied in such a manner that it is 15% of (distributed profits + CDT). Same shall be increased by surcharge @ 12% and health & education cess @ 4%. 2. Said dividend is exempt in the hands of shareholder – Section 10(34). Tax on certain dividends received from domestic companies [Section 115BBDA] [w.e.f. A.Y. 2017-18] (1) Dividend in aggregate exceedingRs.10,00,000 received by certain persons to be taxed at the special rate of 10% [Section 115BBDA(1)]:Not withstanding anything contained in this Act, where the total income of an assesse, being— (i) an individual, or (ii) Hindu undivided family or (iii) a firm Resident in India, includes any income in aggregate exceeding Rs.10,00,000, by way of dividends declared, distributed or paid a domestic company, the income tax payable shall be the aggregate of– (a) the amount of income tax calculated on the income by way of such dividends in aggregate exceeding Rs.10,00,000, @10%; and CFP Level 2 - Module 2 – Taxation - India Page 388

(b) the amount of income tax with which the assesse would have been chargeable had the total income of the assesse been reduced by the amount of income by way of dividends. (2) No deduction to be allowed from dividend taxable at special rate under section 115BBDA(1) [Section 115BBDA(2)]: No deduction in respect of any expenditure or allowance or set off of loss shall be allowed to the assesse under way provision of this act in computing the income by way of dividends referred to in section 115BBDA(1)(a). 3. Said dividend or taxes thereon are not expenses for the company. 4. Similar treatment shall be applied for income on units paid by Mutual Fund Companies {Section 115R & 10(35)}. 5. Amounts distributed to the shareholders in abovesaid cases shall be treated as dividend to the extent of company possess accumulated profits. 6. In case of liquidation, assets distributed by the company to shareholders shall not be treated as transfer and hence no capital gains in the hands of company – Section 46(1) On the other hand, shares in the hands of the shareholder shall be treated as transfer & liable to capital gains – Section 46(2). (a) FVC in the hands of shareholder shall be: Money received + FMV of assets received Less: Deemed dividend u/s 2(22)(c) (b) POH & indexation shall be counted till the date of liquidation. Period between date of liquidation and date of distribution shall not be counted. (c) Capital gains shall be treated as income of the PY in which money and/or assets are received by the shareholder. (d) If later on, shareholder transfers the asset received on liquidation, its CoA shall be the FMV considered above and POH/Indexation shall start from the date on which asset received by the shareholder. 7. It may be noted that above said provisions are applicable only for domestic companies. If any dividend is received by a person from a foreign company, then same shall be taxable u/h IOS. Illustration-3 Ms. Vasumathi purchased 10,000 equity shares of Rejesh Co. Pvt. Ltd. on 28.2.2009 for Rs.1,20,000. The company was wound up on 31.7.2019. The following is the summarized financial position of the company as on 31.7.2019: CFP Level 2 - Module 2 – Taxation - India Page 389

Liabilities Rs. Assets Rs. 60,000 Equity shares 6,00,000 Agricultural lands 42,00,000 General reserve 40,50,000 4,50,000 46,50,000 Cash at bank 46,50,000 The assets were distributed to the shareholders in the proportion of their shareholding. The market value of 6 acres of agricultural land (in an urban area) as on 31.7.2019 isRs.10,00,000 per acre. The agricultural land received above was sold by Ms. Vasumathi on 28.2.2020forRs.15,00,000. Discuss the tax consequences in the hands of the company and Ms. Vasumathi. Solution: Company – no tax issues Ms. Vasumathi Land 10,00,000 Cash 75,000 1075000 - reserve Rs. 6,75,000 FVC for shares 4,00000 - ICOA (1,20,000 x 289 / 137) 2,53,138 LTCG 1,46,862 Dividend Exempt Sale of land 1500000 FVC 1000000 - cost 500000 STCG Buy-back of shares CFP Level 2 - Module 2 – Taxation - India Page 390

8. In case company buy-back its unlisted shares at more than issue price, company is required to pay tax on distributed profits @ 20% + surcharge @ 12% + cess @ 4% (i.e. 23.29%). Capital gains arising from such buy back shall be exempt in the hands of shareholder – Section 10(34A). In this case accumulated profits of the company shall not matter. 9. Tax on income distributed to shareholder in case of listed companies [section 10(34A) W.e.f 5.7.2019 is exempt. 10. Buy-back of other securities (e.g. listed shares, units, etc.) shall result into taxable capital gains in the hands of shareholder. Section 2(22)(e) 11. Advance or loan given by a closely held company to its equity shareholder, holding ≥ 10% voting power, shall be treated as dividend to the extent of accumulated profits. 12. On such dividend, company is not required to pay tax, but same is taxable in the hands of shareholder u/h IOS. (4) Other Incomes Taxable u/h IOS Nature of Income Remarks 1. Interest on  Not taxable on accrual basis but taxable in the hands of person securities receiving the interest in the year of receipt. E.g. debenture purchased by assessee on which interest is payable half yearly on 30/06 and 31/12 of every year. Now 6 months interest (receivable on 31/12/2016) shall be taxable in the hands of assessee if debentures were purchased by him any time before 31/12/2016  Any commission or remuneration payable to any person for realising the interest shall be allowed as expenses. 2. Other interest  e.g. interest on loan, interest on FD, interest on saving bank a/c, etc.  Interest on Post Office Saving Account – exempt to the extent of Rs.3,500.  Interest on PPF – fully exempt 3. Interest on  Taxable u/h IOS in the year of receipt. refund of taxes  Refund of tax itself – income-tax & wealth-tax not taxable since not allowed as expense.  Refund of tax itself – other taxes shall be taxable u/h PGBP only. CFP Level 2 - Module 2 – Taxation - India Page 391

4. Hire charges  Depreciation as per section 32 shall be allowed of plant &  Other expenses like repair, insurance, etc. shall be allowed machinery 5. Family  Family pension means a regular monthly amount payable by the pension employer to the family of an employee in the event of his death.  Rs.15,000 or 1/3rd of such pension, whichever is lower, is exempt. 6. Income from sub-letting a house 7. Director’s sitting fee (for attending board meetings) 8. Rent of vacant land 9. MP & MLA’s salary 10. Fees for setting or checking of papers 11. Agricultural income from land outside India 12. Advance money for field 13. Interest on compensation enhance – 50% Taxable 50% deductible (5) Expenses Allowed – Section 57 Any expenditure incurred to earn such incomes shall be allowed as an expense except expenses of capital nature. (6) Expenses Not Allowed – Section 58 1. Personal expenses 2. Interest or salary paid outside India on which TDS is not deducted or is not deposited 3. Income-tax and Wealth-tax 4. Section 40A(2) – payment to relatives more than reasonable and section 40A(3) – payment in cash in a single day >Rs.10,000, shall apply u/h IOS also. 5. Expenditure incurred to earn any exempt income shall not be allowed under any of the provisions – Section 14A. Such expenses shall be exempt (i.e. cannot be claimed from other expenses) whether any such exempt income has been actually earned or not during the year. Illustration-4 Compute income under head Income from Other Sources of Mr. Z from the following information: CFP Level 2 - Module 2 – Taxation - India Page 392

(a) Director’s sitting fees – Rs.4,000 Taxable (b) Income from agricultural land in Haryana – Rs.10,000 Exempt (c) Income from agricultural land in Burma – Rs.20,000 Taxable (d) Ground Rent for land in J&K – Rs.11,000 Taxable (e) Interest on Postal Savings Bank A/c – Rs.500 Exempt (f) Interest on Deposits with IFCI – Rs.600 Taxable (g) Dividend from a foreign company – Rs.700 Taxable (h) Rent from sub-letting a house – Rs.25,000 Taxable Rent payable by Mr. Z for sub-let house – Rs.11,000 Expense Other expenses for sub-let house incurred by Mr. Z –Rs.1,100 Expense (i) Winnings from KBC (net) Rs.1,05,000 Taxable 150000 (j) Interest on securities (gross) – Rs.1,200 taxable Illustration-4 Compute income u/h Income from Other Sources from the following information of a senior citizen: (a) Director’s meeting fees from Z Ltd. (public substantially interested) Taxable – Rs.15,000 (b) Agricultural income from land situated in Afghanistan – Rs.20,000 Taxable (c) Interest (i) on Fixed Deposit with Bank (net of TDS @ 10%) – Rs.13,500 Exempt upto 50000 (ii) on Post Office Saving Account – Rs.4,000 Exempt 50000 U/S-80TTB (iii) on Government Securities – Rs.5,500 Taxable (iv) on PPF – Rs.10,000 Exempt (v) on National Saving Certificates VIII issue – Rs.11,000 Taxable (d) Dividend from B Ltd. – Rs.21,000 Exempt (e) Lottery prize (net) – Rs.23,100 Taxable 33000 He spent Rs.1,650 for purchasing 330 tickets of lottery, out of which Not allowed he won abovesaid prize on one of the tickets. CFP Level 2 - Module 2 – Taxation - India Page 393

2.5.2. Clubbing of Income (1) Clubbing in case of an Individual Assessee – Section 64 Nature of Income Provisions 1. Income from  Any asset other than house property (for house property, assets section 27 – deemed owner shall apply) transferred by  an individual Exceptions (in following cases, income shall not be clubbed, but (husband/wife) taxable in the hands of spouse only): to his spouse  Transfer for adequate consideration  Transfer in connection with an agreement to live apart (e.g. divorce)  Transfer before marriage (e.g. fiancée)  Relationship of husband & wife ceases to exist  Death of the individual  Clubbing shall take place forever.  If amount gifted by the individual is invested by the spouse in the sole proprietorship business, following PGBP head income shall be clubbed: Investment in business on 1st day of RPY out of gift Income from x received business Total investment in the business on 1st day of the RPY  Similar provision shall apply for interest from partnership firm if such gifted amount is invested in partnership firm. Salary and 2. Income from  profit from such firm shall not be clubbed. assets  Any asset including house property transferred by Exceptions (in following cases, income shall not be clubbed, but taxable in the hands of son’s wife only): an individual to  Transfer for adequate consideration his son’s wife  Transfer before son’s marriage (e.g. son’s fiancée)  Relationship of father/mother-in-law & son’s wife ceases to   exist  Death of the individual Clubbing shall take place forever. In case gifted amount is invested by the son’s wife in sole- proprietorship business or partnership firm business, abovesaid CFP Level 2 - Module 2 – Taxation - India Page 394