Tax

(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 for ₹2,00,000. He gifted the same to his son Mr. Cain on 13.4.06. Mr. Cain constructed a further floor costing ₹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 ₹20,00,000. For transfer purposes, he incurred expenses amounting to ₹45,000. Compute the Income u/h capital gains for AY 2020-21 in the hands of Mr. Cain assuming FMV of house property was ₹4,00,000 on 01.04.2001. Solution: ₹ Particulars LTCA AY 2020-21 20,00,000 Nature: 12.07.1988 – 13.01.2018 FVC 251

Less: Expenses 45,000 Less: ICoA (4,00,000 x 289 / 100) 10,88,000 Less: ICoI (1,50,000 x 289 / 167) 2,44,311 LTCG/(LTCL) (6,22,689) 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 ₹6,00,000. Later on he incurred expense of ₹3,00,000 on 05/05/1994 on account of improvement. He further incurred ₹4,00,000 on 06/06/2006 as improvement. He forfeited advance money of ₹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 ₹30,00,000. Mr. Baj, following the footsteps of his father, incurred ₹5,00,000 on improvement on 08/08/2009 and forfeited advance money of ₹70,000 on 09/09/2013. At last (on 11/11/2019), while shifting to America, Mr. Baj sold the property for ₹2,00,00,000 to Mrs. Saj on which date SDV was ₹2,25,00,000. For the purposes of transfer, Mr. Baj incurred expenses of ₹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 ₹8,00,000. Solution: ₹ Mr. Jaj – no tax implications LTCA 2,25,00,000 Mr. Baj 2,00,000 21,09,700 Particulars 9,47,540 AY 2020-21 9,76,351 Nature: 04.04.1982 – 11.11.2019 1,82,66,409 FVC Less: Expenses Less: ICoA (8,00,000 – 70,000 x 289 / 100) Less: ICoI (4,00,000 x 289 / 122) Less: ICoI (5,00,000 x 289 / 148) LTCG/(LTCL) 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 ₹90 lakh on 1.1.2020, when the stamp duty value 252

was ₹150 lakh. The agreement was, however, entered into on 1.7.2019 when the stamp duty value was ₹140 lakh. Mr. Hari had received a down payment of ₹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 ₹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 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 ₹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 ₹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,- 253

c. without consideration, the stamp duty value of which exceeds Rs.50000, the stamp duty value of such property; d. 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: e. any property, other than immovable property, - f. without consideration, the aggregate fair market value of which exceeds Rs.50000, the whole of the aggregate fair market value of such property; g. 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” 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. 254

Illustration-25 Mr. A purchased a Jewellery on 12.3.2009 for ₹2,00,000. Said jewellery was destroyed by fire on 13.3.2020 and he received insurance claim of ₹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? Solution: Particulars ₹ 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) 4,21,898 LTCG/(LTCL) 78,102 *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. Illustration-26 Mr. Dukhi purchased a residential self-occupied house property comprising of four floors on 10.12.2007 for ₹10,00,000. On 11.12.2010 Govt. compulsory acquired the property and fixed 255

compensation at ₹14,00,000 whereas FMV on that date was ₹30,00,000. He received ₹9,00,000 on 4.4.11 and the balance on 5.5.12. On appeal for the same (paid ₹1,50,000 to a lawyer), Court enhanced the compensation by ₹8,00,000 on 2.1.14. He received ₹5,00,000 on 8.5.16 and the balance on 9.6.17. Compute taxable capital gains for various assessment years. Solution: ₹ Particulars LTCA AY 2012-13 14,00,000 Nature: 10.12.2007 – 11.12.2010 - FVC 12,94,574 Less: Expenses 1,05,426 Less: ICoA (10,00,000 x 167 / 127) Nil LTCG/(LTCL) LTCA AY 2013-14 8,00,000 1,50,000 AY 2017-18 Nil Nature 6,50,000 FVC Less: Expenses Less: ICoA LTCG/(LTCL) 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. 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 for ₹50,000. On 15.3.19, he brought the same into his business as stock-in-trade and recorded the same at ₹4,00,000. On the said date FMV of ring was ₹3,70,000. On 11.11.2019 he sold the ring for ₹5,00,000. Compute the impact of above transaction for various assessment years. 256

Solution: ₹ Particulars STCA AY 2020-21 3,70,000 Nature: 15.07.2016 – 15.03.2019 - FVC 50,000 Less: Expenses 3,20,000 Less: CoA 1,30,000 STCG/(STCL) PGBP (5,00,000 – 3,70,000) 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 was ₹55,000? Solution: Particulars ₹ AY 2020-21 Nature: 15.07.2008 – 15.03.2019 LTCA FVC 3,70,000 Less: Expenses - 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 Particulars ₹ AY 2018-19 Nature: 15.07.1998 – 15.03.2016 LTCA FVC 3,70,000 Less: Expenses - Less: ICoA (55,000 x 280/ 100) 1,54,000 LTCG/(LTCL) (2,16,000) 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) 257

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. ₹2,50,000 or ₹3,00,000 or ₹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. @ ₹130/share on 12.2.19 and paid STT of ₹0.50/share. She sold 6,000 shares on 11.12.19 through recognized stock exchange for ₹180/share and paid STT of ₹0.60/share. She sold balance 4,000 shares on 20.3.20 through recognized stock exchange for ₹200/share and paid STT of ₹0.65/share. Compute capital gains taxable in the hands of Ms. Priyanka. Solution: 6000 4000 Particulars Assessment Year 2020-21 STCA LTCA Nature 6000 x 180 = 10,80,000 4000 x 200= FVC 8,00,000 - Less: Expenses 6000 x 130 = 7,80,000 4000x130 Less: CoA/ICoA 5,20,000 3,00,000 2,80,000 STCG/LTCG Illustration-30 What will be your answer in case asset has been preference shares instead of equity shares? Solution: 6000 4000 Particulars 258

Assessment Year 2020-21 STCA 180 LTCA Nature 130 FVC 6000 x = 4000 x 200 = 10,80,000 8,00,000 Less: Expenses Less: CoA/ICoA - - STCG/LTCG 6000 x = 4000 x 130 x 289 / 7,80,000 / 280 = 5,36,714 3,00,000 2,63,286 Illustration-30 Compute tax liability in both the Questions above assuming her income u/h PGBP is ₹4,20,000/ ₹2,20,000/ ₹27,000 and she contributed ₹45,000 towards PPF during the year. Solution: Particulars ₹ ₹ ₹ Income u/h PGBP 4,20,000 2,20,000 27,000 STCG u/s 111A 3,00,000 3,00,000 3,00,000 LTCG 280,000 2,80,000 2,80,000 GTI 10,00,000 8,00,000 6,07,000 Less: Deduction u/s 80C 45,000 45,000 27,000 TI 9,55,000 7,55,000 5,80,000 Tax on normal income 6,250 - - Tax on STCG u/s 111A @ 15% 45,000 33,750 7,500 Tax on LTCG u/s 112A @ 10% 18,000 18,000 18,000 69,250 51,750 25,500 Less: Rebate u/s 87A - 51,750 25,500 Add: Cess @ 4% 69,250 2,070 1,020 Total tax payable 2,770 53,820 26,520 Particulars 72,020 Income u/h PGBP ₹ ₹ STCG ₹ 2,20,000 27,000 LTCG 4,20,000 3,00,000 3,00,000 GTI 3,00,000 2,63,286 2,63,286 Less: Deduction u/s 80C 2,63,286 7,84,242 5,91,242 TI 9,84,242 45,000 45,000 TI (R/o) 45,000 7,39,242 5,46,242 9,39,242 7,39,240 5,46,240 9,39,240 259

Tax on normal income 47,500 11,250 1,600 Tax on LTCG @ 20% 52,657 52,657 52,657 1,00,157 63,907 54,257 Less: Rebate u/s 87A - - - Add: Cess @ 4% 1,00,157 63,907 54,257 Total tax payable 2,556 2,170 4,006 66,463 56,427 1,04,163 Rounded off 1,04,160 66,460 56,430 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. 9. Conversion of sole-proprietorship into company Following conditions need to be fulfilled: 260

(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 ₹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. 12. Transfer of capital asset in a scheme of reverse mortgage.  Transaction of reverse mortgage shall have no implication under the Income-tax Act.  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.  Money received by the individual shall not be treated as income. 261

 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. Illustration-31 Compute capital gains from the following DEMAT account assuming all the sales were made privately: Date of entry Particulars No. of 04/08/2008 Acquired shares directly in Demat form @ ₹25/share shares 1,000 262

20/06/2009 Acquired shares in physical form on 08/11/1986 2,000 @ ₹6/shareFmv on 01-04-2001; ₹50/ share 18/12/2010 3,000 15/03/2015 Acquired shares directly in Demat form @ ₹55/share 4,000 20/05/2017 Acquired shares in physical form on 24/10/1968 1,400 18/08/2017 @ ₹2/share. FMV as on 01/04/2001 was ₹ ₹50/share 4,800 Sale @ ₹200/share Sale @ ₹225/share Solution: Particulars 1400 shares 400 4800 shares 3000 200 1000 POH 04/08/2008 – 08/11/1986 1600 18/12/2010 24/10/1968 20/05/2017 – – – Nature 20/05/2017 08/11/1986 18/08/2017 18/08/2017 FVC LTCA – Less: 1000 x 200 = LTCA 18/08/2017 LTCA LTCA ICoA 2,00,000 LTCG 1000 x 25 x 400 x 200 = LTCA 3000 x 225 200 x 225 = 272/ 137 = 80,000 = 6,75,000 45,000 49,635 1600 x 225 1,50,365 400 x 50 x = 3,60,000 3000 x 55 x 200 x 50 x 272 / 100 = 272 / 167 = 272 / 100 = 54,400 1600 x 50 x 2,68,743 27,200 272 / 100 = 25,600 2,17,600 4,06,257 17,800 1,42,400 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 263

 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 ₹25 lacs. The expenses incurred for this transfer were ₹28,000. His balance Sheet as on 31-03-2017 is as under: Liabilities Total Assets Unit 1 Unit 2 Total ₹ ₹ ₹ ₹ Building Own Capital 15,00,000 Machinery 12,00,000 2,00,000 14,00,000 3,00,000 1,00,000 4,00,000 Revaluation Reserve (for 3,00,000 Debtors bldg. of unit 1) Other assets 1,00,000 40,000 1,40,000 1,50,000 60,000 2,10,000 Bank loan (70% for unit 1) 2,00,000 Total 17,50,000 4,00,000 21,50,000 Trade creditors (25% for unit 1,50,000 1) Total 21,50,000 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 ₹₹ 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 Assets: 3,00,000 Building 1,00,000 Machinery Debtors 264

Patents (50,000 less 2 year depreciation) 28,125 14,28,125 Others 1,00,000 Liabilities: Bank Loan 1,40,000 1,77,500 Trade Creditors 37,500 12,50,625 2.4.3. Netting Rules and Carry Forward of Capital Losses 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 Any assessee Any assessee HUF 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 before or 2 land has been within 6 years after the used by the months from date of assessee or his the date of transfer of old parents or transfer of old asset HUF for last 2 asset  Construction – years for  Exemption completed within 3 years agricultural shall be  50 lakh purposes maximum ₹50 after the date  Purchase – lacs of transfer of New asset old asset purchased within 2 years from the date of transfer of 265

old asset Exemption Amount of Amount of Amount of Amount of in Investment investment in new investment in investment house new agricultural bonds land CGAS Yes Yes Not available NA option Any If new asset is If new land is  If bonds  Asset Acquised violation in transferred within transferred within should not be future & 3 years from the 3 years from the transferred transferred within 3 years impact date of acquisition date of within 3 years thereof of new asset, then acquisition of from the date CoA of new asset new land, then of acquisition, (for computing CoA of new land then capital capital gains on (for computing gains exempted new asset) shall be capital gains on earlier shall be reduced by the new land) shall be deemed to be amount of reduced by the the income exemption. amount of (LTCG) of the Capital Gains of exemption. previous year such asset shall Capital Gains of in which such always be short- such land shall transfer took term (because always be short- place. It shall transferred within term (because be in addition 3 years) transferred within to capital gains 3 years) arising on transfer of bonds (LTCG or 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. 266

Amendment made in Finance Act, 2019 The Finance Act, 2019 has inserted a proviso under Section 54 (1) to provide as under: 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. 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 for ₹11,24,000 on 1.1.2007. He made an addition of a floor on 1.1.2009 by incurring expenditure of ₹3,51,000. On 1.1.2015 he further constructed a floor incurring ₹78,500. On 1.1.2020, he sold the house for ₹65,00,000. Expenses on transfer were 267

₹1,00,000. He invested ₹10,00,000 on purchase of a new residential house on 20.2.20. Compute capital gains taxable for various assessment years. Solution: ₹ Particulars LTCA AY 2020-21 65,00,000 Nature 1,00,000 FVC 26,62,590 Less: Expenses 7,40,430 Less: ICoA (11,24,000 x 289 / 122) 94,527 Less: ICoI (3,51,000 x 289 / 137) 29,02,453 Less: ICoI (78,500 x 289 / 240) 10,00,000 LTCG/(LTCL) 19,02,453 Less: Exempt u/s 54 LTCG/(LTCL) 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 ₹ AY 2020-21 Nature STCA FVC 65,00,000 Less: Expenses 1,00,000 Less: CoA/ICoA 11,24,000 Less: CoI/ICoI - Less: CoI/ICoI - STCG 52,76,000 Less: Exempt u/s 54 - STCG/LTCG 52,76,000 Illustration-35 Ms. Y sold a residential house for ₹28,00,000 on 5.5.18 which was purchased for ₹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 ₹12,00,000 (whole amount withdrawn from scheme), construction 268

completed on 30.9.2019. She sold the new house on 27.11.19 for ₹18,00,000. Compute capital gains taxable for AY 2020-21 in the hands of Ms. Y. Solution: Particulars ₹ 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) 12,00,000 LTCG 5,95,039 Less: Exempt u/s 54 LTCG AY 2019-20 12,00,000 Deposit in CGAS 12,00,000 Less: Utilised NIL LTCG Section 54F 54G/54GA Assessee Individual or HUF Any assessee having industrial undertaking Transfer of Any capital asset other than residential Land, Building, Plant & of house property Machinery, Furniture industrial undertaking Nature of Long-term Short-term or Long-term Capital Gains New Asset Residential House Property Land, Building, Plant & Machinery, Furniture for industrial undertaking Other conditions  Purchase – within 1 year before or 2  Section 54G – Shifting of years after the date of transfer of old industrial undertaking from house urban area to rural area  Construction – completed within 3  Section 54GA – Shifting of years after the date of transfer industrial undertaking from 269

 Assessee does not own more than 1 urban area to SEZ house property on the date of transfer  Purchase or construction – of old asset within 1 year before or 3 years after the date of transfer of old assets Exemption Proportionate capital gains – in proportion Amount of investment in new to amount invested vs. net sale asset + expenditure incurred on consideration shifting the industry CGAS option Yes Yes Any violation in  If new house is transferred within 3 If new asset is transferred within future & impact years from the date of acquisition of 3 years from the date of thereof new house, then capital gains exempted acquisition of new asset, then earlier shall be deemed to be the CoA of new asset (for computing  income (LTCG) of the previous year in capital gains on new asset) shall which such transfer took place. It shall be reduced by the amount of be in addition to capital gains arising exemption. Capital Gains of such asset shall always be short-term on transfer of new house (STCG) If one more house is acquired within (because transferred within 3 the period specified above, then capital years) gains exempted 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 ₹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 ₹17.48 per share. He sells 4,500 (non-listed) shares in Amit Ltd. on February 12, 2020 at the rate of ₹150 per share (brokerage on sale: 2 per cent). He owns one residential house property. He purchases a residential house on June 29, 2020 for ₹3,50,000. Ascertain the amount of capital gains chargeable to tax for the assessment year 2020-21. Solution: 2500 500 bonus 1500 right Computation of Capital Gains for the A.Y. 2020-21 Particulars original shares shares shares Gross Sale consideration @ ₹150 per share Less: Expenses on transfer (Brokerage @ 2%) 3,75,000 75,000 2,25,000 Net Sale consideration 7,500 1,500 4,500 3,67,500 73,500 2,20,500 270

Less: Indexed cost of acquisition (Note 1) 42,537 Nil 31,573 73,500 1,88,927 Long-term capital gain 3,24,963 Long-term capital gain as percentage of net sale consideration 88.42% 100% 85.68% 1 3 Order of preference for claiming exemption u/s 54F 2 Nil 73,500 Exemption u/s 54F (Note 2) 2,44,495 Nil 1,88,927 2,69,395 Long term capital gain 80,468 Taxable Long Term Capital Gain Notes: 1. Indexed cost of acquisition is computed as follows: Original Shares (Non-Listed) = ₹16,632 x 289/113 ₹42,537 Right Shares (Non-Listed) = ₹1,500 x 17.48 x 289/240 ₹31,573 2. The amount of exemption is determined as under – Particulars Investment utilized for Exemption claiming exemption 73,500 Bonus shares [ ₹73,500 x ₹73,500 / ₹73,500] 73,500 2,44,495 Original shares [ ₹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: (a) Land: Purchased on 20.01.2006 ₹ Sold for 4,83,915 23,85,000 (b) Building [Construction completed on 14.03.2010] WDV of building as on 01.04.2019 8,20,000 Sold for 11,39,000 7,40,000 (c) WDV of cars as on 01.04.2019 271

Sold for 6,00,000 (d) Expenses on shifting the undertaking 1,15,000 (e) Assets acquired for the undertaking in the SEZ (on or before 25.06.2020): 3,00,000 (i) Land 4,00,000 (ii) Building 1,00,000 (iii) Computers 3,20,000 (iv) Car 2,00,000 (v) Machinery (Second hand) 50,000 (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: (a) Land: 23,85,000 Sale price 11,95,310 Less: Indexed cost of acquisition 4,83,915 x 289/117 11,89,690 Long-term capital gain 11,39,000 (b) Building: 8,20,000 Sale value 3,19,000 Less: Opening WDV Short-term capital gain u/s 50 6,00,000 (c) Plant: Car Sale value 272

Less: Opening WDV 7,40,000 Short term capital loss u/s 50 (-)1,40,000 Net short term capital gain ( ₹3,19,000 – ₹1,40,000) 1,79,000 Total capital gain (LTCG+STCG) i.e. ₹11,89,690 + ₹1,79,000 13,68,690 Exemption u/s 54GA is available in respect of the following assets acquired and expenses incurred: ₹ Land 3,00,000 Building 4,00,000 Plant: Computers 1,00,000 Car 3,20,000 Machinery 2,00,000 Expenses of shifting 1,15,000 Total Exemption 14,35,000 Notes: 1. The total exemption available u/s 54GA is the lower of capital gains of ₹13,68,690 or the amount of investment which is ₹14,35,000. Hence, the amount of exemption available u/s 54GA is ₹13,68,690. 2. Furniture purchased is not eligible for exemption u/s 54GA. 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 273

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 If shares/new asset is sold within next 5 years from the date of acquisition, in 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 \"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 startups, 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 for ₹90 lakh and paid brokerage@1% of sale price. He had purchased the said property in May 2002 for ₹26,05,698. In June, 2018, he invested ₹75 lakh in equity of A (P) Ltd., a newly incorporated 274

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 – ₹65 lakh (b) Included in (a) above are ₹6 lakh for purchase of computers and ₹8 lakh for purchase of cars. (c) Air-conditioners purchased for ₹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 – ₹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. Solution: ₹ Computation of taxable capital gains for A.Y.2020-21 90,00,000 Particulars Gross consideration 90,000 Less: Expenses on transfer (1% of the gross consideration) 89,10,000 Net consideration 71,71,873 Less: Indexed cost of acquisition ( ₹26,05,698 × 289/105) 17,38,127 11,70,455 Less: Exemption u/s 54GB ( ₹60,00,000 × ₹21,60,000/ ₹89,10,000) Taxable capital gains 5,67,672 Deemed cost of new plant and machinery for exemption u/s 54GB Particulars ₹ ₹ 65,00,000 (1) Purchase cost of new plant and machinery acquired in July, 6,00,000 2016 8,00,000 15,00,000 1,00,000 50,00,000 Less: Cost of office appliances, i.e., computers 10,00,000 60,00,000 Cost of vehicles, i.e., cars Cost of air-conditioners installed at the residence of Mr. 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 275

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. 276

Taxation of Gifts 1. Following gifts received by an Individual or a HUF is taxable u/h IOS (a) Money without consideration aggregating > ₹50,000 (b) Specified movable property less purchase price > ₹50,000 (c) Immovable property Stamp Duty Value less purchase price > ₹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. 277

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 ₹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 ₹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 ₹208.48 per share (3,000 shares). c) Purchased one residential house at ₹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 ₹5 lakhs. (ii) In the year 2003-04, further construction and improvements costing ₹6 lakhs. (iii) On 10.5.2019 the house was sold for ₹50 lakhs. Expenditure in connection with transfer ₹50,000. (iv) On 20.12.2019, he purchased a residential house for ₹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 ₹1,15,000 was sold by him for a consideration of ₹2,85,000 on 2.11.2019. (ii) He incurred expenses: a) At the time of purchase ₹750 b) At the time of sale (for brokerage) ₹4,000 278

(iii) He invested ₹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 ₹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 ₹40 per share. Instead of taking up the right, he renounced it in favour of ₹B’ at a price of ₹10 per share. What is the capital gain chargeable in the hands of ₹A’? What will be the cost of the shares in the hands of ₹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 ₹100) to the extent of ₹25,000.In 2013, the company converted the face value of its shares from ₹100 to ₹10 each. Half of the holding of the shares held by S was sold by him in October, 2019 for ₹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 ₹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 at ₹150 per share. State in whose hands capital gains on sale of shares is taxable. Also compute the capital gains. Question-7 Amin is the holder of 1,000 debentures of Amin Ltd. having a face value of ₹1,000 each. The company has offered an option to the debenture-holders either to redeem the debentures at ₹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 ₹1,200 per share (face value ₹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 for ₹5,00,000 on 1.10.2019, which had been acquired by him in October, 2006 for ₹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 ₹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 279

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 ₹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 ₹30. In January 2020, she transfers all her shares @ ₹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 for ₹8,00,000, which was sold 28.2.2020 for ₹40,00,000. The expenses of transfer were ₹85,000. 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 years ₹6,00,000. (2) Deposits under Capital Gain Scheme for purchase of a residential house as he does not own any house ₹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 - ₹5,00,000, Municipal Value – – ₹4,00,000; Standard Rent - ₹3,50,000, Fair Rent – ₹3,00,000. – (ii) Municipal tax paid to Municipality, Current year – ₹40,000, Arrears ₹1,60,000. (iii) Interest on loan borrowed towards major repairs to the property – ₹1,40,000. (iv) Arrears of rent from property at Hyderabad which was sold on 10.04.2015 ₹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 for ₹73,906. Mr. Ramaswamy acquired this property by inheritance on 1st December 2003 after the demise of his father. 280

(ii) Fair Market Value as on 01.04.20011 was ₹75,000. (iii) Fair Market Value as on 1.12.2003 was ₹90,000. (iv) Sale consideration received is ₹40,00,000. (v) Stamp duty value; 50,07,213. (vi) Mr. Ramaswamy has invested the sale consideration in a residential flat for ₹25 lakhs out of the sale proceeds. A sum of ₹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 for ₹20,00,000. He had purchased this house on 15-11- 2003 for ₹2,00,000 and had spent ₹50,000 on improvement of the house during the year 2004-05. He purchased a new house on 1-12-2019 for ₹5,00,000. He sold this house on 16-8-2020 for ₹8,00,000. He purchased another house on 1-12-2020 for ₹10,00,000. Compute his capital gains for the assessment years 2020-21 and 2021-22. Question-13 The house property of Charu is compulsorily acquired by the government for ₹15,00,000 vide Notification issued on 12-3-2014. Charu had purchased the house in 2003-04 for ₹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 ₹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. 281

ANSWERS Answer-1 5,000 shares 2,000 shares 3,000 shares Shares 7,00,000 Sale consideration (a) 17,50,000 10,50,000 (5,000 x 350) (2,000 x 350) (3,000 x 350) Less: Indexed Cost of Acquisition NIL 29,88,260 9,82,349 Long-term Capital Gain / (Loss) (b) (5,000 x 206.80 x 289/ 7,00,000 (3,000 x 208.48 x Ratio (b x 100 / a) 100% Ranking 100) I 289/ 184) Exemption u/s 54F (12,38,260) 7,00,000 67,440 -NA- 6.4% -NA- II -NA- 50,580 (67,440x 7,87,500/ Taxable long-term capital gains (12,38,260) NIL Total 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 Net Sale consideration 50,00,000 49,50,000 Sale price 50,000 30,35,825 Less: Expenses on sale 14,45,000 Less: Indexed cost of acquisition (5,00,000 x 289/ 100) 15,90,825 Indexed cost of improvement (6,00,000 x 289/ 109) 282

Long term capital gain 19,14,175 Less: Exemption u/s 54 (Cost of purchase of new residential 15,00,000 house) 4,14,175 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. ₹5 lakhs Answer-3 ₹ Computation of capital gains chargeable to tax 2,85,000 Particulars 4,000 Sale consideration of jewellery Deduct: Expenses on transfer 2,81,000 2,74,194 Less: Indexed cost of acquisition (1,15,750 х 289/122) Long term capital gain 6,806 Less: Investment u/s 54EC of the Act ₹1,20,000. Deduction limited to 6,806 Capital gains chargeable to tax Nil Note 1:It is assumed that Arjun has invested ₹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 ₹50 per share (face value ₹10 plus premium of ₹40).He renounced the rights at a price of ₹10 per share in favour of ₹B’. The cost of acquisition of the right, in terms of section 55(2)(aa)(ii), will be Nil. Therefore, the entire amount of ₹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. 283

The cost of acquisition of shares in the hands of ‘B’ will be as under: ₹ 10,000 Particulars 50,000 Amount paid to ‘A’ for acquiring right to subscribe for right shares 60,000 Amount paid to X & Co Ltd @ ₹50 per share for 1000 shares Cost of acquisition of 1000 shares 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 ₹25,000 Face Value ₹100 Hence no. of shares purchased 250 Conversion resulted in the face value being reduced from ₹100 to ₹10 per share; hence the assessee’s holdings of shares would have become 2500 shares of ₹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 ₹ 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 be ₹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 284

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. 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 55(2)(aa)(iiia)) Nil 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. 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 285

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 ₹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 5,00,000 1,18,442 Sale consideration 3,81,558 Less: Indexed cost of acquisition ( ₹50,000 x 289/122) 3,05,246 Amount of long term capital gain 76,312 Less: Exemption u/s 54F (4,00,000 x 3,88,525/ 5,00,000) Taxable long term capital gain 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. 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 2020-21 286

(a) Right Ltd. is an unlisted company: Particulars ₹ ₹ 1000 original shares Sale proceeds (1000 x ₹150) 1,50,000 60,300 Less: Brokerage paid (2% of ₹1,50,000) 3,000 Net Sale consideration 12,060 Less: Indexed cost of acquisition ( ₹30 x 1000 x 289/ 100) 1,47,000 Long term Capital Gain 86,700 73,500 (1,45,860) 200 bonus shares 30,000 Sale proceeds (200 x ₹150) 600 Less: Brokerage paid (2% of ₹30,000) Net Sale consideration 29,400 Less: Indexed cost of acquisition ( ₹30 x 200 x 289/ 100) (Note) 17,340 Long term Capital Loss 75,000 500 bonus shares 1,500 Sale proceeds (500 x ₹150) 73,500 Less: Brokerage paid (2% of ₹75,000) Nil Net sale consideration Less: Cost of acquisition Long term Capital Gain Long term Capital Gains 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. 287

Answer-10 ₹ ₹ 40,00,000 Computation of capital gain chargeable to tax for A.Y.2020-21 85,000 Particulars 39,15,000 Gross sale consideration 17,92,248 Less: Expenses of transfer 21,22,752 Net sale consideration Less: Indexed cost of acquisition ( ₹8,00,000 x 289/ 129) 14,53,709 6,69,044 Less: Exemption u/s 54EC [Investment in bonds of National Highways 6,00,000 Authority of India] 8,53,708 Exemption u/s 54F for purchase of residential house [Capital gain × Amount invested / Net sale consideration] (22,28,178 x 15,00,000 / 39,15,000) Taxable long-term capital gain Answer-11 Computation of Total income of Mr. Ramaswamy for the A.Y. 2020-21 Particulars Amount Amount ( ₹) ( ₹) Income from House Property Computation of Gross Annual Value (GAV) 3,50,000 5,00,000 ALV for the year = Higher of Municipal Value (MV) and Fair Rent (FR), but 5,00,000 2,00,000 restricted to Standard Rent (SR) 5,00,000 3,00,000 Actual rent received or receivable for the period GAV is the higher of the ALV and Actual rent received or receivable 90,000 2,30,000 Gross Annual Value (GAV) 1,40,000 70,000 Less: Municipal taxes paid (Current year + Arrears) 17,500 Net Annual Value (NAV) Less: Deduction u/s 24 (i) 30% of NAV i.e. 30% of ₹3,00,000 (ii) Interest on loan borrowed Arrears of rent received from property in Hyderabad 25,000 Less: Deduction u/s 24B – 30% of Arrears of rent 7,500 288

Income from House Property 87,500 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 25,00,000 20,00,000 - u/s 54 – Residential Flat - u/s 54EC – NHAI & RECL bonds 3,11,261 Long term Capital Gains 3,98,761 Total Income 3,98,760 Total Income (R/o) 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 = ₹40,00,000 (b) Value for stamp duty = ₹50,07,213 Therefore, the value for stamp duty i.e. ₹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 = ₹73,906 x 272/109 = ₹1,95,952 Answer-12 Computation of Capital gains of Mr. Ganesh for the A.Y.2020-21 Particulars ₹ ₹ 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 ₹5,00,000 8,41,849 Taxable Long-term capital gain 289

Computation of Capital gains of Mr. Ganesh for the A.Y. 2021-22 ₹ 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 ₹ 15,00,000 Full value of consideration 10,09,174 Less: Indexed cost of acquisition – ₹5,00,000 x 220/ 109 4,90,826 Long term capital gain The assessee should either invest at least ₹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. Computation of Capital Gains for the Assessment year 2021-22 ₹ 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 least ₹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. 290

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 291

 what is the deduction allowable in the case of a person with disability  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 ₹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.) ₹10,000, in any case he has to pay tax of ₹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. Illustration-1 Mr. X won a lottery and received (i) ₹70,000 (ii) ₹7,70,000 net of TDS. Compute his income from winnings from lotteries. Solution: 292

1,00,000 11,00,000 Illustration-2 Mrs. A participated in KBC and received ₹2,80,000 (net of TDS). Her other incomes are ₹(i) 3,15,000 (ii) ₹1,10,000 (iii) ₹40,000. Compute her total income and net tax liability assuming she paid LIC premium of ₹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 - - 1,20,500 1,20,000 1,20,000 Less: rebate u/s 87A - 12,500- 12,500 1,20,500 1,07,500 1,07,500 Add: Cess @ 4% 4,820 4,300 4,300 1,25,350 1,11,800 1,11,800 Less: TDS 1,20,000 120000 120000 Tax payable/(refundable) 5,350 8,200 8,200 (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 above said dividends, company (widely held or closely held) is required to pay Corporate Dividend Tax (CDT) @ 15%. Also called Dividend Distribution Tax (DDT) or 293

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 exceeding ₹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 ₹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 ₹10,00,000, @10%; and (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 above said 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) 294

(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 ₹1,20,000. The company was wound up on 31.7.2019. The following is the summarized financial position of the company as on 31.7.2019: Liabilities ₹ Assets ₹ 60,000 Equity shares 6,00,000 Agricultural lands 42,00,000 General reserve 40,50,000 Cash at bank 4,50,000 46,50,000 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 is ₹10,00,000 per acre. The agricultural land received above was sold by Ms. Vasumathi on 28.2.2020 for ₹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 ₹ 6,75,000 FVC for shares 4,00000 - ICOA (1,20,000 x 289 / 137) 2,53,138 LTCG 1,46,862 Dividend Exempt 295

Sale of land 1500000 FVC 1000000 - cost 500000 STCG Buy-back of shares 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 securities person 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 ₹3,500.  Interest on PPF – fully exempt 3. Interest on  Taxable u/h IOS in the year of receipt. refund of  Refund of tax itself – income-tax & wealth-tax not taxable 296

taxes since not allowed as expense.  Refund of tax itself – other taxes shall be taxable u/h PGBP only. 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 pension by the employer to the family of an employee in the event of his death.  ₹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 > ₹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. 297

Illustration-4 Compute income under head Income from Other Sources of Mr. Z from the following information: (a) Director’s sitting fees – ₹4,000 Taxable (b) Income from agricultural land in Haryana – ₹10,000 Exempt (c) Income from agricultural land in Burma – ₹20,000 Taxable (d) Ground Rent for land in J&K – ₹11,000 Taxable (e) Interest on Postal Savings Bank A/c – ₹500 Exempt (f) Interest on Deposits with IFCI – ₹600 Taxable (g) Dividend from a foreign company – ₹700 Taxable (h) Rent from sub-letting a house – ₹25,000 Taxable Rent payable by Mr. Z for sub-let house – ₹11,000 Expense Other expenses for sub-let house incurred by Mr. Z – ₹1,100 Expense (i) Winnings from KBC (net) ₹1,05,000 Taxable 150000 (j) Interest on securities (gross) – ₹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 ₹15,000 Taxable (b) Agricultural income from land situated in Afghanistan – ₹20,000 (c) Interest Exempt upto 50000 (i) on Fixed Deposit with Bank (net of TDS @ 10%) – ₹13,500 Exempt 50000 (ii) on Post Office Saving Account – ₹4,000 U/S-80TTB Taxable (iii)on Government Securities – ₹5,500 Exempt (iv) on PPF – ₹10,000 Taxable (v) on National Saving Certificates VIII issue – ₹11,000 Exempt (d) Dividend from B Ltd. – ₹21,000 (e) Lottery prize (net) – ₹23,100 Taxable 33000 He spent ₹1,650 for purchasing 330 tickets of lottery, out of which he won Not allowed above said prize on one of the tickets. 298

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, section 27 – deemed owner shall apply) assets transferred Exceptions (in following cases, income shall not be clubbed, but by an individual  taxable in the hands of spouse only): (husband/wife)  Transfer for adequate consideration to his spouse  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: Income from x Investment in business on 1st day of RPY out of gift 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 profit from such firm shall not be clubbed. 2. Income from  Any asset including house property Exceptions (in following cases, income shall not be clubbed, but assets transferred  taxable in the hands of son’s wife only): by an individual  Transfer for adequate consideration  Transfer before son’s marriage (e.g. son’s fiancée) to his son’s wife  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 provisions will apply in the same manner. 3. Income from  Income arising from such assets shall be clubbed in the hands of individual transferring the asset. assets transferred Income shall be clubbed to the extent of benefit receivable by the to any person for  spouse/son’s wife benefit of In case of transfer for adequate consideration, clubbing shall not spouse/son’s  take place. wife 299

4. Income of minor  All incomes of minor child shall be clubbed, except the following child incomes:   All incomes of minor who is covered up u/s 80U (physically  handicapped, blind, etc.)   Income earned by minor child from his manual work, or talent or  skill, or specialised knowledge or experience   Income of minor child shall be clubbed in the hands of that parent 5. Salary of spouse  whose personal income is greater.  In case both father and mother are dead, no clubbing shall take place. In that case, income shall be taxable in the hands of minor  only. 6. Income from  In case of attainment of majority during the year, proportionate income shall be clubbed assets transferred  to HUF Income clubbed in the hands of individual shall be exempt to the extent of ₹1,500 (per minor child) Clubbing shall take place even if minor child (son/daughter) is married. Section 27 shall override Section 64 i.e. section 64 shall be applied only if section 27 does not apply. If spouse receives any salary, commission, fees, etc. from an organisation in which individual has substantial interest, then such salary etc. shall be clubbed in the hands of individual. No such clubbing in case spouse possesses technical or professional qualifications/experience. Substantial interest means voting power (or profit sharing ratio) > 20%. Any asset No clubbing in case asset transferred for adequate consideration. Illustration-5 A proprietary business was started by Smt. Savita in the year 2013. As on 1.4.2019 her capital in business was ₹4,00,000. Her husband gifted ₹3,00,000 on 15.4.2019, which amount Smt. Savita invested in her business on the same date. Smt. Savita earned profits from her proprietary business for the Financial year 2019-2020, ₹2,30,000 and Financial year 2020-2021 ₹4,65,000. Compute the income, to be clubbed in the hands of Savita’s husband for the Assessment year 2020-2021 & 2021-2022. 300