CAPITAL GAINS Basic ConditionsBasic Conditions –There must be a Capital Asset. –There must be Transfer of the asset. –Transfer During the previous year. –Due to transfer Gain/ Profit arises.

CAPITAL ASSET Meaning Section 2 (14)Meaning Section 2 (14) –Property of any kind Tangible or IntangibleTangible or Intangible –Whether connected to business or not –Held by Assessee Subject to certain exceptionsSubject to certain exceptions

Exceptions Stock in trade, consumables or raw material held for business.Stock in trade, consumables or raw material held for business. Agricultural Land in rural areaAgricultural Land in rural area Special bearer bonds 1991Special bearer bonds % Gold Bonds 1977, 7% Gold Bonds 1980, National Defence gold bonds6.5 % Gold Bonds 1977, 7% Gold Bonds 1980, National Defence gold bonds

Contd. Personal effects of the assessee i.e.Personal effects of the assessee i.e. –Movable property including furniture, wearing apparel, held for personal use of assessee or his dependents –Excluding Gold, Silver, Semi Precious Stone, Real Stone, Metal Jewellery, Ornaments

TRANSFER 2(47) Sale or Exchange or RelinquishmentSale or Exchange or Relinquishment Extinguishment (like due to fire, theft etc.)Extinguishment (like due to fire, theft etc.) Compulsory AcquisitionCompulsory Acquisition Conversion into stockConversion into stock Transfer of capital asset by a person to a firm in which he is a partnerTransfer of capital asset by a person to a firm in which he is a partner Distribution of capital assets on dissolution of firmDistribution of capital assets on dissolution of firm

PREVIOUS YEAR To decide the previous year Date of Transfer is Important exceptTo decide the previous year Date of Transfer is Important except –In case of receipt of insurance claim – Date of Receipt –In case of conversion of Capital asset into stock – Date of sale of Stock –In case of Compulsory Acquisition – Date of receipt of compensation.

TYPES OF ASSETS Short term assetShort term asset –Asset held for less than 36 months –Subject to exception Long term asset –Asset held for more than 36 months –Subject to exception

EXCEPTION –With respect to Equity shares/ Pref. shares any Co.Equity shares/ Pref. shares any Co. Securities such as Deb. & others of Govt. listed on Stock ExchangeSecurities such as Deb. & others of Govt. listed on Stock Exchange Units of Unit Trust of India (Quoted or not)Units of Unit Trust of India (Quoted or not) Units of Mutual Funds specified U/s.10 (23D) (Quoted or not)Units of Mutual Funds specified U/s.10 (23D) (Quoted or not) –Held for a period less than 12 months- Short Term otherwise Long Term

Problems

Computation of Gain Short Term GainShort Term Gain –Full value of consideration –Less: Transfer Exp. –Less: Cost of Acquisition –Less: Cost of Improvement Long term Gain –Full value of consideration –Less: Transfer Exp. –Less: Indexed Cost of Acquisition –Less: Indexed Cost of Improvement

Full Consideration Full = GrossFull = Gross Means Sale consideration / Sale price / Value received or receivable on transfer.Means Sale consideration / Sale price / Value received or receivable on transfer. Special casesSpecial cases –Transfer of asset between firm and partners (amount in firm’s book) –Conversion of capital asset into stock (F.M.V. on date of conversion) –Compulsory acquisition (Amount of compensation)

Cost of Acquisition Actual CostActual Cost Deemed CostDeemed Cost –Transfer of asset under will/gift/inheritance holding & subsidiary etc. [49(1)] –Amalgamation of companies- cost for amalgamated company –Conversion of Debentures (Cost of Debentures) –Assets received by a member on liquidation (F.M.V.)

Cost of Improvement 55(1)(b) Intangible AssetsIntangible Assets –Nil Tangible Asset –Exp. Which are Capital in nature –Incurred to do additions or alterations to the asset –Allowed only if incurred after1 st April 1981.

Indexing FormulaFormula –Cost of acq.* index no. of year of transfer/ index no of year of acquisition No indexing possible –Short term gain –Transfer of Debentures or bonds –Transfer by NRI

Problems

Shares & Capital Gain Initial SharesInitial Shares Right SharesRight Shares Bonus ShareBonus Share Sale of Right to Right SharesSale of Right to Right Shares

Depreciable Assets (Sec.50) Depreciation under Income taxDepreciation under Income tax Previous year last day, W.D.V. of block zero [50(1)]Previous year last day, W.D.V. of block zero [50(1)] Block of the assets is empty on last day of previous year [50(2)]Block of the assets is empty on last day of previous year [50(2)]

Problems

Conversion of assets into stock Date of sale of Stock = year of taxability of gainDate of sale of Stock = year of taxability of gain Full consideration on conversation = Fair market value as on conversationFull consideration on conversation = Fair market value as on conversation For indexing year of conversation to be consideredFor indexing year of conversation to be considered Actual sale of Stock = Business incomeActual sale of Stock = Business income