Capital Gains- Important Updates & Sections 43CA and 56(2)(vii)(b) Saturday 6 th February 2016 Income Tax Bar Association Raipur PRADIP N. KAPASI1

SYNOPSIS  Period of Holding – s.2(42A)  Deemed consideration for an asset– s.43CA  Insurance Receipts – S.45(1A)  Development Agreement- s.45  Conversion into stock-in-trade– s.45(2)  Introduction of capital asset in a firm– s.45(3)  Distribution on dissolution- s.45(4)  Retirement – s.45 & s.45(4)  Joint Ventures- Co-Development- s.45 & s.28  Family settlement  Corporatisation- s. 47(xiii) & (xiv)  Depreciable Asset- s.50  Stamp Duty Valuation- s.50C  Forfeiture of Advance- s.51  Substitution of FMV- s. 55  Deemed Income- s.56(2)(vii)(b)  Few for the Road PRADIP N. KAPASI2

PERIOD OF HOLDING- s.2(42A)  Held for not more that 36 months  ‘Month’ and ‘British calendar month’  Immediately ‘preceding the date of transfer’  Date of acquisition for s.54/54F  Allotment – Agreement – Possession – Sale Deed  D ate of DA/ Possession for landowner  Agreement with Developer PRADIP N. KAPASI3

DEEMED CONSIDERATION FOR AN ASSET - s. 43CA- I  Introduction w.e.f. A.Y  Provision similar to s. 50C  Thiruvendagum Investments, 320 ITR 345 (Mad.)  All assessees  For computation of business income  Provision for substituting consideration  Received or Accruing  Transfer of an asset  Land or building or both (anywhere in India)  Not a capital asset  Agricultural Land PRADIP N. KAPASI4

DEEMED CONSIDERATION FOR AN ASSET - s. 43CA- II  Where consideration is less than Stamp Duty Value  Stamp Duty Value to be deemed FVC  No exception for marginal cases  Provisions of s. 50C(2) and (3) to apply  Reference to DVO  Stamp Duty Value as on date of agreement  Where value is different on date of registration of transfer  Where receipt by mode other than cash PRADIP N. KAPASI5

DEEMED CONSIDERATION FOR AN ASSET - s. 43CA- III  Double Taxation –S.43CA and S. 56(2)(vii)(b)  Charging or Computation provision  ‘Transfer’ of an asset  TOPA- 2(47) MOA- ICAI  Year of Taxation  Agreement? – Allotment – Possession - FSA  ‘Land or building or both’  Union Territory  ‘Accruing’ as a result of transfer  Value adopted for stamp duty ‘for transfer’  Concept of ‘Full Value of Consideration’ in Business Income PRADIP N. KAPASI6

DEEMED CONSIDERATION FOR AN ASSET - s. 43CA - IV  Applicability of TP provisions  Other issues of s. 50C  Date of agreement and ‘registration of transfer’  Prospective and/or Retroactive  Possibilities for transactions up to  Transfer & Income recognized – Post amendment  Transfer Post amendment - income recognized before  Receipt before amendment  Partial income recognized  Partial income to be recognized PRADIP N. KAPASI7

DEEMED CONSIDERATION FOR AN ASSET - s. 43CA – VI  A Non- Starter?  Registration of same agreement.  SDV & AV conflict  Recognition of Agreement in past  Partial and/or full.  Applicability to Settlement of Accounts. PRADIP N. KAPASI8

INSURANCE RECEIPTS- s.45(1A)  Year of chargeability  Loss of asset or finalization of claim or receipt  Receipt for damages  Whether a transfer?  Period of holding  Effect on WDV- s.43(6)(C)(i)(d)  ‘destroy’- ‘monies payable’  Treatment of expenditure of repairs and premium  Head of Taxation  Applicability of s.50 for insurance receipts  Cir No. 779 dt – para 27  Claim of loss for non-depreciable asset and its year  Unspecified insurance claim  Applicability of s.50C PRADIP N. KAPASI9

DEVELOPMENT AGREEMENT - s.45 - I  Facts in Chatrbhuj Dwarkadas’case  Possession not given – license not given  Payment not received  General Power not given  Tenants not settled  Plans not approved  NOC under Income tax not obtained  CRZ restrictions not removed  Clearances and permissions not obtained PRADIP N. KAPASI10

DEVELOPMENT AGREEMENT - s.45 - II  Findings in Chaturbhuj Dwarkadas’ case  Arrangement conferring privileges of ownership  Passing or transferring complete control  Substantial performance - a non relevant  Payment and permission not relevant factors  Limited POA is significant  even an agreement to grant is sufficient  Irrevocable license relevant  Actual possession and irrevocable license not relevant  Disguised agreement for sale  Year of execution of contract is year of transfer  Objective behind introduction of clause(v) of s. 2(47)  Guideline for Income tax Department  DA is not a transfer under general law 11 Pradip N. Kapasi

 Ingredients of part performance u/s 53A  Agreement for transfer of an immovable property  Written instrument for a consideration  Possession  Willingness to perform  Reconsideration of decision  Possibility to be examined  DTC provision for year of taxation  Is ‘License’ a ‘possession’  Future possession satisfies s.2(47)(v)  Diff. b/w Agreement for sale and Development Agreement PRADIP N. KAPASI12 DEVELOPMENT AGREEMENT - s.45 - III

CONVERSION IN TO STOCK-IN-TRADE- s.45(2) - I  Year of computation & chargeability  Set-off of losses against s.45(2) gains of earlier year  Carry backward of losses  Carry forward of profits  Taxability on ‘sold’ or ‘otherwise transferred’  Development Agreement  Flat Sale Agreements  Introduction in firm  Power of Attorney  Sold or otherwise transferred by ‘him’  Applicability of s.50C  Eligibility for reinvestment related exemptions  S.54 to s.54GB  Period of reinvestment  Cir. No. 560 ( ) and 791 ( ) 13

CONVERSION IN TO STOCK-IN-TRADE- s.45(2)-II  Proofs of conversion  Presumption of conversion  Cut-off date  Year of Accounting- MAT  Exemption u/s 10(38) for LTCG on conversion or s.111A  Need for STT payment  Need for existence of business  Cost of stock-in-trade PRADIP N. KAPASI14

INTRODUCTION OF CAPITAL ASSET IN A FIRM- s.45(3)  Introduction value and LLP  Year of taxation  Transfer by firm in the same year  Applicability to introduction of stock-in-trade  Applicability of s.50C & s.56(2)(vii)  Applicability to AOP and BOI  Cost of acquisition of firm  Period of holding for firm PRADIP N. KAPASI15

DISTRIBUTION ON DISSOLUTION- s.45(4)  Year of taxation  Dissolution or distribution  Entity for taxation  Firm, partner, AOP or BOI  Dissolution or ‘otherwise’  Admission – Retirement - Withdrawal  Change in constitution  Applicability of s.50 & s.50C  Possibility of exemption u/s 47(xiii) or (xiiib)  COA in the hands of recipient  Payment in kind to a retiring partner PRADIP N. KAPASI16

RETIREMENT – s.45 & 45(4)  Taxability of receipt on retirement  Lump sum payment on assignment  Lump sum payment without assignment  Payment of share in surplus  Finality of Supreme Court’s decision  Emerging position  Applicability of s.45(4)  Distribution of assets and payment PRADIP N. KAPASI17

JOINT VENTURE– CO-DEVELOPMENT – s. 45 & s.28  Status- AOP or not  Arm’s Length Transactions  Landowner and Builder  Developer and Builder PRADIP N. KAPASI18

FAMILY SETTLEMENT  Transfer u/s 2(47) and family arrangement  Requisites of a family arrangement  Existence of ‘Family’  Blood relation or not  Hindu or not  Joint in food and worship  Collective efforts  Common engagement  Dispute  Related/affected party’s involvement  Implications for affected party  Cost of acquisition of shares transferred  Original shares  Additional Shares PRADIP N. KAPASI19

CORPORATISATION- s.47(xiii) & (xiv)  Revaluation of Assets by Firm  Continuity of Bank Account  Delay in allotment  Current Account to a loan  Benefit to erstwhile partners  Commission or salary or interest  Transfer of firm to a company - generally PRADIP N. KAPASI20

DEPRECIABLE ASSET- s.50  Purchase or payment during the year  Destruction of Asset  Extinguishment of block of asset  Reinvestment in s.54EC Bonds PRADIP N. KAPASI21

STAMP DUTY VALUATION- s.50C  Reinvestment of actual capital gains  Rights in building under construction  Tenancy rights and lease  Transfer of shares of company  Contest before SDVA/AO  Necessity of notice by AO  Margin of Error  Parallel application of s.50C  Need for Application to AO  Margin of Error  Penalty  Non receipt of DVO’s order PRADIP N. KAPASI22

FORFEITURE OF ADVANCE – s.51 - I  Proviso inserted w.e.f A.Y  Simultaneous Amendment in s.2(24) & s.56(2)(ix)  Present Position- not an income  Travancore Rubber & Tea Co. Ltd., 243 ITR 158 (SC)  Effect on COA as per s.51  COA not to be reduced where taxed u/s 56(2)(ix)  Allowance of expenditure incurred  Higher rate of taxation  Year of taxation- Receipt- Forfeiture- No transfer certainty  Tax under the head ‘Income from Other Sources ’. PRADIP N. KAPASI23

FORFEITURE OF ADVANCE- s.51 - II  ‘Forfeiture’ of ‘any sum of money’  Receipt in kind  Waiver  ‘Received as an ‘advance’ or ‘otherwise’  In the course of negotiation’  For ‘transfer’ of a ‘capital asset’  Negotiations do not result in transfer  Same person PRADIP N. KAPASI24

SUBSTITUTION OF FMV – s.55  FMV of the asset transferred  FMV of the asset in existence on  Transformation of asset in the intervening period  Value addition in intervening period  Statutory changes PRADIP N. KAPASI25

DEEMED INCOME -s. 56(2)(vii)(b)- I  W.e.f. A.Y for Individual & HUF  Introduced and was deleted w.e.f  Receipt of any immovable property  Land or building or both  For inadequate consideration  Difference between SDV and consideration received  Provisions for adopting SDV on date of agreement  Difference to be income if exceeds Rs. 50,000/-  Reference to DVO by A.O. possible  Cost of Acquisition as per s. 49(4)- where taxes paid  Agricultural land  Applicability to a Builder/Developer PRADIP N. KAPASI26

DEEMED INCOME- s. 56(2)(vii)(b)- II  Double Taxation  Stamp duty by seller  Indexation of COA  Purchase from a ‘relative’  Post dated cheques not realised  Implication of s. 49(4) in case of ‘relatives’  Land & Building  Union Territory PRADIP N. KAPASI27

FEW FOR THE ROAD  Allotments/Payments before 1 year of transfer & 54/54F  Acquisition of tenancy right and s.54/54F  Payment of Advance and Purchase for s.54/s.54F  Set-off of LTCL on sale of listed STT paid shares  Rate of taxation on deemed STCG u/s 50  ‘Derivatives’ and capital assets  Set-off where capital assets liable tax at different rates PRADIP N. KAPASI28

THANK YOU & GOOD LUCK PRADIP N. KAPASI29