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Any profit or gain arising from transfer of a Capital Asset is chargeable to tax under the head Capital Gain and is deemed to be the income of the financial year in which the transfer took place.

Capital Asset means property of any kind held by the assessee whether or not connected with his business or profession.However, as per section 2(14), Capital Asset does not include the following:

(i) Any stock-in-trade, consumable store or raw material held for the purpose of business or profession.

(ii) Personal effect (other than jewellery), that is to say, movable property(including wearing apparel and furniture), held for personal use by the assessee or any member of his  family dependent on him.

(iii) Agricultural land in India.

(iv) notified Gold Bonds and special Bearer Bonds 1991 as issued by Central govt.

(v) Gold Deposit Bonds Issued under Gold Deposit scheme, 1999, notified by Central Govt.

Year of Taxability:

 The basic rule is that the capital gains are deemed to be the income of the previous year in which the transfer giving rise to the gains takes place.Therfore the year of charge is the year in which the sale, exchange, relinquishment etc. takes place. But where the transfer is by way of allowing possession of an immovable property by performance of the contact,it is the year in which such possession is handed over.If the handing over of the possession preceeds the entering of the contarct and the transferee is allowed the possession inpart performance of the proposed contract, the year of taxability of the capital gain is the year, in which the contract is entered into.

Long Term Capital Gain/ Short Term Capital Gain:

Where capital gain arises by the transfer of a capital asset which is held for more than 36 months, it is treated as Long Term Capital Gain(otherwise is a short term capital Gain). However, in case capital gain arises by transfer of shares of any company, gain shall be long term, where the shares are held by the assessee for more than 12 months before the date of transfer(otherwise short term capital gain.)

  Important Point to be noted in case of Long Term Capital Gain:A residential house owned by the firm used for the residence of partners was transferred to the partner on dissolution. Partner sold the same before the completion of 3 years from the date of dissolution. It was held by Madras high Court to be Long Term Capital gain in the case of CIT v. M.K.Chnadrakanth & Others(2002)258ITR 14(Mad.) on the ground that it was used as residential house by the partner even before dissolution and the property of the firm is that of partner.

Computation of capital Gain:

As per section 48, capital gain are computed by deducting the following from the full value of consideration arising from transfer-

(a) The cost of acquisition,

(b) The cost of improvement and

(c) The amount of expenditure incurred in connection with the transfer.

But no deduction will be allowed in respect of payment of securities transanction tax(STT) as introduced w.e.f. 1.10.2004 under chapter VII of Finance Act, 2004.

Section 10(38) provides for exemption on long term capital gains arising from transfer of equity shares or units of equity oriented mutual funds w.e.f. 1.10.2004 subject to payment of STT and specified conditions.

Section 111A providesrt term capital gains  arising from transfer of equity shares or units of equity oriented mutual funds at a concessional rate of 15% w.e.f. A.Y. 2009-10.

Cost Inflation Index:

In case of L.T.C. gain, the cost of acquisition/improvement will be substituted with indexed cost as per cost inflation index.Explanation to section 48 defined indexed cost of acquisition as an amount which bears to cost of acquisition  the same proportion as cost inflation index for the year in which the asset is transferred bears to the cost inflation indexfor the first year in which the assets was held by the assessee or for the first year beginning on the last day of April,1981 which ever is later. 

Some Important Points to remember:

Expenditure which is treated as Cost of improvement:

Any expenditure of a capital nature incurred in making additions or alteration to the assets is to be added to the cost of acquisition by way of cost of improvement. Some expenditure are:

(i) construction of boundary wall of an open plot of land or raising the boundary wall.

(ii) construction on an existing plot of land or making additional construction or raising floors in a building.

(iii) clearing of encumbrances on a property as held in a cse of R. Srinivasan v. Sixth ITO(1985) 13 ITD 632(Mad.)

(iv) getting property vacated from unauthorised occupiers.

(v) betterment charges paid to municipality under Town Planning Scheme a held in a cse of Mathura das Mangaldas Parekh v. CIT(1980) 126 ITR 669(Guj.)

The expenditure which is deductible in computiong taxable income under other heads of income cannot be added as cost of improvement.

Also, in cases where the fair market value as on 1.4.1981 is adopted in lieu of cost of acquisition , only expenditure on improvements incurred on or after that date is to be considered.

Date of execution or date of registration to be taken:

Title to immovable property does not pass till conveyance deed is executed and registered.A document on subsequent registration will take effect from the time when it was executed and not from the time of its registration.

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Author:

TaxReply


Jan 11, 2015


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