About the Authors
D.C. Agrawal, Advocate
Basic Concepts of International Taxation” Taxation of Cash Deposits & Deposits after Demonetisation” Law relating to Reassessment
dcagrawal49@gmail.com.
Sanjiv Dutt, Advocate
I-5
I-6 ABOUT THE AUTHORS
.
dutt.sanjiv@gmail.com
Preface
I-7
I-8 PREFACE
PREFACE I-9
I-10 PREFACE
D.C. AGRAWAL
New Delhi SANJIV DUTT
Email address: [dcagrawal49@gmail.com]
[dutt.sanjiv@gmail.com]
PREFACE I-11
Acknowledgements
D.C. AGRAWAL, ADVOCATE SANJIV DUTT, ADVOCATE
I-13
I-14 ACKNOWLEDGEMENTS
Authors’ Disclaimer:
Chapter-Heads About the Authors I-5 Preface I-7 Acknowledgements I-13 Contents I-21 Abbreviations I-53 Chapter 1 Introduction 1 Chapter 2 Exempted Capital Gains - Section 10 19 Chapter 3 Capital Asset - Section 2(14) 34 Chapter 4 Capital Gains and Agricultural Land - Section 2(14)(iii) 81 Chapter 5 Short-term and Long-term capital gains - Section 2(42A), 2(42B), 2(29AA), 2(29B) & Rule 8AA 93 Chapter 6 Transfer - Section 2(47) 119 Chapter 7 Whether Business Income or Capital Gains 148 Chapter 8 Capital Gains - Section 45 165 Chapter 9 Capital gains and entry of new partner/member in the firm/AOP/BOI - Section 45(3) 206 PAGE I-15
CHAPTER-HEADS
I-16
Chapter 10 Capital gains on distribution of assets on dissolution of the firmSection 45(4) 218 Chapter 11 Capital gains on reconstitution of firm/specified entity - Sections 45(4) and 9B 241 Chapter 12 Capital Gains on compulsory acquisition of capital asset - Section 45(5) 270 Chapter 13 Capital gains and Joint Development Agreement - Section 45(5A) 288 Chapter 14 Capital gains on distribution of assets by companies in liquidationSection 46 316 Chapter 15 Buyback of Shares - Section 46A 327 Chapter 16 Transfers to which Section 45 is not applicable - Section 47 340 Chapter 17 Withdrawal of exemption of capital gains in certain cases - Section 47A 410 Chapter 18 Mode of Computation of Capital Gains - Section 48 420 Chapter 19 Indexation - Second Proviso to Section 48 476 Chapter 20 Cost with reference to certain modes of acquisition - Section 49 492 Chapter 21 Capital Gains and Family Settlement - Section 49(1)(i) 537 Chapter 22 Capital Gains on Depreciable Assets - Sections 50 and 50A 553 Chapter 23 Capital gains in case of Market Linked Debenture - Section 50AA 582 Chapter 24 Slump Sale - Section 50B 585 PAGE
I-17
25 Special provision
full value of
-
26 Full Value of Consideration for Transfer of Unquoted Shares - Section 50CA 680 Chapter 27 FMV Deemed as FVC - Section 50D 688 Chapter 28 Treatment of Advance Money Received - Section 51 694 Chapter 29 Exemption on investment in residential house - Section 54 (Basic Conditions) 699 Chapter 30 Exemption on Investment in Agricultural Land - Section 54B 731 Chapter 31 Compulsory Acquisition and Exemption for investing in new Industrial Undertaking - Section 54D 752 Chapter 32 Exemption on Investment in Specified Asset - Section 54E 760 Chapter 33 Exemption on Investment in Specified Asset - Section 54EA 774 Chapter 34 Exemption on investment in specified Asset - Section 54EB 780 Chapter 35 Exemption on Investment in Certain Bonds - Section 54EC 784 Chapter 36 Capital gain on transfer of certain listed securities/units - Section 54ED 807 Chapter 37 Exemption on investment in units of a specified fund - Section 54EE 810
38 Exemption for investment in new residential house - Section 54F 818
39 Exemption on investment in new residential house - Sections 54 and 54F 855 PAGE
CHAPTER-HEADS
Chapter
for
consideration in certain cases
Section 50C 606 Chapter
Chapter
Chapter
CHAPTER-HEADS
Chapter 40
Exemption from capital gains tax and Capital Gains Accounts Scheme 915
Chapter 41
Exemption on shifting of industrial undertaking from Urban AreaSection 54G
Chapter 42
Exemption on shifting of industrial undertaking to SEZ - Section 54GA
Chapter 43
Exemption for investment in start-up - Section 54GB
Chapter 44 Extension of time for investment in cases of compulsory acquisitionSection 54H
Chapter 45 Cost of acquisition in certain cases - Section 55
Chapter 46
Reference to Valuation Officer - Section 55A
Chapter 47
Set off of capital gains/loss - Sections 70, 71, 74 and 80
Chapter 48
Taxation of short-term/long-term capital gains - Sections 111A, 112 and 112A
Chapter 49
Capital gains tax on offshore funds/non-resident person/FIIs in respect of units/GDRs/Securities - Sections 115AB, 115AC, 115ACA, 115AD
Chapter 50
Alternative tax regime in the case of Non-Resident Indians - Sections 115C, 115D, 115E, 115F, 115G, 115H and 115-I
Chapter 51
Chapter 52
Chapter 53
Gains and Business Trust
Gains and International Financial Services Centre (IFSC)
Gains under International Taxation
I-18
933
944
956
974
979
1021
1042
1058
1106
1149
Capital
1170
Capital
1178
Capital
1194 PAGE
CHAPTER-HEADS I-19 Chapter 54 Other applicable provisions relating to capital gains 1228 Chapter 55 Miscellaneous common queries 1254 PAGE
Contents PAGE About the Authors Preface Acknowledgements Chapter-Heads Abbreviations I-5 I-7 I-13 I-15 I-53 CHAPTER 1 INTRODUCTION Key concepts 1 Transaction not regarded as transfer and buy back of shares 3 Computational machinery 5 Cost of acquisition 5 Valuation 9 Rates of taxes 10 Exemptions 12 Specific cases of capital gains 16 CHAPTER 2 EXEMPTED CAPITAL GAINS - SECTION 10 Some general cases of exemption 19 Exemption to funds, Institutions and Authorities 20 Exemption to Specific Tribes and Residents 28 Exemption to certain commercial boards 30 Exemption to other schemes or entities 31 I-21
I-22 CONTENTS PAGE CHAPTER 3 CAPITAL ASSET- SECTION 2(14) Expressions ‘property’, ‘property of any kind’, ‘asset’, ‘capital asset’, ‘held by an assessee’, ‘personal effects’ 41 Assets not forming capital asset 49 Personal effects 54 Point of time to decide character of asset 56 Agricultural land as capital asset 56 Intangible assets as capital assets 56 Goodwill as capital Asset 59 Industrial license as capital asset 61 Route permit as capital asset 61 Bonds as capital asset 62 Right to an annuity as capital asset 63 Leasehold right as capital asset 64 Assignment/transfer of leasehold rights 65 Mining lease rights as capital asset 67 Tenancy rights as asset 68 Management right of a business as capital asset 69 ‘Right to manufacture, produce or process any article or thing’ as capital asset 70 A Contractual Right under a Contract of Sale as Capital Asset 70 Reversionary rights as capital asset 71 Acquisition of rights under a mortgage as capital asset 72 Floor space rights as capital asset 72 Life interest as capital asset 73 Rights granted under a decree as capital asset 73 Intellectual property rights and technology as capital asset 74 Right to specific performance as capital asset 75 Right of Possession of Property as Capital Asset 77 Easement rights as capital asset 77 Right of allotment of a flat in a society as capital asset 78 Share warrants as capital asset 78 Auction rights as capital asset 78
CONTENTS I-23 PAGE ESOP rights as capital asset 78 SUMMARY AND CHECK POINTS FOR TAX PLANNING 80 CHAPTER 4 CAPITAL GAINS AND AGRICULTURAL LANDSECTION 2(14)(iii) Parliament is competent to enact law on capital gains on agricultural land 83 Charge of Capital gains on transfer of agricultural land 87 Capital gains on subsequent use of agricultural land 91 SUMMARY AND CHECK POINTS FOR TAX PLANNING 91 CHAPTER 5 SHORT-TERM AND LONG-TERM CAPITAL GAINSSECTION 2(42A), 2(42B), 2(29AA), 2(29B) & RULE 8AA Holding period of a capital asset 103 Redemption of gold bonds 103 Date of acquisition of asset received by the partner from the firm 104 Holding period of previous owner 105 Holding period in case of stock-in-trade converted into capital asset and vice versa. 106 Holding period of immovable property 107 Holding period of unlisted shares 108 Holding period of intangible assets 108 Holding period of BSE shares 109 Holding period in case of allotment of flat 109 Holding period of right to acquire property 110 Holding period in case of gift/settlement/inheritance 111 Date of acquisition of shares 112 Holding period of right to purchase additional shares 113 Holding period when shares converted into debentures 113 Holding period in some other cases 114 SUMMARY AND CHECK POINTS FOR TAX PLANNING 117
I-24 CONTENTS PAGE CHAPTER 6 TRANSFER - SECTION 2(47) Transfer 128 Possession and Transfer of Property Act 130 Transfer of capital asset and registration 133 Cases which are not transfer 134 Transactions which are not transfer 138 Transactions which are transfer 141 SUMMARY AND CHECK POINTS FOR TAX PLANNING 145 CHAPTER 7 WHETHER BUSINESS INCOME OR CAPITAL GAINS Business income v. Capital gains (sale of shares) 148 Business income v. Capital gains (sale of land) 154 Business income v. Capital gains (sale of other capital asset) 159 Business income v. Capital gains (sale of listed/unlisted securities) 162 SUMMARY AND CHECK POINTS FOR TAX PLANNING 164 CHAPTER 8 CAPITAL GAINS - SECTION 45 Income under the head capital gains 175 Constitutional validity of section 45 175 Essential conditions for invoking section 45 175 Capital gains on transfer of shares of Indian company by holding company to subsidiary company 177 Capital gains exempt u/s 10 177 Capital gains when not chargeable 178 Sections 45 & 48 an integrated code 178 Exemptions from capital gains 179 Cancellation of flat and liquidated damages 180 Date/year of chargeability of capital gains 180 Chargeability of capital gains in different cases 182
CONTENTS I-25 PAGE Overriding titles and chargeability of capital gains 189 Essential conditions u/s 45(1A) 190 Damage in fire, restoration and capital gains 192 Remittance abroad and capital gains 193 Stock-in-trade v. Capital asset 194 Agricultural land, division in plots and capital gains 200 Development rights and capital gains u/s 45(2) 201 Capital gains and section 80CCB 201 Loss on unrealized deposits and set off against capital gains 202 Transfer of land through several conveyance deeds 202 Forfeiture of money and capital gains 203 GPA holder and liability to capital gains 204 SUMMARY AND CHECK POINTS FOR TAX PLANNING 204 CHAPTER 9 CAPITAL GAINS AND ENTRY OF NEW PARTNER/ MEMBER IN THE FIRM/AOP/BOI - SECTION 45(3) Capital gains on incoming partner bringing cash/asset/unquoted shares 208 Capital gains and revaluation of current/fixed assets 212 Section 45(3) v. Section 40A(2) 212 Section 45(3) v. Section 56(2)(x) 213 Section 45(3) v. Section 50C 213 Expression ‘otherwise’ and section 45(3) 214 Capital gains, incoming partner and change in profit sharing ratio 214 Section 45(3) and transfer of shares by non-resident company 216 SUMMARY AND CHECK POINTS FOR TAX PLANNING 216 CHAPTER 10 CAPITAL GAINS ON DISTRIBUTION OF ASSETS ON DISSOLUTION OF THE FIRM - SECTION 45(4) Partner’s share as an asset/capital asset 220 Incidence of taxation u/s 45(4) 221 Meaning of the expression ‘dissolution’ 221 Circumstances where section 45(4) can be invoked 223
I-26 CONTENTS PAGE Section 45(4) and revaluation of asset 226 Payment to retiring partner by remaining partners 226 Payment to retiring partner by incoming partner 227 Payment to retiring partner by the firm 227 Section 45(4) and succession of firm by company 230 Section 45(4) and distribution of asset before dissolution of the firm 231 Section 45(4), revaluation of the asset and conversion into company 231 Section 45(4) and reduction in share capital 232 COA of the asset received by retiring partner 233 Section 45(4) and transfer of stock-in-trade to partner 233 Whether a case of dissolution or retirement 233 Section 45(4) and scope of the term ‘otherwise’ 234 Section 45(4) and section 50C 236 Section 45(4) and transfer of unquoted shares to retiring partner 236 Section 45(4) and dispute before a Court 237 Revaluation of asset by the firm and section 28(iv) 237 Withdrawal of his property from the firm by the retiring partner 238 Section 45(4), retirement of a partner and goodwill 238 SUMMARY AND CHECK POINTS FOR TAX PLANNING 239 CHAPTER 11 CAPITAL GAINS ON RECONSTITUTION OF FIRM/ SPECIFIED ENTITY - SECTIONS 45(4) AND 9B Conditions for invoking section 9B 257 Conditions for invoking section 45(4) 259 Constitutional validity of section 9B 260 Retrospective effect of section 9B 260 Section 9B and section 50C/43CA/56(2)(x)(b) 260 Section 9B v. Section 48 260 Section 9B and transfer of stock-in-trade 261 Interplay of section 9B and section 45(4) 261 Mechanism of operation of section 9B and Section 48(iii) 262 Conditions for attributing capital gains 264
CONTENTS I-27 PAGE CHAPTER 12 CAPITAL GAINS ON COMPULSORY ACQUISITION OF CAPITAL ASSET - SECTION 45(5) Capital gains and compulsory acquisition of capital asset 277 Capital gains and RFCTLARR Act 277 Taxation of interest on enhanced/delayed compensation 282 Year of taxability of compensation/enhanced compensation 284 Exemption of compensation/additional compensation/solatium 286 SUMMARY AND CHECK POINTS FOR TAX PLANNING 286 CHAPTER 13 CAPITAL GAINS AND JOINT DEVELOPMENT AGREEMENT - SECTION 45(5A) Characteristics of JDA 293 Taxation on the landowner under JDA 295 Land as business asset 298 Transfer of land under JDA 299 Year of liability of capital gains under JDA 301 Permissive possession does not amount to transfer 304 Not a transfer if conditions under JDA not fulfilled 305 Consequences of registered JDA 305 Section 2(47)(v) and Indian Registration Act 306 Capital gains under failed JDA 307 Section 50C and JDA 308 Receipt in kind by landowner and FVC 308 Capital gains under JDA on issuance of completion certificate 309 Capital gains and permissive possession under JDA 309 Capital gains under tripartite agreement with developer and customer 310 Capital gains on landowner on sale of constructed area received from developer 310 Applicability of proviso to section 45(5A) 311 SUMMARY AND CHECK POINTS FOR TAX PLANNING 313
I-28 CONTENTS PAGE CHAPTER 14 CAPITAL GAINS ON DISTRIBUTION OF ASSETS BY COMPANIES IN LIQUIDATION - SECTION 46 Salient features of section 46 317 Liquidation/winding up of a company and its different modes 319 Capital gains on money received by shareholder on liquidation of a company 320 Assets/capital assets to be included u/s 46 324 Capital gains u/s 46(2) and exemption u/s 54F/54E 325 SUMMARY AND CHECK POINTS FOR TAX PLANNING 325 CHAPTER 15 BUYBACK OF SHARES - SECTION 46A Scope and effect of section 46A 331 Section 46A v. Section 47(v) 332 Section 46A v. Section 47(iv) 333 Section 46A v. Section 115-O 333 Section 46A and deemed dividend 334 Buyback of shares or colourable device 334 Section 46A v. Section 115QA 334 Section 46A v. Section 10(34A) 337 Interplay of sections 46A, 10(34A), 115QA and 115-O 338 SUMMARY AND CHECK POINTS FOR TAX PLANNING 339 CHAPTER 16 TRANSFERS TO WHICH SECTION 45 IS NOT APPLICABLE - SECTION 47 Capital gains on transfer of property received in partition 378 Capital gains on transfer of property before partition 379 Capital gains on property received in family arrangement 379 Capital gains on equity shares received by company in gift 379 Section 47(iii) applies to actual gift 381
CONTENTS I-29 PAGE Exemption u/s 54 and gift of new asset 382 Conditions for applicability of section 47(iv) 383 The law as on the date of execution of the agreement to apply 383 Transfer of warrants/shares and section 47(iv) 384 Definition of holding company for section 47(iv) 385 Transfer of shares between holding and subsidiary company 385 Section 47(v) not to apply to transfer of stock-in-trade 393 Benefit u/s 47(vii) not available on part transfer of shares 394 Section 47(viii) and transfer of agricultural land 394 Capital gains on conversion of bonds/debentures into shares 395 Membership of a Stock Exchange 396 Section 47(xiii) and sale of shares to company 397 Capital gains under the conditions of section 47(xiii) 397 Delayed allotment of shares by company succeeding a firm 398 Capital gains and violation of conditions u/s 47(xiii) 399 Depreciation on revalued intangible assets received by a private company succeeding a firm 399 Conditions laid down u/s 47(xiii) are mandatory 401 Revaluation of assets in credit into partner’s account 402 Section 47(xiiib) not to apply on grant of loan 403 Ingredients of section 47(xiiib) 403 Capital gains on succession of proprietary concern by a company 404 Reverse mortgage 407 SUMMARY AND CHECK POINTS FOR TAX PLANNING 408 CHAPTER 17 WITHDRAWAL OF EXEMPTION OF CAPITAL GAINS IN CERTAIN CASES - SECTION 47A Section 47A(3) v. Section 47(xiii) 414 Recording of finding before invoking section 47A 414 Time of allotment of shares in case of succession by a company 415 Section 47A(3) and grant of loan to partners by a successor firm/LLP 416 Charge of capital gains on violation of conditions u/s 47(iv)/47(v)/47(xiii) 417 SUMMARY AND CHECK POINTS FOR TAX PLANNING 418
I-30 CONTENTS PAGE CHAPTER 18 MODE OF COMPUTATION OF CAPITAL GAINSSECTION 48 Full value of consideration 432 Receipt by seller/payments by purchaser not part of FVC 441 Full value of consideration and section 50C 442 Year when sale consideration is to be used for computing capital gains 443 Cost of acquisition 443 Expenses not to form part of COA 451 Legal fees as part of COA 454 Capital gains on transfer of TDRs 454 Concept of wholly and exclusively 455 Expenditure to be included in computation of capital gains 457 Expenditure not be considered for computation of capital gains 463 Cost of improvement 467 Expenditure to fall or not to fall as part of COI 468 Miscellaneous 473 SUMMARY AND CHECK POINTS FOR TAX PLANNING 474 CHAPTER 19 INDEXATION - SECOND PROVISO TO SECTION 48 Indexation and transfer in the modes specified u/s 49(1) 479 Indexation in case of conversion of capital asset into stock-in-trade 480 Indexation in the case of computation of book profit u/s 115JB 480 Indexation in the case of transfer of preference shares 481 Indexation in the case of conversion of units of UTI into bonds 482 Benefit of indexation from the date of agreement 482 Indexation on cumulative sale of original/bonus shares 483 Indexation to asset in remand proceedings 483 Indexation from date of payments/allotment 484 Benefit of indexation from the date of purchase 485 Indexation on sale of shares allotted by BSE 485 Benefit of indexation in case of compulsory acquisition 486
CONTENTS I-31 PAGE Cases where benefit of indexation is not available 486 Indexation in the case of JDAs 488 Reverse indexation 489 Calculation of period of indexation 489 SUMMARY AND CHECK POINTS FOR TAX PLANNING 490 CHAPTER 20 COST WITH REFERENCE TO CERTAIN MODES OF ACQUISITION - SECTION 49 COA to the previous owner to be the COA to the assessee 512 Determination of COA in the cases of different transferees 514 Amendment in section 49(1)(iii) is not retrospective 526 Capital gains on sale of right to purchase additional shares 527 Capital gains on sale of properties earmarked for the directors 527 Benefit u/s 49(1) not available in case of converted asset 528 No benefit of section 49(1) on throwing of property into HUF 529 Determination of period of holding of an asset 530 SUMMARY AND CHECK POINTS FOR TAX PLANNING 535 CHAPTER 21 CAPITAL GAINS AND FAMILY SETTLEMENTSECTION 49(1)(i) Family settlement as partition 541 Distribution in family settlement is not a transfer 541 Liability to capital gains in family settlement 542 Stock-in-trade received in family settlement is not capital asset 545 Transfer of shares by a company in family arrangement 545 No capital gains on provision of owelty 546 Benefit of indexation, previous owner and family settlement 546 Benefit of expenditure in the property received in family settlement 546 Family settlement not to be a colourable device for benefit u/s 49(1)(i) 547 Section 47(i) is not applicable on money received after revaluation from the firm 547 Benefit of section 49(i) is not available to Muslims 548
I-32 CONTENTS PAGE Family settlement and section 56(2)(v) 548 Family settlement and section 56(2)(vii) 548 Family settlement and section 2(22)(e)/56(2)(vi) 549 Family settlement and section 2(47)(v) 549 Family arrangement and section 54F 550 Family settlement, difference in book value and FMV, whether unaccounted transaction 550 Family settlement, buy back of shares and expenditure 551 SUMMARY AND CHECK POINTS FOR TAX PLANNING 551 CHAPTER 22 CAPITAL GAINS ON DEPRECIABLE ASSETSSECTIONS 50 AND 50A Capital gains on depreciable assets before insertion of section 50 561 Essential conditions u/s 50 562 For invoking section 50 claim and allowing of depreciation 563 Difference between section 50(1) and 50(2) 564 Interrelationship between sections 50, 48, 49 & 55(2) 565 Estimated income and section 50 565 Section 50 and use of the asset in business 566 Section 50 and block of asset 566 Goodwill, section 50 and Rule 8AC 569 Section 50 and distribution of depreciable assets among partners 570 Section 50 and sale of undertaking 571 Section 50 and sale of both tangible and intangible assets 573 Section 50 and claim of exemptions u/s 54E/54F/54EC 573 Section 50 and set off of brought forward losses 574 Substitution of FMV u/s 50 574 Section 50 and taxability of compensation 576 Section 50 and section 50C 577 Section 50 and section 10B 578 Section 50 and leasehold rights 578 Section 50 and BSE Membership card 578 Conditions for applicability of section 50A 578
SPECIAL PROVISION FOR FULL VALUE OF CONSIDERATION IN CERTAIN CASESSECTION 50C
CONTENTS I-33 PAGE Section 50A and section 48 579 Section 50 and composite nature of asset 579 Section 50 and sale of right shares 580 SUMMARY AND CHECK POINTS FOR TAX PLANNING 580 CHAPTER 23 CAPITAL GAINS IN CASE OF MARKET LINKED DEBENTURE - SECTION 50AA Computation of capital gains in case of Market Linked Debenture 582 Purpose of Newly Inserted Provision 583 CHAPTER 24 SLUMP SALE - SECTION 50B The concept of slump sale and slump price 592 Distinction between three sub-sections of section 50B 594 Section 50B, fair market value and Rule 11UAE 594 Examples of slump sale 596 Transfers not covered as slump sale 598 Deductions allowable in computing net worth 600 Nature of surplus received over net worth 601 Section 50B and section 47(xiv) 601 Section 50B and staggered receipt of compensation 602 Computation of capital gains in slump sale 602 SUMMARY AND CHECK POINTS FOR TAX PLANNING 604
CHAPTER 25
Section 50C, its nature and scope and constitutional validity 612 Retrospectivity of section 50C 617 Stamp duty value, Fair market value and determination of fair market value 618 Section 50C and full value of consideration 623
I-34 CONTENTS PAGE Section 50C and cost of acquisition 624 Scope of the word ‘assessable’ 625 Objections to stamp duty value 627 Reference to DVO and opportunity by DVO 629 Adoption of stamp duty valuation as full value of consideration 634 DVO’s report and challenge to it 641 Tolerance limit 643 Section 50C and joint development agreement 646 Section 50C and development rights 650 Section 50C and rural agricultural land 651 Section 50C and transfer by way of gift/will/merger 653 Section 50C and exemption u/s 54/54F/54EC 653 Section 50C and transfer of shares 656 Section 50C and leasehold rights, Kashtkari Rights and other rights in immovable property 657 Section 50C and section 56(2)(vii)/56(2)(x) 660 Interplay of sections 50, 50C and 43(6) 663 Section 50C and depreciable assets 663 Section 50C and year of chargeability 667 Section 50C and section 263 668 Section 50C and real income 669 Section 50C and Writ 670 Section 50C and section 69B 670 Section 50C and stock-in-trade 671 Section 50C and section 45(3) 673 Section 50C and section 45(4)/49 674 Section 50C and mediatory 675 Section 50C and reopening of assessment 675 Section 50C and penalty for concealment 676 Section 50C and auction sale 676 Section 50C and unregistered sale 676 SUMMARY AND CHECK POINTS FOR TAX PLANNING 677
CONTENTS I-35 PAGE CHAPTER 26 FULL VALUE OF CONSIDERATION FOR TRANSFER OF UNQUOTED SHARES - SECTION 50CA Section 50CA and date of its applicability 683 Retiring partner given unquoted equity shares and Section 50CA 683 Incoming partner bringing unquoted equity shares and section 50CA 684 Section 50CA and Rule 11UAA 684 SUMMARY AND CHECK POINTS FOR TAX PLANNING 687 CHAPTER 27 FMV DEEMED AS FVC - SECTION 50D The concept of fair market value 690 Conditions for applicability of section 50D 690 Cases where section 50D can be invoked 691 Section 50D and section 56(2)(x) 692 SUMMARY AND CHECK POINTS FOR TAX PLANNING 693 CHAPTER 28 TREATMENT OF ADVANCE MONEY RECEIVED - SECTION 51 Forfeiture and reduction in cost of acquisition 697 Taxation of earnest money forfeited 697 Non-genuine nature of advance money 697 Nature of earnest money/advance received 698 SUMMARY AND CHECK POINTS FOR TAX PLANNING 698 CHAPTER 29 EXEMPTION ON INVESTMENT IN RESIDENTIAL HOUSE - SECTION 54 (BASIC CONDITIONS) Conditions for exemption u/s 54 707 Demolition of original asset and exemption u/s 54 710
I-36 CONTENTS PAGE Conversion of new house into commercial asset 710 Determination of holding period of original asset 710 Date of acquisition of property 712 Investment of sale consideration of two or more houses 713 Exchange of old house with new house 714 Circumstances where exemption u/s 54 is available/not available 715 Exemption u/s 54 for transactions covered under development agreement 726 Forfeiture of exemption u/s 54 727 Reckoning the date of acquisition for indexation 727 SDV of old house is not the FVC for investment in new house 727 SUMMARY AND CHECK POINTS FOR TAX PLANNING 728 CHAPTER 30 EXEMPTION ON INVESTMENT IN AGRICULTURAL LAND - SECTION 54B Entities to whom Section 54B is applicable 735 Section 54B and Short term/long term capital asset 738 Section 54B and agricultural land/income 738 Section 54B and deposit in CGAS account 738 Section 54B and investment in new agricultural land 739 Section 54B and penalty for concealment 745 Section 54B and power of Tribunal to estimate COI 746 Consequence to failure to invest in new asset 746 Section 54B and reckoning the period of two years 746 Section 54B and investment in non-agricultural land 746 Availability of exemption u/s 54B as well as u/s 54F 747 Section 54B and section 263 747 Section 54B and partition of ancestral agricultural land 748 Exemption u/s 54B to a builder 748 Exemption u/s 54B on filing return of income 748 Section 54B and legal heir 749 Section 54B and purchase of new asset prior to sale of old asset 749 Section 54B, investment in new asset and DLC rates 750 SUMMARY AND CHECK POINTS FOR TAX PLANNING 750
CONTENTS I-37 PAGE
31
INDUSTRIAL
54D Meaning of ‘industrial undertaking’ for exemption u/s 54D 756 Change of nature of asset on subsequent development 758 Claim of exemption and mentioning wrong section 758 SUMMARY AND CHECK POINTS FOR TAX PLANNING 759 CHAPTER 32 EXEMPTION ON INVESTMENT IN SPECIFIED ASSET - SECTION 54E Exemption allowed even on transfer of depreciable asset 765 Constitutional validity of Section 54E(1C) 766 Transfer of property to take effect on date of registration 766 Source of funds used for investment not material 767 FVC to include amount of discharged mortgage 767 No exemption if impugned transaction not regarded as transfer 768 Manner of reckoning period of 6 months 768 Exemption u/s 54E on enhanced compensation 769 Reopening not valid if no claim made by assessee 770 Discounted value of interest on bonds chargeable in the year of receipt 770 Exemption available even if investment made in names of partners 770 Exemption only on sale of lot of shares yielding capital gains 771 Exemption on fulfilment of all essential conditions 771 Relief u/s 54E can be claimed first time in appeal 772 Exemption only after allowing deduction u/s 48(2) from LTCG 772 SUMMARY 773 CHAPTER 33 EXEMPTION ON INVESTMENT IN SPECIFIED ASSET - SECTION 54EA Exemption u/s 54EA and Joint Development Agreement (JDA) 776
CHAPTER
COMPULSORY ACQUISITION AND EXEMPTION FOR INVESTING IN NEW
UNDERTAKING - SECTION
I-38 CONTENTS PAGE Exemption u/s 54EA and sale of business along with goodwill 777 Exemption u/s 54EA on enhanced compensation for land 777 Section 54EA and specified securities bought in resale 778 Exemption u/s 54EA on sale of shares held under stock options 778 Exemption u/s 54EA on surrender of tenancy rights 779 SUMMARY 779 CHAPTER 34 EXEMPTION ON INVESTMENT IN SPECIFIED ASSET - SECTION 54EB Manner of reckoning of period for making investment 782 Exemption u/s 54EB when consideration received in instalments 783 SUMMARY 783 CHAPTER 35 EXEMPTION ON INVESTMENT IN CERTAIN BONDS - SECTION 54EC Section 54EC and sale of TDRs 791 Reckoning of period of six months for investment 792 Section 54EC and Period of holding of capital asset 795 Retrospective amendment fixing limit of investment 796 Reasonable cause for delay in making investment 796 Maximum limit of investment 797 Investment made jointly with assessee permissible 798 Investment in FDs not eligible for exemption 799 Exemption permissible under both sections 54EC and 54/54F 799 Exemption on investment in specified assets till AY 2018-19 799 Firm to get exemption even if investment made in names of partners 800 No exemption if investment made before transfer of original asset 800 Exemption to be claimed before set off of capital loss 801 Separation exemption for land and building sold together 801 Section 54EC and section 115JB 802 Section 54EC and penalty for concealment 802
GAIN ON TRANSFER OF CERTAIN LISTED SECURITIES/UNITS - SECTION 54ED
ON INVESTMENT IN UNITS OF A SPECIFIED FUND - SECTION 54EE
38
FOR INVESTMENT IN NEW RESIDENTIAL HOUSE - SECTION 54F
CONTENTS I-39 PAGE Section 54EC and section 64 803 Exemption in respect of sale of land held as capital asset 803 Restriction of exemption upto amount of investment 803 Exemption on sale of client relationships and goodwill of business 804 Section 54EC and section 45(4) 804 SUMMARY AND CHECK POINTS FOR TAX PLANNING 805 CHAPTER
CAPITAL
Capital gain on transfer of certain listed securities/units- Section 54ED 807 SUMMARY 809 CHAPTER
EXEMPTION
Section 54EE deserves liberal construction 813 Scope of applicability of section 54EE 813 Investment in new asset can be from other sources/borrowings 814 Maximum amount of exemption u/s 54EE 815 Manner of reckoning the eligibility period of 6 months 815 No denial of exemption if specified authority delays issue of units 815 No denial of exemption if investment made jointly 816 Circumstances entailing withdrawal of exemption u/s 54EE 816 SUMMARY AND CHECK POINTS FOR TAX PLANNING 817 CHAPTER
Various conditions for claiming exemptions u/s 54F 826 Various long-term capital assets on whose transfer exemption u/s 54F can be claimed 827 Stock options 827
36
37
EXEMPTION
I-40 CONTENTS PAGE Sale of rights in a flat 828 Sale of commercial property 828 Sale of vacant land 829 Sale of factory shed 830 Sale of Tenancy rights 830 Sale of allotment letter 830 Sale of Trademark 831 Sale of Agricultural Land 831 Interplay of section 54F and section 50C 831 Transfer of several long-term capital assets 833 Kind of asset purchased, or extent of construction carried out 833 Claim of exemption by a minor 834 Charge of capital gains on failure to purchase new asset 835 Section 54F and section 64 836 Section 54F and owning of more than one residential house 837 Section 54F and investment in house owned by father 840 Section 54F and cancellation of agreement to sell 841 Withdrawal of exemption u/s 54F(3) 841 Adjustment of long-term capital gains against long-term capital loss 843 Claim of exemption by a trust 843 Section 54F and cost of new asset 844 Invalidity of denial of exemption in specific cases 845 Denial of exemption in specific cases 848 SUMMARY AND CHECK POINTS FOR TAX PLANNING 852 CHAPTER 39 EXEMPTION ON INVESTMENT IN NEW RESIDENTIAL HOUSE - SECTIONS 54 AND 54F Concept of residential house 855 Meaning and scope of expressions ‘purchase or construction’ 857 Acquiring a house under a builder-buyer agreement is a purchase 860 Acquiring a house from DDA/Housing societies 861 ‘A residential house’ whether singular or plural 863 New residential house should be habitable 864
CONTENTS I-41 PAGE New residential house outside India 866 Subsequent use of the property purchased is not material 868 Purchase of semi-finished apartment, addition, alteration, extension, reconstruction, modification 869 Purchase of property with furniture and fixtures 872 Section 54F and land appurtenant to the building 874 Possession v. Execution of instrument of transfer of new asset for exemption u/s 54F 875 Residential house on commercial land 877 Investment of net consideration/capital gains in single units or multiple units 878 Claim of Exemption at different stages of assessment and appeal 884 Purchase/construction of house in the name of close relatives or inserting their names 886 Exemption even if wrong section or no section is mentioned 892 Exemption if agreement with builder failed and money refunded 893 Exemption if investment in new asset is staggered 894 Reckoning date of purchase or allotment 895 Source and Period of investment made in new asset 897 Making investment in new asset in prescribed time 900 Withdrawal of Exemption 904 Purchase of new asset from close relatives/joint ventures 905 Allowing Exemption in specific cases 907 Miscellaneous issues 909 SUMMARY AND CHECK POINTS FOR TAX PLANNING 912 CHAPTER 40 EXEMPTION FROM CAPITAL GAINS TAX AND CAPITAL GAINS ACCOUNTS SCHEME Requirement of deposit in CGAS account 919 Making deposit of capital gains/net consideration in saving account 921 Making deposit out of borrowed funds 922 Purchase/construction within prescribed time 922 Deposit within the time allowed u/s 139(4) 925 Failure to file return or failure to offer capital gains tax 930
I-42 CONTENTS PAGE Reasonable cause in delay in making deposit 930 Miscellaneous 931 SUMMARY AND CHECK POINTS FOR TAX PLANNING 932 CHAPTER 41 EXEMPTION ON SHIFTING OF INDUSTRIAL UNDERTAKING FROM URBAN AREASECTION 54G Relevant evidence to prove shifting of industrial undertaking 939 Manner and scope of investment of capital gains in new asset u/s. 54G 939 No denial of exemption due to subsequent notification of urban areas 940 Deposit in CGAS account made within time limit available u/s. 139(4)/ 139(5) 940 Tax treatment of unutilized CGAS deposit in the hands of legal heirs 941 Section 54G and purchase of land/building for business at new place 941 Formal notification as ‘urban area’ not mandatory 942 Essential conditions for availing exemption u/s. 54G 942 SUMMARY AND CHECK POINTS FOR TAX PLANNING 943 CHAPTER 42 EXEMPTION ON SHIFTING OF INDUSTRIAL UNDERTAKING TO SEZ - SECTION 54GA Essential conditions for claiming exemption u/s. 54GA 948 Preference for adjustment of exemption u/s. 54GA against capital gains 949 Circumstances leading to withdrawal of exemption u/s. 54GA 950 Tax treatment of unutilised CGAS deposit in the hands of legal heirs 950 Common principles/propositions applicable to section 54GA 951 Filing of return mandatory to claim exemption 953 SUMMARY AND CHECK POINTS FOR TAX PLANNING 954 CHAPTER 43 EXEMPTION FOR INVESTMENT IN START-UPSECTION 54GB Time limit for investing capital gains in eligible company 965
CONTENTS I-43 PAGE Time limit for eligible company to invest in the new asset 965 How to determine cost of the new asset 966 Grounds for withdrawal of exemption u/s. 54GB 966 Illustration to explain how section 54GB works 967 Common principles/propositions for exemption applicable to section 54GB 969 SUMMARY AND CHECK POINTS FOR TAX PLANNING 972 CHAPTER 44 EXTENSION OF TIME FOR INVESTMENT IN CASES OF COMPULSORY ACQUISITION - SECTION 54H Scope of benefit of section 54H 976 Liability to Capital Gains when compensation received in instalments 977 Remedial action available u/s. 155(11) if capital gains charged 977 SUMMARY AND CHECK POINTS FOR TAX PLANNING 978 CHAPTER 45 COST OF ACQUISITION IN CERTAIN CASESSECTION 55 Financial assets covered u/s. 55(2)(aa) 989 Determination of cost of acquisition of financial assets u/s. 55(2)(aa) 990 Determination of cost of acquisition u/s. 55(2)(ac) 990 Determination of cost of acquisition u/s. 55(2)(b)(iii) 991 Determination of cost of acquisition u/s. 55(2)(b)(v) 991 Determination of cost of acquisition of any other capital asset 992 Cost of acquisition of bonus/right shares/detachable warrants 992 Determination of cost of acquisition of units of business trust 995 Determination of cost of acquisition on conversion of securities 996 Determination of cost of acquisition on amalgamation 996 Determination of cost of acquisition in case of demerger 997 Cost of acquisition of transactions between holding and subsidiary companies 998 Cost of acquisition on conversion of company to LLP 998 Treatment of advance money forfeited 998
I-44 CONTENTS PAGE Cost of acquisition of immovable property covered u/s. 56(2) 999 Cost of acquisition as cost to previous owner 999 Meaning of ‘Previous owner’ 1000 Cost of acquisition in the case of a joint development agreement 1001 Cost of acquisition in case of enhanced compensation 1001 Cost of acquisition on conversion of stock-in-trade into capital asset 1001 Cost of acquisition in case of transfer of a depreciable asset 1002 Determination of cost of acquisition in case of slump sale 1002 Cost of acquisition of goodwill, trademark or brand name 1002 Cost of acquisition in case of transfer/surrender of tenancy rights 1004 Determination of cost of acquisition of know-how 1005 Determination of cost of acquisition of patent 1005 Determination of cost of acquisition of IPRs 1006 Cost of acquisition of licences etc. for setting up a plant 1006 Cost of acquisition in case of payment of non-compete fees 1007 Cost of acquisition in case of transfer of ‘jagirs’ 1007 Cost of acquisition of gold received on redemption of Gold Bonds 1008 Relevant factors in determination of cost of acquisition u/s. 55(2)(a) 1008 Cost of acquisition of shares issued against surrender of BSE card 1009 Relevance of value of asset declared in wealth tax records 1010 Concept of Fair Market Value (FMV) in section 55 1011 Relevance of report of registered valuer/Departmental valuer 1011 Ground for invoking section 55(3) 1012 Salient features of exercising option u/s. 55(2)(b) 1012 Cost of acquisition on conversion to non-agricultural land 1014 Relevant factors while determining cost of acquisition 1015 Salient features of cost of improvement u/s. 55(1)(b) 1017 SUMMARY AND CHECK POINTS FOR TAX PLANNING 1019
46
CHAPTER
Scope of reference to DVO u/s 55A and section 142A 1025 Procedure to be followed by DVO and his powers u/s. 55A 1028
REFERENCE TO VALUATION OFFICERSECTION 55A
CONTENTS I-45 PAGE Reference to DVO u/s. 55A by Investigation Wing 1029 Reference to DVO by the AO u/s. 55A 1029 Validity of reference to DVO if report received after assessment 1030 No rectification of assessment u/s. 155(15) based on DVO’s report 1030 Addition u/s. 153A on the basis of DVOs report 1031 FMV determined by DVO cannot be substituted for FVC u/s. 48 1031 DVO’s report as basis for action u/s. 148 1032 Reference to DVO and rejection of books of account by AO 1032 Difference between reference to DVO u/ss 142A and 55A 1033 Reference to DVO valid even if declared value is more than FMV 1035 Amendment made in section 55A(a) is prospective 1036 Reference to DVO permissible for purpose of section 45(4) 1036 Validity of reference to DVO for purpose of section 50C 1037 Prior hearing to assessee not required for reference to DVO 1037 DVO’s report open to challenge by the assessee 1037 No reference to DVO before assessee has filed return 1038 Second reference possible if first reference to DVO was not valid 1038 AO can estimate FMV if DVO fails to furnish report in time 1038 Reference to DVO only after due application of mind by AO 1039 No reference to DVO u/s. 55A after completion of assessment 1039 Power to remand case on objections to DVO’s report raised in appeal 1039 Reference u/s. 55A does not extend limitation 1040 SUMMARY AND CHECK POINTS FOR TAX PLANNING 1040 CHAPTER 47 SET OFF OF CAPITAL GAINS/LOSSSECTIONS 70,71,74 AND 80 Set off of loss from exempt source/head of income 1051 Intra-head set off of loss 1052 Inter-head set off of loss 1053 Set off of long-term capital loss 1054 Set off of non-genuine capital loss 1055 Set off of long-term capital loss against STCG on transfer of a depreciable asset 1056 SUMMARY AND CHECK POINTS FOR TAX PLANNING 1056
I-46 CONTENTS PAGE CHAPTER 48 TAXATION OF SHORT-TERM/LONG-TERM CAPITAL GAINS - SECTIONS 111A, 112 AND 112A Meaning and scope of ‘equity-oriented fund’ 1085 Section 111A does not apply to STCG 1086 (i) On transfer of preference shares 1086 (ii) On units of debt-oriented MF 1086 (iii) On transfer of unlisted shares 1086 Applicability and scope of section 111A 1087 Deductions allowed from STCG 1088 Deductions not allowed u/s. 111A 1088 No denial of benefit u/s. 111A to assessee if STT not paid by broker 1089 No credit of STT available to assessee 1089 No capital gains on disgorgement of sale proceeds 1089 Section 111A applies not on trading but on investment in shares 1090 Section 111A does not apply where DTAA is attracted 1091 No denial of benefit u/s. 111A merely for omission in IT return 1091 AO cannot raise new issue of denying benefit u/s. 111A in remand 1092 Meaning of ‘zero coupon bond’ 1092 Application of concessional rate of tax u/s. 112 to non-residents 1092 Effect of proviso to section 112(1) 1096 Tax rates u/s. 112 apply to private discretionary trust 1097 Non-resident entitled to the benefit u/s. 55(2)(b)(i) 1097 Tax rate on LTCG arising on transfer of shares allotted in public issue 1098 Benefit of concessional tax rate u/s. 112 available to an individual/HUF 1098 Section 112(1) attracted even if depreciable assets are sold 1098 Section 112(1) and deductions under Chapter VI-A 1099 Tax includes surcharge 1099 Interplay of sections
112 1100 No benefit of section
of
c) 1101 Relief under first
u/s.
1101 No benefit of section
Deep Discount Bonds 1102 No denial of benefit u/s.
of LTCG not
in IT return 1102
48 and 70 before invoking section
112 to a trust on violation
section 13(1)(
proviso to section 112(1) can be availed
154
112(1) on LTCG arising on
112 if details
given
CONTENTS I-47 PAGE No benefit u/s. 112 on conversion of investment into stock-in-trade 1102 SUMMARY AND CHECK POINTS FOR TAX PLANNING 1103 CHAPTER 49 CAPITAL GAINS TAX ON OFFSHORE FUNDS/NONRESIDENT PERSON/FIIs IN RESPECT OF UNITS/ GDRs/SECURITIES - SECTIONS 115AB, 115AC, 115ACA, 115AD Applicability of aforesaid provisions 1128 Meaning and scope of ‘dividend’ and taxation thereof 1128 Taxation of dividend in case of non-resident shareholders 1129 Taxation of dividend from Mutual Funds in case of non-residents 1129 Taxation of dividend from GDRs in case of non-residents 1130 Taxation of dividend from REITs/InVITs in case of non-residents 1130 Liability to deduct withholding tax from payment of dividend 1130 Meaning and scope of GDRs 1131 Types of securities purchased by non-residents in foreign currency 1132 Difference between FCCBs and FCEBs 1132 FCCB/FCEB schemes notified for purpose of section 115AC 1133 Taxation of capital gains u/s. 115AC 1133 Distinction between units and securities 1133 Scope of applicability of section 115AD 1134 Nature of Income of Specified Funds exempt u/s. 10(4D) 1135 Tax rates for LTCG on sale of shares u/ss. 112 and 112A 1136 FIIs assessable on LTCG on transfer of securities only u/s. 115AD 1136 Adjustment of short-term capital loss against STCG of FII 1136 FIIs not barred from trading in derivatives 1137 Income of FIIs from dealing in derivatives taxable as Capital Gains 1138 Benefit u/s. 115AC available to non-residents but not to RNOR 1138 Tax rate applicable to interest income of an FII 1139 Taxability of interest income of foreign company on FCCBs 1139 Chargeability of capital gains on conversion of debentures/bonds 1139 Section 115AD and income of FIIs from sale of portfolio investments 1140 Section 115AD and Interest earned by FII on NCDs 1141
I-48 CONTENTS PAGE Set off of short-term capital loss of an FII against STCG 1141 Section 48 and section 111A/115AD 1142 Exemption of interest income of FII u/s. 10 1142 SUMMARY AND CHECK POINTS FOR TAX PLANNING 1143 CHAPTER 50 ALTERNATIVE TAX REGIME IN THE CASE OF NON-RESIDENT INDIANS - SECTIONS 115C, 115D, 115E, 115F, 115G, 115H AND 115-I Section 115D v. section 88 1159 Section 115D and non-foreign exchange asset 1160 Section 115E and section 115H 1160 Section 115E and transfer of FE asset from one bank to another 1161 Section 115E and section 88 1161 Section 115E and declaration in the return 1162 Section 115E and short term capital gains 1162 Section 115E and interest income from NRO account 1163 Section 115E and LTCG on sale of house by non-resident 1164 Nature of bonus share is same as that of original share 1164 Section 10 and interest income of non-resident 1165 Transactions not regarded as transfer in the case of NRI also 1165 Benefit continue to available to NRI when he becomes RI 1166 Benefit u/s 115H not available to interest on interest 1166 Section 115C/115H and nationalised bank deemed to be an Indian company 1167 Option u/s 115-I 1167 SUMMARY AND CHECK POINTS FOR TAX PLANNING 1167 CHAPTER 51 CAPITAL GAINS AND BUSINESS TRUST Concept of Business Trust 1170 Taxability of Income in hands of Business Trust 1173 Taxability of Income in hands of Shareholder 1175
CONTENTS I-49 PAGE Taxability of Capital Gains in hands of sponsors of business trust 1176 SUMMARY AND CHECK POINTS FOR TAX PLANNING 1177 CHAPTER 52 CAPITAL GAINS AND INTERNATIONAL FINANCIAL SERVICES CENTRE (IFSC) Persons permitted to deal in securities listed in IFSC 1184 Kind of securities traded through the RSEs in IFSC 1184 Transactions in IFSC not treated as ‘transfer’ u/s. 47 1187 Income of units in IFSC as well as investors exempt u/s. 10 1189 Capital Gains tax on transactions in IFSC charged at concessional rates 1192 SUMMARY AND CHECK POINTS FOR TAX PLANNING 1193 CHAPTER 53 CAPITAL GAINS UNDER INTERNATIONAL TAXATION Scope of Article 13 of DTAA relating to capital gains 1204 Capital gains under Article 13 not always charged in Source country 1205 Tax treatment of transfer of shares of Indian Company by non-resident 1206 Taxability of units of Mutual funds under DTAA 1208 Taxation of capital gains arising to Indian resident in a foreign country 1208 Taxability of capital gains arising to non-resident on certain transfers 1208 Factors affecting computation of capital gains in case of non-residents 1209 Cost of acquisition of shares received on redemption of GDRs/FCCBs 1209 Tax rates for charging capital gains in India 1210 Preference for more beneficial tax rates under DTAA v. Income Tax Act 1211 Adjustment of short-term capital loss against STCG of FII 1212 Scope of the expression ‘movable property’ used in Article 13(2) 1213 Applicability of DTAA in specific cases 1213 Condition for availing benefit of DTAA by a non-resident 1214 Taxation under I.T. Act in absence of DTAA 1215 Parameters for place of effective management to locate PE 1215 Transfers exempt under Income Tax Act for a non-resident 1216 Taxable capital gains arising to a non-resident 1217 Liability to deduct TDS from non-resident only if capital gains taxable 1217
I-50 CONTENTS PAGE Tax treatment of capital gains on transfer of immovable property 1218 Nature of income of FIIs from dealings in securities 1218 Transaction in shares/securities as business income of non-resident 1219 No capital gains on notional or hypothetical basis 1220 Carry forward of capital losses allowable to a Mauritian company 1220 Applicability of domestic capital gains provisions to non-residents 1220 Types of income covered by section 9 of Income Tax Act 1221 Tax treatment of certain specific transactions 1223 Taxability of compensation received by a foreign national 1223 Capital gains arising to PE in India to be taxable in India 1223 Relevance of situs of capital asset for tax treatment of capital gains 1224 Capital gains arising to resident of Mauritius on transfer of CCDs 1224 NRI can claim benefits under DTAA as well as under the I.T. Act 1224 No liability for non-deduction if recipient paid taxes on capital gains 1225 Liability to deduct TDS on payment made to non-resident u/s. 195 1225 Capital gain to Indian resident on shares of foreign company taxable 1225 Amendment in sections 40(a)(i) and 201(1) by FA, 2019 retrospective 1225 SUMMARY AND CHECK POINTS FOR TAX PLANNING 1226 CHAPTER 54 OTHER APPLICABLE PROVISIONS RELATING TO CAPITAL GAINS Taxability in the hands of recipient being individual/HUF 1228 Taxability in the hands of recipient being firm or private limited company 1235 Taxability in the hands of recipient being unlisted company 1238 Taxability of money received in advance 1242 General provision for taxability in the hands of recipient 1243 Other provisions 1250 CHAPTER 55 MISCELLANEOUS COMMON QUERIES Claim of exemption 1254 (i) Claim of exemption u/s 54/54F 1254 (ii) During Appellate proceedings 1255 (iii) On enhanced compensation 1255
(
(iv) When finishing of the new house was done subsequently
(v) Only on sale of land attached with the house
(vi) If new house is subsequently used for commercial purposes
(vii) On sale of several houses and investment into one
) On purchase or construction of new house before sale of old house
(
) On exchange of new house for old house
(x) On non-completion of construction within three years
) On purchase of a house with tenancy
) On sale of industrial plot having office cum residence
) On making a claim under wrong section
) On sale of land and building constructed thereon
) On getting the house from the builder beyond stipulated period
) On purchasing new residential house in joint name with wife
) On purchase of the new house for the purposes of hostel
) Purchase of farmland after sale of old farmland through plotting
CONTENTS I-51 PAGE
1256
1256
1256
1256
viii
1256
(
ix
1257
1257
xi
1257
1257 (
1258 (
1258
xv
1258
xvi
1258
xvii
1259 (xviii
1259 (xix)
1259
xx
1259 (xxi
1260 (xxii
1260 (xxiii)
1260 (xxiv) On sale of
land 1260 (xxv)
1260 (xxvi) On
house 1261 (xxvii
1261 (xxviii) On
1261 (xxix) On
instalment 1261 (xxx) Delay in registration 1261 Deposit in CGAS account 1262 Claim of deduction/expenditure 1262 (i) For compensation paid to earlier buyer 1262 (ii) For interest expenditure 1263 Calculation of capital gains 1263 Liability to capital gains 1264
(
xii
xiii
xiv
(
(
(
On purchase of new house outside India
(
) On sale of tenancy rights
) On sale of house property received in gift
) On sale of freehold house which was earlier on lease
On sale of house in the joint name but capital gains declared by husband
house built on leasehold
Claim by a minor
extension of existing
) On investment in two units forming one residential house
cancellation agreement
making payment for new asset in
I-52 CONTENTS PAGE Exemption and application of section 50C 1268 Forfeiture of the exemption 1268 Benefit of indexation 1269 Sale of shares of non-resident company 1269 Who will be charged, assessee or POA holder 1270 Valuation 1270 Actual purchase price cannot be disturbed 1271 Holding period 1272 Agricultural land 1272 Cost of acquisition 1272 Adjustment of brought forward losses 1273 Examples 1273 Others 1280 Amendments made by Finance Act, 2023 1282
CAPITAL GAINS AND ENTRY OF NEW PARTNER/MEMBER IN THE FIRM/AOP/BOI
A. Introduction
When a person becomes a partner in a firm or member in an AOP/BOI, he may contribute his capital either in the form of money or in the form of a capital asset. The capital asset which was earlier owned by that person is now owned by the firm/AOP/BOI. Thus, ownership changes and therefore, liability to capital gains may arise on that person. For the purposes of computing capital gains, the amount recorded in the books of firm/AOP/BOI becomes the full value of consideration. The cost to that person is the cost of acquisition with benefit of indexation. In this chapter, various facts and circumstances arising while computing capital gains on entry of a person into the firm/AOP/BOI are briefly described.
B. The Provision
“45(3) The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and, for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.”
C. Analysis
(
(
i) Section 45(3) was inserted by Finance Act, 1987 w.e.f. 01-04-1988.
ii) There is a transfer of capital asset by a person to a firm/AOP/BOI (but not to a company/co-operative society).
CHAPTER
9 206
[SECTION 45(3)]
(iii) Such person is a partner (or member) or has become a partner (or member) in the firm/AOP/BOI.
(iv) Such transfer of capital asset is by way of capital contribution or otherwise.
(v) For the purposes of section 48, the amount recorded in the books of the firm/AOP/BOI as the value of the capital asset shall be deemed to be the full value of consideration received or accrued as a result of the transfer of the capital asset.
(
vi) The value of the asset as recorded in the books has to be seen on the date of transfer and not earlier or after.1
(vii) The profits and gains arising on such transfer (FMV less Indexed Cost of Acquisition) shall be charged to tax as capital gains of the previous year in which the transfer takes place.
(viii) Such capital gains would be charged in the hands of the partner/ member transferring the capital asset to the firm/AOP and not in the hands of firm/AOP.2
D. Relevant circular
CIRCULAR NO. 495 DATED 22-09-1987:
“24.1 One of the devices used by assessees to evade tax on capital gains is to convert an asset held individually into an asset of the firm in which the individual is a partner. The decision of the Supreme Court in Kartikeya V. Sarabhai v. CIT [1985] 156 ITR 509 has set at rest the controversy as to whether such a conversion amounts to transfer. The Court held that such conversion fell outside the scope of capital gain taxation. The rationale advanced by the Court is, that the consideration for the transfer of the personal asset is indeterminate, being the right which arises or accrues to the partner during the subsistence of the partnership to get his share of the profits from time to time and on dissolution of the partnership to get the value of his share from the net partnership assets.
24.2 With a view to blocking this escape route for avoiding capital gains tax, the Finance Act, 1987 has inserted new sub-section (3) in section 45. The effect of this amendment is that profits and gains arising from the transfer of a capital asset by a partner to a firm shall be chargeable as the partner’s income of the previous year in which the transfer took place. For purposes of computing the capital gains, the value of the asset recorded in the books of the firm on the date of the transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.”
CAPITAL GAINS & ENTRY OF NEW PARTNER/MEMBER IN FIRM 207
1. PCIT v. Dr. D. Ramamurthy [2019] 102 taxmann.com 330 (Madras) (SLP dismissed in PCIT v. Dr. D. Ramamurthy [2019] 103 taxmann.com 24 (SC))
2. ACIT v. Karuna Estates & Developers [2018] 92 taxmann.com 282 (Visakhapatnam - Trib.)
Frequently Asked Questions (FAQs)
CAPITAL GAINS ON INCOMING PARTNER BRINGING CASH/ASSET/UNQUOTED SHARES
1. Will any capital gains arise if incoming partner brings cash?
Ans: No. When incoming partner brings cash into the firm as his contribution, no capital gains is charged in his hands, because there is no transfer of any asset within the meaning of Section 2(47) of the IT Act. The asset in the firm remains the property of the firm. Profit sharing ratio does not fall by introduction of cash. Even though definition of ‘property’ mentioned in Section 2(14)(a) was amended by inserting an Explanation thereunder by the Finance Act, 2012, so as to include in the definition of property, rights in or in relation to an Indian company but there was no change so as to include in that definition rights in or in relation to, a partnership firm.
Ans. Now yes. Prior to amendment by Finance Act, 1987 w.e.f. 01-04-1988, the decision of Hon’ble Apex Court in CIT v. Kartikey V Sarabhai3 was being followed. In this case, it was held that there is transfer when assesseepartner brings his capital asset into partnership as capital contribution since assessee’s exclusive interest in capital asset is reduced to shared interest. As no consideration is received by partner within meaning of section 48, or no profit or gain accrued to him in commercial sense, no capital gain chargeable under section 45 will arise even though contribution made by assessee in firm amounts to transfer under section 2(47) read with section 45 of the Act. The only exception when section 48 can be invoked is where the transfer of an asset to the firm is a device or ruse for converting asset into money.4 The above decision of Hon’ble Apex Court was followed in following cases.5
Where a partner brings asset in the firm on his entry, even though it is a transfer, but section 45 cannot be invoked [prior to insertion of section 45(3) by Finance Act, 1987 w.e.f. 01-04-1988]. It is because no consideration is
3. [1985] 156 ITR 509 (Guj.)
4. Jamnalal Sons Ltd. v. IAC [1989] 29 ITD 164 (Bom.)
5. CIT v. Smt. Minal Rameshchandra (1987) 30 Taxman 282/167 ITR 507 (Guj); Ved Parkash Agarwal v. CIT (1989) 179 ITR 78 (P&H); CIT v. Anasuya Devi [1987] 33 Taxman 499/168 ITR 587 (AP); CIT v. Jehangir B. Jeejeebhoy [1987] 32 Taxman 470/[1988] 169 ITR 552 (Bom.); CIT v. Harikishan Jethalal Patel (1987) 33 Taxman 217/168 ITR 472 (Guj); CIT v. Smt. Mamta Narottam Das (1986) 162 ITR 365 (Guj.); Dhirajben R. Amin v. CIT (1988) 174 ITR 307 (SC); Rajmal Chordia v. CIT [1995] 81 Taxman 342 (Raj.)
208 CAPITAL
GAINS & ENTRY OF NEW PARTNER/MEMBER IN FIRM
received by the partner and no profit and gains arose to him6, and therefore, section 52 cannot be invoked7, except in cases where assessee adopts a device such as first transferring personal assets at enhanced value in the firm constituted with 6 persons who brought in cash as their capital and the assessee withdrew cash and subsequently also dissolved the firm, charge of capital gains can be sustained.8 It is also not essential that the asset should be registered in the name of the firm when brought into the firm by the partner.9
The above view that no capital gains can be charged if incoming partner brings some asset into the firm was nullified by the insertion of sub-section (3) in section 45 by Finance Act, 1987 w.e.f. 01-04-1988 according to which the profit and gains arising from transfer of capital asset by a person to a firm (for becoming a partner) or to an AOP or BOI (other than a company or co-operative society) by way of capital contribution or otherwise shall be chargeable to tax as his income of the previous year in which such transfer takes place and for the purposes of section 48, the amount recorded in the books of account of the firm/AOP/BOI as the value of the capital asset shall be deemed to be the full value of consideration received or accruing as a result of the transfer of the capital asset. Therefore, transfer by the incoming partner or existing partner of his capital asset either as his capital contribution or otherwise is now brought into the net of capital gains.
The order of the CIT u/s 263 could not be upheld where he set aside the order of the AO for the AY 1981-82 by holding that section 45(3) can be invoked on entry of the partner into the firm by bringing asset.10
If there was no evidence to show that something more than apparent consideration was in fact paid by assessee, it could not be said that assessee had understated consideration or that consideration actually received by assessee was more than what was declared or disclosed.11
and registration does not takes place, can section 45(3) be invoked?
Ans. Yes. Where immovable property is transferred by a partner to firm as a capital contribution and registration does not take place by paying stamp
6. Sunil Siddharthbhai v. CIT [1985] 23 Taxman 14W (SC); Jaykrishna Harivallabhdas (HUF) v. CIT [1995] 80 Taxman 491 (Gujarat); Vimal Chand Hirawat v. CIT [1994] 77 Taxman 432 (RAJ.); CIT v. Sanmitra G. Shashtri [1994] 208 ITR 870 (Guj.); Ram Chander Aggarwal v. CIT [1994] 74 Taxman 544 (Delhi); Ambalal Sarabhai D. Trust v. CIT [1995] 213 ITR 263 (Guj.); Sushil Kishore Premchand v. ITO [1988] 26 ITD 285 (Bom.); Dr. Gaur Hari Singhania v. ITO [1986] 16 ITD 1 (BOM.) (SB); CIT v. Subodhchandra S. Patel [2004] 138 Taxman 185 (Guj.)
7. ITAT v. P.A. Varghese [1988] 36 Taxman 139 (Ker.)
8. S.V. Kumaragurupasamy v. CIT [2003] 133 Taxman 360 (Mad.)
9. M. Ahammedkutty v. ITO [2015] 53 taxmann.com 276 (Cochin - Trib.)
10. CIT v. L.F. D’Silva [1992] 62 Taxman 161 (Kar.)
11. CIT v. Smt. Gira Sarabhai [1994] 209 ITR 356 (Guj.)
CAPITAL GAINS & ENTRY OF NEW PARTNER/MEMBER IN FIRM 209
210 CAPITAL GAINS & ENTRY OF NEW PARTNER/MEMBER IN FIRM
duty, case would be covered under section 45(3)12, and the value of capital asset recorded in books of account of firm would be considered as full value of consideration for purpose of computing capital gain.13
But where transfer of land as a part of capital contribution to partnership firm takes place in the year 2008 and land in question was not transferred in the name of firm and no amount was credited by firm in account of assessee as a consideration for land in question during assessment year 2009-10, no capital gains can be charged in that year.14 But where assessee contributed land, valued as per books, at cost of ` 7.81 crores in AY 200405, contribution of assessee became 88 per cent of total capital but he was assigned only 5 per cent profit sharing in the firm, it was found that entire transaction of contribution to partnership was a sham and was an attempt to devise a method to avoid capital gain tax on transfer of land to firm. The capital gains would be charged in the hands of the partner bringing land into firm.15
4. Can section 45(3) be invoked if incoming partner brings current
Ans. No. Section 45(3) is applicable only in cases of transfer/contribution of capital asset by the partner into the firm but where partner contributed a current asset in the business of the firm and on receipt of such asset, the firm also accounted for it as current asset and not as capital asset, section 45(3) will not be applicable.16
Now transfer of stock-in-trade by the partner into the firm will be taxed u/s 43CA. Finance Act, 2013 w.e.f. 01-04-2014 inserted section 43CA providing for taxation of difference between cost of acquisition of land or building or both and stamp duty valuation of such land or building transferred by an assessee other than as capital asset to the firm as profit and gains under the head ‘business income’ and stamp duty valuation will be deemed as full value of consideration received on such transfer to which section 50C would apply and where date of agreement and date of conveyance are different, then the stamp duty valuation on the date of agreement will be treated as full value of consideration.
12. Chakrabarty Medical Centre v. TRO [2015] 56 taxmann.com 76 (Pune - Trib.); K. D. Pandey v. CWT [1977] 108 ITR 214. (All.); Carlton Hotels (P.) Ltd. v. Asstt. CIT [2010] 35 SOT 26 (URO) (Luck)
13. DLF universal Ltd. v. Dy CIT [2010] 123 ITD 1/36 SOT 1 (Delhi) (SB); ACIT v. Moti Ramanand Sagar - 2019 (3) TMI 636 - ITAT Mumbai; ACIT v. Amartara Pvt. Ltd. - 2020 (4) TMI 222 - ITAT Mumbai/[2021] 128 taxmann.com 125 (Mum. - Trib.) ITO v. Chiraayu Estate & Dev. (P.) Ltd
- 2011 (8) TMI 469 - ITAT Mumbai/[2011] 14 taxmann.com 41/47 SOT 200 (URO)
14. Manoj Dwarkadas Pritmani v. Asstt. CIT [2021] 130 taxmann.com 284 (Gujarat)
15. CIT v. Carlton Hotel (P.) Ltd. [2017] 88 taxmann.com 257 (Allahabad)
16. ITO v. Orchid Griha Nirman (P.) Ltd. [2016] 74 taxmann.com 187/161 ITD 818 (Kol.)
5. On whom would the liability to capital gain arise if the newly subsequent years?
Ans. There are two aspects of the issue. When the incoming partner brought in capital asset into the firm, section 45(3) would be triggered and capital gains liabilities would arise on the incoming partner and the value of the capital asset, so introduced, and recorded in the books of the firm will become the full value of consideration. The computation of capital gains will be carried out in accordance with section 48. In the second stage after capital asset so brought in becomes the asset of the firm and is disposed off by it, capital gains would arise on the firm and sale consideration coupled with section 50C will be the full value of consideration and value of the capital asset recorded in the books of the firm will be the cost of acquisition.17
is no difference between cost price of the capital asset in the after transfer, can capital gains be charged in the hands of the transferor?
Ans. No. Profit or gain would arise only when transfer has been made at a price which is more than cost price and difference between cost price and amount at which transfer has taken place can be charged under section 45(3). In a case where the cost price recorded in the books of the partner and that recorded in the books of the transferee is the same, no liability to capital gains would arise u/s 45(3).18
7. How will the capital gains be worked out if incoming partner
Ans: In a case where transferor is incoming partner and brings with him unquoted equity shares, then for computing capital gains in his hands, FMV of the shares calculated in the prescribed manner will be FVC. However, as per Section 45(3), the value of the shares recorded in the books of the firm, for which credit is given to the incoming partner, will be deemed as FVC. Thus, there is conflict between Section 45(3) and Section 50CA. In case of conflict between deeming provision of Section 45(3) and deeming provision u/s 50CA. Section 45(3) will prevail, as there cannot be superimposition of another deeming fiction u/s 50CA over deeming fiction created by Section
CAPITAL GAINS & ENTRY OF NEW PARTNER/MEMBER IN
FIRM 211
17. S.K. Ravikumar v. ITO [2019] 101 taxmann.com 18 (Karnataka)
18. ITO v. Chiraayu Estate & Dev. (P.) Ltd. [2011] 14 taxmann.com 41 (Mumbai); PCIT v. Orchid Griha Nirman (P.) Ltd. [2022] 134 taxmann.com 281 (Calcutta)
45(3). Therefore, for working out capital gains in the hands of incoming partner, FVC will be the value of shares recorded in the books of the firm. COA will be either the cost to the incoming partner or cost as per Section 49(4), where Section 56(2)(vii)/(viia)/(x) may be invoked.
CAPITAL GAINS AND REVALUATION OF CURRENT/FIXED ASSETS
assets, will any capital gains arise?
Ans. No. On revaluation of a current asset and then its transfer to fixed assets, a revaluation reserve account in the books was created by the assessee and the value of asset was enhanced and credited to Revaluation Reserve Account or to partners account19 and debited to the said asset Account. It was held that transfer of an asset from current to fixed after revaluation does not give rise to any receipt or accrual of income to the assessee. It is not necessary that every reserve has to be routed through profit and loss account. “Process of revaluation of stock by itself cannot bring in any real profit as held in following cases.20 Moreover, what is taxable under the income-tax law is only real income.21 The Courts have held that there is no principle by which the stock-in-trade can be valued at market price so as to bring to tax the notional profits which might in future be realized as a result of the sale of the stock-in-trade.22
SECTION 45(3) V. SECTION 40A(2)
9. Can section 40A(2)(a) be invoked simultaneously with section 45(3)?
Ans. Yes. It can be. Where partner had transferred a capital asset to the firm at a value which is higher than stamp duty valuation or fair market value, then partner will be liable to capital gains u/s 45(3) on the difference between cost of acquisition to the partner and the value at which it was transferred to the firm. If the firm records the same value in the books as its cost of acquisition, then the firm may be disallowed a part of expenditure u/s 40A(2)(a), if in the opinion of the AO, expenditure incurred by it is more than SDV/FMV.23
19. PCIT v. Orchid Griha Nirman (P.) Ltd. [2022] 134 taxmann.com 281 (Calcutta)
20. CIT v. K.A.R.K. Firm [1934] 2 ITR 183 (Rangoon); CIT v. Hind Construction Ltd. [1972] 83 ITR 211 (SC)
21. CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC); CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 (SC)
22. CIT v. M.I. Builders (P.) Ltd. [2017] 81 taxmann.com 320 (All.)
23. Asstt. CIT v. Karuna Estates Developer [2018] 92 taxmann.com 282 (Visakhapatnam)
212 CAPITAL
OF NEW
GAINS & ENTRY
PARTNER/MEMBER IN FIRM
SECTION 45(3) V. SECTION 56(2)( )
simultaneously?
Ans. Yes. Where the partner transfers a capital asset to the firm at value which is less than FMV/SDV, then he will be charged u/s 45(3) for capital gains on the difference between its cost of acquisition and value recorded in the books of the firm being value less than FMV/SDV. The firm will also be charged u/s 56(2)(x) on the deemed income being difference between the value recorded in the books and FMV/SDV of that asset. However, provisions of section 56(2)(x) will not be applicable in case of transfer of an asset by the partner to the firm, if it is stock-in-trade. In that case, section 43CA may be invoked.
SECTION 45(3) V. SECTION 50C
11. Can section 50C be invoked while computing capital gains u/s 45(3)?
Ans. No. Where an assessee, a partner in a partnership firm transferred his land as capital contribution and claimed long-term capital loss on said transfer, the Assessing Officer, observing that stamp duty value of land was much higher as compared to consideration received by assessee, invoked provisions of section 50C and made additions for long-term capital gain, it was held that since case of assessee fell under scope of section 45(3) which itself is a deeming section and provided for deeming consideration to be adopted for computation of capital gains under section 48, Section 50C could not be extended to compute deemed full value of consideration accruing as a result of such transfer for computation of capital gain.24
The purpose of insertion of section 45(3) is to deal with cases of transfer between partnership firm and partners and in such cases, the Act provides for computation mechanism of capital gain and also provides for consideration to be adopted for the purpose of determination of full value of consideration. Since the Act itself provides for deeming consideration to be adopted for the purpose of section 48, another deeming fiction provided by way of section 50C cannot be extended to compute deemed full value of consideration as a result of transfer of capital asset by partner in a firm as a capital contribution25 Therefore, Section 45(3) makes it clear that for the purpose of section 48, the amount recorded in the books of account of a firm shall be deemed to be full value of consideration received or accruing as a result of transfer
ITD 318
CAPITAL GAINS & ENTRY OF NEW PARTNER/MEMBER IN FIRM 213
24. ACIT v. Amartara Pvt. Ltd. (2021) 128 taxmann.com 125 (Mum Trib); C. Bhansali Developers Pvt. Ltd. v. ACIT 2022 (9) TMI 1231 - ITAT Mumbai
25. Network Construction Company v. ACIT [2020] 119 taxmann.com 186/185
(Mumbai - Trib.)
of a capital asset. The Assessing Officer cannot import another deeming fiction created for the purpose of determination of full value of consideration as a result of transfer of a capital asset. It is held in CIT v. Mother India Refrigeration Industries (P.) Ltd.26 that “the legal fictions are created only for some definite purpose, and these must be limited to that purpose and should not be extended beyond that legitimate field.” For the proposition that another deeming fiction cannot be imported in the deeming fiction already invoked, reference may be made to the following authorities27
EXPRESSION ‘OTHERWISE’ AND SECTION 45(3) 45(3)?
Ans. Section 45(3) is applicable when there is a transfer of capital asset by a person to a firm, may be by way of capital contribution or otherwise. Additional capital contribution by a partner in a firm may affect profit sharing ratio or may be violation of partnership deed. Therefore, transfer in some cases may not be by way of capital contribution but by way of a separate credit to the partner or as current assets. This may be held as current account as different from capital account. Therefore, the expression ‘otherwise’ would cover all those cases where transfer of capital asset by the partner to the firm is not treated by the partnership firm as capital contribution.
CAPITAL GAINS, INCOMING PARTNER AND CHANGE IN PROFIT SHARING RATIO
Ans. No. From the provisions of section 45(1), (3), (4) and section 2(31) of Income-tax Act, the identity of the firm as well as that of the partners for taxability of income are separate and distinct. They are independently taxable on income arising from their activities. If there is a transfer effected by a firm of capital assets i.e., property held by the firm, the capital gain tax arises in the hands of the firm and not in the hands of the partners and vice versa. Section 45(3) which was inserted by the Finance Act, 1987, with effect from 01-04-1988, deals with a person who transfers a capital asset to a firm as a capital contribution and becomes a partner of a firm. The income so derived is liable to be taxed at the hands of such member or partner. On the
26. [1985] 23 Taxman 8/155 ITR 711 (SC)
27. CIT v. Moonmill Ltd. [1966] 59 ITR 574 (SC); ACIT v. Amartara (P.) Ltd. [2021] 128 taxmann. com 125 (Mumbai - Trib.); Prid Foramer S.A. v. ACIT [2007] 15 SOT 562 (Delhi); CWT v. A.S. Rathore [1994] 73 Taxman 459 (Raj.); Subash Chand v. ACIT [2012] 18 taxmann.com 149 (Chd.)
214 CAPITAL GAINS
OF NEW
& ENTRY
PARTNER/MEMBER IN FIRM
other hand, sub-section (4) of section 45 deals with profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm chargeable to tax as the income of the firm. When the inducted partners became partners in the firm and the firm continued to own assets, but the erstwhile partners withdrew the money brought in by the incoming partners as drawings, they did not retire from the partnership firm and continued to be the partners of the firm. However, their share got reduced to the extent allotted to the inducted partners. As the property was not owned by existing partners, it was owned and continued to be owned by the firm, it cannot be said that “they transferred any part of the asset in favour of incoming/existing partners and any amount represented the consideration received for such transfer and as such it is liable for payment of capital gains under section 45(1)”.28
Ans: The Courts have held that assets remain in the name of the firm at the time of entry of a new partner, or at the time of retirement of an existing partner. The profit-sharing ratio of the existing partners is reduced when a new partner enters and is increased when an existing partner retires. It also results in decrease or increase in the right to share in the properties of the firm of the partners in the newly constituted firm. The view of the department that there will be deemed gift or deemed income u/s 56(2) in the hands of beneficiary is not sustainable as there is no transfer of any asset when there is transfer of money only. Notional increase or decrease in the right to share in the assets of the firm will not give rise to any income chargeable u/s 56(2)(x)/56(2)(vii) or (viia). The expression used in these sections is “when any person receives”, which denotes an actual receipt of money, movable or immovable property and not notional receipt. The expression can be compared with Section 48 which uses the expression “received or accruing”. This has been explained by the court as consideration actually received and not something suspected or deemed.29 Thus, in brief-
(
i) Realignment of shares when new partners enter: When there is realignment of shares when new partners are inducted in the firm, there is no liability to capital gains as no transfer of any asset is involved as assets remained with firm30
CAPITAL GAINS & ENTRY OF NEW PARTNER/MEMBER IN FIRM 215
28. CIT v. P.N. Panjawani [2012] 21 taxmann.com 458 (Kar.)
29. CIT v. Hiraben Govindbhai Patel [2014] 44 taxmann.com 29 (Gujarat)/[2015] 229 Taxman 17 (Gujarat)/[2014] 362 ITR 59 (Gujarat); Pr. CIT v. Ajay Surendrabhai Patel [2016] 69 taxmann. com 309 (Gujarat)
30. ITO v. Smt. Paru D. Dave [2008] 110 ITD 410 (Mumbai)
Law Relating to Capital Gains
AUTHOR : D.C. AGRAWAL , SANJIV DUTT
PUBLISHER : TAXMANN
DATE OF PUBLICATION : APRIL 2023
EDITION : 2023
ISBN NO : 9789357780230
NO. OF PAGES : 1350
BINDING TYPE : PAPERBACK
DESCRIPTION
Rs. 2595 | USD 68
This book is a treatise on 'Capital Gains' under the Income-tax Act. It contains every aspect of the law on the subject matter, which one would wish to know, understand, and search for. This book is presented in a 'question & answer' format, where the answers are crafted with utmost care and precision. The answers also incorporate all aspects of the issue arising from the questions. The coverage of the book includes the following:
• 1,200+ Questions & Answers
• 680+ Topics
• 55 Chapters
• 3,000+ Case Laws
This book will be helpful for Departmental officers, litigants, and tax professionals to understand the all-important and recurring issues that arise in Capital Gains.
The Present Publication is the Latest 2023 Edition and has been amended by the Finance Act 2023. This book is authored by D.C. Agrawal and Sanjiv Dutt, with the following noteworthy features:
• [Lucid Explanation] of various provisions of the Income-tax Act relating to Capital Gains
• [3000+ Case Law based Analysis with 'Relevant' Factual Matrix] that has been considered in the judgement that is being referred
• [Amended & Updated] The newly substituted provisions as per the Finance Act 2023 have been incorporated and explained in a manner that both the experts & beginners can understand with ease
• [Analysis New Topics] such as:
o Capital Gains and Business Trusts
o Capital Gains in International Financial Services Centre (IFSC)
o Capital Gains under International Taxation
o Other Provisions Relating to Capital Gains
The structure of the book is as follows:
• Question and Answer Format
• Bare Provisions Relating to Capital Gains and the Amendments
• Analysis of the Provisions
• Chapter-end Summaries
• Check Points for Tax Planning
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