Capital Gain @ A Glance
Tax planning assumes a special role in the sale of capital assets. An income tax payer who knows the various provisions of Income Tax Law which go to reduce the incidence of income tax in relation to capital gains on the sale or otherwise transfer of a capital asset, would stand to benefit immensely. The duration of holding a capital asset and the various expenses and other deductions to be claimed for arriving at the final quantum of taxable capital gains have a direct bearing on the incidence of income tax in relation to the capital gains in respect of transfer of the capital assets. There are certain transactions which are not regarded as “transfer” and these are outside the orbit of capital gains tax. Similarly, there are certain rules laid down for determining the actual cost of a capital asset which is to be deducted in arriving at the net taxable capital gains. There are certain types of capital gains which are not as a result of some actual transfer of capital asset but which are “deemed” as such under the provisions of Section 45, sub-section (2), (3), (4), (5) and (6) as briefly described below:
a) Section 45(2) provides that the profits and
gains from a capital asset which is converted or treated as a stock-in-trade
would be chargeable for IT as income of the previous year in which such converted
stock-in-trade is sold or is otherwise transferred by the assessee.
b) Section 45(3) provides that for the
purposes of computation of capital gains under Section 48, the amount recorded
in the books of account of a partnership firm, AOP or BOl as the value of the
capital asset would be deemed to be the full value of consideration received or
accrued as a result of the transfer of the capital asset by way of capital
contribution.
c) It is provided in Section 45(4) that for
the purposes of computation of capital gains under Section 48, the fair market
value of the asset on the date of transfer by way of distribution of the
capital asset by a partnership firm, AOP or BOl on dissolution or otherwise
would be deemed to be the full value of the consideration received or accruing
as a result of the transfer.
d) Section 45(5) provides that where the
capital gains arises from the transfer of a capital asset by way of compulsory
acquisition under any law or a transfer, the consideration for which it was
determined or approved by the Central Government or the RBI, and the
compensation or the consideration for such transfer is enhanced or further enhanced
by any court, tribunal or other authority, the capital gain would be dealt with
in the following manner, namely:
(i) the capital gain computed with reference
to the compensation awarded in the first instance or, as the case may, the
consideration determined or approved in the first instance by the RBI, etc.
would be chargeable as income under the head “capital gains” of the previous
year in which such compensation or part thereof or such consideration or part
thereof, was first received; and
(ii) the amount, by which the compensation or
consideration is enhanced or further enhanced by the Court, Tribunal or other
authority, would be deemed to be income chargeable under the head “capital
gains” of the previous year in which such amount is received by the assessee.
(iii) where in the assessment for any year, the
capital gain arising from the transfer of a capital asset is computed by taking
the compensation or consideration referred to in clause (i) above or, as the
case may be, enhanced compensation or consideration referred to in above clause
(ii), and subsequently such compensation or consideration is reduced by any
court, Tribunal or other authority, such assessed capital gain of that year
shall be recomputed by taking the compensation or consideration as so reduced
by court, Tribunal or other authority to be the full value of the
consideration.
e) Section 45(6) provides that the difference
between repurchase price of the equity-linked units as referred to in Section
8OCCB(2) and the capital value of such units would be deemed to be the capital
gaiiis arising to the assessee in the previous year in which such repurchase
takes place or the plan referred to in that Section is terminated and would be
taxed accordingly.
Profits and gains arising from the receipts of an insurance claim on account of destruction or damage of a capital asset as a result of flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature, or riot or civil disturbance; or accidental fire or explosion, or action by an enemy, etc. would be “deemed” to be capital gains for the purpose of Section 48 and would be taxed in the year of receipt.