Introduction @ Capital Gain
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.

 

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