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Capital Gains - Cost of Inflation Index, Indexed Cost of Acquisition & Improvement

capital gains
Contents -
  1. Introduction and Definition of Capital Gains.
  2. Basis of charge: Section 45.
  3. Distribution of Assets by Companies in Liquidation : Section 46.
  4. Transactions not regarded as transfer. : Section 47.
  5. Computation of Capital Gain : Section 48.
  6. Long Term Capital Gain & Tax on Long-Term Capital Gain (Section 112) .
  7. Short Term Capital Gain & Tax on Short-Term Capital Gain (Section 111A) .
  8. Indexed Cost of Acquisition
  9. Indexed Cost of Improvement
  10. Cost of Inflation - Index
  11. Problems of Capital Gains with Solution.
Q: Although there is a transfer of an assets but there is no capital Gain. Discuss. 
Q: Certain transactions are not regarded as transactions for capital gain purposes. Discuss.
Q: What do you mean by Capital Asset and what is meant by Transfer for the purposes of calculating long term capital gain? 
Q: Write short note on - Capital Gains.
Q: What is Capital Gain? Explain the deductions allowed from Capital Gain.

Introduction :

Any profit or gains arising from the transfer of capital assets effected during the previous year is chargeable to income tax under the head 'Capital gains' and shall be deemed to be the income of that previous year in which the transfer takes
place. Taxation of capital gains, thus depends on two aspects - capital assets and transfer.
The following are the certain transactions which are not regarded as "Transfer" for charging capital gain to income tax.

Definition of Capital Assets / Gains (Section 2(14)) :

Capital asset means property of any kind held by the assessee, whether or not connected with his business or profession, but does not include :

1) Any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession as these will be taxed under the head "profits and gains of business or profession".

2) Personal effects, 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. However, the following assets shall not be treated as personal effects though these assets are moveable and may be held for personal use:
i) Jewellery
ii) Archeological collections
iii) Drawings
iv) Paintings
v) Sculptures
vi) Any work of art

3) Agricultural land in India, which is not an urban agricultural land. In other words, it must be a rural agricultural land :
i) Rural agricultural land means an agricultural land in India :
a) If situated in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town committee or by any other name) and its population should be less than 10,000 as per the last published census.
b) If situated outside the limits of municipality, etc. it should be situated certain kilo meters away from the local limits of any municipality, etc. as may be specified by the Central Government in the Official Gazette.

ii) Urban agricultural land is although a capital asset but any capital gain arising from the compulsory acquisition of such land shall be exempt as per Section 10(37) if certain conditions mentioned in that section are satisfied.

4) 6.5% Gold Bonds, 1977, 7% Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government.

5) Special Bearer Bonds, 1991, issued by the Central Government.

6) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government or deposit certificates issued under gold monetisation scheme, 2015. [Amendment vide Finance Act, 2016]

Basis of charge : Section 45 :

Any profit or gain arising from the transfer a capital asset is chargeable under the head, capital gain in the previous year in which the transfer has been made and shall be Deemed to be the income of the previous year in which the transfer to place unless such capital gain is exempt u/s 54, 54B, 54D, 54EC, 54F, 54G and 54GA.

Following conditions to be satisfied for tax liability under the head "Capital gain".
a. There must be a capital gain.
b. The capital asset must be transferred by the assessee.
c. Transfer must be made in the previous year.
d. There must be profit or gain on such transfer which will be known as capital gain.
e. Such capital gain should not be exempt u/s 54, 54B, 54D, 54EC, 54F, 54G and 54GA.

In the case of immovable property is transferred under the part of contract as performance of the contract, capital gain is taxable when the possession is transferred and the agreement to sell is made.

1. Any profit or gain arising from the transfer of a capital asset effected in the previous year shall be chargeable to income tax under the head "capital gain". Section 45(1).

2. Capital gain on receipt of compensation from insurance company for damage or destruction etc of capital asset. Section 45(1A).

3. Capital gains on the conversion of a capital asset into stock-in-trade. Section 45(2).

4. Capital gain on transfer of capital asset by a partner/member to a firm/AOP/B0I/ as capital contribution shall be chargeable to tax in the hands of the partner/member. Section 45(3).

5. Capital gain on transfer of a capital asset by a firm/AOP/BOI/to partner /member on dissolution or otherwise shall be chargeable to tax as the income of the
firm/AOP/BOI.

6. Capital gain on the compulsory acquisition of an asset by Govt.

7. Capital gain on conversion of debentures in to shares.

8. Capital gain on transfer of business.

9. Capital gain on distribution of assets by companies in liquidation Section 46.

10. Joint owner-in case of joint owner capital gain can be divided proportionately among joint owners.

Distribution of Assets by Companies in Liquidation (Section 46) :

Section 46(1) provides that notwithstanding anything contained in Section 45, where the assets of a company are distributed to its shareholders on its liquidation, such distribution shall not be regarded as a transfer by the company for the purposes of Section 45. This sub-section applies only to the distribution of capital assets in specie by a company in liquidation among its shareholders. Capital gains made by the liquidator of a company on sale of the company's assets with the object of distributing the sale proceeds among shareholders, are assessable in the hands of the company. Further analysis of this sub-section would reveal that if the distribution is otherwise than on liquidation of the company, this section cannot be attracted. Moreover, the distribution of assets should have been made to the shareholders of the company. "Shareholders" would mean registered shareholders only and not the beneficial owners of shares.
Sub-section (2) of Section 46 provides that where a shareholder, on the liquidation of a company, receives any money or other assets from the company, he shall be chargeable to income-tax under the head "capital gains" in respect of the money so received or the market value of the other assets on the date of distribution, as reduced by the amount assessed as dividend within the meaning of sub-clause (C) of clause (22) of Section 2 and the sum so arrived at shall be deemed to be the full value of the consideration for the purpose of Section 48. But for this sub-section, any cash or other assets received by a shareholder on liquidation of the company would not be assessable to tax as capital gains.
It is once again emphasised that but for the enlarged scope of the definition of the term 'transfer' in Section 2(47) and Section 46(2) of the Income-tax Act, 1961, the money received by a shareholder from the company on liquidation would not be brought to tax, as the money received by him represents only satisfaction of the right which belonged to him by virtue of his holding the shares and not by operation of any transaction which amounts to the sale, exchange, relinquishment or other transfer of his shares.
Thus, the distributed assets and/or money which are, as a matter of fact not a consideration for 'transfer are deemed, under Section 46(2), to be capital gains
chargeable to tax.

Transactions Not Regarded as Transfer : Section 47 :

Nothing contained in section 45 shall apply to the following transfers :

1. Any distribution of capital assets on the total or partial partition of a Hindu undivided family.

2. Omitted by Finance Act 1987 w.e.f. 1/04/

3. Any transfer of a capital asset under a gift or will or an irrecoverable trust.

4. Any transfer of a capital asset by a company to its subsidiary company, if :
a) The parent company or its nominees hold whole of the share capital of the subsidiary company.
b) The subsidiary company is an Indian company.

5. Any transfer of a capital asset by a subsidiary company to the holding company, if :
a) The whole of the share capital of the subsidiary company is held by the holding company.
b) The holding company is an Indian company.

6. Any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company if the amalgamated company is an Indian company.

7. Any transfer, in a scheme of amalgamation of a capital asset being a share or shares held in an Indian company, by the amalgamating foreign company to the amalgamated foreign company, if :
a) At least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company.
b) Such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated.

8. Any transfer, in a scheme of amalgamation of a banking company with a banking institution sanctioned and brought into force by the Central Government under sub-section (7) of section 45 of the Banking Regulation Act, 1949 (10 of 1949), of a capital asset by the banking company to the banking institution.

9. Any transfer, in a demerger, of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company.

10. Any transfer in a demerger, of a capital asset, being a share or shares held in an Indian company, by the demerged foreign company to the resulting foreign company, if :
a) The shareholders holding not less than three-fourths in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company.
b) Such transfer does not attract tax on capital gains in the country, in which the demerged foreign company is incorporated.

11. Any transfer in a business re organization, of a capital asset by the predecessor co-operative bank to the successor co-operative bank.

12. Any transfer by a shareholder, in a business re organization, of a capital asset being a share or shares held by him in the predecessor co-operative bank if the transfer is made in consideration of the allotment to him of any share or shares in the successor co-operative bank.

13. Any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is made in consideration of demerger of the undertaking.

14. Any transfer by a shareholder, in a scheme of amalgamation of a capital asset being a share or shares held by him in the amalgamating company, if :
a) The transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company.
b) The amalgamated company is an Indian company.

It shall not be necessary for the amalgamated company to issue shares to the shareholders of the amalgamating company to the extent the amalgamated company itself is a shareholder in the amalgamating company w.e.f. assessment year 2013-2014.

15. Any transfer of a capital asset, being bonds or Global Depository Receipts referred to in sub-section (1) of section 115AC, made outside India by a non-resident to another non-resident.

16. Any transfer of agricultural land in India effected before the 1st day of March, 1970.

17. Any transfer of a capital asset, being any work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting photograph or print, to the Government or a University or the National Museum, National Art Gallery, National Archives or any such other public museum or institution as may be notified by the Central Government in the Official Gazette to be of national importance or to be of renown throughout any State or States.

18. Any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificates in any form of a company into shares or debentures of that company.

19. Any transfer by way of conversion of bonds referred to in clause (a) of sub-section (1) of section 115AC into shares or debentures of any company.

20. Any transfer made on or before the 31st day of December, 1998 by a person (not being a company) of a capital asset being membership of a recognized stock exchange to a company in exchange of shares allotted by that company to the transferor.

21. Any transfer of a capital asset, being land of a sick industrial company made under a scheme prepared and sanctioned under section 18(29) of the Sick Industrial Companies Act, 1985 (1 of 1986) where such sick industrial company is being managed by its workers co-operative.

22. Any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, or any transfer of a capital asset to a company in the course of demutualization or corporatization of a recognized stock exchange in India as a result of which an association of persons or body of individuals is succeeded by such company.

23. Any transfer of a capital asset being a membership right held by a member of a recognized stock exchange in India for acquisition of shares and trading or clearing rights acquired by such member in that recognized stock exchange in accordance with a scheme for demutualization or corporatization which is approved by the Securities and Exchange Board of India established under Section 3 of the Securities and Exchange Board of lndía Act, 1992 (15 of 1992).

24. Any transfer of a capital asset or intangible asset by a private company or unlisted public company to a limited liability partnership or any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company in to a limited liability partnership in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act 2008.

25. Where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company.

26. Any transfer in a scheme for lending of any securities under an agreement or arrangement, which the assessee has entered into with the borrower of such securities and which is subject to the guidelines issued by the Securities and Exchange Board of India, established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Reserve Bank of India constituted under sub-section (1) of section 3 of the Reserve Bank of India Act, 1934 (2 of 1934)], in this regard.

27. Any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government.

Computation of Capital Gain (Section 48) :

The income chargeable under the head 'Capital Gains' shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, the following amounts, namely :
1) Expenditure incurred wholly and exclusively in connection with such a transfer.
2) The cost of acquisition of the asset and the cost of any improvement thereto.

However, in the case of long-term capital gain, the cost of acquisition and cost of improvement mention above will be substituted by the words 'indexed cost of acquisition' and 'indexed cost of improvement' respectively (provision 2 to Section 48].

In other words, short-term capital gain is the excess of the full value of consideration over the aggregate of the following three :
1) Expenses of transfer
2) Cost of acquisition of the asset
3) Cost of improvement

Whereas in the case of long-term capital gain, the capital gain shall be the excess of the full value of consideration over the aggregate of the following three amounts :
1) Expenses of transfer
2) Indexed cost of acquisition of the asset
3) Indexed cost of improvement

Provision for Tax Benefits to Sovereign Gold Bond Scheme, 2015 and Rupee Denominated Bonds

1) With a view to providing parity in tax treatment between physical gold and Sovereign Gold Bond, it is provided by amending the Section 47 of the Income Tax Act, that any redemption of Sovereign Gold Bond under the Scheme, by an individual shall not be treated as transfer and therefore shall be exempt from tax on capital gains. Further, the indexation benefits to long terms capital gains arising on transfer of Sovereign Gold Bond is available to all cases of assessees.

2) The Reserve Bank of India has recently permitted Indian corporates to issue rupee denominated bonds outside India as a measure to enable the Indian corporates to raise funds from outside India. Accordingly, with a view to provide relief to non-resident investor who bears the risk of currency fluctuation, it is provided by amending section 48 of the Act that the capital gains, arising in case of appreciation of rupee between the date of issue and the date of redemption against the foreign currency in which the investment is made shall be exempt from tax on capital gains.
This amendment effective from 1st April, 2017 and accordingly apply in relation to assessment year 2017-18 and subsequent assessment years. From capital gain, computed as above, certain exemptions are available u/s 54, 54B, 54D, 54EC, 54F, 54G, 54GA. The capital gain after claiming the said exemption(s) is known as taxable long-term or short-term capital gain. 

Long Term Capital Gain [Section 2(29A)] :

Under section 2(29B), means capital gain arising from the transfer of a long term capital asset. Long term capital asset defined under section 2(29A) as a capital asset which is not a short term capital asset.
When the period of holding of the capital assets is more than 36 months, the gain arising from there is referred as a 'Long Term capital Gain'.
Assets being shares in a company or other security listed in recognized stock exchange in India or unit of U.T.I. or units in Mutual Fund specified u/s 10 (23D) or zero coupon bonds held for more than 12 months.
Any capital asset held by the taxpayer for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset.
However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, Listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.

Note: With effect from Assessment Year 2017-18, period of holding to be considered as 24 months instead of 36 months in case of unlisted shares of a company.

Tax on Long-Term Capital Gains (Section 112) :

Tax on long-term capital gain is payable @ 20%, It applies to every assessee irrespective of any residential status. However, where the long-term capital gain arises from the transfer of units of UTI or mutual fund (specified under Section 10(23D)] or from "listed securities" on a recognized stock exchange in India and the assessee does not claim the benefit of indexed cost, he has the option to pay tax On such long-term capital gain 10%.
Rate of tax is further to be increased by surcharge, as applicable to an assessee and Education Cess 2% (w.e.f. 2005-2006) and SHEC @ 1% (w.e.f. 2008-2009).

"Listed securities" include :
  1. Shares, scrip stock, bonds, debentures, debentures stock or other marketable securities of a like nature.
  2. Government securities.
  3. Such other instruments as may be declared by the Central Government to be securities.
  4. Rights or interest in the securities.
In respect of income other than long term capital gains, in all the above four cases, income tax shall be charged as per the normal provisions of the Act, assuming the Other income only to be the total income. No deduction under section 80C to 80U will be allowed in respect of long term capital gains, 
w.e.f. A.Y. 2013-14, income tax on LTCG arising from the transfer of a capital asset being unlisted securities shall be charged 10%. In computing LTCG :
1) The benefit of indexing of cost etc. shall not be allowed.
2) It the assessee is a non resident, the cost of acquisition and selling price shall not be converted into foreign currency.

Section 112 of the Act has been proposed to be amended to exclude units" from the concessional tax rate of ten per cent. Accordingly, while Long-Term Capital Gains tax on listed securities (other than units) and zero coupon bonds will be continued to be restricted to 10% of such gains (without indexation benefits), long-term capital gain arising on transfer of units, other than transfer of equity-oriented units on which securities transaction tax has been paid, would be taxable at the rate of 20%.
As a consequential change, the reference to definition of the word units has been proposed to be deleted from the section.

Amendment in A.Y. 2017-18 :
At present, the tax on long-term capital gain on transfer of unlisted securities in the case of non-resident u/s 112 (1)(a)(iii) is chargeable at the rate of 10% if benefit of first and second proviso to section 48 is not taken. There was a doubt whether the word "Securities include shares in a company. In order to clarify the position this section is amended from A.Y. 2017-18 to provide that long term Capital Gain from transfer of shares of a closely held company (whether public or private) shall be chargeable to tax at 10% if benefit of first and second proviso to section 48 is not claimed.

Short Term Capital Gain [Section 2(42A)] :

Under section 2(42B), means capital gain arising from the transfer of a short term capital asset. Short term capital asset defined under section 2(42A) as capital asset held by as assessee tor hot more than 36 months immediately preceding the date of transfer.
When the period of the capital assets is more than 36 months, the gain arising from there is referred as a 'Short Term Capital Gain'.
Assets being shares in a company or other security listed in recognized stock exchange in India or unit of U.T.I. or units in Mutual Fund specified u/s 10 (23D) or zero coupon bonds held for not more than 12 months.
Any capital asset held by the taxpayer for a period of more than 36 months immediately preceding the date of its transfer will be treated as short-term capital asset.
However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.

Amendment in A.Y. 2017-18
The third proviso to section 2(42A) has been inserted vide Finance Act, 2016 as per which in case of unlisted shares, period of holding for transfer to be considered as a short-term capital asset reduced from 36 months to 24 months.

Tax on Short-Term Capital Gain (Section 111A) :

Tax on short-term capital gain is chargeable @ 15%, provided the following conditions are satisfied:
1) Short-term capital gain arises on or after 1 October 2004 from the transfer of equity shares or a unit of an equity oriented fund; and
2) Such transaction is chargeable to securities transaction tax.

Rate of tax is further to be increased by surcharge, as applicable to an assessee and Education Cess @ 2% (w.e.f. 2005 - 2006) and SHEC @ 1% (w.e.f. 2008- 2009).

Amendment in A.Y. 2017-18 :
At present, this section provides for levy of tax on short-term Capital Gain at 15% from transfer of equity shares where STT is paid. By amendment of this section from A.Y. 2017-18 it is provided that in respect of short-term capital gain arising from transfer of equity shares through a Recognized Stock Exchange located in International Financial Service Centre (IFSC) where consideration is received in Foreign Currency, the condition for payment of STT will not apply

Example : Mr. Viren (resident and age 62 years) is a businessman. His taxable income for the year 2016-17 is 2,75,200. He does not have any other income. What will be his tax liability for the year 2016-17?
Solution : For resident individual of the age of 60 years and above but below 80 years, the basis exemption limit is 3,00,000. In this case, the taxable income of Mr. Viren is 2,75,200, which is below the basic exemption limit of 3,00,000, hence, his tax liability will be NIL.

Type of Capital Gains :
Since there are two types of capital assets, there will be two types of capital gains, i.e.

1) Section 2(42B) Short-Term Capital Gain: Gain arising on the transfer of short-term capital asset.

2) Section 2(29B) Long-Term Capital Gain: Gain arising on the transfer of long-term capital asset.

Thus, the cumulative effect of the amendment can be summarised in the below table (with effect from A.Y. 2017-18) :

Type of Asset

Holding Period for Qualifying as a Short-Term Capital Asset

Holding Period for Qualifying as a Long-Term Capital Asset

Listed shares of Indian companies

Not more than 12 months

More than 12 months

Unlisted shares of Indian

companies

Not more than 24 months

More than 24 months

Units of equity oriented mutual funds

Not more than 12 months

More than 12 months

Units of any other mutual oriented mutual funds

Not more than 36 months

 

More than 36 months

 

Any other listed security

Not more than 12 months

More than 12 months

Zero Coupon Bonds

Not more than 12 months

More than 12 months

Any other capital assets

Not more than 36 months

More than 36 months



Indexed Cost of Acquisition [Section 48(iii)] :

In the case of short-term capital gain, cost of acquisition and cost of improvement are deducted from the full value of consideration for computation of capital gain. On the other hand, in the case of long-term capital gain, indexed cost of acquisition and indexed cost of improvement are deducted instead of cost of acquisition and cost of improvement.
The cost of acquisition and cost of improvement are indexed on the basis of certain percentage of the consumer price index, which is determined keeping in view the rise in prices due to inflation.

Cost Inflation Index : Cost Inflation Index, in relation to a previous year, means such index as the Central Government may, having regard Lo 75% of average rise in the Consumer Price Index for employees for the immediately preceding previous year to such previous year, by notification in the Official Gazette, specify, in this behalf.

In case of long term capital gain the amounts to be deducted from the full value of consideration includes indexed cost of acquisition and improvement.
Indexed cost of acquisition means the amount bears to the cost of acquisition, the same proportion as Cost inflation Index for the year in which the asset is transferred bears to the Cost inflation Index for the First year in which the asset was held by the assessee or for the year beginning on April 1, 1981. Which ever is later, the indexed cost of acquisition is computed as under,

              Cost of index of the year transfer
Cost of acquisition X -------------------------------
       Cost of Index of the year of acquisition

Indexed Cost of Improvement [Section 48(iv)] :

Indexed cost of improvement means an amount which bears to the cost of improvement the same proportion as cost inflation index for the year in which the asset is transferred bears to the cost inflation index for the year in which the improvement to asset took place.
As already discussed under 'cost of improvement', any expenses or improvement before 1-4-1981 are to be completely ignored. Therefore, cost of improvement only after 1-4-1981, by the assessee should be indexed. However, if the asset is acquired by the assessee from the previous owner in any mode given w/s 49(1). the expenses on improvement incurred by the previous owner after 1-4-1981 will also have to be indexed.
It is to be noted by the students, that if the asset is acquire by the assessee before 1-4-1981, he may opt for the market value as on 1-4-1981 to be the cost of acquisition.

Capital expenditure on improvement after 1-4-1981 x 
CII of year of transfer
--------------------------------------------------
CII of the year in which the improvement

was made by the assessee or previous owner.

Cost of Inflation as Notified by the Central Government :

Financial Years

Cost Of Inflation Index (CII)

Financial Years

Cost Of Inflation Index (CII)

1981-82

100

1999-00

389

1982-83

109

2000-01

406

1983-84

116

2001-02

426

1984-85

125

2002-03

447

1985-86

133

2003-04

463

1986-87

140

2004-05

480

1987-88

150

2005-06

497

1988-89

161

2006-07

519

1989-90

172

2007-08

551

1990-91

182

2008-09

582

1991-92

199

2009-10

632

1992-93

223

2010-11

711

1993-94

244

2011-12

785

1994-95

259

2012-13

852

1995-96

281

2013-14

939

1996-97

305

2014-15

1024

1997-98

331

2015-16

1081

1998-99

351

2016-17

1125


Problems with Solution :

Problem No.1 -
Mr. John gifted diamonds worth Rs. 2,00,000/- to his wife Mrs. John on 1.11.1995. These were acquired by him on 1.5.1981 for Rs. 1,00,000/-. On 1.4.2014 Mrs. John sold these diamonds for Rs.4,00,000/- and invested the same in plot for Rs.6,00,000/- the remaining amount was paid by her own funds. The plot was sold for Rs.7,00,000/- on 28.12.2014.
Compute the chargeable income in the hands of Mr. John and Mrs. John on the sale of diamonds as well as plot if CII (capital inflation index) for 1995-96 is 281.

Solution -

Previous Year

-

-

Sale price of Diamond

4,00,000/-

-

Less Index cost of Diamond

Rs. 1,00,000/- X 1034/281

3,67,971/-

 

32,029/-

 

Long term capital gain to be clubbed in Mr. Johns

Income

-

32,029/-

 

Sale price of plot (2014-15)

7,00,000/-

-

Less cost of acquisition (2014-15)

6,00,000/-

-

Short Term Capital Gain

1,00,000/-

1,00,000/-


Problem No.2 -
Mr. Prakash purchased a house property on September, 1979 for Rs. 2,10,000/-. Fair interest value of the property on 1st April, 1981 was Rs. 1,70,000/-. He incurred the following expenses.
1. Construction of room on the ground floor during 1980 Rs. 10,000/-
2. Renovation work in 1993-94 Rs.39,200/-
The property was transferred on 31st March, 2015 for Rs. 40,65,000/- Compute the capital Gain? Costs of infation Index for the year are as follows Year 1993-94: 244, and 2014-15: 1034.

Solution -

Sales consideration              40,65,000/-
Less:
Index cost of Acquisition
Cost of acquisition     : Rs.2,10,000/-
Fair Market Value       : Rs.1,70,000/-

Hence the higher value considered For cost of acquisition

1. Cost of Acquisition Index :
For cost of acquisition Cost of Acquisition index :
                              1034 (2014-15)
Rs.2,10,000/- X -------------------------------
                              100 (1981-82)
= Rs.21,71,400/-

2. Cost of Construction of Room :
Rs. 10,000/- not considered
As construction (improvement ) before 1-4-1981 = Nil

Indexed cost of improvement : 
                                1034 ( 2014-15)
Rs.3,92,000/- X ------------------------------
                                 244 ( 1993-94)
= Rs.16,61,180/-

Rs.21,71,400/- + Rs.16,61,180/- 
= Rs. 38,32,580/-

Hence Long term capital gain :
= Rs.40,65,000/- less Rs.38,32,580/-
= Rs.2,32,420/-

Problem No.3 -
Mr. Prakash purchased a house property for RS. 2,00,000/- In the year 1969-70.
Following expenses were incurred tor the house property.

1. Cost of construction in the year 1977-78 Rs. 1,50,000/-
2. Cost of construction of 1st floor in the year 1984-85 Rs. 3,50,000/-
3. Alteration to house property in 1993-94 Rs. 3,00,000/-
4. Fair market value of property on 1st April, 1981 Rs. 5,00,000/-. The house property is sold to Mr. B in the F.Y. 2014-15 for Rs. 95,00,000/-
5. Expenses tor the transfer of property Rs. 5,000/-
Compute the capital gain for A.Y. 2015-16.
Cost of inflation index
1981-82.   100
1984-85.   125
1993-94.   244
2014-15.   1024

Solution -

Sales consideration              Rs.95,00,000/-
Less : Transfer expenses     Rs.5,000/-
Net consideration                 Rs. 94,95,000/-

Less cost of acquisition
Before 1.4.1981 the cost of acquisition
Or market value whichever is higher

1. Indexed Cost of Acquisition :
                                1034 (2014-15)
Rs. 5,00,000/- x -------------------------------
                                100 (1981-82)
= Rs.51,70,000/-

2. Indexed Cost of Improvement :
                                1034 (2014-15)
Rs.3,50,000/- x -------------------------------
                                125 (1984-85)
= Rs.28,95,200/-

3. Indexed Cost of Improvement :
                                1034 (2014-15)
Rs.3,00,000/- x -------------------------------
                                244 (1993-94)

= Rs.12,71,311/-                Rs.93,36,311/-
                                          ---------------------------
Long Term Capital gain   Rs.1,58,689/-

Note :
1. Cost of construction for 1977-78 is neglected as it is before 1.4.1981
2. Calculation of cost of acquisition and Cost of improvement are as per Index given for the relevant year.

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