Q. What are Capital Gains?
A. Any profits or gains arising from a transfer
of a capital asset effected in the previous
year, subject to certain exception, are
chargeable to income tax under the head
Capital Gains . Such profits or gains are
deemed to be the income of the previous
year in which the transfer takes place.
Q. What is a 'transfer' for the purposes of capital gains.
A. Section 2(47) of the Income Tax Act, defines
transfer in relation to a capital asset,
and it includes
- the sale, exchange or relinquishment of the asset; or
- the extinguishment of any rights therein ; or
- in a case where the asset is converted by
the owner thereof into, or is treated
by him as, stock-in-trade of a business
carried on by him, such conversion or
treatment;
- any transaction involving the allowing of
the possession of any immovable property
to be taken or retained in part performance
of a contract of the nature referred to
in section 53A of the Transfer of Property
Act, 1882(4 of 1882) ; or
- any transaction (whether by way of becoming
a member of, or acquiring shares in, a
co-operative society, company or other
association of persons or by way of any
agreement or any arrangement or in any
other manner whatsoever) which has the
effect of transferring, or enabling the
enjoyment of, any immovable property.
- Explanation - For the purposes of sub-clauses (v)
and (vi), "immovable property" shall have
the same meaning as in clause (d) of section
269UA]
Q. Which transactions are not deemed to be
transfer for the purposes of capital gains.
A. The Income Tax Act also exempts certain
transactions from being covered under the
definition of transfer. These are more specifically
contained in section 46 & 47 of the
Income Tax Act. In brief the transactions
not regarded as transfer are as under :-
(a) where the assets of a company are distributed
to its share holders upon its liquidation,
the distribution is not regarded as transfer.
However where a share holder receives any
money or other assets on the date of distribution
which exceeds the amount of dividend within
the meaning of section 2(22)(c), the excess
is chargeable under the head capital gains.
(b) any distribution of capital assets on the
total or partial partition of a huf is not
regarded as transfer
© where a capital asset is transferred under
the gift or will or an irrevocable trust,
the transaction is not of the nature of
transfer as per the Income Tax Act.
(d) the transfer of a capital asset to an Indian
subsidiary company by a parent company or
its nominees who hold the entire share capital
of the Indian subsidiary company is not
regarded as transfer.
(e) any transfer of a capital asset by a wholly
owned subsidiary company to its Indian holding
company is also not regarded as transfer
for the purposes of capital gains. However
in respect of (d) & (e) above the transfer
of a capital asset as stock in trade is
covered by the provisions of capital gains.
(f) any transfer in a scheme of amalgamation
of a capital asset by the amalgamating company
to an Indian amalgamated company is also
not a transfer for the purposes of capital
gains.
(g) in the case where the amalgamating and the
amalgamated companies are both foreign companies,
the transfer of shares held in the Indian
company by the foreign amalgamating company
to the foreign amalgamated company is not
regarded as a transfer for the purposes
of capital gains if at least 25% of the
share holders of the amalgamating foreign
company continue to remain share holders
of the amalgamated foreign company and if
such transfer does not attract tax on capital
gains in the country in which the amalgamating
company is incorporated..
(h)
any transfer by a share holder, in a scheme
of amalgamation, of share or shares held
by him in the amalgamating company in consideration
of the allotment of any share or shares
in the amalgamated Indian company is not
regarded as a transfer for the purposes
of capital gains.
(i)
where a non resident transfers any bond
or shares of an Indian company which were
issued in accordance with any scheme notified
by the Central Government for the purposes
of section 115AC or where the non resident
transfer any bonds or shares of a public
sector company sold by the government and
purchased by the non resident in foreign
currency is not regarded as a transfer for
the purposes of capital gains . However
this is so only when the transfer of the
capital asset is made outside India by the
non resident to another non resident.
(j)
where any assessee transfers any work of
art, archaeological or art collection, book,
manuscript, drawing , painting, photograph
or print to a University, the National Museum,
the National Art Gallery, the National Archives,
to the Government or any other notified
institution of national importance is not
considered as transfer for the purposes
of capital gains.
(k)
any transfer by way of conversion of a company's
bonds or debentures, debenture-stock or
deposit certificates in any form into shares
and debentures of that company is not regarded
as transfer for the purpose of capital gains.
(l)
where a non corporate person transfers its
membership of a recognised stock exchange
in India to a company in exchange of shares
allotted by that company is not regarded
as a transfer for the purposes of capital
gains provided that such transfer was made
on or before 31st day of December, 1998.
(m)
any transfer of a land of a sick industrial
company which is being managed by it s Worker's
Cooperative is not regarded as transfer
for the purposes of capital gain if the
transfer is made under a scheme prepared
and sanctioned under section 18 of the Sick
Industrial Companies (Special Provisions)
Act, 1985. This exemption is operative only
in the period commencing from the previous
year in which the said company became a
sick industrial company under section 17(1)
of that act and ending with the previous
year during which the entire net worth of
such company becomes equal to or exceeds
the accumulated losses. The net worth is
defined in the Sick Industrial Companies
Act.
(n)
with effect from 1-4-99 the process of sale
or transfer of any capital or intangible
asset of a firm is not regarded as a transfer
for the purposes of capital gains where
it is on account of the succession of the
firm by a company in the business carried
on by it. This exemption is dependent on
the following conditions :-
(i)
all the assets and liabilities of the firm
before the succession and relating to the
business should become the assets and liabilities
of the company.
(ii)
all the partners of the firm before the
succession should become share holders of
the company in the same proportion in which
their capital accounts stood in the books
of the firm on the date of succession.
(iii)
the partners of the firm should not receive
any consideration or benefit, directly or
indirectly, in any form or manner, other
than by allotment of shares in the company.
(iv)
the aggregate share holding in the company
by the partners should be more than 50%
of the total voting power for a period of
5 years from the date of succession.
(o)
with effect from 1-4-99 where a sole proprietary
concern is succeeded by a company in the
business carried on by it and as a result
of which the sole proprietary concern sells
or transfers any capital asset or intangible
asset to the company, such transfer shall
not be regarded as transfer for the purposes
of capital gains. This exemption is available
only if the following conditions are fulfilled:-
(i)
all the assets and liabilities of the business
of the sole proprietary concern should become
the assets and liabilities of the company.
(ii)
the share holding of the sole proprietor
should be more than 50% of the total voting
power in the company for a period of 5 years
from the date of succession.
(iii)
the sole proprietor should not receive any
consideration or benefit, directly or indirectly,
in any form or manner, other than by way
of allotment of shares in the company.
(p)
with effect from 1-4-99 any transfer in
a scheme for lending of any securities under
an agreement or arrangement which the assessee
enters into with the borrower of such securities
subject to the guidelines issued by the
Securities and Exchange Board of India is
not regarded as a transfer for the purposes
of capital gains.
where
in the transaction of lending shares of
some distinctive numbers and receiving back
shares of some other numbers is the result,
the same would not be considered as exchange
of asset within the definition of capital
asset since the meaning of the word exchange
necessarily involves exchange of two different
assets. Thus where the asset received back
is not different from what was lent in the
above scheme of lending, no transfer is
there for the purposes of capital gain as
long as the assets received back represent
the same fraction of the ownership of the
company.
The
exemptions referred above are not final
and can be withdrawn under specified circumstances
as mentioned in section 47A of the Income
Tax Act.
Q.
How many types of Capital Assets are there?
A.
There are two types of Capital Assets. Short
term Capital Assets and Long term Capital
Assets. A short term Capital Asset held
by an assessee could not more than 36 months
immediately preceding the date of its transfer.
A capital asset which is held by an assessee
for more than 36 months is Long term Capital
Asset.
Q.
What is the cost of acquisition of bonus
shares?
A.
Section 55 of the Income Tax Act has been
amended w.e.f. A.Y. 96-97 so that the cost
of acquisition of bonus shares or security
which is received without payment by the
assesseee on the basis of its holding any
financial asset is taken to be Nil.
Q.
What is the rate at which the Long term
Capital Gains are charged to tax?
A.
Long term Capital Gains are taxable specified
in section 112 from the A.Y. 1993-94 onwards.
Long term Capital Gains are taxable at a
flat rate of 20%. In case of Long term Capital
Gains covered by sections 115AB, 115AC or
115AD the applicable rate is 10%. For details
on these sections you are requested to see
the relevant provisions of Income Tax Act,1961.
Q.
What are the provisons of Section 54EA relating
to investment in specified assets?
A.
A long term asset when transferred by an
assessee during the previous year results
into receipt of consideration. Within six
months from the date of transfer, the assessee
should invest the whole or any part of the
net consideration in specified bonds ,debentures,
share of a public company or unit of mutual
fund to be notified by the Board. Upon investment
in such specified assets , of the entire
sale proceeds , the whole of capital gains
shall be exempt from tax.
