Capital Gains Amendments & Tax - PowerPoint Presentation

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Capital GainsAmendments & Tax Planning

Presented by:CA Vijay Kr Agrawal, JAIPURMCOM,FCA,DISA,DIRM,LLB,NDDY, CCCA, CCFAFD, DATPhone: +91 9828149043 Email: catvijay@yahoo.com

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Capital gains.

45.

 (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year

shall be

chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place.

(

1A) Notwithstanding anything contained in sub-section (1), where any person receives

any

money or other assets

from

an insurer on account of

damage

or

destruction of

any capital asset, as a result of—

(

i

)  flood, typhoon, hurricane, cyclone, earthquake or other

convulsion

of nature;

or (

ii)  riot or civil disturbance;

or (

iii) accidental fire or

explosion

;

or (iv

) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war

),

then Capital gains shall

be deemed to be the income of

the

previous year in which such money

was received.

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(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of

conversion of

a capital asset

into stock-in-trade

shall

be chargeable to income-tax as his income of the previous year in which such stock-in-trade is

sold and

, for the purposes of section 48, the fair market value of the asset

on the date

of

conversion shall

be deemed to be the full value of the

consideration.

(

3) The profits or gains arising from the transfer of a capital asset by a

person to a

firm/AOP/BOI

in

which he

becomes

a partner or member, by way of capital

contribution,

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 shall

be deemed to be the full value of the

consideration.

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(4) The profits or gains arising from the transfer of a capital asset by way of

distribution of capital assets on the dissolution of a firm/ AOP/BOI

, shall be chargeable to tax as the income of the firm, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration

.

(5) Notwithstanding anything contained in sub-section (1), where the capital gain arises by way of

compulsory acquisition under any law

, or where consideration was determined or approved by the Central Government or the RBI, and Compensation or Consideration is enhanced by any court, Tribunal or other authority, the capital gain shall be dealt with in the following manner

:—

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(

a

)  the

compensation

awarded in the first instance or,

the

consideration determined or approved in the first instance

shall

be chargeable

in

the previous year in which such compensation

or

consideration

or part thereof

, was first received;

and

(

b

)  the amount by which the compensation or consideration is

enhanced, of

the previous year in which such

enhanced amount

is received by the

assessee

:

Provided

 that any amount of compensation received in pursuance of an interim order of a court, Tribunal or other authority shall be deemed to be income chargeable under the head "Capital gains" of the previous year in which the final order of such court, Tribunal or other authority is made

;

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Sub-section (5A) inserted by the Finance Act, 2017,

w.e.f

. A.Y.2018-19

(5A) Notwithstanding anything contained in sub-section (1), where the capital gain arises to an

assessee

, being an

individual/HUF,

from the transfer of a capital asset, being land or building or both,

under a specified agreement

,

the capital gains shall be chargeable

in the previous

year in which the certificate of completion for

whole

or part of the project is issued by the competent authority; and

For

the purposes of section 48, the stamp duty value, on the date of issue of the said certificate, of his share, being land or building or both in the project, as increased by the consideration received in cash, if any, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset

:

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Provided 

that the provisions of this sub-section shall not apply where the

assessee

transfers his share in the project on or before the date of issue of said certificate of completion,

in such a case normal provisions shall be applicable.

For the purposes of this sub-section,

"specified agreement" means

a registered agreement in which a person owning land or building or both, agrees to allow another person to develop a real estate project on such land or building or both, in consideration of a share, being land or building or both in such project, whether with or without payment of

additional consideration

in cash;

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Capital gains on distribution of assets by companies in liquidation.

46. 

(1) 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.

(2) 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 purposes of section 48.

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Transactions not regarded as transfer

.

47.

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

Any

distribution of capital assets on partition of a Hindu undivided family;

any transfer of a capital asset under a gift or will or an irrevocable

trust

any

transfer of a capital asset by a company to its subsidiary

company,

any

transfer of a capital asset by a subsidiary company to the holding

company,

any

transfer, in a scheme of amalgamation,

if

the amalgamated company is an Indian

company;

any

transfer, in a demerger,

if

the resulting company is an Indian

company;

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

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any

transfer of Sovereign Gold Bond-2015 issued by the RBI by way of redemption, by an

assessee

being an individual

;

]

any

transfer of agricultural land in India effected before the 1st day of March,

1970;

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.

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;

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any

transfer by way of conversion of preference shares

into

equity

shares;

any

transfer of a capital asset, being land of a sick industrial company, made under a

scheme u/s

18 of the Sick Industrial

Companies Act

,

1985, where

such sick industrial company is being managed by its workers' co-operative

:

any

transfer of a capital

asset as

a result of succession of the firm by a company in the business carried on by the

firm, There are certain Conditions.

any

transfer of a capital asset

by

a private company or unlisted public company

to

a

LLP

or any transfer of a

shares in such a case.

Sole

proprietary concern is succeeded by a

company,

as a result of which the sole proprietary concern sells or otherwise transfers any capital

asset

to the company

:

any

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

;

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Mode of computation

.

48.

 The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing

the

following amounts, namely :—

 (

i

)  expenditure incurred wholly and exclusively in connection with such transfer;

(

ii

)  the cost of acquisition of the asset and the cost of any improvement thereto:

Provided

further

 that where long-term capital gain arises

the

words "cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and "indexed cost of any improvement"

will

respectively

be

substituted

:

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[

Provided also

 

that nothing contained in the proviso shall apply to the long-term capital gain arising from the transfer of a long-term capital asset, being a bond or debenture other than—

capital

indexed bonds issued by the Government;

Sovereign

Gold Bond issued by the

RBI

Provided also 

that no deduction shall be allowed in computing the income chargeable under the head "Capital gains" in respect of any sum paid on account of securities transaction

Indexed Cost of Acquisition – For Transfer Up to 31.03.2017 the Base Year shall be 1.4.1981 and for Transfer on or after 1.04.2017 the Base Year will be 01.04.2001

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Special Cost of acquisition.

49. 

(1) Where the capital asset became the property of the

assessee

—

on total or partial partition of a Hindu undivided family;

under a gift or will;

by succession, inheritance or devolution, or

on any distribution of assets on the liquidation of a company, or

under a transfer to a revocable or an irrevocable trust, or

Some transfers as is referred to in Section 47

such

assessee

being a Hindu undivided family, by the mode referred to in sub-section (2) of section 64 at any time after the 31st day of December, 1969,

the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the

assessee

, as the case may be.

Explanation

.—In this sub-section the expression "previous owner of the property" in relation to any capital asset owned by an

assessee

means the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to above.

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(4) Where the capital gain arises from the transfer of a property, the value of which

was

subject to

clause

(

vii

) or

(

viia

) 

or

(

x

) o

f Section 56(2),

the cost of acquisition of such property shall be deemed to be the value which has been taken into account for the purposes of the said

clause.

(5) Where the capital gain arises from the transfer of an asset declared under the Income Declaration Scheme, 2016, and the

tax

etc

has

been paid

on

the

FMV

of the

asset,

the cost of acquisition of the asset shall be deemed to be the

FMV

which has been taken into account

in

the said Scheme

.

(7) Where the capital gain arises from the transfer of a capital asset, being share in the project, in the form of land or building or both, referred to in

section 45(5A), the

cost of acquisition of such asset, shall be the amount which is deemed as full value of consideration in that sub-section.

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Special provision for

depreciable

assets.

50.

 

Where

the capital asset is

subject to depreciation, the capital gain shall be calculated as under.

(

1

)  where the full value of the

consideration,

exceeds the aggregate of the following amounts, namely :—

expenditure

incurred

in connection with such

transfer;

the Opening WDV

of the block of

assets;

the

actual cost of any asset

acquired

during the

year

,

such excess shall be deemed to be the

short term capital gain.

(

2

)  where any block of assets ceases to exist as such,

the

cost of acquisition of the block

shall

be the

Opening WDV plus Cost of Acquisition of new assets purchased if any and

the income

as

a result of such transfer or transfers shall be

Short Term capital gain.

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Special provision

as DLC Value

.

50C. 

(1) Where the consideration

of

a capital asset, being land or building or both, is less than the value

assessed

or assessable by any authority of a State Government

for payment

of stamp

duty,

the value so

assessed shall

be deemed to be the

consideration :

Provided

 

that where the date of

agreement

fixing the

consideration

and the date of registration for

transfer are

not the same, the value

so assessed on the date of agreement may

be taken for the purposes of computing

consideration (Applicable from A.Y.17-18)

Provided further

 

that the

proviso

shall apply only in a case where the amount of consideration, or a part thereof, has been received by way of an account payee cheque

or draft

or

by electronic

clearing system through a bank account, on or before the date of the

agreement.

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(2) Without prejudice to the provisions of sub-section (1), where—

the

assessee

claims before any

AO

that the value assessed under sub-section (1) exceeds the fair market value of the property as on the date of

transfer;

the

value so adopted or assessed

has

not been disputed in any appeal or revision or

before

any other authority, court or the High Court,

the

Assessing Officer may refer the valuation of the capital asset to a Valuation

Officer.

(

3) Subject to the provisions contained in sub-section (2), where the value ascertained under sub-section (2) exceeds the value adopted or assessed or assessable by the stamp valuation authority referred to in sub-section (1), the value so adopted or assessed or assessable by such authority shall be taken as the full value of the consideration received or accruing as a result of the transfer.

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Special provision

unquoted shares

50CA. 

Where the consideration received or accruing

on transfer shares

of a company other than a quoted share, is less than the fair market value of such share determined in such manner as may be prescribed, the value so determined shall, for the purposes of section 48, be deemed to be the full value of consideration received or accruing as a result of such transfer

.

Advance money received.

51.

 Where on any previous occasion, any advance is received and retained by the

assessee

, it shall be deducted from the cost of acquisition or Opening WDV, as the case may be:

Provided

 that where any

such advance,

has been included in the total income of the

assessee

for any previous year in accordance with the provisions of

section 56(2)(

ix

), then

such sum shall not be deducted from the cost of acquisition or Opening WDV, as the case may be:

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Capital gain on transfer of residential

property

(From 1.4.17)

54GB. 

(1) Where,—

Capital gain from a long-term capital asset, being a residential property (a house or a plot of land), by Individual/ HUF and

the

assessee

, before the due date

of

return

u/s

139(1), utilises the net consideration for subscription in the equity shares of an eligible company and

the

company has, within one year from the date of subscription in equity shares by the

assessee

, utilised this amount for purchase of new asset,

then

, the capital gain shall be exempt if the cost of the new assets is equal to the

Net Consideration

otherwise proportionate.

(2) The amount of the net consideration, received by Company for issue of shares, if not utilised before the due date of furnishing of the return, shall be deposited in a bank as may be specified and shall be utilised in accordance with scheme notified by the Central Government may,

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Provided

 that if the amount so deposited is not utilised, than the capital gain which was exempted will be taxable in the previous year in which the period of one year from the date of the subscription in equity shares by the

assessee

expires;

(

4) If the equity shares of the company or the new asset acquired by the company are sold or transferred within five years the amount of capital gain shall be deemed to be the income of the

assessee

of the previous year in which such equity shares or such new asset are sold/ transferred,

(5) The provisions of this section shall not apply to any transfer of residential property made after the 31st day of March, 2017 :

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"capital asset" means

—

- property of any kind held by an

assessee

,

but does not include—

any stock-in-trade

consumable stores or raw materials

personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal us but excludes—

- jewellery;

- archaeological collections

- drawings;

- paintings;

- sculptures; or

- any work of art.

"jewellery" includes ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;

precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.

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- agricultural

land in India, not being land situate—

within

the jurisdiction of a

municipality

which has a population of

ten thousand or more;

or

in

any area within the distance, measured aerially

,—

not

being more than two kilometres, from the local limits of

any municipality which

has a population

between 10000 to 100000

not

being more than six kilometres, from the local limits of

any municipality which

has a population

between 100000 to 1000000

not

being more than eight kilometres,

which

has a

population of more

than ten lakh.

- 6

½ per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government;

- Special

Bearer Bonds, 1991, issued by the Central Government ;

- Gold

Deposit Bonds issued under the Gold Deposit Scheme, 1999 

4

[or deposit certificates issued under the Gold Monetisation Scheme, 2015] notified by the Central Government

.

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(

42A

) "short-term capital asset" means a capital asset held by an

assessee

for not more than thirty-six months immediately preceding the date of its transfer :

Provided

 that in the case of a security (other than a unit) listed in a recognized stock exchange in India or a unit of the Unit Trust of India or a unit of an equity oriented fund or a zero coupon bond, the provisions of this clause shall have effect as if for the words "thirty-six months", the words "twelve months" had been substituted:

[Provided also 

that in the case of a share of a company (not being a share listed in a recognised stock exchange in India) (

w.e.f

.

F.Y. 01.04.2016

),

 

[

or an immovable property, being land or building or both,

]

 (

w.e.f

.

F.Y. 01.04.2017

) the provisions of this clause shall have effect as if for the words "thirty-six months", the words "twenty-four months" had been substituted.

]

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(

47

)

Transfer Means

the

sale, exchange or relinquishment of the

asset

the

extinguishment of any rights therein ;

or

the

compulsory acquisition thereof under any law ;

or

in

a case where the asset is converted by the owner thereof

into stock-in-trade

of a business carried on by him

, or

the

maturity or redemption of a zero coupon bond;

or

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)

any

transaction (whether by way of becoming a member of, or acquiring shares in, a

society

, company or other

AOP or

by

any other

manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property

.

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Amendments - 2018

Under the existing regime,

long

term capital gains on equity shares of a company or an unit of equity oriented fund or an unit of business trusts, is exempt from income-tax under clause (38) of section 10 of the Act.

In order to minimize economic distortions and curb erosion of tax base, it is proposed to withdraw the exemption under clause (38) of section 10 and to introduce a new section 112A in the Act to provide that long term capital gains arising from transfer of a long term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust

shall be taxed at 10 per cent. of such capital gains exceeding one lakh rupees

.

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This

concessional rate of 10 per cent. will be applicable to such long term capital gains, if—

- in a case where long term capital asset is in the nature of an equity share in a company ,

securities transaction tax has been paid on both acquisition and transfer

of such capital asset; and

- in a case where long term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust,

securities transaction tax has been paid on transfer

of such capital asset.

Further, sub-section (4) of the new section 112A empowers the Central Government to specify by notification the nature of acquisitions in respect of which the requirement of payment of securities transaction tax shall not apply

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Further, the new provision of section 112A also proposes to provide the following:—

The long term capital gains will be computed without giving effect to the first and second provisos to section 48, i.e. inflation indexation in respect of cost of acquisitions and cost of improvement,

The cost of acquisitions in respect of the long term capital asset acquired by the

assessee

before the 1st day of February, 2018 , shall be deemed to be the higher of –

a) the actual cost of acquisition of such asset; and

b) the lower of –

(I) the fair market value of such asset; and

(II) the full value of consideration received or

accruing

as a result

of

the transfer of the capital

asset

.

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The Cost of Acquisition Shall be Deemed

Higher of

Actual Cost of Acquisition

Lower of

Fair Market Value as on 31.01.2018

Actual Sales Consideration

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Scenario 1 – An equity share is acquired on 1st of January, 2017 at

Rs

. 100, its fair market value is

Rs

. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at

Rs

. 250.

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Answer : As

the actual cost of acquisition is less than the fair market value as on 31st of January, 2018, the fair market value of

Rs

. 200 will be taken as the cost of acquisition and the long-term capital gain will be

Rs

. 50 (

Rs

. 250 –

Rs

. 200).

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Scenario 2 – An equity share is acquired on 1st of January, 2017 at

Rs

. 100, its fair market value is

Rs

. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at

Rs

. 150.

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Answer

: In this case, the actual cost of acquisition is less than the fair market value as on 31st of January, 2018. However, the sale value is also less than the fair market value as on 31st of January, 2018. Accordingly, the sale value of

Rs

. 150 will be taken as the cost of acquisition and the long-term capital gain will be NIL (

Rs

. 150 –

Rs

. 150).

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Scenario 3 – An equity share is acquired on 1st of January, 2017 at

Rs

. 100, its fair market value is

Rs

. 50 on 31st of January, 2018 and it is sold on 1st of April, 2018 at

Rs

. 150.

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Answer

: In this case, the fair market value as on 31st of January, 2018 is less than the actual cost of acquisition, and therefore, the actual cost of

Rs

. 100 will be taken as actual cost of acquisition and the long-term capital gain will be

Rs

. 50 (

Rs

. 150 –

Rs

. 100).

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Scenario 4 – An equity share is acquired on 1st of January, 2017 at

Rs

. 100, its fair market value is

Rs

. 200 on 31st of January, 2018 and it is sold on 1st of April, 2018 at

Rs

. 50.

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Answer

: In this case, the actual cost of acquisition is less than the fair market value as on 31st January, 2018. The sale value is less than the fair market value as on 31st of January, 2018 and also the actual cost of acquisition. Therefore, the actual cost of

Rs

. 100 will be taken as the cost of acquisition in this case. Hence, the long-term capital loss will be

Rs

. 50 (

Rs

. 50 –

Rs

. 100) in this case.

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iv) Fair market value

mean

–

Where capital

asset is listed on any recognized stock exchange, the highest price quoted

31.01.2018.

However, where there is no trading

on 31.01.2018,

the highest price of such asset

on

a date immediately preceding the

31.01.2018.

in

a case where the capital asset is a unit and is not listed on

stock

exchange, the

NAV as on 31.01.2018.

v

) The benefit of deduction under chapter VIA shall be allowed from the gross total income as reduced by such capital gains. Similarly, the rebate under section 87A shall be allowed from the income tax on the total income as reduced by tax payable on such capital gains.

These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent assessment years.

Slide43

Tax Planning

Sale your Holding on or Before 31.03.2018, or otherwise be ready to pay Tax on Long Term Capital Gain Which Accrue on or after 31.01.2018

Slide44

10(

38

)

any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust where—

 (

a

) the transaction of sale of such equity share or unit is entered into on or after the date on which

Finance

Act, 2004 comes into force; and

 (

b

) such transaction is chargeable to securities transaction tax under that Chapter :

Following

third proviso shall be inserted after the second proviso to clause (

38

) of section 10 by the Finance Act, 2017,

w.e.f

. 1-4-2018 :

Provided also 

that nothing contained in this clause shall apply to any income arising from the transfer of a long-term capital asset, being an equity share in a company, if the transaction of acquisition, other than the acquisition notified by the Central Government in this behalf, of such equity share is entered into on or after the 1st day of October, 2004 and such transaction is not chargeable to securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004 (23 of 2004

).

Slide45

Dividend distribution tax on dividend

payout

by equity

oriented fund

The existing provisions of section 115R, inter alia, provide any amount of income distributed by

a

Mutual Fund to its unit holders shall be chargeable to tax and

mutual

Fund shall be liable to pay additional income-tax on such distributed income at the rate specified in the section. However, in respect of any income distributed to a unit holder of equity oriented funds is not chargeable to tax under the said section

.

In

the wake of new capital gains tax regime for unit holders of equity oriented funds, it is proposed to amend the said section to provide that where any income is distributed by a Mutual Fund being, an equity oriented fund, the mutual fund shall be liable to pay additional

income tax

at the rate of ten per cent on income so distributed.

This

amendment will take effect from 1st April, 2018

.

Slide46

Rationalization of section 43CA, section 50C and section 56

.

At present, while taxing income from capital gains (section 50C), business profits (section 43CA) and other sources (section 56) arising out of transactions in immovable property, the sale consideration or stamp duty value, whichever is higher is adopted

.

It has been pointed out that this variation can occur in respect of similar properties in the same area because of a variety of factors, including shape of the plot or location. In order to minimize hardship in case of genuine transactions in the real estate sector, it is proposed to provide that no adjustments shall be made in a case where the variation between stamp duty value and the sale consideration is

not more than five

percent

of the sale consideration.

These amendments will take effect from 1st April, 2019

i.e. assessment

year

2019-20.

Slide47

Example

An assess sold Land for

Rs

500000 however the DLC rates are

600000

525000

520000

530000

400000

What would be the Sales price to be taken into account as per the new provisions

600000

500000

500000

530000

500000

Slide48

43CA

.

 (1) Where the consideration received or accruing as a result of the transfer by an

assessee

of an asset (other than a capital asset), being land or building or both, is less than the value

assessed by

any authority of a State Government for the purpose of payment of stamp

duty,

the value so adopted or assessed or assessable shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration received or accruing as a result of such transfer.

(2) The

provisions

of

section

50C shall, so far as may be, apply in relation to determination of the value

assessed under

sub-section (1

).

Slide49

C

onversion

of stock-in-trade into Capital

Asset

Section 45 of the Act, inter alia, provides that capital gains arising from a conversion of capital asset into stock-in-trade shall be chargeable to tax. However, in cases where the stock in trade is converted into, or treated as, capital asset, the existing law does not provide for its taxability.

Slide50

Profit

or gains arising from conversion of inventory into capital asset or its treatment as capital asset shall be charged to tax as business income. It is also proposed to provide that the fair market value of the inventory on the date of conversion or treatment determined in the prescribed manner, shall be deemed to be the full value of the consideration received or accruing as a result of such conversion or treatment

; (Section 28)

clause

(24) of section 2 so as to include such fair market value in the definition of

income;

section

49 so as to provide that for the purposes of computation of capital gains arising on transfer of such capital assets, the fair market value on the date of conversion shall be the cost of acquisition

;

Slide51

(iv) clause (42A) of section 2 so as to provide that the period of holding of such capital asset shall be reckoned from the date of conversion or treatment.

These

amendments will take effect, from 1st April, 2019 i.e. assessment year 2019-20.

Slide52

Rationalization of the provisions of section 54EC

Section 54EC of the Act provides that capital gain, arising from the transfer of a long-term capital asset, invested in the long-term specified asset at any time within a period of six months after the date of such transfer, shall not be charged to tax subject to certain conditions specified in the said section.

The section also provides that “long-term specified asset” for making any investment under the section on or after the 1st day of April, 2007 means any bond, redeemable after three years and issued on or after the 1st day of April, 2007 by the National Highways Authority of India or by the Rural Electrification Corporation Limited; or any other bond notified by the Central Government in this behalf

.

Slide53

In order to rationalise the provisions of section 54EC of the Act and to restrict the scope of the section only to capital gains arising from long-term capital assets, being land or building or both and to make available funds at the disposal of eligible bond issuing company for more than three years, it is proposed to amend the section 54EC so as to provide that

capital gain arising from the transfer of a long-term capital asset, being land or building or both

, invested in the long-term specified asset at any time within a period of six months after the date of such transfer, the capital gain shall not be charged to tax subject to certain conditions specified in this section

.

Slide54

It is also proposed to provide that long-term specified asset, for making any investment under the section on or after the 1st day of April, 2018, shall mean any bond, redeemable after five years and issued on or after 1st day of April, 2018 by the National Highways Authority of India or by the Rural Electrification Corporation Limited or any other bond notified by the Central Government in this behalf.

This amendment will take effect, from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent assessment years.

Slide55

Section 43CB – Computation of income from construction and service contracts

Presently

, the Act allows any method of accounting provided it is regularly followed by the Tax Payer. Thus, there was no specific method of accounting prescribed for construction or service contracts except provided under Accounting standards

.

Slide56

After section 43CA of the Income-tax Act, the following section shall be inserted and shall be deemed to have been inserted with effect from the

1st day of April, 2017

, namely

:—

“

43CB. (1) The profits and gains arising from a construction contract or a contract for providing services shall be determined on the basis of

percentage of completion method

in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145

:

Slide57

Provided that profits and gains arising from a contract for providing services,—

with

duration of not more than ninety days shall be determined on the basis of project completion method;

For

the purposes of percentage of completion method, project completion method

referred

to in sub-section (1)—

the

contract revenue shall include retention money;

the

contract costs shall not be reduced by any incidental income in the nature of interest, dividends or capital gains.”.

Slide58

Tax Planning-1

The Income Tax Act has laid out exemptions under

Section 54 and Section 54F

to help taxpayers save tax on capital gains.

- Exemption

under Section 54 is available on

long- term

Capital Gain on sale of a House

Property.

- Exemption

under Section 54F is available on

long-term

Capital Gain on sale of any asset

other

than a House Property.

To

reiterate, both the exemptions are available only on long-term capital gains

.

Slide59

Common requirements between the two Sections:

- A

new residential house property must be

purchased

or constructed

for exemption

- The

new residential property must be purchased

either

1 year before

or

2 years after the

sale or the

new residential house property must be

constructed

within 3 years of

sale.

- If

you are not able to invest the specified

amount

in the manner stated above before the

due date

of tax

filing,

deposit the specified

amount

in a

bank as

per the Capital Gains

Account

Scheme, 1988

).

Slide60

-

Only

ONE house property can be purchased or

constructed

.

- Starting

FY 2014-15 it is mandatory that this new

residential

property must be situated in India.

The exemption

shall not be available for

properties

bought

or

constructed outside

India

to claim this exemption.

Slide61

Section 54Section 54FTo claim full exemption the entire capital gains have to be invested.To claim full exemption the entire sale receipts have to be invested.No ConditionYou should not own more than one residential house at the time of sale of the original asset.In case entire capital gains are not invested - the amount not invested is charged to tax as long-term capital gains.In case entire sale receipts are not invested, the exemption is allowed proportionately. [Exemption = Cost the new house x Capital Gains/Sale Receipts]This exemption will be reversed if you sell this new property within 3 years of purchase and capital gains from sale of the new property will be taxed as short-term capital gains.This exemption will be reversed if you sell this new property within 3 years OR if you purchase another residential house within 2 years or construct a new house within 3 years of sale of the original asset. Capital gains from the sale will be taxed as long-term capital gains.

Difference between these two sections

Slide62

Tax Planning-2

Capital gain not to be charged on investment in certain

bonds – Section 54EC

.

- Where

the capital gain arises from the transfer of a long-term capital asset

and the

assessee

within

a period of six months after the date of such transfer

, invested the whole or any part of capital gains in the long-term specified asset, the capital gain shall be

extent, the amount of investment.

Provided

 that the investment made on or after the 1st day of April, 2007 in the long-term specified asset by an

assessee

during any financial year

or subsequent financial year does

not exceed fifty lakh rupees

:

Slide63

The long-term specified asset is transferred or converted into money at any time within a period of three years from the date of its acquisition, the amount of capital gains which was claimed exempt, shall be deemed to be the income chargeable under the head "Capital gains" of the previous year in which transfer or conversion took place

.

Hint: Since the Period of Bonds has now been changed to 5 years from 01.04.2018, so if any one is planning to purchase the bonds, he must purchase the same on or before 31.03.2018, so than he can get the maturity within 3 years

Slide64

Tax Planning-3

If you have adult child, than you can give shares gifted to your adult child to avoid the capital gain in one hand.

In addition to this as we are aware that capital gain u/s 112A i.e. Long term Capital gain on Equity Shares are exempt up to 1

Lacs

, so now onward, take the benefit of this 1

lacs

by investing in the name of different family members.

Slide65

Tax Planning – 4

Taken care of STCG or LTCG keeping in view of the following factors.

Exemption: Many

exemption are available only for LTCG and not for STCG

Tax Bracket : if you are under tax bracket of 10% than STCG is better option but if you are in Higher Tax Bracket i.e.30%, than obviously LTCG will be a better option. (Take care of Other option available u/s 54 also)

Indextation

: In LTCG you get the benefit of Indexation, so this point has also taken care to be in

accouint

Slide66

Joint Development Agreement

The

taxability of capital gains arising on transfer of title to land from the land owner to the developer in a Joint Development Agreement (JDA) has always been a heated issue. The taxation of 

Joint Development Agreement

 was never jointly agreed by the A.O. and the

Assessee

.

Irrational determination of date of transfer to be the date

on which

JDA is entered, by

application

of 

Section 2(27) of the Income Tax Act, 1961

.

Vague mode of determination of sale consideration on execution of JDA using fair market value by application of 

Section 50D of the Income Tax Act, 1961. 

The fair market value arrived by

assessee

never appeared to be fair to the A.O. and vice verse!

Slide67

WHY JDA:

If a developer makes an outright purchase of land in the initial stages of the project, given the fact that the land prices have been

ever-increasing,

would lead to huge investment at the start of the project without any revenue generation

leading

to cash crunch to the developer. Hence the model of JDA’s got fancied in the real estate

:

Benefit to Developer:

 

Payment

to landowner can be made as and when collections are made from the customer or by sharing of the built up area with the landowner.

Benefit to Landowner

: 

Landowner with low technical insights on real estate development can now reap the benefits of higher consideration on sale of developed estate than outright sale of land

.

Slide68

OPERATION OF JDA:

In JDA, the share of consideration with the landowner might be either of the following ways:

Monetary Consideration

:

The

developer would give a lump sum to the landowner as refundable security deposit

and

share a specified percentage of the sale consideration of the

project.

Non

Monetary Consideration

:

The

developer would give a lump sum to the landowner as refundable security deposit

and

share a specified percentage of the built up area with the landowner.

Slide69

TAXABILITY UNTIL NOW:

The taxability of JDA in the hands of the developer is under business income and in the hands of the landowner it is under capital gain. (I would restrict the discussion to capital gains).

Determination

of date of Transfer:

Capital Gains arise on “transfer” of a capital asset. As per 

Section 2(47) of the Income Tax Act 1961, 

the word “transfer” amongst other things includes:

“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)”

Slide70

The Following points emerged from the

abovesaid

agreement

The

JDA provides for the consideration, either monetary or non monetary in most

cases

The JDA deals with the transfer of immovable property / rights in the immovable

property

In most cases the developer undertakes an irrevocable power of attorney in his favour to deal with the land, to obtain permission for development, to develop the property etc. Further in most cases the developer gives a security deposit to the land owner on the execution of the JDA

.

Both the landowner and developer are willing to perform their part of the

JDA

Sale deeds are generally registered in the name of the ultimate buyer to avoid the intermediate stamp duty cost however the developer undertakes an irrevocable power of attorney in his favour.

Slide71

Considering the above, the assessing officers contented that the date of execution of the JDA was the date of transfer of the capital asset. However it is worth to note that on the date of execution of the JDA, the landowner has not liquidated the land and has no funds to pay the taxes and hence this appeared irrational and hence led to litigation. Further in the absence of funds the landowner was also unable to claim the benefits under the Section 54 series, causing genuine hardship to the assesses.

Determination

of Consideration:

Considering that the land owner is required to pay the taxes on the date of execution of JDA, the biggest question is that when the project is just on the JDA with no real existence, what will be consideration. For this purpose I would like to draw attention to 

Section 50D of the Income Tax Act, 1961, 

which says,

“Where the consideration received or accruing as a result of the transfer of a capital asset by an 

assessee

is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer.”

Slide72

A few Judicial decisions:

Dwarka

Das

Kapadia

v. CIT [2003]/180CTR (

Bom

.)107/260 ITR 491(

Bom

)/[2003]; 

Bombay HC held that if the contract, read as whole, indicates passing of or transferring of complete control over the property in favour of developer, then the date of contract would be relevant to decide the year of chargeability. Thus the essence of Section 2(47) (v) may be considered, when there is transfer of complete control over the asset by the owner to the developer.

Slide73

Charanjit

Singh

Atwal

v. ITO Ward-VI(1)

Ludhiyana

; 

it was held that Irrevocable General Power of Attorney which leads to overall control of property in hands of developer, even if that does not involve exclusive possession of developer, would constitute transfer within the meaning of Section 2(47) (v) . It was held that the possession contemplated by provisions of Section 2(47) (v) of the Income tax Act, 1961 does not require handing over exclusive possession. What is required is that the transferred by virtue of possession should be able to exercise from overall intended purposes.

Slide74

M/s.

Binjusaria

Properties

Pvt.

Ltd. Hyderabad versus

Asstt

. Commissioner of Income-tax: 

As on date there was no developmental activity on the land which is subject matter of development agreement – The process of construction has not been even initiated and no approval for the construction of the building is obtained – Thus, the sale consideration in the form of developed area has not been received – Mere receipt of refundable deposit cannot be termed as receipt of consideration – the AO calculated the capital gain on the entire land, even though the

assessee

has retained 38% share to itself.

Slide75

General Glass Co. Ltd.

Vs

DCIT 108 TTJ 854 (Mumbai): 

Where payment of balance consideration within stipulated time is essence of the agreement of sale and such payments are not made in time by the transferee, such a contract does not confer any

right on the transferee as envisaged under Section 53A of the Transfer of Property Act and provisions of Section 2(47)(v) cannot be applied in such a situation

Slide76

Sl. No.Financial YearCost Inflation Index(1)(2)(3)12001-0210022002-0310532003-0410942004-0511352005-0611762006-0712272007-0812982008-0913792009-10148102010-11167112011-12184122012-13200132013-14220142014-15240152015-16254162016-17264172017-18272

NOTIFIED COST INFLATION INDEX UNDER SECTION 48, 

EXPLANATION 

(

V

) - FINANCIAL YEAR 2017-18

As per Notification no. So 1790(e)[no. 44/2017 (f. No. 370142/11/2017-tpl)], dated 5-6-2017, following table should be used for the Cost Inflation Index

:-