Earn profit from Short Capital gain Rs. 1,05.400/- and Long term capital gain Rs. 89,375/-and Future & option loss Rs. 68,248/-. Pl. tell me future option loss is trading loss or speculation loss it is adjustable or / no.

Satyanaryan Agarwala , Kolkata

The transaction in Future & Options is business activity now because of amendment in Section 43(5) of the I T Act . Therefore , any loss incurred on F & O is allowable to be adjusted as a business loss is adjusted.

How Business Loss is adjusted?

The provision regarding adjustment of loss is given in section 71 of the I T Act . Which reads as

71. (1) Where in respect of any assessment year the net result of the computation under any head of income, other than Capital gains, is a loss and the assessee has no income under the head Capital gains, he shall, subject to the provisions of this Chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head.

Thus, in simple words, aforesaid provision states that any loss except capital loss , can be adjusted with income under any head . However, section 71(2A) provides that business loss can not be adjusted with salary income.

Thus the business loss of a year can be adjusted with following income of the same year

1. House property income
2. Capital Gains
3. Income From Other Sources

Therefore, your loss incurred on F & O can be adjusted with income earned on capital gains

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In decision delivered dated 3 April 2009 ,Kerala High Court in case of Dr R. V.Patel vs CIT  decided that Indira Vikas Patra is not a capital asset , therefore, maturity proceeds paid by post office is not consideration for transfer of capital asset.As such there can not be capital gains . Read the excerpts

The specific contention raised by the assessee is that IVP is a capital asset and therefore interest accrued is profit assessable as capital gains. The Tribunal rejected the claim by holding that IVP is nothing but a deposit with the Post Office which entitles die assessee to a specific rate of interest on compoundable basis and assessee can encash the deposit only for the maturity value which is pre-determined. The assessee has relied on several Courts' decisions for the proposition that IVP is a capital asset. IVP is admittedly a deposit scheme framed by the Government of India for making deposits in the Post Offices. Purchase of IVP amounts to depositing a specific amount in Post Office for a specific period at specified rate of interest. On maturity the holder can. encash the same from the very same post office. His rate of interest for . IVPs' purchased before 31.3.1987 was 14.97 per cent per annum compounded on the initial sale value. For certificates purchased after 1.41987 the rate of interest was reduced to 13.43% per annum. Government while framing IVP Rules of 1986 lias provided for treatment of tax liability for the interest earnings. Rule 8(3) of the IVP Rules 1986 is as follows:

8(3). In the case of certificate purchased on or before 31 st March, 1987, interest at the rate of 14.97 per cent per annum compounded on the initial safe value of the certificate shall be deemed i₀ have accrued at the end to each year, calculated from the date of initial purchase of the certificate from the Post Office up to the end of the fifth year for the purpose of tax payable by a holder in die relevant assessment year under any law for the time being in force.

Under sub-rule (4) the above scheme is retailed for deposits made after 1.4.1987 but with reduced rate of interest at 13.43 per cent per annum. Even though assessee contended that IVP Rules cannot be read into die scheme of the Income Tax Act or Rules, we are unable to accept this contention because Rule referred to in the IVP pertaining to tax can only be related to income tax payable under the Income Tax Act, 1961. Standing counsel appearing for the department referred to the decision of the Supreme Court in CTT V. BAGYALAKSHMI & CO., AIR. 1965 SC. 1708 and contended that other statutory law not inconsistent with the Income-tax Act should be applied for the purpose of income tax. We are in agreement with this contention more so because post office deposits under IVP Rules specifically refer to tax on interest. So long as the Rule is not in derogation of the scheme of IT Act it is applicable for the purpose of the IT. Act Section 2(14) defines "capital asset" as property of any kind. Clauses (iv) (v) and (vi) specifically excludes certain bonds from the definition of "capital asset'. Relying on these definition clauses, the assessee contended that all other hands are capital assets and therefore IVPs are also in the nature of capital asset. The assessee has relied on the decision in M. P. FINANCIAL CORPORATION’S case, 132 ITR 884 and contended that bonds are capital assets.

However, we do not think IVPs can be treated as bonds because it has no sale value or market value as such. It is nothing but a deposit made in the Post Office which entitles the depositor to receive pre-fixed specific rate of interest and on maturity only the principal amount with accrued interest will be paid. Even though it is transferable it has no market value as such and has only maturity value which is nothing but invested amount with accrued interest. Further, the Tribunal rightly pointed out that the scheme of long term capital gains providing for granting benefits of indexed cost of acquisition under Explanation (iii) to section48 of the Act cannot apply to IVP. We are of the view that repayment of the deposited amount with interest on maturity by the Post Office cannot be treated as consideration for transfer of IVP by the holder. Therefore, the Tribunal rightly rejected the assessee’s claim that IVP is a capital asset. We therefore dismiss the assessee’s appeals on this issue.

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I plan to buy two adjacent flats in Mumbai. These two flats are already joined by breaking-down the internal wall between these flats. As these two flats are in the name of two different people (spouse of each other) there would be two sale agreements. The source of the funds to buy these two flats would be proceeds from sale of an assets (long term capital gain from sale of shares), my own existing savings and bank loan. Right now, I do not have any property in my name. I want to know if I can avail benefits under Sec.54F if I buy these two adjacent flats together. Sanjeev, Mumbai

Section 54 F is for relief from long term capital gains arising on any asset other than residential house. However , the provision u/s 54 or 54F provides for investment of sale proceeds in purchase or construction of of "a residential house" . So , prima facie , the exemption is avalable for one residential house purchase or construction only . But as , stated in your question , when a person invests in two houses adjacent to each other and joined as one or when house is constrcuted on another floor , different courts have held that in that case , more than one house will mean "a residential house " and aggreagte investment in all those houses/flats shall be taken into account for exemption u/s 54F.

In case of Income-tax Officer, Ward-19(3)-4, Mumbai v. Ms. Sushila M. Jhaveri [2007] 107 itd 327 (Mum.) Mumbai Tribunal , Special Bench I was set up to decide on following question :
"Whether, the phrase "a residential house" used in sub-section (1) of sections 54 and 54F means one residential house or more than one residential house independently located in the same building/compound/city ?"

The tribunal after considering many decisions , held as under

The view taken by us in this para is also justified by the decision of the Hon'ble Calcutta High Court in the case of B.B. Sarkar v. CIT [1981] 132 ITR 150, wherein purchase of ground floor of a house and thereafter construction of first floor was held to be an investment in one house only. Their Lordships at page 156 observed as under :
"If a floor is constructed to the new house or if it is renovated it remains a house and this will not be two houses."

11. In view of the above discussion, it is held that exemption under sections 54 and 54F of the Act would be allowable in respect of one residential house only. If the assessee has purchased more than one residential house, then the choice would be with assessee to avail the exemption in respect of either of the houses provided the other conditions are fulfilled. However, where more than one unit are purchased which are adjacent to each other and are converted into one house for the purpose of residence by having common passage, common kitchen, etc., then, it would be a case of investment in one residential house and consequently, the assessee would be entitled to exemption.

To sum up , the Mumbai Special Bench's decision was

1. Exemption u/s 54 or 54F is allowable for one house only.
2. If assessee has purchased more than one house, choice will be with assessee to select on which house he wants to avail exemption u/s 54 or 54 F as the case may be.
3. If more than one unit are purchased and made into one unit for the purpose of residence, it will be considered as one house for claiming exemption u/s 54 or 54 F.
4. If floor is added to a new house , it remains one house , therefore exemption for both the new house and the house on added floor shall be taken together for claiming exemption u/s 54 or 54F.

Therefore, even if you purchase two adjacent house from two different person , but converts those two house as one by breaking the internal wall, you can claim exmeption u/s 54F for investment in both house.

Recent Decision

In CIT vs D. Ananda Pasappa (2009) 309 ITR 321 (Kar), the issue before the court was that the assessee sold a residential house and in lieu of the same purchased two residential flats adjacent to each other by entering into two separate sale deeds. The exemption u/s 54 was sought for investment in both the houses treating them as one unit.

The A.O allowed exemption for only one house and the order of A.O was confirmed by the CIT(A).

The Tribunal agreed with the ground of the assesee that both the house although purchased separately , but the builder had carried modification to make it usable as one unit. The Tribunal allowed the exemption on both the house.

The department filed case in High Court and Hon’ble Karnataka High Court upheld the judgment of the Tribunal by accepting the contention of the assessee that both units were modified by the builder to be use as one

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I am holding some employee shares of a private company. This company is now bought by one listed company and I will be given shares of the listed company in place of shares I am holding. Will I need to pay any tax now? How will my tax be calculated if I decide to sell the shares of the listed company which I will get. Sandip, Mumbai

Section 47 of the I T Act deals with cases of transactions not regarded  as transfer which means no capital gains arises in these case despite the fact there is some kind of transfer .sub-section (vii) of section 47 provides that in case of amalgamation , if any share transfer by a shareholder of amalgamating company i.e the company which is merging in another company ,takes place , it shall not be considered the transfer which means no capital gains arises.The said section 47(vii) is as under:

Section 47 (vii) 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, and

(b) the amalgamated company is an Indian company;

Therefore, if you were holding shares in private limited company and an Indian company which is listed in India has acquired it , there will not be any capital gains despite the fact that your holding in private limited company was transferred to new company which gave you shares of acquiring company (amalgamated company )

What will be the cost  new shares you are allotted ?

When you sell the shares of amalgamated company i.e listed company which acquired your private limited company and allotted you shares , capital gain or loss may arise. At that time , the question of cost of new shares will arise.As per section 49(2) cost will be the cost of original shares of amalgamating company . In your case , the cost of private limited company. The said section is as under

49(2) Where the capital asset being a share or shares in an amalgamated company which is an Indian company became the property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the share or shares in the amalgamating company.

If you sell the shares of listed company after holding for more than one year, the gains will be long term and completely tax free u/s 10(38) of the I T Act.

Relevant reading

Why Long Term Capital Gains On Shares Not Always Tax Free?

Is Sale of Shares Listed Abroad Tax Free?

Simple Terms Related to ESOP Explained !

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I have earned Rs 700000 as from equity market in financial ,year 2005-06, which I was not showing in my return. I do number of transaction during the period but I taken all the share delivery and hold up 1 to 2 month and there after i sold in the market. but subsequently a survey was held on my broker during the year 2007-2008. Now before any notice served by income tax authority I fill up a revised return showing all my gain ,but department treated my gain as business income rather then the capital gain and accordingly they demand for additional tax. How can I justified for treated as a capital before the commissioner of appeal. Arun Kumar Agarwal ,Berhampur

 This is a very old debatable topic between revenue authorities and tax payers. Nothing concrete can be said whether you had done business or investment transaction without going into full facts .Following parameters are important to decide this issue

1. What is the general nature of transactions of assessee in last three years ?

2. What is the manner of maintaining books of account ? Whether those shares on which short term capital gains were claimed are shown in books of account at the time of purchase as an investment or stock in trade.

3. What is the magnitude of purchase and sale of shares under short term vis a vis under business head?

4. In case of short term transactions, what is the general period of holding scrip wise vis a vis the business transactions shares holding? What it means is that find out the period of holding of each share in case of ST and business transaction.

5. How much dividend earned on the shares sold as investment (short Term) ?

Case Laws

There are many case laws on this subject and each was given by going into the facts before it . You can get clues for your own case if you read following case laws properly

1.  In Raja Bahadur Visheshwara Singh & Others V. Commissioner of Income Tax, Bihar & Orissa, (41 ITR 685), the assessee purchased shares during a period of 10 years from his own funds. He then borrowed substantial amounts for making further purchases of shares and securities. He made profits on selling some shares in the subsequent years. The Income Tax Appellate Tribunal, taking note of the magnitude and frequency of the transactions and the ratio of sales to purchases and total holdings, held that the appellant must be regarded as a dealer in shares and securities and that the profits of those years were assessable to income tax. On reference, the Patna High Court held that there was sufficient material to support the findings of the Appellate Tribunal. On further appeal to the Hon'ble Supreme Court it was, inter alia, held :

• that if on the evidence which was before the Tribunal, i.e. the substantial nature of the transactions, the manner in which the books had been maintained, the magnitude of the shares purchased and sold and the ratio between the purchases and sales and the holdings, the Tribunal came to the conclusion that there was material to support the finding that the appellant was dealing in shares as a business, it could not be interfered with by the High Court;

• that the High Court was right in holding that there was sufficient material to support the finding of the Appellate Tribunal.”

It may be noticed that in one of the earlier year of assessment the appellant was not treated as a dealer in shares and this fact was not considered by the High Court but the Hon'ble Supreme Court rejected the contention observing that when an owner of an ordinary investment chooses to realize it and obtain a higher price for it than he originally acquired it at, the enhanced price is not a profit assessable to income tax but where what is done is not merely a realization or a change of investment but an act done in what is truly the carrying on of a business the amount recovered as appreciation will be assessable.

2.  In Dalhousie Investment Trust Co. Ltd. V. Commissioner of Income Tax (Central), Calcutta (68 ITR 486), the appellant was investing its capital in shares and stocks of McLeod & Co. and companies managed by that company. It was changing its investment by sale of its shares from time to time. The appellant purchased bulk of shares of those companies by taking loan at a time when the market price was continuously falling and rate of dividends was very low. Those shares were sold subsequently at a considerable profit. The question was whether the profit derived by the appellant from the sale of those shares was in the nature of revenue receipt or a capital gain. It was held by the Hon'ble Supreme Court that the appellant purchased and sold the shares of the company and the allied companies as stock in trade and that they were in fact purchased even initially not as investments but for the purpose of sale at a profit and therefore the transactions amounted to an adventure in the nature of trade and the profit derived by the appellant from the sale of shares was a revenue receipt and as such liable to income tax. The fact that the department in the earlier years treated the transactions in the nature of investments was not binding in the proceedings for assessment during the subsequent years.

3. In Commissioner of Income Tax, Nagpur v.. Sutlej Cotton Mills Supply Agency Ltd. ( 100 ITR 706), the respondent assessee subscribed for 3,49,000 shares of a new issue of Gwalior Rayon and paid the application and call moneys. Subsequently, he sold 1,58,200 shares with a profit. The Income Tax Appellate Tribunal found that the transaction constituted business being an adventure in the nature of trade and that the profit was liable to income tax. On reference to the High Court of Madhya Pradesh held that the transaction was held not an adventure in the nature of trade. On appeal to the Hon'ble Supreme Court, the decision of the High Court was reversed holding that the Tribunal had considered the evidence on record and applied the correct test in law, and there was no scope for interference with the finding of the Tribunal.

4. We may notice here a recent judgement of the Authority in the case of XYZ/ABC Equity Fund (250 ITR at page 194). In that case the applicant company was a resident of Mauritius which mobilized investment from different investors and collected a large pool of money and after identifying investment opportunities invested in three Indian companies and one USA company. It utilized the services of an advisor who was also advising to other companies. The investment in India was through the custodian which was rendering services in the ordinary course of business to about twenty companies. The Authority ruled, inter alia, that the applicant company had been formed with the object of carrying on the business of acquiring and investing in and holding securities of all kinds and ultimately selling at a profit. It is with that purpose it had raised capital and acquired money from other sources with which it acquired large block of shares in Indian companies and that indicated a large systematic activity for making profits. Transactions of this magnitude in furtherance of the object stated in its memorandum could be nothing other than business and the proceeds of sale of shares in India would amount to business receipts and not capital gains.

4.  In A.V.Thomas & Co.Ltd. v . CIT (Supra), the assessee referred to the memorandum of association to show that it was one of the objects of the assessee to include the promotion of the companies and accordingly the amount in question was paid to promote the Rodier Textile Mills Ltd. Repelling that contention the Hon'ble Supreme Court observed that a memorandum of Association is not conclusive as to the real nature of transaction which has to be deduced from the circumstances in which the transaction took place and not from the memorandum. As a fact it was found that different versions given in the books of accounts of the assessee - company, belied the assertion. What this decision lays down is that mere recital in the memorandum of association is not conclusive of the nature of transaction, there must be some material to show that in furtherance of the object clause in the memorandum steps are taken and it is given effect to.

5. In CIT v.. P.K.N.Co.Ltd. (Supra), the question for consideration before the Hon'ble Supreme Court was whether the profits realized by the assessee company from the sale of properties could be brought to tax. It is observed that the question whether in purchasing and selling land, the assessee company enters upon a business activity has to be determined in the light of the facts and circumstances; the purpose or the object for which it is incorporated may have some bearing, but is not decisive, nor is the profit motive in entering into a transaction is decisive. In that case, the respondent company was formed primarily to take over the assets of a firm. The memorandum of association, inter alia, specified in the objects clause purchase or acquisition, sale, development and disposal of land. It was held that the profits arising from the sale of the land in plots were not taxable income; the primary object of the company was to take over the assets of the firm to carry on the business of planters and to earn profits by the sale of rubber and that the acquisition of the estates was not for the purposes of carrying on business in real estate. The incidental sale of uneconomical or inconvenient plots of land could not convert what was essentially an investment into a business transaction in real estate. Existence of powers in the memorandum of association to sell or turn into account, dispose of or deal with the properties and rights of all kinds had no decisive bearing on the question whether the profits arising therefrom were capital accretion or revenue

6. CIT v . Associated Industrial Development Co.(P) Ltd (Supra), was a case of the assessee company being managing agents of various companies. It sold shares held by it in three of its companies and derived substantial profits. The claim of the assessee was that the profits were in the nature of capital gain and not income. The Tribunal found in view of the multiplicity of the transactions over the years the assessee company had ceased to be an investor and had become a dealer and the profits were liable to be taxed as income. The High Court on reference did not interfere with the finding of the Tribunal but held that the shares were held by the assessee as part of its investment and, therefore, profit on the sale of shares did not arise to it in the course of its business as a dealer in shares, which was a capital receipt. On appeal, the Hon'ble Supreme Court reversed the decision of the High Court holding that the question whether the shares had been held by way of investment, was essentially a question of fact and the Tribunal was not called upon to decide it. The assessee did not place any material from which it could be established whether particular holding of shares was by way of investment or formed part of the stock in trade. It was a matter which was within the knowledge of the assessee who held the shares and he should, in normal circumstances, be in a position to produce evidence from his records to show that the shares were held as stock in trade.

From the above discussion , you compare your case , and see what the A.O has written as reason for treating the transaction as business and not a investment transaction.

Good luck!

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If I 'm having STCL u/s 111A (i.e. transaction in which STT had been paid) & STCG on land (or any other asset on which STT need not be paid), then can I set off that loss against STCG on Land?? & if we can not set it off, then for how many years can we carry Forward that Loss to be set off against STCG u/s 111A? Pls Inform soon.Pauravi, Mumbai

Set off of loss from one source against income from another source under the same head of income is dealt in section 70 of the I T Act . Subsection 2 of this section deals with "short term capital loss. The wordings are as under

(2) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset.

Language is very clear. Short term loss on one kind of capital asset  can be set off with capital gains of any other capital asset. It means that there is no distinction between types of capital asset. So short term capital loss on share can be adjusted with short term or long term gains on any other income.

Carry forward of STCL

Carry forward of loss under capital gains is delat in section 74 of the I T Act.

74. [(1) Where in respect of any assessment year, the net result of the computation under the head Capital gains is a loss to the assessee, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and

(a) in so far as such loss relates to a short-term capital asset, it shall be set off against income, if any, under the head Capital gains assessable for that assessment year in respect of any other capital asset;

(b) ...............

(c) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.]

(2) No loss shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.

So, the carry forward of short term capital loss shall be up to 8 years and it can be adjusted with any kind of capital gains.

Is Date Of Agreement To Sale Always The Date of Transfer For Counting Period Of Holding Of Asset?

Can Short Term capital Loss Be Adjusted With Commission Income?

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It was a plot of land in both Husband and wife's name purchased from Government in
June 2000. We had taken a loan for 5 years . Sold it 29th June 2008. Please tell us in view of the dates mentioned above
1.What is the time period we have till which we can buy a property to save tax on capital gains without depositing the CG money in a Capital gains account.
2.When does it become mandatory to open a Capital Gains account.
3.Is the total payment to be made within this period or staggered payment can be done from savings account over the period.

Renuka Chohan, Mumbai

The last date up to which one can buy without  deposit of money in CGAS is last  date of the financial year i.e in your case , as the land is sold in FY 2008-09 , the date 31/3/2009 is the last date by which sales consideration must be invested in  house property . If you do not do , you will have to pay tax .

After last date of financial year, in your case 31/3 /2009,if one wants to save on tax , it becomes mandatory to open a CGAS account and put the money in that account before filing return of income. So , if you are not required to be audited, the month of 31st July 2009 is the last by which you must deposit the money in CGAS account to save on tax.If your accounts are required to be audited, 30/9/2009 is the last date.

It can be staggered payment , but the time period is not changing , whether one does one time payment or staggered . However, if the amount is in CGAS , you get two years in which staggered payment from that account can be utilized for buying the property.

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In respect of Section 50 C if fair market value of the property is less than the Stamp value, what shall be the consideration shall be taken for valuation ? Satish Ukhale, Pune

Good question but  like the question it has short answer.

Section 50C was introduced in the I T Act from Asst Year 2003-04 (Fy 2002-03) to check the menace of under valuation of sale of property. The provision u/s 50C  empowers A.O to substitute the value of sales consideration  with the  valuation of immovable property taken for determination of  stamp duty  for the purpose of computation of capital gains ,if only he finds that the value shown by the seller is less than the value for determination of stamp duty.

The  said provision is as under

 

Special provision for full value of consideration in certain cases.

50C. (1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed by any authority of a State Government (hereafter in this section referred to as the stamp valuation authority) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer.

As you can see the heading of the section is "Special provision for full value of consideration in certain cases" . The word "certain cases ' is important as the intention of the law makers was to apply the provision in "certain cases only' i.e the case when under valuation is found on comparison with the value adopted for stamp duty. None other case.

Secondly , note that there is not even mention of "Market Value" in section  50C , so there is no implication for market value of the capital gains purpose. The fact that in many cases , it may just happen that market value is less than value adopted for stamp duty, I feel only judicial authority (Tribunal & above)  may give you relief provided you bring this fact clearly and forcefully.(& some luck!)

Therefore, in my opinion the moment it is found that valuation adopted for stamp duty  is less that sales consideration, section 50C is not applicable at all which means that the sale consideration is the value to be taken for capital gains purpose.

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I purchased a land in Sep 01 for Rs. 10 lacs. The land was handed over to a developer for construction of a building. The cost of construction was to be incurred by Developer and I was to get 45% of constructed area from developer as per agreement entered in Dec 03. The developer constructed the building as per the plan approved in my name. I took a portion of the constructed area in Dec 06 although no possession certificate was given to me by the Developer. The area taken by me in Dec 06 was rented out by me to some tenants for rent. The rent income has been shown in my return for Asst Yr 07-08. Whether there shall be any capital Gain and if yes, on what amount ? Sunil Modi, Balasore

Yes, there shall be capital gains. Since the land was belonging to you, the developer constructed flats after having an agreement with you as per which you received possession of constructed flat. As per the agreement , you are also a party to all the flats sale agreement which the developer might have sold the flats on your land. The effect of this is that the land under an agreement with the Developer has got transferred and you received consideration in form of constructed space. That will raise the issue of capital gains.Your capital gains will be computed as under

Value of the constructed space in Developer's book                   xxxxxxx

Add cash received from developer                                                 xxxxxx

 

Less

 

Index cost (If the land was being held for more than 36 months)  xxxxxx

                               Capital gains                                                          xxxxxxx

                               Tax          @          20 %

You can avail of the exemption u/s 54F  or 54EC . For more on this read here.

 

 

 

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I had bought 25 deep discount bonds of Sardar Sarovad Nigam Ltd for Rs. 22500/- per bond on 26/11/2001 with the intension to get redemption amount of Rs. 111000/- in the year 2014. Now company has compulsory repaying Rs. 50000/- per bond on 10/01/2009. Sir please let me know the tax implication for the same case 1 if I get redemption amount of Rs .50000/- & Case 2 if I sale the said bond in the stock market. Shall I eligible for the long term capital gain on the buy / sale difference (calculating indexation cost)? Jagesh Shah

Two kinds of income is the possibility in case of deep discount bond.

1. If the there is redemption of deep discount , the difference in amount of redemption and issue price is taxed as "income from other source ' by considering the difference as "interest' .

2.Deep discount bonds are capital asset . However , if the redemption takes place by the issuing company , the difference This is as per circular of CBDT.

What is best step for tax planning ?

If you find that total interest puts you in 30 % tax rate , it is better to sale the bond in the market because in that case there arise long term gains which is taxed at 20 % rate only. Remember there is no indexation facility in case of bonds and debenture .Another benefit is that you can claim exemption u/s 54F and 54EC which is not available in case the income is earned as interest. 

Are you worried that you did not offer the interest every year?

Then read  How To Save Tax In Case Of Deep Discount Bond? posting which will reveal that for bonds issued before 15/2/2002 , it was not necessary to show interest every year as per accrual method.

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I was working in an Engineering Co. and retired in April 2006. Hence presently I am a retired person.I became a member of a Housing Society in the year Oct. 1979 a plot was allotted to me on 10th March 1988. The total amount paid by me till March 1988 was Rs. 7205/.Now I have decided to sale the plot and I am likely to get Rs. 4.5 lac as per present (Nov. 2008) market price.Please advise whether any capital gain tax will be applicable ? If yes, how to workout the capital gain tax?Sirish Gandhi. Vallabhnagar

In case of society, the ownership on land and property is with the society. The members of society gets the right to enjoy the property. So, when a member wants to sell the house or land in a society, what he does is transfer of his Right to enjoy such land or house. That is the reason for any transfer of asset in a society, a No objection from society is required. However , for the purpose of Income Tax Act, such a no objection procedure has no effect on the event of capital gains. In case of Feredoon K. Irani V. Fifth Income-tax Officer.15 ITD 627 , Mumbai Bench of tribunal went on the issue whether there arise capital gains on transfer of sale of rights and whether No Objection non issuance bu Society has any relevance to I.T.Act. Read below

the right to occupy the flat is independent of the right to hold shares in a co-operative society and secondly, that both these rights are transferable without the prior consent of the co-operative society. The assessee in this case has done all that was required of him to make an effective transfer, i.e., he gave possession of the flat, executed a transfer deed of the property and also all the shares in the co-operative housing society. Thereafter, he went out of the picture except so far as he may be required to state any proceedings under the law that he had affixed his signature to the various documents for a consideration to make the transfer effective. He cannot, in law, be required to refund the consideration because if the transferee cannot obtain membership of the society, it will be for no fault of the assessee and unless the purchaser can prove, which is nobody's case, that the assessee have a defective title, the assessee cannot be made to refund the consideration received for the transfer. Therefore, so far as the assessee is concerned, the transfer was complete and effective because no registered deed of conveyance is required under section 47.

Your specific question
In your case , when you sell the flat for Rs 4.5 lakhs , there may be capital gains , the computation can be done as under

Sale price Rs 4,50,000

Less
Index cost of acquisition Rs 7205 x 582 Rs 27955
-----------------
150

Long term Capital gains Rs 4,22,045

You can save on tax by investing in another residential flat or in capital gains bonds u/s 54EC.
Relevant Readings
How Cost Inflation Index Saves You Tax?
How To Minimise Tax On Huge Gains on Property Sale?
Can One Claim Exemption U/s 54EC On Sale Of Right In Property?

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In case of Capital gains on sale of residential flat, when considering the cost of acquisition, is Interest on housing loan is also taken into account?For eg. My flat cost is Rs 15L. I have Hsg loan of Rs 10L & total Hsg Lona interest paid till date of sale (5 yrs after buying flat) is Rs 7L. Can I show my cost of acuisition as Rs 15L+Rs7L = Rs 22L? Asked by Sanjay

Meaning of  cost of improvement and cost of acquisition are given under  section 55 (1) and 55(2) respectively. While the definition of 'cost of improvement ' expressly excludes 'interest paid ' on loan taken for any kind of improvement in capital asset. Read below

55. (1) For the purposes of sections 48 and 49,—

b) “cost of any improvement”,—

(1) .....

(2) in relation to any other capital asset,—]

(i) .............................

(ii) in any other case, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his property, and, where the capital asset became the property of the assessee by any of the modes specified in ¹⁶[sub-section (1) of] section 49, by the previous owner,

but does not include any expenditure which is deductible in computing the income chargeable under the head “Interest on securities”, “Income from house property”, “Profits and gains of business or profession”, or “Income from other sources”, and the expression “improvement” shall be construed accordingly.

However , no such restriction has been in the definition of cost of acquistion given u/s 55(2) of the I T Act.

The issue of allowance of interest came up in a number of cases . In case of Income-tax Officer V. Smt. Pushpaben B. Wadhwan  16 ITD 704 , Ahmedabad Tribunal held as under

Similar issue had come up before the Hon'ble High Court in the cases of CIT v. Mithlesh Kumari [1973] 92 ITR 9 (Delhi), CIT v. Travancore-Cochin Chemicals Ltd. [1975] 99 ITR 24 (Ker.) (FB), Addl. CIT v. K. S. Gupta [1979] 119 ITR 372 (AP) and CIT v. Maitheryi Pai [1985] 152 ITR 247 (Kar.). In the case of Maitheryi Pai (supra), the Hon'ble High Court has held that the interest paid on the borrowed capital for the purpose of purchase of shares should form part of 'the cost of acquisition . provided the assessee has not got deduction in respect of such interest payment in earlier years. In the instant case from the order of the ITO it is not clear as to when the assess acquried the flat in question and whether she was allowed deduction of interest payments in computing the income from the said flat under the head 'Income from house property' in earlier years If that be so then the interest paid on the loan cannot be treated as part of 'the cost of acquisition. However, if the assessee has not been allowed such deduction in eariler years, then in view of the decision in the case of Maitheryi Pai (supra), the interest should from part of 'the cost of acquisition' of the set sold by her.

So, if the interest was already taken as deduction under I T Act, the interest can not be claimed as deduction, but if the interest was not taken as deduction under I T Act , it becomes cost of acquisition of asset and accordingly will be deducted while computing capital gains.

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I have sold a residential plot on 24/12/2007.and deposited the amount of Capital Gain in Capital Gain Account scheme of SBI before July 2008. Now I want to purchase a Flat with this amount. If i booked today and paid basic cost of flat today(from capital account scheme), but flat would be ready after 3 year from now(in year 2011) can it be OK or i got tax benefit of capital Gain account scheme. The flat is from reputed builder (Supertech Limited). please advice what doc would be required from the builder to get the benefit of tax on Capital Gain Account Scheme. Abha Sharma , Delhi

First of all ,you should note that it is not the capital gain , but net sales consideration which you should have deposited. The 'Net Sales Consideration means , Sale price of land minus the Expense for sale . Read the Explanation given under Clause 1 of section 54(1) as under

net consideration, in relation to the transfer of a capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.

Although the last date up to which the deposit in CGAS is the date of filing return which was in your case 31st July 2008 , however ,good news is that, as per Tribunal decision , you have still time to deposit the balance amount of sales consideration . For this read this posting Here Is A Recent Good Decision For All Claimants of Deduction Under Section 54F !

Deposit of the Net Sales Consideration  in Capital Gains Account Scheme makes you eligible for exemption u/s 54F  the Assessment year 2008-09 . But as per condition given in section , the amount kept in CGAS account should be spent for

• purchase of house within two years 
•                            or
• construction of residential house within three years

from date of transfer of asset which was sold.

However , as per decision of higher appellate authorities, even if the house is not constructed by the builder within three years, still you will be eligible for exemption u/s 54F. Read this posting

 Can You Get Exemption U/s 54F Even If Builder Does Not Complete House Within Three Years?

 

Relevant Readings

Can You Claim Exemption For Two Separate Years For Investment In same House ?

Can Exemption u/s 54F Be Claimed For Buying Two Adjacent Flats Joined By Breaking Internal Wall?

How To Use Capital Gains Account Scheme To Save Tax?

How To Minimise Tax On Huge Gains on Property Sale?

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I have recently sold my flat and have made long term capital gains. Is it necessary to invest full sale proceeds or only the capital gain a) if invested in house and b) if invested in capital gain bonds.M.Balasubramanian, Chennai

The exemption from long term capital gains are provided under section 54 or 54F or 54EC . The principal common to all these provision is that exemption is limited to amount of investment. So the question is rightly asked how much amount i.e whether the amount of investment should be of full consideration of sale of long term asset or only the amount of capital gains on the sale of asset.

Section 54 provides that the exemption is to the extent of capital gains invested in new residential house.

Section 54F however states that the net sale consideration of the capital asset should be invested in new residential house. Net sales consideration means sale consideration minus the cost of sale like brokerage on sale and other expense.

Section 54EC provides that exemption is to the extent capital gains is utilised in purchasing the specified asset (at present REC and NHAI 's bond)

Therefore, in nutshell, for claiming exemption u/s 54 or 54EC, investment should be upto CAPITAL GAINS whereas for claiming exemption u/s 54F , investment should be upto Sales Consideration.

Related Readings

• Can You Claim Exemption From Tax By Buying Land & Commercial ...

• Can One Get Exemption U/s 54 And 54F Together?

• How To Make Tax Planning For Long Term Capital Gains?

• Will I Get Exemption u/s 54 For Buying Commercial property?

• Can Exemption u/s 54F Be Claimed For Buying Two Adjacent Flats ...

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Which Date-Booking or Possession or Registration -Is Important For Capital Gains Tax?

I had booked one flat in March’2004 and builder issued me allotment letter in December 2004. Now in October 2008 I have sold my right on this Flat at profit of Rs 10 Lacs. Building is not yet completed. Please let me know whether i m eligible to claim exemption u/s 54ec if I invest this long term capital gain in REC/NHAI bonds. I am already holding one residential Flat in which I reside.Hemant Kumar , Delhi

Since the flat was booked and allotment letter was received by you, it means that there vested a right in you to own the flat provided you pay as per the purchase agreement with the builder.This right is considered a capital asset .Refer the decision of Bombay High Court in CIT v. Tata Services Ltd. [1980] 122 ITR 594 (Bom.) wherein it has been held that the word ‘property’, used in section 2(14), is a word of the widest amplitude and the definition has re-emphasised this by use of the words ‘of any kind’. Thus, any right which can be called property will be included in the definition of ‘capital assets’. A contract for sale of land is capable of specific performance. It is also assignable. A right to obtain conveyance of immovable ‘property’ is clearly a ‘property’ as contemplated by section 2(14) .

You have held the right to own the flat for more than three years , therefore the Right has become long term capital asset which on sale has given you long term capital gains of Rs 10 Lacs . Section 54EC therefore , is applicable and so you can claim the benefit if deposited in REC or NHAI bonds within six months from the date of transfer . It does not matter if you have another flat.

Relevant reading

Which Date-Booking or Possession or Registration -Is Important For Capital Gains Tax?

How To Make Tax Planning For Long Term Capital Gains?

How To Minimise Tax On Huge Gains on Property Sale?

Buy bonds or house to reduce your tax liability on long term capital gains from sale of land.

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Can short term capital loss from sale of shares of a pvt ltd co be adjusted against business income from commission received. Raj Desai , Pune

The provision regarding adjustment of short term capital losses (STCL)is provided under sub-section 2 of Section 70 of the I T. Act as under

(2) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset.

As can be seen that short term capital loss can be adjusted with any kind of Capital Gains only i.e short term capital gains or long term capital gains. 

Income from commission is not capital gains but falls under the head profit from business or profession. Therefore, short term capital loss can not be adjusted with commission income.

What happens to unadjusted  STCL?

The unadjusted short term capital loss shall be carried forward  to next eight years and shall be adjusted with any kind of capital gains which arises in future. This provided u/s 74 of the I T Act

74. (1) Where in respect of any assessment year, the net result of the computation under the head Capital gains is a loss to the assessee, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and

(a) in so far as such loss relates to a short-term capital asset, it shall be set off against income, if any, under the head Capital gains assessable for that assessment year in respect of any other capital asset;

(b).......

(c) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.]

(2) No loss shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.

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My company has sold a property, The date of agreement being 31st March, 2008 but as the payment was not received in time I have registered the property on 31st July 2008 and handed over the possession on the same date. My question is in which year would I be liable to pay capital gain tax i.e in A. Y. 2008-09 or A. Y. 2009-10.Krunal Shah, Mumbai

In case of immovable property, the transfer is determined in accordance with Transfer of Property Act. However, for Capital Gains purpose, even part performance of a contract is taken as transfer as per definition of transfer given under clause (v) of section 2(47) of the I T Act. The same is as under

(47) transfer, in relation to a capital asset, includes,

(v) 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 ²⁵ of the Transfer of Property Act, 1882 (4 of 1882) ; or

In your case , you had only paper agreement and neither payment nor the possession took place , I am afraid the property can not be considered transferred even in terms of part performance of the contract. So, capital gain will arise in AY 2009-10.

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I had booked a flat under construction in November 2003. The Flat was finally given to me in October 2006 and its registration was completed in March 2007. Does the flat now qualify as a long term property if I sell it now and the gain qualifies as long term gains eligible for lower taxes. In 2003 I had opted for 95% payment of the flat upfront. Please suggest as I want to minimise the taxes. Short term gains will be huge and so will be the taxes.Umang, New Delhi

The question is very relevant for everyone who purchases flats being constructed by builders. Three events -Booking ,Possession of flats and Registration -are part of process of acquiring the flats from builders generally. The day you book the flat , the asset certainly is not created even by builder . So whatever money you give to builder ,in a way, is an advance only . However, when the flats are ready , the builder checks whether you have paid the agreed amount and once he finds that payment is already done, he hands over the flat to you. The registration of document of ownership takes time and generally happens much later than actual handing over of flats.The definition of transfer under I T Act is given u/s 2(47A) which under clause (v) recognise part performance as transfer of capital asset. The said clause is as under

(v) 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
In referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ;

In nutshell , if the payment has been done and possession has been taken, such an asset is considered transferred in the name of purchaser of the property. So, possession date, in my opinion , is the date from which three years should be counted.

Don't lose heart by my opinion, Court Ruling is in your favour.

Higher judicial authorities have different view and as per them , the date of agreement of purchase of property is the date from which period of holding should be counted. The court has regarded right to purchase the property as a capital asset and held that teh date when the agreement to purchase was made is the date from when the period of holding the asset should be counted and not from the date of possession.

Cases in your favour

1. Jitendra Mohan v. Income-tax Officer, Ward 28(2), New Delhi [2007] 11 SOT 594 (Delhi)

The relevant and material facts for the disposal of this issue involved in the grounds of appeal taken by the assessee are that the assessee has been allotted a 'D' type industrial shed at Kirti Nagar Packaging Complex by Delhi State Industrial Development Corporation Ltd. (hereinafter called 'DSIDC') vide letter dated 8-7-1994 which was not of any specific shed as the same was to be decided later on through a draw of lots. On 27-8-1996 by a draw of lots the Shed No. D-13 was allotted to the assessee subject to payment of all outstanding dues and interest. The assessee was allotted the plot on instalment basis and the 1st instalment of Rs. 60,000 was paid on 21-10-1993 and a 2nd instalment of Rs. 1,25,255 was paid on 28-12-1994, similarly, other instalments were paid by the assessee on different dates as given in the chart appearing at page 2 of paper book and the final instalment of Rs. 1,64,561 was paid by the assessee on 19-12-1997. In this manner a total sum of Rs. 14,04,193.50 was spent by the assessee towards the purchase of this industrial shed and the indexed cost of the same was worked out by the assessee at Rs. 1,958,008 as calculated at page 2 of the chart. The possession of the said industrial shed was handed over to the assessee by DSIDC on 18-5-1998 and the plot was sold for a sum of Rs. 17 lakhs by the assessee on 15-12-2000 and after working out the indexed cost on each paid instalment the assessee declared capital loss in the return at Rs. 2,58,008.
3. The short question which arose and was to be considered by the tax authorities below was whether the profit/loss which arose to the assessee from the sale of the industrial shed was a long-term or a short-term capital gain/loss. The assessee has claimed before the tax authorities below that in this case the industrial shed should be taken as having been held from 8-7-1994 i.e., when the allotment of the industrial shed was made by DSIDC in favour of the assessee.

The tribunal held as under "Now keeping in view the provisions of section 2(14) of the Income-tax Act, as well as, the ratio of the above-mentioned decisions (supra) it is absolutely clear that the words 'capital asset' defined in section 2(14) of the Act and the word 'property' used in this section is of the widest amplitude. Which means that any right which a person can be called to hold in a capital asset would be included in the word 'property' used and included in the definition of 'capital asset' in section 2(14) of the Act. Again reverting to the facts of the instant case wherein by a draw of lots the assessee was declared successful for the allotment of a shed, subject to payment of all outstanding dues and interests and in lieu thereof the assessee paid an instalment of Rs. 1,25,255 on 28-12-1994 and thereafter continued paying the remaining instalments to DSIDC, on account of which a particular Shed No. D-13 was allotted to the assessee and ultimately the possession of the same was handed over to the assessee on 28-5-1998 and thereafter the assessee sold the same on 15-12-2000. It means that when in a draw of lots an allotment of a shed was made to the assessee on instalment basis after a payment of instalment of Rs. 1,25,255 on 28-12-1994 as per the wider meaning of the word 'property' used in the definition of 'capital asset' in section 2(14) of the Act the property/shed was held by the assessee for bringing the shed within the meaning of definition of the words 'capital asset' on 28-12-1994 on payment of instalment of Rs. 1,25,255, hence, the sale of the shed by the assessee on 15-12-2000, after holding the same for a period of more than 36 months is to be treated as long-term capital asset and the sale of the same resulting into loss/gain also amounted to long-term capital loss/gain.

2. Jagdish Chander Malhotra. vs Income-Tax Officer. 64 ITD 251

The assessee acquired such capital asset, namely, the rights or interest in the aforesaid two flats at Punjabi Bagh as soon as those flats were booked and the allotment of those flats were made in favour of the assessee by the builders in the year 1983 and 1984. The mere fact that further instalments were paid by the assessee during the years 1983 to 1988, will not lead to the conclusion that the capital asset in question, namely, the right or interest in the said flats was held by the assessee for a period of less than 36 months. The assessee held such capital asset ever since those two flats were booked and allotment of those flats were made in favour of the assessee by the builders in the years 1983 and 1984. Such a view is clearly fortified by the judgment of the Hon'ble Bombay High Court in the case of CIT v. Vimal Lalchand Mutha [1991] 187 ITR 613.

3. Punjab and Haryana High Court in the case of CIT v. Ved Parkash & Sons (HUF) [1994] 207 ITR 148.
The facts of the case are that the assessee entered into agreement for purchase of a flat in New Delhi on 29-5-1970. Pursuant to the agreement he was put in possession of the flat on the same day. According to the stipulation, the assessee was to pay the amount in instalments and the last instalment was paid on 10-2-1973. The assessee sold the property on 10-2-1973 and claimed that gains were long-term capital gains. The Hon'ble Court pointed out that on perusal of section 2(42A) of the Act, it is clear that 'short-term capital asset' means a capital asset held by an assessee or not more than 24 months (now 36 months) immediately preceding date of its transfer. Thus, a person can be said to be holding a property as owner, lessee, mortgagee or on account of part performance of agreement etc. and in this connection, the dates of payment of instalments are not material. The assessee was put in possession of the flat on 29-5-1970 and, therefore, he held the property for more than 24 months immediately preceding the date of its transfer.

[Author's note : previously 24 months was holding period fixed for terming a capital asset as long term. Not is it is 36 months ]

Therefore , if you can count the period of holding from the date of booking the flat and as per that sale of flat will bring long term capital gains . Only risk is that the claim as per verdict of Tribunal and High Court is litigation prone.

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It is commonly believed that long term gains on sale of shares are fully tax free. While , it is true that government has made the long term gains on shares tax free by inserting section 10(38) of the I T Act , not all kinds of long term gains on shares are tax free. Let us first see what the provision of section 10(38) provides

10.In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included
..................

(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 where

(a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and

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

Therefore , in following cases long Term capital gains are taxable, because the the transaction in these shares are not chargeable to securities transaction tax.

1. Sale of shares of private limited companies.
2. Shares listed in foreign stock exchange.
3. Shares sold without involvement of stock exchange .
4. Buyback of shares by companies if no STT is paid.

As a thumb rule, remember long term capital gains on only listed shares sold through stock exchange is tax free.

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Good news for everyone who was waiting for Cost Inflation Index for FY 2008-09. It is notified .

August 13, 2008

Notification No. 86/2008

Section 48, Explanation (v) of the Income-Tax Act, 1961 -
Notified Cost of Inflation Index for the Financial Year 2008-09

In exercise of the powers conferred by clause (v) of the Explanation to section 48 of the Income-tax Act, 1961 (43 of 1961), the Central Government, having regard to seventy-five per cent of the average rise in the Consumer Price Index for the Financial Year commencing from the 1st day of April, 2007 and ending on the 31st day of March, 2008 for the urban non-manual employees, hereby specifies the Cost Inflation Index for the Financial Year commencing from the 1st day of April, 2008 and ending on the 31st day of March, 2009 and for that purpose further makes the following amendment in the notification of the Government of India in the Ministry of Finance (Department of Revenue), Central Board of Direct Taxes number S.O.709(E), dated the 20th August, 1998, namely:-

In the said notification, in the Table, after serial number 27 and the entries relating, thereto, the following serial number and entries shall be inserted, namely :—

“28
2008-09 582”

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