Capital gains was first introduced in 1946 and was in operation only for a short period, that is, in respect of capital gains which arose during the period from 1st April, 1946 to 31st March, 1948. Later it was modified and reintroduced for the purpose of alleviating economic inequalities by the then Finance Minister Shri T.T. Krishnamachari in November 1956 by imposing a tax on capital gains made on or after the 1st April, 1956.
Capital gains is one of the import sources of income under the income tax law. In case of income from salaries, house property, business or profession or other sources where a reasonable understanding of the provisions is sufficient to arrive at income from these heads. However, for computing income from capital gains, a thorough understanding of the provisions is essential:
- Amalgamation [Section 2(1B)];
- Capital asset [Section 2(14)];
- Demerger [Section 2(19AA];
- Demerged Company [Section 2(19AAA];
- Fair Market Value [Section 2(22b)];
- Long Term Capital Asset [Section 2(29A)];
- Long Term Capital Gain [Section 2(29B)];
- Resulting Company [Section 2(41A)];
- Short Term Capital Asset [Section 2(42A)];
- Short Term Capital Gain [Section 2(42B)];
- Slump Sale [Section 2(42C)];
- Transfer [Section 2(47)];
- Zero Coupon Bonds [Section 2(48)]; etc.
The provisions of Income Tax Act or Rules has not covered various types of transactions that are taking place recently. In such cases apart provisions of income tax law, we need to have understanding of latest judgements.
Formulae of capital gain = Capital Asset x Transfer:
Chargeability of a transaction to capital gains as per section 45(1) arises only on its conformity to the above formulae. That means, the asset transferred [Section 2(47)] is a capital asset [section 2(14)] which results into capital gains under section 45.
Note: Amalgamation and demerger are special cases and are to be dealt separately.
Transactions not regarded as transfer: Section 47 of the Income Tax Act provides for certain transaction though transfers, but not regarded as transfers chargeable under section 45(1).
Year of chargeability: Capital gains is chargeable to tax in the previous year in which the capital asset has been transferred. The exception or the special cases where the chargeability or its payment differs to some other previous years are provided in section 45(1A), section 45(2) and section 45(5).
Type of capital assets: There are two types of capital assets. They are:
- Short Term capital asset; and
- Long Term capital asset.
The gain / Loss on transfer of a short term capital asset is treated in the income tax law as short term capital gain. Which is chargeable to tax at normal rates except in case of listed securities and chargeable to tax at a special rate of 15% as per section 111A. In same manner the gain / loss on transfer of a long term capital asset is treated as long term capital gain. Which is chargeable to tax at special rate of 20% as per section 112.
The inputs required for computation of capital gains. The below important information is required for computation of capital gains:
- Cost of acquisition [Section 48];
- Cost of improvement [Section 48];
- Period of holding [Section 2(42A)] for the purpose of indexation of long term capital asset;
- Indexed cost of acquisition [Section 48];
- Indexed cost of improvement [Section 48];
- Full value of consideration [Section 49] read with section 50C / section 50D;
- The amount of exemptions u/s 10 and deduction as per sections 54 to 54H, if any.
Real estate transactions
There are no vivid provisions in the income tax law to deal with development agreements entered by the land owners with the developers of properties. Sub-clause (v) of section 2(47) just says “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”.
Though land owner transferred only certain share of land to the developer, it is in practice by the tax payers to consider total extent of land as transfer and landowner’s share of superstructure value (that is going to build) as per stamp value authority on the date of development agreement, as full value of consideration. It is good to exchequer, if this practice is voluntary and taxpayers made the payment consciously. Such mode of computation is presented by tax authorities to the tax practitioner who in turn insist upon their clientele to comply accordingly. This computation is very unfair upon the tax payers as they compelled to pay tax though they do not receive any money. As no money received by the taxpayers, they have no opportunity to avail the benefits under sections 54 to 54H.
The reason for this anomaly is because of the capital gains provisions of the income tax law are incomprehensive to deal with. The law does not provide for what extent of land amounts to transfer i.e. share allocated to developer or total extent of land. Also, there is no clarity on full value consideration, whether share of superstructure value or land value (both as per stamp value authority). Considering superstructure value is punitive step upon the tax payer. This lacuna is unnoticed for the past several years. Hope its rectification in the years to come.