SIRC CPE Study Circle Meeting

Transcription

1 SIRC CPE Study Circle Meeting Issues on Capital Gains under the Income tax Act, 1961 CA Lambodar S 15 October 2014

2 Overview of Chapter IV E

3 Overview of Chapter IV E Snapshot Factors to be considered Computation Mechanism Long term Capital Gains Capital Asset Transfer of capital asset Full Value of Consideration Less: Indexed Cost of acquisition XXX (XX) Less: Indexed Cost of improvement (XX) Period of Holding Consideration Long term Capital Gains Short term Capital Gains XX Full Value of Consideration XXX Cost of acquisition / improvement Exemptions Less: Cost of acquisition Less: Cost of improvement Short term Capital Gains (XX) (XX) XX 2

4 Business Income Business Income v. Capital Gains

5 Business Income v. Capital Gains Characterization of income Guiding Principles ACIT v. Om Prakash Arora (2011) 16 Taxmann.com 396 (Del.) Intention of the assessee at the time of purchase of property Money borrowed to purchase the property Frequency of purchases and disposal of property Manner of maintenance of books of accounts Characterization of income in case of FII Difficulty in characterisation of income from transaction in securities Capital gain v. Business income The fund manager managing the funds of such investor remains outside India Amendment in Finance Act, 2014 Security held by FII in accordance SEBI regulations would be treated as capital asset Holding period of the property Income arising from transfer of such security would be in the nature of capital gain 4

6 Period of Holding

7 Period of Holding Conversion of Leasehold property to Freehold CIT v. Rama Rani Kalia ITA No. 56 / 2013 (All.) Issue Facts Period of Holding of capital asset in case of conversion of Leasehold Property to Freehold Property The said immovable property was acquired by the taxpayer in FY on leasehold basis. The taxpayer converted the leasehold immovable property to freehold property by getting the required approval from the Collector on 29 March 2004 on payment of required charges. On 31 March 2004 i.e. within 3 days of such conversion, the taxpayer transferred the converted immovable property and considered the gain thereon as long term capital gain. Decision The High Court referred to the definitions of the Short Term Capital Asset and Long Term Capital Asset under the Act and pointed out that the difference between the two is the period over which the property is held and not the nature of title over the property. The lessee of the property has rights as owner of the property subject to covenants of the lease, for all purposes. The conversion of the rights of the lessee in the property from having leasehold to freehold is only by way of improvement of her rights over the property, which she enjoyed. Conversion of the rights of the lessee in the property from leasehold to freehold is only by way of improvement of her rights over the property. No effect on the period of holding which would run from the original date of acquiring the leasehold property. 6

8 Conversion of Stock in Conversion of Stock in Trade to Capital Asset

9 Conversion Stock in trade to Capital Assets DLF Universal Ltd. v. DCIT (2010) 36 SOT 1 (Del.) Grownmore Exports Ltd. v. ACIT (2001) 78 ITD 95 (Mum.) Issue Capital gains implications on conversion of stock in trade to capital asset No Transfer No transfer on mere conversion of stock in trade into capital asset and hence no income arising on such conversion. There is no deeming fiction to deem the conversion as transfer or to deem the fair market value as on date of conversion as cost of acquisition. Holding period Further, the holding period of such converted asset must be counted from the date of acquisition of stock in trade and not from date of conversion. 8

10 Retirement of Partner

11 Retirement of Partner Section 45(4) Capital gains on retirement of partner Issue Taxability of capital asset transferred as settlement to the partner on retirement. Favorable When a partnership is reconstituted by adding a new partner and on the retirement of existing partners there was no transfer of asset within the meaning of section 45(4) of the Act. The court applied the rationale of the apex court decision in the case of B.T.Patil and Sons v. CGT (2001) 247 ITR 588 (SC) and Sunil Sidharthbhai v. CIT (1985) 156 ITR 509 (SC) and the decision was in favour of the assessee CIT v. Kunnamkulam Mills Board (2002) 257 ITR 544 (Ker.) Against The Finance Act, 1987 omitted section 47(ii) the result of which is that the distribution of capital assets on dissolution of firm would be regarded as transfer. The word otherwise takes into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favour of a retiring partner CIT v. A.N.Naik Associates (2004) 265 ITR 346 (Bom.) The expression distribution of capital assets on the dissolution of firm or otherwise, which cannot be extrapolated to bring retirement of one partner into the ambit of legal provision ACIT v. Goyal Dressers (2010) 126 ITD 131 (Che.) Dissolution by operation of law would not imply that there was notional transfer of capital asset of the erstwhile firm to existing partner until such time the capital asset is transferred by way of dissolution CIT v. Vijayalakshmi Metal Industries (2002) 256 ITR 540 (Mad.) 10

12 Capital gains on Capital gains on Liquidation

13 Capital gains on liquidation Rural Agricultural Land Issue Capital gains implications under section 46 on distribution of rural agricultural land Implication The term used in section 46 is Distribution of assets and not Distribution of capital asset. Further, section 46 is a separate charging section by itself. Distribution of rural agricultural land is also covered under section 46. Distribution of assets v. Distribution of Money Issue Sale of capital assets by the liquidator and distribution of money to the shareholders Implication If the liquidator sells the assets of the Company and distributes the funds collected, the incidence of accrual of capital gains in the hands of the Company makes it liable to pay tax on such capital gains even if the sale is made in the liquidation process. 12

14 Capital gains on Capital gains on Depreciable Assets

15 Depreciable Assets Section 50 Eligibility for section 54 exemption CIT v. Rajiv Shukla (2011) 334 ITR 138 (Del.) Facts The assessee had claimed benefit of exemption under section 54F in respect of capital gain on sale of depreciable asset held for more than 36 months. However, the department contended that no exemption under section 54F shall be granted in this case, as the said exemption is for long term capital gain whereas the capital gain arising on transfer of depreciable asset is deemed to be short term capital gain by virtue of provision of section 50. Decision The deeming fiction created by section 50 that the capital gain arising on transfer of a depreciable asset shall be treated as capital gain arising on transfer of short term capital asset is only for the purpose of section 48 and 49 not for the purpose of any other section. Section 54F being an independent section will not be bound by the provisions of section 50. The depreciable asset if held for more than 36 months shall be long term capital asset as per the provision of section 2(29A). The exemption under section 54F on transfer of depreciable asset held for more than 36 months cannot denied on the account of fiction created by section 50 14

16 Slump Sale

17 Slump Sale Section 50B Significance of the term by way of sale CIT v. Bharat Bijlee Ltd. ITA No of 2011 (Bom.) ITO v. Zinger Investments P Ltd ITA No. 275 / Hyd / 2013 Issue Applicability of section 50B to Slump Exchange transactions Facts Transfer of the Undertaking in consideration of allotment of preferences shares and bonds by the buyer. The Taxpayer claimed that the transfer did not give rise to taxable capital gains under the section since it was not in the nature of slump sale but a slump exchange. Decision A plain reading of the definition of slump sale makes it clear that only a transfer by way of sale can be construed as a slump sale. A sale needs to be distinguished from an exchange. In case of sale, the price is paid in money whereas in the case of exchange, it is paid in goods by way of barter. Further the presence of monetary consideration is an essential element in a transaction of sale. Since the consideration is non monetary in nature, it was held that the transfer of undertaking was neither a slump sale nor was it liable to capital gains tax under the general provisions. 16

18 Slump Sale Section 50B Negative Net Worth DCIT v. Summit Securities Ltd. ITA No / Mum / 2009 (SB) Hari Industries Ltd v. ACIT (2007) 105 ITD 569 (Mum.) Paper Base Co. Ltd v. ACIT (2008) 19 SOT 163 (Del.) Real Estate Segment X P Ltd. Manufacturing Segment Sale by way of slump sale View 1 The term net worth is defined in unambiguously terms by way of deeming provision. If contention that negative net worth to be ignored is accepted it would amount to creating one more legal fiction by ourselves within existing legal fiction. Particulars View 1 View 2 Consideration Net worth (157) (157) Capital gains View 2 The cost of acquisition of capital asset cannot be negative. In case of negative net worth, cost of acquisition will be Nil. 17

19 Stamp duty value

20 Section 50C Stamp duty valuation Applicability of 50C to specific provisions Section 45(1A), 45(2), 45(3) and 45(4) deal with specific situations. When a specific provision deals with such situation, general provision could not be applied. Further, section 50C is a facilitating provision which can function along with section 45 and cannot override or function independently from section 45. Provisions of section 56(2)(vii) Section 50C v. Section 56(2)(vii) The following amounts are taxable in the hands of transferee as Income from Other Sources Gift of immovable property without consideration, the stamp duty of which exceeds Rs. 50,000 OR Gift of immovable property for consideration less than stamp duty value by an amount exceeding Rs. 50,000. Possible Double Taxation In case of transfer of capital asset being land or building transferred for a value less than the Stamp Duty Value, the notional difference amount is taxable in the hands of the Transferor as Capital Gain by virtue of Section 50C. The Act does not contain any provision to restrict the taxation of the notional amount again in the hands of the transferee, leading to Double Taxation and collecting a tax of 50% to 60% in aggregate from the Transferor and the Transferee may not be fair. 19

21 Advance for transfer of Advance for transfer of capital asset

22 Advance for transfer of capital asset Forfeiture of advance Implications in the hands of Seller Prior to Finance Act, 2014 Post Finance Act, 2014 Any sum received as an advance or otherwise in the course of negotiation for transfer of capital asset is not chargeable to tax as income in the year of receipt. Any sum received as an advance or otherwise in the course of negotiation for transfer of capital asset is chargeable to tax as income in the year of receipt. Such advance received is reduced from the cost of acquisition or written down value or fair market value of the capital asset. Insertion of section 56(2)(ix) to tax such advance as income under the head Income from Other Sources. In order to avoid double taxation of the advance Section 51 is also amended to provide that where such advance has already been taxed in any previous year under section 56(2)(ix), such amount shall not be deducted from the cost of acquisition of the asset. Amendment applicable w.e.f 01 April

23 Advance for transfer of capital asset Forfeiture of advance Implications in the hands of Buyer CIT v. Sterling Investment Corporation Ltd. (1980) 123 ITR 441 (Bom.) Dinesh Babulal Thakkar v. ACIT (2010) 39 SOT 332 (Ahd.) Issue Tax implication of advance paid and forfeited in the course of negotiation for transfer of capital asset Facts Assessee entered into an agreement with the land owner and paid certain amount as advance. Sale deed was required to be executed within 6 months but assessee could not manage the funds within the prescribed period. Hence, agreement was cancelled and amount paid was forfeited. Essential requirement for charging capital gains (or allowing capital loss) is that transfer of capital asset should be effected in the relevant previous year. Decision By paying advance money, assessee does not get any right which could be termed as capital asset. In the absence of any transfer on forfeiture of capital asset, such advance money forfeited cannot be allowed as capital loss. 22

24 Joint Development Joint Development Agreement

25 Joint Development Agreement Timing of Taxability Against the Assessee Charanjit Singh Atwal v. ITO (ITA 448 /2011) (Chd.) Facts Assessee s Contention Decision A housing society holding land entered into a tripartite JDA with the developers. The society agreed to transfer the land to developer for monetary consideration in kind and has passed a resolution to this effect. The AO invoked section 2(47)(v) and held that the land owners are liable to pay capital gains tax in the year of agreement. Transfer of possession was a permissive license to develop the project and not a part performance of contract. JDA is not registered as against mandatory requirement to register JDA as per Transfer of Property Act. Execution of irrevocable POA would result in control over land. Registration of special POA is sufficient and non registration of JDA will not impact the provisions of section 2(47)(v). The right has not been given for the purpose of doing something, but all the possible rights in property. The developers had made attempts to seek the required approvals for development. The following alternate contentions has also been rejected o Taxing in the year of JDA execution would deprive taxpayer from claiming Section 54/54F exemption o Taxation based on notional income theory o Subsequent events that may lead to abandonment of contract. 24

26 Joint Development Agreement Timing of Taxability Favorable to the Assessee Binjusaria Properties P Ltd. v. ACIT (ITA No. 157 / Hyd / 11) Facts Assessee entered into JDA cum General POA with the developer for handing over the vacant and peaceful possession of land to the developer. The develop shall develop the property and deliver the assessee 38% of constructed residential area. However, no obligation was performed by developer for 45 months from date of JDA. Assessee s Contention Developer has not performed any obligation in pursuance of JDA and hence capital gains are not liable to be taxed in the year of JDA based on the mere signing of JDA. Decision Willingness to perform the obligation by the transferee during the subject year was absent and hence the conditions laid down under section 53A of Transfer of Property Act is not satisfied. Process of construction has not been even initiated and no approval for the construction of the building is obtained. Consideration in the form of developed area has also not been received. Mere receipt of refundable deposit cannot be termed as receipt of consideration. While the assessee has fulfilled its part of the obligation under the JDA, the developer has not done anything to discharge the obligations cast on it under JDA and the capital gains cannot be brought to tax in the year of signing JDA. 25

27 Exemption (Section 54-54GB)

28 Exemption Investment in Residential House outside India Favorable to assessee Against the assessee N.Ranganathan v. ITO (ITA No. 863 / Mds / 2014) Vinay Mishra v. ACIT (2012) 20 ITR 129 (Bang.) Prema P Shah v. ITO (2005) 282 ITR 211 (Mum.) No specific provision to prohibit the purchase of residential house outside India or payment for such house in foreign currency. Leela J Shah v. ACIT (2005) 6 SOT 721 (Ahd.) Intention is not to encourage investment of sale proceeds of residential house outside India. Reinvestment of sale proceeds of residential property for purchase of a property abroad is eligible for exemption under section 54 of the Act. Benefit under section 54F is not allowable for a residential house purchased / constructed outside India. Amendment in Finance Act, 2014 The benefit was intended for investment in one residential house within India. The section 54F(1) and section 54(1) is amended so as to provide that the exemption is available if the investment is made in one residential house situated in India. 27

29 Exemption Meaning of the term Residential House CIT v. Gita Duggal ITA No / 2011 (Del.) Issue Meaning of the term Residential House Facts The assessee had earned long term capital gains during the previous year and had invested the same in a residential house consisting of 3 floors. The AO contended that the assessee has made investment in 3 residential house and exemption is limited to 1 floor only. Decision The expression used is residential house and not residential unit. The requirement of the Section should be taken to have been satisfied so long as the assessee acquires or constructs residential house. There is nothing in these sections which require the residential house to be constructed in a particular manner. The only requirement is that it should be for the residential use and not for commercial use. The assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence. The assessee is entitled to consider the entire cost of building for exemption under section

30 Exemption Section 54EC Significance of the term Financial Year Particulars Scenario 1 Scenario 2 Long term capital gains INR 1,00,00,000 INR 1,00,00,000 Date of transfer 31 August November 2012 Investment in Bonds Due date 28 February May 2013 Investment on 31 January 2013 Investment on 30 April 2013 INR 50,00,000 INR 50,00,000 - INR 50,00,000 Taxable Capital gains INR 50,00,000 - View 1 Literal interpretation of the term financial year creates discrimination adversely affecting the assesses transferring capital asset before September. Deduction for all assessee restricted to INR 50 lakhs. View 2 The intention behind restricting the investment to INR 50 lakhs in a financial year is not to restrict the deduction to INR 50 lakhs. The restriction is because of limited number of bonds available and to provide small capital gains earning assessee to subscribe to the bonds. Amendment was made in Finance Budget, 2014 to restrict the deduction under section 54EC to INR 50 lakhs. 29

31 Exemption Long term capital gain exemption prior to set off CIT v. Vijay M. Mahtaney (ITA No. 152 / Mad. / 2010) Particulars View 1 View 2 Long term capital gains INR 10,00,000 INR 10,00,000 Brought forward long term capital loss Set off of brought forward long term capital loss INR 5,00,000 INR 5,00,000 INR 5,00,000 - Investment in Bonds INR 10,00,000 INR 10,00,000 Taxable Capital gains - - Carry forward of long term capital loss - INR 5,00,000 Decision of High Court The High Court disagreed with the tax department s argument that for the purpose of working out relief of investment in specified bonds, one has to take recourse first to set off provisions and then to look at Section for claiming exemptions for Capital Gain. Thus the High Court confirmed that the taxpayer was entitled to claim benefit of investment in bonds prior to set off provisions. 30

32 Exemption Section 54F Investment made before due date for belated return CIT v. Jagtar Singh Chawla ITA No. 71 / 2012 (P&H) Date Event Issue 30 March 2007 Sale of long term capital asset 30 September 2007 Due date for filing return 30 December 2007 Investment in residential house 31 December 2007 Date of filing of return Eligibility of section 54F exemption if Deposit in Capital gains scheme is not made within due date but Investment in residential house is made before the due date of filing belated tax return 31 March 2008 Due date for belated return The High Court held that such due date would include extended period to file return as mentioned in the Act. The taxpayer s claim for exemption from capital gains where investment was made by her before the extended due date of filing the return was accepted. The benefit of tax exemption on long term capital gains would be available as long as the taxpayer made the new investment within the timeline of filing tax return under Section 139 of the Act. This will not be denied in case a belated return is filed by due date specified thereof 31

33 REIT / Invit

34 REIT / Invit Capital gains implications Resident / Non residents Subscription to units / Debt REIT / Invit Acquisition of controlling / other interest Indian Company Issue of units / Debts Transfer of shares in exchange of units Sponsor Assessee Long term capital gains Short term capital gains Resident / Non Resident Investor Exempt Taxable (15%) Sponsor Taxable (20%) Taxable (15%) REIT / Invit Taxable Taxable 33

35 Other Amendments

36 Other Amendments Finance Act, 2014 Longer holding period for unlisted securities and units of mutual funds (other than equity oriented fund) Benefit of concessional rate of tax under section 112 not available for units Exemption in respect of Transfer of Government Securities carrying periodic interest payout by non resident to another non resident Amount of compensation received in pursuance of an interim order shall be taxable in the year in which final order is passed 35

37 Tax Ideas

38 Tax Ideas 1 Blend of Bonus Issue and Buy Back for distribution of profits of the Company 2 Merger followed by conversion to LLP to comply with the turnover criteria under section 47(xiiib) 3 Use of Partnership Firm as tool for transfer of property 4 Cost step up via Slump Sale 5 Contribution of assets to LLP in a tax efficient manner 37

39 Capital loss

40 Capital Loss Section 74 Long term capital loss v. Gain on sale of depreciable asset Manali Investments v. ACIT (ITA No / Mum. / 2008) Issue Permissibility to set off long term capital loss against capital gains arising on sale of depreciable assets deemed as short term capital gain by virtue of deeming provision under section 50 of the Act. Facts The assessee sold certain depreciable assets which were held for more than 36 months. The gain on such sale was shown as long term capital gain and was set off against the brought forward long term capital loss. Department s contention Tribunal s decision AO did not accept the claim of the assessee by treated it as short term capital gain and disallowed the set off of losses from long term capital assets. CIT(A) also rejected the claim of the assessee and confirmed the order of the AO. The deeming provision of Section 50(2) of the Act can be extended only up to the computation of depreciable assets. The fiction created by the deeming provisions cannot be extended beyond the object for which it was enacted (i.e.) computation of capital gains on disposal of depreciable assets. Tribunal held that the assessee is entitled to set off long term capital loss against the gain on sale of depreciable assets. 39

41 Capital Loss Section 74 Losses of undertaking transferred by slump sale Issue Whether the losses of undertaking which is transferred by slump sale is allowed to be carried forward for set off against subsequent year s profit in the hands of transferee company? View 1 Unlike existence of specific provisions in the Act in respect of carry forward of losses on amalgamation, demerger and business reorganization, there is no specific provision regarding carry forward and set off of losses of undertaking transferred by slump sale. In the absence of specific provision, such losses would not be allowed to be carried forward by transferee company. View 2 Though the Act contains specific provision for carry forward of losses, there is no specific provision for treatment of 43B allowance, carry forward of MAT credit etc. The judicial precedents have however held that since the asset and liabilities of the Company is taken over as a whole, such allowance would be available in the hands of amalgamated company post amalgamation. It is possible to adopt a similar view that all the assets and liabilities of undertaking is taken over and the losses of undertaking sold is determinable. Hence, losses of such undertaking should be allowed to be c/fd in the hands of transferee company. Possible contention In the absence of specific provision, AO may not allow such losses in the hands of transferee company. Alternatively, AO may also contend the carry forward and set off of losses in the hands of transferor company on the grounds that the undertaking has already been transferred and hence losses cannot be set off in the hands of transferor company. 40

42 Answers & Questions 41

43 By CA Lambodar S