Conversion,Transfer of Capital Asset - Taxation | Income Tax for assessment (Inter Level) PDF Download

Conversion,Transfer of Capital Asset - Taxation

Where the owner converts its capital asset into, or treats it as a stock-in-trade of a business carried on by him, then in such case gain arising shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him.

Manner of computation of capital gain 

Note : This provision became applicable from AY 1985-86.

P1: Mr. X converts its investment (securities) into stock-in-trade as per information given below :

He sells whole of the stock in the PY 2016-17 for Rs 17,00,000. Compute his Capital Gain & Profit from Business for the AY 2014-15 and AY 2017-18.

Solution

Computation of Capital Gain for the ay 2017-18

Note: Indexation is done from 2013-14 to 81-82 and capital gain arising is chargeable in the AY 2016-17 since stock in trade is sold in the PY 2016-17.  No capital gain arises in the PY 2013-14.

Profit from business for the ay 2017-18

P2: M/s D.L.F. Ltd. converts its 10,000 shares of Russel Ltd. into stock in trade on 11-4-2013 on which date fair market value of these shares at Rs 67,50,000. The shares were acquired by the Company on 31-5-1970 for a sum of Rs 5,000 and fair market value of these on 1-4-1981 was at Rs 6,75,000. The shares were actually sold by the Company on 2-11-2016 for Rs 70,00,000. Determine the Capital gains and business income of the Company taxable for the AY 2017-18.

Ans: Business Income Rs 2,50,000; Capital Gain Rs 4,11,750.

Transfer of CapitaL Asset by an IndividuaL or a Partner to a FIRM / AOP / BOI

Identifying the income taxable u/h capital gain

The capital gains arising from the transfer of a capital asset by a person to a firm in which he is or becomes a partner by way of capital contribution or otherwise, shall be chargeable to tax in the previous year in which such transfer takes place and the amount recorded in the books of account of the firm shall be deemed to be the full value of the consideration.

Note: The same provision will apply where a member of AOP/BOI/LLP, transfers a capital asset to AOP/BOI/ LLP

Manner of computation of capital gain

P1: X and Y are two partners of a firm, AC & Co. On January 1, 2017, B joins the firm and brings shares in a company as his capital contribution. Fair Market value of these shares on January 1, 2017 is Rs 2,86,000, whereas amount credited in B’s account in the firm is Rs 3,00,000. Assuming cost of acquisition in 2004-05 of these shares was Rs 5,000, find out the amount of chargeable capital gain for the AY 2017-18.

Solution

Full value of consideration	Fair Market Value of the asset on the date of distribution.
Period of holding	Date of acquisition to the immediately prior to the date of distribution
Year of chargeability	Year of distribution (YOC = YOT)
Indexation	Index value of distribution year to the index value of acquisition year

 

P1: Pen and Sword are two partners of a firm. The firm is dissolved on April 8, 2016 and the following distributions are made. No other asset is held by firm apart from the following :

	Factory Building	Bonus Shares	Goodwill of business Land in a village
Date of acquisition	15-9-1972	4-5-20	NA               9-9-2011

 

Cost of acquisition	16,50,000	nil	nil	3,20,000
FMV on 8-4-20	2,60,000	20,000	6,90,000	5,00,000
W.D.V. on 1-4-20	1,00,000	NA	NA	NA
FMV on 1-4-1981	18,00,000	NA	2,00,000	NA
Agreed value as per dissolution deed	5,40,000	35,000	6,60,000	5,60,000

 

Factory building and bonus shares are transferred to Pen and whereas Goodwill of a business and land is transferred to Sword. Compute the capital gain chargeable to tax in the hands of firm for the AY 2017-18.

Ans: STCG 1,60,000; LTCG 7,51,401.

Compulsory Acquisition of CapitaL Asset by the Government

Identifying the income taxable u/h capital gain

Where the capital gain arises from the transfer by way of compulsory acquisition under any law, the consideration for which was determined or approved by the Central Government or the Reserve Bank of India shall be treated as full value of consideration.

 

Manner of computation of capital gain

 

Period of holding	Date of acquisition to the immediately prior to the date of compulsory acquisition.
Year of chargeability	Year in which initial compensation is received either in full or in part.
Year of transfer	Year of compulsory acquisition.
Full value of consideration	Initial compensation
Indexation	Indexation is done from the year of compulsory acquisition of the asset to the year of acquisition of the asset by the assessee.
Enhanced compensation	Compensation or the consideration for such transfer can be enhanced by any Court, Tribunal or other authority. Enhanced compensation is taxable in that previous year in which the final order of such court, Tribunal or other authority is made. No deduction by way of cost of acquisition and improvement is further allowed. However deduction is allowed on recovery of enhanced compensation like filing of suit, litigation expenses etc.
Reduction of compensation	Capital gain which has been assessed in the earlier year shall be recomputed by taking the reduced compensation. Assessee can claim refund.

 

 

P1: Compute Capital Gain chargeable to tax for the AY 2009-10, AY 2017-18 & 2019-20.

 

Mr. Taxcrazy receives Rs 15,000 compensation out of Rs 7,20,000 in the PY 2016-17 and remaining Rs 7,05,000 on 16-3-2019. 

Solution

 

Computation of Capital Gain for the ay 2017-18

 

 

Full value of consideration	7,20,000
Less : Indexed COA (582 - 406 x 1,50,000)	(2,15,025)
LTCG	5,04,975

 

Note 1: Indexation is done from 2008-09 to 2000-01. There is nil capital gain for the AY 2007-08. Chargeability of capital gain is postponed to AY 2017-18 when first compensation is received.

Note 2: Rs 7,05,000 has already been charged in AY 2017-18. Hence no double taxation in the year of receipt.

P2: In the preceding illustration Mr. Taxcrazy not satisfied with the award filed a suit of enhancement of compensation. The Court enhanced the amount of compensation by Rs 4,00,000 on 5-8-2019. The  Govt. paid 70% compensation on 5-8-2020 and remaining 30% on 6-9-2022. The cost of litigation incurred is Rs 54,000.

 

Solution

Computation of Capital Gain for the ay 2020-21

Enhanced compensation	4,00,000
Less : Litigation expenses	(54,000)
LTCG	3,46,000

 

Assignment

P1R: The State Govt. compulsorily acquired a land on April 5, 2012. The land was owned by Mr. Taxcrazy who acquired it by way of gift from his grandmother on 11-9-1998. His grandmother had acquired the land in the PY 1980-81 for — Rs 20,000. Brokerage paid on acquisition Rs 3,000. Market value of the land on different dates are as follows : on 1-4-1981 — Rs 30,000; on 11-9-1998 — Rs 3,00,000; on 5-4-2012 — Rs 9,00,000.

Mr. Taxcrazy incurred Rs 2,00,000 in making certain capital improvement to the land during the PY 2011-12. A compensation of Rs 4,50,000 awarded to Taxcrazy which he received on July 15, 2016.
Taxcrazy files an appeal against the State Govt. in respect of the amount of compensation. The High Court enhances the compensation by Rs 1,10,000 on March 2, 2019 which Taxcrazy receives on September 12, 2019. Taxcrazy incurs Rs 32,000 as legal expenses in this connection. Compute the capital gain arising in this case.

Ans: AY 2017-18 : 1,60,109; AY 2019-20 : 78,000.

P2R: Mr. Taxcrazy acquired a residential house property situated in village by way of will from his father on 11-9-2013 Fair market value on September 11, 2013 is Rs 9,00,000. His father had acquired the house in the PY 2002-03 for Rs 6,00,000. On 31-3-2017, Mr. Taxcrazy became a partner in the firm Give Take & Co. and introduced this property as his capital contribution to the firm. Fair Market value of this property on March 31, 2017 is Rs 15,00,000, whereas amount credited in Taxcrazy’s account in the firm is Rs 10,00,000. Compute the capital gain chargeable to tax for the AY 2017-18.

Ans: 2,81,150.