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Computation of CapitaL Gain,Insurance Claim - Taxation

Computation of capitaL gain in case of transfer of shares or debentures and its cost of acquisition

Particulars	Cost of Acquisition
Original share.	Price paid for its acquisition
Bonus shares allotted before 1-4-1981	FMV as on 1-4-1981
Bonus shares allotted on or after 1-4-1981	Nil
Right share for existing shareholder	Price paid to the company.
Right share entitlement	Nil
Right share for new shareholder	Price paid for its acquisition to the company + price paid to the renouncer.

P1: X purchased 500 equity shares of Rs 10 each for Rs 40 per share in 1980-81 and incurred an expenditure of Rs 400 on brokerage. In May 1980 he received 400 bonus shares. Fair Market value of shares on 1-4-1981 was Rs 35 per share. Again in May 2014 he received 100 bonus shares.

The company made a right issue in the ratio of 1 : 1 on July 15, 2015 at a premium of Rs 40 per share. He acquired 800 shares and renounced 200 right to subscribe for shares in favour of Y at a price of Rs 10 per right share entitlement.

(A) Compute cost of acquisition of different shares in the hands of X and Y.

(B) Compute capital gain if all shares are sold by X on 13-7-2016 for Rs 80 per share.

(D) Compute capital gain if all shares are sold by Y on 15-4-2016 for Rs 20 per share.

Ans: (A) refer soln below; (B) LTCG (3,07,000) ; STCG 24,000; (C) 2,000; (D) STCG (8,000).

Solution

	Original Shares	Bonus Shares	Bonus Shares	Right Shares (X)	Right Shares (Y)
Date of allotment / purchase	1980-81	May 1980	May 2014	15-7-2015	15-7-2015
No of shares	500	400	100	800	200
Price	40.80 / share	Nil	Nil	50 / share	60 / share
COA	40.80 / share	35 / share	Nil	50 / share	60 / share
Sale Consideration	80x500 = 40,000	80x400 = 32,000	100x80= 8,000	800 x 80 = 64,000	200 x 20 = 4,000
Less : ICOA / COA	(2.29.500)	(1.57.500)	Nil	(40.000)	(12.000)
LTCG	(1.89.500)	(1,25,500)	8,000	NA	NA
STCG	NA	NA	NA	24,000	(8,000)

	Date of purchase	Purchaseprice	Brokerage	FMV as on 1-4-1981	COA
Original Shares	1-6-1970	Rs 70	1%	Rs 55	RsRs70.70
Original Shares	1-8-1970	Rs 70	1%	Rs 80	Rs 80
Bonus shares	1-6-1976	Nil		Rs 70	Rs 70
Bonus Shares	1-6-1990	Nil	Nil	Rs 60	Nil
Original Shares	1-8-1997	Rs 80		Rs 96	Rs 81.60

P2R:You are required to compute Capital Gain for the AY 2017-18 on the assumption that fair market value as on 1-4-1981 was Rs 70 per share. Brokerage paid on acquisition of original shares 1%. STT 0.125%.

	Date of acquisition	Cost of acquisition Sale Consideration
1,000 original shares	1-5-1970	Rs 50/share Rs 335/share

200 original shares	1-5-1979	Rs 80/share	Rs 450/share
500 bonus shares	1-5-1978	—	Rs 360/share
300 bonus shares	1-5-19	—	Rs 50/share

Ans: (7,43,050)

P3: X purchases 1,200 listed equity shares in Y Ltd. at the rate of Rs 15 per share (brokerage 1 per cent) on December 11, 1974. He has got 300 bonus shares (by virtue of his holding of 1,200 shares) on January 21, 1980. Fair market value of shares of Y Ltd., is Rs 30. On March 7, 2017, X transfers all the 1,500 shares at the rate of Rs 84 per share (brokerage 1.5 per cent). Compute the capital gain for the assessment year 2017-18. (cs-J01)

Ans: (3,82,140)

P4: X purchased 500 listed equity shares of Rs 10 each for Rs 40 per share in 2012-13 and incurred an expenditure of Rs 400 on brokerage. In May 2013 he received 100 bonus shares. In September 2015, he got 100 rights shares for Rs 20 each. He sold 100 bonus shares in November, 2016 @ Rs 90 per share and 100 rights shares @ Rs 80 per share in December 2016. Find out the capital gains for the assessment year 2017-18. [CS J02]

Ans: LTCG 14,919.

P5: (A) Analyse the following information and compute capital gain chargeable to tax for the AY 2017-18.

X holds

• X holds 1,100 listed equity shares purchased on 1-8-2001 @ Rs 15 per share.

• The company on 1-4-2005 allots bonus shares of one shares for 5 held.

• The company on 1-5-2012 declares right issue for 2 shares for 1 held @ Rs 35 per share which was allotted on 1-6-2012.
• X renounces 1700 right shares in favour of Y @ Rs 3 per share on 3-5-2012 and subscribes for the remaining shares.

X sells

• 100 original shares @ Rs 60 per share on 1-9-2001.

• 700 original shares @ Rs 50 per share on 11-7-2016.

• Whole of the right shares @ Rs 48 per share on 21-8-2016.

• Whole of the bonus shares for Rs 5,000 on 1-3-2017.

Y sells

• Whole of right shares for Rs 40,000 on 1-3-2013.

(B) Also compute capital gain for Mr. X for AY 2002-03, 2013-14 and for Mr. Y for the AY 2014-15.

Ans: (A) refer soln below;

(B) STCG 4,500; 5,100; STCG (24,600).

Solution

	Original Shares	Right Shares	Bonus Shares
Sale Consideration	35,000	33,600	5,000
Less : Indexed COA	1125 - 426 x 700 x 15 = 27,729	1125 - 852 x 35 x 700 = 32,350	nil
LTCG	7,271	(1,250)	5,000

• On the date of allotment of bonus shares he held 1,000 original shares, therefore, bonus share entitlement = 1,000 ÷ 5 = 200 bonus shares.

• On the date of issue of right shares he held 1,000 original shares + 200 bonus shares = 1200 shares, therefore, right share entitlement = 1200 × 2 = 2400 right shares. He renounces 1700 shares in favour of Y, therefore he is left with 700 right shares. Insurance CLaim received on Destruction of Asset

Where any person receives at any time during any previous year any money or other assets under an insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of —

(i)	flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature (Act of GoD); or
(ii)	riot or civil disturbance; or
(iii)	accidental fire or explosion; or
(iv)	action by an enemy or action taken in combating an enemy (whether with or without a declaration of war),

then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head Capital gains.

Manner of computation of capital gain

Period of holding	Date of acquisition to the immediately prior to the date of destruction
Year of chargeability (YOC)	In the year when insurance claim is received either in full or part.
Year of transfer	In the year of destruction of the capital asset.
Full value of consideration	The amount of insurance claim received or receivable.
Indexation	Indexation shall be done from the year of destruction of assets to the year of acquisition of assets.

P1: X owns a house at Kutch (Gujarat) which was purchased by him on 1-8-1976 for Rs 1,80,000. The said property was destroyed by earthquake on 26-1-2016 and he received Rs 35,00,000 from the insurance company on 15-6-2017. The market value of this property on 1-4-1981 Rs 3,00,000. Calculate amount of capital gain and state when it will be taxed.

Ans: AY 2018-19 : 2,57,000.

P2: Mr. A, is an individual carrying on business. His stock an machinery were damaged and destroyed in a fire accident.

The value of stock lost (totally damaged) was Rs 6,50,000. Certain portion of the machinery could be salvaged. The opening WDV of the block as on 1-4-2016 was Rs 10,80,000.

During the process of safeguarding machinery and in the fire fighting operations. Mr. A lost his gold chain and diamond ring, which he had purchased in April, 2013 Rs 1,20,000. The market value of these two items as on the date of fire accident was Rs 1,80,000.

Mr. A received the following amounts from the insurance company :

(i) Towards loss of stock Rs 4,80,000

(ii) Towards damage of Rs 6,00,000

(iii) Towards gold chain and diamond ring Rs 1,80,000

You are requested to briefly comment on the tax treatment of the above three items under the provisions of the Income - tax Act, 1961.
Ans: Business Loss (Rs 1,70,000); STCG (Rs 4,80,000); LTCG Rs 36,230.

The document Computation of CapitaL Gain,Insurance Claim - Taxation | Income Tax for assessment (Inter Level) is a part of the Taxation Course Income Tax for assessment (Inter Level).

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FAQs on Computation of CapitaL Gain,Insurance Claim - Taxation - Income Tax for assessment (Inter Level)

1. How is capital gain computed for tax purposes?

Ans. Capital gain is computed by subtracting the cost basis of an asset from its selling price. The cost basis includes the original purchase price plus any associated expenses, such as brokerage fees. The resulting amount is the capital gain, which may be subject to taxation.

2. Can insurance claims be considered as capital gains for tax purposes?

Ans. No, insurance claims are generally not considered as capital gains for tax purposes. Capital gains typically arise from the sale of assets, such as stocks or real estate. Insurance claims, on the other hand, are payments received due to a loss or damage to insured property and are not typically subject to capital gains tax.

3. Is there a specific tax rate for capital gains?

Ans. The tax rate for capital gains depends on various factors, including the type of asset, holding period, and individual's income level. In many countries, capital gains are subject to a different tax rate compared to regular income. Generally, long-term capital gains, derived from assets held for more than a year, are taxed at a lower rate than short-term capital gains.

4. Are there any exemptions or deductions available for capital gains?

Ans. Yes, there are often exemptions or deductions available for capital gains. Many countries provide exemptions or reduced tax rates for certain types of assets, such as primary residences. Additionally, taxpayers may be eligible for deductions on capital losses, which can offset capital gains and reduce the overall tax liability.

5. How should insurance claims be reported for tax purposes?

Ans. Insurance claims are typically not reported as taxable income on tax returns since they are considered a reimbursement for a loss or damage. However, if the insurance claim exceeds the adjusted basis of the property, it may be necessary to report the excess as a capital gain. It is advisable to consult with a tax professional or refer to specific tax guidelines for accurate reporting of insurance claims.

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