REPLY :  

Maturity proceeds of units of UTI under MIP 95 would attract law applicable to capital gains. Since the maturity proceeds would be based on value of these units on the day of redemption, the resultant may be a capital gain or capital loss. Since you have been holding the unit for more than 12 months, the gain or the loss as the case may be, would be long term. In case of long-term capital gain minimum of the following would be the tax liability:

• Tax @ 20% on long-term capital gains computed after indexation        or
• Tax @ 10% on long-term capital gains computed without indexation.

It would not be out of place to mention that presently the value of the MIP95 under dividend plan is around Rs. 6.85 only (as on 31.12.2001) and any redemption at these values would result into long term capital loss.

REPLY :  

You have not specified the nature of business activity being carried out by your company. In case you are in any business other than money lending, then acquisition of immovable property in lieu of business debt would constitute a business asset for the company. Period of holding would make it either short term or long term. In your case you would be eligible for tax concession meant for long term capital gains.

However, in case of money-lending business the acquired properties in lieu of outstanding debts would become part of the stock-in-trade of that business itself. The disposal of the properties and any consequent profits arising therefrom are transactions relevant to and forming part of the business. The Supreme Court has held that the surplus realised by the company on the sale of the assets constituted profits and gains of the money lending business. Therefore in such a case your company has to pay tax as applicable to normal business profits.

REPLY :  

Reducing taxable profits against loss on sale of units arisen mainly on account of dividend declared by the Mutual Funds, popularly known as ‘dividend stripping' is prohibited if units are bought within a period of three months prior to dividend declaration and then sold within following period of three months. Losses to the extent of tax-free dividend received shall be ignored and are not available for offsetting against any other capital gains earned by you. If your transaction transgress conditions laid down; you are liable to pay taxes even if it was unintentional and genuine.

REPLY :  

For calculating capital gains on sale of immovable properties which were acquired by way of gift, will, and relinquishment (and not by way of purchase) the cost to the previous owner (i.e. your father) shall be assumed to be the cost of acquisition (in your hands). Any expenditure of capital nature towards the improvement is added to arrive at the total cost of acquisition.

When such property is sold the capital gain is calculated as follows:

• To find out whether the capital gain is short term or long term, add the period for which the previous owner held the property. In your case, the gain would be long-term since it has been held since 1979.
• For properties older than 1.4.1981, one can choose either the actual cost plus cost of improvements made upto 1.4.1981 or fair market value as on 1.4.1981.
• Calculate indexed cost of acquisition by applying indexation table from the year 2000, i.e. the year in which you first acquired the property, to the value chosen by you. You shall not be eligible to claim indexation benefit from the base year of 1981-82 in case of cost.
• Calculate indexed cost of improvement incurred after 1981 with reference to the year in which the improvement was carried.
• Long Term Capital Gain = Sale consideration - (indexed cost of acquisition + indexed cost of improvement)

REPLY :  

Currently long-term losses can reduce short-term capital gains, which are taxed at higher rate. An investor may end up with profits on sale of some of the shares without being able to hold them long enough to qualify as long term asset i.e. a period of twelve months. The same investor may also have long-term losses on some other investments. Present law entitles the investor to adjust the two in order to reduce the total tax liability. The unabsorbed long-term loss, if any, can be carried forward and again it could reduce short- term capital gains arising in subsequent years.

However, a major shift has been made in the policy with effect from Assessment Year 2003-04. Now long-term capital losses can be set-off only against long-term capital gains arising in that year. Unabsorbed long-term loss (which can be carried forward or eight years) can be setoff only against long-term gains arising in those years.

Please note that the long term capital losses arising before the amendment are also ineligible for favored treatment which was available till 31.3.2002. Thus on one hand you end up paying tax on short term gains at the marginal rate of tax and on the other hand carry forward the unadjusted long term capital loss to next eight assessment years to be set off only from long term capital gains arising in those years.

There is no change for short-term capital losses, which can be set-off against both short-term capital gains and long-term capital gains of the same year.

REPLY :  

The compensation amount received by you is subject to capital gain tax. Where an owner of a house property refuses to honour the agreement to sell and the person who enters into the agreement for purchase i.e. vendee, receives some compensation besides the refund of advance money paid by him, such compensation shall be liable to capital gains tax as it will amount to relinquishment of a right by the vendee. However it is to be further seen whether the gain is long-term or short-term, depending upon the period for which the advance money was held.

REPLY :  

One of the conditions for depositing the sale consideration is that, the amount should be utilised for the purchase/construction of a new house. If the amount is not so utilised shall be charged as capital gains of the previous year in which the period of three years from the date of transfer of the house expires and it will be long-term capital gain of that previous year.

However, according to CBDT circular no. 743 dtd 6.5.1996, the unutilized amount in the Capital Gains Accounts, Scheme, 1988 in the case of an individual who dies before the expiry of the three years stipulated period under section 54, cannot be taxed in the hands of the deceased. This amount is not taxable in the hands of legal heirs also as the unutilised portion of the deposit does not partake the character of income in their hands but is only a part of the estate devolving upon them.

REPLY :  

There is no proposal to exempt capital gains of units. In my opinion, you have wrongly interpreted the amendment proposed in section 10 (33).

In the year 1999, Finance Act had amended the Section 10(33) so as also to exempts from tax ‘any income received in respect of units from UTI and other MF’ besides dividends from shares. Explanatory statement to the Budget clarified that the income being envisaged for exemption would be similar to the exemption in respect of dividends received from the domestic companies.

It can not be interpreted to include capital gains arising out of purchase and sale of units. The recent amendments, in fact seeks to clarify that the capital gains arising from the transfer of units of UTI /MF cannot be treated as exempt income under this section except in case of such income arising in the hands of UTI/MF by way of transfer of units. 

Budget 2001-2002 proposes to insert a proviso to further clarify section 10(33). It reads as:

“ Provided that this clause shall not apply to any income arising from the transfer of units of the Unit Trust Of India or a mutual fund to a person other than the Unit Trust If India or such mutual fund” 

I feel you had rightly filed your return and there is no need to file revised return.

REPLY :  

No it does not hold good for bonds and debentures other than capital indexed bonds. One can not take advantage of indexation in such cases. You have to pay straight 10 % as long-term capital gain tax on sale of bonds and debentures.

REPLY :  

Where long-term capital gain arises from the transfer of long term capital asset being listed securities or units, then with regard to quantum of tax payable two options are available to the investor: One – calculate gain after applying cost inflation index to the cost of acquisition and pay 20 % long term capital gains tax. Two – calculate gain without applying cost inflation index to cost of acquisition and pay tax at 10 %.

Investor is free to choose either of the two options and there is no bar on applying either of the two options to different securities sold in the same year. Similarly different options may be applied for sales made out of the same lot of security on different dates. One could use combination of two options to lower overall tax liability.

It won’t be out of place to mention that since cost price in the case of bonus units would be taken as nil, it would be more advantageous to opt for 10 % flat tax in case of such units.

REPLY :  

Cost of bonus shares is taken as nil. If you sell the bonus shares, whole of the sale proceed would be long term capital gain. On the other hand if you sell original shares, you would be entitled to claim indexation benefit on the cost price and incur long-term capital loss. This loss can be carried forward to be adjusted against the gains made in future. Thus it is advisable to sell the original shares.

REPLY :  

Incidentally solution to your problem lies in the problem itself. The law offers you an opportunity to switch from one asset to another without attracting the capital gains tax. One can save entire capital gain tax accrued on account of sale of agricultural land if the gain is utilised in buying another agricultural land. Proportionate amount of gain is taxed in a case where whole of the gain is not utilised for purchase of agricultural land.

However there is a caveat that the agricultural land so purchased should not be sold for at least three years falling which the tax advantage would be lost.

It is worthwhile to note that only agricultural lands situated within the municipal limits are subject to capital gains. On the other hand the agricultural lands situated outside the municipal limits, are not classified as ‘capital assets’ and hence question of capital gains does not arise on their transfer.

Thus you may sell your land and buy another land preferably in rural area because the agricultural land situated in the rural area is not a capital asset and its sale is out of the purview of this caveat. In other words this tool may be used as a tax-planning tool wherein capital gain on sale of agricultural land (urban) may first be invested in rural agricultural land which is sold immediately thereafter.

REPLY :  

Under the capital gain scheme the amount deposited under the scheme is to be utilised for acquiring the new asset within the period. If the amount is not so utilised, the capital gain related to the unutilised amount shall be treated as capital gain in the previous year in which the stipulated period expires.

However according to other provisions of the Act, in a case where a person dies, then his legal representative shall be liable to pay any tax which the deceased would have been liable to pay had he not died, in the like manner and to the same extent as the deceased. On the other hand the unutilised amount under the Capital Gain Account Scheme, 1988 in the case of an individual who dies before the expiry of the stipulated period is not taxable in the hands of the deceased. This was laid down by CBDT in Circular No.743 dated 6th May 1996. It further provides that such amount is not taxable in the hands of the legal heirs also as the unutilised portion of the deposit does not partake the character of income in their hands but is only a part of estate devolving upon them.

Therefore, you are free to withdraw the money invested under the scheme without attracting any tax liability.

REPLY :  

Clubbing provisions state that for calculating tax liability there shall be included any income as arises directly or indirectly to the spouse of such individual from assets transferred directly or indirectly other than for adequate consideration. So you are right in including the rental income of the property in your income as you are the deemed owner of the house. The Supreme Court has held in Sevanthilal Maneklal sheth Vs. CIT that capital gain arising on the sale of gifted asset shall also be treated as income arising from such asset and to be included in the income of the transferor. In view of this ruling you are also liable for capital gain tax.

REPLY :  

Transfer of shares on face value may result into transfer at inadequate consideration. Transfer of assets to HUF without adequate consideration would invoke clubbing provisions and the income if any from the asset so transferred would be clubbed in the hands of the transferor. Incidentally dividend income which is earned on the shares is presently exempt from taxation and even if the such dividend income is added in your hands, it would not affect the tax liability.

It would be prudent and lawful to transfer the shares of closely held limited company at Book Value. This may result into capital gain or capital loss which would be assessed under the head Capital Gains.

REPLY :  

Insurance claims received on account of loss of capital assets are taxable under the head capital gains provided the loss to the capital asset is on account of earthquake or floods, typhoon, hurricane, cyclone or other convulsion of nature, riot or civil disturbance, accidental fire or explosion, action by an enemy or action taken in combating an enemy.

Since the property was acquired in 1989, the capital gain would be calculated with the reference to its indexed cost of acquisition. The indexed cost of acquisition of your property would be Rs.1218000 and hence you would in fact incur a capital loss, which can be adjusted or carried forward. Market value is not relevant to determine gain.

REPLY :  

Whenever a capital asset (or investment) is converted into `Stock-in-Trade’, capital gain arises to the owner of the capital asset either as short term or long term depending on the length of period for which such asset was held at the time of conversion. The capital gain would be equal to the difference between the market value prevailing on the date of conversion and indexed cost in case of long term capital asset and original cost, in case of short term assets. Indexed cost means the original cost to you multiplied by cost inflation index factor in the year of conversion. But the capital gain so arisen is only for theoretical interest in the year of conversion since the liability to pay tax on capital gain, arises only in the year when the shares are ultimately sold rather than year of conversion.

The stock in trade is to be carried forward at the market value prevailing as on the date of conversion. Sale of these shares, now held as stock in trade would result into business profit or loss which is equivalent to the difference between sale price and conversion price. Normal business expenses may be adjusted against these business profits.

REPLY :  

‘Transfer’ of capital asset is a primary condition to book capital gains or loss. Though ‘transfer’ includes relinquishment or extinguishment of rights in a capital asset but a shareholder cannot by unilateral act relinquish or extinguish the shares held as shareholder of the Company. There has to be a third party to whom the ownership of such shares has to be transferred as far as booking of capital loss on account of fall in the value of the shares is concerned.

Even in case of winding up of the Company, the shareholder remains owner of the shares. He remains liable to contribute to the extent of unpaid call money and at the same time have the right to participate in the residue left after paying off the liabilities. Unless the ownership changes hands, loss or profit under the head capital gains can not be booked.

REPLY :  

(a) For the purpose of determining short term / long term capital gain in case of shares received as gift, the period for which the “previous owner” had held these shares will also be considered. “Previous owner” is the person who actually paid for the shares or to whom the allotment is made. Thus in case of shares of M & M the period of holding would commence from 23.09.1993 and in case of shares of ITC, it would be 17.11.1994. In any case both would result into long term capital gain.

‘Cost of acquisition’ will be the cost actually paid by “previous owner” who acquired these shares. So, it will be Rs. 3000 in case of M&M shares and Nil in case of ITC shares. As the shares are long term capital assets, the benefit of cost inflation index would be available but for the purpose of arriving at the indexation factor the applicable year would be the year in which the long term assets are first held by your mother.

(b) Sale is a transfer of ownership in exchange for a price paid or promised. Waiving off consideration/income does not absolve you of liability to pay tax on income so waived. However, if it is proved to the satisfaction of the assessing officer that the transaction does not amounts to sale or investment, it would be out of tax purview.

REPLY :  

Land is treated as a separate asset for income tax purposes. Even for claiming deduction of depreciation, building means only the superstructure and does not include the site. Income chargeable under the head " Capital gains " is computed by deducting cost of acquisition or indexed cost as the case may be from the full value of the consideration received. If the price of two capital assets has been charged at one consolidated price, then the assessee is entitled to bifurcate the same. It has been held that the benefit to a person cannot be denied in respect of the gain arising from the sale of an asset which could be considered as a long term capital gain.

As building is a depreciable capital asset, so any profit or loss from the sale will be treated short term capital gain or loss. In case of land the nature of capital gain or loss will be long term.