Income from Capital Gains for CFP – 4

Forfeiture Sec. 51

Under this section any advance money received and forfeited by the current owner is subtracted from the cost of acquisition. Hence, forfeiture increases the tax liability.

Note: Amount forfeited by previous owner will not be considered

 

Example:

Within two years of purchase of his flat, Vaibhav entered into an agreement to sell the same to Mihir for Rs. 8 lakh. Vaibhav had bought the flat for Rs. 5.5 lakh. Mihir pays Vaibhav earnest money of Rs. 50000 in respect of the transaction with the balance money payable within a month. However, for some unavoidable reason, Mihir could not make the rest of the payment and in terms of the agreement between the two; the earnest money paid was forfeited by Vaibhav. Subsequently, within a month Vaibhav sold the flat to another buyer for Rs. 9 lakh. Compute Vaibhav’s taxable income under capital gains.

a)Short-term capital gains of Rs. 4.5 lakh

b)Short-term capital gains of Rs. 4 lakh

c)Short-term capital gains of Rs. 5 lakh

d)Long-term capital gains of Rs. 4 lakh

 

Answer: B

This transaction is a short term in nature.

Sale consideration:  900000

Cost of purchase: 550000-50000=500000

Hence the capital gain amount is Rs.400000.

 

Conversion of Capital Asset into Stock in Trade

1. W.e.f. AY 1985-86 such conversion is regarded as a transfer
2. The notional profit arising from transfer by way of conversion of capital asset in to stock-in-trade is chargeable to tax in the year in which it is sold
3. Indexation benefit is available till the date of conversion
4. Sale of stock will be taxable as business income

Example: Let say a jeweller converts his private gold in the jewellery in 2008 and sells jewellery in 2010. The capital gain tax liability will arise in the year 2010 and not in 2008.

 

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Income from Capital Gains for CFP-3

Till now we have understood the definitions of capital asset, transfer and holding period. Lets begin with calculation of Cost of Acquisition in this session.

Transfer of self generated assets like goodwill, brand etc are not subject to capital gain tax.

For any other assest Cost of Acquisition(COA) means:

1. If the assessee purchased the asset before 1/4/1981, the COA is actual purchase price or Fair Market Value (FMV) of the asset on 1/4/1981 at the assessee’s  option. (assessee is free to select higher of actual price of FMV as COA)
2. If the assessee purchased the asset after 1/4/1981, the COA is actual purchase price

If there is any improvement made in the asset, the cost of improvement is calculated as:

1. COI in relation to capital asset being goodwill of business or a right to manufacture or right to carry on any business shall be taken to be nil
2. Any expenditure incurred before 1/4/1981 is to be ignored

Indexed Cost of Acquisition:

CII means cost inflation index which is published by the IT department every year. Which started in year 1081-82 with a base of 100.

Indexed Cost of Improvement

Important:

Cost to the previous owner is deemed to be the cost of acquisition to the assessee in cases where capital asset became the property of the assessee under any mode of transfer described below:

1. Assets received on total or partial partition of HUF
2. Assets received under gift or will
3. Assets received by succession, inheritance

In such cases previous owners cost of acquisition as the cost of acquisition for the assesse and Indexation benefit can be taken from the year in which previous owner fist held the asset. (from AY 2013-14)

Before AY 2013-14 following calculation prevailed.

Indexation benefit begins from the year in which assessee acquires the asset. Lets have a look at the following example:

A father purchased a residential house for Rs. 5 lakh on 6th September 1983. He expired on 21st March 2003 and his son inherited the property. On this date, the fair market value of the property was Rs. 20 lakh. The son sold the inherited property on 25th June, 2006 for a net consideration of Rs. 28 lakh. Determine the year from which the son gets the benefit of indexation, if at all, for calculation of capital gains.

1. 1983-84
2. 2002-03
3. 2003-04
4. Indexation will not be applicable.