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Income from Capital Gains for CFP – 4

Posted by Prashant Shah on May 24, 2011

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

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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