In the preceding chapter, the general rules of computing taxable capital gains were considered. There are, however, certain situations requiring special treatment. Law dealing with such situations is given in this Chapter.

Transfer  of Shares  or  Debentures   of an  Indian Company by Non-Residents

There is a special provision for protection from fluctuation of rupee value against foreign currency for capital gains arising out of transfer of shares or debentures of Indian Companies made by Non-residents. In this case, the entire computation of capital gains is done by converting the relevant figures of full value of consideration, cost of acquisition etc. into the foreign currency. The capital gains is also determined in the foreign currency. The capital gains thus determined in the foreign currency is then converted into Indian rupees for the purpose of determining the capital gains liability. In computing the Capital Gains, even if it is LTCG, no indexation will be given for cost of acquisition or cost of improvement.

Transfer of Capital assets by a partner to a firm or by a member to Association of Persons, etc.

Though under the general law, firm does not have a distinct legal identity apart from its partners, under the Income-tax Act, transfer of a capital asset by the partner to a firm or by a Member to Association of Persons by way of capital contribution or otherwise is chargeable to tax as capital gains of the previous year in which such transfer place. The amount recorded in the books of account ;of the firm, association or body as the value of the capital asset is deemed to be the full value of consideration.

Similar   is   the  position  when   a   capital   asset  is Inferred to the partner or member by way of distribution capital asset on the dissolution of a firm or association body. The fair market value of the asset on the date of transfer is treated as the full value of consideration.

Compulsory Acquisition of Assets under any Law

Transfer includes compulsory acquisition of a property any law. In such cases, settlement of the amount of compensation usually takes a long time. The compensation is initially fixed by the Land Acquisition Officer which is subject to appeal and re-determination by higher courts High Courts or even the Supreme Court, " The compensation amount may vary as the case progresses from one authority to another. The transferor may get paid in instalments as and when a higher authority awards further compensation.

 In cases of compulsory acquisition of an asset, the compensation received is the fall value of consideration, Initially, the Capital Gains would be computed by taking compensation awarded in the first instance as the full of consideration and deducting there from the cost of .acquisition and other costs. As and when any further compensation is awarded, the same would be brought to tax as capital gains of the year in which such further compensation is awarded.

As the deductions in computing the capital gains are considered while computing the capital gains in the initial year, no further deductions are allowed in the subsequent calculations on account of cost of acquisition etc.

Transfer of Depreciable Assets

Depreciable assets are assets owned by the tax payer and used in his business.

Whatever be the period for which a depreciable asset was held by the transferor, the capital gain arising from the transfer is always short term capital gains. Excess of full value of consideration over the written down value of the book of assets and expenditure in connection with the transfer is the short term capital gains. Written down value is the cost of the asset in the year of purchase as reduced by the depreciation allowed in subsequent years.

If the full value of consideration of the transferred assets in a block of assets is less than the written down value of all the assets of that block, there will be no capital gain chargeable to tax.

Exemption of Capital Gain on Compensation received on compulsory acquisition of urban Agriculture land

Clause (37) has been inserted in section 10 with effect from the assessment year 2005-06.

Section 10(37) is applicable if the following conditions are satisfied -

1. The assessee is an individual or a Hindu undivided family.

2. He owns an agriculture land situated in urban area.

3. There is transfer of the agriculture land by way of compulsory acquisition or the consideration for transfer is approved or determined by the Central Government or RBI.

4. The agriculture land was used by the assessee (and/or his parents if the land was owned by an individual) for agricultural purposes during 2 years immediately prior to the date of transfer.

5. The asset may be long-term capital asset or short-term capital asset.

6. Capital gain arises from compensation (and/or additional compensation) or consideration which is received by the assessee after March 31, 2004.

Capital gain (whether short-term or long-term) will be exempt from tax from the assessment year 2005-06 if the above conditions are satisfied.

Slump Sale

Any profit arising from slump sale shall be chargeable to LTCG if the undertaking(s) is/are owned or held by an assessee for more than 36 months and as STCG if they are held for not more than 36 months.

Slump sale means transfer of one or more undertakings as a result of the sale for a lumpsum consideration without values being assigned to the individual assets and liabilities in such sale. Undertaking includes any part of the undertaking or a unit or division of the undertaking or a business activity as a whole but does not include individual assets or liabilities or any combination thereof not constituting a business activity.

The net wealth of the undertaking (aggregate value of the total assets of the undertaking minus the value of liabilities as appearing in books of accounts) shall be to be the cost of acquisition and the cost of improvement for the purpose of computation of capital No indexation would be given even in the case of

A report of an Accountant has to be furnished along the return of income indicating the computation of wealth of the undertaking and certifying that the net has been correctly arrived at.

Fair Market Value

While dealing with the computation of capital gains come across certain situations where fair market value ' an asset has to be taken. Fair Market Value is the price sit the capital asset would ordinarily fetch on sale in the market on the relevant date and where such price is ascertainable the price as may be determinable in accordance with the rules made under the I.T. Act. For this purpose of determining the fair market value the assessing officer may refer to the valuation of a capital asset to a valuation officer.