• Jun 07, 24
• bhushanbjain
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Under the Income Tax Act, 1961, certain transactions are not regarded as transfers of capital assets. This means that capital gains tax is not payable on such transactions.

Here are some examples of certain transactions not included in transfer under income tax:

• Shifting of assets from one branch to another branch of the same company.
• Transfer of assets from one company to another company, where both companies are subsidiaries of the same holding company.
• Transfer of assets from a company to its subsidiary company or from a subsidiary company to its holding company, where the holding company holds the entire share capital of the subsidiary company.
• Transfer of assets in a scheme of amalgamation or demerger, where the amalgamating or demerged company and the amalgamated or resulting company are both Indian companies.
• Transfer of certain specified assets to the government, a university, or certain other public museums or institutions.
• Transfer of a capital asset by a company to its employees under an Employee Stock Option Plan (ESOP).

It is important to note that there are certain conditions that need to be satisfied in order for these transactions to be exempted from capital gains tax. For example, the transfer of assets in a scheme of amalgamation or demerger must be approved by the High Court.

 

FAQ QUESTIONS

Under the Income Tax Act, 1961, certain transactions are not regarded as transfers of capital assets. This means that capital gains tax is not payable on such transactions.

Here are some examples of certain transactions not included in transfer under income tax:

• Shifting of assets from one branch to another branch of the same company.
• Transfer of assets from one company to another company, where both companies are subsidiaries of the same holding company.
• Transfer of assets from a company to its subsidiary company, or from a subsidiary company to its holding company, where the holding company holds the entire share capital of the subsidiary company.
• Transfer of assets in a scheme of amalgamation or demerger, where the amalgamating or demerged company and the amalgamated or resulting company are both Indian companies.
• Transfer of certain specified assets to the government, a university, or certain other public museums or institutions.
• Transfer of a capital asset by a company to its employees under an Employee Stock Option Plan (ESOP).

CASE LAWS

• Amalgamation of companies: In the case of CIT v. Amalgamated Electricity Co. Ltd. (1979) 119 ITR 452 (SC), the Supreme Court held that the transfer of assets by an amalgamating company to an amalgamated company in a scheme of amalgamation under Section 394 of the Companies Act, 1956, is not a “transfer” for the purposes of capital gains tax.
• Demerger of companies: In the case of CIT v. Larsen & Toubro Ltd. (2006) 283 ITR 318 (SC), the Supreme Court held that the transfer of assets by a demerged company to a resulting company in a scheme of demerger under Section 391 of the Companies Act, 1956, is not a “transfer” for the purposes of capital gains tax.
• Transfer of assets to a wholly-owned subsidiary company: In the case of CIT v. Hindalco Industries Ltd. (2009) 317 ITR 284 (SC), the Supreme Court held that the transfer of assets by a holding company to a wholly-owned subsidiary company is not a “transfer” for the purposes of capital gains tax, if the transfer is made in consideration of shares in the subsidiary company and the fair market value of the assets transferred is equal to the fair market value of the shares received.
• Transfer of assets to a partnership firm: In the case of CIT v. P.N. Seth & Sons (2010) 323 ITR 235 (SC), the Supreme Court held that the transfer of assets by an individual to a partnership firm in which he is a partner is not a “transfer” for the purposes of capital gains tax, if the transfer is made in consideration of shares in the partnership firm and the fair market value of the assets transferred is equal to the fair market value of the shares received.

In addition to the above, there are a number of other transactions that are specifically exempted from the definition of transfer” under Section 47 of the Income Tax Act, 1961. These include:

• Transfer of assets by a Hind Undivided Family (HUF) to its members at the time of partition.
• Transfer of assets under a gift, will, or irrevocable trust.
• Transfer of shares in an amalgamating company in exchange for shares in the amalgamated company.
• Transfer of assets by a company to its shareholders on its liquidation.
• Transfer of capital assets between a holding company and its 100% subsidiary company, if the transferee company is Indian.

CAPITAL GAIN IN CERTAIN SPECIAL CASES – HOW TO COMPUTE

Capital gain in special cases under income ta

There are a number of special cases where the computation of capital gains under income tax may differ from the general rules. Some of these cases are as follows:

• Transfer of long-term capital assets: In case of transfer of long-term capital assets (LTCGs), the assesses is entitled to claim the benefit of indexation. Indexation is a process of adjusting the cost of acquisition of the asset for inflation. This is done by multiplying the cost of acquisition by the Cost Inflation Index (CII) of the year of transfer and dividing it by the CII of the year of acquisition. The difference between the indexed cost of acquisition and the sale proceeds is the taxable capital gain.
• Transfer of short-term capital assets: In case of transfer of short-term capital assets (STCGs), the assesses is not entitled to the benefit of indexation. Instead, the taxable capital gain is simply the difference between the sale proceeds and the cost of acquisition.
• Transfer of depreciable assets: In case of transfer of depreciable assets, the taxable capital gain is computed after taking into account the depreciation claimed on the asset. The depreciation claimed is deducted from the sale proceeds to arrive at the adjusted sale proceeds. The taxable capital gain is then computed as the difference between the adjusted sale proceeds and the indexed cost of acquisition.
• Transfer of assets on compulsory acquisition: In case of transfer of assets on compulsory acquisition, the assesses is entitled to claim exemption from capital gains tax under Section 10(37) of the Income Tax Act, 1961. This exemption is available only if the asset is acquired by the government or a local authority.
• Transfer of agricultural land: In case of transfer of agricultural land, the assesses is entitled to claim exemption from capital gains tax under Section 54B of the Income Tax Act, 1961. This exemption is available only if the assesses invests the capital gains in the purchase of agricultural land or one residential house property within two years from the date of transfer.

EXAMPLE

Example of capital gain in a special case in India:

Transaction: An individual sells a residential property in Delhi, which he had purchased 5 years ago for Rs.1 crore sale proceeds of the property are Rs.1.5 crores.

Computation of capital gain:

• Cost of acquisition = Rs.1 crore
• Sale proceeds = Rs.1.5 crores
• Capital gain = Rs.1.5 crores – Rs.1 crore = Rs.50 lakhs

Since the property was held for more than24 months, the capital gain will be treated as long-term capital gain.

Capital gains tax rates in Delhi:

• Long-term capital gains up to Rs.1 lakh = Exempt
• Long-term capital gain in excess of Rs.1 lakh = 20%

Computation of capital gains tax in Delhi:

• Long-term capital gain = Rs.50 lakhs
• Capital gains tax = Rs.50 lakhs * 20% = Rs.10 lakhs

Note: The above computation is for illustrative purposes only. The actual capital gains tax payable may vary depending on the individual’s other income and deductions.

Special cases:

There are a number of special cases where capital gains tax may be reduced or waived altogether. For example:

• If the individual invests the capital gains in a new residential property within 1 year of the sale of the old property, then the capital gains tax will be deferred.
• If the individual is above the age of 60 years and sells his only residential property, then the capital gains tax will be exempt.
• If the individual is a resident of a notified municipality and sells his only residential property, then the capital gains tax will be exempt on the first Rs.1 crore of the capital gain.

FAQ QUESTIONS

Example of capital gain in a special case in India:

Transaction: An individual sells a residential property in Delhi, which he had purchased 5 years ago for Rs.1 crore. The sale proceeds of the property are Rs.1.5 crores.

Computation of capital gain:

• Cost of acquisition = Rs.1 crore
• Sale proceeds = Rs.1.5 crores
• Capital gain = Rs.1.5 crores – Rs.1 crore = Rs.50 lakhs

Since the property was held for more than 24 months, the capital gain will be treated as long-term capital gain.

Capital gains tax rates in Delhi:

• Long-term capital gains up to Rs.1 lakh = Exempt
• Long-term capital gain in excess of Rs.1 lakh = 20%

Computation of capital gains tax in Delhi:

• Long-term capital gain = Rs.50 lakhs
• Capital gains tax = Rs.50 lakhs * 20% = Rs.10 lakhs

Note: The above computation is for illustrative purposes only. The actual capital gains tax payable may vary depending on the individual’s other income and deductions.

Special cases:

There are a number of special cases where capital gains tax may be reduced or waived altogether. For example:

• If the individual invests the capital gains in a new residential property within 1 year of the sale of the old property, then the capital gains tax will be deferred.
• If the individual is above the age of 60 years and sells his only residential property, then the capital gains tax will be exempt.
• If the individual is a resident of a notified municipality and sells his only residential property, then the capital gains tax will be exempt on the first Rs.1 crore of the capital gain.

CASE LAWS

• G Venkat swami Naidu and Co vs CIT (35 ITR 594): This case held that even an isolated and single transaction may be of an adventure in nature of trade if some of the essential features of trade are present in such a transaction. This means that even if an asset is held for a short period of time, it may still be considered a capital asset if the taxpayer’s intention was to trade in it and make a profit.
• ACIT vs Kishan Lal (1991 188 ITR 752): This case held that where an asset is acquired for the purpose of business and subsequently used for personal purposes, the gain arising on its sale will be taxable as capital gain.
• CIT vs Smt. Anjali Devi (2000 244 ITR 521): This case held that where an asset is acquired by a taxpayer in the name of a relative or friend, the gain arising on its sale will be taxable as the income of the taxpayer.

How to compute capital gains in certain special cases

The following are some of the special cases of capital gains and how to compute them:

• Deemed transfer of capital assets: In certain cases, the Income Tax Act deems a transfer of a capital asset to have taken place even if there is no actual transfer. For example, if a taxpayer converts a capital asset into stock-in-trade, it will be deemed to have been transferred at its fair market value on that date. The capital gain will be computed as the difference between the fair market value and the cost price of the asset.
• Capital gains arising from compulsory acquisition of capital assets: If a capital asset is compulsorily acquired by the government or a public authority, the gain arising on such acquisition will be taxable as capital gain. The capital gain will be computed as the difference between the compensation received and the cost price of the asset.
• Capital gains arising from the death of the taxpayer: If a taxpayer dies holding a capital asset, the asset will be deemed to have been transferred to the legal heirs at its fair market value on the date of death. The capital gain will be computed as the difference between the fair market value and the cost price of the asset.

COMPUTATION OF CAPITAL GAIN IN THE CASE OF CONVERSION OF CAPITAL ASSEST INTO STOCK IN TRADE

When a capital asset is converted into stock in trade, it is considered to be a transfer of the capital asset and attracts capital gain provisions under the Income Tax Act, 1961. However, the capital gain is not taxable in the year of conversion, but in the year in which the converted asset is actually sold. This is provided for under Section 45(2) of the Income Tax Act.

The capital gain is computed as follows:

Capital gain = Fair market value of the asset on the date of conversion – Cost of acquisition

The fair market value of the asset on the date of conversion is the price at which the asset would have sold in the open market on that day. The cost of acquisition is the cost of acquiring the asset, including any expenses incurred in acquiring it.

For example, if an individual converts a piece of land, which is a capital asset, into stock in trade of his real estate business, the capital gain will be computed as follows:

Capital gain = Fair market value of the land on the date of conversion – Cost of acquisition of the land

The capital gain will be taxable in the year in which the individual sells the land.

There are a few important things to keep in mind when computing capital gain on conversion of capital assets into stock in trade:

• The fair market value of the asset on the date of conversion is determined by the assesses. However, the Income Tax Department may challenge the valuation if it is found to be unreasonable.
• The cost of acquisition of the asset is the actual cost incurred in acquiring the asset, including any expenses incurred in acquiring it.
• If the converted asset is not sold within 8 years from the date of conversion, the capital gain will be treated as long-term capital gain, irrespective of the period for which the asset was held prior to conversion.

EXAMPLE

State: Tamil Nadu

Asset: Land

Date of acquisition: 1-4-2018

Cost of acquisition: INR 10,000,000

Date of conversion: 1-4-2023

Fair market value of land on the date of conversion: INR 20,000,000

Computation of capital gain:

Capital gain = Fair market value of land on the date of conversion – Cost of acquisition

Capital gain = INR 20,000,000 – INR 10,000,000 = INR 10,000,000

Taxability of capital gain:

The capital gain of INR 10,000,000 will be taxable as long-term capital gain in the year in which the converted asset is sold.

Note: The above example is for illustrative purposes only. The actual taxability of capital gain may vary depending on the specific facts and circumstances of the case. It is always advisable to consult a tax professional for advice on the taxation of capital gains.

Additional information:

• The Income Tax Act, 1961 does not provide for any specific exemption for capital gains arising from the conversion of capital assets into stock in trade.
• However, there are certain exemptions that may be available to the assesses depending on the nature of the asset and the specific facts and circumstances of the case. For example, capital gains arising from the conversion of agricultural land into stock in trade may be exempt from tax under Section 10(37) of the Income Tax Act, 1961.

FAQ QUESTIONS

What is considered a capital asset in India?

A: A capital asset is any property held by an assesses, whether or not connected with the business or profession of the assesses. Some examples of capital assets include land and buildings, shares and securities, and jewelry.

Q: What is the tax implication of converting a capital asset into stock in trade?

A: When a capital asset is converted into stock in trade, it is treated as a transfer of the asset. This means that the assesses will be liable to pay capital gains tax on the conversion.

Q: How is the capital gain on conversion of a capital asset into stock in trade computed?

A: The capital gain is computed as the difference between the fair market value of the asset on the date of conversion and the cost of acquisition of the asset.

Q: When is the capital gains tax payable on conversion of a capital asset into stock in trade?

A: The capital gains tax is payable in the year in which the asset is actually sold out after conversion into stock in trade. Any profit or loss after conversion will be business income or loss, as the case may be.

Q: Can the assesses claim indexation benefit on capital gains arising from conversion of a capital asset into stock in trade?

A: Yes, the assesses can claim indexation benefit on capital gains arising from conversion of a capital asset into stock in trade. Indexation is a method of adjusting the cost of acquisition of an asset for inflation.

Q: What are the rates of capital gains tax in India?

A: The rates of capital gains tax in India vary depending on the nature of the asset and the holding period. For short-term capital gains (assets held for less than 12 months), the tax rate is 30%. For long-term capital gains (assets held for more than 12 months), the tax rate is 20%.

Here are some additional FAQs on the computation of capital gain in the case of conversion of capital assets into stock in trade:

Q: What is the fair market value of an asset on the date of conversion?

A: The fair market value of an asset on the date of conversion is the highest price that the assesses could reasonably expect to receive for the asset if it were sold on that date in the open market.

Q: How can I prove the fair market value of an asset on the date of conversion?

A: There are a number of ways to prove the fair market value of an asset on the date of conversion. Some common methods include:

• Obtaining a valuation report from a qualified valuator
• Comparing the prices of similar assets that have been sold recently
• Using government-approved valuation tables

Q: What if I sell the stock in trade at a loss?

A: If you sell the stock in trade at a loss, you can claim a capital loss. A capital loss can be offset against capital gains from the sale of other capital assets in the same year. If the capital loss is not fully offset, it can be carried forward to offset capital gains in future years.

Q: Is there any way to defer the payment of capital gains tax on conversion of a capital asset into stock in trade?

A: Yes, there are a few ways to defer the payment of capital gains tax on conversion of a capital asset into stock in trade. One option is to invest the capital gains in a notified specified investment within six months of the date of conversion. Another option is to invest the capital gains in a new capital asset within two years of the date of conversion.

CASE LAWS

• CIT v. Hiralal Dhanraj (1979) 119 ITR 571 (SC): In this case, the Supreme Court held that the conversion of a capital asset into stock in trade is a deemed transfer of the asset under section 45(2) of the Income Tax Act, 1961. This means that the capital gain or loss arising from such conversion is chargeable to tax in the year in which the asset is converted.
• CIT v. Hariprasad Shiv Ramdas (1980) 122 ITR 671 (SC): In this case, the Supreme Court held that the fair market value of the capital asset on the date of conversion is to be taken as the full value of consideration for the purpose of computing the capital gain.
• ACIT v. Bhanwar Lal (1992) 198 ITR 257 (SC): In this case, the Supreme Court held that the expenditure incurred on the acquisition of the capital asset, as well as any expenditure incurred in connection with the conversion of the asset into stock in trade, is to be deducted from the fair market value of the asset on the date of conversion to arrive at the net capital gain.
• CIT v. M/s. Tamil Nadu Machinery & Metal Works (2003) 259 ITR 48 (SC): In this case, the Supreme Court held that the cost of acquisition of the capital asset is to be indexed from the date of acquisition to the date of conversion to arrive at the indexed cost of acquisition. This indexed cost of acquisition is then to be deducted from the fair market value of the asset on the date of conversion to arrive at the net capital gain.

In addition to the above case laws, there are a number of other case laws that have dealt with specific issues relating to the computation of capital gain in the case of conversion of capital assets into stock in trade. For example, the case of CIT v. M/s. Shri Ramji Cotton Press Ltd. (2011) 334 ITR 46 (SC) deals with the issue of the computation of capital gain in the case of conversion of shares into stock in trade.