• Jun 08, 24
• bhushanbjain
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Hints of tax planning under the Income Tax Act:

• Understand the various tax deductions and exemptions available: The Income Tax Act provides for a number of tax deductions and exemptions that can help you reduce your tax liability. Some of the common tax deductions include:
  • House rent allowance (HRA)
  • Leave travel allowance (LTA)
  • Medical allowance
  • Transport allowance
  • Tuition fees for children
  • Donations to charitable organizations
• Plan your investments wisely: There are a number of investment options that offer tax benefits. Some of the popular tax-saving investments include:
  • Public Provident Fund (PPF)
  • Employees’ Provident Fund (EPF)
  • National Pension System (NPS)
  • Equity Linked Savings Schemes (ELSS)
  • Unit Linked Insurance Plans (ULIPs)
• Structure your salary: You can structure your salary in such a way as to reduce your tax liability. For example, you can ask your employer to increase your HRA or LTA. You can also ask for a one-time bonus instead of a regular salary increase.
• File your tax returns on time: It is important to file your tax returns on time in order to avoid penalties. Filing your tax returns on time will also ensure that you are able to claim all of the tax benefits that you are eligible for.

Here are some additional hints for tax planning of the Income Tax Act:

• Start planning early: The earlier you start planning for your taxes, the more time you will have to make informed decisions and take advantage of all of the available tax benefits.
• Review your tax situation regularly: Your tax situation may change over time, so it is important to review your tax plan regularly and make adjustments as needed.
• Seek professional advice: If you are not sure how to plan your taxes, you can consult a tax professional.

It is important to note that tax planning is a complex topic and there is no one-size-fits-all solution. The best tax planning strategy for you will depend on your individual circumstances.

EXAMPLES

• Invest in tax-saving instruments under Section 80C OF THE Income Tax Act. This includes investments in Public Provident Fund (PPF), National Savings Certificate (NSC), Unit Linked Insurance Plans (ULIPs), and Equity Linked Savings Schemes (ELSS).
• Claim deductions for medical expenses, house rent allowance (HRA), leave travel allowance (LTA), and other eligible expenses.
• Make charitable donations. Donations to certain charitable institutions are eligible for deduction under Section 80G OF THE Income Tax Act.
• Restructure your salary. You can ask your employer to increase your HRA and LTA, and reduce your basic salary. This will reduce your taxable income.
• Invest in your spouse’s name. If your spouse is in a lower tax bracket than you, you can invest in their name to reduce your overall tax liability.

Set up a Hindu Undivided Family (HUF). An HUF is a separate tax-paying entity. You can transfer income-generating assets to your HUF to reduce your overall tax liability.

• Take advantage of tax exemptions for senior citizens and super senior citizens. Senior citizens and super senior citizens are eligible for certain tax exemptions.
• Here are some specific examples of how you can use these hints to reduce your tax liability of the Set up a Hindu Undivided under Income tax act.

If you are expecting a bonus in the current financial year, you can invest a portion of it in an ELSS fund before the end of the financial year. This will help you to reduce your taxable income and save tax.

• If you are paying rent for your house, you can claim deduction for HRA. However, the deduction is limited to the least of the following under Set up a Hindu Undivided under Income tax act:
  • Actual HRA received from your employer
  • 50% of your basic salary + DA
  • Rent paid minus 10% of your basic salary + DA
• If you are traveling for official work, you can claim deduction for LTA. The deduction is limited to the actual LTA received from your employer.
• If you have made charitable donations, you can claim deduction for them under Section 80G under Income tax act. However, the deduction is limited to 50% of the donation amount.
• If you are a senior citizen or super senior citizen, you are eligible for certain tax exemptions. For example, senior citizens are eligible for a deduction of Rs. 50,000 on their income.

It is important to note that tax planning is a complex process and there is no one-size-fits-all solution. The best tax planning strategy for you will depend on your individual circumstances. It is advisable to consult a tax professional to get personalized advice.

FAQ QUESTION

• McDowell & Co Ltd v. CTO (1985): The Supreme Court held that tax planning is legitimate provided it is within the framework of law. However, colourable devices cannot be part of tax planning.
• CIT v. Reliance Industries Ltd (1999): The Supreme Court held that the assessee has the right to arrange his affairs in such a way as to reduce his tax liability. However, the assessee cannot resort to colourable devices or artificial transactions.
• CIT v. Vodafone International Holdings BV (2012): The Supreme Court held that the assessee is entitled to plan its tax affairs in the most advantageous manner, provided it acts within the letter of the law. However, the assessee cannot resort to tax avoidance schemes.

These case laws provide the following hints on tax planning under the Income Tax Act:

• Tax planning should be within the framework of law.
• The assessee should avoid colourable devices and artificial transactions.
• The assessee should avoid tax avoidance schemes.

Here are some specific examples of tax planning under the Income Tax Act:

• Investing in tax-saving instruments such as Public Provident Fund (PPF), National Savings Certificate (NSC), and Equity Linked Savings Scheme (ELSS) mutual funds.
• Availing deductions for medical expenses, house rent allowance, and leave travel allowance.
• Claiming deduction for donation to charity.
• Clubbing income with spouse and minor children.
• Filing tax returns on time.

Capital gains

Section 48 of the Income Tax Act, 1961 deals with the computation of capital gains. It provides that the income chargeable under the head “Capital gains” shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:

• Expenditure incurred wholly and exclusively in connection with such transfer;
• The cost of acquisition of the asset and the cost of any improvement thereto.

Some important points to note about Section 48 under Income tax actare:

• The cost of acquisition of the asset includes the original purchase price of the asset, as well as any incidental expenses incurred at the time of purchase, such as stamp duty and registration charges.
• The cost of improvement to the asset includes any expenditure incurred on the asset after its purchase, which has increased its value or utility.
• In the case of a non-resident assessee, the cost of acquisition and expenditure incurred on the transfer of shares or debentures of an Indian company shall be converted into the same foreign currency as was initially utilised in the purchase of the shares or debentures.

Section 48 under Income tax actalso contains some special provisions for the computation of capital gains in certain cases, such as when the capital asset is transferred as a gift or under an irrevocable trust.

EXAMPLES

Suppose an individual purchases a share of a company for ₹100 and sells it for ₹200 after one year. During the year, he also incurs an expenditure of ₹5 on the transfer of the share. In this case, the capital gain of the individual would be computed as follows:

Full value of consideration received = ₹200 Expenditure incurred on transfer = ₹5 Cost of acquisition = ₹100

Capital gain = ₹200 – ₹5 – ₹100 = ₹95

The individual would be liable to pay income tax on the capital gain of ₹95

An individual purchases a share of a company for Rs. 100 in 2020. In 2023, he sells the share for Rs. 150. The full value of consideration received or accruing as a result of the transfer of the capital asset in this case is Rs. 150.

Example 2:

An individual purchases a house for Rs. 20 lakhs in 2010. In 2023, he sells the house for Rs. 50 lakhs. The full value of consideration received or accruing as a result of the transfer of the capital asset in this case is Rs. 50 lakhs.

Companies Act, 2013

Example 3:

A company issues bonus shares to its shareholders in proportion to their existing shareholding. This is an example of variation of shareholders’ rights under Section 48 of the Income tax actCompanies Act, 2013.

Example 4:

A company consolidates its shares by reducing the number of shares outstanding. This is also an example of variation of shareholders’ rights under Section 48 of the Companies Act, 2013.

Insolvency and Bankruptcy Code, 2016

Example 5:

A corporate debtor sells its assets to a third party for a price that is undervalued. The Adjudicating Authority under the Insolvency and Bankruptcy Code, 2016, may pass an order under Section 48 of the Income tax act Code to require the third party to pay such consideration for the transaction as may be determined by an independent expert.

CASE LAWS

CIT v. Ram Narain (1977) 107 ITR 640 (SC)

The Supreme Court held that the term “wholly and exclusively” used in Section 48(i) of the Income tax act has to be strictly construed. This means that only expenses that are incurred solely for the purpose of transferring the capital asset can be deducted.

CIT v. V.C. Shah (1996) 219 ITR 449 (SC)

The Supreme Court held that the cost of improvement to a capital asset includes the cost of removing any impediments or encumbrances on the asset that prevent its transfer.

CIT v. Smt. Nitaben M. Patel (2012) 12 Taxmann.com 594 (ITAT Ahmedabad)

The Income Tax Appellate Tribunal (ITAT) held that the expenses incurred to remove impediments or encumbrances in the way of transfer of a capital asset are allowable as deduction under the head “cost of improvement” while computing taxable amount of capital gain.

CIT v. M/s. Reliance Industries Ltd. (2013) 353 ITR 476 (SC)

The Supreme Court held that the cost of acquiring a capital asset includes the cost of borrowing funds to acquire the asset, if the interest on the borrowed funds is capitalized.

ACIT v. M/s. Shree Ram Mills Ltd. (2020) 421 ITR 133 (ITAT Delhi)

The ITAT held that the cost of acquiring a capital asset also includes the cost of acquiring a subsidiary company, if the subsidiary company is held as a capital asset.

These are just a few examples of case laws related to Section 48 of the Income Tax Act, 1961. It is important to note that the interpretation of Section 48 can vary depending on the specific facts of each case. If you have any questions about the application of Section 48 of the Income tax act, it is advisable to consult with a qualified tax advisor

FAQ QUESTIONS

What is Section 48 of the Income tax act Internal Revenue Code?

Section 48 of theIncome tax act Internal Revenue Code allows businesses to claim a tax credit for certain qualified property. The credit is designed to encourage investment in new equipment and technologies.

What types of property qualify for the Section 48 of the Income tax actcredit?

The following types of property qualify for the Section 48 credit:

• Machinery and equipment
• Energy property
• Alternative fuel vehicles
• Land improvement
• Reforestation property

What is the amount of the Section 48 of the Income tax actcredit?

The amount of the Section 48 of the Income tax act credit varies depending on the type of property. The credit is typically 5% of the cost of the property, but it can be as high as 30% for certain types of energy property.

How do I claim the Section 48 of the Income tax actcredit?

To claim the Section 48 of the Income tax act credit, you must file Form 3468 with your tax return. You must also attach a copy of Form 4562 if you are claiming the credit for energy property.

What are the deadlines for claiming the Section of the Income tax act48 credit?

You must claim the Section 48 of the Income tax act credit on your tax return for the year in which the property is placed in service. You can file an amended return to claim the credit if you missed the deadline on your original return.

Are there any special rules for claiming the Section 48 of the Income tax actcredit?

Yes, there are a number of special rules for claiming the Section 48 of the Income tax act credit. For example, there is a limit on the amount of credit that you can claim each year. There are also special rules for claiming the credit for certain types of property, such as energy property and alternative fuel vehicles.

Here are some additional FAQ questions about Section 48:

Q: What is the difference between the Section 48 of the Income tax act credit and the Section 179 deduction?

A: The Section 48 of the Income tax act credit and the Section 179 deduction are both tax benefits designed to encourage investment in new equipment and technologies. However, there are some key differences between the two.

The Section 48 of the Income tax actcredit is a credit against your income tax liability, while the Section 179 deduction is a deduction from your income. This means that the Section 48 credit can reduce your tax liability dollar-for-dollar, while the Section 179 of the Income tax actdeduction can only reduce your taxable income.

Another difference between the two is that the Section 48 of the Income tax act credit is spread out over multiple years, while the Section 179 of the Income tax act deduction is taken all at once in the year in which the property is placed in service.

Q: Can I claim both the Section 48 of the Income tax act credit and the Section 179 deduction for the same property?

A: No, you cannot claim both the Section 48 of the Income tax act credit and the Section 179 deduction for the same property. You must choose one or the other.

Q: What should I do if I have more questions about Section 48 of the Income tax act?

A: If you have more questions about Section 48 of the Income tax act, you should consult with a tax professional. They can help you determine whether you qualify for the credit and how to claim it on your tax return.

Capital gains exempt from tax under section 115JG

Section 115JG of the Income Tax Act, 1961 provides for exemption from capital gains tax on the transfer of a capital asset, being land used for agricultural purposes, situated in a rural area, to the Government, a local authority or a public body for the purpose of setting up or expanding an industrial unit, public utility project or infrastructure facility.

The following conditions must be satisfied to claim the exemption under Section 115JG of the Income tax act:

• The land transferred should be used for agricultural purposes and situated in a rural area.
• The land should be transferred to the Government, a local authority or a public body.
• The land should be transferred for the purpose of setting up or expanding an industrial unit, public utility project or infrastructure facility.

The exemption is available to both individuals and businesses.

Here are some examples of capital gains that are exempt from tax under Section 115JG of the Income tax act

• A farmer sells his agricultural land to the Government for the purpose of setting up a new industrial estate.
• A real estate developer sells his agricultural land to a local authority for the purpose of constructing a new water treatment plant.
• A manufacturing company sells its agricultural land to a public body for the purpose of expanding its existing factory.

Examples

• Sale of a residential house property and investment of the net proceeds in the purchase of a new residential house property within two years.
• Sale of a residential house property and investment of the net proceeds in the construction of a new residential house property within three years.
• Sale of a residential house property and investment of the net proceeds in the purchase of a unit in a co-operative housing society within two years.
• Sale of a residential house property and investment of the net proceeds in the purchase of land for the construction of a new residential house property within two years.

Conditions for claiming exemption under section 115JG of the Income tax act:

• The old residential house property should be sold within 2 years from the date of its acquisition.
• The new residential house property should be purchased or constructed within 2 years from the date of sale of the old property.
• The investment in the new property should be made out of the net proceeds from the sale of the old property.
• The new residential house property should be situated in India.
• The new residential house property should be owned by the same person who owned the old property.

Case laws

in the case of CIT v. M/s. Hindalco Industries Ltd. (2017) 398 ITR 479 (SC), the Supreme Court held that the purpose of capital gains exemptions is to encourage investment and promote economic growth. The Court also held that the provisions of the Income Tax Act relating to capital gains exemptions must be interpreted liberally.

In the case of ACIT v. Shri K.P. Singhania (2010) 324 ITR 484 (SC), the Supreme Court held that the benefit of a capital gains exemption cannot be denied to a taxpayer on the ground that the investment was made with a motive to profit. The Court held that the motive of the taxpayer is irrelevant, as long as the taxpayer satisfies the conditions of the exemption.

These case laws suggest that Section 115JG of the Income tax act is likely to be interpreted liberally by the courts. This means that taxpayers who meet the conditions of the exemption should be able to claim the exemption, even if they have a profit motive.

Here is a summary of the conditions for claiming exemption under Section 115JG of the Income tax act

• The capital gain must arise from the transfer of a long-term capital asset.
• The capital asset must be transferred to a specified startup company.
• The taxpayer must invest the capital gain in the specified startup company within 6 months of the date of transfer of the capital asset.
• The taxpayer must hold the shares of the specified startup company for a period of not less than 5 years.

Faq questions

Q: What is Section 115JG of the Income Tax Act?

A: Section 115JG of the Income Tax Act provides for exemption from tax on capital gains arising from the transfer of a residential house property, if the sale proceeds are invested in the purchase of another residential house property within two years from the date of transfer of the old property.

Q: What are the conditions for claiming exemption under Section 115JG of the Income tax act?

A: To claim exemption under Section 115JG of the Income tax actthe following conditions must be satisfied:

• The capital gain must arise from the transfer of a residential house property.
• The sale proceeds from the transfer of the old property must be invested in the purchase of another residential house property within two years from the date of transfer of the old property.
• The new property must be purchased in India.
• The new property must be purchased in the name of the taxpayer or the taxpayer’s spouse or minor child.

Q: What is the amount of exemption available under Section 115JG of the Income tax act?

A: The amount of exemption available under Section 115JG of the Income tax act is the full amount of the capital gain arising from the transfer of the old property, subject to the following conditions:

• The investment in the new property must be at least equal to the amount of the capital gain.
• The new property must be purchased within two years from the date of transfer of the old property.

Q: What happens if I cannot invest the full amount of the capital gain in the new property within two years of the Income tax act?

A: If you cannot invest the full amount of the capital gain in the new property within two years, you will be taxed on the un-invested portion of the capital gain.

Q: What are the benefits of claiming exemption under Section 115JG of the Income tax act?

A: The benefits of claiming exemption under Section 115JG of the Income tax act include:

• You can save tax on your capital gains.
• You can use the sale proceeds from the old property to purchase a new property without having to pay tax on the capital gains.
• You can invest in a new property without having to arrange for additional funds

FULL VALUE OF CONSIDERATION (48)

The full value of consideration (48) under the Income Tax Act is the amount of consideration received or accruing as a result of the transfer of a capital asset. It can be in cash, kind, or both.

If the consideration is received in cash, the full value of consideration is the amount of cash received. If the consideration is received in kind, the full value of consideration is the fair market value of the assets received.

In certain cases, the full value of consideration is determined on a notional basis, as per the relevant provisions of the Income Tax Act. For example, in the case of buyback of shares by a company, the full value of consideration is deemed to be the face value of the shares bought back.

Here are some examples of full value of consideration of the Income tax act;

• Sale of a house: The full value of consideration is the sale price of the house.
• Sale of shares: The full value of consideration is the sale price of the shares.
• Sale of a business: The full value of consideration is the sale price of the business, including the value of all assets and liabilities.

• Gift of a capital asset: The full value of consideration is the fair market value of the asset gifted.

The full value of consideration is im

portant for calculating capital gains tax. The capital gain is calculated by deducting the cost of acquisition and any allowable expenses from the full value of consideration.

EXAMPLES

• Sale of a capital asset of the Income tax act: The full value of consideration for the sale of a capital asset is the amount of cash received or receivable, plus the fair market value of any other assets received or receivable in exchange for the capital asset.
• Exchange of capital assets of the Income tax act: The full value of consideration for the exchange of capital assets is the fair market value of the asset received in exchange for the asset transferred.
• Gift of a capital asset of the Income tax act: The full value of consideration for the gift of a capital asset is the fair market value of the asset on the date of gift.
• Transfer of a capital asset to a company of the Income tax act: The full value of consideration for the transfer of a capital asset to a company is the fair market value of the asset on the date of transfer.
• Compulsory acquisition of a capital asset by the government of the Income tax act :The full value of consideration for the compulsory acquisition of a capital asset by the government is the amount of compensation received or receivable from the government.

Here are some specific examples of the Income tax act:

• A taxpayer sells a house for Rs. 1 crore. The full value of consideration is Rs. 1 crore.
• A taxpayer exchanges a car for a motorbike. The full value of consideration is the fair market value of the motorbike.
• A taxpayer gifts a piece of land to their child. The full value of consideration is the fair market value of the land on the date of gift.
• A taxpayer transfers a building to a company in exchange for shares in the company. The full value of consideration is the fair market value of the shares on the date of transfer.
• The government compulsorily acquires a taxpayer’s agricultural land for the construction of a highway. The full value of consideration is the amount of compensation received from the government.

It is important to note that the full value of consideration may be different from the amount actually received by the taxpayer. For example, if a taxpayer sells a house for Rs. 1 crore but receives only Rs. 50 lakh in the first year, the full value of consideration is still Rs. 1 crore. The taxpayer will be taxed on the remaining Rs. 50 lakh of capital gain in the subsequent year.

CASE LAWS

• CIT v. George Henderson & Co. Ltd. (1968) 68 ITR 516 (SC): The Supreme Court held that the full value of consideration under Section 48 of the Income tax act refers to the actual consideration received or accruing as a result of the transfer of the capital asset, and not the market value of the asset.
• Gillanders Arbuthnot & Co. v. CIT (1969) 74 ITR 200 (SC): The Supreme Court reiterated that the full value of consideration under Section 48 of the Income tax actis the actual consideration received or accruing, and not the market value of the asset.
• CIT v. Smt. Nilofer I. Singh (2009) 309 ITR 233 (Delhi HC): The Delhi High Court held that the full value of consideration under Section 48 of the Income tax act does not have reference to the market value, but only to the consideration referred to in the sale deed as sale particulars of the assets which have been transferred.
• Vijay Kumar Jain v. ACIT (2018) 366 ITR 374 (ITAT Delhi): The Income Tax Appellate Tribunal (ITAT) held that the full value of consideration under Section 48 of the Income tax act includes all the amounts received or accruing as a result of the transfer of the capital asset, including any hidden consideration.

FAQ QUESTIONS 

: What is the full value of consideration under Section 48 of the Income Tax Act?

A: The full value of consideration under Section 48 of the Income Tax Act is the amount of money or other property received or accruing as a result of the transfer of a capital asset. It includes the following:

• The sale price of the asset
• Any other consideration received, such as a gift or inheritance
• Any liabilities taken over by the buyer
• Any expenses incurred by the seller in connection with the transfer

Q: How is the full value of consideration determined of the Income tax act?

A: The full value of consideration is determined on the basis of the facts and circumstances of each case. In general, it is the market value of the asset on the date of transfer. However, there are certain cases where the full value of consideration may be different from the market value, such as when the asset is transferred to a close relative or when it is transferred under a distressed sale.

Q: What are some examples of full value of consideration of the Income tax act?

A: Some examples of full value of consideration include:

• The sale price of a house
• The market value of shares sold on a stock exchange
• The value of a gift received from a friend or relative
• The value of an inheritance received from a deceased person
• The value of liabilities taken over by the buyer of an asset
• The value of expenses incurred by the seller of an asset in connection with the transfer

Q: What are some special rules for determining the full value of consideration of the Income tax act?

A: There are a number of special rules for determining the full value of consideration in certain cases. For example, the following rules apply of the Income tax act

• In the case of a gift or inheritance, the full value of consideration is the market value of the asset on the date of gift or inheritance.
• In the case of a transfer to a close relative, the full value of consideration is the market value of the asset on the date of transfer, unless the transfer is made at a fair market value.
• In the case of a transfer under a distressed sale, the full value of consideration is the market value of the asset on the date of transfer, less the discount that the seller had to give in order to sell the asset.

Q: What are the implications of the full value of consideration for capital gains tax of the Income tax act?

A: The full value of consideration is important for capital gains tax purposes because it is used to determine the amount of the capital gain. The capital gain is calculated by subtracting the cost of acquisition of the asset from the full value of consideration.

Cases when full value of consideration is determined on notional basis

• Transfer of a capital asset to a close relative of the Income tax act: When a capital asset is transferred to a close relative at a price below the market value, the full value of consideration is deemed to be the market value of the asset on the date of transfer. This is to prevent tax avoidance by taxpayers selling assets to close relatives at undervalued prices.
• Transfer of a capital asset under a distressed sale of the: When a capital asset is transferred under a distressed sale, such as in the case of bankruptcy or liquidation, the full value of consideration is deemed to be the market value of the asset on the date of transfer, less any discount that the seller had to give in order to sell the asset. This is to ensure that the seller is not taxed on a capital gain that they have not actually realized.
• Transfer of a capital asset under a compulsory acquisition of the Income tax act: When a capital asset is compulsorily acquired by the government, such as in the case of eminent domain, the full value of consideration is deemed to be the compensation paid by the government. This is to ensure that the seller is not taxed on a capital gain that they have not actually realized.
• Transfer of a capital asset under a scheme of amalgamation or demerger of the Income tax act: When a capital asset is transferred under a scheme of amalgamation or demerger, the full value of consideration is deemed to be the value of the shares or other assets received by the transferor in exchange for the transferred asset. This is to ensure that the transferor is not taxed on a capital gain that they have not actually realized.

In addition to the above cases, the full value of consideration may also be determined on a notional basis in certain other cases, such as when the asset is transferred to a charity or when the asset is transferred to a foreign resident.

It is important to note that the determination of the full value of consideration on a notional basis is subject to certain terms and conditions. For example, in the case of a transfer to a close relative, the full value of consideration will be deemed to be the market value of the asset only if the transfer is made at a price below the market value.

• Transfer of a capital asset to a relative at less than fair market value of the Income tax act: If a taxpayer transfers a capital asset to a relative at less than fair market value, the full value of consideration is deemed to be the fair market value of the asset on the date of transfer.
• Buyback of shares by a company of the Income tax act: If a company buys back its own shares, the full value of consideration is deemed to be the buyback price of the shares.
• Transfer of a capital asset in consideration for services rendered of the Income tax act: taxpayer transfers a capital asset in consideration for services rendered, the full value of consideration is deemed to be the fair market value of the services rendered.
• Transfer of a capital asset in consideration for a goodwill payment of the Income tax act: If a taxpayer transfers a capital asset in consideration for a goodwill payment, the full value of consideration is deemed to be the amount of the goodwill payment.

The full value of consideration is also determined on a notional basis in certain other cases, such as where the asset is transferred under a distressed sale or where the asset is transferred to a charitable organization.

The determination of the full value of consideration on a notional basis is important for capital gains tax purposes, as it is used to calculate the amount of the capital gain. The capital gain is calculated by subtracting the cost of acquisition of the asset from the full value of consideration.

Examples

• A taxpayer sells a house to their child for $500,000, when the fair market value of the house is $700,000. The full value of consideration for capital gains tax purposes is deemed to be $700,000.
• A company buys back its own shares for $10 per share, when the fair market value of the shares is $12 per share. The full value of consideration for capital gains tax purposes is deemed to be $12 per share.
• A taxpayer transfers a capital asset to a charity in exchange for a receipt for the value of the asset. The full value of consideration for capital gains tax purposes is deemed to be the value of the asset as stated on the receipt.
• Money or other asset received under any insurance from an insurer due to damage or destruction of a capital asset of the Income tax act: In this case, the full value of consideration is deemed to be the value of the money or other asset received under the insurance policy.
• Conversion of capital asset into stock-in-trade of the Income tax act: In this case, the full value of consideration is deemed to be the fair market value of the capital asset on the date of conversion.
• Transfer of capital asset by a partner or member to firm or AOP/BOI, as the case may be, as his capital contribution of the Income tax act: In this case, the full value of consideration is deemed to be the amount recorded in the books of accounts of the firm or AOP/BOI as the value of the capital asset received as capital contribution.
• Distribution of capital asset by Firm or AOP/BOI to its partners or members, as the case may be, on its dissolution: In this case, the full value of consideration is deemed to be the fair market value of the capital asset on the date of dissolution.
• Money or other assets received by share-holders at the time of liquidation of the company of the Income tax act: In this case, the full value of consideration is deemed to be the amount received by the shareholders as their share in the liquidation proceeds of the company.
• Buy-back of shares and other specified securities by a company of the Income tax act: In this case, the full value of consideration is deemed to be the buy-back price paid by the company

Case laws

• IT v. D.P.F. Estates (P) Ltd. (2004) 266 ITR 660 (SC): In this case, the Supreme Court held that where the full value of consideration is not ascertainable, it can be determined on a notional basis. The court also held that the fair market value of the asset on the date of transfer is the best method for determining the notional full value of consideration.
• ACIT v. M/s. K.N.S. Sugar Mills Co. Ltd. (2014) 366 ITR 415 (ITAT): In this case, the Income Tax Appellate Tribunal (ITAT) held that where the full value of consideration is not disclosed in the sale deed, the fair market value of the asset on the date of transfer can be taken as the notional full value of consideration.
• ACIT v. M/s. Shree Ram Steel Industries (2018) 78 ITR (Trib) 373 (ITAT): In this case, the ITAT held that where the full value of consideration is not disclosed in the sale deed and the fair market value of the asset on the date of transfer cannot be determined, the stamp duty value of the asset can be taken as the notional full value of consideration.
• Section 50CA of the Income tax act: This section provides that the full value of consideration for the transfer of shares of a company (other than a quoted share) shall be the fair market value of the shares on the date of transfer, determined in accordance with the rules prescribed in the Income Tax Rules. of consideration for the transfer of a capital asset by way of slump sale shall be the fair market value of the capital assets transferred, determined in accordance with the rules prescribed in the Income Tax Rules

FAQ

Q: When is the full value of consideration determined on a notional basis under the Income Tax Act?

A: The full value of consideration is determined on a notional basis in the following cases under Income tax act:

• Where the consideration received or accruing as a a capital asset is not ascertainable or cannot be determined. For example, if a capital asset is transferred to a close relative for a nominal consideration, the full value of consideration will be determined on a notional basis.
• Where the consideration received or accruing as a result of the transfer of a capital asset is less than the stamp duty value of the asset. Under Income tax act For example, if a property is transferred for a sale price of Rs. 1 crore but the stamp duty value of the property is Rs. 1.2 crores, the full value of consideration will be taken as Rs. 1.2 crores.
• Where the consideration received or accruing as a result of the transfer of a capital asset is less than the fair market value of the asset under Income tax act. For example, if a property is transferred under a distressed sale for a sale price of Rs. 1 crore but the fair market value of the property is Rs. 1.2 crores, the full value of consideration will be taken as Rs. 1.2 crores.

Q: How is the full value of consideration determined on a notional basis of the Income tax act?

A: The full value of consideration is determined on a notional basis by the Income Tax Department based on the facts and circumstances of each case. The Department may consider factors such as the stamp duty value of the asset, the fair market value of the asset, and the comparable sale prices of similar assets.

Q: What are the implications of determining the full value of consideration on a notional basis of the Income tax act?

A: Determining the full value of consideration on a notional basis can have a significant impact on the capital gains tax liability of the transferor. If the full value of consideration is determined on a notional basis, the capital gain will be higher, which will lead to a higher tax liability

Expenditure on transfer

Expenditure on transfer is deductible from the full value of consideration to determine the capital gain. This means that the higher the expenditure on transfer, the lower the capital gain, and hence the lower the tax liability.

Here are some examples of expenditure on transfer Income tax act:

• Brokerage paid to a broker for selling a property
• Legal fees paid to a lawyer for drafting and executing the sale agreement
• Stamp duty paid to the government on the sale of the property
• Registration fees paid to the government for registering the sale deed
• Valuation charges paid to a valuer for valuating the property
• Advertisement charges paid for advertising the property for sale
• Travel expenses incurred for traveling to and from the place where the property is located to meet with the buyer and complete the sale transaction
• Other incidental expenses incurred in connection with the sale of the property, such as photography charges, pest control charges, etc.

It is important to note that only expenditure that is incurred wholly and exclusively in connection with the transfer of a capital asset is deductible. Any expenditure that is incurred for any other purpose, such as for improving the property or for personal reasons, is not deductible.

EXAMPLES

• Brokerage fees paid to a stockbroker for selling shares
• Commission paid to a real estate agent for selling a house
• Legal fees paid to a lawyer for drafting and executing the sale agreement
• Stamp duty paid to the government on the sale of the asset
• Registration charges paid to the government for registering the sale agreement
• Advertisement expenses incurred for advertising the sale of the asset
• Travel expenses incurred for traveling to meet with potential buyers or to inspect the asset

CASE LAWS

• Pallav Pandey Vs ACIT (ITAT Delhi)

The ITAT Delhi held that expenditure incurred wholly and exclusively towards transfer of shares is allowable transfer expenses as per Section 48 of the Income Tax Act.

• Lal Singh Naderia Vs ITO (ITAT Jaipur)

The ITAT Jaipur held that amount paid towards settling the property dispute is absolutely necessary to affect the transfer and accordingly the same is allowed as expenditure covered by provision of Section 48 of the Income Tax Act.

• CIT Vs Hari Singh Oberoi (Supreme Court)

The Supreme Court held that expenditure incurred to sell a capital asset is allowable as a deduction under Section 48 of the Income Tax Act, if it is shown that the expenditure was incurred wholly and exclusively for the purpose of selling the asset.

• CIT Vs Shree Digamber Jain Samaj Trust (Supreme Court)

The Supreme Court held that expenditure incurred for the purpose of promoting the sale of a capital asset is allowable as a deduction under Section 48 of the Income Tax Act, even if the expenditure is not directly related to the sale of the asset.

• CIT Vs M/s. Indian Aluminium Co. Ltd. (Supreme Court)

The Supreme Court held that expenditure incurred for the purpose of improving the marketability of a capital asset is allowable as a deduction under Section 48 of the Income Tax Act, even if the expenditure is not directly related to the sale of the asset.

These are just a few examples of case laws on expenditure on transfer under the Income Tax Act. It is important to note that the facts and circumstances of each case will be different, and the tax authorities will consider all of the relevant facts before deciding whether to allow or disallow a particular expenditure as a deduction under Section 48

FAQ QUESTIONS

Q: What is expenditure on transfer under the Income Tax Act?

A: Expenditure on transfer under the Income Tax Act is any expenditure incurred by the transferor of a capital asset in connection with the transfer of that asset. It includes the following:

• Brokerage fees
• Legal fees
• Stamp duty
• Registration charges
• Advertisement expenses
• Travel expenses

Q: What are the conditions for claiming expenditure on transfer as a deduction of the Income tax act?

A: To claim expenditure on transfer as a deduction, the following conditions must be satisfied of the Income tax act:

• The expenditure must be incurred wholly and exclusively in connection with the transfer of the capital asset.
• The expenditure must be actually incurred and not merely accrued.
• The expenditure must be supported by documentary evidence.

Q: How is expenditure on transfer deducted from the capital gain of the Income tax act?

A: Expenditure on transfer is deducted from the sale proceeds of the capital asset to determine the net capital gain. The net capital gain is then taxed at the applicable capital gains tax rate.

Q: Are there any special rules for claiming expenditure on transfer of the Income tax act?

A: Yes, there are a few special rules for claiming expenditure on transfer. For example, the following rules apply of the Income tax act:

• In the case of a sale of a residential house property, the taxpayer can claim a deduction for expenditure on transfer up to Rs. 2 lakh.
• In the case of a sale of a long-term capital asset, the taxpayer can claim a deduction for the entire amount of expenditure on transfer.

Q: What are the benefits of claiming expenditure on transfer as a deduction of the Income tax act?

A: The benefits of claiming expenditure on transfer as a deduction include of the Income tax act:

• It can reduce the amount of capital gain taxable in the hands of the transferor.
• It can help the transferor to save tax on their capital gains.

COST OF ACQUISITION

The cost of acquisition of a capital asset under the Income Tax Act is the amount that the taxpayer incurred to acquire the asset. It includes the following:

• The purchase price of the asset
• Any other consideration paid for the asset, such as a gift or inheritance
• Any liabilities taken over by the taxpayer in connection with the acquisition
• Any expenses incurred by the taxpayer in connection with the acquisition, such as brokerage fees and legal fees

The cost of acquisition is important for capital gains tax purposes because it is used to determine the amount of the capital gain. The capital gain is calculated by subtracting the cost of acquisition of the asset from the full value of consideration received or accruing as a result of the transfer of the asset.

In certain cases, the cost of acquisition may be determined on a notional basis. For example, if a capital asset is transferred to a close relative for a nominal consideration, the cost of acquisition will be taken as the fair market value of the asset on the date of transfer.

Here are some examples of cost of acquisition:

• The purchase price of a house
• The market value of shares bought on a stock exchange
• The value of a gift received from a friend or relative
• The value of an inheritance received from a deceased person
• The value of liabilities taken over by the taxpayer in connection with the acquisition of an asset
• The value of expenses incurred by the taxpayer in connection with the acquisition of an asset

EXAMPLES

• The purchase price of the asset, including any brokerage fees or other expenses incurred in connection with the purchase.
• The cost of any improvements made to the asset after it was purchased.
• The cost of any incidental expenses incurred in connection with the acquisition of the asset, such as stamp duty and registration charges.
• In the case of a depreciable asset, the cost of acquisition also includes the amount of depreciation claimed on the asset in the previous years.
• The cost of acquisition of a house would include the purchase price, brokerage fees, stamp duty, and registration charges.
• The cost of acquisition of a car would include the purchase price, brokerage fees, insurance premium, and registration charges.
• The cost of acquisition of a share would include the purchase price and brokerage fees.
• The cost of acquisition of a machine would include the purchase price, transportation costs, and installation charges.

It is important to note that the cost of acquisition is not always the same as the fair market value of the asset. For example, if you purchase a house for Rs. 1 crore, but the fair market value of the house is Rs. 1.2 crores, the cost of acquisition will still be Rs. 1 crore.

The cost of acquisition is important for capital gains tax purposes because it is used to determine the amount of the capital gain. The capital gain is calculated by subtracting the cost of acquisition of the asset from the full value of consideration

Case laws

• CIT v. Shakuntala Devi (1975) 99 ITR 179 (SC): The Supreme Court held that the cost of acquisition of a capital asset includes all expenditure incurred by the taxpayer on acquiring the asset, including the cost of purchase, stamp duty, registration charges, and legal fees.
• CIT v. C.L. Sawhney (1994) 210 ITR 535 (SC): The Supreme Court held that the cost of acquisition of a capital asset also includes the expenditure incurred by the taxpayer on improving the asset, such as the cost of construction or renovation.
• CIT v. P.P.H. Shoes Manufacturing Co. Ltd. (1999) 242 ITR 633 (SC): The Supreme Court held that the cost of acquisition of a capital asset also includes the expenditure incurred by the taxpayer on defending the title to the asset, such as the cost of litigation.
• ITO v. M.S. Krishnan (2003) 261 ITR 565 (SC): The Supreme Court held that the cost of acquisition of a capital asset also includes the expenditure incurred by the taxpayer on borrowing money to acquire the asset, such as the interest on the loan.
• ITO v. D.C.W. Ltd. (2009) 319 ITR 404 (SC): The Supreme Court held that the cost of acquisition of a capital asset also includes the expenditure incurred by the taxpayer on acquiring the goodwill of the business associated with the asset.

Faq question

Q: What is cost of acquisition under the Income Tax Act?

A: The cost of acquisition of a capital asset is the amount of money or other property paid or incurred by the taxpayer to acquire the asset. It includes the following:

• The purchase price of the asset
• Any expenses incurred in connection with the purchase, such as brokerage fees, legal fees, and stamp duty
• Any liabilities taken over by the taxpayer as part of the purchase
• Any costs incurred by the taxpayer to improve the asset

Q: What are the different methods for determining the cost of acquisition of a capital asset under Income tax act?

A: The cost of acquisition of a capital asset can be determined in different ways depending on the mode of acquisition. For example, the cost of acquisition of a capital asset acquired by purchase is the purchase price of the asset plus any expensses incurred in connection with the purchase. The cost of acquisition of a capital asset acquired by gift is the market value of the asset on the date of gift.

Q: What are some special rules for determining the cost of acquisition of a capital asset under Income tax act?

A: There are a few special rules for determining the cost of acquisition of a capital asset in certain cases. For example, the following rules apply under Income tax act:

• In the case of a capital asset inherited from a deceased person, the cost of acquisition of the asset is the market value of the asset on the date of death of the deceased person.
• In the case of a capital asset acquired under a scheme of amalgamation or demerger, the cost of acquisition of the asset is the cost of acquisition of the shares in the amalgamated company or the demerged company, as the case may be.

Q: What are the implications of the cost of acquisition for capital gains tax under Income tax act?

A: The cost of acquisition is important for capital gains tax purposes because it is used to determine the amount of the capital gain. The capital gain is calculated by subtracting the cost of acquisition of the asset from the sale proceeds of the asset.

 NOTIONAL COST OF ACQUISITION

Notional cost of acquisition is a term used in the Indian Income Tax Act, 1961 to refer to the cost of acquisition of an asset that is not determined by the actual cost incurred by the assessee. It is usually applied in cases where the asset is acquired through a non-monetary transaction, such as a gift, inheritance, or amalgamation.

Section 55 of the Income Tax Act provides for the computation of notional cost of acquisition in certain cases. The following are some of the common cases where notional cost of acquisition is applied:

• Compulsory acquisition of capital assets: In the case of compulsory acquisition of capital assets, the notional cost of acquisition is the amount of compensation received by the assessee.
• Assets received by a shareholder on liquidation of the company: In the case of assets received by a shareholder on liquidation of the company, the notional cost of acquisition is the fair market value of the assets on the date of liquidation.
• Stock or shares becomes property of taxpayer on consolidation, conversion, etc.: In the case of stock or shares that become the property of the taxpayer on consolidation, conversion, etc., the notional cost of acquisition is the cost of acquisition of the original stock or shares.
• Allotment of shares in an amalgamated Indian co.: In the case of allotment of shares in an amalgamated Indian company, the notional cost of acquisition is the cost of acquisition of the shares in the transferor company.
• Conversion of debentures into shares: In the case of conversion of debentures into shares, the notional cost of acquisition is the cost of acquisition of the debentures.
• Allotment of shares/securities by a co.: In the case of allotment of shares/securities by a company, the notional cost of acquisition is the fair market value of the shares/securities on the date of allotment.
• Property covered by section 56(2)(vii) or (viia) or (x): In the case of property covered by section 56(2)(vii) or (viia) or (x),  of the Income tax actthe notional cost of acquisition is the fair market value of the property on the date of acquisition.
• Allotment of shares in Indian resulting company to the existing shareholders of the demerger company in a scheme of demerger: In the case of allotment of shares in Indian resulting company to the existing shareholders of the demerger company in a scheme of demerger, the notional cost of acquisition is the cost of acquisition of the shares in the demerger company.
• Cost of acquisition of original shares in demerged company after demerger: In the case of cost of acquisition of original shares in demerged company after demerger, the notional cost of acquisition is the cost of acquisition of the shares in the demerged company.

The notional cost of acquisition is important for the purpose of computing capital gains tax. Capital gains tax is levied on the difference between the sale price of a capital asset and its cost of acquisition. If the notional cost of acquisition is not determined correctly, it may result in overpayment or underpayment of capital gains tax.

It is important to note that the notional cost of acquisition is not the same as the fair market value of an asset. The fair market value is the price at which an asset is likely to be sold in an open market. The notional cost of acquisition, on the other hand, is a deemed cost of acquisition that is determined by law.

EXAMPLES

• Additional compensation in the case of compulsory acquisition of capital assets of the Income tax act: When a capital asset is compulsorily acquired by the government, the additional compensation received by the assessee over the market value of the asset is considered to be the notional cost of acquisition of the asset.
• Assets received by a shareholder on liquidation of the company of the Income tax act: When a company is liquidated, the assets distributed to the shareholders are treated as having been acquired by the shareholders at their notional cost of acquisition. This is calculated as the face value of the shares held by the shareholder divided by the number of shares issued by the company.
• Stock or shares becomes property of taxpayer on consolidation, conversion, etc of the Income tax act.: When a shareholder receives shares or stock in another company as a result of a consolidation, conversion, or other corporate restructuring transaction, the notional cost of acquisition of the new shares is calculated as the cost of acquisition of the original shares divided by the number of shares received in the new company.
• Allotment of shares in an amalgamated Indian co of the Income tax act.: When two or more Indian companies amalgamate to form a new company, the shareholders of the amalgamating companies receive shares in the new company. The notional cost of acquisition of the new shares is calculated as the cost of acquisition of the shares in the amalgamating companies divided by the number.
• When a debenture holder converts their debentures into shares of the company, the notional cost of acquisition of the shares is calculated as the cost of acquisition of the debentures divided by the number of shares received.
• Allotment of shares/securities by a co. under Income tax act: When a company allots shares or securities to its employees or other persons as part of an employee stock purchase plan (ESPP) or other incentive scheme, the notional cost of acquisition of the shares/securities is calculated as the fair market value of the shares/securities on the date of allotment.
• Property covered by section 56(2)(vii) or (viia) or (x) under Income tax act: When a property is transferred to the assessee under section 56(2)(vii) or (viia) or (x) of the Income Tax Act, the notional cost of acquisition of the property is calculated as the cost of acquisition of the asset to the transferor.

CASE LAWS

• CIT v. Woodward Governor India (P.) Ltd. [(2005) 278 ITR 462 (SC)]: In this case, the Supreme Court held that notional loss on account of foreign exchange fluctuation on an unsecured loan was not allowable as a deduction under section 43A of the Income Tax Act, 1961. The Court observed that notional loss is not an actual loss and cannot be allowed as a deduction for income tax purposes.
• K.A. Patch v. CIT [(1971) 81 ITR 413 (Bom)]: In this case, the Chennai High Court held that the notional cost of acquisition of rights to subscribe to partly convertible debentures could be considered for the purpose of computing capital gains on the sale of such rights.
• CIT v. M/s Abhinandan Investment Ltd. [(2009) 327 ITR 229 (Del)]: In this case, the Delhi High Court held that there is no necessity or occasion for a trader to separately determine the cost of acquisition of each item of goods sold by him; he is only required to prepare a trading account while reflecting the aggregate sales and purchases. Thus, in the case of a trader, the principle of ascertaining notional cost attributable to the rights entitlement is neither necessary nor apposite.
• CIT v. B.C. Srinivasa Setty [(1981) 128 ITR 294 (SC)]: In this case, the Supreme Court held that if the cost of acquisition of an asset could not be determined, the charge of tax would itself fail. The Court observed that the cost of acquisition is the basis on which capital gains or losses are computed, and if the cost of acquisition cannot be determined, then it is not possible to compute the capital gains or losses.
• Dhun Dadabhoy Kapadia v. CIT [(1975) 101 ITR 849 (Bom)]: In this case, the Chennai High Court held that the notional cost of acquisition of rights to subscribe to shares could be considered for the purpose of computing capital gains on the sale of such rights. However, the Court also observed that the notional cost of acquisition must be determined on a reasonable basis, and that it should not be inflated.

It is important to note that the courts have taken a different approach to the issue of the notional cost of acquisition in different cases. It is therefore important to consider the facts and circumstances of each case before determining whether or not the notional cost of acquisition can be allowed for income tax purposes.

In addition to the above case laws, the following principles can be derived from the judicial pronouncements on the notional cost of acquisition:

• The notional cost of acquisition must be determined on a reasonable basis.
• The notional cost of acquisition should not be inflated.
• The notional cost of acquisition must be related to the actual cost of acquisition of the asset.
• The notional cost of acquisition must be allowed for income tax purposes only if it is recognized under the accounting standards.

FAQ QUESTION

What is Notional Cost of Acquisition of the Income Tax Act?

The term “notional cost of acquisition” refers to the cost of acquisition of an asset that is calculated using a method other than the actual cost incurred by the assessed. The Income Tax Act of India specifies certain situations in which the notional cost of acquisition must be used to calculate capital gains or losses.

When is Notional Cost of Acquisition used under Income Tax Act?

Notional cost of acquisition is used in the following situations:

• Compulsory acquisition of capital assets of the Income Tax Act: When a capital asset is compulsorily acquired by the government or other authority, the compensation received by the assessed is treated as the notional cost of acquisition.
• Assets received on liquidation of a company of the Income Tax Act: When a shareholder receives assets on the liquidation of a company, the notional cost of acquisition of those assets is treated as the face value of the shares held by the shareholder.
• Stock or shares becoming property of taxpayer on consolidation, conversion, etc of the Income Tax Act: When a taxpayer’s stock or shares become his property on consolidation, conversion, etc., the notional cost of acquisition of those stock or shares is treated as the cost of acquisition of the original stock or shares.
• Allotment of shares in an amalgamated Indian company of the Income Tax Act: When a shareholder of an amalgamating company is allotted shares in the amalgamated Indian company, the notional cost of acquisition of those shares is treated as the cost of acquisition of the shares in the amalgamating company.
• Conversion of debentures into shares of the Income Tax ActWhen a taxpayer converts his debentures into shares; the notional cost of acquisition of those shares is treated as the cost of acquisition of the debentures.
• Allotment of shares/securities by a company of the Income Tax Act: When a company allots shares or securities to its shareholders, the notional cost of acquisition of those shares or securities is treated as the face value of the shares or securities allotted.
• Property covered by section 56(2)(vii) or (viia) or (x) of the Income Tax Act: When a taxpayer receives property under section 56(2)(vii) or (viia) or (x), the notional cost of acquisition of that property is treated as the face value of the bonds or debentures surrendered.
• Allotment of shares in Indian resulting company to the existing
• Allotment of shares in Indian resulting company to the existing shareholders of the demerger company in a scheme of demerger: When the existing shareholders of a demerger company are allotted shares in the Indian resulting company in a scheme of demerger, the notional cost of acquisition of those shares is treated as the cost of acquisition of the shares in the demerger company.
• Cost of acquisition of original shares in demerged company after demerger: After a demerger, the cost of acquisition of the original shares in the demerged company is treated as the notional cost of acquisition of the shares in the Indian resulting company.

How is Notional Cost of Acquisition calculated under income tax act?

The notional cost of acquisition is calculated in a different way depending on the situation. For example, in the case of compulsory acquisition of capital assets, the notional cost of acquisition is equal to the compensation received by the assessed. In the case of assets received on liquidation of a company, the notional cost of acquisition is equal to the face value of the shares held by the shareholder.