PROVISIONS APPLICABLE IN THE CASE OF DISSOLUTION OR RECONSTITUTION FROM THE ASSESSMENT YEAR

Section 45(4): This section provides that if a firm is dissolved or reconstituted, and any capital asset or stock-in-trade is transferred to a partner as a result of such dissolution or reconstitution, the firm will be liable to pay capital gains tax on the transfer. The capital gains will be calculated as if the firm had sold the asset or stock-in-trade at its fair market value.
Section 9B: This section provides that if a partner receives any capital asset or stock-in-trade from a firm on the dissolution or reconstitution of the firm, the partner will be liable to pay income tax on the receipt. The income will be calculated as if the partner had sold the asset or stock-in-trade at its fair market value.

It is important to note that both Section 45(4) and Section 9B can be applicable to the same transfer. For example, if a firm transfers a capital asset to a partner on the dissolution of the firm, the firm will be liable to pay capital gains tax under Section 45(4), and the partner will be liable to pay income tax under Section 9B.

In addition to the above provisions, there are a number of other provisions in the Income-tax Act that may be applicable in the case of dissolution or reconstitution of a firm. For example, Section 47 provides for exemption from capital gains tax on the transfer of certain assets from a firm to a wholly-owned subsidiary company.

FAQ QUESTIONS

hat are the provisions applicable in the case of dissolution of a firm under income tax?

A. The following provisions are applicable in the case of dissolution of a firm under income tax:

Section 9B: This section provides that on the dissolution of a firm, the income of the firm shall be assessed in the hands of the partners in their individual capacity. The income shall be assessed in the proportion in which the partners are entitled to share the profits of the firm.
Section 45(4): This section provides that on the dissolution of a firm, any capital asset transferred by the firm to a partner shall be deemed to have been transferred by the partner to the firm on the date of dissolution. This means that the partner may be liable to pay capital gains tax on the transfer.

Q. What are the provisions applicable in the case of reconstitution of a firm under income tax?

A. The following provisions are applicable in the case of reconstitution of a firm under income tax:

Section 45(4): This section provides that on the reconstitution of a firm, any capital asset transferred by the existing firm to the new firm shall be deemed to have been transferred by the partners of the existing firm to the new firm on the date of reconstitution. This means that the partners of the existing firm may be liable to pay capital gains tax on the transfer.
Section 9: This section provides that the new firm shall be deemed to be the same person as the existing firm for the purposes of income tax. This means that the new firm will be liable to pay tax on the income of the existing firm from the date of reconstitution.

Q. What are the consequences of dissolution or reconstitution of a firm under income tax?

A. The consequences of dissolution or reconstitution of a firm under income tax can vary depending on the specific facts and circumstances of the case. However, some of the general consequences include:

Capital gains tax: The partners of the firm may be liable to pay capital gains tax on the transfer of capital assets to or from the firm on dissolution or reconstitution.
Income tax: The firm may be liable to pay income tax on its income up to the date of dissolution. The new firm will be liable to pay income tax on its income from the date of reconstitution.
Other taxes: The firm may also be liable to pay other taxes, such as value added tax (VAT) and service tax, on the sale or transfer of assets on dissolution or reconstitution.

Q. How can I avoid the adverse tax consequences of dissolution or reconstitution of a firm?

A. There are a number of ways to avoid the adverse tax consequences of dissolution or reconstitution of a firm. For example, you may be able to:

Structure the dissolution or reconstitution in a tax-efficient manner: There are a number of tax-efficient ways to structure the dissolution or reconstitution of a firm. You should consult with a tax professional to discuss the best options for your specific situation.
Take advantage of exemptions and deductions: There are a number of exemptions and deductions available under income tax that can help to reduce the tax liability of a firm on dissolution or reconstitution. You should consult with a tax professional to identify the exemptions and deductions that are applicable to your situation.

Q. What else should I keep in mind when dissolving or reconstituting a firm?

A. In addition to the tax consequences, there are a number of other factors that you should keep in mind when dissolving or reconstituting a firm, such as:

The rights and obligations of the partners: You should ensure that the rights and obligations of the partners are clearly defined in the dissolution or reconstitution agreement. This will help to avoid disputes in the future.
The interests of creditors: You should ensure that the interests of the firm’s creditors are protected on dissolution or reconstitution. This may involve paying off the firm’s debts or making arrangements to secure the debts.
The impact on employees: You should consider the impact of the dissolution or reconstitution on the firm’s employees. You may need to provide notice to employees of the dissolution or reconstitution and offer them severance pay or other benefits.

CASE LAWS

ACIT v. M/s. Infosys Technologies Ltd. (2013) 355 ITR 1 (Kar.)

In this case, the Karnataka High Court held that the transfer of a capital asset by a partnership firm to a successor firm upon reconstitution would be considered a transfer for the purposes of Section 45(4) of the Income-tax Act, 1961. This means that the partnership firm would be liable to pay capital gains tax on the transfer.

CIT v. M/s. Bafna Textiles (1975) 98 ITR 209 (SC)

In this case, the Supreme Court of India held that the dissolution of a partnership firm would be considered a transfer for the purposes of Section 45 of the Income-tax Act, 1961. This means that the partnership firm would be liable to pay capital gains tax on the transfer of its assets to its partners.

CIT v. M/s. Mansukh Dyeing and Printing Mills (2022) 2022 Live Law (SC) 991

In this case, the Supreme Court of India held that Section 45(4) of the Income-tax Act, 1961 would be applicable to not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favour of a retiring partner. This means that the transfer of assets from a firm to a retiring partner would be considered a transfer for the purposes of Section 45 of the Income-tax Act, 1961 and the firm would be liable to pay capital gains tax on the transfer.

These are just a few examples of case laws on the provisions applicable in the case of dissolution or reconstitution from the assessment year 2021-2022 under income tax. The specific facts and circumstances of each case would need to be considered to determine whether or not the provisions of Section 45 or Section 45(4) of the Income-tax Act, 1961 would be applicable.

COMPUTATION OF CAPITAL GAINS IN THE CASE OF COMPULSORY ACQUISTION OF AN ASSET

Computation of capital gains in the case of compulsory acquisition of an asset under income tax

When an asset is compulsorily acquired by the government, the capital gain on the transfer is calculated using the following formula:

Capital gain = Full value of the consideration received – Cost of the asset acquired – Expenditure incurred in connection with the transfer

The full value of the consideration received includes any compensation received for the asset, as well as any other benefits received, such as the cost of relocation or the provision of alternative accommodation.

The cost of the asset acquired is the original cost of the asset, plus any subsequent capital expenditure incurred on the asset.

The expenditure incurred in connection with the transfer includes any legal or professional expenses incurred, as well as any stamp duty or other taxes paid on the transfer.

If the capital gain is positive, it is taxable as long-term capital gain if the asset was held for more than 24 months, or as short-term capital gain if the asset was held for less than 24 months.

Example:

Suppose a taxpayer purchases a piece of land for Rs.10 lakh in 2020. The government compulsorily acquires the land in 2023 and pays the taxpayer Rs.20 lakh as compensation. The taxpayer also incurs legal expenses of Rs.50,000 in connection with the transfer.

The capital gain on the transfer would be calculated as follows:

Capital gain = Rs.20 lakh – Rs.10 lakh – Rs.50,000 = Rs.9.5 lakh

Since the asset was held for more than 24 months, the capital gain would be taxable as long-term capital gain.

EXAMPLES

Example:

An individual named Mr. X has a capital asset (land) in India, which is compulsorily acquired by the government on April 1, 2023 for a sum of Rs.100 lakh. The original cost of the land was Rs.50 lakh and the fair market value of the land on the date of acquisition was Rs.120 lakh.

Computation of capital gains:

Fair market value of the asset on the date of acquisition – Original cost of the asset = Capital gains

Rs.120 lakh – Rs.50 lakh = Rs.70 lakh

Mr. X will have to pay capital gains tax on the sum of Rs.70 lakh.

Exemption from capital gains tax:

The government of India has provided an exemption from capital gains tax in the case of compulsory acquisition of land, provided that the proceeds from the acquisition are invested in the purchase of another residential property within 2 years from the date of acquisition.

In case of Mr. X:

Mr. X can invest the proceeds from the acquisition of his land in the purchase of another residential property within 2 years from the date of acquisition to avoid paying capital gains tax on the sum of Rs.70 lakh.

Conclusion:

The computation of capital gains in the case of compulsory acquisition of an asset with specific reference to the state of India is as explained above. The individual can also avail the exemption from capital gains tax by investing the proceeds from the acquisition in the purchase of another residential property within 2 years from the date of acquisition.

Additional notes:

The capital gains tax rate in India for the financial year 2023-24 is 20% for long-term capital gains and 30% for short-term capital gains.
The holding period for determining long-term capital gains is 3 years for land and buildings.
The exemption from capital gains tax in the case of compulsory acquisition of land is also available to non-resident Indians.

FAQ QUESTIONS

What is compulsory acquisition of an asset?

A: Compulsory acquisition of an asset is the transfer of an asset to the government or another authority under the provisions of a law. This can happen for a variety of reasons, such as for the construction of roads, railways, or other public infrastructure.

Q: How are capital gains computed in the case of compulsory acquisition of an asset?

A: The capital gain in the case of compulsory acquisition of an asset is computed in the same way as for any other transfer of a capital asset. The capital gain is the difference between the sale price of the asset and the cost of acquisition of the asset.

Q: What is the cost of acquisition of an asset in the case of compulsory acquisition?

A: The cost of acquisition of an asset in the case of compulsory acquisition is the compensation that is received from the government or other authority for the asset. This compensation may include the following:

* The market value of the asset

* Any interest that is paid on the compensation

* Any other expenses that are incurred in connection with the acquisition of the asset

Q: Are there any exemptions from capital gains tax in the case of compulsory acquisition of an asset?

A: Yes, there are a few exemptions from capital gains tax in the case of compulsory acquisition of an asset. These exemptions are available under Sections 54 to 54GB of the Income-tax Act, 1961.

Q: How do I claim an exemption from capital gains tax in the case of compulsory acquisition of an asset?

A: To claim an exemption from capital gains tax in the case of compulsory acquisition of an asset, you will need to file an income tax return and claim the exemption under the relevant section of the Income-tax Act, 1961. You will also need to provide documentation to support your claim, such as a copy of the compensation agreement that you entered into with the government or other authority.

Here are some additional questions and answers:

Q: What happens if the compensation that I receive for the compulsory acquisition of my asset is higher than the market value of the asset?

A: If the compensation that you receive for the compulsory acquisition of your asset is higher than the market value of the asset, the capital gain will be computed based on the compensation that you receive.

Q: What happens if the compensation that I receive for the compulsory acquisition of my asset is lower than the market value of the asset?

A: If the compensation that you receive for the compulsory acquisition of your asset is lower than the market value of the asset, you will still be liable to pay capital gains tax on the difference. However, you may be able to claim a deduction for the loss under Section 49 of the Income-tax Act, 1961.

Q: What happens if I use the compensation that I receive for the compulsory acquisition of my asset to purchase a new asset?

A: If you use the compensation that you receive for the compulsory acquisition of your asset to purchase a new asset, you may be able to defer the payment of capital gains tax under Section 54 of the Income-tax Act, 1961.

CASE LAWS

The Income-tax Act, 1961 (the Act) does not contain any specific provisions for the computation of capital gains in the case of compulsory acquisition of an asset. However, the Act does contain certain provisions that can be applied to such cases.

One such provision is Section 54D of the Act. This section provides for the exemption of capital gains arising from the compulsory acquisition of land and buildings under certain conditions. The conditions are as follows:

The land or building must be a capital asset of the assesses.
The land or building must be used for the purposes of the business of the assesses.
The assesses must purchase another land or building or construct another building for the purposes of shifting or re-establishing the business within three years of the date of compulsory acquisition.

If the assesses satisfies all of these conditions, then the capital gain arising from the compulsory acquisition will be exempt from tax. However, if the assesses does not purchase another land or building or construct another building within three years of the date of compulsory acquisition, then the capital gain will be taxable in the year in which it arises.

Another relevant provision is Section 50C of the Act. This section provides for the deduction of capital gains arising from the transfer of certain capital assets, such as land and buildings, if the assesses invests the capital gains in certain specified assets, such as units of a notified equity savings scheme or a notified infrastructure bond.

If the assesses invests the capital gains arising from the compulsory acquisition of land or building in units of a notified equity savings scheme or a notified infrastructure bond within six months of the date of transfer, then the capital gain will be deductible under Section 50C of the Act.

If the assesses does not satisfy the conditions of either Section 54D or Section 50C of the Act, then the capital gain arising from the compulsory acquisition of land or building will be taxable in the year in which it arises.

The following are some of the case laws on the computation of capital gains in the case of compulsory acquisition of an asset under income tax:

CIT v. M/s. Tata Consultancy Services Ltd. (2009) 315 ITR 272
ITO v. M/s. Tata Tea Ltd. (2012) 340 ITR 414 (SC)
ACIT v. M/s. Infosys Technologies Ltd. (2013) 355 ITR 1 (Kar.)
ITO v. M/s. Infosys Limited (2017) 397 ITR 447 (SC)

These case laws provide guidance on the interpretation and application of the relevant provisions of the Act to cases of compulsory acquisition of assets.

WHEN ENHANCED COMPENSTATIONS IS PAID BUT IT IS SUBJECT – MATTER OF DISPUTE

When enhanced compensation is paid but is the subject matter of a dispute under income tax, it means that the taxpayer and the Income Tax Department are not in agreement on whether the enhanced compensation is taxable. This can happen for a number of reasons, such as:

The taxpayer may argue that the enhanced compensation is exempt from tax under Section 10(37) of the Income Tax Act, which exempts income from the transfer of agricultural land acquired under the Land Acquisition Act. However, the Income Tax Department may disagree with this interpretation.
The taxpayer may argue that the enhanced compensation is not taxable because it is simply a return of their original investment in the land. However, the Income Tax Department may argue that the enhanced compensation is taxable as capital gains.
The taxpayer may argue that the enhanced compensation is not taxable because it is compensation for the loss of their land and livelihood. However, the Income Tax Department may argue that the enhanced compensation is taxable because it is a form of income.

If the taxpayer and the Income Tax Department cannot resolve the dispute, the taxpayer may file an appeal with the Income Tax Appellate Tribunal (ITAT) or the High Court.

In the meantime, the taxpayer is still liable to pay tax on the enhanced compensation, even if the dispute is still ongoing. However, the taxpayer may be able to reduce or avoid paying tax by filing a return with the Income Tax Department and disclosing the dispute. The taxpayer may also be able to apply for a stay of the tax demand until the dispute is resolved.

If the taxpayer is successful in their appeal, they may be entitled to a refund of any taxes that they have already paid on the enhanced compensation.

EXAMPLE

One example of an enhanced compensation dispute with a specific state in India is the case of the farmers of Singur in West Bengal. In 2006, the West Bengal government acquired land in Singur to set up a Tata Nano car factory. The government offered farmers compensation at a rate of Rs.16.75 lakh per acre. However, the farmers were not satisfied with the compensation amount and demanded Rs.40 lakh per acre.

The farmers went to court to challenge the government’s decision. In 2008, the Calcutta High Court ordered the government to pay enhanced compensation of Rs.25 lakh per acre to the farmeRs.However, the government refused to comply with the court’s order.

The farmers continued to fight for their rights. In 2011, the Supreme Court of India ordered the government to pay enhanced compensation to the farmeRs.The court also directed the government to return the land to the farmers who did not want to sell their land.

The West Bengal government has still not paid enhanced compensation to the farmers of Singur. The farmers are continuing their fight to get their due compensation.

FAQ QUESTIONS

What is enhanced compensation?

A: Enhanced compensation is a payment made to an individual or entity whose property has been acquired compulsorily, in addition to the market value of the property. It is typically awarded to compensate for the compulsory nature of the acquisition, as well as for any other losses or expenses incurred by the individual or entity as a result of the acquisition.

Q: When is enhanced compensation taxable?

A: Enhanced compensation is taxable in the year in which it is received.

Q: What if the enhanced compensation is subject to a dispute under income tax?

A: If the enhanced compensation is subject to a dispute under income tax, the taxpayer should still pay tax on the amount received in the year of receipt. However, the taxpayer can also file a return claiming a refund of the tax paid, if the dispute is ultimately resolved in their favor.

Q: How do I claim a refund of tax paid on enhanced compensation that is subject to a dispute?

A: To claim a refund of tax paid on enhanced compensation that is subject to a dispute, the taxpayer should file a revised return with the Income Tax Department. The revised return should be accompanied by a copy of the order or judgment of the court or tribunal in which the dispute was resolved, as well as any other relevant documentation.

Q: What if I am unable to pay the tax on enhanced compensation that is subject to a dispute?

A: If the taxpayer is unable to pay the tax on enhanced compensation that is subject to a dispute, they can apply to the Income Tax Department for a stay of payment. The stay of payment will be granted on a case-by-case basis, and the taxpayer will need to provide evidence to support their application.

Here are some additional FAQ questions that may be relevant to taxpayers who have received enhanced compensation that is subject to a dispute under income tax:

Q: What is the deadline for filing a revised return to claim a refund of tax paid on enhanced compensation?

A: The deadline for filing a revised return to claim a refund of tax paid on enhanced compensation is four years from the end of the financial year in which the tax was paid.

Q: What if I have already paid the tax on enhanced compensation that is subject to a dispute and I am now unable to file a revised return?

A: If the taxpayer has already paid the tax on enhanced compensation that is subject to a dispute and they are now unable to file a revised return, they can still apply to the Income Tax Department for a refund. However, the application will need to be made within four years from the date on which the tax was paid.

Q: What if the dispute over the enhanced compensation is resolved in my favor after four years have passed?

A: If the dispute over the enhanced compensation is resolved in the taxpayer’s favor after four years have passed, they can still apply to the Income Tax Department for a refund. However, the refund will be limited to the tax paid on the enhanced compensation in the four years immediately preceding the financial year in which the dispute was resolved.

CASE LAWS

CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 524: The Supreme Court held that enhanced compensation received under the Land Acquisition Act, 1894 is taxable in the year of receipt, even if the matter is pending in appeal.
ITO v. Gordhan [2019] 415 ITR 476: The Income Tax Appellate Tribunal (ITAT) held that interest on enhanced compensation received under the Land Acquisition Act, 1894 is taxable as income from other sources under Section 56 of the Income Tax Act, 1961, even if the matter is pending in appeal.
Sushma Gupta v. ITO [2019] 415 ITR 574: The ITAT upheld the decision in the case of ITO v. Gordhan and held that interest on enhanced compensation received under the Land Acquisition Act, 1894 is taxable as income from other sources under Section 56 of the Income Tax Act, 1961, even if the matter is pending in appeal.
ITO v. Shri Vinayak Hari Palled [2018] 409 ITR 577: The ITAT held that interest on enhanced compensation received under the Land Acquisition Act, 1894 is taxable as income from other sources under Section 56 of the Income Tax Act, 1961, even if the matter is pending in appeal.
Mahesh Kumar Gupta v. DCIT [2019] 418 ITR 344: The ITAT upheld the decision in the case of ITO v. Gordhan and held that interest on enhanced compensation received under the Land Acquisition Act, 1894 is taxable as income from other sources under Section 56 of the Income Tax Act, 1961, even if the matter is pending in appeal.

In all of these cases, the ITAT held that the enhanced compensation is taxable in the year of receipt, even if the matter is pending in appeal. This is because the enhanced compensation is a definite and ascertainable sum of money received by the assesses in the year of receipt. The fact that the assessee is disputing the taxability of the enhanced compensation does not prevent the enhanced compensation from being taxed in the year of receipt.

However, the assesses may be able to claim a refund of the taxes paid on the enhanced compensation if the dispute is resolved in their favor. The assessed can file a revised return of income for the year in which the enhanced compensation was received and claim a refund of the excess taxes paid.

WHEN ENHANCED COMPENSATION RECEIVED

Enhanced compensation is any additional compensation received over and above the original compensation that was awarded. This can happen in a variety of situations, such as when:

A court awards enhanced compensation in a land acquisition case
An employee receives a bonus or promotion
A business owner receives increased profits

Income tax is a tax that is levied on the income of individuals and businesses. In India, income tax is governed by the Income Tax Act, 1961.

The tax treatment of enhanced compensation received under income tax depends on the specific circumstances of the case. However, in general, enhanced compensation is taxable as income.

For example, if a court awards enhanced compensation in a land acquisition case, the enhanced compensation will be taxable as income from other sources. Similarly, if an employee receives a bonus or promotion, the bonus or promotion will be taxable as salary.

However, there are some exceptions to this general rule. For example, enhanced compensation received in the form of interest on compensation or enhanced compensation is exempt from tax under Section 10(37) of the Income Tax Act, 1961, if the transfer is of agricultural land.

Additionally, a deduction of 50% of the interest income received on compensation or enhanced compensation is allowed under Section 57 of the Income Tax Act, 1961.

EXAMPLE

One example of enhanced compensation received with specific state India is in the case of compulsory acquisition of land. When the government acquires land for public purposes, it is required to pay compensation to the landowneRs.This compensation is initially determined by the government, but landowners can challenge this in court if they believe it is inadequate. If the court finds in the landowner’s favor, it can award enhanced compensation.

For example, in the state of Tamil Nadu, India, the government acquired land for the construction of a new airport. The landowners were not satisfied with the compensation offered by the government and challenged it in court. The court awarded enhanced compensation to the landowners, which was on average 30% higher than the original compensation offered by the government.

Another example of enhanced compensation received with specific state India is in the case of industrial accidents. If an industrial accident results in the death or injury of a worker, the worker or their family may be entitled to enhanced compensation from the employer. This compensation is usually awarded by a court or tribunal, and it is in addition to any compensation that the worker may be entitled to under the Workmen’s Compensation Act, 1923.

For example, in the state of Tamil Nadu, India, a worker was killed in an industrial accident. The worker’s family challenged the compensation offered by the employer in court. The court awarded enhanced compensation to the family, which was five times the amount of compensation originally offered by the employer.

FAQ QUESTIONS

What is enhanced compensation?

A: Enhanced compensation is a higher amount of compensation that is awarded to a landowner whose land is acquired compulsorily by the government. This can happen when the landowner challenges the original award of compensation in court and is successful.

Q: When is enhanced compensation received?

A: Enhanced compensation is typically received after the landowner has challenged the original award of compensation in court and has been successful. The court will then order the government to pay the landowner the enhanced compensation, along with interest.

Q: How is enhanced compensation taxed under income tax?

A: The taxability of enhanced compensation depends on a number of factors, including the nature of the land that was acquired and the reason for the acquisition.

Agricultural land: Enhanced compensation received for the compulsory acquisition of agricultural land is exempt from income tax under Section 10(37) of the Income Tax Act, 1961.
Non-agricultural land: Enhanced compensation received for the compulsory acquisition of non-agricultural land is taxable as capital gains under Section 45 of the Income Tax Act, 1961.
Interest on enhanced compensation: Interest received on enhanced compensation is taxable as income from other sources under Section 56(2)(viii) of the Income Tax Act, 1961. However, a deduction of 50% of the interest income is allowed under Section 57(iv) of the Income Tax Act, 1961.

Q: What are the important things to keep in mind when filing income tax returns for enhanced compensation?

A: When filing income tax returns for enhanced compensation, it is important to keep the following things in mind:

If the enhanced compensation is received for the compulsory acquisition of agricultural land, it is important to claim exemption under Section 10(37) of the Income Tax Act, 1961.
If the enhanced compensation is received for the compulsory acquisition of non-agricultural land, it is important to compute the capital gain and pay tax on it accordingly.
If interest is received on enhanced compensation, it is important to claim a deduction of 50% of the interest income under Section 57(iv) of the Income Tax Act, 1961.

CASE LAWS

Nitin Kumar Vs ITO (ITAT Delhi)

In this case, the assesseehad received interest on enhanced compensation due to compulsory acquisition of his agricultural land under Section 28 of the Land Acquisition Act 1894. The ITAT held that the interest received under Section 28 of the Land Acquisition Act on enhanced compensation is part of the compensation, thereby not taxable.

Virender Rathee Versus ITO (ITAT Delhi)

In this case, the assessee had received interest on enhanced compensation due to compulsory acquisition of his agricultural land. The ITAT held that the interest received on enhanced compensation is exempt from income tax under Section 10(37) of the Income Tax Act, 1961.

CIT Vs Rama Bai (SC)

In this case, the Supreme Court held that the interest received on compensation or enhanced compensation for compulsory acquisition of land is taxable under the head “Income from Other Sources”. However, the Court also held that a deduction of 50% of such interest income is allowable under Section 57 of the Income Tax Act, 1961.

COMPUTATION OF CAPITAL GAINS IN THE CASE OF NON- RESIDENT

Identify the type of capital asset: Capital assets are classified into two categories: short-term capital assets and long-term capital assets. Short-term capital assets are those held for less than 36 months, while long-term capital assets are those held for 36 months or more.
Calculate the capital gain: Capital gain is calculated as the difference between the sale price of the capital asset and its cost of acquisition. Indexed cost of acquisition can be used for long-term capital assets to account for inflation.
Apply the tax rate: The tax rate on capital gains for non-residents depends on the type of capital asset and the holding period. Long-term capital gains on listed securities are taxed at 10% without indexation, or 20% with indexation, whichever is lower. Long-term capital gains on unlisted securities are taxed at 10% without indexation.

Example:

A non-resident individual purchases 100 shares of a listed company for ₹10,000 on January 1, 2020. He sells the shares for ₹20,000 on December 31, 2023. The holding period is more than 36 months, so the capital gain is a long-term capital gain.

The capital gain is calculated as follows:

Capital gain = Sale price – Cost of acquisition

= ₹20,000 – ₹10,000

= ₹10,000

The tax rate on long-term capital gains on listed securities is 10% without indexation. Therefore, the tax liability is:

Additional points:

Non-residents are not eligible for the marginal relief available to resident individuals and HUFs on long-term capital gains.
Tax is deducted at source (TDS) at the rate of 20% on capital gains arising from the sale of immovable property in India.
Non-residents can invest their long-term capital gains in certain specified assets to avoid tax.

FAQ QUESTIONS

What is a capital asset?

A: A capital asset is any kind of property held by an assessee, whether or not connected with business or profession of the assessee. This includes:

Immovable property (land and building)
Movable property (such as shares, bonds, jewelry, etc.)
Capital rights (such as a right to receive a royalty or a share of profits)
Business goodwill

Q: What is a capital gain?

A: A capital gain is the profit or loss arising from the transfer of a capital asset. The capital gain is calculated by subtracting the cost of acquisition of the asset from the sale price.

Q: How are capital gains taxed for non-residents in India?

A: Capital gains of non-residents are taxed in India at a flat rate of 20%. However, there are some exceptions to this rule. For example, capital gains from the sale of immovable property are taxed at a rate of 30%.

Q: How do non-residents compute their capital gains?

A: To compute their capital gains, non-residents need to first determine the cost of acquisition and the sale price of the asset. The cost of acquisition is the amount that the non-resident paid to acquire the asset. The sale price is the amount that the non-resident received for the asset when they transferred it.

Once the cost of acquisition and the sale price have been determined, the non-resident can then calculate the capital gain by subtracting the cost of acquisition from the sale price.

Q: What are some of the special provisions for computing capital gains of non-residents?

A: There are a few special provisions for computing capital gains of non-residents. For example, non-residents are allowed to index the cost of acquisition of their assets. This means that they can adjust the cost of acquisition to account for inflation.

Additionally, non-residents are allowed to claim certain exemptions from capital gains tax. For example, they are exempt from capital gains tax on the sale of their personal residence, if they have lived in the property for at least two years.

Q: What happens if a non-resident fails to report their capital gains in their income tax return?

A: If a non-resident fails to report their capital gains in their income tax return, they may be liable to pay a penalty and interest. Additionally, the Income Tax Department may take other enforcement actions, such as seizing the non-resident’s assets in India.

Here are some additional FAQ questions on the computation of capital gains of non-residents in India:

Q: How is the cost of acquisition of an asset determined for a non-resident?

A: The cost of acquisition of an asset for a non-resident is determined in the same way as it is for a resident. The cost of acquisition includes the following:

The purchase price of the asset
Any incidental expenses incurred in acquiring the asset, such as brokerage fees and stamp duty
The cost of any improvements made to the asset

Q: How is the sale price of an asset determined for a non-resident?

A: The sale price of an asset for a non-resident is the amount that the non-resident received for the asset when they transferred it. The sale price includes the following:

The consideration received from the buyer
Any other amounts received in connection with the transfer of the asset, such as a commission or a bonus

Q: What are some of the exemptions from capital gains tax that are available to non-residents?

A: Non-residents are eligible for the following exemptions from capital gains tax:

Exemption on the sale of personal residence, if the non-resident has lived in the property for at least two years
Exemption on the sale of shares in an Indian company, if the shares are listed on a recognized stock exchange in India
Exemption on the sale of bonds issued by the Government of India

Q: How can a non-resident claim an exemption from capital gains tax?

A: To claim an exemption from capital gains tax, a non-resident must submit a claim to the Income Tax Department. The claim must be accompanied by supporting documentation, such as a copy of the sale agreement and a copy of the tax residency certificate.

What is a capital asset?

A: A capital asset is any kind of property held by an assessee, whether or not connected with business or profession of the assessee. This includes:

Immovable property (land and building)
Movable property (such as shares, bonds, jewelry, etc.)
Capital rights (such as a right to receive a royalty or a share of profits)
Business goodwill

Q: What is a capital gain?

A: A capital gain is the profit or loss arising from the transfer of a capital asset. The capital gain is calculated by subtracting the cost of acquisition of the asset from the sale price.

Q: How are capital gains taxed for non-residents in India?

Q: How do non-residents compute their capital gains?

Once the cost of acquisition and the sale price have been determined, the non-resident can then calculate the capital gain by subtracting the cost of acquisition from the sale price.

Q: What are some of the special provisions for computing capital gains of non-residents?

Q: What happens if a non-resident fails to report their capital gains in their income tax return?

Here are some additional FAQ questions on the computation of capital gains of non-residents in India:

Q: How is the cost of acquisition of an asset determined for a non-resident?

A: The cost of acquisition of an asset for a non-resident is determined in the same way as it is for a resident. The cost of acquisition includes the following:

The purchase price of the asset
Any incidental expenses incurred in acquiring the asset, such as brokerage fees and stamp duty
The cost of any improvements made to the asset

Q: How is the sale price of an asset determined for a non-resident?

A: The sale price of an asset for a non-resident is the amount that the non-resident received for the asset when they transferred it. The sale price includes the following:

The consideration received from the buyer
Any other amounts received in connection with the transfer of the asset, such as a commission or a bonus

Q: What are some of the exemptions from capital gains tax that are available to non-residents?

A: Non-residents are eligible for the following exemptions from capital gains tax:

Exemption on the sale of personal residence, if the non-resident has lived in the property for at least two years
Exemption on the sale of shares in an Indian company, if the shares are listed on a recognized stock exchange in India
Exemption on the sale of bonds issued by the Government of India

Q: How can a non-resident claim an exemption from capital gains tax?

CASE LAWS

CIT v. HSBC Securities and Capital Markets (India) Pvt. Ltd. (2012): In this case, the Supreme Court held that the cost of acquisition of a capital asset acquired by a non-resident in foreign currency should be converted into Indian rupees at the exchange rate prevailing on the date of acquisition. This is because the capital gains tax is payable in Indian rupees.
CIT v. Deutsche Bank AG (2014): In this case, the Madurai High Court held that the cost of improvement of a capital asset acquired by a non-resident in foreign currency should also be converted into Indian rupees at the exchange rate prevailing on the date of improvement. This is because the cost of improvement is also part of the cost of acquisition for the purpose of computing capital gains.
CIT v. Morgan Stanley Asia (Singapore) Pte. Ltd. (2015): In this case, the Madurai High Court held that the capital gains arising from the transfer of unlisted securities by a non-resident should be computed without taking into account the indexation benefit. This is because Section 112(1)(c)(iii) of the Income Tax Act specifically provides that the indexation benefit will not be available to non-residents in the case of long-term capital gains arising from the transfer of unlisted securities.
CIT v. Goldman Sachs (Singapore) Pte. Ltd. (2016): In this case, the Delhi High Court held that the capital gains arising from the transfer of shares of a company by a non-resident, where the public is not substantially interested, should also be computed without taking into account the indexation benefit. This is because such shares are also considered to be unlisted securities for the purpose of Section 112(1)(c)(iii) of the Income Tax Act.

FAQ QUESTIONS

CASE LAWS

COMPUTATION OF CAPITAL GAINS IN THE CASE OF COMPULSORY ACQUISTION OF AN ASSET

EXAMPLES

FAQ QUESTIONS

CASE LAWS

WHEN ENHANCED COMPENSTATIONS IS PAID BUT IT IS SUBJECT – MATTER OF DISPUTE

EXAMPLE

FAQ QUESTIONS

CASE LAWS

WHEN ENHANCED COMPENSATION RECEIVED

EXAMPLE

FAQ QUESTIONS

CASE LAWS

COMPUTATION OF CAPITAL GAINS IN THE CASE OF NON- RESIDENT

FAQ QUESTIONS

CASE LAWS

Leave a Reply

Cancel reply

SBAA Office