India: Budget 2012 : Highlights - Capital Gains Tax

Last Updated: 15 November 2012

Definition of 'Capital Asset': Sec. 2(14)

'Capital asset' at present has been defined by the said section as property of any kind held by an assessee. A proviso is to be inserted retrospectively from 1st April, 1962, which clarifies that a property‟ "includes any rights in or in relation to an Indian Company, including rights of management or control or any other rights whatsoever".

This proposed retrospective amendment has been made as a reaction to the Vodafone case as the current definition does not include property indirectly held. Furthermore, it would have to be understood what is meant by rights of management or control and whether is it a reference to voting rights agreement, right to appoint director etc.

Definition of 'transfer'

Sec. 2(47): Definition of transfer‟, which currently includes sale, exchange or relinquishment of assets or rights therein etc. has been proposed to be extended retrospectively from 1st April, 1962 by insertion of Explanation 2‟. The explanation provides that transfer‟ includes creation of or disposing of any right in an asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (entered in or outside India) or otherwise. Further the Explanation provides that there will be a transfer‟ notwithstanding that the interest created in contingent or dependent on transfer of shares in a Company. Therefore, option agreements, contingent contracts etc could amount to transfer of shares.

The extended meaning of transfer may include creation of beneficial interest in an asset and therefore, there may be tax payable on having beneficial ownership.

Mode of computing Cost of acquisition

Sec. 49(1)(iii)(e): Sec. 49(1) provides for cost of acquisition in certain cases, including cost of acquisition of an asset in the hands of the LLP, where a LLP had succeeded a Company on conversion, as the cost in the hands of the Company originally as increased by cost of improvement. However, the said section does not provide for cost or acquisition in the hands of the Company, where a Company has succeeded a partnership firm or a sole proprietary concern.

The proposed amendment as a clarification, coming into effect from 1st April, 1999, provides that the cost of acquisition in the hands of the Company, where a Company had succeeded a partnership firm or a sole proprietary concern, would be the cost that was originally in the hands of the partnership firm or a sole proprietary concern as increased by any cost of improvement.

Deemed sales consideration where consideration not ascertainable on transfer of a capital asset: Sec. 50D

Presently on transfer on a capital asset if the consideration is not ascertainable there would be no levy of capital gains tax. This was held recently by AAR in the case of Re Dana Corporation following the principle laid down by Supreme Court in the case of BC Srinivasa Shetty. Re Dana Corporation involved a business reorganization in which several assets were transferred with the

liabilities for no consideration and the consideration for assets could not be ascertained. The AAR held that there would be no capital gains as there was no consideration ascertainable.

Sec. 50D has been proposed to be inserted, w.e.f. 1st April, 2013, which provides that where the consideration on transfer of a capital asset is not ascertainable or cannot be determined, the FMV of the said asset on the date of transfer shall be deemed to be the sale consideration.

Capital gain on sale of land used for agricultural purposes:Sec. 54B(1)

At present when an assessee invests the capital gains on sale of land, which was being used for agricultural purposes by him or by his parent, to purchase land for agricultural purposes there is no capital gains tax on the original gain.

By a proposed amendment to Sec. 54B(1), w.e.f 1st April, 2013, even a HUF would get the exemption from capital gains on sale of land which was being used for agricultural purposes.

Capital gains on sale of residential property not to be charged in certain cases

A new Sec. 54GB is proposed to be inserted w.e.f 1st April, 2013, which provides for an exemption from capital gains tax when an assessee being an individual or HUF incurs capital gain on sale of a residential property (a house or a plot of land) and, before the due date of filing his return, utilises the net consideration to subscribe to shares of a eligible company and the said company utilises the said amount of net consideration, within one year from the date of subscription, to purchase a new asset being plant and machinery (with certain exceptions).

The said eligible company shall deposit such amount in a specified account before the due date of filing of return of the individual or HUF who incurred the said gain.

The following conditions shall be fulfilled for the company to qualify as an eligible company:

  1. The Company is an Indian Company
  2. The Company is engaged in the business of manufacture
  3. The assessee has more than 50% of share capital or voting rights in the Company after the subscription under this Sec.
  4. The Company qualifies as a Small or Medium enterprise as defined by Micro, Small and Medium Enterprise Act, 2006.

New asset excludes:

  1. A second hand plant or machinery
  2. Any Plant or Machinery installed in any office or residential premises including guest house
  3. Any office appliance including computers or computer software
  4. Any vehicle
  5. Any plant or machinery the whole cost of which is deductible by way of depreciation or otherwise

This Sec. shall apply only for transfer of residential property up to 31st March, 2017

Short term Capital Gains Tax in certain cases: Sec. 111A

Rate of short Term capital Gains Tax is proposed to be increased to 15% from 10%

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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