1. Capital gains is chargeable to tax in the year in which transfer takes place except in certain exceptional cases such as compulsory acquisition by government; conversion of capital asset into stock-in-trade ; destruction of asset resulting in awarding insurance compensation. It is therefore advisable not to transfer properties on credit basis. In the absence of liquidity, difficulty will arise for payment of tax.
2. Where the landowner and builder execute joint development agreement, if the consideration is receivable in built-up area to be constructed and handed over by the builder to the landowner, it is advisable to avoid the applicability of section 53A of the Transfer of Property Act. This can be achieved by mentioning in the agreement that license is granted to the builder to enter the premises and construct the building. The possession is retained by the landowner, which will be handed over as and when the built-up area is constructed and delivered. By this stipulation, the transfer will take place only in the year in which the built-up area is received and not before.
3. In order to attract the levy of capital gains tax, the assessee must hold a capital asset and it must undergo ‘transfer’. If investments are made in assets not treated as ‘capital asset’ under section 2(14) then the profit arising on transfer of such assets shall not attract capital gains. E.g. (i) Personal effects of movable nature such as silver household utensils, personal motor car, etc. (ii) Agricultural lands outside the specified area.
4. Planning can be done in such a way that the capital asset is transferred through any transaction which is not regarded as ‘transfer’ under section 47. E.g. transfer in a scheme of amalgamation, partition of HUF, etc.
5. When the asset is transferred, it can be ensured that it is a long-term capital asset so that the benefit of indexation can be availed and the concessional rate of tax prescribed under section 112 can be availed. Besides exemption under section 54, 54B, 54D, 54EC, 54ED, 54F, 54G can be availed if, applicable (of course Chapter VIA deductions cannot be claimed in respect of long term capital gain – section 112).
6. In respect of capital gains arising on account of – a. conversion of a capital asset into stock-in-trade; b. Compulsory acquisition under any law in force, taxability does not arise in the year of transfer. In the case of conversion, it arises only in the year of sale of stock-in-trade and in the case of compulsory acquisition, it arises in the year of receipt of compensation. Wherever permissible, year of chargeability can be accordingly planned.
7. In the case of compulsory acquisition, the Supreme Court decision in CIT vs. Hindustan Housing and Land Development Trust, 161 ITR 524, wherein it was held that ad hoc amount received pending dispute cannot be charged to tax should be borne in mind. In the case of non-residents, foreign companies, foreign institutions and overseas financial organisation, the special and concessional rates prescribed under section 112, 115A, can be taken advantage of.
8. Where an asset acquired prior to 1.4.81 is transferred, the fair market value as on that date can be availed as the cost of acquisition as, invariably, it may be more than the actual cost.
9. Subject to fulfillment of conditions, planning can be done to claim exemptions under sections 54 to 54G. If the investment in the eligible asset is not immediately possible, then deposit under capital gains account scheme can be made within the due date for filing the return or before the date of filing of the return of income, whichever is earlier.
10. Even if the amount deposited in capital gains account scheme is not utilised within the stipulated period, the amount shall be taxed as capital gain only in the year in which such period expires and not in the year in which exemption was availed. Therefore, it postpones the liability to capital gains tax.
11. Where exemption under sections 54, 54B, 54D or 54G had been claimed in respect of any asset acquired, transfer of such asset within a period of three years will result in reduction of the amount of such exemption from the cost of acquisition of such asset. This will have the effect of increasing the short term capital gain and assessee will end up paying more tax whereas exemption earlier availed might be in respect of long term capital gain which was taxable at a concessional rate under section 112. Therefore, the new asset should not be sold within a period of 36 months. In the alternative, loan can be availed to meet any financial crisis and such loan can be cleared by selling the property after 36 months.
12. Where the assessee transfers an agricultural land situated in specified area he can avail exemption under section 54B by investing in another agricultural land. If the agricultural land so acquired is outside the specified area, then also exemption can be availed. Further, if such agricultural land is subsequently sold (even within 36 months), there will not be any tax implication as it is not a ‘capital asset’ and the question of computing capital gain thereon does not arise.
13. Where any long-term capital asset is transferred and it is invested in the eligible asset, exemption is available in the computation of capital gain. A question arose about the possibility of assessee investing the net consideration in business and later borrows money for investment in the eligible asset within the time prescribed. In such a situation, it has been favourably held that the assessee is entitled to exemption – ITO vs. K.C. Gopal, 107 Taxman 591 (Ker). Applying this analogy, an assessee may invest the net consideration in business or use it for such other purpose. Housing loan can be obtained for investment in house property to avail exemption under section 54 or 54F, as the case may be. Assessee can avail interest as deduction under section 24, repayment of principal under section 80c as rebate. The loss, if any, computed under house property head can be set off against business income.
14. Existing old buildings are demolished and multistoried buildings are constructed. Prior to demolition of old buildings, tenants occupying such building are paid either compensation or they are given space in the new building on construction. Surrender of tenancy rights attracts liability to capital gains tax. Therefore, two separate agreement may be executed, one for surrender of tenancy right and another for construction of the residential unit for the tenant by the builder in which case exemption under section 54F can be availed. Net consideration arising on transfer of the longterm tenancy right shall be treated as invested in a residential house.
Excerpts from Direct Tax Laws with tax planning aspects by T.N. Manoharan.
(Article was first published on 07.06.2006)