Know All About Latest Judicial Decisions on Capital Gains
Loss on Sale of Capital Assets
The Gujarat High Court in the case of Kishorebhai Bhikhanhai Virani v. ACIT 367 ITR 261 held that the loss on sale of Capital Assets which is covered by section 10(38) cannot be set off against Capital Gains assessable under section 45. Hence, the loss arising out of sale of such an asset and covered by the clause would likewise not be includeable in computation of income of the assessee for the year under consideration.
Capital Gain or Business Income
The Rajasthan High Court in the case of Vimal Singhvi v. ACIT 370 ITR 275 held that in respect of agricultural land there was no evidence with the assessee to substantiate claim of carrying out agricultural operation and that the Sale Deed clearly showed the assessee as the absolute owner of residential land having converted its use from agriculture. Hence, the surplus was assessable as business income and not as Capital Gains.
Possession on Part Performance
The Karnataka High Court in the case of CIT v. Ved Prakash Rakhra 370 ITR 762 held that when a party is put in possession of property in part performance of an agreement as contemplated under section 53A of the Transfer of Property Act, 1882, the person who is in possession in such capacity has to be treated as the owner from the date on which he was put in possession. In this case the brief facts were that on 5th November, 1975, the Bangalore Development Authority allotted property in favour of the assessee’s father on lease-cum-sale basis and put the allottee in possession of the property.
In the meantime, the assessee’s father died and, thereafter, the Authority executed a registgered sale deed in favour of the assessee and his two brothers on August 8, 1987. The assessee put up construction and a compound wall to the property. The assessee for the assessment year 2001-02, while computing the capital gains from the property, claimed the benefit of indexation of the cost of acquisition with reference to the date of original allotment by the Authority. The allotment had been made and put the allottee in possession in the year 1977. The assessee was entitled to a one-third share on the property.
Since the allotment had been made and the allottee put in possession prior to April 1, 1981, the fair market value as on April 1, 1981, was taken into consideration for arriving at capital gains of Rs. 8,53,000. On the ground that the term “transfer” under section 2(47) had undergone change with effect from April 1, 1988, by insertion of sub-clause (v) to section 2(47) which provides that any transaction involving allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the 1882 Act, will also come within the ambit of transfer of the property as on April 1, 1981, and, accordingly, entitled to indexation while computing the capital gains.
Time of Transfer
The Kerala High Court in the case of CIT v. Cochin Stock Exchanges Ltd. 363 ITR 382 held that Capital Gain whether Long-term or Short-term is to be determined with reference to transfer of immovable property. Where the agreement for sale of land to the developer was done in April 2003 and part of consideration was paid as also the buyer was in possession of the land in April 2003 itself and that buyer was given Power of Attorney to sell portions of the land. The Honourable judges of the High Court held that the transfer took place in April 2003. Hence, the gain will be Long-term Capital Gain.
Allotment of Flat and Payment of First Installment
The Punjab and Haryana High Court in the case of Mrs. Madhu Kaul v. CIT and Another 363 ITR 54 held that where the allotment of a flat is made to the assessee and the payment of the first installment made, in such a situation the allottee obtains a right to hold the property and the period of holding is to be reckoned from the date when the allotment was made.
Date of Execution of Conveyance Deed to decide Capital Gain
In the case of CIT v. K. Ramakrishnan 363 ITR 59 the Delhi High Court held that in a situation where the assessee acquires possession of the plot of land on 12th December 2005 and sells it through a Registered Sale Deed dated 9th January 2008, it was held that as the assessee has acquired the beneficial interest in the property and at least 96 per cent of the amount was paid by the assessee by 3rd October 1999, hence the Sale proceeds were to be considered as Long-term Capital Gains.
Conversion of land from leasehold to freehold and transfer thereof
The Allahabad High Court in the case of Amar Nath Agarwal v. CIT and Another 371 ITR 183 held that where land is held on lease for more than three years and the same is later on converted into freehold and thereafter transferred, in such a case for the purposes of Capital Gain, the Gain would be Long-term Capital Gain. Hence, the conversion of the land from leasehold to freehold might bring an improvement of the title but would not have an effect on the taxability of the profits as short-term gain or long-term gain. This is very important decision for the benefit of the tax payers.
Adventure in the nature of trade
The Karnataka High Court in the case of CIT v. Shahrooq Ali Khan 370 ITR 246 held that where the assessee acquires right to sell the property with no intention to hold the property, in such an event the sale of the property subsequently would result into profit and such profit will not be a Capital Gain but it will be a transaction constituting adventure in the nature of trade. Hence, the gain amount would be assessable as business income.
Exemption under section 54 or under section 54F
It is well known fact that if the residential house is sold, the tax payer can make the investment only of the Capital Gain amount in buying a new property. However, in case any other capital asset is sold other than the residential house property for saving tax in respect of the same, the entire sale consideration has to be invested in buying a new house property in terms of section 54F of the Income-tax Act, 1961.
However, in a situation where the owners of a residential building demolish the said residential building and hand over the vacant space to the developer, in that situation they will not be entitled to exemption under section 54 but would be entitled to exemption only in terms of section 54F of the Income-tax Act, 1961.
Long-term Capital Gains or business income
The Delhi High Court in the case of CIT v. D & M Components Ltd. 364 ITR 179 held that the short duration of holding of the shares and lack of clarity in the account books in such a situation the sum of Rs. 26,82,115 as shown by the assessee as Short-term Capital Gain was not accepted by the Honourable judges of the High Court and it was held that the said amount shall be treated as a business income and not capital gains.
Business Income on Short-term Capital Gains
The Delhi High Court in the case of CIT v. Devasan Investment Pvt. Ltd. 365 ITR 452 held that the nature of purchase and sale of shares was essentially in the nature of transactions relating to investment and that the assessee had kept a target price of the shares for selling the same. Whenever the target price was appeared to have been achieved, the assessee sold the shares. Hence, the Honourable judges of the court opined that there cannot be any single factor criteria ought to be given undue weight ordinarily.
Hence, having regard to the entire facts of the case, the court was satisfied that on a fair application of the various tests, viz., the volume, frequency and duration of holding test ; the source of funds (own or borrowed) ; the objects – of the enterprise – test ; the nature of the assessee’s business) ; the previous history of such transactions, etc., the conclusions of the Commissioner, endorsed by the Income-tax Appellate Tribunal after its independent analysis of the circumstances. Hence, the gain in this situation was held to be Short-term Capital Gain and not business income.
Investment in purchase of two flats under two agreements from different sellers valid to save Capital Gains
Generally speaking, in terms of section 54 of the Income-tax Act, 1961 an assessee is entitled to purchase only one residential house property to save Capital Gains. But in one case the assessee purchased two flats under two distinct agreements from different sellers. Though these flats were acquired under two distinct agreements and from different sellers, the map of the general layout plan as well as internal layout plan in regard to these flats indicated that there was only one common kitchen for both flats. The flats were constructed in such a way that adjacent units or flats could be combined into one. The flats were converted into one unit for the purpose of residence of the assessee. Hence, the assessee was entitled to deduction and benefit in terms of section 54 of the Income-tax Act, 1961.
Capital Gains or Business Income
The Delhi High Court in the case of CIT v. CNB Fenwiz Ltd. 369 ITR 228 held that in the case of the assessee who was a share broker and was engaged in the business of sale and purchase of shares and the assessee maintained two portfolios one relating to investment and the other relating to stock in trade.
While the profit and losses from investments were shown as Capital Gains either Long-term or Short-term and the profits and losses from stock in trade were shown as business income. The same position was accepted in the case of the assessee for the earlier years. Hence, as the shares held in investments were kept in a separate portfolio, hence, it would not be treated as stock in trade and the profit arising from the sale of the same after a gap of four months would be treated as Short-term Capital Gain.
Cost of acquisition of inherited assets
The Karnataka High Court in the case of CIT v. Smt. Kaveri Thimmaiah 369 ITR 81 held that in respect of the property obtained on inheritance the cost of acquisition will be taken as the Index Cost of Acquisition of the previous owner and thereafter the Capital Gains has to be computed.
Construction of House – Meaning of
The Delhi High Court in the case of CIT v. Ashok Kumar Ralhan 360 ITR 575 held that if the assessee purchases a residential house property and demolishes the old house and constructs a new house on the same land within a period of three years, then the assessee would be entitled to exemption in terms of section 54 of the Income-tax Act. It was further held that section 54F of the Act requires that construction should be carried out within a period of three years from the date of sale of the capital asset. In the present case, the construction was carried out within the outer limit of three years.
Non-genuine transaction of purchase and sale of shares
The Gauhati High Court in the case of CIT v. Smt. Sanghamitra Bharali 361 ITR 481 held that amount claimed to be capital gains but on finding if the Department finds that the transactions for sale and purchase of the shares were not genuine, then the Honourable judges of the High Court held that the amount would be assessable as income.
Subhash Lakhotia Subash Lakhotia is a Tax and Investment Consultant and Tax Guru in CNBC Awaaz. The views expressed in this article are the author´s own.
