Exemption under the head Capital Gains

Notes:

1. If the new asset is transferred, within a period of 3 years from the date of purchase/construction, the cost shall be reduced, in the year of transfer, by the gains exempted earlier.
2. If the gains are not reinvested as specified, before the due date of filing the return u/s. 139(1), then the amount not so reinvested is required to be deposited on or before that date in an account in a specified bank/institution and utilised for the purchase/construction of the relevant asset in accordance with the notified scheme within specified time limit in order to continue availing of the benefit of exemption [For the notified scheme, See 172 ITR (St.) 91].
3. Industrial land or building must have been used for the purposes of the business of the undertaking. New asset must be purchased/constructed for the purposes of shifting/reestablishing/setting up industrial undertaking.
4. The assessee must not own more than one residential house other than the new house on the date of the transfer of the original asset.
5. The assessee must neither purchase within two years after or construct within three years after the day of transfer, any other residential house other than the one in which reinvestment is made nor transfer the new asset within 3 years from the date of its acquisition/construction, otherwise the amount of gains earlier exempted shall be deemed to be LTCG in the year of such transfer.
6. The industrial undertaking must have been situated in an urban area and the transfer must have been effected as a result of shifting to a non-urban area.
7. The industrial undertaking must have been situated in an urban area and the transfer must have been effected as a result of shifting to a Special Economic Zone as defined in clause (za) of the Special Economic Zones Act, 2005.
8. ‘Foreign Exchange Asset’ means any of the assets listed in Note 9 below which assessee has acquired or purchased with, or subscribed to in convertible foreign exchange.
9. A 'Specified Asset' u/s. 115F means :
   1. Shares in an Indian company;
   2. Debentures issued by Indian company which is not a pvt. company;
   3. Deposits with an Indian company which is not a private company;
   4. Any security of the Central Government as defined in S. 2(2) of the Public Debt Act;
   5. Other notified assets.
10. In case of compulsory acquisition of asset under any law, time for reinvestment or deposit in specified assets, of sale proceeds or capital gains as the case may be, as prescribed by Ss. 54, 54B, 54D, 54EC and 54F shall be reckoned from the date of receipt of compensation as per provisions of S. 54H.
11. Board Cir. No. 471 dtd. 15-10-1986 (162 ITR (St) 41) has clarified that cases of allotment of flats under the self financing scheme of the Delhi Development Authority (DDA) should be treated as cases of ‘construction’ for the purposes of Ss. 54 and 54F.
    Similarly, the Board Cir. No. 672 dtd. 16-12-1993 (205 ITR (St) 47) has clarified that allotment of flats/houses by co-op. societies and other institutions, whose schemes of allotment and construction are similar to those of DDA (as mentioned in para 2 of aforesaid Cir. No. 471), would be treated as ‘construction’ for the purposes of Ss. 54 and 54F.
12. Board Cir. No. 667 dtd. 18-10-1993 (204 ITR (St) 103) has clarified that for the purpose of computing exemption u/s. 54 or 54F, the cost of the plot together with cost of the building will be considered as cost of new asset, provided the acquisition of the plot and also the construction thereon are completed within the period specified in these sections.
13. Where new asset is transferred within 3 years from date of its acquisition, or converted into money or any loan/advance is taken on securities of specified bond, the amount of gains earlier exempted shall be deemed to be LTCG in the year of such transfer or conversion.
14. Cost of specified asset shall not be considered for:
    • rebate u/s. 88 up to Assessment Year 2005-06;
    • deduction u/s. 80C from Assessment Year 2006-07.
      Where new asset is transferred within 3 years from date of its acquisition or converted into money or any loan/advances is taken on the security of specified assets, amount of gains earlier exempted shall be deemed to be LTCG in year of such transfer or conversion.
      Where new asset is transferred within one year from date of its acquisition, amount of gains earlier exempted shall be deemed to be LTCG in the year of such transfer.
      The benefit of exemption under section 54B extended to HUF with effect from 1st April, 2013.
      Under section 54GB
      18.1 "Eligible company" means a company which fulfils the following conditions, namely:—
      it is a company incorporated in India during the period from the 1st day of April of the previous year relevant to the assessment year in which the capital gain arises to the due date of furnishing of return of income under sub-section (1) of section 139 by the assessee;
      1. it is engaged in the business of manufacture of an article or a thing;
      2. it is a company in which the assessee has more than 50% share capital or more than 50% voting rights after the subscription in shares by the assessee; and
      3. it is a company which qualifies to be a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006;

      18.2 "New asset" means new plant and machinery but does not include—

      4. any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person;
      5. any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house;
      6. any office appliances including computers or computer software;
      7. any vehicle; or
      8. any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any previous year.

      18.3 As per the section, the amount of the net consideration, which has been received by the company for issue of shares to the assessee, to the extent it is not utilised by the company for the purchase of the new asset before the due date of furnishing of the return of income by the assessee under section 139, shall be deposited by the company, before the said due date in an account in any such bank or institution as may be specified and shall be utilised in accordance with any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and the return furnished by the assessee shall be accompanied by proof of such deposit having been made

      18.4 If the equity shares of the company or the new asset acquired by the company are sold or otherwise transferred within a period of five years from the date of their acquisition, the amount of capital gain arising from the transfer of the residential property which was not charged to tax, shall be deemed to be the income of the assessee chargeable under the head “Capital gains” of the previous year in which such equity shares or such new asset are sold or otherwise transferred, in addition to taxability of gains, arising on account of transfer of shares or of the new asset, in the hands of the assessee or the company, as the case may be.

      18.5 The exemption is available in case of any transfer of residential property made on or before 31st March, 2017.

      18.6 Section 54GB shall be effective from 1st April, 2013 and would accordingly apply from A.Y. 2013-14 and subsequent years.

      Deduction under sections 54 and 54F shall be allowable in respect of one residential house only, constructed or purchased, in India, within the time limit specified under that section. (wef 1-4-2015)

NO TRANSFER FOR THE PURPOSES OF CAPITAL GAIN

Following transactions are not regarded as transfer for the purpose of Capital Gain (S. 47).

Distribution/Transfer of a Capital Asset

1. On total or partial partition of H.U.F. [S. 47(i)]
2. Under a gift/an irrevocable trust (except shares, debentures or warrants issued under ESOP/ESOS) or under a will [S. 47(iii)].
3. By a company to its Indian subsidiary company if Parent company held all the shares of Indian subsidiary company [S. 47(iv)] (see notes 1 and 2).
4. By a subsidiary company to the Indian holding company if the Indian holding company held all the shares of the subsidiary company. [S. 47(v)] (see notes 1 and 2).
5. By the amalgamating company to the Indian amalgamated company in a scheme of amalgamation. [S. 47(vi)].
6. Being shares held in an Indian company by the amalgamating foreign company to the amalgamated foreign company in the scheme of amalgamation. [S. 47(via)]
   • At least 25% of shareholders of the first company remains share holders of the later company, and
   • there is no capital gains tax on such transfer in the country of first company
7. A capital asset by a banking company to a banking institution in a scheme of amalgamation sanctioned and brought into force by the Central Government u/s. 45(7) of the Banking Regulation Act, 1949 [S. 47(viaa)].
8. Clause (viab) and (viac) inserted w.e.f. 1-4-2016 by Finance Bill, 2015 as follows –
   (viab) any transfer, in a scheme of amalgamation, of a capital asset, being a share of a foreign company, referred to in Explanation 5 to clause (i) of sub-section (1) of section 9, which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the amalgamating foreign company to the amalgamated foreign company, if—
   1. at least twenty-five per cent of the share holders of the amalgamating foreign company continue to remain share holders of the amalgamated foreign company; and
   2. such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated;

   (vicc) any transfer in a demerger, of a capital asset, being a share of a foreign company, referred to in Explanation 5 to clause (i) of sub-section (1) of section 9, which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the demerged foreign company to the resulting foreign company, if,—

   1. the share holders, holding not less than three-fourths in value of the shares of the demerged foreign company, continue to remain share holders of the resulting foreign company; and
   2. such transfer does not attract tax on capital gains in the country in which the demerged foreign company is incorporated:

   Provided that the provisions of sections 391 to 394 of the Companies Act, 1956 shall not apply in case of demergers referred to in this clause;

9. By the demerged company to the resulting company if the resulting company is an Indian company [S. 47(vib)].
10. Being share or shares held in an Indian company by the demerged foreign company to the resulting foreign company, if
    • the share holders holding not less than 3/4th in the value of shares of the demerged foreign company continue to remain share holders of the resulting foreign company.
    • there is no capital gain tax on such transfer in the country in which the demerged foreign company is incorporated [S. 47(vic)].
11. Transfer by a predecessor co-operative bank to a successor co-operative bank in a business reorganisation. [S. 47(vica)].
12. Transfer of shares of a predecessor co-operative bank against shares of successor co-operative bank in a business reorganisation [S. 47(vicb)].
13. Transfer or issue of shares in case of a demerger to share holders of demerged company by resulting company [S. 47(vid)] (In the case of a demerger, there is a requirement under section 2(19AA)(iv) that the resulting company has to issue its shares to the share holders of the demerged company on a proportionate basis. It is proposed to amend the provisions of section 2(19AA) so as to exclude the requirement of issue of shares where resulting company itself is a share holder of the demerged company. The requirement of issuing shares would still have to be met by the resulting company in case of other share holders of the demerged company.)
14. Being shares held in the amalgamating company by a share holder in a scheme of amalgamation against the allotment of shares in the Indian amalgamated company “except where the share holder itself is the amalgamated company ”[S. 47(vii)].
15. Being bonds or shares referred to in S. 115AC(1), made outside India by a non-resident to another non-resident. [S. 47(viia)].
16. Clause (viib) (w.e.f. 1-4-2015) – any transfer of a capital asset, being a Government Security carrying a periodic payment of interest, made outside India through an intermediary dealing in settlement of securities, by a non-resident to another non-resident.
    Explanation.— For the purposes of this clause, “Government Security” shall have the meaning assigned to it in clause (b) of section 2 of the Securities Contracts (Regulation) Act, 1956;
17. Being items of national importance specified in S. 47(ix) trf. to a University, National Museum, etc.
18. By conversion of bonds, debentures, etc. into shares or debentures of same company. [S. 47(x)].
19. Conversion of Foreign Currency Exchangeable Bonds referred to in S. 115AC(1)(a) into shares or debentures of any company. [S. 47(xa)]
20. Being membership of a recognised stock exchange, on or before 31.12.1988, in exchange of shares by a person other than a company to a company “Membership of recognised stock exchange” is defined by explanation to S. 47(xi).
21. Being land of Sick Industrial co., under a scheme of SICA 1985, where such co. is managed by its workers co-operative. [S. 47(xii)].
22. Transfer of a capital asset where an AOP or a BOI is succeeded by a company in the course of demutualisation or corporatisation of a recognised stock exchange in India under a scheme approved by SEBI provided all the assets and liabilities of the AOP/BOI are taken over by the successor company. [S. 47(xiii)]
23. any transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust to the transferor. [ S. 47(xvii)- wef 1.4.2015]
24. Explanation.— For the purposes of this clause, the expression “special purpose vehicle” shall have the meaning assigned to it in the Explanation to clause (23FC) of section 10.
25. Clause (xviii) inserted w.e.f. 1-4-2016 by Finance Bill, 2015 as follows – any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating scheme of a mutual fund, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated scheme of the mutual fund:
    Provided that the consolidation is of two or more schemes of equity oriented fund or of two or more schemes of a fund other than equity oriented fund.
    Amendment also made in section 2(42A) whereby period of holding of the units of the consolidated scheme shall include the period for which the units in consolidating schemes were held by the assessee.
26. Sale/Transfer of any Capital Asset. Where a firm/Sole Proprietary Concern (SPC) is succeeded by a company provided following conditions are complied. [S. 47(xiii/xiv)]

IMPORTANT CONDITIONS FOR FIRMS

1. All partners become share holders in ratio of capital.
2. Aggregate shares of old partners not to reduce below 50% of the total voting power for min. 5 years.
3. All assets and liabilities are taken over by new company.
4. Partners not to receive any benefit (other than shares) as a consideration.

IMPORTANT CONDITIONS FOR SOLE PROPRIETARY CONCERN (SPC)

5. Proprietor’s shares not to reduce below 50% for minimum 5 yrs.
6. Conditions c & d of firms also applicable to SPC
   Transfer of a membership right in a recognised stock exchange for acquisition of shares, and trading or clearing rights under a scheme of demutualisation or corporatisation approved by SEBI. [S. 47(xiiia)]
   Sale/transfer of capital asset where a private company or unlisted public company is converted into a limited liability partnership (LLP) provided following conditions are fulfilled: (see notes 2 and 3) (S. 47(xiiib)).

IMPORTANT CONDITIONS FOR CONVERSION INTO LLPS

All the assets and liabilities of the company before conversion are taken over by the new LLP.

1. All the share holders of the company become the partners of the LLP. The profit sharing ratio and capital contribution are in the same proportion as their shareholding in the company.
2. The shareholders do not receive any additional benefit.
3. Aggregate profit sharing ratio of the old share holders not to reduce below 50% for min. 5 years.
4. The total assets, turnover or gross receipts of the company in any three years preceding the year of conversion do not exceed sixty lakhs.
5. No amount is paid to the partners out of the accumulated profits as on the date of conversion for three years from the date of conversion.
   Transfer in a scheme of lending of any securities subject to the guidelines issued by SEBI, established under sec. 3 of SEBI Act, 1992 (15 of 1992) (or RBI constituted under sec. 3(1) of the RBI Act, 1934) [S. 47 (xv)].
   Transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government [S. 47(xvi)] (retrospective from A.Y. 2008-09).
   Section 46(1) : Where assets of the company are distributed to the share holders on liquidation of company, such distribution shall not be regarded as transfer by company.

Notes

Note 1 : If there is any transfer of a capital asset as a stock-in-trade after 29-2-1998 then clauses (iii) and (iv) given above will not apply.

Note 2 : Please refer S. 47A for withdrawal of exemption in certain cases.