CAPITAL GAINS etc mod 14, onwards

Question 1

Financial asset

Answer 1

Financial Assets: - it includes four types of assets;
* Listed Securities.
* Equity oriented fund.
* Unit of UTI
* Zero coupon bonds

Non-Financial Assets: - it includes all the capital assets except the
financial assets.

12 months period for long term CG

Question 2

Define capital asset

Answer 2

SEC 45 as charging section. there must be a CAPITAL ASSET and assesse must TRANSFER the asset and then capital gains shall be computed

INCLUDES: JAPDSA
JEWELLERY
ARCHEOLOGICAL collectios
PAINTINGS
DRAWINGS
Sculptures
Any other works of art

Securities held by foreing institutional investor who has invested per SEBI
soverieng gold bonds issues by RBI
rights of management control in indian company

EXCLUDES
1. Movable personals like cars, clothes, etc
2. Rural Agricultural land in India (RALI)
3. Special Bearer bonds, gold deposit bonds

Question 3

Short term financial assets

Answer 3

If Financial assets are held by assessee for 12 months or less than 12 months are called as short term capital assets.= equity shares mutual funds

non financial assets= like land building
held for 24 months or LESS before its transfer= short term capital asset

OTHER capital asset= (e.g., jewelry, paintings, debt-oriented mutual funds, unlisted debentures, etc.).
If sold within 36 months of acquisition, the gains are treated as short-term.

Any gain or loss arising from the transfer of short term capital
assets is called short term capital gain/loss. If there is any short-term capital loss, it may be adjusted from Short-term capital gain/Long-term capital gain.

However long term capital loss can only be offest/ recovered from long term capital asset gain

Question 4

transfer of cap asset

Answer 4

TRANSFER OF CAPITAL ASSET u/s 2
(47)

Transfer includes
* Sale, Exchange, Relinquishment of any asset.
* The extinguishments of any right therein.
* It compulsory acquisition under any law.
* Where the assessee converts his capital asset into stock in trade.
* To handover the possession of an immovable property in the
part performance of a contract for the transfer of the property
* Maturity or Redemption of zero coupon bonds.
* Conversion of business into limited company.

Question 5

Certain transaction not regarded as
transfer.

Answer 5

1. Distribution of capital assets on total or partial division of HUF.
2. Any transfer under gift, will or irrevocable trust.
3. Any transfer by subsidiary company to holding company.
4. 4. Any transfer from Amalgamating company to Amalgamated company.
5. Transfer of Share by shareholder of amalgamating company in the scheme of amalgamation to amalgamated company.
6. 6. Any transfer of capital asset being work of; art, book, and manuscript, photograph etc.to Government, University or to national Museum.
7. Conversion of debentures, debenture stock,deposit certificate of
   the company into shares or debentures of that company.
8. Transfer of shares of an Indian company by foreign Amalgamating company to foreign Amalgamated Company in the scheme of amalgamation.
9. transfer of sick company before it is revived
10. transfer in case of demerger to resulting indian company
11. business reorganisation transfers it assets from one cooperative bank to another
12. Where an Individual redeems any sovereign gold bonds
    originally issued by the Reserve bank of India.

Question 6

computation of capital gain

Answer 6

SHORT Term Capital Gain
FULL VALUE OF CONSIDERATION MINUS
(Cost of acquisition+cost of improvement+ Transfer expense)

LONG TERM CAPITAL GAIN :

FULL value of sales consideration MINUS
( Indexed cost of aquisition + indexed cost of improvement + expense on transfer) = long term capital gain/loss

IndexedCostofAcquisition=
CostofAcquisition × (CII of Year of Sale/ CII of year of purchase)

Cost of Improvement=
ACTUAL COST x (CII of year of transfer / CII of year of improvement )

AT TIME OF PURCHASE=
If the property was acquired before April 1, 2001, the taxpayer can substitute the actual purchase price with the Fair Market Value (FMV) FOR property acquired BEFORE April 1, 2001 (or retain the actual purchase price if higher). The cost of improvement shall include only those capital expenses which are incurred after 1 April 2001, ONLY IF LESS THAN SDV otherwise sdv of 2001 prevails

At the Time of Sale (Sale Consideration):=
SDV vs Sale price whichever is higher will be used

​

LTCG= 20% tax
In case of transfer of listed securities (other than units) and ZCBs,
LTCG would be taxable at the lower of the following rates
* 10% without indexation benefit
* 20% with indexation benefit

STCG= 15% u/s 111A

Question 7

USHA VAID vs ITO

Answer 7

Assessee had inversted net consideration within 3 yrs after transfer of original asset in 54F it says that amount should be invested in construction of resedential house
HELD: in this situation when house is completed after expiry of 3 years from transfer of original asset the assesee is entitled to exemption under the mentioned section

Question 8

CIT v CELLO PLAST

Answer 8

Can venefit from 54 EC be denied on the grounds that bonds were not purchased within stipulated time limit even though assessees choice of bond was not available at the time ?

CANNOT BE DENIED he will get benefit

Question 9

Extension of time-limit for acquiring new asset (Section 54, 54D, 54EC
&54F)

for cases like CIT v Cello plast , usha vaid v ito

Answer 9

1. Section 54: Exemption on sale of residential property= Available to individuals or HUFs who sell a residential property and purchase another residential property.
- Time Limits:
Purchase: Within 1 year before or 2 years after the sale.
Construction: Within 3 years after the sale.
Extension: If the new property is not purchased or construction is incomplete by the due date of filing the return, the capital gains can be deposited in a Capital Gains Account scheme (CGAS) account to extend the timeline.

Section 54F: Exemption on sale of any capital asset other than a residential house

Eligibility: For individuals or HUFs selling a capital asset (other than residential property) and using the proceeds to purchase a residential house.
Time limit is same as above

2. Section 54D: Exemption on compulsory acquisition of assets used in a business

Eligibility: Available for individuals or entities if land/building used for business is compulsorily acquired.
Time Limits:
Acquire another land/building: Within 3 years of receiving compensation.
Extension: CGAS account

3. Section 54EC: Exemption on long-term capital gains by investing in specified bonds

Eligibility: Applicable to any taxpayer who invests in specified bonds (e.g., REC or NHAI).
Time Limit: 6 month
Investment in bonds must be made within 6 months from the date of the transfer.

Question 10

Distinction Between Business Expenditure and Capital Expenditure

Answer 10

Nature of Asset or Advantage Acquired:
If the expenditure creates a long-term advantage or results in the acquisition of an enduring asset, it is capital in nature.
If it is incurred for the day-to-day operations or maintenance of the business, it is revenue (business) expenditure.

Purpose of the Expense:
Expenses for establishing or improving the profit-earning structure are capital.
Expenses for carrying on existing operations or earning profits are revenue.

Recurring vs. One-Time:
Recurring expenses are typically revenue.
One-time or infrequent expenses associated with acquisition or improvement of assets are capital.

Effect on Profitability:
If the expense affects the fixed capital of the business, it is capital expenditure.
If it affects working capital oroperational costs, it is revenue expenditure

**Capital Expenditure:

Treated as an asset in the balance sheet.
Depreciation is allowed as a deduction over time, but the expenditure itself is not deductible in the year it is incurred.

Revenue Expenditure:

Treated as an expense in the profit and loss account.
Fully deductible in the year it is incurred.

Question 11

C.I.T. v. Jalan Trading Co.

Answer 11

1. C.I.T. v. Jalan Trading Co. (Pvt.) Ltd. (1985) 155 ITR 536 (SC)
- Issue: Whether contributions to statutory funds are capital or revenue expenditure.
- Judgment: The Supreme Court held that contributions made under statutory obligations (like payments to funds for workers) are revenue expenses as they are related to the operation of the business and not for acquiring any enduring asset.

Question 12

2. Bikaner Gypsums Ltd. v. C.I.T., AIR 1991 SC 227

Answer 12

2. Bikaner Gypsums Ltd. v. C.I.T., AIR 1991 SC 227
   - Issue: Distinction between expenditure for removing obstacles in business operations and acquiring a new asset.
   - Judgment: The Supreme Court held that expenditure incurred to remove hindrances or obstacles for smooth functioning (e.g., payments to resolve disputes over mining leases) is revenue expenditure, as it is directly connected with operations rather than creating new assets.

Question 13

3. C.I.T. v. General Insurance Corporation, 2007 (1) SCJ 800

Answer 13

3. C.I.T. v. General Insurance Corporation, 2007 (1) SCJ 800
- Issue: Whether contributions for creating an employee welfare fund are capital or revenue expenditure.
- Judgment: The Supreme Court held that such contributions are revenue expenditure, as they do not create an enduring benefit or asset for the company but are part of routine business obligations.

Question 14

IFOS

SECTION 56

Answer 14

anything not falling under the other heads of salary, house property, PGBP, Capital Gains

1. fees or comission to employee from anyone apart from employer
2. interests apart from interest from securites
3. income of tenant by sub letting house
4. Salary of Member of Parliament, Member of legislative assembly or council. However, the allowances received by Member of Parliament are exempt from tax.
5. Family pension received by the widow or legal heirs of employee after his death.but under this there is a deduction of 1/3 or 15k whichever is less is exempted
6. Tips received by a waiter or taxi driver.
7. DIVIDEND: if declared at AGM= normal divedent and is taxable in the PY in which it is declared
   INTERIM DIVIDEND= declared b4 agm and is taxable in the year it is DISBURSED/ given to shareholder. it is taxable at hands of the investor/shareholder
   - ALSO SItting FEES of NON EXECUTIVE DIRECTORS
8. income from lottery/games etc
9. hire of machinery, plant along w building
10. gifts recieved by individual or HUF
11. remuneration to university professors for verifying answer sheets
12. UNEXPLAINED CASH CREDITS/ jewellery etc taxed at 60% on gross amt

Question 15

INCOME OF LOTTERY, GAMES
ETC.

Answer 15

Winning from lottery, cross word puzzle, card games, gambling,
other games, betting, races (including horse race) etc. is taxable in
the head income from other source.

No Tax is deducted from casual income if it is up to 10,000.

However,if it is above 10,000 then TDS is made @30% from the total amount of income.

grossing up:
If income is up to 10,000 then No Grossing Up.

If it is above 10,000 but the amount of gross winning is given then also not to be grossed.

If the winning is above 10,000 and net/received amount is given in
that case the formula of grossing will be applied as follows:
Amount of casual income received
X 100/70
30% TDS, and 30% tax even for net winnings from online games

INCLUDES:
Horse Race betting- no expense or loss allowed flat 30% tax

Question 16

dividend and deemed dividend

Answer 16

following are to be deemed dividend to the extent of the profts of a company:
1. distribution of any asset to shareholders
2. bonus to shareholder or debuntures to shareholders
3. distribution of asset @ time of liquidation or reduction of capital
4. loan or advances given by closely held company

but it is not to be considered deemed dividend if:
it is actually a lending maid in ordinary course of business and lending money substantial part of the company
OR
dividend paid is set off against the deemed dividend
OR
Distribution of shares pursuat to a DE-Merger

TAX: 10% up to 5000 if paid to resident
NR/Foriegn company then 20%

Question 17

Morvi Mercantile Bank Ltd. V. CIT

Answer 17

q= whether the case of a banking company in liquidation, the
interest on fixed deposits made by liquidated in winding up order is taxable as IFOS or as business income ?

TAXABLE AS IFOS

Question 18

Katilal Manilal vs CIT

Answer 18

Q= if distributuion of the right to apply for the shares by a company in favour of its shareholders amounted as distribution of dividend?
HELD: YES
if instead of selling the right in the market and then distributing hte proceeds, they directly distributed it to benefit hands of shareholders so it is still dividend and it need not bee in money it can be distributed by dilevery of property etc

Question 19

INCOME OF GOOFY ASS CRICKETER

Answer 19

The money received by a cricketer from cricket control board for playing test matches in India is entitled for a deduction of 75% of the amount received.

The money received by a cricketer from cricket control board for
playing One day matches in India is entitled for a deduction of 100% of
the amount received.
One day 100% is exempt

The money received by a cricketer for playing matches outside India is
entitled for a deduction of 50% of the amount received.
500000X50%= 250000 will be exempt

Question 20

INCOME FROM SECURITIES

Answer 20

TAX FREE GOVERNMENT SECURITIES U/S 10(15)

Certain securities are prescribed to be tax free and a list of these
securities under section 10 (15) is given in this behalf.
No tax is charged on these securities. no question of grossing up.

Question 21

Deductions from gross total income 80C

Answer 21

Eligible= individual or HUF
Max deductions= 1.5L
For which payments?
1. LIC premium,
2. contribution to PPF or superannuation fund, certain pension fund
3. repayment of housing loand taken from govt bank LIC or specified employer,
4. tuition fees for indian university college school of 2 childeren
5. Term deposit for period not less than 5 years

Question 22

80D

Answer 22

eligible: individual or HUF
Max deduction- 25k or 50k if senior citizen
APPLIES TO:
Medical insurance premium payment for self, spouse, of dependent

80DD
for: resident individual or HUF for when dependent avg disabled person
Deduction= 75000
in case of severe disabilty which is 80% or more disabled= 1.25L deduction

80 U
when YOU as assessee are urself disabled= 75k in normal disability and 1.25L for severe diability

Payments: maintenance and medical fee of disabled person

Question 23

80E

80E e for education

Answer 23

for: individual
deduction?: no limit
purpose: payment on interest from first year of interest payment till up to 7 years/ when interest is paid in full
HIGHER EDUCATION LOAN

80EE=
for individual up to 50K when loan taken for acquiring residential property
COnditions: no prior resedential house,
loan sanctioned less then 35 lakhs, value of house less than 50 L, and loan taken during 2016-17

80EEA
deduction up to 1.5 L, loan for residential house property sanctioned between 1st april 2019 to 2022, SDV less than 45 Lakhs and no prior house

Question 24

80G

Answer 24

for all assessee
- 100% of deduction for amount donated to charitible institutes without any qyalifying limit for specific charitable funds that are fully exempted tyoically national level funds
- 50% deduction for specific funds usually like named after someone like nehru fund etc

80GG=
eligible= individuals who do not recieve housing rent allowance
permissible deduction= least of all from the follwoing\
1. 25% of total income
2. if rent paid is 10% of income
3. 5000 per month

Question 25

rebate, relief

Answer 25

Rebate (Section 87A)
Section 87A provides tax relief to individual taxpayers by allowing a rebate on their total tax liability, reducing the amount of tax payable.

Eligibility Criteria:

Applicable to resident individuals.
Total income (after all deductions) should not exceed ₹7,00,000 (from FY 2023-24 under the new tax regime).
Key Points:

The rebate is 100% of the income tax payable or ₹25,000 (whichever is lower) for those under the new tax regime.
Under the old tax regime, the rebate amount is up to ₹12,500 for total incomes up to ₹5,00,000.

2. Relief (Section 89)
   Objective:
   Section 89 provides relief to taxpayers when they receive arrears or advance salary, which could push them into a higher tax bracket for the year of receipt.

Key Points:

Scenario: This relief applies when income is received in a lump sum (e.g., arrears of salary, family pension, or advance salary).
Computation:
Relief under Section 89 is calculated by apportioning the income to the years to which it pertains and then recalculating the tax liability for each year as if the arrears/advance were included in those years.

Question 26

Clubbing of income section 60

Answer 26

TRANSFER of Income without transfer of asset

Exercise 1: Mr. Vatsan has transferred, through a duly registered document, the
income arising from a godown to his son, without transferring the godown.
Section 60 expressly states that where there is transfer of income from an asset without
transfer of the asset itself, such income shall be included in the total income of the
transferor. Hence, the rental income derived from the godown shall be clubbed in the
hands of Mr. Vatsan.

Question 27

clubbing revocable transfer of asset

Answer 27

Section 61: All income arising to any person by virtue of a revocable transfer of assets
is to be included in the total income of the transferor.

Revocable transfer shall be deemed to be
revocable if:
(i) it contains any provision for the re-transfer of whole or any part of the income or assets to the transferor;
(ii) it, in any way, gives the transferor a right to re-assume power

RevocableTransfer shall be deemed to be
revocable if:
(i) it contains any provision for
the re-transfer directly or indirectly of the whole or any part of the income or assets to
the transferor;
(ii) it, in any way, gives the
transferor a right to re-assume
power directly or indirectly over
the whole or any part of the
income or assets

Sec. 62
Irrevocable
The provisions of sec 61 shall not apply to any income arising to any person by virtue of a
transfer-
(i) by way of trust which is not revocable during the lifetime of the beneficiary, and, in the case of any other transfer, which is not revocable during the lifetime of the transferee ;
or
(ii) made before 1st April 1961, which is not revocable for a period exceeding 6 years

Question 28

Clubbing – Income arising to spouse
– Remuneration - [Sec. 64(1)(ii)]

Answer 28

When both of them have substantial interest and both are in receipt of income, such
income will be includible in the hands of the spouse whose total income (excluding
this) is higher. if one spouse recieves remuneration from a company where other spouse has substantial interest (20%) and IS NOT qualifed for the “job” and recieves the money= then there will be clubbing of income and will be clubbed under the spouse who has substantial interest

IF there is a “gift” which is then invested into a business then the proportional return will be clubbed to the gifters income
**TotalProfit× (GiftedCapital/ TotalCapital) **
​

BY TRANSFER OF ASSET:
* Transfer to spouse without adequate consideration
* Provisions does not apply for an agreement to live apart
* Transferor – Deemed Owner
* Taxed in transferor’s hand

Question 29

Clubbing – Minor’s Income - Sec. 64(1A)

Answer 29

The income of minor child
suffering from disability covered u/s 80U shall not be clubbed but assessed in the hands of the child.
Ø Clubbing provisions are also attracted even in respect of married minor daughter.
Ø Exemption in respect of clubbed income u/s 10(32) – Up to ₹1,500 per minor child.

FUrhter if the Minors income is skill based then wont be clubbed

Typically the income of the minor child is clubbed with the parent that has higher income

also if transferring individual property to HUF= then income taxed on transferor

Question 30

Philip John Plasket Thomas v. C.I.T.,

ion 64 of the Income Tax Act, 1961.

Answer 30

The assessee transferred shares in a company to his wife and minor child without adequate consideration.
The income arising from those shares was clubbed with the assessee’s income by the Income Tax Department. held taxable

Question 31

Batta Kalyani v. Commissioner of Income Tax,

Answer 31

The assessee transferred shares in a private limited company to her husband without consideration.
The Income Tax Officer clubbed the dividend income from these shares with the income of the transferor (wife).

The Court clarified that the clubbing of income would apply even if the transferred asset produces income indirectly (e.g., reinvestment income).

Question 32

J.M. Mokashi v. Commissioner of Income Tax

Answer 32

The assessee, a government employee, transferred funds to his wife’s account, and she used tProvisions of Section 64(1)(ii): This section requires the inclusion of income earned by a spouse in a concern where the taxpayer has a substantial interest unless:

The spouse possesses technical or professional qualifications, and
The income is solely attributable to the application of such qualifications and experience.
Court’s Findings: Mrs. Mokashi did not possess the necessary qualifications to meet these criteria. Hence, the salary she received was deemed attributable to her marital relationship with Dr. Mokashi and not to professional knowledge or expertise.he money to purchase property.
The income from the property (e.g., rental income) was not disclosed in the assessee’s income.

The rental income from the property purchased with the transferred funds was rightly clubbed with the income of the transferor (husband).

Question 33

Transfer Pricing (Sec.92 to
92F) Meaning

Answer 33

It is the price which is paid for goods or services transferred from one unit
of an organization to its other units situated in different countries.

“transfer pricing” generally refers to prices of transactions between associated enterprises which may take place under conditions
differing from those taking place between independent enterprises

3 conditions:
1. International Transaction between two entities called AE
2. enterprises should be Associate Enterprise
3. International Transaction be between two or more AE s

Question 34

Two Entities deemed
AEs

Answer 34

**Direct or indirect ownership of 26% or more of voting power.

Control over the management or financial policies.
Common directors or substantial financial dependence.
Advancing Loan for more than 51% of the value of assets

Giving guarantee for the borrowings for more than 10% of the total borrowings

More 90% of the raw material is supplied

The prices of the goods are influenced by the other company

If one enterprises Is controlled by HUF, the other is controlled by a member of such
HUF.

Both the enterprises has mutual interest.

Question 35

SECTION 92

Answer 35

Section 92 mandates that any income arising from an international transaction between associated enterprises (AEs) must be
computed at an arm’s length price (ALP). This ensures that tax liabilities cannot be manipulated by artificially lowering or
inflating profits through related-party transactions. If the transaction is not at ALP, adjustments will be made to reflect the correct price for tax purposes.

Question 36

section 95

Answer 36

GAAR APPLIES :
1. Transaction after 1 april 2017
2. tax benefit of relevant AY more than 3 crore
3. in case of foriegn institutional investor=
- should be assessee under act
- not taken benefit of double taxation avoidance agreement
- invested in listed or unlisted securities in accordance w sebi

IMPERMISSIBLE AVOIDANCE AGREEMTN
trnxn that:
1. creates rights/obligations which are not ordinarily created if parties are at arms lenght
2. misuse or abuse of provisions
3. lacks commercial substance
4. entered into/carried out in a manner not ordinarily used for bonafide purpose

“DEEMED TO LACK COMMERCIAL SUBSTANCE”
1. substance or effect of arrangement is inconsistent with the individual steps
2. involves round trip financing, an accomodating party, elements that have effect of cancelling or offsetting eachother or conducted through multiple persons to disguise value of object of transaction
3. involves an asset/transaction at location which has no benefit other than tax avoidance
4. does not have any significant risk or net cash flows

Question 37

Tainted Element Test and Purpose Test

Answer 37

Tainted Element Test:
Definition: This test evaluates whether an arrangement contains elements that are inherently abusive or manipulative of tax laws. like multi layered trnxn or carried out in a manner not usually used for bona fied purpose

Purpose Test:
Definition: This test assesses the main objective or purpose of the arrangement. If the dominant purpose is to gain a tax advantage, the arrangement may be deemed impermissible under GAAR.
Focus: Even if there is some commercial benefit, the arrangement can still fail this test if the primary intent is tax avoidance.

Question 39

Consequences of Applying GAAR (Section 98 of the Income Tax Act):

Answer 39

1. Disregarding the Arrangement:
   The entire arrangement may be declared void for tax purposes.
2. Reallocating Income or Deductions:
3. Denial of Tax Benefits:
4. Recharacterization of Transactions:
5. Tax Recovery with Penalties:

Question 40

BEPS

Answer 40

Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies used by multinational companies to exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax jurisdictions where there is little or no economic activity, thus eroding the tax base of higher-tax jurisdictions.

Key Features:
Profit Shifting: Moving profits to jurisdictions with lower tax rates through mechanisms like transfer pricing, strategic use of royalties, or intercompany loans.
Base Erosion: Reducing taxable income by claiming excessive deductions, exploiting loopholes, or using hybrid entities that create mismatches in tax treatment.