Introduction:

The purpose of this article is not to discuss the basic provisions of computation nor to discuss case law on the subject, but to consider those amendments made by Finance Act 2004 having bearing on, or relevance to computation of capital gains or other sources. This is particularly so, because in Chap IV E, there is only one amendment viz., insertion of 5th proviso in sec. 48 stating that the Security Transaction Tax (S.T.T.) will not be allowed as deduction while computing capital gains.

Subject to above, let us first consider the amendments concerning Capital Gains.

1. CAPITAL GAINS

   1. Sec. 10(37): Exemption to Capital Gains arising on compulsory acquisition of agricultural land within specified urban limits
      
      Normally, capital gain on transfer of agricultural land situated within 8 K.M. from Municipal limits is taxable. This provision is made to mitigate the hardship that may be caused to genuine agriculturists, where their lands of above categories are acquired compulsorily:
      
      Conditions and pre-requisits for allowance:

      1. The gain should arise from transfer of lands to which s. 2(14)(iii)(a) or (iii)(b) applies;

      2. The transfer is by way of compulsory acquisition or it is such that its consi-deration is determined or approved by Central Government or R.B.I.

      3. Compensation or consideration is received on or after 1-4-2004.

      4. Land was being used by such individual or HUF or by his parents for agriculture purposes during preceding two years immediately preceding the year of transfer.

      5. The exemption will be available to compensation whether determined originally or enhanced or further enhanced by order of any court, Tribunal or any other authority.
          

   2. Sec. 10(38): Exemption to Capital Gains on sale of specified securities
      This new sub-section has extended and liberalised the earlier exemption granted by s. 10(36). Under that section, the exemption was granted to long-term capital gain on transfer of securities covered by BSE 500 Index and which were acquired on or after 1st day of March, 2003 but before 1st day of March, 2004.
      
      The new sec. 10(38) provides exemption to capital gain on transfer of equity shares or units of equity oriented fund (EOF for short) provided all the following conditions are satisfied:–

      1. The transaction of sale of such equity shares or units of EOF is entered into on or after 1st October, 2004 the date on which Securities Transactions Tax (STT) came into force;

      2. Such transaction is chargeable to S.T.T. S.T.T. is chargeable on all transactions of sale and purchase of securities entered into on recognised stock exchange.

      3. The exemption is available to long-term capital gain on sale of such equity shares or units of E.O.F.

      4. The exemption is available to all assessees irrespective of their residential or assessment status.

      From combined reading of above conditions the following important issues arise which need careful consideration.

      1. The shares or eligible units must have been held as long-term capital asset. Thus, the gains on shares/units held as stock-in-trade will not enjoy exemption;

      2. The transaction of sale should be effected though recognised stock exchange on or after 1st October, 2004 on which S.T.T. is chargeable.

      3. The mode and date of acquisition is not relevant. Hence acquisition through application, acquisition of unlisted shares getting listed subsequently, bonus shares, shares converted from partly convertible debentures, amalgamations, demergers, inheritance etc. are covered by exemption;

      4. The gains from transfer of preference shares, buy backs, redemptions will not be eligible for exemption.

      5. In respect of gains on transactions prior to 30th Sept., 2004, the assessee can claim exemption u/s. 10(36) if the conditions of that section are satisfied.
          

   3. Sec. 111A : Concessional tax treatment to short-term capital gain arising on transfer of securities

      Pursuant to this newly introduced section, the short-term capital gain on sale of equity shares or units of E.O.F. will be charged to tax at 10%. Hitherto, the short-term capital gain was liable to tax at normal income tax rates.

      The conditions prescribed are pari materia, the same as applicable to long-term capital gain. In nutshell (i) the shares/units should be of listed companies/mutual funds, (ii) the sale should be after 1-10-2004 (iii) the transactions should be subject to S.T.T.

      The benefit of this section is available to all assessees.
       

   4. Amendment to section 115AD
      Sub-clause (ii) of sub-section 1 of 115AD provided for the tax at 30% on short-term capital gain earned by Foreign Institutional Investors (F.I.I.) on short-term capital gain @30%. To bring this sub-section in line with sec. 111A, it is now provided that the rate of 30% shall be substituted by 10%.
       

   5. Section 94(7) was introduced by Finance Act, 2001 w.e.f. 1-4-2002 as a measure to plug the tax evasion by assessees adopting a methodology popularly known as dividend stripping. The said section; i.e., 94(7) provided an artificial formula of ignoring or scaling down the short-term capital losses by the amount of dividend earned by the assessee. The said section was applicable to securities and units of mutual fund transaction and the time interval between purchase and sale of securities and units was 3 months before and 3 months after record date.
      
      The amendment by Finance Act 2004 has extended the time limit for sale of units, from 3 months to 9 months.
       

   6. Insertion of new sub-section 94(8)
      As discussed above, sub-clause (7) introduced by F.A. 2001 was targeted at the systematic tax evasion through practice of dividend stripping. Similar practice was noticed in case of mutual funds. The units of mutual funds were purchased in expectation of bonus issue. After securing the bonus units without consideration, the original holdings were thereafter disposed of. The resultant short- term capital loss was claimed against short- term/long-term capital gains. To discourage this practice section 94(8) is introduced. It provides that in transactions falling under this sub-section, the short-term capital loss on sale of original holdings will be ignored and such loss will be deemed to be the cost of bonus units allotted to the assessee. For this purpose the time interval between purchase and sale is 3 months before and 9 months after the record date.
      
      It is very necessary to bear in mind the effect of sub-sections (7) and (8) while quantifying the short-term capital loss.
       

   7. Section 50
      Attention of the readers is drawn to the landmark judgment of Hon'ble Bombay High Court in case of CIT vs. ACE Builders Pvt. Ltd. reported in 144 Taxman 855 (Bom.) having direct bearing on capital gain arising on sale of depreciable assets. It is now possible to save the entire capital gain tax by making investment in tax saving bonds enlisted in Sec. 54EC if the period of six months has not elapsed from the date of transfer of depreciable capital assets.
       

   8. Section 50C
      Though there is no amendment to this section by Finance Act 2004, it is intended to draw the attention of the readers to this section which is becoming a topic of prolonged litigation.
      
      Briefly, the section provides that the fair market value of the land and building or both as determined or assessed by the stamp authorities will be deemed to be the consideration received even if the document price is lower. The section provides the remedy to the assessee to either dispute the stamp duty valuation before the appellate forum under Stamp Act or alternatively to request the Assessing Officer to refer the matter to the valuation officer. The Assessing Officer in that case shall (though the word used in the section is ‘may’) then get the valuation done before completing the assessment. However, in actual practice it is very often noticed that in the absence of such specific letter requesting for reference to Valuation Officer, the assessing officer generally proceeds to accept the return u/s. 143(1). In such event the appeal to CIT (Appeals) often fails since the authority is inclined to hold that there is neither grievance nor any cause of appeal since the returned income is accepted.
      
      Last but not the least, it must be borne in mind that the return of income must be filed within the time limit prescribed u/s. 139(1) particularly where there is loss. By this the benefit of carry forward of loss as well as the right of filing revised return is not lost.
       

2. OTHER SOURCES

   Though there is only one amendment in Chapter IV-F – amendment to Sec. 56(2). It has a far reaching effect of taxing purported gifts as income. The objective, as evident from Finance Minister’s speech, is to prevent money laundering. Accordingly, gifts above Rs. 25,000/- will now be taxed as income.

   New clause (xiii) is added to section 2(24), which provides for inclusion of sums referred to in section 56(2)(v) as income of the recipient.

   1. Scope of section 56(2)(v)
      Newly introduced sub-clause (v) seeks to bring into the tax net any sum of money exceeding Rs. 25,000/- received without consideration by an individual or H.U.F., after 1st September, 2004 from any person.
      
      It will however not include any receipt of money from :
      
      (i) any relative or (ii) on occasion of marriage of that individual or (iii) under a Will or inheritance or (iv) in contemplation of death of the payee.
      
      Explanation to clause (v) defines the term relative by enlisting seven categories of persons. However, since under each clause there is reference to spouse, brother, sister, lineal ascendant, descendant etc. the actual list works out to seventeen categories of relatives. A useful reference may be made to page 1.55 of Master Guide to Income-tax Act, 2004 edition.

      In practice, many ticklish issues may arise in interpreting the section. Some are narrated hereunder :-

      Very often (a) ailing patients requiring costly medical treatment receive aid from unrelated persons, to meet cost of treatment. Taxation Laws Amendment Bill 2005 mitigates this hardship to some extent by providing that sums received from charitable institutions will not be chargeable. (b) Compensation is received by injured persons. (c) Voluntary contributions received by religious heads or by gurus from disciples, then, whether such sums will constitute their income ?

      In such cases, it is possible to invoke ‘the rule of mischief’ for interpretation of statute and it can be argued that considering that such interpretation will be against the avowed objective viz., check against money laundering. Hence the receipts cannot be taxed as income.

      Sub-clause (v) refers to any sum of money exceeding Rs. 25,000/- received without consideration. The question arises whether sums received by individual or H.U.F. from various persons, individually less than Rs. 25,000/- are to be aggregated. For illustration where five gifts of Rs. 20,000/- are received from five different persons, then whether Rs. 1,00,000/- received will constitute income? From plain reading of section, it appears, that threshold limit is to be applied qua payer, particularly because there is no phrase suggesting the aggregation of gifts.

      The section is however clear on following points :—

      1. It applies only to individuals and H.U.F.s and not to gifts received by firms, companies, A.O.P.s.

      2. Gift in kind will not get covered in view of phrase ‘sum of money’.

      3. It applies to even Non Resident Individuals and H.U.F.s.

      4. Gifts received on occasions other than marriage like birthdays, thread ceremony will get taxed.

      5. Where gift exceeds Rs. 25,000/- the whole of such gift will become taxable and not the excess over Rs. 25,000/-.

      6. Where minor receives any gift, the same will be includible in the hands of his parents.

      In view of this, it is very necessary for every assessee to verify with due care, all transactions of credits to his capital account.