Where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the fair market value on the date on which the capital asset became the property of the previous owner under Cost of Acquisition [Section 55] :
Illustration
ABC Ltd., converts its capital asset acquired for an amount of Rs 50,000 in June, 1991 into stock-in-trade in the month of November, 2014. The fair market value of the asset on the date of conversion is Rs 4,50,000. The stock-in-trade was sold for an amount of Rs 6,50,000 in the month of December, 2015. What will be the tax treatment?
| Financial year | Cost Inflation Index |
| 1991-92 | 199 |
| 2014-15 | 1024 |
| 2015-16 | 1081 |
Solution
The capital gains on the sale of the capital asset converted to stock-in-trade is taxable in the given case. It arises in the year of conversion (i.e. P.Y. 2014-15) but will be taxable only in the year in which the stock-in-trade is sold (i.e. P.Y. 2015-16). Profits from business will also be taxable in the year of sale of the stock-in-trade (P.Y. 2015-16).
The long-term capital gains and business income for the A.Y.2016-17 are calculated as under:
| Particulars | Rs | Rs |
| Profits and Gains from Business or Profession | ||
| Sale proceeds of the stock-in-trade | 6,50,000 | |
| Less: Cost of the stock-in-trade (FMV on the date of conversion) | 4,50,000 | 2,00,000 |
| Long Term Capital Gains | ||
| Full value of the consideration (FMV on the date of the conversion) | 4,50,000 | |
| Less: Indexed cost of acquisition (Rs 50,000 x 1024/199) | 2,57,286 | 1,92,714 |
Note: For the purpose of indexation, the cost inflation index of the year in which the asset is converted into stock-in-trade should be considered.
Illustration
Ms.Usha purchases 1,000 equity shares in X Ltd. at a cost of Rs 15 per share (brokerage 1%) in January 1978. She gets 100 bonus shares in August 1980. She again gets 1100 bonus shares by virtue of her holding on February 1985. Fair market value of the shares of X Ltd. on April 1, 1981 is Rs 25. In January 2016, she transfers all her shares @ Rs 200 per share (brokerage 2%).
Compute the capital gains taxable in the hands of Ms. Usha for the A.Y. 2016-17 assuming:
(a) X Ltd is an unlisted company and securities transaction tax was not applicable at the time of sale.
(b) X ltd is a listed company and the shares are sold in a recognised stock exchange and securities transaction tax was paid at the time of sale.
Cost Inflation Index for F.Y. 1981-82 : 100, F.Y.1984-85 : 125 & F.Y.2015-16 :1081.
Solution
(a) Computation of capital gains for the A.Y. 2016-17
| Particulars | Rs |
| 1000 Original shares | |
| Sale proceeds (1000 × Rs 200) | 2,00,000 |
| Less : Brokerage paid (2% of Rs 2,00,000) | 4,000 |
| Net sale consideration | 1,96,000 |
| Less : Indexed cost of acquisition [Rs 25 × 1000 × 1081/100] | 2,70,250 |
| Long term capital loss (A) | (74,250) |
| 100 Bonus shares | |
| Sale proceeds (100 × Rs 200) | 20,000 |
| Less : Brokerage paid (2% of Rs 20,000) | 400 |
| Net sale consideration | 19,600 |
| Less : Indexed cost of acquisition [Rs 25 × 100 ×1081/100] [See Note below] | 27,025 |
| Long term capital loss (B) | (7,425) |
| 1100 Bonus shares | |
| Sale proceeds (1100 × Rs 200) | 2,20,000 |
| Less: Brokerage paid (2% of Rs 2,20,000) | 4,400 |
| Net sale consideration | 2,15,600 |
| Less: Cost of acquisition | NIL |
| Long term capital gain (C) | 2,15,600 |
| Long term capital gain (A+B+C) | 1,33,925 |
Note: Cost of acquisition of bonus shares acquired before 1.4.1981 is the FMV as on 1.4.1981 (being the higher of the cost or the FMV as on 1.4.1981).
(b) The long-term capital gains on transfer of equity shares through a recognized stock exchange on which securities transaction tax is paid is exempt from tax under section 10(38). Hence, the taxable capital gain for A.Y.2016-17 is Nil.
| Illustration
On January 31, 2016, Mr. A has transferred self-generated goodwill of his profession for a sale consideration of Rs 70,000 and incurred expenses of Rs 5,000 for such transfer. You are required to compute the capital gains chargeable to tax in the hands of Mr. A for the A.Y. 2016-17. Solution The transfer of self-generated goodwill of profession is not chargeable to tax. It is based upon the Supreme Court’s ruling in CIT vs. B.C. Srinivasa Shetty |
Illustration
Mr. R holds 1000 shares in Star Minus Ltd., an unlisted company, acquired in the year 1981- 82 at a cost of Rs 25,000. He has been offered right shares by the company in the month of August, 2015 at Rs 140 per share, in the ratio of 2 for every 5 held. He retains 50% of the rights and renounces the balance right shares in favour of Mr. Q for Rs 25 per share in September 2015. All the shares are sold by Mr. R for Rs 300 per share in January 2016 and Mr. Q sells his shares in December 2015 at Rs 280 per share.
What are the capital gains taxable in the hands of Mr.R and Mr.Q?
| Financial year | Cost Inflation Index |
| 1981-82 | 100 |
| 2015-16 | 1081 |
Solution
Computation of capital gains in the hands of Mr. R for the A.Y.2016-17
| Particulars | Rs |
| 1000 Original shares | |
| Sale proceeds (1000 × Rs 300) | 3,00,000 |
| Less : Indexed cost of acquisition [Rs 25,000 × 1081/100] | 2,70,250 |
| Long term capital gain (A) | 29,750 |
| 200 Right shares | |
| Sale proceeds (200 × Rs 300) | 60,000 |
| Less : Cost of acquisition [Rs 140 × 200] [Note 1] | 28,000 |
| Short term capital gain (B) | 32,000 |
| Sale of Right Entitlement | |
| Sale proceeds (200 × Rs 25) | 5,000 |
| Less : Cost of acquisition [Note 2] | NIL |
| Short term capital gain (C) | 5,000 |
| Capital Gains (A+B+C) | 66,750 |
Note 1: Since the holding period of these shares is less than 3 years, they are short term capital assets and hence cost of acquisition will not be indexed.
Note 2: The cost of the rights renounced in favour of another person for a consideration is taken to be nil. The consideration so received is taxed as short-term capital gains in full. The period of holding is taken from the date of the rights offer to the date of the renouncement.
Computation of capital gains in the hands of Mr. Q for the A.Y.2016-17
| Particulars | Rs |
| 200 shares : | |
| Sale proceeds (200 × Rs 280) | 56,000 |
| Less: Cost of acquisition [200 shares × (Rs 25 + Rs 140)] [See Note below] | 33,000 |
| Short term capital gain | 23,000 |
Note: The cost of the rights is the amount paid to Mr. R as well as the amount paid to the company. Since the holding period of these shares is less than 3 years, they are short term capital assets.