New Direct Tax Code Analysis for Capital Gains

1. Decoding the Direct Taxes Code - IV
FAQ on Provisions relating to Capital Gain
By CA. Pradip R Shah
pradip@pradiprshah.com
Introduction:
The Direct Taxes Code (DTC) proposes major changes with respect to computation of
income from Capital Gain (CG). Not only the old concepts are proposed to be discarded, the
methodologies of computing deductions, certain current practices of misusing the provisions
relating to the holding period of the asset have been plugged and exemptions have been
totally changed. Numbers of new terms are proposed to be introduced. A reader of sections
from 44 to 53 containing the provisions for taxation of CG will not be in a position to discern
its true meaning easily. It requires reading of these sections various times for getting its
flavour. An impression that emerges is that whatever provisions have been introduced under
the Income Tax Act (ITA) for plugging the loopholes have been kept as they are. With
respect to deductions from CG, there is substantial dilution in this respect, particularly when
the provisions of S. 54, 54EC etc. of ITA are compared.
In ancient times, one of the techniques applied for imparting education was use of the
question and answer method. To a large extent, the said method of pedagogy helped the
students in learning the most complex subjects. Keeping this objective in mind and, looking
to the complexities involved in understanding the provisions relating to CG, an attempt has
been made to explain it in the form of question and answer.
Taxation of CG
Q: Are there any changes with respect to Capital Gain (CG) under the DTC?
A: There are major changes with respect to computation of CG and tax liability arising there
from.
Q: In what respect the provisions under DTC and ITA are different?
A: The ITA has always treated income from CG under special category. Not only liberal
deductions / exemptions were provided, even the rate of tax was low as compared to the rate
of tax on income from salary, business etc. Since long, CG has always been classified into
two broad categories viz. Long Term (LT) and Short Term (ST) although its definition from
time to time has been changing. But the need for differentiating between the two was
addressed. DTC propose to discard these concepts and related provisions. Under the ITA, CG
was taxed differently for Residents and Non-Resident (NR). NR were treated softly while
levying tax on CG derived. However, all these concepts and methods are proposed to be
changed.
Total Income
Q: How is CG being proposed to be treated under DTC?
A: As per S. 2(1), every person shall be liable to pay income-tax in respect of his Total Income
(TI) for the Financial Year (FY).
Q: What is TI?
A: S. 284(283) defines it as the total income computed under section 71 for that FY. (Reference
to S. 71 in DTC appears to be not correct. It should be S. 60 which is titled as
“Determination of total income”)

2. Q: How is TI determined?
A: S. 60 provides the formula by which the TI is required to be computed. It is as follow:
(A - B) + C
Where
A = ‘gross total income from ordinary sources’, for the FY;
B = aggregate amount of deductions allowed under sub-chapter I; and
C = ‘total income from special sources’, for the FY.
Gross Total Income
Q: S. 60 refers to “Gross Total Income from Ordinary Sources” (GTIOS). What is it?
A: S. 284 (117) defines it as the net result of the aggregation under sub-section (3) or (4) of
section 58, for that FY. It means it is the income from Ordinary Sources (OS) before
deductions.
Q: Whether income from CG has to be aggregated with income from OS?
A: Clause (2) of S. 58 provides that CG as computed u/s 47 has to be aggregated with that of the
income under various other heads. Net TI so arrived at is called “Current Income from
Ordinary Sources” (CIOS).
Method of computing CG
Q: Whether DTC provides any method for computation of CG?
A: S. 44 to 53 covers method for computation of CG.
Q: If income from CG is aggregated with other income viz. Income from Employment, Business
etc. identity of income from CG will be lost. How will tax thereon be levied?
A: DTC dispense with the special rate of tax as in the existing structure for STCG and LTCG.
Hence, the question of maintaining identity of STCG and LTCG does not arise. DTC
proposes to levy tax on CG at the rates as applicable to income from employment, business
etc. In order to ensure that tax is not levied on the inflated cost, provisions have been made
for adjusting the cost of acquisition by means of inflation index.
Q: How to compute CG? What are the provisions related thereto?
A: S 44(1) provides that income arising from transfer of any Investment Asset (IA) is required to
be computed under the head “CG”.
Investment Asset:
Q: What is IA?
A: S. 284(151) defines it as an asset which is not Business Capital Asset (BCA).
Q: What is BCA?
A: S. 284 (42) covers following types of assets under the title BCA.
(a) self-generated capital asset generated in the course of business;
(b) any intangible capital asset in the nature of,-
(i) goodwill of a business,
(ii) a trade mark or brand name associated with the business,
(iii) a right to manufacture or produce any article or thing,

3. (iv) right to carry on any business,
(v) tenancy right in respect of premises occupied by the assessee and used by
him for the purposes of his business, or
(vi) licence, right or permit acquired in connection with the business;
(c) any tangible capital asset in the nature of a building, machinery, plant or furniture; or
(d) any other capital asset connected with or used for the purposes of business;
Q: In what respect the term IA differs from the corresponding term under the ITA?
A: S. 2(14) of ITA defining the term “Capital Asset” (CA) covers all the assets held by an
assessee except the following items.
a) Stock-in-Trade, consumable stores, raw materials etc.
b) Personal effects
c) Agricultural land
d) 6.50% Gold Bonds, 1977
e) Special Bearer Bonds
f) Gold deposit Bonds
It means that all the assets other than as mentioned above, whether connected with the
business or not are CA under the ITA. In order to avoid any controversy, the definition of
BCA under DTC covers intangible and self-generated assets as well.
Q: Does it mean that a partnership firm and a limited company cannot derive income from CG
as all the assets held by them will be for business only?
A: No. If the partnership firm or the limited company is holding the property which is not being
used for any business activity but, say, let on hire and income from which is taxed under the
head “Income from house Property” or “Income from Other Sources” will be covered under
the definition of IA. Moreover, the firm / the company might have made investment in shares
and securities which are not held as stock-in-trade. Periodical income from these sources is
proposed to be taxed under the head “Income from Residual Sources”. In all such cases, the
provisions relating to CG will be applicable.
Transfer:
Q: S. 44(1) refers to income arising on transfer. What is transfer?
A: S. 284(287) covers 16 types of the transactions as transfer. They are as follow:
(a) sale, exchange or relinquishment of the asset;
(b) extinguishments of any rights in the asset;
(c) compulsory acquisition of asset under any law;
(d) conversion asset into, or its treatment as stock-in-trade of a business;
(e) buy-back of any shares by the issuer of such shares or securities;
(f) any contribution of the asset to a company or an unincorporated body, in which the
transferor becomes, a shareholder or participant;
(g) distribution of the asset on account of dissolution of an unincorporated body;

4. (h) distribution of the asset on account of liquidation or dissolution of a company;
(i) any agreement allowing the possession of an immovable property, to be taken in part
performance of a contract of the nature referred to in section 53A of the Transfer of
Property Act, 1882;
(j) any agreement which enables the enjoyment of the asset, being any immovable
property, whether by way of becoming a participant in an unincorporated body or
acquiring shares in a company or by way of any agreement, arrangement.
(k) maturity or redemption of a zero coupon bond;
(l) slump sale;
(m) any damage to the insured asset or its destruction as a result of -
(i) flood, typhoon, hurricane, cyclone, earthquake or any other convulsion of nature;
(ii) riot or civil disturbance;
(iii) accidental fire or explosion; or
(iv) action by an enemy or action taken in combating an enemy;
(n) transfer of securities by a person having beneficial interest in the securities held by a
depository as registered owner;
(o) distribution of the asset to a participant in an unincorporated body on account of his
retirement from the body; and
(p) any disposition, settlement, trust, covenant, agreement or arrangement.
Q: How does it differ from the provisions under the IT Act?
A: S. 2(47) of ITA defining the term “transfer” covers many of these provisions. Definition
under DTA is extensive. It has brought in some of the items which were otherwise appearing
u/s 45 of ITA.
Q: Whether all the types of transfer of assets are covered therein?
A: No. S. 45 provide a long list of the transactions which are not covered for the purpose of
taxation as CG. They are as follow.
(a) distribution of any IA on the total or partial partition of a Hindu undivided family;
(b) gift, or transfer under an irrevocable trust, of any IA, other than sweat equity share;
(c) transfer of any IA by a company to its subsidiary company, if—
(i) the parent company or its nominees hold the whole of the share capital of
the subsidiary company,
(ii) the subsidiary company is an Indian company; and
(iii) the subsidiary company treats the asset as an IA;
(d) transfer of any IA by a subsidiary company to the holding company, if

5. (i) the whole of the share capital of the subsidiary company is held by the
holding company or its nominees,
(ii) the holding company is an Indian company, and
(iii) the holding company treats the asset as an IA;
(e) transfer of any IA by a predecessor to a successor in a scheme under a business re-
organisation if the successor is neither a non-resident nor a foreign company;
(f) transfer of any IA situated in India, by an amalgamating or demerged foreign company
to the amalgamated or resulting foreign company, if -
(i) the transfer is effected under a scheme of amalgamation or demerger, as the
case may be; and
(ii) the transfer does not attract tax on capital gains in the country, in which the
amalgamating or demerged company is incorporated;
(g) transfer of shares of a predecessor by a shareholder under a scheme of business re-
organisation, if-
(i) the transfer is made in consideration of the allotment to the shareholder of
shares in the successor amalgamated company; and
(ii) the successor is neither a non-resident nor a foreign company;
(h) transfer of bonds or global depository receipts by a non-resident to another non-
resident, if the transfer is made outside India;
(i) transfer of any work of art, archaeological, scientific or art collection, book,
manuscript etc.;
(j) transfer by way of conversion of any bonds or debentures, debenture-stock or deposit
certificates in any form, of a company into shares or debentures of that company;
(k) transfer by way of conversion of foreign exchange convertible bond of a company into
shares or debenture of any company;
(l) transfer of any securities, if-
(i) the transfer is effected under a scheme for lending of any securities; and
(ii) the scheme is framed in accordance with the guidelines issued by the Securities
and Exchange Board of India, or the Reserve Bank of India.
(m) transfer of any IA, if -
(i) the transferor is a company; and
(ii) the asset of the company is distributed to its shareholders on its liquidation;
(n) transfer of a IA under a will;
Q: Apart from the transactions covered within the definition of “transfer”, are there any
transactions wherein income will be treated as CG?

6. A: S. 44(2) provides for four contingencies wherein even though transfer of assets do not takes
place, the provisions of CG will get invoked. They are as under.
(a) income from the transfer referred to in clause (c) or clause (d) of sub-section (1) of
section 45, if,-
(i) the parent company, or its nominee, ceases to hold the whole of the
share capital of the subsidiary company; or
(ii) the IA is converted by the transferee into, or treated by it as, its
business trading asset;
(b) the income from the transfer referred to in clause (e) of section 45, if any of the
conditions laid down in clause (16) or clause (81), as the case may be, of section
284 is not complied with;
(c) the amount of withdrawal referred to in sub-section (4) of section 53 to the extent
determined in accordance with the formula -
AXB
C
Where
A = amount of deduction claimed under section 53;
B = the amount withdrawn from the account under the capital gains deposit
scheme, which is not utilised for the purposes of purchase or construction of
the new IA within one month from the end of the month in which the
amount is withdrawn;
C = the net consideration as a result of the transfer of original IA; and
(d) the amount of deposit referred to in sub-section (5) of section 53 to the extent
determined in accordance with the formula -
AXB
C
Where
A= amount of deduction claimed under section 53;
B = the balance in the account referred to in sub-section (5) of section 53, of
the assessee, as on the first day of the FY immediately following the three
financial years from the end of the FY in which the transfer of the original IA
referred to in that section is effected;
C= the net consideration as a result of the transfer of original IA.
FY of Taxability
Q: In which year the tax liability for CG will arise?
A: Generally, in the case of an immoveable property, tax liability arises when the conveyance
deed is executed. In the case of moveable property, it arises when title to the goods are passed
on to the buyer. However, S. 46 lays down a Table containing various types of transactions
where the liability for CG gets triggered at different point of time. They are as under.
Sl. Nature of Transfer The FY in which -
No.

7. a If the IA is converted by the (a) the business trading asset is sold;
holding or subsidiary company
into business trading asset, as
provided under section
45(1)(c) or(d)
If the parent company, or its (b) it ceases to hold the whole of the share capital
nominee, ceases to hold the of the subsidiary company
whole of the share capital of
the subsidiary company
b Transfer in a scheme under a any of the conditions referred to in clause (16) or
business re-organisation, clause 81 or of section 284 are not complied with.
referred to in clause (e) of sub-
section (1) of section 45 is not
complied with.
c Transfer by way of the compensation is determined by the Central or
compulsory acquisition under State Government or the RBI, is received.
any law
d Transfer referred by way of the converted or treated asset is sold or otherwise
conversion into, or its transferred.
treatment as business trading
asset
e Transfer by way of - the asset is transferred or distributed.
(i)contribution of the asset,
whether by way of capital or
otherwise, to a company or an
unincorporated body, in which
the transferor is, or becomes,
a shareholder or participant,
as the case may be; or
(ii) the distribution of the
asset on account of dissolution
of an unincorporated body.
f Transfer by way of part the possession of the immovable property is taken
performance of a contract, or retained.
referred to in sub-clause(i) of
clause (287) of section 284
g Transfer by way of damage or which the money or asset is received.
destruction referred to in sub-
clause(m) of clause (287) of
section 284
h Transfer by way of distribution the money or the asset is distributed.
of the asset to a participant in
an unincorporated body on
account of his retirement from
the body.
i Transfer by any mode other the transfer took place.

8. than the modes referred to in
serial numbers a to h.
Q: Is there any method laid down by which CG is required to be computed?
A: S. 47 lays down the method under which CG has to be computed. As per the same, full value
of consideration accrued or received on transfer of IA is required to be reduced by the
aggregate amount of the deductions as provided in S. 49.
Q: Does it mean that CG has to be offered for taxation even though consideration has not been
received by the seller?
A: Yes. Since the word “accrued” has been used in S. 47(1), tax will have to be paid even though
consideration for transfer of the asset has not been received. However, an exception has been
provided for in the case of compulsory acquisition wherein CG is proposed to be levied when
the compensation is received.
Consideration
Q: What is “Full Value of the Consideration”(FVC)?
A: S. 48 defines it in two ways. Sub-clause (1) refers to it as amount received by, or accruing to,
the transferor as a result of the transfer of the IA. Apart from that, S. 48(2) also provides for
various transactions / cases under which the method for computation of consideration has
been laid down. They are as follow:
Sr If the transfer is by way of Method for computing consideration
1 compulsory acquisition under any law amount of compensation awarded in
the first instance or, the consideration
determined or approved by the Central
Government or the Reserve Bank of
India
2 conversion of assets into stock-in-trade the fair market value of the asset as on
of a business the date of the transfer
3 buy-back of any shares by the issuer of the amount of consideration received
such shares
4 contribution of the asset to a company the value of the IA
or an unincorporated body, in which the
transferor becomes, a shareholder or
participant
5 distribution of the asset on account of the fair market value of the asset as on
dissolution of an unincorporated body the date of the transfer
6 any damage to the insured asset or its the fair market value as on the date of
destruction the receipt of any asset, received
under an insurance from an insurer;
7 Distribution of asset by a company amount of money, or the fair market
under liquidation etc. value as on the date of distribution of
any asset,
8 distribution of the asset to a participant fair market value as on the date of
in an unincorporated body on account of distribution of the asset, received by
his retirement from the body the participant
9 gift, or transfer under an irrevocable fair market value as on the date of
trust, of any IA, other than sweat equity transfer of the asset
share
10 In the case of immoveable property the higher of the stamp duty value of
the asset and the value of the asset
ascertained on reference, if any, to the
Valuation Officer.

9. Losses under CG
Q: What will happen to the losses incurred?
A: In case of loss incurred in respect of any IA, it will get set-off against income from CG of
other IA. In case, if the total of gain / loss of all the IA are negative i.e. the assessee has made
the losses under the head CG, taxable income under it will be considered as NIL [S 47(4)]. It
means that losses computed under the head CG will be carried forward as “Unabsorbed
Current Capital Loss” (UCCL). Since, it is not permitted to be aggregated with that of the
income from ordinary sources, loss under CG cannot be set-off against income from, say,
employment or business etc. The Discussion Paper refers to it as “ring-fenced” meaning
thereby the loss under CG will be fenced and is permitted to move within defined area.
Q: What will happen to loss which the assessee has incurred in Ass Yr 2011-12 and prior years
and which are permitted to be carried forward for setoff as per the provisions of S. 74 of
ITA?
A: There is no specific clause permitting setoff of such losses. Although the language is not
clear, clause 282(2)(g) relating to Repeal and Savings can be interpreted to mean permitting
such setoff. The said clause permits any election, declaration made or option exercised by an
assessee under the ITA is deemed to be an election or declaration made or option exercised.
However, clarity in this respect would have helped a lot.
Deductions from FVC
Q: Are there any provisions permitting any deductions from CG?
A: S. 49 provides for deduction from CG. It is proposed to bifurcate the deductions based on the
time of IA asset held by the assessee. S. 49(1) provides for the deductions in respect of IA
asset held for certain timeframe. If the IA is held for more than one year after the end of the
FY in which it was acquired, the assessee is permitted to apply indexed cost of acquisition,
fair market value of the asset as on 1-4-2000, rollover of the asset etc.
Q: At which stage deductions are required to be claimed?
A: As per S. 47(2), income from CG in respect of each asset sold will have to be computed
separately. For example, the assessee has sold shares of four companies during the year;
computation of CG of each of this item will have to be made separately. The process to be
followed for each IA sold will be as under.
In the first step, full value of consideration received or accrued will have to be reduced by the
amount of deductions as defined u/s 49.
In the second step, the benefit of rollover availed, if any, will have to be applied.
In the third step, after computing CG of each IA sold, it will have to be aggregated. The
amount so arrived at is called “Current Income from Capital Gain” (CICG).
In the fourth step, the amount of “Unabsorbed Preceding Year Capital Loss” will be
aggregated with that of the CICG. Result of the said computation will be called “Income from
CG”.
In the final step, if the amount of CG so arrived at is positive, it will have to be aggregated
with the income from Employment, business etc. treating it as IOS.
Q: Which types of deductions are permitted from consideration?

10. A: Depending upon the period of holding of the IA, two types of deductions are permitted. As
per the provisions of S. 49(2), if the IA is held for more than 12 months from the end of the
year in which it was acquired, the assessee is permitted to apply inflation index on it.
Secondly, in such cases, the assessee is also permitted certain relief for rollover of the asset.
Q: Under the ITA, shares of listed companies held for more than one year are being treated as
LTCG. In respect of other items, the period of holding is three years. What are the provisions
in this respect under DTC?
A: S 49(2) provides the method of computation of period for the IA held as the period of more
than one year computed from the end of one year of the FY in which the asset is acquired.
Therefore, the period will have to be reckoned not from the date of purchase of the IA but
from the end of the year in which it was acquired.
Q: What are its implications?
A: As a result of this provision, the limit of one year as provided under the ITA, get extended by
more than one year. For example, if the assessee has purchased IA, say, on 1-4-2011, the said
period will apply with effect from 1st April, 2013. This is for the reason that the period of one
year will begin after 31-3-2012. It practically extends the period of one year to more than that
depending upon the date of the FY on which it was purchased. However, in the case of
purchase of IA on, say, 31st March, 2012 the period will commence from 1st April, 2013.
Thus, in this case, the period will be almost of 12 months.
Q: Why is it so?
A: S. 2(42) of ITA defines short term capital assets with reference to the actual period of
holding. The wordings under the ITA for computation of the period are capital asset held by
an assessee for not more than thirty-six months immediately preceding the date of its
transfer. As against it, DTC is applying totally different concept. It defines the period of
holding with reference to one year from the end of the FY year in which it was acquired. At a
plain reading, it looks very similar to the provisions of ITA. However, there is a marked
difference. Under DTC the period of holding starts from the end of the FY in which the IA
was acquired. Thus, the period of holding gets extended from the date of purchase till the end
of the respective FY. It means IA purchased on 31st March of FY will be required to be held
for one year only.
Q: What is the rationale for such provision?
A: During the last three / four years, certain Mutual Funds (MF) have come out with the
products wherein by structuring its period of holding spilling over two FY, it was possible to
have benefit of CII for two years while the total period of investment was slightly more than
one year. It appears that, in order to curb these practices, this clause has been made more
stringent.
Cost of IA
Q: How to determine the cost of IA?
A: S. 51 provides for five contingencies and lays down the method for computation of cost for
IA.
Q: Under the ITA, in the case of asset acquired prior to 1-4-1981, it’s fair market value as on 1-
4-1981 is permitted as cost. What are the provisions in this respect?

11. A: S. 49(1) gives an option to the assessee. As per S. 49(1)(a) the assessee can opt for purchase
price of the asset. As per sub-clause (2) the assessee can opt for market value as on 1-4-2000
if the asset was acquired prior to the said date.
Q: What implications it can have on CG tax liability?
A: As a result of the proposed change, appreciation in the value of IA during the intervening
period of April, 1981 to April, 2000 will not be taxed. Since, the period covered is of 20
years, substantial amount of appreciation in IA which has taken place during the said period
will be tax free. As far as IA acquired subsequent to April, 2000 is concerned, adjustment
thru CII will permit reduction in the appreciation in the value of IA due to erosion in the
value of rupee.
Q; Whether this method is applicable in all the cases?
A: No. S. 51(2) to (5) covers the cases wherein a different method of computation will have to
be employed.
Sub-clause 2 provides for computation of the cost under special cases which have been laid
down in Seventeenth Schedule. It mainly covers the case of shares issued under
amalgamation, de-merger, sweet equity etc.
Sub-clause (3) refers to cost in the case of Special Modes of Acquisition (SMA).
Q: What is SMA?
A: S. 284(257) includes nine different types of the cases. They are as follow:
(a) acquisition of converted property by a Hindu Undivided Family; and
(b) acquisition by any person in any of the following manners,-
(i) upon distribution of any asset on the total or partial partition of a Hindu
undivided family;
(ii) by way of a gift;
(iii) under a will;
(iv) by way of succession, inheritance or devolution;
(v) upon distribution of any asset on the dissolution of an unincorporated
body;
(vi) upon distribution of any asset on the liquidation of a company;
(vii) upon a revocable or an irrevocable settlement to a trust; and
(viii) under a transaction referred to in clause (c) to clause (f) of sub-section
(1) of section 45;
Q: Which method is to be applied for such cases?
A: As per clause 51(3)(a), the assessee is permitted to opt for the cost of purchase of the
previous owner. As per clause 51(3)(b), the assessee is permitted to opt for the fair market
value of the IA as on 1-4-2000, provided the previous owner was holding the said IA as on
the said date.

12. Q: How to compute the cost in the case of asset received on retirement of partnership firm?
A: S. 51(4) provides the formula for computation of cost.
A - (B + C)
where,
A= the amount payable to the participant as appearing in the books of account of the
unincorporated body on the date of distribution;
B= any amount attributable to the change in the value of the bundle on account of
revaluation of the bundle, if any, up to the date of distribution; and
C= the cost of acquisition of any other asset, if any, forming part of the bundle
acquired by the participant, on distribution of the asset to him on account of his
retirement from any incorporated body if the cost of acquisition has been allowed
as a deduction under section 49 in any earlier FY.
Q: What are the provisions for computation of cost for self-generated asset?
A: According to S. 51(5) the cost of acquisition of an IA shall always be nil.
Indexed Cost of Acquisition (ICA)
Q: What is ICA?
A: S. 50(1) provides for the formula for computation of ICA. It is computed by dividing the
Cost Inflation Index (CII) for the year in which the IA is transferred, by the CII for the FY
(FY) immediately following the FY in which the IA was acquired. In the case of IA acquired
prior to 1-4-2000, CII applicable will be as that of for the year 2000-01.
Q: What is CII?
A: As per S. 284(69), it is the index as the Central Government may specify by Notification in
the Official Gazette, having regard to 75.00% of the average rise in the consumer price index
for urban manual employees for the immediately preceding FY
Q: Is it the same index as referred to under the ITA?
A: No. Explanation (v) to S. 48 of I Tax Act refers to it as Consumer Price Index for urban non-
manual employees However, S. 284(69) refers to consumer price index for urban manual
employees.
Q: Is there any difference between the two? Is it beneficial to the assessee?
A: It is not clear. To what extent both the indexes are different and how they move, is to be
examined.
Q: If the assessee has incurred cost for improvement of the asset whether CII will be
applicable?
A: Yes. S. 50(2) provides for the same. Provisions in this respect are on the same line as that of
S. 50(1).
Relief for Rollover of the Asset
Q: S 53 refers to rollover. What is it?
A: There is no definition of the said term under DTC. It is being used in UK and other
countries. It implies deferring (i.e. rolled-over) of capital gain arising on the disposal of
certain types of asset provided the proceeds are reinvested in new permitted assets. Under
such a scheme, the gain is deducted from the cost of the new asset.

13. Q: What is relief for rollover of the asset?
A: S. 49(2)(iv) provides some relief to the assessee while computing deductions from CG. S. 53
makes detailed provision in this respect.
Q: What are the special features of it?
A: As per S. 53(1) only an individual or HUF is permitted to have benefit of this section. It
means a company, partnership firm or charitable trust cannot avail benefit of rollover. This is
in sharp contrast to the corresponding provisions under the ITA wherein all the assessees
were permitted to avail the benefits.
Q: Which are the types of IA in respect of which the benefit of rollover can be availed?
A: S. 53 contains a Table titled as “Table-3: Deduction in respect of Capital Gain”. It provides
for three cases wherein the benefit for rollover can be availed.
In the first place, consideration received for sale of agricultural land can be rolled over to for
the purchase of agricultural land.
Q: Are there any conditions laid down for the same:
A: Yes. As per clause (i), the first condition is that the nature of the land which has been sold
should have been that of agricultural during the two years immediately preceding the FY in
which it was transferred. Secondly, as per clause (ii), the assessee should have held the said
asset for one year before the beginning of the FY in which it was transferred.
Q: What is the difference between the clause (i) and (ii)?
A: Clause (i) refers to the nature of land for two years immediately preceding the FY in which
it was transferred. However, clause (ii) refers to the holding period of the land by the
transferee.
Q: Are there any provisions for rollover relief for purchase of a residential house?
A: Yes. Entry 2 provides for the case wherein if the assessee purchases a residential house then
he will get some relief from CG.
Q: Are there any conditions for the same?
A: Yes. The assessee has to satisfy two conditions for availing the said benefit.
Firstly, this benefit is available to the assessee who does not own residential house on the
date of transfer of the original IA.
Secondly, the assessee should have held the original IA for at least one year prior to one year
before the beginning of the FY in which the transfer took place. For example, if the assessee
is disposing off the asset on 1-4-2012 or thereafter, he should have purchased it before 1-4-
2011. The period of holding will remain the same if the asset is, say, disposed off on 30-3-
2013.
Q: The first condition is harsh one. It means that in order to have setoff of CG arising on sale of
existing house property and shifting to new house can not be done. For the purpose of setoff,
one will have to dispose-off the existing property and buy a new one thereafter. What should
he do during the intervening period? This is for the reason that one needs a shelter. Apart
from that selling a house and buying a new one is not so easy process. It takes considerable
time.

14. A: Yes. The proposed provision is harsh one. It does not take into consideration such cases. An
assessee may face a problem and is forced to get shifted to new residence. Such provision
will hit both the ways. One cannot get shifted to rented house and dispose off the existing
house to avail the benefit of the setoff of CG. In view, of this, the provision in this respect
needs a revision.
Q: Are there any other cases wherein relief for rollover is available?
A: Yes. If the CG arising on transfer of IA is deposited in Capital Gains Savings Scheme
(CGSS) certain relief is provided.
Q: Are there any conditions to be complied with?
A: Yes. The IA which has been transferred should have been acquired by the assessee prior to
one year before the beginning of the FY in which the transfer took place. Secondly, the
amount is deposited within sixty days from the date of transfer of the original IA.
Q: Whether the condition regarding depositing CG within sixty days is not too short?
A: Yes. It may pose hardship in some of the cases. For example, it restricts setoff against the loss
incurred within sixty days only. As per the proposed provisions, income under the head CG
has to be computed by aggregating CG of each IA disposed off. It may so happen that after
disposing off a particular IA, the assessee may opt for depositing CG under CGSS. In the
process, tax payable in respect of the same may be nil. However, subsequent to the same, if
the assessee dispose off another IA and incurs the loss, the benefit of setoff of loss for the
said particular IA against the CG for earlier IA will not be available. This is for the reason
that by making deposit of CG in CGSS, CG has been made nil. In view of this, loss incurred
on the sale of second IA will have to be setoff against the CG arising subsequently in the
same FY or to be carried forward for setoff in the next year. In order to provide flexibility, it
is advisable to extend the said period up to 31st March of the FY. This will permit absorption
of the loss which might have been incurred at any point of time during the FY.
Q: Is there any formula to be applied for computation of relief for rollover?
A: S. 53(2) provides for the formula under which relief can be computed. According to it, the
amount paid for acquisition of agricultural land or residential house or deposited in Capital
Gain Deposit Scheme (CGDS) is required to be divided by net consideration received. The
result so derived is required to be multiplied with the amount of CG as computed u/s 47.
Q: Clause 3 of the Table 3 refers to CGSS while the formula provided in S. 53(2) refers to
CGDS. Are they different schemes?
A: S. 284(49) defines CGSS as the scheme framed and prescribed by the Central Government in
this behalf. However, no definition has been provided for CGDS. Moreover, there is no
reference to CGDS in Table-3. There appear to be some confusion in this respect. There is a
conflict between the provisions of S. 53(2) and item 3 of Table-3.
Q: Can one claim higher amount of relief for rollover?
A: No. S. 53(3) provides that the relief of rollover cannot exceed the amount of CG arising from
the transfer of IA.
Q: What are the features of CGSS?
A: Although no details are yet available, however, at a meeting on 12th September, 2009 at
Ahmedabad Mr. Arbind Modi, Joint Secretary, Ministry of Finance, stated that the said
scheme will operate on the principles of EET. The assessee will be permitted to make

15. investment of CG in different types of financial instruments making it tax exempt. Income
accruing on such new investment will be tax free as indicated in second limb of EET. The
question of tax liability will arise only when the assessee liquidates the investment and
withdraws the money.
Q: Whether the amount so withdrawn will be treated as CG or normal income?
A: Amount so withdrawn will be treated as Income from Residual sources and will be taxed as
normal income.
Losses under CG
Q: How the losses are to be treated under CG?
A: In terms of provisions of S. 47(2), CG in respect of each IA is required to be computed
separately. Secondly, CG of all the IA are required to be aggregated.[S. 47(3)] . If the total of
the same is loss then it has to be carried forward to the next year.
Q: Whether loss under the head CG can be set-off against income from any other head, say,
business or employment etc.?
A: No. S. 47(4) specifically provides that loss under the CG has to be carried forward and to be
setoff against income from CG in the next year.
Q: Is there any time limit for which such losses can be carried forward?
A: No. There is no time limit laid down. It means that such losses can be carried forward for any
number of years for setoff against income from CG in future.
CG and Deductions from Income
Q: Whether deductions for savings as provided u/s 66 of DTC, will be permitted from total
income comprising of CG?
A: S. 65(2) restricts deduction from total income up to the amount of income derived from IOS.
Since CG is also part of IOS, deductions from total income can be claimed from CG as well.
CG and Non-residents Individual (NRI)
Q: How the CG derived by NR will be treated?
A: Table forming part of clause 3 of the First Schedule of DTC which lays down the rates of tax
for various entities, provides the rate of tax @30.00% on CG derived by NRI. Provisions
relating to CG contained in sections from 44 to 53 do not make any reference to NR. It means
that all the assessees i.e. Residents and NRI, are treated at par.
Q: Will it not form part of various other incomes derived from India?
A: Such income are proposed to be treated as income from any special sources and taxed @
30.00%. It may be noted that Para 1 of clause I of the First Schedule laying down the rates of
tax for various persons, covers the case of NRI Individual deriving income from any sources
in India. It means that NRI will be entitled for basic threshold exemption of Rs. 1,60,000 and
the rate of tax will be 10.00%, 20.00% and 30.00% as applicable. However, it is only in the
case of CG, the rate of tax will be 30.00%.
Q: Whether it will be beneficial to the country? Will not NRI be discouraged to make investment
in the country?
A: At a first glance, one may feel so. However, as explained by Mr. Arbind Modi, Joint
Secretary, Ministry of Finance, at various forums, the country has moved forward in many
directions since 1990. Its requirements today are quite different. May be with the database

16. available with the policy-makers, one may be ready to take such a risk. It may be that looking
to the scenario prevailing at global level, the policy makers have thought it fit to convey
different signals.
Classification of IA
Q: Abolition of classification of CA into short term and long term may hit hard to investors as
tax liability may increase. Can it not have adverse impact?
A: It is difficult to generalize. If we look at the proposed provisions in totality, it may not be so.
For example, under the ITA period of holding of IA in the form of immovable property is
three years. As per the proposed code it will be less than that as there will not be
classification of IA like shares of listed companies, immoveable properties etc. Provisions
regarding holding period are applicable to all the IA.
Secondly, by shifting the base period from 1981 to 2000, those who are holding the IA over a
longer period of time will get substantial benefit as the CG accruing during the said period
will be tax free.
Looking from the equity point of view also, if tax has to be levied on appreciation in value of
IA, there is no justification for classifying the IA into different classes and giving soft
treatment to certain class of assets. Those who are investing in the shares may find it
restrictive. However, to some extent, it may impart some stability to movement in the prices
of shares on the stock exchange.
Strategy for Existing Portfolio of Assets
Q: All these sound confusing. What should one do to ensure that there is no substantial liability
on account of CG after 1-4-2011?
A: With respect to the investment made with the idea of disposing off over a long period of time,
one will have to assume 1-4-2011 as cut-off date for computing tax implications. Although
the provisions contained in the DTC as available today are not final, there may be many
changes prior to it comes into effect. One will get clear picture somewhere in November /
December, 2010 when the final Bill is placed before the Parliament for its approval. The
investor may get three months time to work out the strategy i.e. whether to reshuffle the
portfolio, to book the CG and held the asset with new cost etc. Since, IA consists of different
types of items having varying degree of appreciation and the cost involved in churning the
portfolio, it is difficult to generalize. For example in the case of shares held in a company
wherein substantial appreciation has taken place as compared to its cost, one will have to
evaluate whether to dispose it off by incurring the cost of Security Transaction Tax and
having the CG as tax free.
Shifting of the base year from 1-4-1981 to 1-4-2000 will complicate the matter further. One
will have to consider whether the appreciation in value has taken place after 1-4-2000 or
thereafter. All these are complex working and one has to be careful before entering into any
transaction.
As far as other assets are concerned, say, immoveable property, it will pose the problem of
stamp duty and other expenses providing the least flexibility.
A template containing these provisions which can help in understanding complexities to some
extent is given here below.

17. Name:
Address
From 01/04/2011 Status Indl.
To 31/03/2012 Resi. " Resident
Fin. Yr. 2011-12 Citizen Indian
P. A. No.
Sex MALE
COMPUTATION OF CAPITAL GAIN - [S. 44 to 53]
Rs. Rs.
Investment Asset No.1
Full value of consideration accrued or received as a result of the transfer xxxxxx
add:
1) Ceasing of holding of shares of 100% subsidiary as referred to in
S. 45(c) or (d) [S 44(2)(a)(1)(i)] xxx
2) Conversion of investment asset by the transferee into business
trading asset as referred to in S. 45(c) or (d) [S 44(2)(a)(1)(ii)] xxx
3) Income from transfer of asset in a scheme of business re-organisation
- failure to comply with the conditions of S. 284(16) or (81) xxx
4) Amount withdrawn from Capital Gain Deposit Scheme xxx
xxxxx
less: Deduction for Cost of acquisition, inflation-adjustment etc. [S 49]
A) Asset held for LESS than One Year from the end of the
FY in which it was acquired
a) Amount of expenditure incurred wholly and exclusively in
connection with the transfer of an asset xxx
b) Cost of acquisition of the asset xxx
c) Cost of improvement of the asset xxx
xxxx
B) Asset held for MORE than One Year from the end of
the FY in which it was acquired
a) Amount of expenditure incurred wholly and exclusively in
connection with the transfer of an asset xxx
b) Indexed Cost of acquisition of the asset i.e.
i) Purchase price of the asset
ii) Fair Market Value of Asset as on 1-4-2000 if the
asset has been acquired before the said date
at the option of the assessee xxx
c) Indexed Cost of improvement of the asset xxx
d) Relief for rollover of the asset as provided u/s 53 xxx
xxx
xxxx
Investment Asset No. 2
(computation as above)
SUMMARY
Current Income from CG [47(2)] (Total of CG Asset No.1, 2 as computed above) xxxx

18. less: Unabsorbed preceding year Capital Loss xx
Income from Capital Gains [ S. 47(3)] xxx
Note:
1) If the amount as computed above is positive, it has to be added to Income from Ordinary Sources.
2) If the amount as computed above is negative, it has to be tread as Nil for the current year and balance
of loss is to be carried forward
Conclusion:
Q: What is the rationale for taxing CG provisions as proposed?
A: As we know, the DTC proposes to chart a new path with respect to taxing income. Many of
the concepts, as evolved internationally in the last decade, are proposed to be introduced. As
announced, the idea is to do away with large number of exemptions and deductions. At the
same time, to levy the tax on real income at a low rate. If we look from the said perspective,
the methodology proposed to be adopted for computation of CG is that tax has to be levied on
the gain which has been en-cashed. However, since such gain will be consisting of
appreciation in the market value due to inflation, and consequential erosion in the value of
Rupee, deduction is permitted in the form of CII. Once the element of inflationary value is
taken out, the amount of CG represents the income derived. Therefore, it should get the same
treatment, like Income from Employment, Business etc. If the amount received is in the
nature of income, there is no reason why it should get soft treatment. More particularly when
income from employment and business are taxed @10.00%, 20.00% or 30.00%, can there be
any justification for treating income from CG differently?
One more aspect which, we should not loose sight of, is that since 1990 the country has
moved far away from what it was. There are structural changes taking place. Therefore, the
concepts and the system which were valid in those days may not be so today. A society
cannot remain static; it has to move with the time. Considering the scenario prevailing at the
relevant point of time, income from CG has been treated at lower rate of tax. However, the
time has changed and, therefore, the need for different structure.