Mukesh Patel.in
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THE MAGIC WAND OF INDEXATION!

Gujarat High Court holds capital gains on gifted or inherited assets also enjoy indexation from date of original holding!

Section 49(1) of the Income-tax Act provides that where the capital asset has been acquired by the taxpayer in any of the modes such as on partition of a Hindu Undivided Family or under gift or Will or by succession or inheritance, etc., the cost to the previous owner shall be deemed to be cost of acquisition of the taxpayer.

Similarly, Section 2(42A) provides that where a capital asset is acquired by way of gift or inheritance as mentioned in Section 49(1), period of holding of the previous owner shall also be included in the period of holding of the taxpayer.

In the above context, an interesting question that would arise for consideration is whether while computing the taxable capital gains arising on transfer of a capital asset acquired by a taxpayer under gift or inheritance, the ‘indexed cost of acquisition,’ as per the provisions of Section 48, has to be computed with reference to the year in which the previous owner first held the asset or the year in which the taxpayer became the owner of the asset.

Consider a case where your grandfather had acquired a plot of land for Rs.20 lakhs in late 1981, which you received by way of inheritance on his death in 2013 and you were planning to sell the same in early 2014 for a consideration of Rs.1.80 crore. Guess, what would be the income-tax you would be required to pay on your capital gains? Difficult to believe, but ‘zero tax’ is the correct answer. (more…)

RELIEVING PAIN ON CAPITAL GAIN!

Bombay & Delhi High Courts hold that taxpayers can enjoy indexation even on assets received via gift or inheritance

    If your grandfather had acquired a plot of land for Rs.10,00,000 in late 1981, which you received by way of inheritance on his death in 2012 and you are planning to sell the same in early 2013 for a consideration of Rs.85,00,000, what would be the income-tax you would be required to pay on your capital gains? Difficult to believe, but ‘zero tax’ is the correct answer.

GAIN COMPUTATION OF GIFTED & INHERITED ASSETS

Section 49(1) of the Income-tax Act provides that where the capital asset has been acquired by the taxpayer in any of the modes such as on partition of a Hindu Undivided Family or under gift or will or by succession or inheritance, etc., the cost to the previous owner shall be deemed to be cost of acquisition of the taxpayer.

Similarly, Section 2(42A) provides that where a capital asset is acquired by way of gift or inheritance as mentioned in Section 49(1), period of holding of the previous owner shall also be included in the period of holding of the taxpayer. (more…)

PERSONAL EFFECTS TAX EXEMPT!

Wearing apparel, furniture, utensils, vehicles, etc. held for personal use not liable to capital gains tax!

Readers will recall that the Cost Inflation Index (CII) for purposes of computing the Indexed Cost of Acquisition for computation of Long Term Capital Gains for FY 2011-12 was 785. As against the same the Central Government has recently notified the CII for FY 2012-13 at 852. This reflects an 8.5% rise in inflation over the preceding year.

As per Section 2(14) of the Income-tax Act ‘personal effects,’ excluding jewellery, are not treated as capital assets and hence any gain arising on their transfer cannot be made liable to capital gains tax. ‘Personal effects’ would include movable property such as wearing apparel, furniture, household articles, utensils, vehicles, etc. held for personal use. Jewellery which has been excluded from ‘personal effects’ would include ornaments made of gold, silver, platinum or any other precious metal, precious or semi-precious stones and any articles set in any such stones.

A motor car or any other conveyance held for the personal use of a taxpayer is also a personal effect and any profit or gain arising from the same cannot be charged to tax as capital gains. In this regard, one can rely on the decision of the Bombay High Court in the case of ‘CIT vs. Sitadevi N. Poddar’ 148 ITR 506(Bom.). (more…)

PAVING FOR DOUBLE TAX SAVING!

ITAT Ahmedabad holds capital gains of Rs.1 crore exempt u/s.54EC, where investment is split in two financial years

             Section 54EC of the Income-tax Act provides for exemption of taxable long term capital gains (LTCG) arising from the transfer of an asset, to the extent the amount of such gains are invested in notified bonds within a period of six months from the date of transfer. Notified for this purpose are the three year bonds issued by National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC).

            Until FY 2006-07, there was no monetary ceiling prescribed in regard to investment in such capital gains bonds and hence a taxpayer could virtually invest his entire taxable gain, even running into crores of rupees, in these bonds and avail the benefit of 100% exemption under Section 54EC.

            However, the Finance Act, 2007 amended Section 54EC so as to provide that this exemption would be available subject to the condition that the investment in the notified capital gains bonds made on or after 1st day of April, 2007 does not exceed Rs.50 lakhs during any financial year. (more…)

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