Over a period of time, in our consulting practice, we have come across many an interesting case. Of course, the background and facts of any matter are specific to that particular client.
Nonetheless, many a times, the taxation principles and concepts of a case and are such that other taxpayers could benefit from the same, not only for general interest but also to proactively do their tax planning. So with that in mind, we present the first part of this compilation on capital gains tax.
House under Construction
A builder takes installments from the purchaser of a flat during the construction of the building. When the purchaser eventually sells the flat, how should he compute the indexed cost? Should he index each installment or index the total? What is the date of acquisition? The Act is silent on this issue.
You have earned a right to own a flat when you pay the very first installment. The cost of acquisition of this right is the total cost of the flat at which the agreement with the builder is signed. The fact that you did not pay the entire sum in a lump sum is immaterial and inconsequential.
If you sell the property before the flat is ready for possession, you would be selling this right. The cost of the acquisition of this right is the total contracted price less, the installments payable. The long-term or short-term nature will depend upon whether the period of 3 years have elapsed from the date of the contract.
After the house is ready and you have taken possession, it becomes a different species. The clock for long-term or short-term starts once again from the date of your taking possession and the cost of acquisition is the total payments to the builder. You have to index the total amount from the year of possession of the flat.Some experts feel that the indexed cost of acquisition should be arrived at by indexing each installment. This would be too clumsy and time consuming. In any case, I do not subscribe to this view.
Cost of Acquisition and Miscellaneous Expenses
For share transactions, the broker’s commission is available in his note and therefore, there is no problem to take it into account as a part of cost of acquisition when shares are purchased and as reduction in sale proceeds when shares are sold. The charges for converting the scrips from physical to demat mode can be added to the cost of acquisition of individual scrips.
The same tenet may be applied to the DP fees for holding the scrips in the demat mode. The exercise will be complicated but worthy of undertaking it.
Other expenses such as travelling to broker’s office, telephone charges, etc., can be taken into account in theory but in practice, it will be very difficult to do so.
Loss v Exemption
Take the case of an individual who has earned LT capital gains and has invested immediately thereafter the gains in Sec. 54EC Bonds to come down to nil tax on capital gains. Later, during the same FY he has incurred a long-term capital loss. Will the loss have to be setoff against the gains in spite of the assessee having invested in the Bonds u/s 54EC? Again, will the loss not be allowed to be carried forward u/s 74?
The answers to these questions lie in the fact that Sec. 54EC offers exemption and not deduction. In other words, if an income is eligible for exemption, it is not to be included in the computation of income. On the other hand, deductions (Secs. 80C, 80G, 80D, etc.) are to be claimed after having aggregated the incomes from different sources.
After having claimed the exemption u/s 54EC, such income ceases to be taxable and will not be included in the total income. As such, the full amount of capital loss can be carried forward. For clarity, even if the assessee earns long-term capital gains later in the same FY, he can invest in bonds within 6 months, claim exemption u/s 54EC, and carry forward the loss.
Setoff Business Loss
Business loss can be setoff against capital gains. It is only the capital loss that cannot be set off against income under any other head including business income. Moreover, any long-term loss cannot be setoff against short-term gain.
U/s 71(1), the loss computed against any one head of income is allowed to be setoff against income computed against any other head. There are four
(i) Capital gains; (ii) Speculative business; (iii) Business of owning and maintaining of horses for races; and
(iv) Loss under ‘Profit and gains of business or profession’. These are not be allowed to be setoff against ‘Salaries’.
Painting Cost is not Cost of Improvement
While getting a paint job done goes a long way in maintaining the robustness and durability of any structure, one cannot treat painting expense as a part of selling expenses. Only indexed expenditure of a capital nature is allowed to be added to the indexed cost of acquisition. Painting is not a capital expenditure.
Reinvestment in Office Premises
Reinvestment in office or factory or business premises does not qualify for the exemption u/s 54 or 54F. Similarly, a new room constructed and annexed to the existing flat cannot be construed to be a residential house. Only residential properties are eligible.
Watch out for more such tips and tricks in the second part of the series to be published next week.
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