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T. Banusekar

I HAVE been investing in shares of public limited companies. Most of these investments are done at the time of public offers made by companies. I have made these investments since 1970. Most of these shares are, at present, held in dematerialised form. I do not have an exact track of the date of investment. I now hold shares which have a current market value of about Rs 6 lakh. If I sell these shares how am I to determine the capital gains?

Sarika

Reply

In the case of transfer of capital assets that is long-term, the capital gains are to be computed as shown in Table 1.

The indexed cost of acquisition is determined as follows:

Cost of acquisition x cost inflation index of the financial year of transfer / cost inflation index of the financial year in which the asset was first held by the assessee or the cost inflation index of the financial year 1981-82, whichever is later

In the case of shares, there would generally be no cost of improvement and, therefore, no indexed cost of improvement as well.

In the case of dematerialised shares, the cost of acquisition and the period of holding are to be determined on the basis of the first-in-first-out (FIFO) method. This is provided for in Section 45(2A).

The Board has, through Circular No 768 of June 24, 1998 (1998 232 ITR St 5), clarified on how the FIFO method should be applied. In effect this circular explains that the FIFO method should be adopted account wise and the relevant date to be taken for determining which shares are transferred in cases where the shares were purchased in physical form and later dematerialised would be the date of dematerialisation and not the date of its acquisition in physical form.

The period of holding will, however, be taken with reference to when the share was acquired in physical form and not from the date of dematerialisation. In other words, it is only for determining which shares are sold on the basis of the FIFO method that the date of dematerialisation is relevant. The benefit of indexation will also be available from the date on which the shares were actually acquired.

For easier understanding, an example given in the Circular is presented in Table 2. If, say, 2,500 shares were sold from out of this account, then the period of holding and the cost of acquisition of the first 2,000 shares should be as from May 25, 1997, and the cost thereof, whereas the balance 500 shares will be treated as having been acquired in November 1985, at the relevant cost. This is the effect of the FIFO method.

In respect of shares held in physical form the period of holding will be determined on the basis of the distinctive number of shares that are actually transferred and the cost can also be determined on the basis of the price paid to acquire the said shares.

In effect, therefore, it would be required that at least the financial year of investment should be known for correct calculations to be made in respect of the capital gains.

If the shares were short-term assets, the benefit of indexation would not be available. Shares are short-term assets if they are held for 12 months or less and long-term if held for more than 12 months.

Query

My gross annual income is Rs 9.30 lakh. Am I eligible for rebates under Section 88?

J. Banerjee

Reply

The rebate under Section 88 is available at the percentages given in Table 3. In the instant case, as the gross total income exceeds Rs 5 lakh, no rebate can be claimed under this section.

Query

Under a family partition, I was allotted 41,043 sq.ft. of plotted land. This partition took place in January 1998. Before the partition, the family had converted 69,250 sq.ft. of land into plots aggregating 41,043 sq. ft. The market value of the plot in January 1998 was Rs 134 per sq.ft.

I have since converted the plotted land held as a capital asset into stock-in-trade. The conversion into stock-in-trade was done in August 2003. This stock-in-trade is to be sold at different points in time up to March 2004 at Rs 210 per sq.ft.

The market value of the land in August 2003 was Rs 186 per sq.ft. The family acquired the property before 1981 and the fair market value as on April 1, 1981, was Rs 4 per sq.ft. How is the income from this conversion into stock-in-trade and subsequent sale to be computed?

Sanjay Bahety

Reply

On the conversion of a capital asset into stock-in-trade, there is a transfer within the meaning of Section 2(47) of the Act. However, by virtue of the provisions of Section 45(2), the tax on such capital gains arising as a result of transfer needs to be paid only on the sale of the stock-in-trade.

In the instant case, both the conversion into, and the sale of, stock-in-trade have taken place in the same previous year, that is, 2003-04. The capital gains will, therefore, arise in the assessment year 2004-05, that is, the previous year 2003-04. The full value of consideration will have to be taken as the fair market value as on the date of conversion of the capital asset into stock-in-trade.

In your case, the full value of consideration would be Rs 76,33,998 (41,043 x 186). The cost of acquisition in accordance with Section 49 would be the cost to the previous owner. However, the fair-market value as on April 1, 1981, can be substituted for the cost of acquisition (Section 55). It is assumed that the fair market value as on April 1, 1981, is more than the cost of acquisition.

Therefore, the cost of acquisition would be Rs 2,77,000 (69,250 x 4). The capital gains will be computed as the difference between Rs 76,33,998 and Rs 2,77,000 subject to the benefit of indexation from 1981-82 onwards. The benefit of indexation from 1981-82 can be taken on the strength of the decision of the Tribunal in Smt. Pushpa Sofat vs ITO (2002 81 ITD 1 Chd).

In this case, it was held that the benefit of indexation would be available to the assessee on whom assets have devolved on the death of the owner from the date on which the previous owner held the asset. The same view should be taken in the case of family partition as well. The indexed cost of acquisition would be Rs 12,82,510 (2,77,000 x 463/100). The capital gain would, therefore, be Rs 63,51,488 (Rs 76,33,998 - Rs 12,82,510).

It has not been indicated whether that there is any cost of improvement to the land. It is most likely that the same should have been there at the time of plotting. If such improvement has taken place on or after April 1, 1981, the same can also be indexed and the gain computed after reducing such indexed cost of improvement. Such gain would be a long-term capital gain and the tax would, therefore, be at 20 per cent (as increased by a surcharge of 10 per cent as the income exceeds Rs 8,50,000) of such gain.

Your business income would be computed as the difference between the sale consideration and the fair market value as on the date of conversion of the capital asset into stock-in-trade. The sale consideration in the instant case is Rs 86,19,030 (41,043 x 210). The fair market value as on the date of conversion is Rs 76,33,998. Your business income would, therefore, be Rs 9,85,032 (Rs 86,19,030 - Rs 76,33,998).

If there are expenses on sale, the same can also be reduced in arriving at the business income. This will be taxed in the assessment year 2004-05 (previous year 2003-04) at the normal rates of tax applicable to the individual. It may be mentioned that the cost inflation index for the financial year 1981-82 is 100 and for financial year 2003-04, 463.

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