Landmark Cases on Capital Gains

The decision in ADIT vs Legg Mason Sia (Ex Japan) Analyst Fund and Capital International Emerging Markets Funs vs DIT supports the assessee where non-STT paid funds are concerned.

The source of funds used to purchase a new residential property is irrelevant for claiming exemption under Section 54 of the Income Tax Act, 1961. The exemption is granted if a new residential house is acquired within the specified period, regardless of whether the sale proceeds of the old asset were used for the purchase.

An assessee can hold land as an investment even if they are a dealer in lands, and the treatment of the land in the books of account is a key indicator of this intention.

The actual cost of acquisition for capital gains purposes cannot be the fair market value (FMV) as provided under Section 55(2)(b) of the Income-tax Act. The FMV of an asset on a specified date, if chosen by the assessee, determines the cost of acquisition, not the other way around.

Land is considered agricultural land for capital gains tax purposes if its physical characteristics have not changed, even if it is located within a municipality or local authority's limits or has been converted for non-agricultural use. The conversion must be reflected in the land's physical state.

An assessee has the sole discretion to determine when they convert a capital asset into stock-in-trade, which is relevant for the applicability of Section 45(2) of the Income Tax Act. The conversion itself is sufficient to trigger Section 45(2).

Expenditure incurred to pay tenants to vacate premises, which are the subject of a sale transaction, is allowable as a deduction in computing capital gains. This is because the expenditure is directly connected to and necessary for effecting the transfer of the property.

Provisions related to capital gains under Section 55(2)(b) and 55(3) do not apply in certain circumstances, particularly when capital gains are not the primary issue or when the subject matter falls outside the scope of these sections. This is supported by decisions of the Supreme Court and High Courts.

The true nature of a transaction, rather than its mere entry in the books of accounts, determines its taxability or the allowability of expenses. Surrendering tenancy rights for consideration can be treated as a transfer, potentially leading to a capital loss claim with indexation.

Even when the cost of acquisition cannot be ascertained, the cost is deemed to be the market value on the date of acquisition as per section 55(3). This applies even if the asset was acquired by succession, and the court considered judgments like B.C. Srinivasa Setty.

Section 54F exemption for capital gains is allowable for investment in the construction of a residential house, even if the land appurtenant to the building is agricultural in nature, as there is no specific rider against it.

Profit from the sale of shares held for a long time, purchased with own funds and with a view to wealth creation, is assessable as capital gains, not business income.

The amount received by a partner upon retirement is not taxable as capital gains in the hands of the retiring partner because it does not involve a transfer of assets, with any tax liability falling on the partnership firm.

Long-term capital gains exemption under Section 10(38) is allowed on the sale of shares of M/s Sunrise Asian Limited, as confirmed by the Supreme Court, when the ITAT's order considering all facts is upheld.

Determining the true nature of a transaction, such as whether it constitutes business income or capital gains from an investment, requires considering the totality of relevant factors and circumstances, not just a single test like motive or intention at the time of purchase.

To determine the nature of an asset, the intention of the assessee at the time of purchase, whether it was to be held as a capital asset or stock-in-trade, is the determining factor.

Income received by a partner on retirement from a firm is not taxable as capital gains.

While the case involves a reference to "fresh tangible material", "valuation of shares", "going concern", and "indexed cost of acquisition", the provided passages do not clearly articulate the specific holding of Bharat Hari Singhania v. CWT.

A property acquired through an agreement to sell, with full payment and possession, constitutes a capital asset for claiming exemption under Section 54B, even without a registered sale deed.

Portfolio management fees are allowable as a deduction under Section 48 when computing capital gains arising from the sale of shares.

An assessee claiming deduction under Section 54F is not disentitled if they are a co-owner of another residential property, as fractional ownership does not violate the conditions of the section.

When an assessee fails to establish the genuineness of share price increases in penny stock companies within a short period, the AO can reasonably conclude that transactions are bogus and capital gains result from accommodation entries.

When interpreting "within six months" for reinvestment of capital gains, the period should be considered in calendar months rather than strictly based on specific dates of receipt of consideration and reinvestment.

Long-term capital gains or short-term capital losses claimed on transactions in penny stocks are considered fictitious and bogus, justifying their denial by the Assessing Officer. The court considers the preponderance of probabilities in such cases.

Shares held in a broker's pool account are considered for determining the holding period of shares for capital gains purposes. The period of holding should be traced from the broker's demat account to verify purchases and the time shares were held before being transferred to the assessee's demat account.

Denial of exemption for bogus long-term capital gains from penny stocks is justified, as such gains can be treated as unexplained cash under section 68 or unexplained expenditure under section 69C.

The case is authority for the proposition that the transfer of property took place during a particular assessment year, which is relevant for deductions under section 54F.

The court held that when the cost of acquisition of an asset cannot be ascertained, Section 55(3) of the Income-tax Act mandates that the cost is to be taken as the market value on the date of acquisition. Therefore, capital gains are not excluded solely on the basis that the asset's value is unascertainable.

The date on which possession of a property is handed over to the purchasers is relevant for determining the sale consideration and is a valid basis for tax assessment, especially when supported by High Court decisions.

The period for which a capital asset is 'held' by an assessee, for the purpose of computing capital gains, is determined by the date when the assessee acquired rights over the asset, not necessarily the date of registration or possession.

The case concerns the exemption from capital gains tax under Section 2(14) of the Income Tax Act.

The intention of the assessee at the time of selling land, evidenced by applications to convert agricultural to non-agricultural status and subsequent payment of non-agricultural taxes by the buyer, indicates the land should be treated as non-agricultural for tax purposes.

Land ceases to be agricultural land when the assessee agrees to sell it for use as house sites. All relevant factors must be considered cumulatively.

Transfer of property occurs on the date of execution of the sale document, not on the date of registration.

Construction of a residential house for claiming deduction under section 54F must be a real construction and not merely symbolic. The intention behind section 54F is to promote housing construction, not the destruction of existing residential buildings.

Payment made to secure an order of eviction and evict an unauthorized occupant can be treated as a cost of improvement.

The term 'property of any kind' in the definition of capital asset has a wide amplitude and includes every possible interest a person may hold and enjoy, not being limited to ownership under a registered deed.

Interest paid on loans taken for acquiring an asset is includible in the cost of acquisition for computing capital gains. This interest is also eligible for indexation benefit.

The beneficial provisions of Section 54F must be construed liberally, and the condition precedent for claiming the benefit is that the capital gain is invested in purchasing or constructing a residential house.

Investments made prior to the date of transfer out of earnest money or advanced money are eligible and considered as investments made out of sale proceeds for the purpose of Section 54B of the Act.

Deduction under Section 54F or 54 cannot be denied solely for non-deposit of unutilized sale consideration in the capital gains account scheme before filing the return under Section 139(1). The revenue must verify if the sum was utilized within the stipulated time for construction.

Capital gains from share transactions cannot be added as unexplained cash credit under section 68 if shares were purchased on the stock exchange, paid for through banking channels, delivered via Demat, held for over a year, and sold on the exchange, unless there's evidence of bogus transactions.

For capital gains arising from a development agreement, the date of transfer is the date on which the builder takes possession, which may be determined by the date of the agreement or its extension.

Investment in a residential property outside India does not qualify for deduction under Section 54 of the Income Tax Act.

The amendment to Section 54 of the Income-tax Act, allowing for exemption on multiple residential units, is applicable from Assessment Year 2015-16 onwards.

Deduction under Section 54 of the Income Tax Act, 1961, for capital gains is allowable even if the full consideration for the new property is not paid or registration is not completed, provided an agreement to purchase has been entered into and capital gains are invested. The date of the agreement to purchase can be considered the date of purchase for this purpose.

For the purpose of claiming deduction under section 54, the date of possession of a new flat, even if under construction, is considered the date of acquisition, not the date of registration.

The profit arising from the sale of shares and securities is taxable under the head 'capital gains'. The deductibility of Portfolio Management Scheme (PMS) fees in computing such capital gains is a point of dispute where two views have been taken by the Tribunal.

Sums received by a partner on retirement, representing balances in their capital or current account, are not taxable as capital gains as they do not constitute a 'transfer' of interest in the firm's assets under Section 2(47) of the Income Tax Act.

A delay in investing in Section 54EC bonds can be condoned, and the deduction shall not be disallowed, particularly when the bonds were unavailable in the market within the prescribed period from the date of transfer. The Assessing Officer is directed to verify the facts and allow the deduction under Section 54EC.