COMPUTATION OF CAPITAL GAIN IN CERTAIN CASES
1. Section 51 – Advance Money Received
2. Section 50D- Fair Market Value deemed to be full value of consideration in certain cases
3. Section 50B – Special provision for computation of capital gains in case of Slump Sale
SECTION 51 – ADVANCE MONEY RECEIVED
Q. What is the treatment of advance money received by the assessee in respect of capital asset?
• Where on any capital asset, on any previous occasion, for the subject of its transfer, any advance or other money received and retained by the assessee in respect of such negotiations, shall be deducted from the COA
– Advance or other money will be deducted from COA only if it was received and retained or forfeited by the assessee himself and not by the previous owner
– If the advance money forfeited was received by the assessee before 1-4-1981 and the assessee has assumed the FMV of the asset as on 1-4-1981 as the COA ,such advance will still be deducted from FMV.
Q. What if advance money forfeited is more than cost of acquisition?
In such a case the excess of the advance money forfeited over the cost of acquisition of such asset shall be a capital receipt not taxable. [Travancore Rubber & Tea Co. Ltd v. CIT (2000)243 ITR 158 (SC)]
Some Practical Issues
ISSUE 1 – Treatment in the hands of buyer
Forfeiture of earnest money by the vendor if due to default on the part of vendee, will not amount to relinquishment of a right in that asset .Therefore the amount forfeited will not be allowed as a capital loss under the head capital gains. [CIT V. Sterling Investment Corporation Ltd (1980)123 ITR 441 (BOM)]
Due to default on the part of vendor : vendee receives some compensation besides the refund of the earnest money paid by him, such compensation shall be subject to capital gains as it will amount to relinquishment of a right by the vendee. [CIT V. Vijay Flexible Container (1990)186 ITR 693(BOM) and K.R.Srinath v. Asst.CIT (2004)268 ITR 436 (MAD)].
SECTION 50D- FAIR MARKET VALUE DEEMED TO BE FULL VALUE OF CONSIDERATION IN CERTAIN CASES
Prior to section 50D, capital gains are calculated on transfer of a capital asset, as sale consideration minus cost of acquisition. In some recent rulings, it has been held that where the consideration in respect of transfer of an asset is not determinable or ascertainable, then, as the machinery provision fails, the gains arising from the transfer of such assets is not taxable and also that fair market value cannot be taken as deemed full value of consideration unless there is a specific provision in this respect. This particularly happens when shares in Indian companies are transferred ‘without consideration’ by companies as part of restructuring exercise. Obviously, these transfers are not “gifts