Section 48*

Computation of capital gains

General principles

Principles applicable - In working out capital gain or loss, the principles that have to be applied are those which are a part of the commercial practice or which an ordinary man of business will resort to when making computation for his business purposes - Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651 (SC).

If computation is not possible, no charge of tax can arise - If, on the facts of a particular case, computation under section 48 is not possible, the charge under section 45 fails because it cannot be effectuated - CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC).

Practical obstacles in valuation cannot defeat charge of tax - A mere practical obstacle to the valuation cannot defeat the charge of tax in respect of capital gains arising. If valuation by inspection and empirical examination is not possible, the other methods, of valuation have to be adopted. One has then to go by the book value or go by the market value as on the date of acquisition with such adjustments as the circumstances of the case may call for - Shahdara (Delhi) Saharanpur Light Railway Co. Ltd. v. CIT [1994] 208 ITR 882 (Cal.).

In composite sales, gains must be bifurcated into long-term and short-term - Where the land is a long-term capital asset and the building thereon is a short-term capital asset, and both are sold together for a consolidated consideration, the gains must be bifurcated into long-term (pertaining to land) and short-term (pertaining to building) and brought to tax, since the land is an independent and identifiable capital asset, and it continues to remain so even after the construction of building - CIT v. Dr. D.L. Ramachandra Rao [1999] 236 ITR 51 (Mad.).

Conversion from foreign currency

Rate of exchange on date of conversion must be applied - For converting capital gains accruing in foreign currency, the rate of exchange on the date of conversion is to be applied - D.A. Graham & N.G. F. Graham v. CIT [1985] 154 ITR 879 (Kar.).

Uniform rate should be applied for consideration and cost of acquisition - Where capital gains are received in foreign currency, for conversion of amount received into Indian currency, uniform rate of exchange should be adopted for determining value of acquisition and consideration received for transfer of capital asset - Jayakumari & Dilharkumari v. CIT [1991] 189 ITR 99 (Kar.).

Currency conversion will not arise when cost and sale price are in rupees - The place where the assessee resides and the currency in which the money is deposited in the bank for the purpose of purchase, etc., are not relevant factors for determining the income arising from transactions where the cost of acquisition and consideration for transfer, etc., are all expressed in Indian rupee - Asbestos Cement Ltd. v. CIT [1994] 72 Taxman 181 (Bom.).

Where sale took place in India and consideration was received in Indian currency, conversion of currency under Rule 115 will not apply - Where a non-resident sold shares in India, and received the consideration in Indian currency, but then remitted the proceeds to USA in foreign currency, rule 115 will not apply, and the capital gains must be computed in Indian currency only without applying any conversion formula - CIT v. E.R. Squibb & Sons Inc. [1999] 235 ITR 1 (Bom.).

Asset having no cost of acquisition

Asset must be such that it is possible to envisage its cost - What is contemplated under section 48 is an asset in the acquisition of which it is possible to envisage a cost. None of the provisions pertaining to the head ‘Capital gains’ suggests that they include an asset in the acquisition of which no cost at all can be conceived - CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC).

Import licences can have no cost of acquisition - Since there cannot be any cost of acquisition of the import licences which are granted to assessees on their complying with the conditions prescribed by the Government for the grant of such a licence, such licences cannot be considered as assets which are capable of acquisition initially for a price. Thus, when such assets are transferred, there can be no question of capital gains - CIT v. Modiram Laxmandas (P.) Ltd. [1983] 142 ITR 702 (Bom.)/Nonsuch Tea Estates Ltd. v. CIT [1981] 129 ITR 28 (Mad.)/ Addl.CIT v. K.S. Sheik Mohideen [1978] 115 ITR 243 (Mad.) (FB)/ CIT v. T. Kuppuswami Pillai & Co. [1977] 106 ITR 954 (Mad.).

‘Full value of consideration’

Market value cannot be construed as full value of consideration - The expression ‘full value of consideration’ cannot be construed as the market value but as the price bargained for by the parties to the sale. The expression ‘full value’ means the whole price without any deduction whatsoever and it cannot refer to the adequacy or inadequacy of the price bargained for - CIT v. George Henderson & Co. Ltd. [1967] 66 ITR 622 (SC).

In the case of a sale for a price, there is no question for any market value unlike in the case of an exchange. Therefore, in the case of sales, all that one has to see is what is the consideration bargained for - CIT v. Gillanders Arbuthnot & Co. [1973] 87 ITR 407 (SC).

Solatium will form part of full value of consideration - It is true that solatium is an extra payment provided for under the Land Acquisition Act for the reason of the compulsory nature of the acquisition. It is nevertheless compensation and forms part of the consideration received or accruing as a result of the transfer by way of acquisition of a capital asset within the meaning of section 48 - CIT v. Smt. M. Subaida Beevi [1986] 160 ITR 557 (Ker.)/ Vadilal Soda Ice Factory v. CIT [1971] 80 ITR 711 (Guj.).

Solatium awarded in case of compulsory acquisition of land is to be taken into account in computing capital gains - CIT v. Smt. M. Subaida Beevi [1986] 160 ITR 557 (Ker.)/Vadilal Soda Ice Factory v. CIT [1971] 80 ITR 711 (Guj.).

Solatium paid for the transfer of the undertaking is part of the sale consideration and forms part of the capital gains - Karvalves Ltd. v. CIT [1992] 197 ITR 95 (Ker.).

Insurance money - The compensation paid in pursuance of a contract of insurance cannot be considered as consideration - C. Leo Machodo v. CIT [1988] 172 ITR 744 (Mad.) - See also Supreme Court decision in the case of Vania Silk Mills given under section 2(47).

Interest on unpaid sale price is not part of capital gains - Where the agreement for sale provided for payment of part of the sale price in instalments along with interest after the sale deed was registered, interest received on unpaid sale price cannot be treated as ‘profits and gains’ arising from the transfer of capital asset under section 45, but just a revenue receipt - Mount Stuart Tea Estate and Amar Coffee Plantation v. CIT [1999] 239 ITR 489 (Mad.).

Goodwill acquired for a price - Where the assessee acquired a cinema business by paying a consideration towards cost of goodwill, and after running the business for a few years, sold the cinema business as a whole, the consideration earlier paid for goodwill is deductible in the computation of capital gains, even though the vendee did not want to purchase the goodwill. Even if there is any clause in the agreement with regard to non-transfer of goodwill, it will automatically get transferred. The goodwill is inseparable from business, and hence it cannot be contended that the goodwill was not sold, but was retained by the assessee - CIT v. K. Raffiuddin [2000] 242 ITR 57 (Mad.).

Payments by vendee to vendor’s creditors - Where the assessee sold a mortgaged property, and the vendee paid a part of the consideration to the mortgagees and creditors of the assessee, the amount so paid is not deductible for arriving at the taxable capital gains, when it was not disputed that the mortgage had been created by the vendor-assessee. The amounts paid by the vendee to the mortgagees/creditors was paid as part of the consideration to the sale. It is untenable to draw a distinction between a case where the mortgage was discharged by the vendor prior to the sale and a case where the discharge of the mortgage was effected at the time of sale by payment of the outstanding amount to the mortgagees by the vendor - CIT v. N. Vajrapani Naidu [2000] 241 ITR 560 (Mad.).

Others - Controlling interest is incidence of shareholding and has no independent existence and, therefore, entire consideration for sale of shares is required to be considered for purpose of computing capital gains in hands of assessee and no amount can be excluded in computing capital gains from shares on account of consideration attributable to transfer of controlling interest - Venkatesh (Minor) v. CIT [2000] 109 Taxman 78/243 ITR 367 (Mad.).

Compensation for acquisition - The amount awarded under section 23(1) of the Land Acquisition Act, on account of the damage (if any) sustained by the person interested at the time of the Collector’s taking possession of the land, by reason of the acquisition injuriously affecting his other property, movable or immovable, in any other manner, or his earning, also represents compensation for land acquired under the said Act - Smt. P. Mahalakshmi v. CIT [2002] 176 CTR (SC) 103.

Deductions for expenditure

Expenditure incurred prior to passing of title is also deductible - The words ‘in connection with’ used in section 48(i) are very wide in their ambit and hence there is no warrant for importing a restriction that to qualify for deduction the expenditure must necessarily have been incurred prior to the passing of title. It is immaterial whether the expenditure was incurred prior to subsequent to the passing of title - CIT v. Dr. P. Rajendran [1981] 127 ITR 810 (Ker.).

Deductions are allowable even if substituted fair market value is adopted as cost of acquisition - Even if an assessee exercises his option to substitute the market value of the asset instead of the actual cost price, under section 55(2)(i), deduction of any type of expenditure whether it is in connection with the transfer or in connection with the improvement to the capital asset, is allowable - CIT v. Shakuntala Kantilal [1991] 190 ITR 56 (Bom.).

Amount spent for discharge of mortgage - No referable question of law could be said to arise from Tribunal’s order holding that in case where property is mortgaged not by previous owner but by assessee himself, then amount paid to discharge mortgage debts could not be treated as cost of acquisition so as to allow same as deduction - V.S.M.R. Jagadishchandran v. CIT [1997] 93 Taxman 389/227 ITR 240 (SC).

Any amount spent by the transferor himself for discharging the mortgage created by him is not deductible in the computation of taxable capital gains - Mahamood Ibrahim Sait v. ITO [1994] 76 Taxman 164 (Ker.). Contrary view taken in CIT v. Daksha Ramanlal [1992] 197 ITR 123 (Guj.) (dissented from)

Tax dues paid for releasing attached property are not deductible - Where the assessee sold a property inherited by her which was under attachment by the Income-tax Department towards tax dues, and the assessee paid the tax dues out of the sale proceeds, the amount so paid was not deductible, since it could not be treated as expenditure incurred for making any additions or alterations to the asset - Smt. K. Sarala Devi v. CIT [1996] 88 Taxman 18/222 ITR 211 (Ker.).

Estate duty - Where one ‘U’, who inherited property on her husband’s death, adopted assessee as her son and by a will bequeathed all her properties to assessee and assessee sold some properties and claimed deduction of estate duty paid for estate of ‘U’ and her husband as cost of acquisition/improvement, assessee’s claim could not be allowed - R.M. Arunachalam v. CIT [1997] 93 Taxman 423/227 ITR 222 (SC).

Interest on borrowals is deductible only if it is not allowed under section 57 - The interest paid on borrowings for the acquisition of a capital asset must fall for deduction under section 48. But, if the same sum is already the subject-matter of deduction under other heads like those under section 57, it cannot find a place again for the purpose of computation under section 48 - CIT v. Maithreyi Pai [1985] 152 ITR 247 (Kar.).

Interest on provident fund loan is not deductible - Interest paid on provident fund loan taken for buying a house is not a deductible expenditure - Vashist Bhargava v. ITO [1975] 99 ITR 148 (Delhi).

Ground rent is not deductible - Ground rent cannot be said to be expenditure incurred by the assessee for the acquisition of the capital asset and it cannot, therefore, be included in computing the actual cost to the assessee of the capital asset - CIT v. Mithlesh Kumari [1973] 92 ITR 9 (Delhi).

Provision for marriage of female member is not an ‘expenditure’ and is not deductible - Mere liability or obligation cannot be regarded as an item of expenditure, let alone an expenditure incurred wholly and exclusively in connection with the sale of the properties. Thus, where there was an obligation on the part of the assessee for making provision for marriage of his sister and the liability was created under the terms of a partition deed, and the assessee later sold the properties received on partition no deduction towards the aforesaid liability was allowable while computing capital gains - CIT v. A. Venkataraman [1982] 137 ITR 846 (Mad.).

Payment for surrender of tenancy right is not deductible - In a compulsory acquisition case, any payment made by the landlord to the tenant in regard to surrender of tenancy right cannot be considered as an expenditure incurred with compulsory acquisition - CIT v. R. Ranga Setty [1986] 159 ITR 797 (Kar.).

Where a landlord entered into agreement for sale with third parties in respect of lands owned by him which were in possession of tenants, and the vendees insisted on getting vacant possession amounts paid by the landlord to the tenants for getting the land vacated are deductible in the computation of capitals gains - CIT v. A. Venkataraman [1982] 137 ITR 846 (Mad.).

Legal expenses in compulsory acquisition cases are deductible - Legal expenses incurred for obtaining compensation in compulsory acquisition cases are deductible - CIT v. R. Ranga Setty (supra). Also, see CIT v. Dr. P. Rajendran [1981] 127 ITR 810 (Ker.)/ CIT v. Smt. M. Subaida Beevi [1986] 160 ITR 557 (Ker.)/ V.A. Vasumathi v. CIT [1980] 123 ITR 94 (Ker.).

Deduction is not admissible towards mental agony and suffering - No deduction is admissible towards mental agony and suffering caused due to the wrongful detention or withholding of the transferred property - B.N. Pinto v. CIT [1974] 96 ITR 306 (Mys.).

Embazzlement loss after completion of sale and receipt of consideration is not deductible - Where the transaction of sale was completed by execution of sale deed and the consideration had also been credited to the account of the agent of the assessee, but thereafter part of the consideration was embezzled by the power of attorney holder of the assessee, the amount so embezzled is not deductible while computing capital gains - Mrs. G.Y. Chenoy v. CIT [1999] 102 Taxman 406 (AP).

Payments to tenants for vacating premises are deductible - Expenditure incurred by the assessee towards amounts paid to tenants for vacating the premises which is sold has nexus with the transaction of sale, since without the tenants vacating the premises the building cannot be sold. The said expenditure would hence be allowable as deduction in the computation of capital gains - Naozar Chenoy v. CIT [1998] 234 ITR 95 (AP).

Expenditure on removing encumbrance to transfer is deductible - Where the assessee paid a certain sum to his son who had instituted a suit seeking injunction restraining the assessee from selling a property, so as to remove the encumbrance prior to selling that property, the said sum was deductible - CIT v. Abrar Alvi [2001] 247 ITR 312 (Bom.).

Urban land tax and corporation tax are not deductible - Urban land tax and corporation tax do not fall under expenditure incurred wholly and exclusively in connection with transfer, nor do they form part of cost of acquisition and cost of improvement. They are hence not deductible - CIT v. Sas Hotel (P.) Ltd. [2000] 246 ITR 729 (Mad.).

Kist amount recovered from sale proceeds is not deductible - Where the assessee had mortgaged his immovable property to the Government as security for the ‘kist’ amount due by him to the State, and later Government auctioned the property and paid the balance amount (after deducting ‘kist’ due) to the assessee, the ‘kist’ amount was not deductible in the computation of capital gains, since the price received in the auction in its entirety belonged to the assessee, and therefore capital gains had to be computed on the full price (less other admissible deductions) - CIT v. Attili N. Rao [2001] 252 ITR 880 (SC).

Compensation paid for eviction of dwellers is deductible - Where the assessee paid compensation to dwellers on his land in order to evict them prior to the sale of the land, the expenditure incurred for having the land vacated would certainly amount to cost of improvement, since the value of the land would increase. Therefore the compensation so paid was an allowable expenditure in the computation of capital gains - CIT v. Miss Piroja C. Patel [2002] 122 Taxman 752 (Bom.).

Cost of improvement - To bring an expenditure within the meaning of ‘cost of improvement’, the expenditure in making the addition and alteration to the capital asset has to be an expenditure of capital nature - Industrial Credits & Development Syndicate Ltd. v. CIT [2001] 251 ITR 720/118 Taxman 705 (Kar.).