Welcome to a new episode of Dharamvayi. I am your friend,
your sympathizer, your companion, C.S. Shreya Gupta.
And today, we would like to take our discussion on capital
gain a little further.
Sir, in the last lecture, we talked about cost of
acquisition, cost of improvement.
These two were the things that we minus from the sale
consideration and get our short-term or long-term capital
gains.
When it will come out, then their rates are different.
By multiplying by those different rates, you will get to
know that what is your income tax that you have spent on
your capital asset.
Were the points clear that we talked about cost of
acquisition, cost of improvement?
Today, I would like to discuss a different topic with you.
Till now, we have been discussing about capital assets.
And we are discussing that whenever you transfer a capital
asset, then the capital gain that will come from it, in
which year will it be taxable?
In which year will it be taxable?
The year that capital asset was sold.
From where am I telling this?
I am telling this from section 45, which was our charging
section.
The text of section 45 says that profit or gains arising
from transfer of capital asset affected in the previous
year shall be chargeable to income tax in the year in which
transfer took place.
The year in which your property transfer takes place, in
the same year, the profit that comes out of selling capital
asset, it becomes taxable to you.
The year in which your capital asset was sold.
If you sell a capital asset in 2022, if you sell a property
in 2022, then it becomes taxable in 2022.
Sir, have you gone mad?
You had told this in the very beginning.
Why are you telling the same thing again?
Son, I am telling the same thing again because it also has
some exceptions.
What are you saying, sir? It also has exceptions?
Yes, friends.
Exceptions means, till now we have been discussing that
capital asset was transferred.
So, the year in which it was transferred, it becomes
taxable to you.
But what are the exceptions?
The transfer took place today.
But when will it become taxable?
In some other year.
Today it is not taxable.
Even if the transfer takes place today, there is no problem.
It will be done.
But when will it become taxable?
In some other year.
These are the exceptions of section 45.
What are the exceptions? How are they done?
Come, let us try to understand this, my dear.
First of all, there is insurance receipt.
What is the meaning of insurance receipt, sir?
Come, let us try to understand.
What is the case?
For example, this is my factory.
This is a factory.
Sir, this is a factory.
This looks like your house to us.
This looks like your house.
You have made it a factory.
Look, there is smoke coming out from behind.
Consider this as a factory.
You know that I am a very artistic person.
I have been awarded Padma Bhushan in drawing by the
government of this country.
And you are questioning my drawing.
You are not sensible.
You are not able to understand what I have drawn.
I have drawn a factory.
I have not drawn a house.
I have drawn a factory.
You are not aware of it.
This is a factory.
You are not aware of it.
I have been an expert in drawing.
Come, sir.
This is my factory.
And there is a fire in this factory.
Maybe I have some machines in this factory.
So, these machines, what did they turn into after burning?
Ashes.
The flame of fire turned into a ball of ashes.
Now, there is only ashes in that ball.
There is only gunpowder left.
Nothing is left in it.
But I was a sensible businessman.
What did I do for all this?
I got insurance.
My dear, as you move ahead in your business, you will find
that there are many things which require insurance from a
business point of view.
Because these are such things, factories etc.
Even while working, there can be a fire.
It is possible that your enemy sets fire to you.
He might be smoking a cigarette and thinking how to destroy
it.
And he throws this cigarette away.
Your factory is on fire.
So, what did I do?
I took his insurance.
So, because of this,
I got some money from the insurance company as a claim.
What did I get?
I got a claim.
I got an insurance claim.
Now, tell me one thing.
For example, all my assets were worth Rs. 50 crores.
My machinery and factory were worth Rs. 50 crores.
Its value was Rs. 50 crores.
The insurance company was a very good company.
They said,
Mr. Gupta, we believe that your factory is on fire.
And we will not trouble you.
We will give you a claim of Rs. 50 crores.
We will give you the same amount of claim that you asked
for.
First, tell me, does this cover the definition of transfer?
Think about it and tell me.
This is the case.
Director, if you want to focus on this.
Please focus on this.
Does this cover the definition of transfer?
Does this cover the definition of extinguishment of rights?
In a way,
I am getting money from an insurance company.
Whatever rights I had on this factory, those rights are no
more.
Now, I do not have any ownership of this factory, of this
machine.
I am getting some money from the insurance company.
So, it can be assumed that the money you are getting from
the insurance company, is your sales consideration.
What is it?
It is your sales consideration.
Here, it is your sales consideration.
Rs. 50 crores.
Your capital will be counted on this.
Okay, sir.
No problem.
But, because this is an exception.
Whose? Of the charging section.
What did the charging section say?
That the year you transfer, the capital will be taxable.
But, this year, there have been 2-3 cases.
Today, there is a fire.
For example, in 2020, there was a fire in 2020.
I filed a claim today.
But, if you pay attention,
when you file a claim, you do not get the claim the next
day.
It takes a year, a year and a half, two years, three years
to get the claim.
The insurance companies are also very smart.
They enquire about you.
I had worked in one place.
I have also worked in the insurance sector.
There, we used to make survey reports.
We used to go for a survey to see if the person who is
speaking is lying.
Is he asking for the right amount of claim?
So, to do all these things, it takes a year, a year and a
half, two years.
For example,
I got the money here in 2022.
The transfer is being accepted in some other year.
The receipt is coming in some other year.
So, in this case, the confusion increases.
If the transfer is happening here,
and if I had imposed a capital gain tax on this person,
wouldn't it be unjust?
This person's factory caught fire and he incurred a loss of
50 crores.
He has just filed a claim.
You are saying that by accepting the transfer, impose a
capital gain tax on him.
Has he received any money here in 2020?
Has he received any money?
Till now, he does not know how much portion of the claim
I will get.
I do not know how much I will be receiving.
So, on what basis should I impose a capital gain tax on him?
When I do not even know what my sale consideration is.
When I do not even know how much money the insurance
company will allow.
So, on what basis and on how much money should I impose a
capital gain tax on him? So, in this case, the government
said, okay, two cases are going on, the transfer is
happening in a different year and your capital, I mean, the
receiving is happening in a different year.
So, what to do in this case?
The year you receive, in 2022, the year you receive, the
same year it will be taxable here.
In 2022, when you receive this money, you make it taxable.
Logically, if you think logically, then it seems absolutely
right.
Because, brother, there is a fire here in 2020.
I have incurred my own loss.
I have not received anything from the insurance company yet.
And you are imposing a tax on me on an unknown amount.
When I receive that money, I will impose a tax on it.
The law says that when I actually get the money, then you
impose a tax on it.
The same government did.
The year you receive, the year of receipt, the year of
receipt, the year you receive the money, you will impose a
tax on it.
How long will you do the indexation?
Because if it is a long-term asset, then how long will you
do the indexation?
You have to do its indexation until the year that asset is
destroyed.
That is, you will do its indexation till 2020.
Is the point clear?
Come, let's take a look at it with me.
What does the section say?
It talks about insurance receipts.
It has told us everything.
Where any person receives any money or any other asset
under any insurance from the insurer because of damage or
destruction of the capital asset as a result of flood,
or there has been a riot in my country, an earthquake, an
accidental fire, or an enemy has taken some action, an
enemy country has invaded our country, because of that my
factory has caught fire, my factory has been destroyed.
So in that case, if I get money from any insurance company,
then it is coming that the capital gain shall be deemed to
be the income of such person for the year in which money is
received.
The year in which money is received, that year your income
will be considered.
And full value of the consideration means, what will be the
sale price?
Obviously, what will I consider the money that I will get
from there?
Sales.
How much money will I get?
In order to compute the capital gain, value of money or
fair market value of the asset,
It is possible that they have given you 50 crores, that you
take 35 crores cash or cheque, and take 15 crores of assets
from me, which had caught fire in the machine,
it was a machine worth 15 crores, so 15 crores, we give you
a machine worth 15 crores, take 35 crores more from me.
So what is the total? 35 plus fair market value of the
machine.
In order to compute the capital gain, value of the money,
means 35 crores, fair market value of other assets, on the
date of such receipts, shall be deemed to be the full value
received, as a result of transfer.
What will be the sale consideration?
Whatever money you received.
Is the point clear?
If you want to read it, read it.
Then we will move to the next point.
Come sir, shall we move to the next point?
What is the next point?
Conversion of the capital asset into stock and trade.
I had given you an example of this, one or two lectures
back, that I have a friend, and what is the value of that
friend?
His height is 5 feet 2 inches, he is fair skinned, has a
personality like Lala, and his weight is around 200 kilos.
And his personality looks like this, he is like this, this
is his face, and he is always happy, and his body becomes
like this, like this.
You can see his personality like this, these are his feet,
and what is the name of this friend of mine?
His name is Lappi,
Lappi Lahiri.
This is my friend, his name is Mr.
Lappi Lahiri.
What is his job?
His job is jewellery.
This is his shop, called LL Jewellers.
Okay? His shop is called LL Jewellers.
And this is his display, he keeps different types of
jewellery here.
I had given you this example earlier also, that suppose, he
is newly married, and his mother-in-law,
whose name is Pappi Lahiri,
Pappi, P-A-P-P-I,
Pappi Lahiri, she was so impressed with him, that her
mother-in-law gave him 1 crore rupees worth of jewellery as
a gift.
And she kept it in the safe, this is my safe, she kept 1
crore rupees worth of jewellery in the safe.
His job is jewellery.
What is his stock for jewellery?
What is the stock for a jeweller?
The jewellery, the gold, the silver, that is the stock of a
jeweller.
What is he receiving here?
He is receiving 1 crore rupees worth of jewellery.
But, this is a capital asset for him at this time.
The reason for this is that it is not his intention to sell
this asset.
This is a capital asset.
As an investment, he keeps it safe in his safe.
The stock in the business is different, that is kept in the
shop.
This is a capital asset, as an investment purpose, he kept
it safe.
He kept it safe.
A few days later, a news was published in the newspaper,
that whoever has this jewellery worth 1 crore rupees,
if he sells this jewellery,
then his market value of jewellery is worth 10 crore rupees.
And everyone is looking for it.
And he showed his hand to his priest.
The priest said, you have this jewellery.
If you keep this jewellery in your house, then you will be
in trouble.
Sell this jewellery in the market.
Lappi, sell this jewellery in the market.
If you don't sell this jewellery in the market, then what
will happen to you?
You will be ruined.
You will be on the streets.
LL Jewellers will go bankrupt.
So what did he do?
He saw the demand for this jewellery in the market, of 10
crore rupees.
What did he do?
This is the key of the vault of this jewellery.
He opened the lock of the vault with the key of the vault.
He took out the jewellery worth 1 crore rupees.
And where did he keep it?
He kept it in the shop of LL Jewellers.
The jewellery worth 1 crore rupees.
The objective of keeping the jewellery worth 1 crore rupees
here was, that if I get a good customer, who will value
this jewellery worth 10 crore rupees,
I will sell this asset worth 10 crore rupees.
Now, now, did this become their stock, or was it their
capital asset?
Think about it and tell me.
Here, I am telling you that it was their capital asset.
Because they had kept it for investment purposes.
But now, because it is the job of the jewellers, they are
the jewellers themselves.
Now, the capital asset worth 1 crore rupees, what has
become of it now?
To sell it, they have put it on display in the shop.
What has become?
Stock.
What is happening in this entire transaction?
What is happening in this transaction?
Conversion is taking place.
Whose? Whose conversion is taking place?
The conversion of capital asset has taken place in the
stock.
Capital asset has been converted into stock of the business.
Now, when this stock will be sold,
will I get capital gain, or will my profit and gain of
business and profession go?
Now, there will be no question of capital gain here.
Now, this has become the stock of business.
Assume that this is the business of my remote, and I sell
this remote,
then the money that will come after selling the remote,
will become the part of my profit and gain.
Now, whatever happens here, will go to PGPP.
Sir, then where is the capital gain?
I am telling you, where is it?
This is a transaction of conversion.
You will consider this as a transfer.
If you go into the definition of transfer, then you will
know why I am saying this.
This will be considered as a transfer, and on top of the
conversion, your capital gain tax will be imposed, my dear.
Sir, you are saying that capital gain tax will be imposed.
Now, assume that he has done the conversion.
earlier it was kept as a capital asset, now it has become a
stock.
Now it is converting, so it is fine.
We have accepted conversion as a transfer and we are
investing capital gain on it.
But what value should we invest in it? What should we
invest in sale consideration?
Sale consideration is required.
Cost of acquisition, it knows, is of 1 crore rupees.
Cost of previous owner.
I will also do its indexation.
What should I invest in sale consideration? I have not sold
it yet.
I have converted it.
Right now it is kept on display.
I have not sold it yet.
When I have not sold it, what value should I invest in it?
So the government said that this is a very good question
you have asked us.
When I have not sold it, what value should I invest in it?
Its value, my dear, you invest it.
Fair market value on conversion
date. Whatever date you are converting, what value does
that date have in the market? Assume that day it had value
in the market because the question of 10 crores was going
on.
So it had a market value of 10 crores.
So what is this 10 crores? Its sale price.
You will consider this as its sale price.
What will you do minus? Cost of acquisition.
Did it buy it? No, it did not.
Did it get it as a gift? Yes, it got it.
So I had said that if you get something as a gift, then
take the cost of the previous owner.
Do the indexation.
Assume that it was of 1 crore rupees and assume that the
previous owner had also bought it recently.
It was short term and when it is short term, there is no
need for indexation.
So minus 1 crore, 9 crores will be in its hands.
Capital gain will come, my dear.
Capital asset.
I have kept it for investment purpose.
I have converted it into stock.
I will sell the stock.
The amount of stock that will be sold will be the business
income.
But at the time of conversion, the income of capital gain
will come.
The sale price of that date, the date of conversion, the
market value of that will become its sale price.
And when will it be taxable? It will be taxable when, see
there are two things.
You think about it and tell me.
The day I converted my capital asset into stock, did my
stock sell on that date? Did my stock sell? It is not
necessary that it will sell on that day.
It is possible that the customer comes after 6 months.
Right now, I have kept my jewelry on display.
It is possible that it will take 6 months for it to sell.
If you take capital gain tax from me at the time of
conversion, then what will be the problem? Right now, my
stock has not sold.
You are taking capital gain tax from me.
From where will I give? Okay, there is fair market value.
I know.
I will get fair market value only when I sell it.
Right now,
I am getting an idea.
I am getting an idea of how much it will sell.
Right now, it has not sold in actual.
I did not get the actual money.
I did not get the actual receipt.
I did not get the actual receiving.
So, how much should I sell? I mean, how much tax will
I impose? And why will I impose tax when I did not get the
money? The thing is, it has not sold.
When it did not sell, I did not get the money.
And when I did not get the money, I did not get the money.
So, if you impose tax, then how will Lappi pay the money?
So, the government said, your point is very good.
You do one thing.
When finally this thing sells, finally, when your stock
sells, whichever year your stock sells, that year you
deposit capital gain tax.
Whichever year your stock sells.
Assume that the stock sells in 2020.
Assume that the stock sells in 2023.
So, when the stock sells in 2023, you must have got the
money by then.
You must have got the money by then.
Now, you have got the money.
Now, you have the capability to deposit tax.
Now, you deposit your capital gain tax in 2023.
Because now you have got the money.
Here, you did not get the money.
You just converted it.
And you just got the market value of it.
Here, keep the tax.
Do not deposit it here.
Deposit it in 2023.
When finally your stock sells, at that time you will
deposit your capital gain tax.
And suppose, suppose, instead of 10 crores,
I sell it for 12 crores.
If I sell it for 12 crores, then what happens? 12 minus 10
crores, its fair market value, this 2 crores will go to my
PGPP.
2 crores of my business profit will go to PGPP.
taxable ho jayega.
A person who is the owner of the capital asset, convert
karwa sakta hai, apne capital asset ko into stock and trade
of the business.
As noted above, the above transaction is a transfer.
Isko transfer mana jayega.
Aur yeh section kya kehata hai?
Ki 45 kehata hai, being the charging section, profit and
gain arising from the above conversion will be chargeable
to income tax as the income of the year in which stock is
sold.
saal bik jaye, uss saal aapka income mana jayega.
Calculate pehle karke rakh lena, lekin tax kab lagega? Jab
aapka stock bik jayega.
Full value of the consideration kya hai? Sale price kya
loge aap? Simple si baat hai.
Sale price aapko kya lena hai? Jo fair market value, yeh
dekho yeh, ispe dekho.
Sale price, aapka fair market value on the date of the
conversion minus cost of acquisition.
Yeh symbols aapka capitaling aise nikalega.
Fair market value on the date of conversion.
10 crore rupe ki fair market value thi, wo aapka sale
consideration aa jayega my dear.
Haan, fair market value ke upar agar aapko sale karte ho,
wo aapki business ki income maan li jayegi my dear.
Clear hai point? Clear hai sa point? Yeh ek example hai
iska, ki koi Mr.
X hai, usna na kapital asset convert kar diya, stock mein.
Aur jis date ko convert kya saade 5 lakh rupe ki uski fair
market value thi.
To yeh fair market value to fix ho gayi.
Yeh mera kya hai? Sale consideration.
Isme se kya minus karna padega? Cost of acquisition. To kya
nikal ke aajaega mera? Kapital gain.
Aur baad mein kehata hai ki mene stock apna bech diya 6
lakh rupe ka.
To 6 lakh minus 5 lakh business ki income aur 5.5 lakh
minus cost of acquisition, capital gain ki income.
Aur yeh capital gain, kab taxable hoga? Jis saal actual
mein, yeh actual mein bik jaye, 10 June 2022 ko.
Aao zara answer bhi dekhlo kya hai iska? Answer isne bola
hai, ki both the capital gain, ek minute zara, both the
capital gain and business income chargeable to tax in
23-24, jab aapka actual mein bik jata hai.
6 lakh minus 5.5 lakh, yeh aapki business income hai,
50,000 rupee ki.
Koi dikkat isme? Clear hai point?