Special Cases of Capital Gains Computation

Understand Special Cases of Capital Gains Computation

Key rules to remember

Slump sale: gain

Capital gain = Full value of consideration − Net worth

Net worth is deemed to be both cost of acquisition and cost of improvement. Short-term if the undertaking was held for 36 months or less, otherwise long-term (section 77).

Net worth of undertaking

Net worth = Aggregate value of total assets − Liabilities as per books

Ignore any revaluation of assets. Liabilities are taken as appearing in the books (section 77(5)).

Aggregate value of total assets

Depreciable assets: WDV of block | Self-generated goodwill: nil | Assets fully allowed or allowable under section 46: nil | Other assets: book value

Goodwill not acquired by purchase from a previous owner is nil. Purchased goodwill takes its book value (section 77(5)(b)).

Block of assets: short-term gain

Gain = Full value of consideration − (Transfer expenses + Opening WDV of block + Actual cost of assets acquired in the year)

Applies only if the result is positive, and the gain is deemed short-term (section 74(2)).

Block ceases to exist

Cost of acquisition = Opening WDV + Actual cost of assets acquired during the year

All assets of the block transferred in the tax year. The income or loss is short-term (section 74(3)).

Bonus shares

Cost of acquisition = nil

For a financial asset allotted without any payment on the basis of holding another financial asset (section 90(6)(d)). The original shares cost the amount actually paid for them (section 90(6)(a)).

Rights entitlement and rights shares

Original shares: amount paid | Renounced right: nil | Shares subscribed: amount paid | Renouncee: price paid to renouncer + amount paid to company

Section 90(6)(a) to (e).

Grandfathering of equity shares

Cost = Higher of [Actual cost, Lower of (FMV on 31 Jan 2018, Full value of consideration)]

For long-term equity shares, units of equity oriented funds or business trust units acquired before 1 February 2018 (section 90(7)). FMV: highest quoted price on 31 January 2018; if no trading that day, the highest price on the immediately preceding traded date; for a unit not listed, its net asset value on that date. For certain equity shares not listed on 31 January 2018, FMV is cost × CII 2017-18 ÷ CII of the first year of holding or the year beginning 1 April 2001, whichever is later (section 90(8)).

Assets held before 1 April 2001

Cost = Actual cost or FMV on 1 April 2001, at the assessee's option

Applies to other capital assets that became the assessee's property before 1 April 2001, not to assets with a special cost rule. For land or building, FMV on 1 April 2001 cannot exceed the stamp duty value of that date, where available (section 90(9) and (10)).

Goodwill and similar rights

Cost of improvement = nil | Cost of acquisition = purchase price if bought, else nil

Applies to goodwill, trade marks, brand names, tenancy rights, stage carriage permits, loom hours and similar rights (section 90(1) and (3)).

How to solve Special Cases of Capital Gains Computation questions

1. 1Identify the case: slump sale, depreciable block, bonus or rights shares, pre-2001 or pre-February 2018 asset, compulsory acquisition, or conversion into stock in trade.
2. 2Fix the year of taxability. For a slump sale it is the tax year in which the transfer took place, and a block gain is worked out for the tax year of the sale. For compulsory acquisition and conversion into stock in trade, use the year-of-taxability rule in the Income-tax Act, 2025 and your study material, as the supplied text does not cover it.
3. 3Decide short-term or long-term. A slump sale is short-term if held for 36 months or less. Gains on a depreciable block are always short-term.
4. 4Find the full value of consideration, and deduct expenses wholly and exclusively connected with the transfer.
5. 5Apply the special cost rule: net worth, block WDV plus additions, nil for bonus shares, grandfathered cost, or actual cost or FMV on 1 April 2001 (for land or building, FMV capped at the stamp duty value of that date).
6. 6Compute the gain or loss and show each figure on its own line.
7. 7Write the conclusion in words: type of gain, year, and amount carried to the head Capital gains.

Quickest way: Case-and-cost shortcut

Common mistakes in Special Cases of Capital Gains Computation

• Computing gain on each machine separately when a block of assets is sold.

  Students apply the normal formula to every asset.

  Fix: Use the block formula. Gain arises only if the sale value exceeds transfer expenses plus opening WDV plus additions during the year.

• Using the book value of self-generated goodwill in net worth.

  Students copy the balance sheet figure.

  Fix: Goodwill not purchased from a previous owner is nil. Purchased goodwill is taken at book value.

• Taking the revalued figure of assets in a slump sale.

  Students forget the instruction in the section.

  Fix: Ignore any change in value due to revaluation. For depreciable assets, use the WDV of the block, not the book value.

• Treating gain on a depreciable block as long-term because the asset was held for years.

  Students apply the holding period test.

  Fix: Gain under the block rule is deemed short-term, whatever the period of holding.

• Giving bonus shares a cost equal to market value on allotment.

  Students confuse bonus with purchase.

  Fix: Bonus shares allotted without payment have nil cost. The original shares keep their own cost.

• Using the full FMV on 1 April 2001 for land or building without checking the stamp duty value.

  Students remember the FMV option but forget the limit on it.

  Fix: For land or building, FMV on 1 April 2001 cannot exceed the stamp duty value of that date, where available. Use the lower figure if FMV is higher.

Worked examples