Question 4 OR (b)
Long-term capital gain on gold with section 54F, and its withdrawal (as set, 1961 Act, AY 2016-17 and 2018-19)
6 marks
- Time to write
- About 12 minutes
From an older CBCS paper
Question
Question 4 OR (b) · 6 marksOn October 1, 2015 Mr. X transfers gold for Rs. 40,00,500, incurring Rs. 500 as expenses on the transfer. The gold had been purchased on May 1, 1985 for Rs. 1,00,000. On June 10, 2015 he purchased a new house in Mumbai for residential purpose, for Rs. 30,00,000. He owns no other house. The Mumbai property was sold by him on April 15, 2017 for Rs. 70,00,000. Ascertain the capital gain chargeable for the assessment years 2016-17 and 2018-19. The cost inflation index for 1985-86 is 133, and for 2015-16 it is 1081.
Paper note: The as-set version: set and answered under the Income-tax Act, 1961 for assessment year 2016-17 (previous year 2015-16), with the dates as printed. Marks printed: 6. The question itself asks for the assessment years 2016-17 and 2018-19; the sale of the Mumbai property on April 15, 2017 falls in the previous year 2017-18. The Hindi twin prints the cost of the new house as 3,00,000 where the English has 30,00,000; the English figure is kept.
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- AscertainFormula first, then the working, then the answer with its unit (₹, %, units).
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 Long-term capital gain on the gold 2 marks 3 min
- 2 Exemption under section 54F 2 marks 3 min
- 3 Assessment year 2018-19: withdrawal and short-term gain 2 marks 3 min
- Check: arithmetic, units (₹, %), final answer underlined 2 min
Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Assessment year 2016-17: gain on the gold
Gold bought on 1 May 1985 and sold on 1 October 2015 was held for more than 36 months, so it is a long-term capital asset (section 2(42A)). It is a capital asset. Section 2(14)(ii) takes personal effects (movable property held for the personal use of the assessee or a dependent member of his family) out of the definition, but that exclusion does not extend to jewellery, which by Explanation 1 to section 2(14)(ii) includes ornaments of gold or another precious metal. So gold held as ornaments is a capital asset even when held for personal use, and gold in any other form is one unless held for personal use, which is not stated here. Either way the gold is a capital asset. Cost is indexed (second proviso to section 48). For this year the index base was 1 April 1981, so the index of 1985-86 (133) applies (a footnote to Explanation (iii) of section 48 shows 1 April 2001 substituted only from 1 April 2018).
| Particulars | ₹ |
|---|---|
| Sale consideration | 40,00,500 |
| Less: expenses on transfer (section 48(i)) | 500 |
| Net consideration | 40,00,000 |
| Less: indexed cost of acquisition, ₹1,00,000 × 1081 ÷ 133 | 8,12,782 |
| Long-term capital gain | 31,87,218 |
Section 54F applies to an individual who transfers a long-term capital asset other than a residential house and buys a residential house in India within one year before or two years after the transfer. Mr. X bought the Mumbai house on 10 June 2015, within one year before the sale of the gold, and owns no other house, so the bar in the proviso to section 54F(1) (more than one other house owned on the date of transfer) does not apply; nor do its other limbs, as he is taken to buy no other house within one year, or build one within three years, after the transfer.
The cost of the new house (₹30,00,000) is less than the net consideration (₹40,00,000), so only a proportion is exempt (section 54F(1)(b)):
Exemption = ₹31,87,218 × ₹30,00,000 ÷ ₹40,00,000 = ₹23,90,414 (rounded to the rupee).
Capital gain chargeable for assessment year 2016-17
| Particulars | ₹ |
|---|---|
| Long-term capital gain | 31,87,218 |
| Less: exemption under section 54F | 23,90,414 |
| Long-term capital gain chargeable | 7,96,804 |
Assessment year 2018-19: sale of the Mumbai house
The Mumbai house, bought on 10 June 2015, was sold on 15 April 2017, within three years of its purchase. Two consequences follow in the previous year 2017-18 (assessment year 2018-19), the year the paper calls 2018-19:
- Withdrawal of the exemption. Section 54F(3) treats the gain exempted earlier, ₹23,90,414, as long-term capital gain of the previous year in which the new house is transferred.
- Gain on the house itself. The house was held for about 22 months. That is short-term whether the limit is 36 months, or the 24 months that the third proviso to section 2(42A) sets for land or building from 1 April 2018 (assessment year 2018-19). Unlike section 54, section 54F does not reduce the cost of the new house, so its cost is ₹30,00,000 and no indexation applies.
Capital gains chargeable for assessment year 2018-19
| Particulars | ₹ |
|---|---|
| Short-term capital gain: sale price ₹70,00,000 less cost ₹30,00,000 | 40,00,000 |
| Long-term capital gain: exemption under section 54F withdrawn (section 54F(3)) | 23,90,414 |
| Total capital gains | 63,90,414 |
No transfer expenses on the Mumbai house are given.
Where the 6 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Long-term capital gain on the gold | 2 |
| 2 | Exemption under section 54F | 2 |
| 3 | Assessment year 2018-19: withdrawal and short-term gain | 2 |
| Total | 6 |
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