Question 4 OR (b)
Capital gains on inherited land with forfeited advances, and on unlisted shares with bonus
12 marks
- Time to write
- About 24 minutes
- Topic
- Capital gains
- Notes
- Crux notes
Question
Question 4 OR (b) · 12 marksUnder the head capital gains, compute income in the following transferred during the tax year 2026-27.
From his father, under his will, Mr. A received a plot of land on 01/09/2016. His father had bought the plot in year 2012-13 for Rs. 500000. The land's fair market value on 01/09/2016 was Rs. 900000. Earlier, his father came into an agreement to sell this property to Mr. X, receiving advanced money of Rs. 300000 on 01/05/2015, but as Mr. X could not pay the full amount of consideration within due time, Mr. A's father forfeited the advanced money. Mr. A also come into agreement to sell this property to Mr. Y on 01/06/2026, and advance received money of Rs. 500000. But the deal could not finalize, and Mr. A forfeited Rs. 500000. Finally, Mr. A sell this property for Rs. 4500000 to Mr. Z, on 01/02/2027. The property's stamp value is Rs. 4900000; expenses on transfer, Rs. 100000.
In ABC Ltd., Mr. P subscribed 500 unlisted equity shares at a price of Rs. 40 each, on 01/06/2013. Later, a bonus shares were allotted in ratio of 5:2; the date was 01/04/2022. All the shares are sold, at Rs. 300 per share, on 25/09/2026. These shares were unlisted at the time of transfer. Transfer expenses: Rs. 10 per share.
| Year | 2001-02 | 2012-13 | 2013-14 | 2016-17 | 2022-23 | 2026-27 |
|---|---|---|---|---|---|---|
| Index (CII) | 100 | 148 | 167 | 220 | 289 | 348 |
Paper note: Set under the Income-tax Act, 1961 for assessment year 2024-25 (previous year 2023-24); answered under the Income-tax Act, 2025 for tax year 2026-27, so the year term moves forward by 3 years and every date in the question moves forward by the same 3 years, so that intervals, holding periods and ages are as printed. Every figure and name is as printed. "In the following transferred", "come into agreement", "advance received money", "sell this property" and "A bonus shares were allotted in ratio of 5:2" are as printed; the ratio is read as 5 bonus shares for every 2 held. The index for the inherited land is taken from the year the father acquired it; the figure from the year of inheritance is also shown. The index base year (2001-02 = 100) is fixed by the law and is not moved; the other index years move with the dates, and their figures are the paper's own, not the published index for the moved years.
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
- computeHead by head: each income under its head, exempt items marked exempt, then the deductions and the tax.
Write it in this order
- Read the data; note exactly what is asked 2 min
- 1 Inherited land: cost, holding period and stamp duty value 3 marks 6 min
- 2 Treatment of the two forfeited advances 3 marks 5 min
- 3 Indexation comparison under section 197(3) 2 marks 4 min
- 4 Shares and bonus shares 3 marks 5 min
- Check: arithmetic, units (₹, %), final answer underlined 2 min
Try it first. About 24 minutes for 12 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.
- Mr. A and Mr. P are resident individuals.
- The bonus ratio 5:2 means five bonus shares for every two held: 500 × 5/2 = 1,250 bonus shares.
- For the indexation comparison of section 197(3), the index is taken from the year the father acquired the land (the previous owner's holding counts as the assessee's when the asset is inherited).
(i) Land inherited from the father
Nature: the land came to Mr. A under his father's will, so its cost and holding period include the father's (sections 73 and 2(101)). Held since 2012-13, it is a long-term capital asset.
Advances forfeited:
- By the father (₹3,00,000 in 2015): only an advance received and retained by the assessee is deducted from the cost (section 81). An advance forfeited by a previous owner is ignored.
- By Mr. A (₹5,00,000 on 01/06/2026): the negotiations did not end in a transfer, so it is his income from other sources (section 92(2)(h)); it is not deducted from cost (section 81(b)).
Full value of consideration: the stamp duty value (₹49,00,000) does not exceed 110% of the consideration (₹49,50,000), so the consideration of ₹45,00,000 is the full value (section 78(1)(b)).
| Particulars | Rs. |
|---|---|
| Full value of consideration | 45,00,000 |
| Less: Expenses on transfer | 1,00,000 |
| Less: Cost of acquisition (the father's cost; the fair market value on inheritance is not relevant) | 5,00,000 |
| Long-term capital gain | 39,00,000 |
The land was acquired before 23 July 2024, so the tax is limited to 20% of the gain computed with indexation (section 197(3)). Indexed cost = ₹5,00,000 × 348/148 = ₹11,75,676; indexed gain = ₹44,00,000 − ₹11,75,676 = ₹32,24,324. Tax at 12.5% on ₹39,00,000 (₹4,87,500) is lower than tax at 20% on ₹32,24,324 (₹6,44,865), so there is no excess to ignore and the gain is taxed at 12.5%.
(ii) Unlisted shares and bonus shares
All 1,750 shares were sold on 25/09/2026, after 23 July 2024. Unlisted shares held for more than 24 months are long-term; both lots qualify (originals from 01/06/2013, bonus shares from 01/04/2022). The gain is computed without indexation (indexation is not available for shares) and taxed at 12.5%. The cost of bonus shares is nil (section 90(6)(d)).
| Particulars | Original shares Rs. | Bonus shares Rs. |
|---|---|---|
| Sale consideration (500 and 1,250 shares at ₹300) | 1,50,000 | 3,75,000 |
| Less: Expenses on transfer at ₹10 a share | 5,000 | 12,500 |
| Less: Cost of acquisition (500 × ₹40; bonus nil) | 20,000 | — |
| Long-term capital gain | 1,25,000 | 3,62,500 |
Income under the head Capital gains for tax year 2026-27, each taxpayer separately
Mr. A and Mr. P are separate taxpayers, so each is assessed on his own gains.
| Taxpayer | Particulars | Rs. |
|---|---|---|
| Mr. A | (i) Long-term capital gain on the inherited land | 39,00,000 |
| Mr. A | Income under the head Capital gains | 39,00,000 |
| Mr. P | (ii) Long-term capital gain on the original shares | 1,25,000 |
| Mr. P | (ii) Long-term capital gain on the bonus shares | 3,62,500 |
| Mr. P | Income under the head Capital gains | 4,87,500 |
| Both together (the single figure the question asks for) | 43,87,500 |
Mr. A also has ₹5,00,000 as income from other sources (the advance he forfeited).
- If indexation ran from the year of inheritance (2016-17, index 220), the indexed gain on the land would be ₹44,00,000 − ₹7,90,909 = ₹36,09,091; tax at 20% on it (₹7,21,818) is still above tax at 12.5%, so the answer is the same.
- Mr. A and Mr. P are different persons; the gains are added together only to answer the question as set.
Where the 12 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Inherited land: cost, holding period and stamp duty value | 3 |
| 2 | Treatment of the two forfeited advances | 3 |
| 3 | Indexation comparison under section 197(3) | 2 |
| 4 | Shares and bonus shares | 3 |
| 5 | Total | 1 |
| Total | 12 |
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