Capital gain

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

31 December 2014 a sole proprietary concern is succeeded by a company where land is also transferred. shares in new company are allotted as sale consideration it claims exemption under section 47(xiv). later the shares in the company are transferred by the proprietor before expiry of five years. what should be the value of sale consideration of land for calculation of capital gain- fair market value or the value at which it was transferred to the company.

CA Nitin K. Varshney

CA Nitin K. Varshney (Expert)
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31 December 2014 value of sale consideration will be the value of asset taken by the company.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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18 July 2024 In the scenario where a sole proprietary concern is succeeded by a company, and land is transferred to the company in exchange for shares, claiming exemption under section 47(xiv) of the Income Tax Act, the subsequent transfer of shares within five years raises questions regarding the calculation of capital gains. Here’s how the situation typically unfolds:

### Initial Transfer to the Company

1. **Nature of Transfer:**
- The transfer of land to the company in exchange for shares qualifies for exemption under section 47(xiv) of the Income Tax Act, which states that any transfer of a capital asset by a sole proprietary concern to a company in a scheme of amalgamation, merger, demerger, or any other arrangement approved by the Central Government is not considered a transfer for the purpose of capital gains tax.

2. **Value Consideration:**
- The value of consideration for the transfer of land would typically be the value of shares allotted by the company in exchange for the land. This value is crucial as it forms the base for determining the cost of acquisition of the shares received by the proprietor.

### Subsequent Transfer of Shares

1. **Capital Gains Calculation:**
- If the shares received in exchange for the land are subsequently transferred by the proprietor before the completion of five years from the date of their acquisition, the exemption claimed under section 47(xiv) would be invalidated.
- In such a scenario, capital gains would be computed based on the fair market value (FMV) of the land at the time of its transfer to the company. This FMV is determined as per the provisions of the Income Tax Act for the purpose of calculating capital gains tax.

2. **Cost of Acquisition:**
- The cost of acquisition of the shares received by the proprietor is considered to be equal to the FMV of the land transferred to the company. This FMV is important for determining the capital gains on the subsequent transfer of shares.

### Conclusion

Therefore, in the case where shares received in exchange for land are subsequently transferred before five years, the value of consideration for the initial transfer of land to the company, which was exempt under section 47(xiv), would be the fair market value of the land at the time of transfer to the company. This fair market value is used to compute the capital gains arising from the subsequent transfer of shares.

It’s advisable to consult with a tax advisor or chartered accountant to ensure compliance with tax laws and accurate calculation of capital gains in your specific case. They can provide tailored advice considering all relevant details and recent updates in tax regulations.

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