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Date of Acquisition for LTCG

Manoj (Head- Finance) (77 Points)

08 January 2010

XYZ Ltd. a public limited company having A, B, C, D, E, F & G as shareholders purchased land on 31.07.1962. The said land was being used for manufacturing business up to 1998. On 01.04.1989 the said A, B, C, D & E sold his shareholding to O, P, Q, M & R (Present Management). During the year 2000 the company converts the said land into the stock for construction business.

For the purpose of LTCG, which date is to be consider as date of acquisition – 31.07.1962 on which the land was originally acquired or 01.04.1989 on which the present shareholder (management) purchase the shares?

Kindly reply on it with any case laws, if available.

Thanks

Manoj Jha

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10 Replies

ashish gupta ( student) (1922 Points)
Replied 08 January 2010

the date of acquisition should be taken as 31-07-1962 i.e the date on which the assets is purchased by the company.

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Amir (Learner) (4016 Points)
Replied 08 January 2010

Agree with Ashish..COMPANY is a separate legal entity from it's shareholders

pavanreddy (Student) (104 Points)
Replied 08 January 2010

date of acquestion will taken as 01-04-1981 because any asset purchased before 01-04-1981 cost of acquetion willbe taken as 01-04-1981

Manoj (Head- Finance) (77 Points)
Replied 08 January 2010

Originally posted by : Manoj
	XYZ Ltd. a public limited company having A, B, C, D, E, F & G as shareholders purchased land on 31.07.1962. The said land was being used for manufacturing business up to 1998. On 01.04.1989 the said A, B, C, D & E sold his shareholding to O, P, Q, M & R (Present Management). During the year 2000 the company converts the said land into the stock for construction business. For the purpose of LTCG, which date is to be consider as date of acquisition – 31.07.1962 on which the land was originally acquired or 01.04.1989 on which the present shareholder (management) purchase the shares? Kindly reply on it with any case laws, if available. Thanks Manoj Jha

The assessing officer has passed the order considering the land being an independent and identifiable assets (CIT Vs Vimal Chand Golecha [1999] 201ITR 442(RAJ),

He has taken FMV of 2000 as sales consideration and original cost of 1962 as cost of acquisition without applying section 55 (2) (B) stating “Land was purchased in 1989, Hence not entitled to adoption of FMV as on 01.04.1981.”

Kindly give your suggestion with any case laws.

Amir (Learner) (4016 Points)
Replied 08 January 2010

Dear Manoj,

The issue in the case u have mentioned was whether "LAND & BUILDING should be taxed separetely - in case Building is constructed after many years from the acquisition of Land"

Now this judjement has nothing to do with ur case..

In ur case question is whether change in ownership of the company has any affect on the date of acquisition of the assets held by the company. -

I would say "NO"

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Max Payne (employed) (2574 Points)
Replied 08 January 2010

1. Dear Manoj, show the AO the purchase deed in 1962.

2. If the name of the company has been changed when the management changed, it might have caused him doubt about the year of acquisition. Show him the fresh certificate of incorporation from ROC evidencing change of name.

3.Show him annual return of the year 1989 filed at ROC site. This should be sufficient evidence to convince him that it was the company itself that was transferred and not the land.

You wont get these docs at ROC, you will have to get the physicals from somewhere.

He has to allow you to take the cost of the land or FMV on 01.04.1981 at your option as the cost of land. Choosing the cost of acquisition is your prerogative.

The case AO has brought before you has no application here.

Amir has given you the other necessary guidance.

Naveen (Learner) (116 Points)
Replied 09 January 2010

Hi Manoj..

Since the company converted the Land into stock in the year 2000, FMV as on 2000 will be taken as sales consideration.

(For the purposes of calculation of Income Tax under Capital gains, Conversion of capital asset into stock is Transfer and hence hould be chargeable to capital gain taxes. FMV on the date of conversion is to be taken as Sale Considerarion.)

For cost of acquistion- ACtual purchase cost in the year 1962 shoud be treated as cost of acqusition for the purposes of calculation of Tax liablity. However benifit of indexation should be available. Since land was purchased before 1981, base year for indexation should be taken as 1981.

CG tax can be calculated as:

Sale proceedings (ie FMV in the year2000)

less: Indexed cost of acquisition.

Please note that this capital gain should be chargeable in the year 2000 (ie year of transfer)

Any subsequent sale will not attract any capital gain tax because land is now part of stock and sale of stock does not attract capital gains Tax.

Moreover, FMV as on 2000 should be allowable as deduction while calculation income under the head Business and Profession. (Cost of Stock)

I hope this should be the treatment.

Thanks

Max Payne (employed) (2574 Points)
Replied 09 January 2010

Originally posted by : Naveen
	Hi Manoj.. Since the company converted the Land into stock in the year 2000, FMV as on 2000 will be taken as sales consideration. (For the purposes of calculation of Income Tax under Capital gains, Conversion of capital asset into stock is Transfer and hence hould be chargeable to capital gain taxes. FMV on the date of conversion is to be taken as Sale Considerarion.) For cost of acquistion- ACtual purchase cost in the year 1962 shoud be treated as cost of acqusition for the purposes of calculation of Tax liablity. However benifit of indexation should be available. Since land was purchased before 1981, base year for indexation should be taken as 1981. CG tax can be calculated as: Sale proceedings (ie FMV in the year2000) less: Indexed cost of acquisition. Please note that this capital gain should be chargeable in the year 2000 (ie year of transfer) Any subsequent sale will not attract any capital gain tax because land is now part of stock and sale of stock does not attract capital gains Tax. Moreover, FMV as on 2000 should be allowable as deduction while calculation income under the head Business and Profession. (Cost of Stock) I hope this should be the treatment. Thanks

Naveen, it is provided in the act that the assessee shall at his option, choose between the actual cost and FMV as on 01.04.1981, for assets acquired prior to that date.

Then why "ACtual purchase cost in the year 1962 shoud be treated as cost of acqusition for the purposes of calculation of Tax liablity". It should be FMV on 01.04.1981. This provision to adopt FMV was introduced because indexation benefit is available only from 1981-82.

Manoj, The company holds land in its own name. Just prove to the AO that the asset transferred in 1989 was the company and not the land

tapesh Kumar (ARTICLE) (46 Points)
Replied 09 January 2010

Dear Mr Manoj,

In the above case, the transfer of shares has no relevance for capital gain.

In the year 2000, the land was converted into stock-in-trade, the period of holding shall be taken from 1962. However the cost of acquisition shall be taken market value as on 1.04.1981 or 31.07.1962 depends upon the assessee. The conversion value shall be at least of municipal value on the date of transfer. The capital gains tax will be payable only when the land is actually sold by the said company.

For taking value as on 01.04.1981, the assessee has to take the certificate frmo a certified valuer.

In the above judgement of the concerned AO, the contention of the AO is not valid.

CA Amit Kumar (C.A., CWA Final) (251 Points)
Replied 09 January 2010

Dear Manoj

Date of acquisition will be 31/7/1962 but for the purpose of computation of capital gain u will have to apply sec 43(2),

as per this section :

for the purpose of calculating LTCG, full value of consideration , FMV shall be the value of property on the date of conversion. date of acquisition in this case shall be the date when it is acquired by the company i.e 31/7/1962 or FMV of 1981 which ever is higher.

But, Capital shall be arise in the year of sale and not in the year of conversion.

Calculation of LTCG

Full value of consideration **********

(FMV on the date of conversion)

Less: Index cost of acquisition **********

___________

LTCG ************

___________

In case of sale there shall also be a business income.