Section 48

Section 48 — the law in short

What the courts have decided on section 48, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• CIT v Balbir Singh Maini Supreme CourtHelps taxpayer
  Our JDA was never registered and the project collapsed. Am I still taxed on capital gains?
  No. After the 2001 amendment to the Transfer of Property Act, a s.53A contract has no effect in law unless registered, so an unregistered JDA is not a transfer under s.2(47)(v); s.2(47)(vi) was not attracted either because the owners kept ownership. Independently, with the permissions never obtained, no enforceable right to receive income accrued and the gain was hypothetical.
• CIT v V.S. Dempo Company Ltd Supreme CourtHelps taxpayer
  I sold a depreciable asset held for over three years. Can I still claim the capital gains exemption?
  Yes. Section 50 is only a special mode of computing gains on depreciable assets, and its deeming fiction is limited to the computation under ss.48 and 49. An asset held for more than thirty-six months stays a long-term capital asset, so exemption under s.54E, and on the same reasoning s.54EC, survives even though the gain is computed as short-term.
• PNB Finance Ltd v CIT Supreme CourtHelps taxpayer
  My whole business was taken over for one lump sum with no item-wise breakup and I cannot work out what the undertaking cost me. Can the Department still tax me on capital gains?
  No, not on those facts and not for years before section 50B. The Supreme Court held that where a business undertaking is transferred as a going concern for a composite price, the capital asset transferred is the undertaking itself, which includes intangibles such as goodwill, tenancy rights, manpower and the value of a banking licence whose cost is not determinable. Since the consideration could not be earmarked item-wise and no cost of acquisition could be found, the computation provisions failed, and on B.C. Srinivasa Setty the case fell outside section 45 altogether. Compensation of Rs 10.20 crore was not taxable.
• CIT v D.P. Sandu Bros. Chembur (P) Ltd Supreme CourtHelps taxpayerSuperseded by amendment
  The landlord paid my company to give up its tenancy. Is that taxable, and if it cannot be computed as a capital gain can the officer tax it as a casual receipt instead?
  No — he cannot move it to another head. A tenancy right is a capital asset and its surrender is a transfer, so s.45 is the only head that can reach the consideration. For assessment year 1987-88 the Court held the receipt escaped tax altogether because the cost of acquiring the tenancy could not be ascertained and s.48 therefore could not be worked, and it refused to let the department bring the same receipt back under s.10(3) read with s.56. Section 55(2) was amended with effect from 1 April 1995 to supply a cost of acquisition for a tenancy right, so the computation gap this case turned on is closed for later years — the head-of-income holding is what survives.
• CIT v Attili N. Rao Supreme CourtHelps department
  My mortgaged property was auctioned and the department kept what I owed it out of the proceeds. Do I pay capital gains on the whole price or only on what reached me?
  On the whole price. The Supreme Court allowed the Revenue's appeal and set aside the High Court and the Tribunal. What the State sold at the auction was the immovable property belonging to the assessee, so the price realised belonged to him. Out of that price the State deducted the dues owed to it and paid over the balance. The capital gain is therefore computed on the full price realised, less the admitted deductions. The Tribunal's view - that the sale price had two components and that the part answering the mortgage debt reached the Government by overriding title and never reached the assessee - was held to be wrong.
• V.S.M.R. Jagadishchandran v CIT Supreme CourtHelps department
  I sold a property and the buyer paid off my mortgage out of the price. Can I deduct that repayment as cost of acquisition, or is it a diversion at source?
  Neither. The Supreme Court held that where the assessee created the mortgage himself, discharging it out of the sale proceeds is not cost of acquisition, not cost of improvement and not a diversion of income by overriding title. The owner mortgaged what was already his, so he acquires nothing by paying the mortgagee off. The Court distinguished the case of a mortgage created by a previous owner, where the successor takes only the mortgagor's interest and by clearing the debt acquires the mortgagee's interest, which is deductible under section 48. The appeal was dismissed.
• Sunil Siddharthbhai v CIT Supreme CourtCuts both waysSuperseded by amendment
  I brought my shares into a partnership firm as my capital contribution and the firm credited my account at market value. Am I taxable on capital gains on the appreciation?
  No, on the law as it then stood, though for a reason narrower than the taxpayer wanted. The Supreme Court held there was a transfer: the definition in section 2(47) is inclusive, and a partner who brings a personal asset into the firm reduces his exclusive interest to a shared interest, which is a transfer of interest even though it is not a sale. But no capital gain arose. The consideration is only the right to a share of profits and, on dissolution or retirement, to the value of a share in the net assets; the credit in the capital account is a notional figure, not the true consideration. As it cannot be valued under section 48, the case falls outside section 45 altogether.
• K.P. Varghese v ITO Supreme CourtHelps taxpayerSuperseded by amendment
  The AO says I sold below market value and wants to tax the difference. Can he do that?
  Not on the gap alone. Section 52(2) applied only where the consideration had actually been understated; a difference of more than fifteen per cent between fair market value and the declared price was not by itself enough, and the burden of establishing actual understatement lay on the Revenue.
• CIT v B.C. Srinivasa Setty Supreme CourtHelps taxpayerSuperseded by amendment
  We sold the goodwill our own firm built up over the years. It cost us nothing to acquire. Is the price taxable as a capital gain?
  No, on the law as it stood. The Supreme Court held that the goodwill generated in a newly commenced business is not an asset within section 45, so its transfer is not chargeable under capital gains. Section 48 contemplates an asset in whose acquisition a cost can be envisaged, and no cost element can be identified in self-generated goodwill; nor can the date of its acquisition be fixed, which the computation provisions also require. Charge and computation form an integrated code, and where the computation provisions cannot apply at all, the case was never intended to fall within the charge.
• CIT v Gillanders Arbuthnot & Co Ltd Supreme CourtCuts both ways
  I sold shares to a company I control for an agreed price and took the company's own shares, at face value, in satisfaction. Can the officer compute my capital gain on what those shares were really worth?
  No, on these facts. The Supreme Court held that where the transaction is a sale for a price, the full value of the consideration is the price bargained for, not the market value of what was received in satisfaction of it. The agreement said the partners would sell and the company would purchase for Rs 75 lakhs; the clause allotting shares merely provided the mode of satisfying that price. That the firm gained by taking shares issued at face value did not turn the sale into an exchange. Market value can be substituted only where the first proviso applies, and it did not.
• CIT v George Henderson & Co Ltd Supreme CourtCuts both ways
  I sold shares well below market value. Can the officer compute my capital gain on the market price instead of the price I actually received?
  Not under the general computation provision. The Supreme Court held that the consideration for a transfer is what the transferor receives in lieu of the asset he parts with, so the asset transferred cannot itself be the consideration. Full value of the consideration therefore means the whole price bargained for, without deduction, and has no necessary reference to the market value of the asset or to the adequacy of the price. Market value can be substituted only where a deeming provision says so - here a proviso requiring both a connection between the parties and an object of avoiding liability, conditions the Revenue conceded were not met.
• Miss Dhun Dadabhoy Kapadia v CIT Supreme CourtHelps taxpayerValidity unconfirmed
  I sold my rights entitlement in a rights issue and my old shares fell in value the same week. Must I pay capital gains tax on the whole sale price of the rights?
  No. The Supreme Court held that the net capital gain on renouncing a right to take new shares is the amount realised less the depreciation in the value of the original holding caused by the issue. The assessee sold rights over 710 Tata Iron and Steel shares for Rs 45,262.50 while her old shares fell from Rs 253 to Rs 198.75, a fall of Rs 54.25 a share. That fall, of a little over Rs 37,630, had to be deducted. The High Court's view that principles of accountancy do not apply to a tax computation was rejected.
• CIT v Dalmia Investment Co Ltd Supreme CourtCuts both waysPartly overruled — read this first
  I received bonus shares and later sold my holding. What is the cost of the bonus shares: face value, nil, or something else?
  Something else. By a majority the Supreme Court rejected both extremes. Face value is wrong, because a bonus share is not a voucher for the amount on its face and nothing was paid for it. Nil is also wrong, because on the issue of bonus shares there is an instant loss in the value of the original holding: the earning capacity of the capital is unchanged, dividends per share fall, and the market price moves accordingly. The correct course, where the bonus shares rank pari passu with the old, is to spread the cost of the original shares over the old and the new taken together. On that basis the cost of Rs 5,84,283 was spread over 31,909 old and 31,909 bonus shares.
• T R Balasubramanium v ACIT High CourtHelps taxpayerValidity unconfirmed
  I received a flat when my company was wound up, paid capital gains tax then, and sold it in the same year. What is my cost?
  The fair market value of the asset on the date of distribution. A liquidation produces two transfers, not one — the extinguishment of the shareholder's rights in exchange for the asset, and then the shareholder's own sale of that asset — and where the shareholder has been assessed to capital gains on the first, s.55(2)(b)(iii) gives him the distribution-date value as his cost for the second.
• Gopal Vazirani v Principal Commissioner of Income Tax High CourtHelps taxpayerUnder appeal
  The Commissioner says the proviso to section 240 shows that returned income is sacrosanct, so he cannot give my client a refund below what he himself returned. Is that right?
  No. The proviso to section 240 bites only in the two situations it describes — an assessment set aside or cancelled with a fresh assessment directed, and an assessment annulled — and says nothing about a case where neither has happened. There is no provision in the Act denying a refund of excess tax where the income ultimately assessable is less than the returned income; an assessee can be asked to pay only such tax as is legally due and nothing more.
• CIT v Gauranginiben S. Shodhan High CourtHelps taxpayer
  The Assessing Officer sent my property to the Departmental Valuation Officer because he thought my sale price and my 1981 cost were both wrong — was he entitled to?
  No, on these facts. The Gujarat High Court held that a section 55A reference to ascertain fair market value on the date of sale is redundant for computing capital gains, because section 48 works on the full value of consideration received, not on market value. As for the 1981 value, where the assessee has supported it with a registered valuer's estimate the reference can only be made under clause (a), and clause (a) as it then stood required the officer to think the claimed value was less than fair market value — not more. The Revenue's appeals were dismissed.
• Cairn UK Holdings Ltd v DIT High CourtHelps taxpayerValidity unconfirmed
  I am a non-resident selling listed shares of an Indian company off market, and I have already used the foreign currency computation under the first proviso to section 48 — can I still pay tax at ten per cent under the proviso to section 112(1)?
  Yes. The Delhi High Court held on 7 October 2013 that the proviso to section 112(1) applies on its own terms to long-term capital gains on listed securities, units and zero coupon bonds computed without indexation. Nothing in it requires the assessee to have been entitled to the second proviso to section 48, and nothing excludes an assessee who has taken the currency-fluctuation benefit under the first proviso. The two provisos to section 48 serve different purposes — exchange rate neutralisation and inflation neutralisation — and are not interchangeable. The Authority for Advance Rulings' contrary ruling was quashed and the ten per cent rate allowed.
• CIT v Dynamic Enterprises (Karnataka Full Bench) High CourtHelps taxpayerSuperseded by amendment
  Three partners retired and took cash for their share. The firm carried on. Is the firm liable to capital gains under s.45(4)?
  On the pre-2021 provision, no. A Full Bench of the Karnataka High Court held that s.45(4) needs an actual distribution of a capital asset by the firm to a partner, so that the firm's interest in that asset is extinguished and the partner acquires it. Where the retiring partners took only money representing the value of their share and the property stayed with the firm, nothing was distributed and nothing was transferred. The Court held that the earlier Division Bench decision in CIT v. Gurunath Talkies did not lay down the correct law. This is authority for assessment years up to 2020-21 only: the Finance Act 2021 rewrote s.45(4) so that money received by a partner on reconstitution is itself the charging event on the firm.
• Gouli Mahadevappa v ITO High CourtCuts both waysSuperseded by amendment
  If the gain is computed on the stamp duty value, can I at least claim s.54F on everything I actually put into the new house?
  Yes, on this authority. Where the capital gain had been assessed on the notional consideration of Rs 36,00,000 substituted under s.50C in place of the Rs 20,00,000 actually received, the Karnataka High Court held that the Rs 24,00,000 the assessee invested in constructing a residential house was available for exemption under s.54F.
• CIT v Manjula J. Shah High CourtHelps taxpayer
  I sold a flat that was gifted to me. Do I index from the gift date or the original purchase?
  From the previous owner's purchase. Under Explanation 1(i)(b) to s.2(42A) the previous owner's holding period is included, and the Bombay High Court held that the same fiction applies to clause (iii) of the Explanation to s.48, so the indexed cost of acquisition is computed from the year the previous owner first held the asset, not the year of the gift.
• CIT v Ace Builders (P) Ltd High CourtHelps taxpayer
  I sold a building I had held for years and claimed depreciation on. The gain is computed as short-term under section 50. Can I still claim the capital gains exemption for investing the proceeds?
  Yes. The Bombay High Court held that the deeming fiction in section 50 is confined to the mode of computing capital gains under sections 48 and 49. It deems the gain to be short-term; it does not deem the asset to be a short-term capital asset. Section 54E draws no distinction between depreciable and non-depreciable assets, so an assessee who invests the net consideration from a long-term asset in the specified securities within the time allowed gets the exemption, whether the gain was computed under sections 48 and 49 or under section 50.
• CIT v Texspin Engg & Mfg Works High CourtHelps taxpayer
  My partnership firm became a limited company under Part IX of the Companies Act. The Assessing Officer wants capital gains tax on the market value of the assets. Is that right?
  No, on the law as it stood for assessment year 1996-97. The Bombay High Court held that section 45(4) needs a transfer by way of distribution of capital assets, and statutory vesting on a Part IX conversion is not distribution: vesting takes the properties across as they stand, while distribution presupposes division, realisation and appropriation. Section 45(1) also failed, both because a firm treated as a company is a case of transmission with no counterparty and no incoming consideration, and because even if there were a transfer, full value of consideration in section 48 means what the transferor gets, not the market value of what he parts with.
• CIT v Texspin Engineering & Manufacturing Works High CourtHelps taxpayerValidity unconfirmed
  Our partnership firm became a limited company under Part IX of the Companies Act. The Assessing Officer wants capital gains on the market value of the assets. Is that right?
  No, on the law as it stood for assessment year 1996-97. The Bombay High Court held that neither section 45(4) nor section 45(1) was attracted. Section 45(4) needs a transfer by way of distribution of capital assets, and statutory vesting under Part IX is not distribution, which presupposes division, realisation and appropriation of the proceeds. Section 45(1) fails because there is no party and counterparty and no consideration coming to the firm: the same entity simply exchanges one cloak for another. And even if vesting were a transfer, section 48 allows only the consideration actually received or accrued, not market value, which is deemed only by section 45(4). Depreciation was also allowed.
• CIT v Mithlesh Kumari High CourtCuts both waysValidity unconfirmed
  I borrowed to buy a plot, paid interest on the loan for three years, then sold it. Can I add that interest to my cost when I compute capital gains?
  Yes for interest, no for ground rent. The Delhi High Court held that interest of Rs 16,878 paid on money borrowed to buy the plot formed part of the actual cost of the plot for computing capital gains. What the assessee laid out to acquire the asset is its cost, and it makes no difference that the interest went to a different person or was paid after the purchase. Ground rent of Rs 3,793 stood on a different footing: it was paid to keep the asset in her possession, not to acquire it, and could not be added.
• CIT v Daulal Mohta (HUF) High CourtHelps taxpayerSuperseded by amendment
  I used a registered valuer's FMV as my cost of acquisition. Can the AO send it to the DVO?
  Not on the text of s.55A as it then stood. A reference to the DVO could be made only where the value shown by the assessee was less than fair market value, so where the registered valuer's figure was the higher one the reference was without jurisdiction and the DVO's lower value could not displace it.
• Brijesh Poddar v ITO ITATHelps taxpayerValidity unconfirmed
  I borrowed money to buy crypto. Can I deduct the interest against my 115BBH income?
  That is what a single note reports, and nothing about the order can be checked. The judgment could not be found in a full-text subscription research database on a search of the party name, the appeal number or the section, and there is no decision of any Tribunal or High Court on s.115BBH in that database at all. What the note reports is that interest on funds borrowed exclusively to acquire virtual digital assets, up to the date of acquisition, was treated as part of the cost of acquisition, s.115BBH(2)(a) barring every other deduction but not defining that expression. Treat it as a line of argument, not as authority.
• Rajesh Saluja v DCIT ITATHelps departmentValidity unconfirmed
  I am selling the house. Can I add the home loan interest to the cost of acquisition under s.48, with indexation, on top of whatever I claimed under s.24(b)?
  This Tribunal said no. Following the Supreme Court in CIT v. Tata Iron and Steel Co. Ltd., it held that the cost of an asset and the cost of raising money to buy the asset are two different and independent transactions, so interest on borrowed capital has no direct nexus with the property and cannot enlarge the cost of acquisition. The disallowance of Rs 1,16,43,521 claimed as indexed cost referable to interest of Rs 94,17,082 was upheld.
• Amartara Pvt Ltd v DCIT (ITAT Mumbai) ITATHelps taxpayerValidity unconfirmed
  I put land into an LLP as capital. The stamp value is higher than the value the firm recorded. Can the Assessing Officer apply s.50C?
  On this order, no. Section 45(3) itself supplies the deemed full value of consideration for a capital contribution, namely the amount recorded in the books of the firm. The Mumbai Tribunal held that one deeming fiction cannot be extended by importing another, so s.50C cannot be used to replace the book figure with the stamp duty value. The addition made by substituting a stamp value of Rs. 9,41,78,500 for the recorded Rs. 5.60 crores was deleted.
• ITO v Raj Kumar Parashar ITATHelps taxpayer
  The AO substituted the circle rate under s.50C. Does that higher figure also become the net consideration I have to reinvest for s.54F?
  No, on this line of authority. The Jaipur Bench held that the deeming fiction in s.50C is confined to computing capital gains under s.48 and does not carry into s.54F, so 'net consideration' in the Explanation to s.54F is the consideration actually received under the sale deed. The assessee had reinvested the whole of the actual consideration and got the whole gain exempted, even though the gain itself had been computed on the stamp duty value.
• Dharamshibhai Sonani v DCIT ITATHelps taxpayer
  I fixed the price in 2005 but registered the sale in 2007. Which date's stamp duty value applies?
  The agreement date. The Ahmedabad Tribunal held the proviso to s.50C inserted by the Finance Act, 2016 with effect from 1 April 2017, which allows the stamp duty value on the date of the agreement to be adopted, to be curative and therefore retrospective from 1 April 2003, when s.50C was introduced.
• Nand Lal Popli v DCIT ITATCuts both ways
  I return income under 44AD. Can the AO treat the balance of my receipts as expenditure actually incurred?
  No. Once income is estimated at a percentage of gross receipts, the residual percentage is a notional figure, not a finding that expenditure of that amount was in fact incurred. With the declared turnover undisturbed, an addition built on that assumption has no foundation.
• ACIT v C Ramabrahmam ITATHelps taxpayerSuperseded by amendment
  I claimed housing loan interest under s.24(b) every year. When I sell, can the same interest also go into the cost of acquisition?
  Yes, on this Tribunal view - but the point is contested. The Chennai Bench held that a deduction under s.24(b) and the computation of capital gains under s.48 are covered by different heads of income and neither excludes the other, so interest already allowed against house property income may still be included in the cost when capital gains are computed. The Karnataka High Court has taken the opposite view.
• DCIT v Summit Securities Ltd (Special Bench) ITATHelps departmentValidity unconfirmed
  I sold an undertaking as a slump sale and its net worth worked out to a negative figure. Do I compute capital gain on the price alone, or does the negative net worth get added to it?
  It is added. The Special Bench of the Mumbai Tribunal held that where the net worth computed under section 50B is negative, it cannot be reduced to nil. Section 48 requires the cost of acquisition to be deducted from the full value of consideration, and deducting a negative figure necessarily means adding it. The Bench rejected the argument that capital gain can never exceed the sale consideration, holding that this is true of an ordinary asset but not of an undertaking, which is a bundle of assets net of liabilities. On the facts, the consideration was Rs.143 crore and the net worth minus Rs.157.19 crore.
• CBDT SOP on s.45(5A) joint development CBDT Circulars & InstructionsHelps departmentValidity unconfirmed
  I gave my land to a builder under a JDA. When do I have to pay tax on the capital gain?
  In the year the completion certificate is issued. For an individual or HUF transferring land or building under a specified agreement, s.45(5A) charges the gain in the previous year in which the competent authority issues the completion certificate for the whole or part of the project, with consideration taken as the stamp duty value of the landowner's share plus any money received.
• CBDT Circular 14/2021 CBDT Circulars & InstructionsCuts both waysValidity unconfirmed
  A partner retired and took assets out of the firm. How do s.9B and s.45(4) work together?
  Separately, and both can apply to the same reconstitution. Section 9B is applied first, to the deemed transfer of the assets received by the partner at fair market value; s.45(4) is then applied to the money or asset received in excess of the partner's capital account balance, computed without any revaluation increase. There is no set-off between the two.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.