Section 49

Section 49 — the law in short

What the courts have decided on section 49, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• 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.
• Vijay Kumar Budhia v CIT (Supreme Court) — assets received on a company's liquidation are chargeable as capital gains under s.46(2) even though nothing was transferred, and the only deduction the sub-section allows is the s.2(22)(c) dividend Supreme CourtHelps department
  My client received assets, not money, when the company he held shares in was wound up. He says there was no transfer, so there can be no capital gain. Is that argument open to him?
  No — and note at the outset that this is a liquidation case, not a buy-back case, so nothing in it is affected by the 1 October 2024 changeover. The Supreme Court held that even though the money or assets received by a shareholder in liquidation proceedings are not received on account of any transfer of property, Parliament has chosen by s.46(2) to treat the receipt as capital gains, and the value of the assets received was rightly brought to capital gains tax. The Court also fixed the mechanism: the only deduction expressly provided by the sub-section is the amount assessed as dividend within s.2(22)(c), and the sum arrived at after that deduction is deemed to be the full value of the consideration for s.48, which is where the cost of acquisition and the other permissible deductions then come in.
• 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.
• T R Balasubramanium v ACIT High CourtHelps taxpayerNo later treatment found
  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.
• 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.
• Rajesh R Hemrajani v ITO ITATHelps taxpayerNo later treatment found
  When I sell ESOP shares, is my cost of acquisition under section 49(2AA) the fair market value used for the perquisite even if that perquisite was never actually taxed in India?
  Yes, on this order. The Mumbai Bench read the words of section 49(2AA) - the fair market value which has been taken into account for the purposes of section 17(2)(vi) - and held that the provision nowhere requires that value to have been subjected to tax in India or included in total income. The assessee, a non-resident working at the UK branch of L&T Infotech, exercised 1,540 options at Re 1 a share when the fair market value was Rs 1,753.58. The Assessing Officer had cut the cost of acquisition down to the exercise price and added Rs 29,59,332. The Tribunal held the fair market value was the cost and allowed the appeal.
• Manali Investments v Assistant Commissioner of Income-tax ITATHelps taxpayer
  I sold depreciable assets I had held for over three years and the whole block ceased to exist, so the gain was computed under section 50. The Assessing Officer says the gain is short-term and refuses to set it against my brought-forward long-term capital loss. Is he right?
  No. The Mumbai Tribunal held that s.50 is a computation provision and a deeming provision, and that the fiction cannot be carried beyond the purpose for which it was enacted: once the capital gain on the depreciable asset has been computed under s.50, the operation of that section is spent and the gain must be dealt with under the other provisions of the Act. The asset having been held for more than thirty-six months, the gain retains the character of long-term capital gain for all other provisions and qualifies for set-off against the brought-forward long-term capital loss under s.74.
• Mrs Rohita Subramaniam v DCIT ITATHelps departmentNo later treatment found
  My husband died some years ago. The Assessing Officer says my minor sons' income must be clubbed with mine. Which limb of the Explanation to s.64(1A) applies to a widow, and does it matter that the boys have their own money to live on?
  Clause (a) of the Explanation applies, not clause (b): on the death of a spouse the marriage does not cease to subsist, so the income goes to the parent whose total income is greater. Where the other parent is dead and therefore has nil income, the surviving parent's income is necessarily the greater, however small it is, and the minors' income is clubbed there.
• Statutory position — s.47(vi), (via), (vib), (vic), (vicc), (vid) and (vii): the amalgamation and demerger transfers that are not transfers, with the cost rules in s.49(2), (2C) and (2D) CBDT Circulars & InstructionsCuts both waysNo later treatment found
  Which transfers in an amalgamation or a demerger are outside section 45, and what cost and holding period do the shares in the transferee company carry afterwards?
  Seven clauses of section 47 take reorganisation transfers out of section 45. At company level: (vi) a transfer in a scheme of amalgamation of a capital asset by the amalgamating company to the amalgamated company, if the amalgamated company is an Indian company; (vib) a transfer in a demerger of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company; (via) a transfer in a scheme of amalgamation of shares held in an Indian company by an amalgamating foreign company to an amalgamated foreign company, on two conditions; and (vic) and (vicc), the corresponding foreign demerger cases. At shareholder level: (vid) any transfer or issue of shares by the resulting company in a demerger to the shareholders of the demerged company in consideration of the demerger; and (vii) a transfer by a shareholder in a scheme of amalgamation of shares in the amalgamating company, if made in consideration of the allotment of shares in the amalgamated company except where the shareholder is itself the amalgamated company, and the amalgamated company is an Indian company. Clause (vi) is the central one: any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company, if the amalgamated company is an Indian company — this is what takes the transfer of the undertaking itself out of section 45. On cost, s.49(2) gives the shareholder who receives shares in an amalgamated Indian company on a s.47(vii) transfer the cost of his shares in the amalgamating company; s.49(2C) splits the cost of the demerged company's shares to the resulting company's shares in the ratio the net book value of the assets transferred bears to the net worth of the demerged company immediately before the demerger; and s.49(2D) reduces the cost of the original shares by the amount so arrived at.
• Statutory position — rule 11UAE: computation of the fair market value of capital assets for s.50B(2)(ii), FMV1 on the assets transferred and FMV2 on the consideration received, the higher of the two being taken, with effect from 24 May 2021 CBDT Circulars & InstructionsCuts both ways
  We have done a slump sale and the Assessing Officer says the consideration we recorded is not the full value of the consideration. How is the fair market value computed under s.50B, and from when does that apply?
  Under rule 11UAE two figures are computed and the higher is taken. Sub-rule (1) provides: "For the purpose of clause (ii) of sub-section (2) of section 50B, the fair market value of the capital assets shall be the FMV1 determined under sub-rule (2) or FMV2 determined under sub-rule (3), whichever is higher." FMV1 looks at what was transferred and is computed as A+B+C+D-L, where A is the book value of all assets of the undertaking or division other than jewellery, artistic work, shares, securities and immovable property, reduced by income-tax paid less income-tax refund claimed and by any amount shown as an asset, including unamortised deferred expenditure, which does not represent the value of any asset; B is the open market price of jewellery and artistic work on a registered valuer's report; C is the fair market value of shares and securities determined under rule 11UA(1); D is the stamp duty value adopted or assessed or assessable by any Government authority for immovable property; and L is the book value of the liabilities of the undertaking or division, excluding paid-up equity capital, amounts set apart for dividends on preference or equity shares not declared before the date of transfer, reserves and surplus by whatever name called, provisions for taxation, provisions for meeting liabilities other than ascertained liabilities, and contingent liabilities other than arrears of cumulative preference dividend. FMV2 looks at what was received and is computed as E+F+G+H, where E is the monetary consideration received or accruing, F is the fair market value of non-monetary consideration represented by property referred to in rule 11UA(1), determined under rule 11UA(1), G is the open market price on a registered valuer's report of non-monetary consideration being property other than immovable property and not referred to in rule 11UA(1), and H is the stamp duty value where the non-monetary consideration is immovable property. Sub-rule (4) fixes the valuation date: the fair market value under sub-rules (2) and (3) is determined on the date of slump sale, and the valuation date in rule 11UA also means the date of slump sale. The rule was inserted with effect from 24 May 2021, and the clause it serves, s.50B(2)(ii), was substituted with effect from 1 April 2021.

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.