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How are capital gains computed?

I purchased a flat in September 2003 for Rs. 6.30 lakh and sold this during November 2006. While purchasing this property, I took a bank loan of Rs. 4 lakh. I closed this loan out of the sale proceeds, to the extent of Rs. 1.82 lakh to retrieve the original sale deed back. Now can I deduct this loan repayment out of the sale proceeds and calculate capital gains on the net consideration?

Besides I incurred stamp duty, registration charges, and architect and advocate's fees, while purchasing this property. Further I incurred brokerage fees while purchasing and selling. But the receipts are hard to obtain from them. Can I claim without proper receipts? Not only that, I paid for compound fencing, electricity deposit, sewerage deposits etc. Can I add these payments in my cost before the work out of cost inflation index?

According to Sec. 54 of IT Act, the exemption can be claimed only when the sale proceeds are kept in "Capital Gains Account Scheme". Is it necessary the entire sale proceeds are to be kept in the above scheme or only the capital gain portion? Does it vary in its application when Sec. 54EC is applied?

What is allowed as a deduction in computation of capital gains is the cost of the asset and the cost of improvement, if any. Though the property sold might have been charged by way of loan to bank or others, the amount paid to have the property released would not be cost of the property, since the loan is self-created, as held by the Supreme Court in Jagadishchandran (V.S.M.R.) v CIT (1997) 227 ITR 240 (SC).

The amount incurred at the time of purchase for the purposes of stamp duty, registration charges or advocate's fees will be part of the cost.

Brokerage paid at the time of purchase will also be cost, while brokerage paid at the time of sale will reduce the sale consideration. Ordinarily expenses claimed are expected to be proved, not necessarily with reference to receipts for the payees, but with credible evidence, that such expenses were actually incurred.

Since the reader has held the property for more than three years, it is a long-term capital asset, so that the cost can be indexed. It has been stated that the assessee has incurred cost on fencing. Such cost may not be capable of being claimed as cost of improvement, since such expense may not be construed as on capital account. If it is only of capital nature, it can be treated as cost of improvement. If a compound wall has been erected instead of fencing, it might have added to the cost.

Deposit for electricity and sewerage will not be taken as cost, but if the deposits are endorsed in favour of the purchaser without extra charge for the sale, it may go to reduce the sale consideration.

The reader is right in inferring that if the sale proceeds could not be utilised for acquiring another property before the due date for filing return relevant for the year of capital gains, such capital gains will have to be invested under Capital Gains Accounts Scheme for availing the benefit of reinvestment in another residential property within the specified period. For purposes of relief under Sec. 54, where the capital gains arise on sale of residential property, it is sufficient, if capital gains alone are invested. If what is sold is any other asset, the amount to be invested for acquiring another residential property is the entire net sale consideration for getting full exemption. In either case, where the amount is invested is less than capital gains / sale proceeds, relief will be proportionate to the amount deposited / utilised.

It is possible for a taxpayer to get the benefit of reinvestment in residential house property under Sec. 54/54F either along with relief under Sec. 54EC or solely on investments in notified bonds. But, there are no notified bonds now available.

Since the computation is complex and there are rigid time limits for availing reliefs, it is better that those liable get timely professional advice.

It is seen from a number of letters received in respect of capital gains that most people try to get advice from all and sundry. Newspaper columns are also no substitute, since facts of the case are more relevant. Telephonic requests and self-addressed covers continued to be received for getting such advice. They are not entertained, since these will not substitute professional advice after eliciting all relevant facts from the taxpayer. It is advice prior to sale, which is likely to be useful for complying with tax obligations and availing tax reliefs.

S. RAJARATNAM

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