One such tax planning tool is the Capital Gains Account Scheme. The CGAS is a well-conceived idea but it needs minor changes. To understand these lacunae, let us first understand the utility of the CGAS. ITA has provided relief to an assessee from payment of tax on long-term capital gains u/s 54, 54B, 54D, 54F or 54G for different assets provided the assessee purchases another specified asset within a certain time frame.
Consider an investor who has earned long-term capital gains of Rs 50 lakh (Rs 5 million) by selling a long-term asset for Rs 60 lakh (Rs 6 million). The tax @20 per cent on this amount works out at Rs 10 lakh (Rs 1 million). Sec. 54F offers him exemption from this tax if he purchases within two years or constructs within three years a residential house costing Rs 60 lakh.
The only condition is that he should not be the owner of more than one residential house at the time of sale. Reinvestment of a lesser amount would earn proportionate exemption.
Prior to 1988, the investor was required to pay the tax in the financial year during which the capital gains arose, even if he intended to buy or construct a house. After purchasing or constructing a house, when he would actually receive the refund.
Of course, the other problem is that having paid Rs 10 lakh as tax, how can anyone purchase or construct a house costing Rs 60 lakh? He had to settle for a smaller house costing Rs 50 lakh and forego the Rs 200,000 refund on Rs 10 lakh.
CGAS, introduced in 1988, eliminated the need to reopen the assessments for rectifications. CGAS (Capital Gains Account Scheme) is a special account with banks or specified institutions to be used when the amount of capital gain is not utilised in time.
The unutilised amount can be deposited in a special deposit account otherwise known as CGAS in any public sector bank.
If the amount is not utilised fully within the stipulated period, then it is treated as capital gain of the previous year in which the period of three years from the date of transfer of original asset expires.
In such a case, the investor shall be entitled to withdraw such an amount in accordance with the aforesaid scheme.
*The amounts deposited in these accounts are deemed to be utilised for the purchase of the asset.
*There are two types of accounts; Type-A: savings deposit and Type-B : term deposit. Type-B can be either cumulative or non-cumulative. Normal interest rates are applicable.
*Amounts are freely transferable from Type-A to Type-B and vice versa. For premature transfers from Type-B to Type-A, the normal penalties will be applicable.
*Withdrawals can be made only from Type-A by submitting a declaration that the amount sought to be withdrawn is proposed to be utilised for the intended purpose. Where the amount sought to be withdrawn exceeds Rs 25,000, the bank shall make payment by way of a crossed demand draft drawn in favour of the person to whom the depositor intends to make the payment and it must be utilised within 60 days. The unutilised portion, if any, shall be redeposited into CGAS.
*While applying for any withdrawal other than the initial one, the assessee shall furnish (Form-D) giving details regarding the manner and extent of use of the amount of withdrawal.
*The account can be closed (Form-G) only with the approval of the ITO.
To understand the extent to which the authors are not in contact with real problems, let us again turn to the assessee who has deposited Rs 60 lakh in CGAS to save tax.
CGAS does not allow any withdrawals, except for the specified purposes, even of interest! In this case, it is around Rs 400,000 per year. The cruellest cut is that he is required to pay tax on this interest, to which he has no access, on accrual basis out of his other income!
If the sale is effected in, say, the first month of the fiscal (e.g. April '03), the assessee may deposit the amount in CGAS before the date of actual filing of his returns or the last date for filing returns whichever is earlier.
In other words, the assessee can freely utilise this money for 15 months (or more). It also includes what he would have paid as advance tax. Ergo, say in July '04 he buys a two-year FD under CGAS and does not lift a finger to purchase or to construct a house.
In that case the amount not so utilised shall be charged as the income of the previous year in which the period of three years expires. That means he has to pay capital gains tax in FY 06-07. The first date for payment of advance tax is 15.9.06 by which time his FD conveniently matures to provide him the required funds.
Prior to FA92, a defaulting assessee had to pay the tax and also a penalty. He used to lose the benefit of the initial deduction of Rs 15,000 u/s 48(2) and also the exemption of Rs 200,000 u/s 53! FA92 has deleted the section and consequently, even the penalty!
Exemption from tax on long-term capital gains is offered by Sec. 54EC if the capital gains are reinvested in specified avenues with a lock-in of three years. Similarly, Sec. 54ED provides exemption if the gains are invested in primary issues with a lock-in of one year. The investment is required to be made within six months from the date of transfer.
Now, suppose our assessee has earned long-term capital gains in March 2004. He is supposed to file his returns by 31.7.04 by which time the period of six months is not over. Can the assessee claim the exemption merely by declaring that he intends to do the needful within the permissible period?
We have already discussed the fact that if the amount is not utilised wholly or partly for the desired purpose, within the specified period, the unutilised amount shall be treated as capital gains of the year during which the specified period expires.
If this amount is to be treated as capital gain of that year, can the assessee purchase another house within two years or construct within three years? Can he use CGAS again? Can he deposit this amount in avenues covered by the Sec. 54EC or invest in primary issues to save the tax on capital gains u/s 54ED?
The answers to these questions are in the negative. However, I do strongly feel that the assessee has the right to setoff carried forward capital losses against these gains.
The CGAS offers one additional benefit. Circular 743, dt 6.5.96 states that in case an individual dies before the expiry of the stipulated period, the unutilised deposit amount cannot be taxed in the hands of the deceased and the legal heirs. All in all, CGAS, has left some questions unanswered.