CAPITAL GAINS

FACULTY OF LAW,
JAMIA MILLIA ISLAMIA

Capital gains
(Income tax act 1961)

Submitted to: Professor Kiran Bala

Submitted by: Nasir Alam
6th Semester (Self-Finance)
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ACKNOWLEDGEMENT

Firstly, I would like to express my profound gratitude towards the Almighty for providing me
with authentic circumstances for the completion of my project.

Secondly, I would like to express my sincere thanks and deep regards to my teacher Prof. Kiran
Bala Faculty of Law, Jamia Millia Islamia, for his exemplary guidance and constant
encouragement throughout the course of the assignment based on “Capital gains ”.

My cardinal thanks to my parents and friends for being my constant source of affection,
inspiration and motivation.

Nasir Alam

BA.LLB (HONS.)

6th Semester (Self-Finance)

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CONTENTS

Referred in

1. Acknowledgement…………………………………………………………..2

2. Chargeability section 45(1)................................................................................................4

3. Definition of ‘Capital Asset’ – Section 2(14)……………………………………...4

4. Types of capital assets………………........................................………………8

5.Transfer of capital assets:……........................................................ ……………9

6. Computation of capital gain/loss……….…………………………………13

7. Capital gains exemptions………………………………………………….15

8.Bibliography………………………………………………………………..21

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CHARGEABILITY SECTION 45(1)

Any profit or arising from the transfer of capital asset is chargeable to Tax under the head capital
gains in the previous year in which the transferred to please if it is not eligible for exemption
under section 54 54B 54D 54EC 54EB 54F and 54G. In other words Capital gain’s tax liability
arises when the following conditions are satisfied:

1. There should be a capital asset.

2. The capital asset is transferred by the assessee.

3. Such transfer takes place during the previous year.

4. Any profit or gains arises as a result of such transfer.

5. Such profit or gains is not exempt from tax under section 54, 54B, 54D, 54EC, 54F and 54G
and 54GA.

If the aforesaid conditions are satisfied, then capital gain is taxable in the assessment year
relevant to the previous year in which the capital asset is transferred.

1. MEANING OF CAPITAL ASSET SECTION 2 (14)

As per S. 2(14) of the Income Tax Act, 1961, unless the context otherwise requires, the
term “capital asset” means:
(a) property of any kind held by an assessee, whether or not connected with his
business or profession;

(b) any securities held by a Foreign Institutional Investor which has invested in such
securities in accordance with the regulations made under the Securities and Exchange
Board of India Act, 1992;

but does not include:

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(i) any stock-in-trade, other than the securities referred to in sub-clause (b), consumable
stores or raw materials held for the purposes of his business or profession;

(ii) personal effects, that is to say, movable property (including wearing apparel and
furniture) held for personal use by the assessee or any member of his family dependent
on him, but excludes:

(a) jewellery;

(b) archaeological collections;

(c) drawings;

(d) paintings;

(e) sculptures; or

(f) any work of art.

Explanations:

1. For the purposes of this sub-clause, “jewellery” includes:

(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy
containing one or more of such precious metals, whether or not containing any precious
or semi-precious stone, and whether or not worked or sewn into any wearing apparel;

(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other
article or worked or sewn into any wearing apparel.

2. For the purposes of this clause:

(a) the expression “Foreign Institutional Investor” shall have the meaning assigned to it
in clause (a) of the Explanation to section 115AD;
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(b) the expression “securities” shall have the meaning assigned to it in clause (h) of
section 2 of the Securities Contracts (Regulation) Act, 1956;

(iii) agricultural land in India, not being land situate:

(a) in any area which is comprised within the jurisdiction of a municipality (whether
known as a municipality, municipal corporation, notified area committee, town area
committee, town committee, or by any other name) or a cantonment board and which
has a population of not less than ten thousand; or

(b) in any area within the distance, measured aerially:

(I) not being more than two kilometres, from the local limits of any municipality or
cantonment board referred to in item (a) and which has a population of more than ten
thousand but not exceeding one lakh; or

(II) not being more than six kilometres, from the local limits of any municipality or
cantonment board referred to in item (a) and which has a population of more than one
lakh but not exceeding ten lakh; or

(III) not being more than eight kilometres, from the local limits of any municipality or
cantonment board referred to in item (a) and which has a population of more than ten
lakh.

Explanation: For the purposes of this sub-clause, “population” means the population
according to the last preceding census of which the relevant figures have been
published before the first day of the previous year.7

(iv) 6½ per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National
Defence Gold Bonds, 1980, issued by the Central Government;

(v) Special Bearer Bonds, 1991, issued by the Central Government;

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(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit
certificates issued under the Gold Monetisation Scheme, 2015 notified by the Central
Government.

Explanation:
“Property” includes and shall be deemed to have always included any rights in or in
relation to an Indian company, including rights of management or control or any other
rights whatsoever.

From the above, we can say that definition of capital asset mainly distinguish the
business assets from other assets for the purpose of taxation under the head Capital
Gains.

1.1 property of any kind is a Capital Asset- Ahmed G.H. Ariff v. CWT1property of
any kind held by an assessee accept the five cases enumerated above by sub
section 125 of Clause 49 of section 2 is Capital Asset for the purpose of the
Income Tax Act it includes movable assets in available assets tangible intangible
assets incorporeal tried and choosers in action the term property is a term of the
widest important and subject to any limitation which the context may require its
significance of every possible interest which a person can clearly hold and enjoy.

1.2 Held by assessee meaning of the word ‘held” is commonly used to describe the
ownership of an interest in property either possessed or controlled by the owner.
As a technical term held embraces two ideas- that of actual possession of
property and that of being invested with legal title or right to hold a claim such
possession. the word held by an assessee in the definition of ‘capital asset’ in
Section 2(14) includes physical constructive and also symbolic possession of
property of any kind

1
(1970) 76 ITR 471 (SC)
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1.3 Stock in trade, raw material etc is not a Capital Asset Section 2(14)(1)- buy
virtue of sub clause 1 of Clause 14 to section 2, any stock in trade consumable
stores at raw material held for the purpose of business or profession is not a
Capital Asset this is because of the fact that any surplus arising on sale or
transfer of stock in trade consumable stores raw material is chargeable to tax as
a business income under section 28.

1.4 Personal effects being movable property or not capital assets Section
2(14)(2)- personal effects are not Capital Asset under section 2(14)(2) if the
following conditions are satisfied firstly it should be movable property secondly it
should be held for personal use by assessee or any member of his family
dependent on him. Maharaja Rana Hemant Singh Ji vs CIT2 gold andsilver
coin and bars used for Pooja of dities as a matter of pride for ornamentation and
normally not intended for personal or household use are not personal effect and
therefore treated as capital assets. CIT vs H.H Maharani Usha Devi3property
intended for personal for household use (may for ceremonial occasion only) it
always a personal effects for instances clothes need for used at wedding or
formal occasions are not use daily yet they are restricted for personal uses of the
real as such that they would be form a part of his personal effects.

2. TYPES OF CAPITAL ASSETS

There are two type of capital assets long term capital Assets and short term capital assets

“Short term capital asset” means a capital asset held by an assessee for not more than 36 months,
immediately prior to its date of transfer.

In the following cases, however, such period is taken as 12 months:

1. Equity or Preference Shares in a company (shares may or may not be quoted).

2
CIT (1976) 103 ITR 61 (SC)
3
(1998) 98 309 (SC)
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2. Securities (like debentures, Government securities) listed in a recognized stock exchange in

India.

3. Units of UTI (units may or may not be quoted).

4. Units of a mutual fund specified under section 10(23D) [units may or may not be quoted].

5. Zero coupon bonds (bonds may or may not be quoted).

In the aforesaid cases, if the asset is held for more than 12 months immediately prior to its date
of transfer, then it is “long-term capital asset”.

The tax incidence under the head ‘capital gains’ depend upon whether the capital gain is a short
term or a long term. Long term capital gain is generally taxable at a lower rate . If the Asset
transferred is short term capital gain will be short term capital gain conversely long term capital
gain arises on transfer of long term Capital Asset .

3. TRANSFER OF CAPITAL ASSET:

Transfer, in relation to a capital asset, includes sale, exchange or relinquishment of the asset or
the extinguishment of any rights therein or the compulsory acquisition thereof under any law.

3.1 Transfer include sale of capital assets; transfer include sale. A sale may be defined as
a contract founded on money consideration by which the absolute or general property in
the subject of sale is transferred from the seller to buyer.Clark v. Gault4 the essential of
sale our 1. mutual agreement 2. competent parties 3. money consideration 4. a transfer of
absolute or general property from the seller to buyer if any of these ingredients be
wanting there is no sale.

3.2 Transfer includes exchange; transfer includes exchange of capital assets according to
the shorter Oxford English dictionary the word ‘exchange’ means ‘the action or an act of
reciprocal giving and receiving a mutual grant or equal interest the one in consideration
of another’ . According to Section 118 of the Transfer of Property Act when two person
mutually transfer the ownership of one thing for the ownership of another thing that thing
or both thing being money only that transaction is called an exchange. exchange involve

4
N.E. 900 77 OHIO St 497
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the Transfer of Property by one person to another and reciprocally the Transfer of
Property by buy the other to the first person. CIT v. Rasiklal Manekla ( HUF)5there
must be mutual transfer of ownership of one thing of another.

3.3 Transfer includes relinquishment; under section 247 the word transfer include
relinquishment of the Asset or the extinguishment of any right thereon. according to the
shorter Oxford English dictionary while the word ‘relinquish’ means to withdraw from,
desert , the word extinguish means to put a total end to. In other word in a transaction of
relinquishment the interest of a person in a property that the given up, abandoned or
surrender. CIT v. Rasiklal Manekla ( HUF6)relinquishment take place when the owner
withdraws in cell from the property in abundance is right there to it presume that the
power continue to exist after the punishment

However, certain transactions are not regarded as transfers:

1. Transfer of capital asset at the time of liquidation [Sec. 46(1)]: If the capital assets are
distributed in kind by a company to its shareholders on its liquidation, then such a distribution is
not treated as “transfer”.

2. Transfer of capital asset at the time of partition of family [Sec. 47(i)]: If the capital assets
are distributed in kind by a Hindu Undivided Family on total or partial partition of the family,
then such a distribution is not treated as “transfer”.

3. Transfer of capital asset by gift [Sec. 47(iii)]: If a capital asset is transferred in kind by any
of the given mode (viz., under gift, under will or under an irrevocable transfer), then it is not
treated as “transfer”.

4. Transfer of capital asset by holding company to subsidiary company [Sec. 47(iv)]: If the
given below conditions are satisfied, then the transaction is not treated as “transfer”.

a. Capital asset is transferred by a parent company or its nominee.

5
(1989) 177 ITR 198 (SC)
6
(1989) 177 ITR 198 (SC)

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b. It is transferred to a wholly* owned subsidiary company (* There should be at least

2 shareholders in a company. To apply this provision, if shares are held by the
holding company, say 99%, along with one of its directors, say 1%, in the subsidiary
company, this condition is satisfied).

c. The subsidiary company is an Indian company.

It may, however, be noted that if capital asset is transferred as stock-in-trade after

February 28,1988, then the aforesaid rule is not applicable and it will be treated as
“transfer”.

5. Transfer of capital asset by subsidiary company to holding company [Sec. 47(v)]: If the
given below conditions are satisfied, then the transaction is not treated as “transfer”.

a. The whole* (* There should be at least 2 shareholders in a company. To apply this

provision, if shares are held by the holding company, say 99%, along with one of its
directors, say 1%, in the subsidiary company, this condition is satisfied) of the share
capital of a subsidiary company is held by the holding company.

b. Capital asset is transferred by the aforesaid subsidiary company to its holding

company.

c. The holding company is an Indian company.

It may, however, be noted that if capital asset is transferred as stock-in-trade after

February 28, 1988, then the aforesaid rule is not applicable and it will be treated as
“transfer”.

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6. Transfer of capital asset in a scheme of amalgamation [Sec. 47(vi)]: If any capital asset is
transferred by the amalgamating company to an Indian amalgamated company, in a scheme of
amalgamation, then the transaction is not treated as “transfer”.

7. Transfer of capital asset in a scheme of amalgamation of two foreign companies [Sec.

47(via)]:If the given below conditions are satisfied, then the transaction is not treated as
“”transfer:

a. The capital asset is shares in an Indian company.

b. Such shares are held by a foreign company (amalgamating company).

c. Such shares are transferred in a scheme of amalgamation.

d. Such shares are transferred to another foreign company (amalgamated company).

e. Persons holding at least 25% (in value) shares in the amalgamated foreign company
should become shareholders in the amalgamated foreign company.

f. The above transaction does not attract tax on capital gains in the country in which
the amalgamating company is incorporated.

8. Transfer in a scheme of amalgamation of banking company [Sec. 47(viaa)]: Any transfer

of a capital asset by a banking company to a banking institution in a scheme of amalgamation of
such banking company with such banking institution, is not treated as “transfer”.

9. Transfer of capital asset in a scheme of demerger [Sec. 47(vib)]: If any capital asset is
transferred by the demerged company to an Indian resulting company, in a scheme of demerger,
then the transaction is not treated as “transfer”.

10. Transfer of shares in Indian company in a scheme of demerger of a foreign company [Sec.
47(vic)]: If the given below conditions are satisfied, then the transaction is not treated as
“”transfer:
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a. A foreign company (demerged company) holds shares in Indian company.

b. Such shares are transferred in a scheme of demerger by the aforesaid demerged

company to the resulting foreign company.

c. Persons holding at least 75% (in value) shares in the demerged foreign company
should become shareholders in the resulting foreign company.

d. The above transaction does not attract tax on capital gains in the country in which
the demerged company is incorporated.

11. Issue of shares by the resulting company to the shareholders of the demerged company
[Sec. 47(vid)]: Whenever shares are issued in a scheme of demerger by the resulting company to
the shareholders of demerged company, in consideration of demerger of undertaking, then the
transaction is not treated as “transfer”. Etc.

4. COMPUTATION OF CAPITAL GAINS/ LOSS [Sec. 48]:

The tax incidence is generally higher in the case of short-term capital gain as compared to long-
term capital gain. It is to be noted that no deduction is allowed in respect of securities transaction
tax in computing income under the head “Capital gains”.

Short Term Capital Gain/ loss:

Full value of consideration XX

Less: Expenses on transfer XX

Cost of acquisition XX

Cost of improvement XX XX

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Balance XX

Less: Exemption under section 54B, 54D, 54G and 54GA XX

STCG/ STCL XX

Long Term Capital Gain/ loss:

Full Value of Consideration XX

Less: Expenses on transfer XX

Indexed cost of acquisition (ICA) XX

Indexed cost of improvement (ICI) XX

Balance XX

Less: Exemption under section 54, 54B, 54D, 54EC, 54F, 54G and 54 GA XX

LTCG/ LTCL XX

5.1 full value of consideration[Sec. 48]:

The expression “full value” means the whole price without any deduction whatsoever. The
following points should be noted in this regard:

Full value of consideration is the consideration received or receivable by the transferor in lieu of
assets, which he has transferred. Such consideration may be received in cash or in kind. If it is
received in kind, then fair market value (FMV) of such assets is taken as full value of
consideration.

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5.2 expenditure on transfer

Expenditure incurred wholly and exclusively in connection with transfer of capital asset is
deductible from full value of consideration. The expression “expenditure incurred wholly and
exclusively in connection with such transfer” means expenditure incurred which is necessary to
effect the transfer. Examples of such expenses are: brokerage or commission paid for securing a
purchase, cost of stamp, traveling expenses incurred in connection with transfer, litigation
expenditure for claiming enhancement of compensation awarded in the case of compulsory
acquisition of assets.

5.3 Cost of acquisition:

Cost of acquisition of an asset is the value for which it was acquired by the assessee. Expenses of
capital nature for completing or acquiring the title to the property are includible in the cost of
acquisition.

5.4 cost of improvement:

Cost of improvement is capital expenditure incurred by an assessee in making any additions/

improvement to the capital asset. It also includes any expenditure incurred to protect or complete
the title to the capital assets or to cure such title. Cost of improvement includes only expenditure
on improvement incurred on or after April 1, 1981 (whether incurred by the previous owner or
by the assessee).

6. CAPITAL GAIN EXEMPTIONS:

Capital gains arising from the TRANSFER OF RESIDENTIAL HOUSE PROPERTY [Sec.
54]:

Capital gain arising from the transfer of a house property is exempt from tax provided the
following conditions are satisfied:

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1. A residential house property whose income is taxable under the head “Income from house
property” should be transferred by an individual or a HUF. The exemption is available
whether the residential house property is self-occupied or let out.

2. The house property which is transferred should be a long-term capital asset.

3. To claim exemption, the taxpayer will have to purchase another residential house property (old
or new) or constructanother residential house property within the specified period. This another
residential house may be situated in India or outside India.

4. The specified period is 1 year before, or within 2 years after, the date of transfer of the
residential house property in case of purchase option. However, in case of construction option, the
construction should be completed within 3 years from the date of transfer of residential house
property.

Amount of exemption:

The amount of exemption is lower of the following:

a. the amount of capital gain generated on transfer of residential house property; or

b. the amount invested in purchasing or constructing (including the amount deposited in the
deposit scheme, cost of land and cost incurred for making house habitable) another residential
house property.

Consequences:

In this case, for the purpose of computing capital gain on such transfer, cost of acquisition of the
new house property shall be reduced by the amount of capital gain exempt under this section i.e.,
section 54 earlier, and such capital gain will always be a short-term capital gain.

Capital gains arising from the TRANSFER OF LAND USED FOR AGRICULTURAL
PURPOSE [Sec. 54 B]:

Exemption gains arising from the transfer of agricultural land is exempt from tax provided the
following conditions are satisfied:
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1. The taxpayer is an individual.

2. He transfers an agricultural land. It may be long-term capital asset or short-term capital

asset.

3. The agricultural land was used by the taxpayer or his parents for agricultural purposes for
a period of two yearsimmediately preceding the date of transfer.

4. The taxpayer has purchased another land for agricultural purposes within a period of 2
years from the date of such transfer. In case capital gain arises on compulsory acquisition of
agricultural land by the Government, the time limit of 2 years shall apply from the date of receipt
of compensation (whether initial or additional). The new land may be in urban area or rural area.
Further it is a transfer by way of compulsory acquisition, one may claim exemption under section
10(37).

Amount of exemption:

The amount of exemption is lower of the following:

a. the amount of capital gain generated on transfer of agricultural land; or

b. the amount invested in purchasing new agricultural land (including the amount deposited in the
deposit scheme).

Consequences:

In case the new agricultural land is transferred within a period of 3 years of its purchase, the
capital gain which was exempt earlier under section 54B shall be reduced from the cost of the
new agricultural land for the purpose of computation of capital gain in respect of the new
agricultural land and it will be a short-term capital gain.

It is to be noted that if the new agricultural land is situated in a rural area, the gain arising on its
transfer is not chargeable to tax as an agricultural land situated in a rural area is not a “capital
asset” under section 2(14).

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Capital gains on COMPULSORY ACQUISITION OF LAND AND BUILDING, forming

part of industrial undertaking [Sec. 54D]:

Exemption under this section is available if the following conditions are satisfied:

1. The taxpayer may be an individual, HUF, firm, company or any other person.

2. The asset may be short-term or long-term.

3. Capital gain arises on transfer by way of compulsory acquisition of land or building which
forms a part of an industrial undertaking belonging to the taxpayer.

4. Such land or building was used by the assessee for the purpose of the industrial undertaking
for at least 2 yearspreceding the date of compulsory acquisition.

5. Assessee has purchased any other land or building within a period of 3 years from the date
of receipt of compensation or constructed a building within such period.

6. Newly acquired land or building should be used for the purposes of shifting or re-establishing
the said undertaking or setting up another industrial undertaking.

Amount of exemption:

The amount of exemption is lower of the following:

a. the amount of capital gains generated by way of compulsory acquisition of land or building; or

b. the amount invested in new land and building (including the amount deposited in the deposit
scheme).

Consequences:

If case the new land and building is transferred within a period of 3 years from the date of its
acquisition (or completion of construction), the capital gain which was exempt under this section
earlier, shall be reduced from the cost of the new asset for the purpose of computation of capital
gain in respect of the transfer of the new asset.

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Capital gains not to be charged on INVESTMENT IN CERTAIN BONDS [Section 54EC]:

Exemption under this section is given provided the following conditions are satisfied:

1. The taxpayer may be an individual, firm, company or any other person.

2. The asset transferred is a long-term capital asset.

3. Within 6 months from the date of transfer of the asset, the assessee should invest the whole (or
any part of) capital gain in long-term specified assets.

“Long-term specified assets” means any bond redeemable after 3 years issued by:

a. the National Highways Authority of India (NHAI); or

b. the Rural Electrification Corporation Ltd

Amount of exemption:

The amount of exemption is lower of the following:

a. the amount of capital gains generated on transfer of capital asset; or

b. the amount invested in specified assets as stated above.

The following points should be noted in this regard:

1. The cost of specified assets which is considered for the purpose of section 54EC shall not be
eligible for deduction under section 80C.

2. The investment made (on or after April 1, 2007) in the long-term specified assets noted above
by an assessee during any financial year cannot exceed ` 50 lakh.

Consequences:

If the specified assets are transferred (or converted into money or any loan/ advance is taken on
the security of specified assets) within a period of 3 years from the date of their acquisition, the
amount of capital gains arising from the transfer of original asset which was not charged to tax,

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will be deemed to be the income by way of LTCG of the previous year in which specified assets
are transferred.

Capital gains on transfer of a LONG-TERM CAPITAL ASSET OTHER THAN A HOUSE

PROPERTY [Sec. 54F]:

Exemption under this section is available if the following conditions are satisfied:

1. The taxpayer is an individual/ HUF.

2. The capital asset which is transferred is a long-term capital asset but other than a
residential house property (for instance, it may be a plot of land, commercial house property,
gold, share or any asset but not a residential house property).

3. To claim exemption, the taxpayer will have to purchase a residential house property (old or
new) or construct a residential house property within the specified period.

4. The specified period is 1 year before, or within 2 years after the date of transfer of the original
asset in case of purchase option. However, in case of construction option, the construction should
be completed within 3 years from the date of transfer of original asset.

The following points should be noted in this regard:

1. A residential house should be purchased or acquired. It is not the requirement that the new
house should also be used for residential purposes.

2. It is to be noted that under section 54F, exemption is available only if on the date of transfer
of the original asset, the taxpayer does not own more than one residential house
property (other than the new house). He should also not purchase within a period of 2 years
after such date (or complete construction within a period of 3 years after such date) any
residential house(other than the new house). For this purpose, “ownership” does not mean only
registered ownership. Even beneficial ownership would be sufficient to debar the benefit.

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BIBILOGRAPHY

1. V. K. Singhania: Students Guide to Income-Tax including Service Tax/VAT,

Taxmann Publications Pvt. Ltd., New Delhi.

2. Girish Ahuja and Ravi Gupta: Professional Approach to Direct Taxes Law & Practice,

Bharat Publications, New Delhi.

3. Girish Ahuja and Ravi Gupta: Systematic Approach to Income-Tax, Service Tax and

VAT, Bharat Law House, Jaipur.

4. J. K. Mittal: Law, Practice & Procedure of Service Tax, CCH India, (Walters Kluwer

(India) Pvt. Ltd.), New Delhi.

5. Sampath Iyengars: Law of Income Tax, Bharat Law House Pvt. Ltd., Jaipur
6. WWW.indiankanoon.com

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