Heads of income

Capital Gains

Ms. Lavanya Bhagra

 Overview
The provisions for computation of Income from capital gains are covered under sections 45 to 55 of
the Income Tax Act, 1961. Section 2(14) defines the term capital gain and section 45, the charging
section lays down basis of charge for taxability of capital gain/loss arises on transfer of capital asset.
Taxability of capital gain depends upon the nature of capital gain i.e., short term capital gain or long
term capital gain, which in turn depends upon the period for which the capital asset is held.
To give relief to the assessee, the concept of exemption introduced under section 54, 54B, 54D,
54EC, 54EE, 54F, 54G, 54GA, 54GB and 54H.
Clarification
Whether “Capital Gains” being a capital receipt can be brought to tax as income?
The ordinary accounting canons of distinctions between a capital receipt and a revenue receipt are
not always followed under the Income-tax Act.
The constitutional validity of the provisions of the Act relating to capital gains was challenged in
Navin Chandra Mafatlal v. C.I.T. (1955) 27 ITR 245. The Supreme Court while upholding the
competence of parliament in legislating with regard to capital gains as part of income, observed
that the term income should be given the widest connotation so as to include capital gains within
its scope.
Charging section
Section 45 of the Act, provides that any profits or gains arising from the transfer of a capital asset
effected in the previous year shall, save as otherwise provided in various sections of Sec. 54, be
chargeable to income-tax under the head “Capital Gains” and shall be deemed to be the income of
the previous year in which the transfer took place.
Essential ingredients
The requisites of a charge to income-tax, of capital gains under Section 45(1) are:
(i) There must be a capital asset.
(ii) The capital asset must have been transferred.
(iii) The transfer must have been effected in the previous year.
(iv) There must be a gain arising on such transfer of a capital asset.
(vi) Such capital gain should not be exempt under Sections 54, 54B, 54D, 54EC, 54EE, 54ED,
54F, 54G, or 54GA
 CAPITAL ASSET [Section 2(14)]
Capital Asset means:
a. Property of any kind, whether fixed or circulating, movable or immovable, tangible or
intangible held by assessee, whether or not connected with his business or profession.
b. Any securities held by Foreign Institutional Investor (FII) which has invested in such
securities as per SEBI regulations (applicable with effect from the assessment year
2015-2016).
 Exclusion
Capital Asset does not include:
i. Any stock-in-trade (other than securities held by FII mentioned in clause (b) above),
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

iii. Rural agriculture land

iv. Special Bearer Bonds 1991 issued by the Central Govt.
v. 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.
 SHORT-TERM & LONG-TERM
ASSETS
Ref. Sec 2(42A) for definition of short term capital asset
STCA –Short term Capital Asset, LTCA – Long Term Capital Asset.

STCA, if held for ≤ 12 month • Security (other than unit) listed in a recognized stock
LTCA, if held for > 12 months exchange
• Unit of equity oriented fund/ unit of UTI
• Zero Coupon bond

STCA, if held for ≤ 24 month • Unlisted shares

LTCA, if held for > 24 months • Land or building or both

STCA, if held for ≤ 36 month • Unit of debt oriented fund

LTCA, if held for > 36 months • Unlisted securities other than shares
• Other capital assets
 TRANSFER [SECTION 2(47)]
(a) Sale, Exchange or Relinquishment of Capital Asset.
(b) Extinguishment of any right in a Capital Asset.
(c) Compulsory Acquisition of Capital Asset under Any law.
(d) Conversion of Capital Asset into Stock in trade of Business.
(e) Any transaction in which possession of Immovable Property is taken u/s 53A of Transfer of
Property Act.
(f) Any transaction (whether by way of becoming a member of, or acquiring shares in a Cooperative
Society, Company or AOP), which has effect of transferring or enabling enjoyment of Immovable
Property.
(g) Maturity or Redemption of a zero coupon bond.
 Sale, exchange and Relinquishment
The essentials for sales:-
a) Must have mutual agreement
b) Parties must be competent
c) Money consideration
d) Absolute or general property transfer from seller to buyer

An exchange means the transfer of property by one person to another and reciprocally the transfer of
property by that other person to the first person. There must be a mutual transfer of ownership of the
one thing for the ownership of another – CIT v. Rasiklal Maneklal (HUF) [1989] 177 ITR 198 (SC)
A relinquishment arises when owner withdraws himself from the property and abandons his rights
thereto. It presumes that the property continues to exist after the relinquishment – CIT v. Rasiklal
Maneklal (HUF) [1989] 177 ITR 198 (SC)
 What doesn’t constitute Transfer?
Section 47 specifies certain transactions which will not be regarded as a transfer, as below:
Any distribution of capital assets on total / partial partition of HUF
Any transfer of a capital asset under a gift / irrevocable trust (doesn’t include ESOP’s)
Transfer of asset from Holding Company to its wholly owned Indian Subsidiary and vice-versa
Transfer of capital asset from amalgamating company to amalgamated company, in a scheme of
amalgamation, as long as the resultant company is an Indian Company
Transfer of capital asset from demerged company to resulting company, in a scheme of demerger, as
long as the resultant company is an Indian Company
Transfer / issue of shares by the resulting company to the shareholders of the demerged company, if
such transfer was made in consideration of such demerger
Transfer of shares by a shareholder, held in the amalgamating company, in a scheme of
amalgamation, if such transfer is made as a consideration, by way of allotment of shares in the
amalgamated Indian company
Transfer of rupee denominated bonds / any government security, outside India, by a non-resident to
another non-resident
Redemption of sovereign gold bonds, issued by RBI, by an individual
Transfer of any capital asset to the Government / University / National Museum / National Art
Gallery, any work of art, book, manuscript, drawing, painting, print
Transfer made outside India of Rupee Denominated Bond (RDB’s) of an Indian Company, issued
outside India by a non-resident to another non-resident.
Transfer by way of conversion of bonds / debentures / preference shares into equity shares of that
Company
Transfer of capital asset under reverse mortgage
Transfer by a unit holder under consolidation plans / schemes of Mutual Fund
Transfer when complete and effective
Generally, capital gain is taxable capital asset is transferred. Different rules are applicable in the
case to find out when a capital asset is “transferred”.
1. Immovable property when documents are registered-
Title to immovable assets will not pass till conveyance deed is executed and registered-Alapati
Venkataramiah v. CIT [1965]57 ITR 185 (SC).
A document on subsequent registration from the time of its registration will take effect from the
time when it was executed and not from the time of its registration of movable/immovable assets
 2. Immovable property when documents are not registered
Even if the documents are not registered but the following conditions of section 53A of the Transfer
of Property Act are satisfied, ownership in the property is “transferred”:
a. there should be a contract in writing:
b. the transferee has paid consideration or is willing to perform his part of the contract; and
c. the transferee should have taken possession of the property.

When these conditions are satisfied, the transaction will constitute "transfer" for the purpose of
capital gains.
 3. Movable property-
Title to a movable property passes at the time when property is delivered pursuant to a contract to
sell. Entries in the books of account are not relevant for determining the date of transfer- Alapati
Venkataramiah v. CIT [1965]57 ITR 185 (SC)
Computation of capital gain [Sec. 48]
Depends upon the nature of capital asset transferred, viz. short term capital asset or long-term
capital asset
The tax incidence is generally higher in the case of short-term capital gain as compared to
long-term capital gain.
LTCA gives LTCG
STCA gives STCG
 Computation of short-term capital gain
1. Find out full value of consideration
2. Deduct the following:
a. expenditure incurred wholly and exclusively in connection with such transfer
b. cost of acquisition
c. cost of improvement

3. From the resulting sum deduct the exemption provided by sections 54B, 54D, 54G and 54GA
= The balancing amount is short-term capital gain
 Computation of Long-term capital gain
1. Find out full value of consideration
2. Deduct the following:
a. expenditure incurred wholly and exclusively in connection with such transfer
b. Indexed cost of acquisition
c. Indexed cost of improvement

3. From the resulting sum deduct the exemption provided by sections 54, 54B, 54D, 54EC,
54EE, 54F 54G, 54GA and 54GB
= The balancing amount is long-term capital gain
 Full value of consideration [Sec. 48]
whole or entire, or complete.
The expression “full value” means the whole price without any deduction whatsoever. The following
points should be noted:
1. 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 a received
in kind, then fair market value of such assets is taken as full value of consideration.
2. The full value of consideration does not mean market value of that asset which is transferred
3. Adequacy or inadequacy of consideration is not a relevant factor for the purpose of determining of
full value of consideration (see, however, the provisions of section 50C)
4. Where in the case of a transfer, consideration for the transfer of a capital asset(s) is not
determinable, then for the purpose outing capital gains under section 45, the fair market value of the
asset shall be taken to be the full market value of consideration [sec. 50D]
5. It makes no difference whether (or not) full value of consideration" is received during the previous
year. Even if the full value of consideration is received in instalments in different years, the entire
value of consideration has to be taken into account for computing the capital gains, which become
chargeable in the year of transfer.
6. Where by acquiring a portion of a larger plot, the value of the unacquired portion is injuriously
affected, compensation received for injurious affection of unacquired portion is also part of full value
of consideration- CIT v. P. Mahalakshmi [1982] 134 ITR 428 (Kar.).
7.Section 48 does not show that only consideration shown in sale deed is to be regarded as full value
of consideration received: there is nothing in section, which precludes Assessing Officer from
substituting actual sale consideration for sale consideration shown in sale deeds, if there is evidence
to show that assessee had indeed received higher amount-Inderpal Singh Ahuja v. CIT [2006] 103
ITD 271 (Asr.).
8. Where a mill belonging to the assessee-company is transferred in a public auction and purchaser of
the mill makes payments in instalments along with interest, the amount of interest is part of sale
consideration and, thus, the same is to be treated as capital gain under section 45 and not as income
from other sources-Cauvery Spg. & Wvg. Mills Lid. v. CIT [2011] 200 Taxman 22 (Mad.)(Mag.).
 Few cases when “full value of consideration” is determined on notional basis –

Different Situation The amount which is taken as full value of consideration Section

Money or other asset received under Value of money or the fair market value of the asset (on 45(1A)
any insurance from an insurer due to the date of receipt)
damage or destruction of a capital
asset
Conversion of capital asset into stock Fair market value of the capital asset on the date of 45(2)
in trade conversion
Transfer of capital asset by a Amount recorded in the books of account of the 45(3)
partner/member to firm/association firm/association of persons/body of individuals as the
of persons/body of individuals as his value of the capital asset
capital contribution
Distribution of capital asset by Fair market value of such asset on the date of transfer 45(4)
firm/association of persons/body of
individuals to its partners members
on its dissolution
 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 effect the transfer. Even if an expenditure has some nexus with the
transfer, it does not qualify for deduction unless it is wholly and exclusively in connection with the
transfer-Sita Nanda v. [2001] 119 Taxman 227 (Delhi)
Any amount, the payment of which is absolutely necessary to effect the transfer will be an expenditure in
connection with transfer. In other words, if without removing any encumbrances, sale or transfer cannot be
effected, the amount paid removing that encumbrance will fall under the aforesaid provision-Gopee Nath Paul
& Sonis. [2005] 147 Taxman 629 (Cal.).
Examples of deductible expenses are: brokerage or commission paid for securing a purchase.com of stamp,
registration fees borne by the vendor, travelling expenses incurred in connection transfer, litigation expenditure
for claiming enhancement of compensation awarded in the case compulsory acquisition of assets, etc.
 Examples
Tenant - Amount paid to tenant to get property vacated is deductible from gains arising from sale of
property-CIT v. Venkataraman [1982] 137 ITR 846 (Mad.)
Legal expenses - Legal expenses incurred by the assessee for obtaining compensation for
compulsory acquisition of his land can be properly considered as an expenditure incurred wholly
and exclusively in connection with such transfer under section 48(1) and it is immaterial whether the
expenditure is incurred subsequent to or prior to the award-CIT v. R. Ranga Shetty [1985]11
Taxman 192 (Kar.).
Expenditure for enhancement of compensation - Proceedings in a civil court for enhancement of
compensation are an integral part of proceedings for transfer of a property in the case of compulsory
acquisition. Expenditure incurred in such proceeding is incurred wholly and exclusively in
connection with such transfer-CIT v. P. Rajendran [1981] 127 ITR 810 (Kar)
Repayment of loan - Where the assessee-company had taken a loan on security of immovable property and
the liquidator sold this property in liquidation proceedings against the assessee, the repayment of the
aforesaid loan cannot be said to be an expenditure incurred in connection with transfer of property so as to
be allowed as deduction in computation of capital gains - CITV. SR Press & Publications (P.) Ltd. [1999]
107 Taxman 458 (Ker.)
Discharge of mortgage - Where a property has been mortgaged by the vendor, the amounts spent for
discharging that burden of the vendor, whether prior to sale, or at the time of sale, by payment to such
creditors including the mortgagees directly by the vendee, cannot be regarded as expenditure wholly and
exclusively in connection with the transfer so as to be deductible from capital gain arising on sale of such
property in the hands of vendor - CIT v. N. Vajrapani Naidu [1999] Taxman 277 (Mad.), CIT v. Attili N.
Rao [2001] 119 Taxman 1030 (SC).
Payment to co-operative society to get NOC- An assessee sells a flat and in computing capital gains claims
a sum of Rs 4 lakh as expenditure under section 48, being payment made to the society for getting NOC
from the society for the sale of flat. A sum of Rs. 25,000 is paid as transfer charges and balance of Rs.
3,75,000 is voluntary contribution to the society but to get “no objection” certificate from the society. Since
entire amount of Rs. 4 lakh is a necessary expenditure for transfer of flat, it is allowable under section 48
-Damodar G. Nagalia v. CIT [2007] 12 SOT 600 (Mum.)
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.
Litigation expenses for registration of shares - Litigation expenses incurred for compelling the
company to register the shares in the name of the assessee would be of capital nature, forming
part of cost of acquisition of the shares- CIT v. Bengal Assam Investors Ltd. [1969] 72 ITR
(Delhi).
Advocates fee and brokerage – Expenses included in cost of acquisition – S Sudha v CIT
[2011]48 SOT 335 (Chennai).
 Cost of improvement
Sec. 55.
Cost of improvement is capital expenditure incurred by an assesses 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. To put it differently, expenditure incurred
to increase the value of the capital asset is treated as cost of improvement.
Expenditure incurred before April 1, 2001 not considered - Any cost of improvement incurred before
April 1, 2001 is not taken into consideration for calculating capital gain chargeable to tax,. The rule
does not have any exception. Expenditure incurred on improvement of a capital asset before April 1,
2001 is always taken as equal to zero.
Capital gain exempt from tax
Under Section 54, 54B, 54D, 54EC, 54F, 54G and 54H of the Act, capital gains arising from the
transfer of certain capital assets are exempt from tax under certain circumstances.
 EXEMPTION FOR CAPITAL GAINS
ARISING ON TRANSFER OF
RESIDENTIAL HOUSE PROPERTY
Following conditions should be satisfied to claim the benefit of section 54.
The benefit of section 54 is available only to an individual or HUF.
The asset transferred should be a long-term capital asset, being a residential house property.
Within a period of one year before or two years after the date of transfer of old house, the taxpayer
should acquire another residential house or should construct a residential house within a period of
three years from the date of transfer of the old house. In case of compulsory acquisition the period of
acquisition or construction will be determined from the date of receipt of compensation (whether
original or additional).
Exemption can be claimed only in respect of two residential house ( as amended by the Finance
Act, 2020, with effect from Assessment Year 2021-22) property purchased/constructed in India.
If more than two house is purchased or constructed, then exemption under section 54 will be
available in respect of one house only. No exemption can be claimed in respect of house
purchased outside India.
The exemption for investment made, by way of purchase or construction, in two residential
house properties shall be available if the amount of long-term capital gains does not exceed Rs.
2 crores. If assessee exercises this option, he shall not be entitled to exercise this option again
for the same or any other assessment year.
Exemption under section 54 will be lower of following :
Amount of capital gains arising on transfer of residential house; or
Amount invested in purchase/construction of new residential house property.
Capital gain arising from transfer of
land used for agricultural purpose
Sec 54B
is available only to an individual or HUF.
The asset transferred could be a agricultural land property used for agricultural purposes for
immediate preceding two years.
Another agricultural land to be purchased within two years from date of transfer.
Amount of exemption: lower of -
The amount of capital gain generated on transfer of agricultural land; or
The amount invested in purchasing new agricultural land
 Compulsory acquisition of lands and
buildings
Sec 54D
Conditions for claiming exemption:
Any assessee
There must be a compulsory acquisition of land & building or any right in land or building forming
part of an industrial undertaking
Such land & building should have been used for business purposes of the industrial undertaking for
2 years immediately preceding the date of transfer.
The assessee must purchase any another land / building / construct any building(for shifting or
re-establishing the existing undertaking or setting up a new industrial undertaking) within 3 years
from date of transfer
 Other exemptions
Capital gain not to be charged on investment in certain bonds, Sec 54EC
Capital gain on transfer of a long-term capital asset other than a house property, Sec 54F
Capital gains on transfer of assets in case of shifting of industrial undertaking from urban area, Sec 54G
Exemption of capital gains on transfer of assets in case of shifting of industrial undertaking from urban area to
any Special Economic Zone, Sec 54GA
Capital gain on transfer of residential property to acquire equity shares of eligible company, which in turn has
to purchase new assets within a year of subscription, Sec 54GB
Tax rates
Short-term Capital Gains (STCG)
– STCG is clubbed with Total Income and therefore charged to tax at normal rates

Long Term (LTCG)

-is clubbed with Total Income and therefore charged to tax at normal rates
Capital Gains