INCOME UNDER THE HEAD CAPITAL GAINS

Section 45(1): [Charging Section]

Any profits arising on the Transfer of any Capital Asset shall be chargeable to tax under the head
Capital Gains in the same previous year in which such transfer took place.
Section 2(14): [Capital Asset]
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 (FII) which has invested in such
securities in accordance with SEBI Regulations.
However, Capital asset does not include the following:
(i) Any stock in trade [other than securities listed in clause (b) above], raw materials or
consumable stores held for the purposes of business or profession;
(ii) Personal effects of movable nature, such as wearing apparel, furniture, utensils, and vehicles
held for personal use by the assessee or any dependent member of his family;
(iii) Agricultural land in India which is not situated in any Specified Area.
(iv) 6.5% Gold deposit Bonds 1977, 7% Gold Bonds 1980 or National Defence Gold Bonds issued
by Central Government.
(v) Special Bearer Bonds issued by the Central Government.
Personal Effects of movable nature do not include:
• Jewellery: “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,
utensils or other article or worked or sewn into any wearing apparel.
• Archaeological Collections;
• Sculptures;
• Any art work, paintings, drawings etc.
Accordingly, these assets are within the purview of the definition of capital asset and any transfer
thereof is subject to tax under the head “Capital Gains”
Capital Assets includes (urban) agricultural land means an agricultural land in India-
(a) In any area within the jurisdiction of a municipality or cantonment board having population of
not less than 10,000 or

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 (b) In any area within the distance measured aerially (shortest aerial distance).
• Up to 2 Kms, from the local limits of any municipality or cantonment board and which
has population ranging between 10,001 to 1,00,000; or
• Up to 6 Kms, from the local limits of any municipality or cantonment board and which
has population ranging between 1,00,001 to 10,00,000; or
• Up to 8 Kms, from the local limits of any municipality or cantonment board and which
has population more than 10,00,000.

Section 2(47): [Transfer]

In relation to Capital Assets, “Transfer” includes the following:
(i) Sale, Exchange or relinquishment of a capital asset; or
(ii) Extinguishment of any rights therein; or
(iii) Compulsory acquisition of any Capital asset under any law; or
(iv) Conversion or treatment of a capital asset into stock in trade; or
(v) The maturity or redemption of a zero-coupon bond; or
(vi) Any transaction involving the allowing of possession of any immovable property to be taken
or retained in part performance of a contract of the nature referred to in Sec-53A of the
Transfer of Property Act, 1882; or
(vii) Any transaction whether by way of acquiring shares in or by way of becoming a member of
a co-operative society, company or other association of persons or by way of any agreement
or arrangement or in any other manner which has the effect of transferring, or enabling the
enjoyment of any immovable property.
• The expression “transfer” includes disposing of or parting with an asset or any interest therein, or
creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or
conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India

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 or outside India) or otherwise, notwithstanding that such transfer of rights has been characterized
as being effected or dependent upon or flowing from the transfer of a share or shares of a company
registered or incorporated outside India – Explanation 2 to Sec. 2(47).
• Relinquishment: Relinquishment means withdrawn from, abandoning or giving up anything.
Where an assessee gives up the right to claim specific performance for purchase of immovable
property, it is relinquishment of a capital-asset.
• Extinguishment of any rights in an asset: It means total destruction, annihilation, termination
or extinction of a capital asset. It refers to extinguishment of rights on account of transfer (Vania
Silk Mills Ltd.)
Case Law-1 CIT vs Banarshilal Katarika (High Court) Capital Gains arise on sale of Silver
Utensils: Silver utensils were found (approx. 49 kgs) in form of thali, katori etc. & the assessee
contended that these were personal use and not capital assets.
It was held that silver utensils consisted of thalis, katoris etc which are meant for personal use
although they may not be used daily. The main factor in deciding whether an article constitute personal
effect is the nature of the article. Therefore, in this case silver utensils constitute personal affect and
no capital gains will arise on sale of silver utensils.
Case Law-2 CIT vs Maharaja Rana Hemant Singh (Supreme Court) Capital gains on sale of Gold
bars, sovereigns etc. even if used for puja: The assessee sold 4825 gold sovereigns, 790440 old silver
rupees and 255000 (app) silver bars and claimed that these are personal affects & hence no capital
gains shall arise. He claimed that these articles were used for the purpose of Mahalaxmi puja and for
other religious activities.
His contention was rejected and Supreme Court held that silver bars and bullions can by no
stretch of imagination be deemed to be effects meant for personal use. So, the gold sovereign, silver
coins and silver bars have been used for puja of deities as a matter of pride but it is difficult to
understand how such use can be characterised as personal use. Therefore, capital gain is taxable here
in this case.
Note: Gold utensils are not personal effects and are capital assets. It is a tradition in Indian families to
use silver utensils on occasions but there is no such tradition to use gold utensils.
Case Law-3 CIT vs Anarkali Sarabhai (Supreme Court) Redemption of Preference shares amount
to transfer: When preference shares are redeemed by company the shareholders have to abandon or
surrender his rights in shares in order to get the money in lieu thereof. Thus, there is a relinquishment
which amount to transfer and resulting Capital gains.

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Section 46 [Distribution of assets on liquidation of Company]
Where the assets of a company are distributed to its shareholders on liquidation of a company, such
distribution shall not be regarded as transfer in the hands of the company.
Section 47 [Transactions not regarded as Transfer]
The following transactions are exempted from the chargeability to Capital Gains, subject to
satisfaction of conditions as stipulated:
1. Distribution of capital assets on full or partial partition of HUF.
2. Transfer of a capital asset by way of gift or under a will or an irrevocable trust. [This clause shall
not apply to transfer under a gift / irrevocable trust of a capital asset being share, debentures or
warrant allotted by a company to its employee under ESOP of the company as per guidelines of
Central Government i.e. ESOP are not covered over here].
3. Transfer of a capital asset by holding company to its subsidiary company or vice versa is exempt
if the following two conditions are fulfilled:
a) The holding company or its nominee should hold the whole of the share capital of the
subsidiary company;
b) The transferee company should be an India Company.
Amendment u/s 47: Where a holding company transfers a capital asset to its subsidiary company as
a Stock in trade or vice versa, then exemption u/s 47 shall not be available.
Withdrawal of exemption: According to Sec. 47A, if any of the following events occur within a
period of 8 years from the date of transfer of capital assets, the capital gains so exempted earlier shall
be chargeable to tax in hands of the transferor company in the year of transfer of such capital asset:
a. The holding company does not continue to hold the whole of the share capital of the subsidiary
company; or
b. The transferee company converts into or treats the capital asset as stock-in-trade.
4. Amalgamation of companies: Transfer of a capital asset in a scheme of amalgamation, is exempt
if the amalgamated company is an Indian company.
5. Transfer of a capital asset in a demerger by the demerged company to the resulting company is
exempt. If the resulting company is an Indian company.
6. Transfer of a capital asset being shares held in an India company, in a scheme of amalgamation
by the amalgamating foreign company to the amalgamated foreign company is exempt, if the
following two conditions are fulfilled:
a) At least 25% of the shareholders of the amalgamating foreign company continue to be
shareholders of the amalgamated foreign company; and

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 b) Such transfer does not attract tax on capital gains in the country in which the amalgamating
company is incorporated
7. Asset Transferred is SHARE of A FOREIGN COMPANY (Amalgamation) referred to in Expl. 5
to Sec 9(1), which drives directly or indirectly, its value substantially from the shares of an Indian
Company. Provided:
a) At least 25% of the shareholders of amalgamating foreign company remains shareholders
of the amalgamated foreign company.
b) Such transfer does not attract Capital Gain Tax in country in which the amalgamating
company is incorporated.
8. Transfer of a capital asset, being share or shares held in an India company by the demerged foreign
company to the resulting foreign company, is exempt if:
a) The shareholders holding not less than 75% in value of the shares of the demerged foreign
company continue to remain shareholders of the resulting foreign company; and
b) Such transfer does not attract tax on capital gains in the country, in which the demerged
foreign company is incorporated.
9. Asset Transferred is SHARE of A FOREIGN COMPANY (Demerger) referred to in Expl. 5 to
Sec 9(1), which drives directly or indirectly, its value substantially from the shares of an Indian
Company. Provided:
a) Atleast75% of the shareholders of amalgamating foreign company remains shareholders
of the amalgamated foreign company.
b) Such transfer does not attract Capital Gain Tax in country in which the amalgamating
company is incorporated.
10. Transfer of capital asset being shares held by a shareholder in the amalgamating company is
exempt, if the following two conditions are fulfilled:
a) The transfer is made in consideration of allotment to him of any shares in the amalgamated
company except where the amalgamated company itself is the shareholder; and
b) The amalgamated company is an India company.
11. Transfer / issue of shares by the resulting company in a scheme of demerger to the shareholders
of the demerged company in consideration of demerger is exempt.
12. Transfer of capital asset by a banking company to a banking institution in a scheme of
amalgamation is exempt.
13. Transfer of capital asset by a predecessor co-operative bank to a successor co-operative bank in a
scheme of business reorganization is exempt.

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14. Transfer of shares held by the shareholder in predecessor co-operative bank in lieu of the shares
issued by the successor co-operative bank in a scheme of business reorganization is exempt.
15. Any transfer of a capital asset being a membership right held by a member of a recognised stock
exchange in India as approved by SEBI.
16. Conversion of preference shares of a company into equity shares of that company.
17. Conversion of bonds, debentures, debenture stock or deposit certificates of a company into shares
or debentures of that company is exempt.
18. Any transfer by way of conversion of bonds u/s 115AC into share or debentures of a company.
19. Transfer of Capital Assets referred u/s 115AC (GDR / FCCB) by a Non-Resident to another Non-
Resident.
20. Transfer of Capital Assets being Government security (carrying periodic payment of interest)
through an intermediary dealing in settlement of securities.
21. Sovereign Gold Deposit Bond: Any redemption of Sovereign Gold Bond under the scheme (by
Individual) shall not be treated as transfer.
Note 1: SGBs are government securities denominated in grams of gold. They are substitutes for
holding physical gold. Investors pay issue price in cash & bonds will be redeemed in cash on
maturity. RBI issues SGB on behalf of government.
Note 2: It is important to note that exemption is available on redemption only. It means if these
SGBs are transferred then Sec 47 shall not be applicable i.e. charged to Capital Gain tax.
Note 3: If any individual purchased these bonds from market then also, he shall be eligible to get
exemption at the time of maturity.
22. Any transfer made outside India of a capital asset being rupee denominated bond of an Indian
company issued outside India, by a non-resident to another non-resident shall not be regarded as
transfer.
23. Any transfer of a capital asset, being—
a) bond or Global Depository Receipt referred to in sub-section (1) of section 115AC; or
b) rupee denominated bond of an Indian company; or
c) derivative,
d) such other securities as may be notified by the Central Government in this behalf, made by a
non-resident on a recognised stock exchange located in any International Financial Services
Centre and where the consideration for such transaction is paid or payable in foreign currency.
24. Transfer of capital asset being any work of art, archaeological, scientific or art collection, book,
manuscript, painting, drawing, photograph or print, to the Government or a University or the

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 National Museum, National Archives, National Art Gallery or any such other public museum or
institution notified by the Central Government to be national importance.
25. Transfer of land of a sick industrial company under a scheme sanctioned under Sec. 18 of the Sick
Industrial Companies (Special Provisions) Act, 1985, where such sick industrial company is being
managed by its workers’ co-operative. Such transfer is eligible for exemption only if the transfer
is made during the period commencing from the previous year in which the company has become
sick and ending with the previous year in which the entire net worth of such company becomes
equal to or exceeds the accumulated losses.
26. Transfer in a scheme for lending of any securities under an agreement or arrangement, which the
assessee has entered into with the borrower of such securities and which is subject to the guidelines
issued by SEBI or RBI is exempt.
27. Transfer of capital asset in a transaction of reverse mortgage.
[A reverse mortgage is a scheme for the benefit of senior citizens, under which banks could takes
on properties from such senior citizens and provide loans in lump-sum or instalments. The
intention of the reverse mortgage is to secure a stream of cash flow to senior citizens against the
mortgage of a residential property. The liability to capital gains arises in the hands of borrower
(senior citizen) on reverse mortgage, when the bank sells the property to realize the dues].
Note: Further, Sec. 10(43) provides that any lumpsum amount or instalments received (exempt)
under the scheme of reverse mortgage from a bank by senior citizens.
28. Transfer of share of a special purpose vehicle (SPV) to a business trust in exchange of units
allotted by that trust to the transferor.
29. In a case where a private company or an unlisted public company is converted into LLP, any
transfer of capital asset or intangible asset to LLP shall not be regarded as transfer. In addition,
transfer of shares held by the shareholder also not to be considered as transfer. These exemptions
are available subject to fulfilment of following conditions:
a) All the assets and liabilities of the company relating to the business immediately before
the conversion shall become the assets and liabilities of the LLP;
b) All the shareholders of the company immediately before the conversion become the
partners of the LLP and their contribution as well as profit sharing ratio in the LLP should
be in the same proportion in which they held shares in the company on the date of
conversion;
c) The shareholders of the company do not receive any consideration or benefit, directly or
indirectly, in any form or manner, other than by way of share of profit and capital
contribution in the LLP;
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 d) The aggregate of profit-sharing ratio of the shareholders of the company to the extent of
not less than 50% in LLP should be continued for a period of five years from the date of
the conversion;
e) The total sales, turnover or gross receipts in business of the company in any of the three
preceding previous years should not exceed Rs. 60 lakhs; and
f) The partners of LLP should not withdraw the accumulated profits as on the date of
conversion, including reserves, of the company for a period of 3 years from the date of
conversion.
g) The total value of the assets as appearing in the books of company in any of the 3 preceding
years in which conversion took place should not exceed Rs 5 crores.
30. Any transfer of a capital asset or intangible asset to a company where a proprietary concern is
succeeded by such company in the business carried on by it, is not regarded as transfer subject to
the following conditions :
a) All the assets and liabilities of the sole proprietary concern relating to the business
immediately before the succession shall become the assets and liabilities of the company;
b) The shareholding of the sole proprietor in the company is not than 50% of the total voting
power in the company and his shareholding shall continue to remain as such for a period
of five years from the date of succession; and
c) The sole proprietor does not receive any consideration or benefit, directly, in any form or
manner, other than by way of allotment of share in the company.
31. Any transfer of a capital asset or intangible asset by a firm/BOI/AOP to a company as a result of
succession or any transfer of a capital asset to a company in the course of demutualisation or
corporatization of a recognised stock exchange in India as a result of which an AOP or BOI is
succeeded by such company is not regarded as transfer subject to the following conditions:
a) All the assets and liabilities of the firm or AOP or BOI relating to the business immediately
before the succession shall become the assets and liabilities of the company;
b) All the partners of the firm immediately before the succession become the shareholders of
the company in the same proportion in which their capital accounts stood in the books of
the firm on the date of succession;
c) The partners of the firm do not receive any consideration or benefit, directly or indirectly,
in any form or manner, other than by way of allotment of share in the company;
d) The partners of the shareholding in the company of the partners of the firm is not less than
50% of the total voting power in the company and their shareholding continues to be as
such for a period of five years from the date of the succession; and
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 e) The demutualisation or corporatization of a recognised stock exchange in India is carried
out in accordance with a scheme approved by SEBI in this regard.
32. Units in consolidating scheme of mutual fund:
Transaction: Transfer by a Unit Holder, made in consideration of the allotment to him of a Capital
Asset, being units in the consolidated scheme of a mutual fund.
Capital Assets: Units held by him in the consolidating scheme of a mutual fund.
Condition: Consolidation is of two or more schemes of equity-oriented fund or of two or more
schemes of a fund other than equity-oriented fund.
33. Any transfer by a unit holder of a capital asset being a unit or units held by him in consolidating
plan of a mutual fund scheme, made in consideration of the allotment of him a capital asset, being
a unit or units, in the consolidated plan of that scheme of the mutual fund shall not be considered
as transfer.
Section 2(42A): [Short-term Capital Asset]
Short-term Capital Asset means any capital assets of which the period of holding is not more
than 36 months just before the date of transfer. However, in respect of:
(a) A security listed in a recognised stock exchange in India; or
(b) Units of UTI; or
(c) A unit of an equity-oriented fund; or
(d) A zero-coupon bond
Shall be treated as Short term capital asset, if they are held for not more than 12 months# before the
date of its transfer.
#
in following cases 24 months would be considered instead of 36 months:
1- Unlisted shares of any company: 24 months.
2- Immovable Property: Land, Building, Both: 24 months
Note: If the capital asset is held for more than specified period then it is treated as long-term capital
asset.
Note: It may be noted that, securities listed in a recognized stock exchange shall be treated as long
terms capital asset, if it is held for more than 12 months. However, unlisted shares, namely, shares held
in private companies or unlisted public companies shall be considered as long only if it is held for
more than 24 months from the date of its acquisition.