CAPITAL ASSETS, CAPITAL GAIN AND TRANSFER OF CAPITAL

ASSET

Submitted By: R. HARSHAD

Reg No: 17040142060

Batch 2017-22

Submitted to: Prof. ABHISHEK SRIVASTAVA

ALLIANCE SCHOOL OF LAW

Alliance University,

Bangalore

DAT
E OF SUBMISSION: 21St November 2020

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 Table of Content

1. Capital Assets
2. Types of Capital Assets
3. Capital Gain
4. Types of Capital Gain
5. Capital Gain Tax Exemptions
6. Transfer of Capital Assets
7. Conclusion

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Capital Assets

Capital assets are significant pieces of property such as homes, cars, investment properties,
stocks, bonds, and even collectibles or art. For businesses, a capital asset is an asset with a useful
life longer than a year that is not intended for sale in the regular course of the business's
operation. This also makes it a type of production cost. For example, if one company buys a
computer to use in its office, the computer is a capital asset. If another company buys the same
computer to sell, it is considered inventory.

A capital asset can be used in a business sense as an asset investment that is anticipated to
generate some kind of value over a specified period of time.

Capital assets have these characteristics:

 The asset has an expected useful life of greater than one year.
 The acquisition cost of the asset exceeds some predetermined company minimum
amount, also known as a capitalization limit.
 The asset is not anticipated to be sold as part of normal business operations.
 The asset is not easily convertible to cash.

For tax purposes, the classification of a capital asset differs. While the above classification holds
true as a broad definition of a capital asset, what one company deems as such may not actually
qualify under this classification for tax purposes.

Additionally, individuals and businesses can hold capital assets. For tax purposes, many types of
property are considered capital assets, but the following holdings are excluded:

 Stock or other property that can be counted as inventory.

 Property used for a trade or business.
 A copyright that is held by and created by the taxpayer’s own efforts.
 Accounts receivable that are associated with the operation of a business.

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  Any publication of the U.S. government.
 Any commodities derivative financial instrument.
 A hedging transaction that is clearly identified as such.
 Supplies consumed though the regular course of the taxpayer’s business or trade.

When you file your taxes, you must designate gains or losses incurred as the result of applicable
capital assets as such.

Capital Assets under Section 2(14) in The Income Tax Act, 1995

Property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible.
Besides,

It includes the following:

1. Any rights in or in relation to an Indian company, including rights of management or

control or any other rights whatsoever.
2. Property of any kind held by an assessee (whether or not connected with his business or
profession).
3. Any securities held by a Foreign Institutional Investor which has invested in such
securities in accordance with the regulations made under the SEBI Act.

But does not include:

1. Any stock-in-trade [other than the securities referred to in sub-clause (b) above, consumable
stores or raw materials held for the purposes of his business or profession,
2. Personal effects, that is to say, movable property 1 (including wearing apparel and furniture),
held for personal use by the assessee or any member of his family dependent on him.
However, the following assets shall not be treated as personal effects though these assets are
moveable and may be held for personal use:
2.1. Jewellery;
2.2. archaeological collections;

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Substituted by the Finance Act, 1972, w. e. f. 1- 4- 1973.

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 2.3. drawings;
2.4. paintings;
2.5. sculptures; or Any work of art
3. Agricultural land in India2, which is not an urban agricultural land. In other words, it must be
a rural agricultural land;
4. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates
issued under Gold Monetisation Scheme, 2015 notified by the Central Government.

 Types of Capital Assets:

Capital assets are of two types:

1. Short-Term Capital Asset (STCA)

2. Long-Term Capital Asset (LTCA)

Short-Term Capital Asset - STCA which is defined under Section 2(42A):

A capital asset held by an assessee for Not more than 36 months immediately preceding the date
of its transfer is known as a short term capital asset3.

Exceptions:

1. The following assets shall be treated as short-term capital assets if they are held for Not
more than 12 months (instead of 36 months mentioned above immediately preceding the
date of its transfer:

a. a security including shares (other than unit) listed in a recognized stock exchange
in India

b. a unit of an equity oriented fund

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Agricultural land in India" by the Finance Act, 1970, w. e. f. 1- 4- 1970.
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Substituted by the Finance Act, 1973, w. e. f. 1- 4- 1974. It was also amended by the Finance Act, 1966, w. e. f. 1-
4- 1966; Finance (No. 2) Act, 1967, w. e. f. 1- 4- 1967 and Finance Act, 1968, w. e. f. 1- 4- 1969.

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 c. a zero coupon bond

2. The following assets shall be treated as short-term capital assets if they are held for Not
more than 24 months (instead of 36 months/12 months mentioned above immediately
preceding the date of its transfer:

a. Share of a company (not being a share listed in a recognized stock exchange in

India)

b. An immovable property being land and building or both.

Hence, if unlisted share or immovable property is transferred after 24 months from the date of its
acquisition, the gain arising from the transfer of share or immovable property shall be treated as
long-term capital gain.

Long-Term Capital Asset - LTCA which is defined under Section 2(29A):

It means a capital asset which is not a short-term capital asset. In other words, if the asset is held
by the assessee for more than 36 months/24 months/12 months, as the case may be, such an asset
will be treated as a long-term capital asset.

Capital Gain

This is denoted as the net profit that an investor makes after selling a capital asset exceeding
the price of purchase. The entire value earned from selling a capital asset is considered as
taxable income. To be eligible for taxation during a financial year, the transfer of a capital
asset should take place in the previous fiscal year.
Financial gains against a sale of an asset are not applicable to inherited property. It is
considered only in case of transfer of ownership. According to The Income Tax Act, assets
received as gifts or by inheritance are exempted in the calculation of income for an individual.
Buildings, lands, houses, vehicles, Mutual Funds, and jewelry are a few examples of capital
assets. Also, the rights of management or legal rights over any company can be considered as
capital assets. 

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 The following are not included under capital assets:
 Any stock, consumables or raw materials that are held for the purpose of business or
profession.
 Goods such as clothes or furniture that are held for personal use.
 Land for agriculture in any part of rural India.
 Special bearer bonds that were issued in 1991.
 Gold bonuses issued by the Central Government such as the 6.5% gold bonus of 1977,
7% gold bonus of 1980 and defense gold bonus of 1980.
 Gold deposit bonds that were issued under the gold deposit scheme (1999) or the
deposit certificates that were issued under the Gold Monetisation Scheme (2015).

Types of Capital Gain

Depending on the tenure of holding an asset, gains against an investment can be broadly

divided into the following types

1. Short term capital gain

If an asset is sold within 36 months of acquisition, then the profits earned from it are known as

short term capital gains. For instance, if a property is sold within 27 months of purchase, it will

come under short term capital gains. 

However, tenure varies in the case of different assets. For Mutual Funds and listed shares,

Long term capital gain happens if an asset is sold after holding back for 1 year.

2. Long term capital gain

The profit earned by selling an asset that is in holding for more than 36 months is known as
long-term capital gains. After 31st March 2017, a holding period for non-moveable properties
was changed to 24 months. However, it is not applicable in case of movable assets such as
jewelry, debt-oriented Mutual Funds, etc. 
Furthermore, a few assets are considered as short-term capital assets if the holding period is
less than 12 months. Here is a list of assets that are considered according to the rule mentioned
above
Equity shares of any organization, securities like bonds, debentures, etc. that are listed on any
Indian stock exchange and zero-coupon bonds.

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All the assets mentioned above are considered as long-term capital assets if they are held for
12 months or more. In case of any asset acquired by inheritance or gift, then the period for
which an asset is owned by a previous owner is considered. Furthermore, in the case of bonus
shares or right shares, the period of holding is considered from the date of allotment.

Capital Gains Tax Exemptions

These exemptions mentioned below can be claimed either fully or partially. For example if
purchase price is Rs 80 lakh and your sale proceeds are Rs 1 crore (hence gains of Rs 20 lakh)
and you deposit Rs 50 lakh as per the below mentioned exemptions, half your capital gains (Rs
10 lakh) will be exempt. The other half (Rs 10 lakh) will be taxable.

Section 54: If the sale proceeds of a residential property are further utilized to buy another
residential property4, the capital gains on the sale proceeds are exempt. This is however subject
to the following conditions

a) The purchase of property should be done either 1 year prior to selling the property or within
two years of the sale.

b) In case of under construction property, the same should be done within maximum three years
from the transfer date of the earlier property.

c)The newly acquired property cannot be further sold within 3 years of purchase or construction.

d) The newly acquired property should be located in India.

Section 54F: If you sell any other asset like agricultural land within 10 km of a city or valuable
paintings, jewellery, debt funds etc, you can take the benefit of Section 54F. This section grants
deduction for purchase of a house property from the proceeds of the sale of any capital asset. The
following additional conditions apply:

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 Provided that nothing contained in this section shall apply to a case where the assessee owns on the date of such
transfer any other residential house.

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a) The purchase of property should be done either 1 year prior to selling the property or within
two years of the sale.

b) In case of under construction property, the same should be done within maximum 3 years
from the transfer date of the earlier property.

c)The newly acquired property cannot be further sold within 3 years of purchase or construction.

d) The newly acquired property should be located in India.

e) The person should not have more than one residential property on the date of the transfer.

f) No other property is purchased within 1 year of the transfer or constructed within 3 years of
the transfer

The investor can deposit the sale proceeds in a Capital Gains Account Scheme before the due
date for filing returns in order to take the benefit of the above sections even if he has not
bought/constructed another property. However he must buy/construct the new property within
the time limits specified above and can pay for it by using the money deposited in the Capital
Gains Account Scheme.

Section 54EC: Capital Gains Bonds issued by NHAI (National Highways Authority of India)
and REC (Rural Electrification Corporation) are eligible for exemption from capital gains tax up
to Rs 50 lakh. They have tenure of 5 years and carry a fixed interest rate (currently 5.25%). The
interest on these bonds is taxable. Only capital gains in real estate are eligible for this deduction.
For example, if you buy an asset for Rs 10 lakh and sell it for Rs 20 lakh investing the entire Rs
20 lakh in NHAI/REC capital gains bonds, the said transaction would not attract capital gains
tax.

Transfer of Capital Assets to arise Capital Gain

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Capital gain arises only when there is a transfer of capital asset. If the capital asset is not
transferred or if there is any transaction which is not regarded as transfer that there will not be
any capital gain. However, in case of profits or gains from insurance claim due to damage or
destruction of property, there will be capital gain although no asset has been transferred in such
case.

Transfer of Capital Assets under Section 2(47):

Transfer, in relation to capital asset, includes:

i. the sale, exchange or relinquishment of the asset; or

ii. the extinguishment of any rights therein; or

iii. the compulsory acquisition thereof under any law; or

iv. in a case where the asset is converted by the owner thereof into, or is treated by him, as
stocking-trade of a business carried on by him, such conversion or treatment; or

v. the maturity or redemption of zero coupon bonds; or

vi. any transaction involving the allowing of the possession of any immovable property to be
taken or retained in part performance of a contract of the nature referred to in section 53A
of the Transfer of Property Act, 1882; or

vii. any transaction (whether by way of becoming a member of, or acquiring shares in a
cooperative society, company or other association of persons or by way of any agreement
or any arrangement or in any other manner whatsoever) which has the effect of
transferring, or enabling the enjoyment of any immovable property.

Transactions not regarded as Transfer of Capital Assets as per Sections 465 and 47:

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Section - 46, Income-tax Act, 1961-2019 (No. 1).

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The meaning of transfer is given in section 2(47), whereas transactions not regarded as transfer
are covered u/ss 46 and 47. In many transactions although there is a transfer, but these are not
considered to be transfer for purposes of capital gains.

Some of the relevant transactions which are not regarded as transfer are:

i. 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;

ii. any distribution of capital assets on the total or partial partition of Hindu Undivided
Family;

iii. any transfer of a capital asset under a gift or will or an irrevocable trust;

iv. any transfer of a capital asset by a company to its 100% subsidiary company provided the
subsidiary company is an Indian company;

v. any transfer of a capital asset by a 100% subsidiary company to its holding company, if
the holding company is an Indian company;

vi. any transfer in a scheme of amalgamation of a capital asset by the amalgamating

company to the amalgamated company, if the amalgamated company is an Indian
company;

vii. any transfer in a scheme of amalgamation of shares held in an Indian company by the
amalgamating foreign company to the amalgamated foreign company if certain
conditions are satisfied;

viii. any transfer, in a demerger, of a capital asset by the demerged company to the resulting
company, if the resulting company is an Indian company;

ix. any transfer in a demerger, of a capital asset, being a share or shares held in an Indian
company, by the demerged foreign company to the resulting foreign company, if certain
conditions are satisfied;

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 x. any transfer or issue of shares by the resulting company, in a scheme of demerger to the
shareholders of the demerged company if the transfer or issue is made in consideration of
demerger of the undertaking;

xi. any transfer by a shareholder, in a scheme of amalgamation, of shares held by him in the
amalgamating company if certain conditions are satisfied:

xii. 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;

Transfer in case of Immovable and Movable Property

Different rules are applicable in case of movable/immovable assets to find out when a capital
asset is “transferred”.

Transfer in case of Immovable property when documents are registered:

Title to immovable assets will not pass till the conveyance deed is executed or registered.

Transfer in case of 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 an immovable 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.

Transfer in case of Movable Property

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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 date of transfer.

Conclusion:

Capital gain should be taken to mean profit or gains arising to the assessee from the transfer of a
capital asset. Such capital gain is added to the total income of the previous year in which the
transfer of the asset took place. In other practical sense, when we buy any kind of property for a
lower price and then subsequently sell it at a higher price, we make a gain. The gain on sale of a
capital asset is called capital gain. This gain is not a regular income like salary, or house rent. It
is a one-time gain; in other words the capital gain is not recurring, i.e., not occur again and again
periodically. Opposite of gain is called loss; therefore, there can be a loss under the head capital
gain. We are not using the term capital loss, as it is incorrect. Capital Loss means the loss on
account of destruction or damage of capital asset. Thus, whenever there is a loss on sale of any
capital asset it will be termed as loss under the head capital gain. After going through this lesson
I am able to understand the meaning of capital asset, types of capital asset, what is not capital
asset, computation of capital gain, types of capital gains etc. The capital gain is also an income
and it is taxable too

Bibliography:

The Income Tax, Act

V.G. Mehta’s income tax ready reckoned assessment year 2014-15.

Webliography:

Incometaxmanagement.in
Economictax.in
Myitreturn.com
Armstat.in

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