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Section 45(1)

Charging Section

Section 2(14)

Capital Assets

Any profits or gains arising from the transfer of a capital


asset effected in the previous year shall be deemed to be
the income of the previous year in which the transfer
took place.
Capital asset means property of any kind held by an
assessee, whether or not connected with his business or
profession,but does not include:
1. Stock in trade Any stock-in-trade, consumable stores
or raw materials held for the purposes of his business or
profession shall not be considered to be capital asset.
2. Personal movable effects
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.
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.

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Accordingly, items of personal use like household


furniture, utensils, TV, fridge, sofa, personal motor
car etc. shall not be considered to be Capital Assets,
and any amount received on their sale shall be
considered to be a capital receipt not chargeable to tax
under any head.
3. Agricultural land
Agricultural land in India in rural area shall not be
considered to be capital asset. If the land is in the urban
area, it will be considered to be capital asset.
4. Gold Deposit Bonds
Gold Deposit Bonds issued under the Gold Deposit
Scheme, 1999 notified by the Central Government.

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5. Special Bearer Bonds, 1991


Special Bearer Bonds, 1991, issued by the Central
Government.
Example:If a dealer of Maruti cars has sold ten motor cars and there is a gain of `1,00,000, it
will be considered to be income under the head business/profession and not under the head
Capital Gains.
Example: Mr. Neeraj Kumar purchased one motor car for his personal use and subsequently
it was sold by him, in this case it will not be considered to be capital asset.
Example :Mr. Abhishek Bhasin purchased one fridge for his personal use but subsequently it
was sold by him, it will not be considered to be capital asset.
Example: Mr. Aman Sehgal purchased silver utensils for his personal use and subsequently
these utensils were sold by him, it will not be considered to be capital asset because silver
utensils can not be considered to be jewellery and further they are the items of personal use,
as per the decision in CIT v. Benarshilal Katarika
Whether capital gain arise on the sale of silver utensils.
In CIT v. Benarshilal Katarika, during the previous year relevant year to assessment year
1977-78, the assessee sold 49.521 kgs. of silver utensils which were in the form of thalis,
katoris, tumblers, etc. The assessee contended that the silver utensils were for personal use
and they were not capital assets within the meaning of section 2(14) of the Income Tax Act,
1961 and thus the profit on sale of these utensils was not liable to capital gains tax. The ITO
rejected the assessees claim that the silver utensils were personal effects
The high court held that silver utensils, consisted of thalis, katoris, tumblers, etc. which are
meant for personal use although they may not be used daily. Whether silver utensils
constitute personal effects depend not merely on the financial status of the assessee. The main
factor in deciding whether an article constitute personal effect is the nature of the article.
Therefore, in the present case, silver utensils constitute personal affects and no capital gains
will arise on the sale of silver utensils.

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Whether capital gain arise on the sale of gold/silver coins.


H.H. Maharaja Rana Hemant Singh Ji
In this case the assessee sold 4825 gold sovereigns, 7,90,440 old silver rupee coins and silver
bars weighing 2,54,174 tolas and claimed that no capital gains arose as the aforesaid items
fell outside the definition of capital assets. The assessee claimed that these articles formed
personal effects as they were used by the assessee and his family for personal use as it was
evident that they were used for the purpose of Mahalaxmi Puja and other religious festivals in
the family. His contention was rejected by the appellate authorities and the High Court. The
Supreme Court also decided the case against the assessee as according to it, these articles did
not constitute personal effects. The Court held that only those effects can be legitimately be
said to be personal which pertain to the assessees person. In other words, an intimate
connection between the effect and the person of the assessee must be shown to exist to render
them personal effects. The Court said that the silver bars or bullion can by no stretch of
imagination be deemed to be effects meant for personal use. According to the Supreme
Court, the gold sovereigns, silver coins and silver bar have been used for puja of the deities as
a matter of pride or ornamentation but it is difficult to understand how such use can be
characterized as personal use. Therefore, the capital gains are taxable in the present case.
H.H. Maharani Usha Devi v CIT (1982) 133 ITR 43 (MP)

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Even if personal effects were occasionally used as and when dinners were arranged for the
family and guests, it will still be a personal effect and occasional use shall not be taken into
consideration.
Example: If any person has movable items in his business or profession, these items shall be
considered to be capital assets
Example: Mr. Mukesh has one motor car in the use of his business and subsequently this
motor car was sold by him, it will be considered to be capital asset and capital gains shall be
computed.
Example: If personal effects are immovable, they will be considered to be capital assets. e.g.
A house meant for assessees own residence shall be considered to be capital asset.
Example: Rohit has agricultural land in the rural area which was purchased by him for Rs
5,00,000 and it was sold by him for Rs 11,00,000, in this case capital gain shall not be
computed, but if the land is in Delhi, in this case capital gains shall be computed.
Example: If the agricultural land is in rural area outside India, it will be considered to be
capital asset or in other words agricultural land situated outside India is capital asset in all
cases.
Example:Mr. Vipul has agricultural land in the rural area in India which was sold by him, in
this case there are no capital gains.
Example:Mr. Mukesh has one agricultural land in urban area in India which was
sold by him, in this case capital gains shall be computed.
Example: Mr. Yogesh has agricultural land in rural area which is six kms away from
Delhi municipality and the Government has notified it to be urban area, in this case it will be
considered to be capital asset.
Example: Mr. Sunny who is resident and ordinarily resident has sold one agricultural
land in rural area in Nepal, in this case it will be considered to be capital asset because the
land is not situated in India.
Section 2(47)

Transfer

Transfer includes:
a)
b)
c)
d)
e)
f)

The sale exchange or relinquishment of the assets, or


Extinguishment of any right therein, or
Compulsory acquisition under any law, or
Conversion of capital asset into SIT, or
Maturity of ZCB, or
Any transaction involving the allowing the possession of any
immovable property to be taken or retained in part performance
of the contract referred u/s 53A of TPA, 1882, or
g) Any transaction(whether by way of becoming a member or
acquiring shares in a co operative society, company etc) which
has the effect of transferring or enabling the enjoyment of any
immovable property.
Case Law: Redemption of preference shares by a company is a transfer
in the hands of shareholders. (ANARKALI SARABHAI VS CIT)

The following transactions will not be considered as transfer


Transactions
not regarded and therefore, no capital gains will arise:as transfer
(1) Any distribution of capital assets on the total or partial
partition of a Hindu Undivided Family.
(2) Any transfer of a capital asset under a gift or will or an
irrevocable trust.

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Section 47

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However, this clause shall not include transfer under a gift


or an irrevocable trust of a capital asset being shares,
debentures, or warrants allotted by a company directly or
indirectly to its employees under ESOP to its employees.
(3) Any transfer of a capital asset by a company to its
subsidiary company, if
(a) the holding company or its nominees hold the
whole of the share capital of the subsidiary
company, and
(b) the subsidiary company is an Indian company.
The above exemption will not apply if a capital asset is
transferred as SIT after 29-2-88.
(4) Any transfer of a capital asset by a subsidiary company
to the holding company, if
(a) the whole of the share capital of the subsidiary
company is held by the holding company, and
(b) the holding company is an Indian company.
>The above exemption will not apply if a capital asset is
transferred as SIT after 29-2-88.
(5) 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.
(6) 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.
(7) Any transfer of shares in the amalgamating company
by a shareholder, in a scheme of amalgamation, if
(a) the transfer is made in consideration of the
allotment to him of shares in the amalgamated
company, except where the shareholder itself is
the amalgamated company and
(b) the amalgamated company is an Indian company.
(8) Any transfer or issue of shares by the resulting company
, in a scheme of demerger to the shareholders of
demerged company if the transfer or issue is made in
consideration of demerger of the undertaking.

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(9) Any transfer in a scheme of amalgamation of shares held


in an Indian company by the amalgamating foreign
company to the amalgamated foreign company:
a) At least 25% shareholders of the amalgamating
foreign company must continue to remain shareholders of

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foreign amalgamated company.


b) Such transfer should not attract capital gains in the
country in which foreign amalgamating company is
incorporated.
(10) Any transfer in a scheme of amalgamation of shares
held in an Indian company by the demerged foreign
company to the resulting foreign company:
a) Shareholders holding not less than 75% value of
shares of the demerged foreign company must continue to
remain shareholders of foreign resulting company.
b) Such transfer should not attract capital gains in the
country in which foreign amalgamating company is
incorporated.
(11) Any transfer in a scheme of amalgamation of a
banking company with a banking institution.
(12) Any transfer of a capital asset, being any work of art,
archaeological, scientific or art collection, book,
manuscript, drawing, painting, photograph or print,
to the Government or a University or the National
Museum, National Art Gallery, National Archives or
any such other public museum or institution as may be
notified by the Central Government.
(13) Any transfer by way of conversion of bonds or
debentures, debenture-stock or deposit certificates
etc. of a company into shares or debentures of that
company.
(14) Any transfer of securities referred u/s 115AC by a Non
Resident to Non Resident. The transaction must be
made outside India.
(15) Any transfer of urban agricultural land in India before
01-03-70.
(16) Capital gain arising from the transfer of land under Sec
18 of SICA,1985 by a sick industrial company during its
SICK period.
Such transfer is made in the period commencing from
the PY in which the said company has become sick and
ending with the PY in which the entire net worth of such
company becomes equal to or exceeds the accumulated
losses.

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(17) Any transfer of a capital asset by a firm to a company


as a result of succession of the firm by a company.
Provided that

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(a) all the assets and liabilities of the firm or of the


association of persons or body of individuals 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.
(c) the partners of the firm do not receive any consideration
other than by way of allotment of shares in the company.
(d) the aggregate of the shareholding in the company of the
partners of the firm is not less than fifty per cent 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.
(18) If a sole proprietary concern is succeeded by a
company in the business carried on by it as a result of
which the sole proprietary concern sells or otherwise
transfers any capital asset or intangible asset to the
company.
Provided that
(a) all the assets and liabilities of the sole proprietary
concern should become the assets and liabilities of the
company.
(b) the shareholding of the sole proprietor in the company is
not less than fifty per cent of the total voting power and
it should be maintained for a minimum period of five
years from the date of the succession and
(c) the sole proprietor does not receive any consideration or
benefit, in any manner, other than by way of allotment
of shares in the company.

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(19) Any transfer of a capital asset or intangible asset by a


private company or unlisted public company to a
limited liability partnership as a result of conversion
of the company into a limited liability partnership. or,
Any transfer of shares held in the company by a
shareholder as a result of conversion of company
into LLP as per LLP Act, 2008
Provided that
(a) All the assets and liabilities of the company immediately
before the conversion become the assets and liabilities
of the limited liability partnership;
(b) All the shareholders of the company immediately before
the conversion become the partners of the limited
liability partnership and their capital contribution and
profit sharing ratio in the limited liability partnership are
in the same proportion as their shareholding in the
company on the date of conversion;
(c) The shareholders of the company do not receive any

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consideration or benefit, directly or indirectly, in any


form or manner, other than by way of share in profit and
capital contribution in the limited liability partnership;
(d) The aggregate of the profit sharing ratio of the
shareholders of the company in the limited liability
partnership shall not be less than fifty per cent. at any
time during the period of five years from the date of
conversion;
(e) The total sales, turnover or gross receipts in business of
the company in any of the three previous years
preceding the previous year in which the conversion
takes place does not exceed sixty lakh rupees; and
(f) No amount is paid, either directly or indirectly, to any
partner out of balance of accumulated profit standing in
the accounts of the company on the date of conversion
for a period of three years from the date of conversion.

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(20) Any transfer of a capital asset in a transaction of


reverse mortgage under a scheme made and notified
by the Central Government

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Section 2(42A)

Short-term capital
asset

Section 2(29A)

Long-term capital
asset

Sec 48

Computation
Capital Gain

of

1st Proviso to Sec


48
2nd Proviso to
Sec 48

Indexation

Short-term capital asset means a capital asset held by an assessee for not
more than thirty-six months.
Provided that in the following cases the period shall be twelve months instead
of thirty-six months.
(i) A share held in a company (whether listed or not);
(ii) A unit of the Unit Trust of India or a unit of a Mutual Fund specified under
section 10(23D) (whether listed or not).
(iii) A zero coupon bond.
(iv) Any other security listed in a recognised stock exchange in India.
Long-term capital asset means a capital asset which is not a short-term capital
asset.
Full Value of Consideration
Less: Cost of Acquisition
- Cost of Improvement
- Exp wholly or exclusive in connection
With such transfer
Capital Gain
Discussed in Classroom in Detail

xxx
xxx
xxx
xxx
xxx

In case of long term capital gains, instead of cost of acquisition and cost of
improvement, indexed cost of acquisition and indexed cost of improvement
shall be taken into consideration.
Indexed cost of acquisition means the cost adjusted as per cost inflation
index i.e.
ICOA =

ICOI =

3rd Proviso
Sec 48

to

5th Proviso
Sec 48

to

No deduction of STT.

Capital Gains in
case of Insurance
Claims

If any person receives any money under an insurance claim on account of


damage or destruction of, any capital asset, because of
(i) flood, typhoon, hurricane, cyclone, earthquake or other conclusion of nature
or
(ii) riot or civil disturbance or
(iii) accidental fire or explosion or
(iv) action by an enemy or action taken in combating an enemy (whether with or
without a declaration of war),
then, any profits arising from receipt of such money shall be chargeable to
income-tax under the head Capital gains and shall be deemed to be the income
of such person of the previous year in which such money or other asset was
received and the amount so received shall be deemed to be the full value of the

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Section 45(1A)

Asset purchased before 01.04.1981


If any capital asset has been purchased or constructed before 01.04.1981, in that
case cost shall be considered to be the cost incurred or fair market value of the
asset as on 01.04.1981 whichever is higher and further indexed of 1981-82 shall
be used instead of the index of the earlier year.
Indexation is not applicable in case of bonds or debentures except capital
indexed bonds.

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Section 45(2)

Capital Gains in
case of conversion
of capital assets
into
Stock-InTrade

consideration.
The profits or gains arising from the transfer by way of conversion by the owner
of a capital asset into stock-in-trade of a business carried on by him shall be
chargeable to income-tax as his income of the previous year in which such
stock-in-trade is sold or otherwise transferred by him and, for the purposes of
section 48, the fair market value of the asset on the date of such conversion or
treatment shall be deemed to be the full value of the consideration.
Section 45(2) is applicable only if the asset has been converted into stock-intrade w.e.f. 01.04.1984 onwards. If the conversion is prior to 01.04.1984, no
capital gains shall be computed as per Supreme Court decision in Bai Shirinbai
K. Kooka v. CIT (1962)(SC).

Capital gains in
case of transfer of
capital asset by a
depository

Section 45(3)

Capital gains in
case of transfer of
a capital asset by a
person to a Firm,
Association
of
Person or Body of
Individual

Section 45(4)

Capital gains in
case of transfer of
a capital asset by
way of distribution
on the dissolution
of a firm etc.

The profits or gains arising from the transfer of a capital asset by way of
distribution of capital assets on the dissolution of a firm or other association of
persons or body of individuals or otherwise, shall be chargeable to tax as the
income of the firm, association or body, of the previous year in which the said
transfer takes place and the fair market value of the asset on the date of such
transfer shall be deemed to be the full value of the consideration received as a
result of the transfer.

Section 45(5)

Computation
of
capital gains on
compulsory
acquisition of a
capital asset

If any capital asset has been acquired compulsorily by the Government or other
similar agency, capital gains shall be computed in the year in which the asset
was acquired but capital gains so computed shall be taxable in the year in which
the compensation or the part of compensation is first received.
Enhanced Compensation
If the compensation is enhanced by the Court, Tribunal etc., such enhanced
compensation shall be the capital gains of the year in which the enhanced
compensation is received. The cost of acquisition and the cost of improvement
shall be taken to be nil.
Reduced Compensation
If the compensation is reduced subsequently by any Court etc., in such cases
capital gains shall be re-computed taking into consideration such reduced
compensation.
Death of the Transferor
It is possible that the transferor may die before he receives the enhanced
compensation. In that case, the enhanced compensation or consideration will be
chargeable to tax in the hands of the person who receives the same.

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Section 45(2A)

Section 2(22B) Fair Market Value, in relation to a capital asset, meansthe


price that the capital asset would ordinarily fetch on sale in the open market on
the relevant date.
Where any person has had at any time during previous year any beneficial
interest in any securities, then, any profits or gains arising from transfer made by
the depository or participant of such beneficial interest in respect of securities
shall be chargeable to income-tax as the income of the beneficial owner of the
previous year in which such transfer took place and shall not be regarded as
income of the depository who is deemed to be the registered owner of securities
by virtue of section 10(1) of the Depositories Act, 1996, and the cost of
acquisition and the period of holding of any securities shall be determined on
the basis of the first-in-first-out method.
The profits or gains arising from the transfer of a capital asset by a person to a
firm or other association of persons or body of individuals in which he is or
becomes a partner or member, by way of capital contribution or otherwise, shall
be chargeable to tax as his income of the previous year in which such transfer
takes place and the amount recorded in the books of account of the firm,
association or body as the value of the capital asset shall be deemed to be the
full value of the consideration received or accruing as a result of the transfer of
the capital asset.

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Section 49

Ascertainment of
Cost in Specified
Circumstances

A person becomes the owner of a capital asset not only by purchase but also by
several other methods. Section 49 given guidelines as to how to compute the
cost under different circumstances.
(1) In the following cases, the cost of acquisition of the asset shall be deemed to
be cost for which the previous owner of the property acquired it. To this cost,
the cost of improvement to the asset incurred by the previous owner or the
assessee must be added:
(i) on any distribution of assets on the total or partition of a HUF;
(ii) under a gift will;
(iii) by succession, inheritance or devaluation;
(iv) on any distribution of assets on the liquidation of a company;
(v) under a transfer to revocable or an irrevocable trust;
(vi) under any transfer by a holding company to its 100% subsidiary company or
vice versa;
(vii) under any scheme of amalgamation by the amalgamating company to the
amalgamated Indian company;
(viii) by transfer of shares held in an Indian company in a scheme of
amalgamation by the amalgamating foreign company to
the
amalgamated
foreign company;
(ix) by transfer of capital asset by a banking company to a banking institution in
a scheme of amalgamation of the banking company with the banking institution;
(x) Under any such transfer of a capital asset in a business reorganization by the
predecessor co-operative bank to the successor co-operative bank;
(xi) under any such transfer by a shareholder in a business reorganization, of a
capital asset being a share or share held by
him in the predecessor cooperative bank if the transfer is made in consideration of the allotment to him of
any share or share in the successor co-operative bank;
(xii) on conversion of a company into an LLP;
(xiii) on succession of a firm or sole proprietorship concern by a company in a
business carried on by it, fulfilling the condition mentioned in section 47 (xiii)
and section 47 (xiv), respectively;
(xiv) by conversion by an individual of his separate property into a HUF
property, by the mode referred to in section 64(2).
The cost of acquisition of the asset is the cost for which the previous owner
acquired the asset as increased by the cost of any improvement of the assets
incurred or borne by the previous owner or the assessee, as the case may be.
Accordingly. section 2 (42A) provides that in all such cases, for determining the
period for which the capital asset is held by the transferee, the period of holding
of the asset by the previous owner shall also be considered.

Section 50B

Capital gains in
respect of slump
sales

Any profits or gains arising from the stump sale effected in the previous year
shall be chargeable to income-tax as capital gains arising from the transfer of
long-term capital assets and shall be deemed to be the income of the previous
year in which the transfer took place. Short term capital gains-Any profits and
gains arising from such transfer of one or more undertaking held by the assessee
for not more than thirty-six months shall be deemed to be short-term capital
gains [Sub-section (1)].
The net worth f the undertaking or the division, as the case may be, shall be
deemed to be the cost of acquisition and the cost of improvement for the
purposes of sections 48 and 49 in relation to capital assets of such undertaking
or division transferred by way of such sale and the provisions contained in the
second proviso to section 48 shall be ignored [Sub-section(2)].
Every assessee in the case of slump sale shall furnish in the prescribed form
along with the return of income, a report of a chartered accountant indicating the
computation of net worth of the undertaking or division, as the case may be, and
certifying that the net worth of the undertaking or division has been correctly
arrived at in accordance with the provisions of this [Sub-section (3)].

(ii)

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(iii)

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(i)

(ii)
(ii)
Section 50C

Special Provision(i)
for Full Value of
Consideration in
Certain Cases

(ii)

(iii)

Where the consideration received or accruing as a result of transfer of a capital


asset, being land or building or both, is less than the value adopted or assessed
or assessable by any authority of a State Government (Stamp Valuation
Authority) for the purpose of payment of stamp duty in respect of such asset,
such value adopted or assessed or assessable shall be deemed to be the full value
of the consideration received or accruing as a result of such transfer [Subsection (1)].
Where the assessee claims before an Assessing Officer that the value so adopted
or assessed or assessable by the authority for payment of stamp duty exceeds
the fair market value of the property as on the date of transfer and the value so
adopted or assessed of assessable by such authority has not been disputed in any
appeal or revision or no reference has been made before any other authority,
court or High Court, theAssessing Officer amy refer the valuation of the capital
asset to a valuation officer as defined in section 2 (r) of the Wealth-tax SAct,
1957. Where any reference has been made before any other authority, Court or
the High Court, the provisions of section 16A (relating to reference to Valuation
Officer), section 23A (dealing with appealable orders before Commissioner
(Appeals), section 24 (order of Appellate Tribunal), section 34AA (appearance
by registered valuer), section 35 (rectification of mistakes) and section 37
(power to take evidence on oath) of the Wealth-tax Act, 1957, shall, with
necessary modifications, apply in relation to such reference as they apply in
relation to a reference made by the Assessing Officer under sub-section (1) of
section 16A of that Act [Sub-section (2)].
Where the value ascertained by such valuation officer exceeds the value
adopted or assessed or assessable by the Stamp authority the value adopted or
assessed or assessable shall be taken as the full value of the consideration
received or accruing as a accruing as a result of the transfer [Sub-section (3)].
The term "assessable" has been added to cover transfers executed through power
of attorney. The term 'assessable' has been defined to mean the price which the
stamp valuation authority would have, notwithstanding anything to the contrary
contained in any law for the time being in force, adopted or assessed, if it were
referred to such authority for the purposes of the payment of stamp duty.

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(iv)

Explanation I to the section defines the expression "net worth" as the aggregate
value of total assets of the undertaking or division as reduced by the value of
liabilities of such undertaking or division as appearing in the books of account.
However, any change in the value of assets on account of revaluation of assets
shall not be considered for this purpose.
Explanation 2 provides that the aggregate value of total assets of such
undertaking or division shall be as follows :
In the case of depreciable assets : the written down value of block of assets
determined in accordance with the provisions contained in sub-item of item
(i) of section 43 (6) ;
In case of capital assets in respect of which the whole of the expenditure has
been allowed or is allowable as a deduction undr section 35AD : Nil ;
For all other assets : Book value.

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Sec. 10 (37)

EXEMPTOION IN
RESPECT OF
CAPITAL GAINS
IN CASE OF
AGRICULTURAL
LAND

In case of an assessee-being an individual or a Hindu Undivided family,


-any income chargeable under the head "Capital gains"
-arising land the transfer of agricultural land, where(i) such land is situated in any area referred to in item (a) or item (b) of
sub-clause (iii) of clause (14) of section 2; and
(ii) such land, during the period of two years immediatediately preceding
the date of transfer, was being used for agricultural purposes by such
Hindu undivided family or individual or a parent of his; and
(iii) such transfer is by way of compulsory acquisition under any law, or a
transfer the consideration for which is determined or approved by the
Central Government or Reserve Bank of India; and
(iv) such income has arisen from the compensation or consideration for
such transfer received by such assessee on or after the 1st day of April,
2004.
Explanation-For the purposes of this clause, the expression "compensation
or consideration" includes the compensation or consideration enhanced or
further enhanced by any court, tribunal or other authority.
Explanation; "Population" to mean population according to the last
preceding census of which the relevant figures have been published before
the first day of the previous year.

Income Tax

(a) the transaction of sale of such equity share or unit is entered into
on or after 1.10.2004 and

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13

EXEMPTION IN
RESPECT OF
LONG TERM
CAPITAL GAINS
IN CASE OF
SPECIFIED
SECURITIES

Page

Sec. 10(38)

Agricultural Land situated in rural area is not a capital asset and no


capital gains shall arise on transfer of agricultural land situated in rural
area. In case the agricultural land situated in rural area is transferred by
way of compulsory acquisition under any or under a transfer the
consideration for which is determined or approved by Central
Government or Reserve Bank of India, no capital gains shall arise.

Agricultural land situated in urban area is a capital asset. Section 10


(37) exempt the capital gains arising from transfer of agricultural land
situated in urban area if the following conditions are cumulatively
satisfied:
o Assessee is an individual or Hindu Undivided Family.
o Assessee transfers the agricultural land situated in urban area.
o Such land is held as capital asset and is not held as stock-in-trade.
o Such land was being used for agricultural purposes by such HUF or
individual or a parent of the individual during the period of two years
immediately preceding the date of transfer.
o The transfer takes place by way of compulsory acquisition under any
law or the transfer is the one for which the consideration is determined
or approved by the Central Government or the RBI.
o The compensation or consideration for the transfer is received by
the assessee on or after 1.04.2004.
o Capital gains whether long term or short-term are exempt.
o Capital gains computed with reference to the original
compensation as well as the capital gains computed with reference
to enhanced compensation are exempt.
The following income shall be exempt from tax from Assessment Year 2005-06:
Any income arising from
- the transfer of a long-term capital asset
- being an equity share in a Company or
- a unit an equity oriented fund where-

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(b) such transaction is chargeable to securities transaction tax.


Explanation-For the purpose of this clause, "equity oriented fund" means a
fund(i) Where the investible funds are invested by way of equity shares in domestic
companies to the extent of more than 65% of the total proceeds of such fund;
and
(ii) which has been set up under a scheme of a Matual Fund specified under
section 10)23D).
Provided that the percentage of equity shareholding of the fund shall be
computed with reference to the annual average of the monthly averages of the
opening and closing figures.
"Equity oriented fund" means a fund(i)
where the investible funds are invested by way of equity shares in
domestic companies to the extent of more than 65% of the total proceeds of
such fund; and
(ii)
which has been set up under a scheme of a Mutual Fund specified
under section 10(23D).

the asset is a long term capital asset;

the gains arise from sale of the capital asset;

the transaction of sale is entered into on or after 1.10.2004.

such transaction is chargeable to Securities Transaction Tax (STT);

Income Tax

AY 14-15

Chapter : Capital Gains

Page

(Amendment by Finance Act, 2012).


Sale of unit of an equity oriented fund to the Mutual Fund.
The exemption is available only if the sale transaction is chargeable to STT. In
respect of equity shares, STT is payable only in respect of transactions on a
recognized stock exchange in India. Also as per Finance Act 2012, STT is also
payable on sale of unlisted equity shares under an offer for sale to public
included in public offer. Hence, the exemption shall not be available to capital
gains arising pursuant to buyback, sale of rights entitlement, delisted shares,
negotiated deals, etc.

14

POINT TO BE NOTED:

The exemption is available to all assesses including Foreign


institution Investors and non-residents.

The exemption is available to an investor who holds the equity


shares/units of Equity Oriented Fund as capital assets and not as
stock-in-trade. Hence, assesses claiming exemption will have to
establish that they were holding the equity share/unit of Equity
Oriented Fund as capital asset and not stock-in-trade.

The exemption is not available to securities other than equity shares


and units of equity oriented funds. Thus, it does not cover other types
of securities such as preference shares, debentures, deep discount
bonds, units of debt Mutual Fund, etc.

The exemption is available if the sale transaction is chargeable to


securities transaction tax. Securities transaction tax applies to the
following :
(i) sale of Equity shares in a company where the transaction of such
sale is entered into in a recognized stock exchange.
(ii) sale of unit of an equity oriented fund where the transaction of
such sale is entered into in a recognized stock exchange.
(iii) Sale of unlisted equity shares by any holder of such shares under
an offer for sale to the public included in an initial Public offer and
where such shares are subsequently listed on recognized stock
exchange.

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The acquisition need not be through a recognized stock exchange.


Loss from sale of securities-The section exempts any income arising from the
transfer of a specified security. If income from a particular source is altogether
exempt from tax, then loss from that source cannot be set off against income
from a different source or income under a different head, Hence, a loss arising
on sale of specified securities satisfying the conditions of section 10 (38) is not
eligible for set off against taxable gains under section 70 or carry forward and
set off under section 74. Such loss shall have no tax treatment.
SECURITIES TRANSACTION TAX (STT)
AMENDMENT BY FINANCE ACT, 2012
Securities transaction Tax shall be levied on the sale of unlisted equity shares by any holder of such shares under an offer for
sale to the public included in an initial Public offer and where such shares are subsequently listed on a recognized stock
exchange.
Balance Sheet of Tulip Ltd.
(Rs. In crores)
Liabilities
Amount (Rs.)
Assets
Amount (Rs)
50 Crores Equity shares of Rs 10
500 net Assts
2,500
2000
Reserve & Surplus
TOTAL
2,500
TOTAL
2,500
Company Tulip Ltd. comes out with a public issue of 30 crores shares at an issue price of Rs 50 (Rs. 10 plus Rs. 40
premium). The terms of issue are:
(a) Fresh issue of 20 crore share @ Rs. 50 each
(b) Promoters will offer 10 crore shares to the public @ Rs. 50 each. In other words, in the public offer, promoters will offer
their 10 crore shares to the public at aprice of Rs. 50 each and these 10 crore shares will form part of the public issue.

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15

After the public issue all 70 crore shares will be listed on the stock exchange.
As per Finance Act, 2012 the seller i.e. promoters shall pay STT @ 0.20% of sale price i.e. @ 20% on 500 crores (10 crores
shares @ Rs. 50 each)
As per Finance Act, 2012, the Lead Merchant Banker appointed by the Company shall collect STT from seller i.e. promoters
and deposit with the Government.
Point to be noted :
1. As per section 10(38), the Long Term capital Gains on above sale shall be exempt.
2. As per section 111A, the Short Term Capital Gains on the above sale shall be taxable @ 15%.

Income Tax

AY 14-15

Chapter : Capital Gains

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Sec 111A

Tax on STCG

Where the total income of an assessee includes any income chargeable under the
head "Capital gains", arising from the transfer of a short-term capital asset, being
an equity share in a company or a unit of an equity oriented fund and the
following conditions are fulfilled(a) the transaction of sale of such equity share or unit is entered into on or after
1.10.2004;
(b) such transaction is chargeable to securities transaction tax;
(c) such equity shares are transferred through a recognized stock exchange or such
units are transferred through a the tax payable by the assessee on the total
income shall be computed as under(i) on such short-term capital gains-15%; and
(ii) on the balance amount of the total income-special rates or normal as
applicable.
However, in the case of an individual or a Hindu undivided family being a
resident, where the total income as reduced by such short-term capital gains is
below the maximum amount which is not chargeable to income-tax, then, such
short-term capital gains shall be reduced by the amount by which the total income
as so reduced falls short of the maximum amount which is not chargeable to
income-tax and the tax on the balance of such short-term capital gains shall be
computed at the rate of 15%.

Sec 112

Sec 47

Tax on LTCG
Tax on LTCG in case
of NR or Foreign
Company
First Proviso to Sec
112

Reverse Mortgage

No deduction under chapter VIA : Further, where the gross total income of an
assessee includes any short-term capital gains referred to above, the deduction
under Chapter VIA shall be allowed from the gross total income as reduced by
such capital gains.
20%
10% of LTCG on UNLISTED SECURITIES without giving effect to the first
proviso & second proviso to Sec 48.
10% on the following without indexation:
-Listed Securities
-Units
-ZCB
Note: Assessee shall go with lower of the following on LTCG:
1- LTCG : 20% with indexation
2- LTCG : 10% without indexation on abovementioned capital assets.
Reverse Mortgage shall not be considered to be transfer for the purpose of capital
gain.
Under reverse mortgage, an individual can mortgage his house property to the
bank and the bank shall grant a loan against the security of house property and
such loan shall be given in monthly installments and the amount so received shall
not be considered to be income of the mortgagor under section 10(43).
After the death of the mortgagor the bank shall have right to sell off the property
and shall adjust loan and interest and shall compute capital gains for the deceased
person and shall pay tax to the government.

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In general, the mortgagor repay the loan in installments but in this case mortgagee
i.e. bank is paying installment to the mortgagor and hence it is called reverse
mortgage.

16

The purpose of the scheme is to make available regular amount to the persons
who do not have regular income but are the owners of the house property.

Income Tax

AY 14-15

Chapter : Capital Gains

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