1. CAPITAL GAINS
Meaning: (Acc. To sec 54)
“Any profits or gains arising from the transfer of a capital asset effected in the previous
year shall be chargeable to income-tax under the head Capital gains.”
Basically, it is a profit that results from a disposition of a capital asset, such as stock, bond, etc.
The gain is the difference between a higher selling price and a lower purchasing price.
E.g.: ‘A’ a dealer in stock exchange buys a stock of 100 shares at Rs.100000. On the next day he
sold the same at Rs. 120000. His capital gain is 20000 (120000-100000).
Meaning of Capital Assets:
Sec.2(4) defines capital assets as “property of any kind held by an assessee whether or
not connected with his business or profession. It means that every asset that is related to his
profession or business is a capital asset. And the assets that are used for persona purposes does
not come under capital asset under. E.g.: A car owned and used by the assessee and his family is
exempted since it is not related to his business or profession.
Types of Capital Assets:
a) Short term Capital Assets: An asset which is held by an assessee for not more than 36
months immediately preceding the date of its transfer is termed as a short term capital
asset (Sec 2 (42-a)). But the securities listed in any stock exchange, units of U.T.I, units
of mutual funds shall be treated as long term capital assets if held for 12 months or more.
Any gain or loss accruing on such asset shall be known as short term capital gain or loss.
b) Long term Capital Assets: The assets which are held by the assessee for a period
exceeding 36 months immediately preceding the date of transfer, are called long term
capital assets. Any gain or loss accruing on such asset shall be known as long term capital
gain or loss.
Conditions of Chargeability:
a) There should be a capital asset
b) Capital Assets should be transferred during the previous year
c) Gains should be arisen
d) Such Gains are chargeable to income-tax.
2. Transfer of Capital Assets:
Transfer includes:
a) the sale, exchange or relinquishment of the asset
b) the extinguishment of any right therein
c) the compulsory acquisition thereof under any law
d) In a case where the asset is converted by the owner thereof into, or is treated by him as,
stock-in-trade of a business carried on by him, such conversion or treatment.
Exchange of Capital Asset:
a) It involves mutual transfer of ownership of one thing for the ownership of another.
b) The title of one property is passed in consideration of the title of another title.
c) Examples :Conversion of preference shares to ordinary shares
d) Exchange of title in land for ownership flat
Relinquishment
a) It takes place when the owner of the asset surrenders his rights in the asset in favour of
another person.
b) The property continues to exist, but interest therein of the owner is either given up or
abandoned.
c) Examples: a) The transfer of rights to subscribe the shares in a company under a ‘Right
issue’ to a third person.
b)surrenders one’s right in a certain portion of land or surrenders one’s right
to build flats etc.
Exclusion from Capital Asset under sec 2 (14):
a) Stock in trade, Raw materials held for business.
b) Personal effects including wearing apparel and furniture.
c) Agricultural Land
d) Certain specified gold bonds.
e) Special Bearer Bonds
f) Gold Deposit bonds
INDEXATION: It is the working out of the value of asset based on cost inflation index.
E.g.: Cost Inflation Index for the year 1981-82 is 100 and CII for 2012-13 is 582. If an assessee had
purchased an asset during the year 81-82 for a sum of 100 but the same asset value will be 582 during
2012-13 based on cost inflation index.
