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Head of Income: Capital Gains

 Head of Income: Capital Gains



Whenever we listen to the word capital, a sudden surge of mental block or brain fogging is associated with it. We think a big company, with lots of assets, or to put in simpler words things, which it will sell and whatnot.

        However, what if a told you that it is a simple concept which can be understood by an Eighth Grade student who would learn profit and loss, selling price and cost price etc.

Feeling confused about how it can be?

I guarantee you, that this blog would work wonders if read with a view just as an Eighth Grade student, who would learn Profit and Loss without much burden on his head. 

So put the thinking cap on, and let us get started.

Introduction

So what are capital assets?

Capital Assets are defined under Section 2(14) of the Income Tax Act, 1961. Capital Assets mean property of any kind held by the assessee whether it is connected with his business or profession or not. 

The term 'assets' includes all kinds of properties, whether movable or immovable, tangible or intangible, fixed or changing.

        Any securities held by a Foreign Institutional Investor who has invested in such securities shall also become a part of Capital Assets.

According to Section 55(2), the following are also capital assets:

  1. Goodwill of a business or a trademark or brand name associated with the business.
  2. Right to subscribe to right shares or any other security.
  3. Tenancy Rights, Stage carriage permissions or Loom Hours.
  4. A right to manufacture, produce or process any article or thing.
However, the following items are not termed as Capital Assets for the purpose of this head of income.

  1. Stock-in-trade: Consumable stores or Raw materials held for the purpose of the business or profession of the assessee.
  2. Personal effects of the assessee, namely wearing apparel, furniture etc. held by him either for his personal use or for the use of his family members dependent on him.
                However, the following items meant for personal use are treated as capital assets and any profit on their sale is taxable.

a) Archaeological Collections
b) Drawings
c) Paintings
d) Sculptures
e) Any work of Art
f) Jewellery 

Agriculture land in India
However, it does not include any land situated
- in any area which falls within the jurisdiction of a Municipal or Cantonment Board, having a population of not less than 10000 according to the published figures of the last preceding census.
- within the area measured aerially specified below:
  • not being more than two kilometres from the local limits and which has a population of more than ten thousand but not exceeding Rs. One Lakh
  • Not being more than six kilometres from the local limits and which has a population more than eight kilometres from the local limits 
  • 6 1/2 Gold Bonds, 1977
  • 7% Gold Bonds, 1950 
  • National Defence Gold Bonds, 1980
Charging Section: Section 45(1) 
Transfer of assets should be done in the previous year. Its assessment would be done in the assessment year.

Conditions to fulfil to qualify as a capital asset to be chargeable under Section 45(1)

1. There must be a capital asset.
2. The capital asset must be transferred. 
3. Such a transfer should take place in the previous year.
3. Profit or gain should arise from such a transfer.
4. Such a profit or gain should not be exempted under Section 54, 54B, 54D, 54EC, 54F, 54G, 54GA.


Types of capital Assets

There are two types of Capital Assets, these are short term capital assets and long term capital assets.

Short term Capital Assets [Section 2(42A)]
A capital asset which is not held by the assessee for more than 36 months would be known as a short term capital asset. 
        However, we see that the following assets would be termed short term capital assets if they are not held for more than 12 months. These include:
  1. Equity or preference shares (Listed on a recognised stock exchange in India)
  2. Any other securities listed in the recognised Stock Exchange in India.
  3. Units of the Unit Trust in India or units of Mutual Fund specified under Section 10(23D)
  4. Zero-coupon bonds
            The period for holding the unlisted equity and preference shares is of 24 months.


Long term Capital Assets [Section 2(29A)]
It means the capital gains which are held for a period of more than 36 months. However, we see that in the case of shares, bonds or equity such a time period would be reduced to 12 months. Such capital gains which would fulfil these criteria would be called the long term capital gains.

What is transfer under Capital Gains u/s 45(1)?

However, as we have seen that thee should be a transfer of the capital assets. It is important to first understand what is 'transfer'.

        The meaning of transfer of capital assets is explained under section 2(47). The term transfer means:
  • The sale, exchange, relinquishment of the capital assets
  • The extinguishment of any right therein
  • The compulsory acquisition thereof under any law
  • The 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 as conversion or treatment
  • any transaction involving the allowing of the possession of any immovable property to be taken or retained in the part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882.
How is the cost of short term capital assets calculated?

Gross total value of sale

(-) Cost of Acquisition        CoA

(-) Cost of Sale               CoS

(-) Cost of Improvement        CoI

Balance  --------------        ____

Exemptions under Section 54B etc.

Short term Capital Gain [ ---- ] 


How to calculate the long term capital assets? 

   The full value of the sale 

(-) Indexed Cost of Acquisition    ICoA 

(-) Indexed Cost of Sale           ICoS

(-) Indexed Cost of Improvement    ICoI

(-) Expense of transfer 

Balance  --------------            _____

Exemptions under Section 54B etc.

Long term Capital Gain [ ---- ]  


             Where indexation means adjusting the inflation rates with the help of the formula: 


**Note: CII for the Year 2020-21 = 301, 2021-2022 = 307


Case Laws 

Bejoy Kumar Panday vs CIT
In this case it was held that the silver utensils have a personal value attached to them. They do not form the capital assets, as they are used for personal purposes. Therefore, they are not taxable as capital assets.

Dr. Maya Shenoy v. Asst. CIT [2009] 124TTJ (Hyd.)
In this case, it was held that even if there is a part performance completed in the transfer of the possession and ownership of a property, it would be deemed as a transfer in the eyes of Section 2(47) of the Income Tax Act, 1961.

Hussain Lal Puri v. ITO [2013] (Chand.)
In this case, it was held that the complete transfer is not necessarily the condition precedent for the application of Section 2(47) of the Income Tax Act, 1961. It was held that even the part performance or the transfer of ownership for a limited purpose would be considered a transfer in case of Section 47(2) and related to the transfer of capital assets under Section 2(14) of the Income Tax Act, 1961.

Dr. T. Achyuta v. Assistant CIT [2007] 108TTJ (Hyd.)
The assessee entered into a sales cum development agreement with the developer. There was an irrevocable transfer of power of attorney to the other party. It was held that such a transfer shall be a valid one. Here, it was held that such a transfer of property under Section 53A of the Transfer of Property Act, 1882, fell within the scope of Section 2(47)(v) of the Income Tax Act, 1961.

There are various exemptions regarding the heads under Capital Gains. In order to ease the understanding, it is presented in the tabular form below.




Conclusion

From the above discussion, we see that there are various provisions regarding capital gains. The Act is beautifully crafted in a very meticulous manner. We see that today there is a wide debate going on regarding the taxability of cryptocurrency under the head of Capital Gains. 
        What would be your opinion regarding the taxability of cryptocurrency under the head of capital gains, share in the comments below...

Signing off...


Addendum: Difference between drawing and paintings


Addendum: Cryptocurrency can be deemed to be a capital asset if it is purchased for the purpose of investment by a taxpayer.

Gain: 
Receiving an excessive amount of money where a financial instrument is sold for more than its purchase price. This is referred to as a capital gain.

Dividend vs Capital Gains

  • When an investment is made in stocks, two types of financial returns can be enjoyed by the investor; those are dividends and capital gains.
  • Capital gains are defined as the gains that arise from the sale of a capital asset that is used for business purposes or is held for more than one year.
  • Dividends are not considered to be capital gains as they are a form of income received by the shareholder.
  • The tax rate for capital gains will be higher than the tax applied for dividends.

Profits vs Capital Gains

• Profits can be in the form of income or capital gains; which will depend on how the asset is characterized, the period held, and the purpose for which the asset was utilized.

• Capital gains are defined as the gains that arise from the sale of a capital asset that is used for business purposes or is held for more than one year.

• Income, on the other hand, refers to any funds inflow that arises from the sale of an asset which is not considered to be a capital asset.


Gain and profit are the terms sometimes used interchangeably but there is an appropriate difference between these two. Let's go through the meaning of these two first.


Gain-A profit that arises from events or transactions which are incidental to business such as the sale of fixed assets, winning a court case, or appreciation in the value of an asset.

Profit- The excess of revenues of a period over its related expenses during an accounting year is termed as profit. Profit increases the investment of the owners.

From the above meaning of gain and profit, it is clear the profit that arises from events incidental to business or non-recurring in nature called gain and profit that arises with business operation activity or with those activities which are recurring in nature called the profit. 



Profit: Income derived from the regular business activity, by deploying capital labour and time. In other words, it is the return on the capital employed after deducting all working capital and fixed expenses usually appears on the liabilities side of the balance sheet.

Gain: Income derived on investment over a period of time not falling under regular business activity. It is the return derived on investment.



Further reading

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