Income Tax Act, is the only Act in which there are bound to change in Budget of Central Government, every year. We know that there are FIVE heads of Income under the Income Tax Act since so many years and accordingly income is to be calculated. These heads are as under:

1. Salary Income: Under this head only Salary Income of an assessee is to shown. One thing we should remember that under this head income earned by person must be on the relationship of Employer and Employee. In partnership firm partners are receiving remuneration but there is no relation of employer and employee, hence this will not fall under the head Salary.

Capital Gain – Meaning of Capital Assets & Transfer of Assets

2. Income from House Property: Any income received from House property consist of building or land appurtenant thereto will fall under this head. Income from open plot of land will not fall under this head, as there is no building appurtenant thereto.

3. Profit and Gains of Business OR Profession: Definition of Business u/s 2(13) includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture and Profession is given u/s 2(36) to include vocation or profession which calls for an intellectual or manual skill falls under this head.

4. Capital Gains: Capital gains means any profit or gain arising from the transfer of a capital asset.

5. Income from Other sources: Any income which does not fall under above 4 heads will considered under this head.

Out of above 5 heads of income, we are going to discuss about 4th head i.e. Capital gain. Section 45 to 55A says about Capital gain income. Under this head there are two important words Capital Assets and Transfer of Assets. Which assets are to be considered and when it be considered as transfer.  

CAPITAL ASSETS:

As per Section 2(14) of the Income Tax Act, 1961 “capital asset” means:

(i) property of any kind held by an assessee, whether or not connected with his business or profession; including movable or immovable assets

(ii) any securities held by Foreign Institutional Investor (as define in the explanation (a) to Section 115AD) which has been invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992.

As per amendment made by Finance Bill 2021, from 1st April, 2021 Unit Linked Insurance Policy, which was not considered as income u/s 10(10D) of the Act, is now considered as capital assets, if it has been purchased after 1st February, 2021 and annual premium is more than Rs. 2,50,000.

Capital Assets does not include following:

01. Any stock-in-trade, consumable stores raw material to be used for Business or Profession (other than securities);

02. Any personal effect, like Furniture, wearing apparel, motor car, air conditioner, refrigerator etc., held for personal use by the assessee or by any members of the family dependent on him. However following assets are to be considered as capital Assets,

  • Any kind of Jewellary including ornaments of gold, silver, platinum, diamond,
  • Archaeological collection,
  • Drawings, paintings, sculptures and any work of art,
  • Wearing apparel having diamond or gold button,
  • Any gold, silver, diamond items fitted to furniture.

03. Agriculture land:

  • Situated in India, not being land situate:

i) In any area within the jurisdiction of a municipality or a cantonment board which has a population of not less than 10,000; or

ii) In any area within the distance measured aerially: (a) not being more than 2 kilometers, from local limits of any municipality or cantonment board referred to in item (i) above and which has a population of more than 10,000 but not exceeding 1,00,000; or (b) not being more than 6 kilometers, from the local limits of any municipality or cantonment board referred to in item (i) above and which has a population of more than 1,00,000 but not exceeding 10.00.000; or (c)not being more than 8 kilometers from the local limits of any municipality or cantonment board referred to item (i) above and which has a population of more than 10,00,000. Please remember that population means the population according to the last preceding census of which the relevant figures have been published before the 1st day of the previous year.

04. Bond issued by the Central Government:

  • 5% Gold Bonds, 1977;
  • 7% Gold Bonds, 1980;
  • National Defense Gold Bonds, 1980;
  • Special Bearer Bonds, 1991;
  • Gold Deposit Bonds issued under the Gold Deposit Scheme,1999;
  • Deposit certificates issued under the Gold Monetization Scheme, 2015

Transfer of Assets: Section 2(47):

“ Transfer” in relation to Capital asset, includes the sale, exchange or relinquishment of the asset, or the extinguishment of any rights therein or the compulsory acquisition thereof under any law or 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; or the maturity or redemption of a zero coupon bond.

Transfer of movable property is complete when delivery or possession is complete.

Transfer of immovable property includes possession of immovable property given without registration of conveyance deed; and also transactions in agreements to buy or sell any immovable property or any rights thereon.

From the above one can understand that following kinds of transaction are to be considered as transfer.

  • Sale of asset, Exchange of asset and relinquishment of right from asset, though the person who relinquish the right, did not get any amount.
  • Extinguishment of right from asset.
  • Compulsory acquisition of asset under any law. Corporation or Government may acquire any asset for furtherance of any public project. For metro rail project many assets are being acquire by corporation, for bullet train project government acquire land. In acquisition of asset, there is no choice of the owner of the asset.
  • Transfer of asset in to stock in trade is not a transfer, but when asset is sold, will considered as transfer.

Following transactions are not considered as Transfer:

  • Distribution of assets by a company to its shareholders on its liquidation.
  • In the case of HUF, at the time of total or partial partition, distribution of assets are not considered as transfer.
  • Any transfer of a capital asset under a gift or by will or an irrevocable trust.
  • Any transfer of a capital asset by a company to its subsidiary company and by subsidiary company to main company, provided the transferee is an Indian Company and the entire share capital of the subsidiary company is held by the parent company or its nominees.
  • Any transfer of asset, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamating company, if the amalgamated company is an Indian company.
  • Any transfer of agriculture land in India before 1st March, 1970
  • Any transfer of capital asset, being any work of art, archaeological, scientific or art collection, book etc., to Government or the National Museum, National Art Gallery, National Archives or a University or any notified public museum or institution.
  • Any transfer by way of conversion of bond or debenture-stock or deposit certificates in any form, of a company in to shares or debenture of that company.
  • Any transfer of capital asset including intangible asset by a firm/sole proprietary concern to a company in certain cases.
  • A member of a recognized stock exchange in India transfers his membership card(right), for acquisition of shares and trading or clearing rights acquired by him in the same stock exchange, in accordance with a scheme for demutualization or corporatization approved by the SEBI.
  • Any transfer capital asset in a transaction of reverse mortgage under notified scheme.
  • Any transfer by way of conversion of preference shares of a company  in to equity shares of that company.

Over and above there are other transactions, which are not considered as transfer for calculation of Capital Gain. It is advisable to refer these two definition of Capital Assets and Transfer of Capital assets before calculation of Capital Gain on transfer of capital assets.

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