1. Ingredients of Section 45(1).
Section 45(1) of the Income tax Act.1961 provides than any profit and gains arising from the transfer of a capital assets effected in previous year shall be chargeable to tax under the head of capital gain and shall be deemed to be the income of the previous year in which the transfer took place.
2. Three Condition for chargeability of capital gains:
(a) There exists a capital assets.
(b) There is effected transfer of such asset during the previous year.
(c) There shall arise profit and gains from such transfer.
Capital gains tax is leviable on transfer of a capital assets. The assets should be a capital assets as defined in section 2(14) of Income tax act. 1961 and transfer thereof should be in accordance with any of the modes of transfer as laid down in section 2(47) of Income tax act. 1961.
These primary conditions must be fulfilled or satisfied before levying capital gains as held by Hon’ble Madras High court in C A Natrajan V CIT (1973) 92 ITR 347 (Mad).
As held by Hon’ble Culcatta High Court in CIT v Chunilal Prabhudas & Co (1970) 76 ITR 566 (Cal) there have four primary tests in order that any amount is taxable as capital gains under section 45, namely
(i) Profit or gain (ii) Capital asset (iii) such profit or gain arising out of any (iv) sale, exchange or transfer by any modes.
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“Capital Asset” ( Section 2(14) )
Section 2(14) provides a very vide definition of the expression capital asset accordingly, capital assets means.—
a. Property of any kind held by an assessee, whether or connected with his business or profession.
b. Any securities held by a foreign Institutional investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act,1992.
However, following asset are not capital assets-
(i) Stock in trade (Finished goods,Raw Material WIP etc. )
(ii) Personal effects (Including wearing apparel and furniture)
(But excluding : a) Jewellary, b) Archaelogical collections c) drawings d) Paintings, e) sculptures or f) any work of art held or personal use by the assessee or any member of his family
(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 apprarel.
(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.
(iii) Agricultural land in India, provided it is not situated (From AY 2014-2015)
(a) in any area which is comprised within situated the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified are committee, town area committee, town committee or by any other name) or a cantonment board and which has a population of less than ten thousand; or
(b) in any area within the distance, measured aerially,-
(i) not being more than two kilometers, from local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or
(ii) not being more than six kilometers, from local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not exceeding ten lakh; or
(iii) not being more than eight kilometers, from local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten lakh .
For the purpose of section 2(14)(iii) “ 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.
(iv) 6.5 per cent Gold Bonds,1977; 7 per cent Gold Bonds,1980 and National Defence Gold Bonds 1980 issued by the Central Government.
(v) Special Bearer Bonds,1991 issued by Central Government.
(vi) Gold deposit Bond issued under Gold Deposit Scheme, 1999 notified by the Central Government. The Finance Act, 2016 has amended section 2(14) from the assessment year 2016-17 so as to provide that deposit certificates issued under the Gold Monetization Scheme, 2015 shall not be treated as capital assets.
Transfer [Section 2(47)]
The term transfer in relation to capital asset in inclusively defined by clause 47 of section 2 of Income tax Act. Thus transfer in relation capital asset includes:
(i) the sale, exchange or relinquishment of the asset; or
(ii) the extinguishment of any right therein; or
(iii) the compulsory acquisition thereof under any law; or
(iv) in a case where the asset in 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
(iva) the maturity or resumption of a zero coupon bond.
(v) 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
(vi) any transaction ( whether by way of becoming a member of, or acquiring shares in, a co-operative 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.
Therefore, all the following ways of parting with capital assets for consideration are brought within the taxation net of capital gains;
(a) Sale,
(b) Exchange,
(c) Relinquishment
(d) Compulsory acquisition
(e) Extinguishment of any right in the assets,
(f) Convertion of capital asset into stock in trade
(g) Maturity or redemption of zero coupon bond,
(h) Transfer of rights in the immovable property only through agreement to sell and giving possession thereof, and
(i) Transfer of immovable property by means of agreement, transfer of shares or arrangement of enabling the the enjoyment thereof.
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