Capital Gain 8

STUDY NOTE - 8
CAPITAL GAINS
This Study Note includes

• Meaning of Capital Asset
• Meaning of Transfer
• Various Provisions of the Income Tax Act for computation of income under the
head “Capital Gain”
• Exemptions for Capital Gain
INTRODUCTION
Capital Gain means any profit arising from the transfer of a capital asset. Certain exemptions from tax
have been provided for income form Capital Gain. To understand the topic, it is necessary to study (i)
Meaning of ‘Capital Asset’ (ii) What is ‘Transfer’, (iii) Computation of Capital Gain and (iv) What
exemptions are prescribed?
THE PROVISIONS RELATING TO COMPUTATION OF CAPITAL GAINS AND ITS

CHARGEABILITY ARE BROADLY CLASSIFIED AS UNDER
Sections
Definitions 2(14), 2(47), 2(22B), 2(29A), 2(29B), 2(42A), 2(42B),
2(42C)
Computation of capital gains, Cost of
Acquisition & Full Value consideration 48, 49, 50,50A, 50B, 50C, 51, 55
Exemption from capital gains 54 to 54H
Special provisions 47, 47A, 55A, 112
Chargeability 45, 46, 46A
8.1 CAPITAL ASSET [Sec. 2(14)]
Transfer of ‘Capital Asset’ gives rise to capital gain. If property transferred is not a capital
asset, capital gain cannot result.
Applied Direct Taxation 109

Capital Gains
‘Capital asset’ means property of any kind except the following:

(a) Stock-in-trade, consumable stores or raw-materials held for the purpose of Business or
Profession.
(b) Personal effects like wearing apparel, furniture, motor vehicles etc., held for personal use
of the tax payer or any member of his family. However, jewellery, even if it is for personal
use, is a capital asset.
(c) Agricultural land in India other than the following:
(i) Land situated in any area within the jurisdiction of municipality, municipal corpora-
tion, town area committee, town committee, or a cantonment board which has popu-
lation of not less than 10,000 according to the figures published before the first day of
the previous year based on the last preceding census.
(ii) Land situated in any area around the above referred bodies up to a distance of 8 kms.
from the local limits of such bodies as notified by the Central Government.
(d) 6½ per cent Gold Bonds, 1977, 7 per cent Gold Bonds, 1980, National Defense Gold Bonds,
1980 and Special Bearer Bonds, 1991 issued by the Central Government.
(e) Gold deposit bonds issued under the Gold Deposit Scheme, 1999 notified by the Central
Government.
Though there is no definition of ‘property’ in the Income-tax Act, it has been judicially held
that a property is a bundle of rights which the owner can lawfully exercise to the exclusion of
all others and is entitled to use and enjoy as he pleases provided he does not infringe any law
of the State. Property can be movable (gold, jewellery, furniture, car) or Immovable (land,
building, house). It can be tangible (gold, jewellery, furniture, car, land, buildings) or intan-
gible (goodwill, brand, copyrights. It can be corporal or incorporeal. All the properties are
assets, if it does not fall in the aforesaid exceptions stated in clause (a) to (e), above. Thus, if an
assessee sells his household furniture or utensils, the difference in sales price and cost will not
be regarded as capital gain because these are personal effects and are not covered in the defini-
tion of capital asset. Similarly, sale of stock does not result into capital gain, but as one is aware
it results into profits or gains from business.
Case Law :
Under the charging section, the crucial requirements are that there must be a transfer and the
transfer must be of a capital asset. The implication is that at the time of the transfer the subject
of the transfer must be a capital asset. - M. Venkatesan v. CIT 144 ITR 886 (Mad.).
A contract for sale of land is capable of specific performance. It is also assignable. A right to
obtain conveyance of immovable ‘property’ is clearly ‘property’ as contemplated by section
2(14) - CIT v. Tata Services Ltd. 122 ITR 594 (Bom.).
A business as a going concern would constitute a capital asset within the meaning of section 45
- CIT v. F.X. Periera & Sons (Travancore)(P.) Ltd. 184 ITR 461 (Ker.).
Route permits are capital assets - Route permits for plying buses issued by authorities under
the Motor Vehicles Act are property for the deprivation of which compensation is payable to
the permit holder and, hence, such route permits are capital assets in the hands of the assessee-
110 Applied Direct Taxation

transport company - Addl. CIT v. Ganapathi Raju Jegi, Sanyasi Raju 119 ITR 715 (AP)
Only those effects can legitimately be said to be personal which pertain to the assessee person.
In other words, an intimate connection between the effects and the person of the assessee must
be shown to exist to render them ‘personal effects’. The enumeration of articles like wearing
apparel, jewellery and furniture mentioned by way of illustrations in the definition of ‘per-
sonal effects’ also shows that the Legislature intended only those articles to be included in the
definition which were intimately and commonly used by the assessee - H.H. Maharaja Rana
Hemant Singhji v. CIT 103 ITR 61.
Where certain land was situated in the most important and busiest thoroughfare in city and
land was surrounded on all sides by industrial and commercial buildings, and no agricultural
operations were being carried on any land nearby, the mere fact that vegetables were being
raised thereon at the time of the sale or for some years prior thereto, could not change the
nature and character of the land from non-agricultural to agricultural - CIT v. Gemini Pictures
Circuit (P.) Ltd. 85 Taxman 594/220 ITR 43.
TYPES OF CAPITAL ASSETS AND CAPITAL GAINS
For the purpose of taxation assets are divided into two categories viz. (i) Long Term Capital
asset and (ii) Short Term Capital asset.
(a) Long Term Capital Asset [Sec. 2(29A)]: It is defined as a capital asset which is not a short-
term capital asset.
If capital asset is held by the assessee for more than thirty-six months it becomes a Long-term
capital asset. In the case of shares in a company, securities listed in a recognised stock exchange
in India, units of Unit Trust of India or units of Mutual Fund specified u/s. 10(23D) as the case
may be, such an asset will be treated as a long term capital asset if it is held for more than
twelve months.
(b) Short Term Capital asset [Sec. 2(42A)]: If capital asset held by an assessee for not more
than thirty-six months immediately preceding the date of its transfer is known as short term
capital asset. However, the following assets shall be treated as short term capital asset if they
are held for not more than 12 months preceding the date of transfer.
(i) Equity or preference shares held in a company.

(ii) Securities listed in a recognised stock exchange in India.
(iii) Units of the Unit Trust of India or units of a Mutual Fund specified u/s. 10(23D).
PERIOD OF HOLDING IN CERTAIN CASES
Normally the period is counted from the date of acquisition to the date of transfer. However, it
has the following exceptions:
(i) in the case of a share held in a company on liquidation the period subsequent to the date
on which the company goes into liquidation would not be considered.
(ii) where the cost of acquisition is to be taken as the cost to the previous owner [Sec. 49(1) e.g.
gift, will, succession, merger, etc.], the period of holding by the previous owner should
also be considered.

Capital Gains
(iii) where the capital asset is the shares of an amalgamated company acquired in lieu of the
shares of the amalgamating company, the period of holding of the shares of the amalgam-
ating company should also be considered.
(iv) where the capital asset is the shares or any other security subscribed by the assessee in a
right issue, or subscribed to by the person in whose favour the assessee renounces his
right, the period should be considered from the date of allotment of such asset.
(v) where the capital asset is the right to subscribe to a rights offer and it is renounced, the
date of offer of the rights should be taken as the date of acquisition.
(vi) where the capital asset is share(s) in an Indian company which has become the property of
the assessee in consideration of a demerger, the period for which the share(s) of the
demerged company were held should also be considered.
(vii) where the capital asset is the financial asset acquired without any payment (e.g. bonus
shares), the period should be considered from the date of allotment of such asset.
(viii) in the case of a capital asset, being any specified security or sweat equity shares allotted
or transferred, directly or indirectly, by the employer free of cost or at concessional rate to
his employees (including former employee or employees), the period shall be reckoned
from the date of allotment or transfer of such specified security or sweat equity shares.
In respect of capital assets other than those mentioned above, the period for which any capital
asset is held by the assessee shall be determined subject to any rules which the CBDT may
make in this behalf.
Case Law :
Bonus shares issued by a company are acquired by a shareholder when they are issued and
they must be taken to be held by shareholder from the date of their issue and not from the date
when the original shares, in respect of which they are issued, were acquired by the shareholder
- Executive of the Will of Late Shri Manecklal Premchand v. CIT 48 Taxman 310/Manecklal
Premchand v. CIT 186 ITR 554.
A member of a housing society becomes owner of flat on date on which he acquires shares in
society and question as to whether flat is a long-term capital asset has to be decided by taking
that date into consideration rather than date of possession of flat - CIT v. Anilaben Upendra
Shah 262 ITR 657134 Taxman 522.
(c) Long Term Capital Gain [Sec. 2(29B)]: Gains arising due to transfer of long term capital
asset, as defined above, are called as long term capital gain.
Any asset on which depreciation is allowed under the Income-tax Act, it is held as short term
capital gain (Section 50).
In respect of long term capital gain, certain concessions like exemption, lower tax rate, deduc-
tion of indexed cost of acquisition are available.
(d) Short Term Capital Gain [Sec. 2(42B)]: Gains arising due to transfer of short term capital
asset, as defined above, are called as short term capital gain.
Short term capital gain is included in taxable total income of the assessee and normal tax rate is
applicable, for income-tax payment..

8.2 TRANSFER [Sec. 2(47)]
Transfer is defined in a much wider sense than as is commonly understood. A layman loosely
calls it ‘sale’. In order to attract capital gains tax, ‘transfer should take place. Meaning of ‘trans-
fer’ includes sale, but it includes many more category of transactions.
‘Transfer’, in relation to capital asset, includes the following:
(i) Sale, exchange or relinquishment of a capital asset. A sale takes place when title in the
property is transferred for a price. The sale need not be voluntary. An involuntary sale like
that by a Court of a property of judgment debtor at the instance of a decree holder is also
transfer of a capital asset.
An exchange of capital asset takes place when the title in one property is passed in consider-
ation of the title in another property.
Relinquishment of a capital asset arises when the owner surrenders his rights in property in
favour of another person. For example, the transfer of rights to subscribe the shares in a com-
pany under any ‘Rights Issue’, to a third person.
(ii) Extinguishment of any rights in a capital asset. This covers every possible transaction
which results in destruction, termination, cessation or cancellation of all or any bundle of
rights in a capital asset. For example, termination of a lease or and of a mortgagee’s inter-
est in a property.
(iii) Compulsory acquisition of the capital asset under any law. Acquisition of immovable
properties under the Land acquisition Act, acquisition of industrial undertaking under
the Industries (Development and Regulation) Act or preemptive purchase of immovable
properties by the Income-tax Department are some of the examples of compulsory acqui-
sition of a capital asset.
(iv) Conversion of a capital asset into stock-in-trade. Normally, there can be no transfer if
the ownership in an asset remains with the same person. However, the Income-tax Act
provides an exception for the purpose of capital gains. When a person converts any capi-
tal asset owned by him into stock-in-trade of a business carried on by him, it is regarded as
a transfer. For example, where an investor in shares starts a business of dealing in shares
and treats his existing investments as the stock-in-trade of the new business, such conver-
sion arises and is regarded as a transfer.
(v) Contract of the nature of Part performance. Normally transfer of an immovable property
worth Rs. 100 or more is not complete without execution and registration of a conveyance
deed. However, section 53A of the Transfer of Property Act envisages situations where
under a contract for transfer of an immovable property, the purchaser has paid the price
and has taken possession of the property, but the conveyance is either not executed or if
executed is not registered. In such cases the transferor is debarred from agitating his title
to the property against the purchaser.

Capital Gains
(vi) Transfer of rights in immovable properties through the medium of cooperative societ-
ies, companies etc. Usually flats in a building and in group housing schemes are regis-
tered in the name of a co-operative society constituted by a number of members. A Com-
pany may be formed with an object of owning a building and shareholders are entitled to
enjoy occupancy of certain tenement. In such circumstances transfer of rights to use and
enjoy the flat is effected by changing the membership of cooperative society or by trans-
ferring the shares in the company.
(vii) Transfer by a person to a firm or other Association of Persons (AOP) or Body of Indi-
viduals (BOI). Normally, firm/AOP/BOI is not considered a distinct legal entity from its
partners or members and so transfer of a capital asset from the partners to the firm/AOP/
BOI is not considered as ‘Transfer’. However, under the Capital gains, it is specifically
provided that if any capital asset is transferred by a partner to a firm/AOP/BOI by way of
capital contribution or otherwise, the same would be construed as transfer.
(viii) Distribution of money or other assets by Company on Liquidation. If a shareholder
receives any money or other assets from a Company in liquidation, the shareholder is
liable to pay capital gains as the same would have been received in lieu of the shares held
by him in the company. However, if the assets of a company are distributed to the share-
holders on its liquidation, such distribution shall not be regarded as transfer by the com-
pany.[ Sec. 46(2)].
(ix) the maturity or redemption of a zero coupon bond.
Case Law :
The definition of ‘transfer’ under section 2(47) is merely inclusive and does not exhaust other
kinds of transfer Sunil Siddharthbhai v. CIT 156 ITR 509 (SC).
A ‘transfer’ of a capital asset takes place when the investiture of title takes place under a law
relating to compulsory acquisition of property Mangalore Electric Supply Co. Ltd. v. CIT 113
ITR 655 (SC).
Transaction of reduction of share capital by company and pro rata distribution of amount/
assets to shareholders amounts to ‘transfer’ within meaning of section 2(47) - CIT v. G.
Narasimhan 102 Taxman 66/236 ITR 327 (SC).
Redemption of preference shares involves ‘transfer’ - Redemption of preference shares by the
company will squarely come within the phrase ‘sale, exchange or relinquishment of the asset’
- Anarkali Sarabhai v. CIT 90 Taxman 509/224 ITR 422 (SC).
An exchange involves the transfer of property by one person to another and reciprocally the
transfer of property by the other to the first person. There must be a mutual transfer of owner-
ship of one thing for the ownership of another - CIT v. Rasiklal Maneklal (HUF) 177 ITR 198/
43 Taxman 259.
A relinquishment takes place when the owner withdraws himself from the property and aban-
dons his rights thereto; it presumes that the property continues to exist after the relinquish-
ment - CIT v. Rasiklal Maneklal (HUF) 177 ITR 198/43 Taxman 259.

TRANSACTIONS NOT REGARDED AS TRANSFER [Sec. 46(1), 47]
Under the Act, certain transactions are expressly excluded from being considered as ‘transfer’.
When any person undertakes transactions of the nature which are nor regarded as ‘transfer’,
capital gain does not arise and no tax becomes payable. The following are categories of such
transactions:
(a) Distributions of assets by companies in liquidation to the shareholders of a company.
[Sec. 46(1)]
(b) (i) distribution of capital assets on the total or partial partition of a HUF.
(ii) transfer of a capital asset under a gift or will or an irrevocable trust except transfer
under a gift or an irrevocable trust, of shares, debentures or warrants allotted by a
company to its employees under Employees’ Stock Option Plan or Scheme;
(iii) transfer of a capital asset by a company to is subsidiary company, if :
(a) the parent company or its nominees hold the whole of the share capital of a
subsidiary company,
(b) the subsidiary company is an Indian company,
(c) the capital asset is not transferred as stock-in-trade,
(d) the subsidiary company does not convert such capital asset into stock-in-trade
for a period of 8 years from the date of transfer, and
(e) the parent company or its nominees continue to hold the whole of the share
capital of the subsidiary company for 8 years from the date of transfer.
(iv) 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,
(b) the holding company is an Indian Company,
(c) the capital asset is not transferred as stock-in-trade,
(d) the holding company does not convert such capital asset into stock-in-trade for a
period of 8 years from the date of transfer, and
(e) the holding company or its nominees continue or hold the whole of the share
capital of the subsidiary company for 8 years from the date of transfer.
(v) in a scheme of amalgamation, transfer of a capital asset by the amalgamating company
to the amalgamated company if the amalgamated company is an Indian company.
(vi) transfer of shares of an amalgamating company, if :–
(a) the transfer is made in consideration of the allotment of share or shares in the
amalgamated company, and
(b) the amalgamated company is an Indian company. [Sec. 47(vii)]
(c) any transfer in a business reorganisation, of a capital asset by the predecessor co-
operative bank to the successor co-operative bank

Capital Gains
d) any transfer by a shareholder, in a business reorganisation, of a capital asset

being a share or shares held by him in the predecessor co-operative bank if the
transfer is made in consideration of the allotment to him of any share or shares in
the successor co-operative bank
(vii) transfer of shares of an Indian Company, by an amalgamating foreign company to
the amalgamated foreign company, if :
(a) at least twenty-five per cent of the shareholders of the amalgamating foreign
company continue to remain shareholders of the amalgamated foreign company
and
(b) such transfer does not attract tax on capital gains in the country, in which the
amalgamating company is incorporated. [Sec. 47(via)]
(c) Sec. 47(viaa): Amalgamation of banking company with the banking institutions.
Any transfer of a capital asset by banking company to banking institution in a
scheme of amalgamation of such banking company with such banking institution
sanctioned and brought into force by the Central Government u/s 45(7) of the
Banking Regulation Act, 1949.
(viii) in a demerger :
(a) transfer of a capital asset by the demerged company to the resulting company, if
the resulting company is an Indian company;
(b) transfer of share or shares held in an Indian company by the demerged foreign
company to the resulting foreign company if :
(i) the share holders holding not less than three fourths in value of the shares of the
demerged foreign company continue to remain shareholders of the resulting
foreign company; and
(ii) such transfer does not attract tax on capital gains in the country, in which the
demerged foreign company is incorporated.
(c) transfer or issue of shares, in consideration of demerger of the undertaking by,
the resulting company to the shareholders of the demerged company. [Sec. 47(vib),
(vic), (vid)]
(ix) transfer of bonds or Global Depository Receipts, purchased in foreign currency, by a
non-resident to another non-resident outside India. [Sec. 47(viii)]
(x) transfer of any work of art, manuscript, drawing, to the Government or a University
or the National Museum, or any such other public museum or institution notified by
the Central Government in the Official Gazette to be of national importance.
[Sec. 47(ix)]
(xi) transfer by way of conversion of bonds or debentures, debenture stock or deposit
certificate in any form, of a company into shares or debentures of that company.

(xii) transfer of membership of a recognised stock exchange made by a person (other
than company) on or before 31.12.1998, to a company in exchange of shares allotted
by that company. However, if the shares of the company are transferred within 3
years of their acquisition, the gains not charged to tax by treating their acquisition
as not transfer would be taxed as capital gains in the year of transfer of the shares.
[Sec. 47(x)]
(xiii) transfer of land of a sick industrial company, made under a scheme prepared and
sanction under the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of
1986) where such sick industrial company is being managed by its workers’
cooperative and such transfer is made during the period commencing from the
previous year in which the said company has become a sick industrial company u/
s. 17(1) of that Act and ending with the previous year during which the entire net
worth of such company becomes equal to or exceeds the accumulated losses.
[Sec. 47(xii)]
(xiv) (i) transfer of a capital asset or intangible asset by a firm to a company as a result of
succession of the firm by a company in the business carried on by the firm; or
(ii) transfer of a capital asset to a company in the course of Corporation of a recognised
stock exchange in India as a result of which AOP/BOI is succeeded in such
company, if
(a) all the liabilities of the AOP or BOI relating to the business immediately before
the succession 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 in the books of the firm on the date of succession,
(c) the partners of the firm do not receive any consideration or benefit, directly or
indirectly, in any form or manner, other than by way of allotment of shares in the
Company and
(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
succession. If the conditions laid down above are not complied with, then the
amount of profits arising from the above transfer would be deemed to be the
Profits and gains of the successor company for the pervious year during which
the above conditions are not complied with.
(e) W.e.f. Assessment Year 2002-2003, the corporatisation of recognised stock
exchange in India is carried out in accordance with a scheme approved by SEBI.
[Sec. 47(iii)].
(xv) Where 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
and capital asset or intangible asset to the company, if :

Capital Gains
(a) all the assets and liabilities of the sole proprietary concern relating to the business
immediately before the succession become the assets and liabilities of the
company.
(b) the shareholding of the sole proprietor in the company is not less than fifty percent
of the total voting power in the company and his shareholding continues to so
remain as such for a period of five years from the date of the succession and
(c) the sole proprietor does not receive any consideration or benefit, directly or
indirectly, in any form or manner, other than by way of allotment of shares in the
company [Sec. 47(xiv)].
(xvi) Transfer in a scheme of lending of any securities under an arrangement subject to the
guidelines of Securities and Exchanges Board of India (SEBI).With effect from
assessment year 2003-04 securities which are subject to guide lines issued by RBI is
also included for this purpose.
(xvii) any transfer in a business reorganisation, of a capital asset by the predecessor
co-operative bank to the successor co-operative bank.
(xviii) any transfer by a shareholder, in a business reorganisation, of a capital asset being a
share or shares held by him in the predecessor co-operative bank if the transfer is
made in consideration of the allotment to him of any share or shares in the successor
co-operative bank.
Case Law :
When a proprietary business is converted into a partnership business by the induction of
partners, there is a transfer of part of the assets at least by the assessee in favour of the
inducted partners. Since the transfer did not result in yielding any profit or gain to the
assessee, no gains should be subjected to tax under section 45 - CIT v. H. Rajan & H. Kannan
236 ITR 42 .
The date of sale or transfer is the date when the sale or transfer takes place, and for the purpose
of determining such a date, entries in the account books are irrelevant - Alapati Venkataramiah
v. CIT 57 ITR 185 .
THE CENTRAL GOVERNMENT OF DIRECT TAXES ISSUED THE FOLLOWING
CIRCULARS IN REGARD TO DETERMINATION OF DATE OF TRANSFER/PERIOD OF
HOLDING ETC. OF CAPITAL ASSET.
Circular No. (i) If securities are transacted through stock exchanges, the date of broker’s
note should be treated as the date of transfer provided the transaction is
followed up by delivery of shares and also the transfer deeds. Similarly, in
respect of the purchase of the securities, the holding period shall be reck-
oned from the dated of the broker’s note for purchase on behalf of the in-
vestors.
(ii) In case the transactions take place directly between the parties and not
through stock exchanges, the Board has clarified that the date of contract of

sale as declared by the parties shall be treated as the date of transfer
provided it is followed up by actual delivery of shares and the transfer of
deeds.
(iii) In cases where the shares are purchased in several lots at different points of
time and are taken delivery of in one lot and are subsequently sold in parts,
in the absence of correlation of the dates of purchase and sale through spe-
cific numbers of the scrips, it is difficult to determine the period of holding
of the shares which are sold in parts. In this retgard, Board has clarified that
First-in-first-out (FIFO) method shall be adopted to reckon the period of
holding. Therefore, the shares acquired first will always be treated as sold
first and the shares acquired last will be taken to be remaining with the
assessee.
(iv) The FIFO method will be applied only in respect of the dematerialised hold-
ings because in the case of sale of dematerialised securities, the securities
held in physical form cannot be construed to have been sold as they con-
tinue to remain in the possession of the investor and are identified sepa-
rately.
(v) In the depository system, the investor can open and hold multiple accounts.
In such a case, where an investor has more than one security account, the
FIFO method will be applied account wise. This is because in case where a
particular account of an investor in debited for sale securities, the securities
lying in his other account cannot be construed to have been sold as they
continue to remain in that account.
(vi) If in an existing account of dematerialized stock, old physical stock is
dematerialised and entered at a later date, under the FIFO method, the ba-
sis for determining the movement out of the account is the date of entry
into the account.
8.3 VARIOUS PROVISIONS OF THE INCOME TAX ACT FOR

COMPUTATION OF INCOME UNDER THE HEAD “CAPITAL
GAIN”
CAPITAL GAIN
Capital gain arises from transfer of a capital asset. Charge over ‘capital gain’ is created by
section 45 r.w.s. 2(24) [defining income] of the Act. Unless expressly exempt under the Act,
capital gain is liable to tax.
Section 45 provides as under:
(1) 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’, and shall be deemed
to be the income of the previous year in which the transfer took place.

Capital Gains
(1A) Apart anything contained in sub-section (1), when any person receives during any previ-
ous year any money under an insurance from an insurer on account of damage to, any
capital asset, as a result of—
(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion 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.
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.
(2) Apart anything contained in sub-section (1), the profits 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. 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 received.
(2A) Where any person has had at any time during previous year any beneficial interest in any
securities, then, any profits arising from transfer made by the depository of such benefi-
cial 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 securi-
ties. 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
(3) 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 indi-
viduals (not being a company or a co-operative society) or otherwise, shall be chargeable
to tax as the income of the firm, 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.
(4) Apart anything contained in sub-section (1), where the capital gain arises from the trans-
fer of a capital asset, being a transfer by way of compulsory acquisition under any law, or
a transfer the consideration for which was determined or approved by the Central Gov-
ernment or the Reserve Bank of India, and the consideration for such transfer is enhanced
or further enhanced by authority, the capital gain shall be dealt with in the following
manner, namely:—
(a) the capital gain computed with reference to the compensation awarded in the first
instance or by the Central Government or the Reserve Bank of India shall be charge-
able as income under the head ‘Capital gains’ of the previous year in which such
compensation or part thereof, was first received and
(b) the amount by which the consideration is enhanced by any other authority shall be
deemed to be income chargeable under the head ‘Capital gains’ of the previous year
in which such amount is received by the assessee;

(c) where in the assessment for any year, the capital gain arising from the transfer of a
capital asset is computed by taking the consideration referred to in clause (a) or, as
the case may be, enhanced consideration referred to in clause (b), and subsequently
such consideration is reduced by any authority, such assessed capital gain of that
year shall be recomputed by taking the consideration as so reduced by authority to be
the full value of the consideration.
Explanation.—For the purposes of this sub-section,—
(i) in relation to the amount referred to in clause (b), the cost of acquisition and the cost
of improvement shall be taken to be nil;
(ii) the provisions of this sub-section shall apply also in a case where the transfer took
place prior to the 1st day of April, 1988;
(iii) where by reason of the death of the person who made the transfer, or for any other
reason, the enhanced compensation or consideration is received by any other person,
the amount referred to in clause (b) shall be deemed to be the income, chargeable to
tax under the head ‘Capital gains’, of such other person.
(6) The difference between the repurchase price of the units referred to in sub-section (2) of
section 80CCB and the capital value of such units shall be deemed to be the capital gains
arising to the assessee in the previous year in which such repurchase takes place or the
plan referred to in that section is terminated and shall be taxed accordingly.
CHARGEABILITY [Sec. 45, 46, 46A]
Any profits or gains arising from the transfer of capital asset effected in the previous year shall
be chargeable to Income-tax under the head ‘capital gains’. Chargeability of capital gains are
analyzed as under:-
(i) Sec. 45
Sec. Mode of transfer Year of chargeability Value of consideration
45(1) Transfer of a capital asset Previous year in which Consideration for the
transfer takes place transfer
45(2) Conversion of a capital Previous year in which Fair market value as on the
asset into stock -in-trade. stock-in-trade is sold. date of conversion.
45(2A) Transfer of securities made Previous year in which Consideration for the
by the depository transfer takes place on transfer and chargeable
FIFO method in case of beneficial owner.
45(3) Transfer of a capital asset Previous year in which The value of the asset by
partner/member to a recorded transfer takes place.
firm/AOP/BOI as capital
contribution or otherwise.

Capital Gains
Sec. Mode of transfer Year of chargeability Value of consideration
45(4) Transfer of a capital asset Previous year in which Fair market as on the
by way of distribution on transfer takes place. date of transfer.
dissolution or otherwise of
a firm or association of
persons.
45(5) Transfer of a capital asset Previous year in which The initial compensation or
by way of compulsory compensation is received. enhanced compensation if
acquisition under any law. any.
45(6) Repurchase of units of refer Previous year in which Repurchase price.
to in sec. 80CCB. repurchase takes place or
the scheme terminates.
46(2) Shareholders receiving In the year assets are Money receipt or market
assets from the liquidator received from the value of the assets on the
from the liquidation of liquidator. date of distribution
the company. by the liquidator
reduced by the deemed
dividend u/s. 2(22) (e).
46A Purchase by a company Previous year in which such Consideration for the
of its own shares or other shares or other securities are purchase of shares.
securities. purchased.
Case Laws :
The fact that capital gains are connected with the capital assets of a business will not make
them the profits of the business - CIT v. Express Newspapers Ltd. 53 ITR 250.
Where business is sold as a going concern valuing plant and machinery, etc., surplus arising
over and above difference between written down value and actual cost has to be taxed under
section 45 - CIT v. Artex Mfg. Co. 93 Taxman 357/227 ITR 260.
Any surplus arising from the transfer of a going concern from a firm to a company in which all
the erstwhile partners of the firm became shareholders of the company was liable to be as-
sessed to capital gains in the status of body of individuals and not in the status of association of
persons - Artex Mfg. Co. v. CIT [1981] 131 ITR 559 (Guj.).
Surplus arising on sale of shares by an investment company is capital gain, and not business
profit - CIT v. Sugar Dealers [1975] 100 ITR 424 (All.).
The word ‘otherwise’ used in section 45(4) takes into its sweep not only the cases of dissolution
but also the cases of subsisting partners of a partnership, transferring assets in favour of a
retiring partner - CIT v. A.N. Naik Associates [2004] 136 Taxman 107 (Bom.).

COMPUTATION OF CAPITAL GAIN
In order to ascertain or compute the capital gain, it is necessary it bifurcate the gain into the
following categories:
1. Capital gain from Depreciable Asset
2. Capital gain from other than Depreciable Asset
(i) Short Term Capital gain
(ii) Long Term Capital gain
3. Computation of Capital Gain in case of Compulsory Acquisition of Property.
4. Capital Gain in Case of a Slump Sale
Computing capital gain in all cases stated above is summarized in the following table:
A DEPRECIABLE ASSET RUPEES REMARKS

Full Value of consideration XXXXXXXX From Sale of One or
More or All the
Assets In The Block
Less: Expenses in connection with the transfer XXX
= Net consideration XXXXXX
Less: Opening Written Down value of Block of XXXX Block To Which Asset
Assets Belongs
Less: Additions in the Block During the Year XXXX
= Gross capital gains XXXXXX
Less: Exemption u/s. 54, 54D, 54EC, 54ED, 54F XXXXX
= Net capital gains XXXXX Deemed To Be ‘Short
Term Gain’
COMPUTATION OF CAPITAL GAINS IN CASE OF DEPRECIABLE ASSET

[Sec 50]:
In case of asset on which depreciation has been claimed and allowed for the purpose of in-
come-tax, called depreciable assets, there will be no indexation or the capital gains is deemed
to be ‘Short-term Capital Gains’.
Section 50 provides for the computation of capital gains in case of depreciable assets. It Kindly
note that where the capital asset is a depreciable asset forming part of a block of assets, section
50 has an overriding effect. This is in spite of anything contained in section 2(42A) which de-
fines a short- term capital asset. Section 50provides that where the capital asset is an asset
forming part of a block of assets in respect of which depreciation has been allowed, the provi-
sions of sections 48 and 49 shall be subject to the following modifications :

Capital Gains
A. Where the full value of consideration received or accruing for the transfer of the asset plus
the full value of such consideration for the transfer of any other capital asset falling with
the block of assets during previous year exceeds the aggregate of the following amounts
namely:
(1) expenditure incurred wholly and exclusively in connection with such transfer;
(2) WDV of the block of assets at the beginning of the previous year;
(3) the actual cost of any asset falling within the block of assets acquired during the pre-
vious year such excess shall be deemed to be the capital gains arising from the trans-
fer of short-term capital assets.
B. Where all assets in a block are transferred during the previous year, the block itself will
cease to exist. In such a situation, the difference between the sale value of the assets and
the WDV of the block of assets at the beginning of the previous year together with the
actual cost of any asset falling within that block of assets acquired by the assessee during
the previous year will be deemed to be the capital gains arising from the transfer of short-
term capital assets.
Now, let us discuss each ingredient of Computation :
Full Value of consideration :
Simply stated it is the price or compensation for which transfer has taken place.
This means in the case of sales, the consideration bargained for CIT v. Gillanders Arbuthnot &
Co. 87 ITR 407 (SC).
The compensation paid in pursuance of a contract of insurance cannot be considered as consid-
eration - C. Leo Machodo v. CIT 172 ITR 744 (Mad.)
Interest received on unpaid sale price cannot be treated as ‘profits and gains’ arising from the
transfer of capital asset under section 45, but just a revenue receipt - Mount Stuart Tea Estate
and Amar Coffee Plantation v. CIT 239 ITR 489 (Mad.).
In a case capital gain is received in foreign currency, for conversion of amount received into
Indian currency, uniform rate of exchange should be adopted for determining value of acqui-
sition and consideration received for transfer of capital asset - Jayakumari & Dilharkumari v.
CIT 189 ITR 99 (Kar.).
The expression ‘full value of consideration’ cannot be construed as the market value but as the
price bargained for by the parties to the sale. The expression ‘full value’ means the whole price
without any deduction whatsoever and it cannot refer to the adequacy or inadequacy of the
price bargained for - CIT v. George Henderson & Co. Ltd. 66 ITR 622.
Immovable Property [Sec. 50C].

In the case of transfer of land or building, if the sale consideration received is less than the
value determined by the stamp duty authorities, then such value would be deemed to be the
Full Value of the Consideration for computation of capital gains.

However, if the assessee contains that such stamp duty value is higher than Fair Market Value
of the property transferred and the assessee has not disputed such determination of value in
any appeal, revision or reference, then the assessing officer may refer the matter to the Valua-
tion Officer.
If the Fair Market Value determined by the Valuation Officer is less than the value determined
by stamp duty authorities, the assessing officer may take such Fair Market Value to be the Full
Value of the consideration. However, if the Fair Market Value is more than the value deter-
mined by stamp duty authorities then the stamp duty value would be deemed to be the Full
Value of Consideration for computation of capital gains.
Consideration in Installments
If the Full Value of Consideration agreed upon is received in installments, the entire value of
consideration has to be considered in computation of capital gain in the year the capital asset is
transferred.
Advance Money Received [Sec 51]

An assessee may receive some advance in respect of the transfer of capital asset. Due to the
break-down of the negotiation, the assessee might have confiscated and retained the advance.
Section 51 provides that while calculating capital gains, the above advance retained by the
assessee must go to reduce the cost of acquisition.
Expenses in connection with the Transfer
Expenses like commission or brokerage for sale, advertisement, lawyer’s fees for transaction
are deductible as transaction costs.
The words ‘in connection with’ used in section 48(i) are very wide in their ambit and hence
there is no warrant for importing a restriction that to qualify for deduction the expenditure
must necessarily have been incurred prior to the passing of title. It is immaterial whether the
expenditure was incurred prior to subsequent to the passing of title - CIT v. Dr. P. Rajendran
[1981] 127 ITR 810 (Ker.).
Legal expenses incurred for obtaining compensation in compulsory acquisition cases are de-
ductible - CIT v. R. Ranga Setty (supra). Also, see CIT v. Dr. P. Rajendran [1981] 127 ITR 810
(Ker.)/ CIT v. Smt. M. Subaida Beevi [1986] 160 ITR 557 (Ker.)/ V.A. Vasumathi v. CIT [1980]
123 ITR 94 (Ker.).
Expenditure incurred by the assessee towards amounts paid to tenants for vacating the pre-
mises which is sold has nexus with the transaction of sale, since without the tenants vacating
the premises the building cannot be sold. The said expenditure would hence be allowable
as deduction in the computation of capital gains - Naozar Chenoy v. CIT [1998] 234 ITR
95 (AP).
Where the assessee paid a certain sum to his son who had instituted a suit seeking injunction
restraining the assessee from selling a property, so as to remove the encumbrance prior
to selling that property, the said sum was deductible - CIT v. Abrar Alvi [2001] 247 ITR 312
(Bom.).

Capital Gains
Written Down Value

The asset sold belongs to certain ‘Block of Assets’. The written down value of such block of
assets at the beginning of the previous year in which transfer took place is considered. This
WDV is deducted from the net consideration.
It is possible that the opening WDV of such block of assets at the beginning of the previous year
may be ‘Nil’.
Additions During the Year

There of one or more assets in the block of assets acquired during the previous year to which
the asset sold belongs. Cost of such assets is deductible.
Case Law:
The cost of acquisition of the depreciable asset is bound to be computed in accordance with
section 50. In other words, section 55(2) is applicable only in respect of sections 48 and 49 of
the Act and it has no application to section 50 of the Act - CIT v. Peirce Leslie & Co. Ltd. 227
ITR 759.
On block of assets on which depreciation is allowed on cost method [S. 50A] – Where the
capital asset is used in an undertaking engaged in generation or generation and distribution of
power on which depreciation is allowed at a certain percentage on actual cost u/s. 32(1)(i) in
any previous year, then for the purpose of computing capital gains on such asset, the written
down value of the asset as adjusted shall be taken as the cost of acquisition of the asset.
Short Term Capital Gain

The excess net consideration from sale of depreciable asset over opening WDV and additions
during the year represents capital gain from sale of depreciable asset/s. Irrespective of period
of holding of the depreciable asset; such a capital gain is deemed to be from Short Term Capital
Asset (sec. 50).
However, if the depreciable asset is held for more than thirty-six months i.e. is a long term
capital asset, exemption under the relevant sections available for can be availed.
Note: - Short term capital loss may arise only when the block of asset ceases to exist i.e. only
assets in the block are transferred. [Sec. 50(2)]

B OTHER THAN DEPRECIABLE ASSET - SHORT TERM
Full Value of consideration XXXXXXXX
= Net consideration XXXXXX
Less: Cost of acquisition XXXX
Less: Cost of Improvement XXX
= Gross capital gains XXXXX
Less: Exemption u/s. 54B, 54D and 54G if XXXX

applicable
= Net capital gains XXXXXXX
Let us discuss each ingredient of Computation, which is not discussed above :

COST OF ACQUISITION [Sec 55]
Stated simply, cost of acquisition means the cost for which the asset is purchased or acquired
by the assessee.
With respect to certain assets special provisions have been made, which decide the cost of
acquisition. These are as follows:
(i) Goodwill of a business or a trademark or brand name associated with a business or a

right to manufacture, produce or process any article or thing, or right to carry on any
business, tenancy rights, stage carriage permits and loom hours - In the case of the above
capital assets, if the assessee has purchased them from a previous owner, the cost of acqui-
sition means the amount of the purchase price.
(ii) Self-generated assets - There are circumstances where it is not possible to ascertain cost of
acquisition. For example, suppose a doctor starts his profession. With the passage of time,
the doctor acquires lot of reputation. He opens a clinic and runs it for 5 years. After 5 years
he sells the clinic to another doctor for Rs.10 lacs which includes Rs.2 lacs for his reputa-
tion or goodwill. Now a question arises as to how to find out the profit in respect of good-
will. It is obvious that the goodwill is self-generated and hence it is difficult to calculate
the cost of its acquisition. However, it is certainly a capital asset.

Capital Gains
The Supreme Court in CIT v/s. B.C. Srinivasa Shetty [1981] 128 ITR 294 (SC) held that in order
to bring the gains on sale of capital assets to charge under section 45, it is necessary that the
provisions dealing with the levy of capital gains tax must be read as a whole. Section 48 deals
with the mode of computing the capital gains. Unless the cost of acquisition is correctly
ascertainable, it is not possible to apply the provisions of section 48. Self-generated goodwill is
such a type of capital asset where it is not possible to visualise cost of acquisition. Once section
48 cannot be applied, the gains thereon cannot be brought to charge. This decision of the Su-
preme Court was applicable not only to self-generated goodwill of a business but also to other
self-generated assets like tenancy rights, stage carriage permits, loom hours etc. In order to
supersede the decision of the Supreme Court cited above, section 55 was amended. Accord-
ingly, in case of self-generated assets namely, goodwill of a business or a trademark or brand
name associated with a business or a right to manufacture, produce or process any article or
thing, or right to carry on any business, tenancy rights, stage carriage permits, or loom hours,
the cost of acquisition will be taken to be nil. However, it is significant to note that the above
amendment does not cover self-generated goodwill of a profession. So, in respect of self-gener-
ated goodwill of a profession and other self-generated assets not specifically covered by the
amended provisions of section 55, the decision of the Supreme Court in B. C. Srinivasa Setty’s
case will still apply.
(iii) Other assets - In the following cases, cost of acquisition shall not be nil, but will be deemed
to be the cost for which the previous owner of the property acquired it:
Where the capital asset became the property of the assessee—
(1) On any distribution of assets on the total or partial partition of a Hindu undivided
family.
(2) Under a gift or will.
(3) By succession, inheritance or devolution.
(4) On any distribution of assets on the liquidation of a company.
(5) Under a transfer to a revocable or an irrevocable trust.
(6) Under any such transfer referred to in sections 47(iv), (v), (vi), (via) or (viaa).
(7) Where the assessee is a Hindu undivided family, by the mode referred to in section 64(2).
(iv) Financial assets - Many times persons who own shares or other securities become entitled
to subscribe to any additional shares or securities. Further, they are also allotted addi-
tional shares or securities without any payment. Such shares or securities are referred to as
financial assets in Income-tax Act. Section 55 provides the basis for ascertaining the cost of
acquisition of such financial assets.
(1) In relation to the original financial asset on the basis of which the assessee becomes
entitled to any additional financial assets, cost of acquisition means the amount actu-
ally paid for acquiring the original financial assets.
(2) In relation to any right to renounce the said entitlement to subscribe to the financial
asset, when such a right is renounced by the assessee in favour of any person, cost of
acquisition shall be taken to be nil in the case of such assessee.

(3) In relation to the financial asset, to which the assessee has subscribed on the basis of
the said entitlement, cost of acquisition means the amount actually paid by him for
acquiring such asset.
(4) In relation to the financial asset allotted to the assessee without any payment and on
the basis of holding of any other financial assets, cost of acquisition shall be taken to
be nil in the case of such assessee. In other words, where bonus shares are allotted
without any payment on the basis of holding of original shares, the cost of such bo-
nus shares will be nil in the hands of the original shareholder.
(5) In the case of any financial asset purchased by the person in whose favour the right to
subscribe to such assets has been renounced, cost of acquisition means the aggregate
of the amount of the purchase price paid by him to the person renouncing such right
and the amount paid by him to the company or institution for acquiring such finan-
cial asset.
(6) In relation to equity shares allotted to a shareholder of a recognised stock exchange in
India under a scheme for demutualisation or corporatisation approved by SEBI, the
cost of acquisition shall be the cost of acquiring his original membership of the ex-
change.
(7) The cost of a capital asset, being trading or clearing rights of a recognised stock
exchange acquired by a shareholder (who has been allotted equity share or
shares under such scheme of demutualisation or corporatisation), shall be deemed to
be nil.
(v) Any other capital asset –
(1) Where the capital asset become the property of the assessee before 1-4-1981 cost of
acquisition means the cost of acquisition of the asset to the assessee or the fair market
value of the asset on 1-4-1981 at the option of the assessee.
(2) Where the capital asset became the property of the assessee by any of the modes
specified in section 49(1), it is clear that the cost of acquisition to the assessee will be
the cost of acquisition to the previous owner. Even in such cases, where the capital
asset became the property of the previous owner before 1-4-1981, the assessee has got
a right to opt for the fair market value as on 1-4-1981.
(3) Where the capital asset became the property of the assessee on the distribution of the
capital assets of a company on its liquidation and the assessee has been assessed to
capital gains in respect of that asset under section 46, the cost of acquisition means the
fair market value of the asset on the date of distribution.
(4) A share or a stock of a company may become the property of an assessee under the
following circumstances :
(a) the consolidation and division of all or any of the share capital of the company
into shares of larger amount than its existing shares.
(b) the conversion of any shares of the company into stock,
(c) the re-conversion of any stock of the company into shares,

Capital Gains
(d) the sub-division of any of the shares of the company into shares of smaller
amount, or
(e) the conversion of one kind of shares of the company into another kind.
In the above circumstances the cost of acquisition to the assessee will mean the cost of acquisi-
tion of the asset calculated with reference to the cost of acquisition of the shares or stock from
which such asset is derived.
Note:
‘Fair Market Value’ in relation to a capital asset, means—
(i) The price which the capital asset would ordinarily fetch on sale in the open market on the
relevant date; and
(ii) Where the price referred to in sub-clause (i) is not ascertainable, such price as may be
determined in accordance with the rule made under this Act.
[SEC. 2(22B)]
(vi) Where the cost for which the previous owner acquired the property cannot be ascer-
tained, the cost of acquisition to the previous owner means the fair market value on the
date on which the capital asset became the property of the previous owner.
Cost of Acquisition for Non-residents

In order to give protection to non-residents who invest foreign exchange to acquire capital
assets, section 48 contains a proviso. Accordingly, in the case of non-residents, cost of acquisi-
tion, etc. of shares or debentures of an Indian company is to be computed as follows:
The cost of acquisition, the expenditure incurred wholly and exclusively in connection with
the transfer and the full value of the consideration are to be converted into the same foreign
currency with which such shares were acquired. The resulting capital gains shall be recon-
verted into Indian currency. The aforesaid manner of computation of capital gains shall be
applied for every purchase and sale of shares or debentures in an Indian company. Rule 115A
is relevant for this purpose.
Case Law:
The interest paid on borrowings for the acquisition of a capital asset must fall for deduction
under section 48. But, if the same sum is already the subject-matter of deduction under other
heads like those under section 57, it cannot find a place again for the purpose of computation
under section 48 - CIT v. Maithreyi Pai [1985] 152 ITR 247 (Kar.).
COST OF IMPROVEMENT [Sec 55]
When an asset is acquired, before it is sold, it is possible that certain improvements are made.
For example, leveling and fencing of land, loft or partition is constructed in building acquired,
accessories like CD player, career may be added to a car, etc. costs incurred on such improve-
ments are also deductible while computing capital gain.

Section 55 provides that “cost of any improvement”,—
(1) in relation to a capital asset being goodwill of a business or a right to manufacture, pro-
duce or process any article or thing or right to carry on any business shall be taken to be
nil; and
(2) in relation to any other capital asset:

(i) where the capital asset became the property of the previous owner or the assessee
before the 1st day of April, 1981 means all expenditure of a capital nature incurred in
making any additions or alterations to the capital asset on or after the said date by the
previous owner or the assessee, and
(ii) in any other case, means all expenditure of a capital nature incurred in making any
additions or alterations to the capital asset by the assessee after it became his prop-
erty, and, where the capital asset became the property of the assessee by any of the
modes specified in sub-section (1) of section 49, by the previous owner.
However, such a cost of improvement does not include any expenditure which is deductible in
computing the income chargeable under the head “Interest on securities”, “Income from house
property”, “Profits and gains of business or profession”, or “Income from other sources”.
C OTHER THAN DEPRECIABLE ASSET - LONG TERM
Full Value of consideration XXXXXX
= Net consideration XXXX
Less :Indexed Cost of acquisition XXX
Less: :Indexed Cost of Improvement XXX
= Gross capital gains XXXX

Less: Exemption u/s. 54, 54B, 54D, 54EC, 54ED, 54F and 54G, if
applicable XXX
= Net capital gains XXXXXX

Capital Gains
Let us discuss each ingredient of Computation, which is not discussed above:

INDEXED COST OF ACQUISITION AND IMPROVEMENT [Sec 48]
Section 48 provides that where long-term capital gain arises from the transfer of a long-term
capital asset, deduction will be made of “indexed cost of acquisition” and “indexed cost of any
improvement” and not of “cost of acquisition” and “cost of any improvement”.
However, provisions of ‘indexation’ are not allowed for capital gain arising to a non-resident
from the transfer of shares in, or debentures of, an Indian company acquired in foreign cur-
rency.
“indexed cost of acquisition” means an amount which bears to the cost of acquisition the same
proportion as Cost Inflation Index for the year in which the asset is transferred bears to the
Cost Inflation Index for the first year in which the asset was held by the assessee or for the year
beginning on the 1st day of April, 1981, whichever is later;
“indexed cost of any improvement” means an amount which bears to the cost of improvement
the same proportion as Cost Inflation Index for the year in which the asset is transferred bears
to the Cost Inflation Index for the year in which the improvement to the asset took place;
“Cost Inflation Index”, in relation to a previous year, means such Index as the Central Govern-
ment may, having regard to seventy-five per cent of average rise in the Consumer Price Index
for urban non-manual employees for the immediately preceding previous year to such previ-
ous year, by notification in the Official Gazette, specify, in this behalf.
Cost Inflation Index for the year 1981-82 (base year) is 100 and for the year 2007-08 is 551.
COST INFLATION INDEX
Cost of Inflation Index has been notified by the Central Government Year wise, commencing
from Financial Year, 1981-82 as the base year, having regard to 75% of average rise in the
Consumer Price Index for urban non-manual employees for the immediately preceding previ-
ous year to the previous year for which it is to be taken. The cost of acquisition and cost of
improvement will thus be adjusted with reference to the rate applicable for the relevant year,
which are given as follows:–
Table of Cost Inflation Index
Financial Cost Inflation Financial Cost Inflation Index
Year Index Year Index
1981-82 100 1994-95 259
1982-83 109 1995-96 281
1983-84 116 1996-97 305
1984-85 125 1997-98 331
1985-86 133 1998-99 351
1986-87 140 1999-00 389
1987-88 150 2000-01 406
1988-89 161 2001-02 426
1989-90 172 2003-04 463
1990-91 182 2004-05 480
1991-92 199 2005-06 497
1992-93 223 2006-07 519
1993-94 244 2007-08 551

INDEXATION WHEN NOT APPLICABLE FOR COMPUTATION OF LONG TERM CAPI-
TAL GAINS
(i) Transfer of Bond and debentures other than capital indexed bonds issued by the Govern-
ment
(ii) Transfer of shares or debentures acquired by a non-resident in foreign currency.
(iii) Transfer of depreciable asset. [Sec. 50]
(iv) Transfer of undertaking or division in a slump sale. [Sec. 50B]
(v) Transfer units of UTI or Mutual fund [referred to in sec. 10(23D)] purchased in foreign
currency by overseas financial organisation. [Sec. 115AB]
(vi) Transfer of Global depository receipt or bonds of an Indian company or share or bonds of
Public Sector Company sold by the Government and purchased in foreign currency by a
non-resident. [Sec. 115AC]
(vii) Transfer of Global depository receipt purchased in foreign currency by an individual resi-
dent in India and employee of an Indian company. [Sec.115ACA]
(viii) Transfer of securities by Foreign Institutional Investors. [Sec. 115AD]
(ix) Transfer of foreign exchange asset by a non-resident. [Sec. 115D]
CAPITAL GAINS IN RESPECT OF SLUMP SALES [Sec 50B]

‘Slump Sale’ means the transfer of one or more undertakings as a result of the sale for a lump
sum consideration without values being assigned to the individual assets and liabilities in
such sales. [Sec. 2(42C)]
Provisions for computation of capital gain are as follows:
(i) Any profits or gains arising from the slump 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. However, if such transfer is of one or more undertakings held by the assessee for
not more than thirty-six months any profits and gains arising from shall be deemed to be
short-term capital gains. [Sub-section (1)]
(ii) The net worth of 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 computation of
capital gain. [Sub-section (2)]
(iii) Every assessee in the case of slump sale shall furnish in the prescribed form along with the
return of income, a report of an 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 under-
taking or division has been correctly arrived at in accordance with the provisions of this
section. [Sub-section (3)]
Explanation 1 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.

Capital Gains
Explanation 2 provides that the aggregate value of total assets of such undertaking or division
shall be as follows:
(i) In the case of depreciable assets: the written down value of block of assets determined in
accordance with the provisions contained in sub-item (C) of item (i) of section 43(6)(c) and
(ii) the book value for all other assets.
8.4 EXEMPTIONS
(a) Transfer of a residential house and investment in residential house [Sec. 54].
If an individual or HUF having LTCG from transfer of a residential unit makes investment to
purchase or construct a residential unit, the amount invested in the new residential unit is
allowed as a deduction from the LTCG. The new residential unit can be constructed within 3
years from the date of transfer or can be purchased one year before or two years after the date
of transfer.
To claim this deduction, the assessee, after taking into consideration the amount that he has
already invested for construction or purchase of the new residential unit upto the due date of
filing of return of income in his case, should deposit the remaining amount which he intends to
use for purchasing or constructing the new residential unit in a Capital Gains Deposit Account
on or before the due date for filing of the return and enclose proof of investment in construc-
tion or purchase and proof of making such deposit into the capital gains account along with
the return of income. Based on this he would be allowed the deduction from the LTCT for that
assessment year.
The amount which is deposited in the Capital Gains Deposit Account has to be utilised by him
within two/three years from the date of transfer for the purpose of purchase/construction of
the new residential unit. In case he fails to utilise this amount either wholly or partly for the
above purpose within this period the amount remaining unutilised would be taxed as Capital
gains in the year in which the above mentioned period is over.
The cost of the new residential unit purchased/constructed would be reduced by the amount
of deduction allowed from LTCG if the new house purchased or constructed is transferred
within a period of 3 years from its date of purchase/construction.
Case Law :
(i) Capital gains account scheme - For transfer of deposit under Capital Gains Accounts
Scheme, 1988 from Account ‘B’ to Account ‘A’, clearance of Assessing Officer is not re-
quired - Sadula Janardhan (HUF) v. State Bank of Hyderabad 286 ITR 291
(b) Transfer of Agricultural lands [Sec. 54B].
If LTCG is arising from transfer of land which is being used by the assessee for agricultural
purposes for at least 2 years prior to the date of transfer, then, the assessee can invest in pur-
chasing any other land for being used for the purpose of agriculture within 2 years from the
date of transfer of the original agricultural land and the amount invested by him for purchase
of a new agricultural land would be allowed as a deduction from the LTCG.

Case Law :
(i) ‘Land’ need not be ‘agricultural land’ - The exemption under section 54B is available to the
seller of ‘a capital asset being land’. It does not restrict the benefit to agricultural land only.
However, the land against which the benefit is sought must have been used by the asses-
see or his parent for agricultural purpose in the two years immediately preceding the date
of sale - CIT v. Smt. Savita Rani 133 Taxman 712/ 270 ITR 40.
(c) Compulsory Acquisition of Land and Buildings of Industrial Undertakings [Sec. 54D].
This deduction is available to all categories of tax payers. The conditions for claiming this
deduction are as under:
(i) the asset transferred is land or building or any right in land or building which forms part
of new industrial undertaking belonging to the tax payer.
(ii) asset in question is transferred by way of compulsory acquisition under any law.
(iii) the asset in question was used for the purpose of industrial undertaking at least for two
years immediately before the date of compulsory acquisition.
The deduction is available if within 3 years of the date of compulsory acquisition, the taxpayer
for the purposes of shifting or re-establishing the old industrial undertaking or setting up a
new industrial undertaking.
(a) purchases any other land, building or any right in any other land or building, or
(b) constructs any other building.
Deduction from the LTCG is given to the extent of above investment.
If the new asset is not acquired by the due date from furnishing the return of income for the
relevant assessment year, the unutilized amount of capital gains must be deposited in a Capital
Gains Deposit Account.
The cost of acquisition of the new asset would be reduced by the amount of deduction allowed
from Capital Gains if the new asset purchased/constructed is transferred within a period of 3
years of its purchase or construction — LTCG for a period of 3 years from its date of acquisi-
tion.
Case Law :
(i) Meaning of ‘industrial undertaking’ - The words ‘industrial undertaking’ should be un-
derstood to have been used in section 54D in a wide sense, taking in its fold any project or
business a person may undertake. Thus, the ‘running of a lodge’ can be said to be an
‘industrial undertaking’ within the meaning of section 54D - P. Alikunju M.A. Nazeer Cashew
Industries v. CIT 166 ITR 804.
d) Capital gain on transfer of capital assets not to be charged in certain cases [Sec. 54E]
(1) Where the capital gain arises from the transfer of a long-term capital asset before the 1st
day of April, 1992, (the capital asset so transferred being hereafter in this section referred
to as the original asset) and the assessee has, within a period of six months after the date of
such transfer, invested or deposited the whole or any part of the net consideration in any

Capital Gains
specified asset (such specified asset being hereafter in this section referred to as the new
asset), the capital gain shall be dealt with in accordance with the following provisions of
this section, that is to say,—
(a) if the cost of the new asset is not less than the net consideration in respect of the
original asset, the whole of such capital gain shall not be charged under section 45;
(b) if the cost of the new asset is less than the net consideration in respect of the original
asset, so much of the capital gain as bears to the whole of the capital gain the same
proportion as the cost of acquisition of the new asset bears to the net consideration]
shall not be charged under section 45:
Provided that in a case where the original asset is transferred after the 28th day of February,
1983, the provisions of this sub-section shall not apply unless the assessee has invested or
deposited the whole or, as the case may be, any part of the net consideration in the new asset by
initially subscribing to such new asset
Provided further that in a case where the transfer of the original asset is by way of compulsory
acquisition under any law and the full amount of compensation awarded for such acquisition
is not received by the assessee on the date of such transfer, the period of six months referred to
in this sub-section shall, in relation to so much of such compensation as is not received on the
date of the transfer, be reckoned from the date immediately following the date on which such
compensation is received by the assessee or the 31st day of March, 1992, whichever is earlier
(1A) Where the assessee deposits after the 27th day of April, 1978, the whole or any part of the
net consideration in respect] of the original asset in any new asset, being a deposit referred to in
sub-clause (vi) of clause (a)of Explanation 1 below sub-section (1), the cost of such new asset
shall not be taken into account for the purposes of that sub-section unless the following condi-
tions are fulfilled, namely
(a) the assessee furnishes, along with the deposit, a declaration in writing, to the bank or the
co-operative society referred to in the said sub-clause (vi) with which such deposit is made,
to the effect that the assessee will not take any loan or advance on the security of such
deposit during a period of three years from the date on which the deposit is made;
(b) the assessee furnishes, along with the return of income for the assessment year relevant to
the previous year in which the transfer of the original asset was effected or within such
further time as may be allowed by the Assessing Officer, a copy of the declaration referred
to in clause (a) duly attested by an officer not below the rank of sub-agent, agent or man-
ager of such bank or an officer of corresponding rank of such co-operative society.
(1B) Where on the fulfilment of the conditions specified in sub-section (1A), the cost of the new
asset referred to in that sub-section is taken into account for the purposes of sub-section
(1), the assessee shall, within a period of ninety days from the expiry of the period of three
years reckoned from the date of such deposit, furnish to the Assessing Officer a certificate
from the officer referred to in clause (b) of sub-section (1A) to the effect that the assessee
has not taken any loan or advance on the security of such deposit during the said period of
three years.

(1C) Notwithstanding anything contained in sub-section (1), where the capital gain arises from
the transfer of the original asset, made after the 31st day of March, 1992, in respect of
which the assessee had received any amount by way of advance on or before the 29th day
of February, 1992 and had invested or deposited the whole or any part of such amount in
the new asset on or before the later date, then, the provisions of clauses (a) and (b) of sub-
section (1) shall apply in the case of such investment or deposit as they apply in the case of
investment or deposit under that sub-section
(2) Where the new asset is transferred, or converted (otherwise than by transfer) into money,
within a period of three years from the date of its acquisition, the amount of capital gain
arising from the transfer of the original asset not charged under section 45 on the basis of
the cost of such new asset as provided in clause (a) or, as the case may be, clause (b), of sub-
section (1) shall be deemed to be income chargeable under the head “Capital gains” relat-
ing to long-term capital assets] of the previous year in which the new asset is transferred
or converted (otherwise than by transfer) into money.
(3) Where the cost of the equity shares referred to in sub-clause (va) of clause (a) of Explanation
1 below sub-section (1) is taken into account for the purposes of clause (a) or clause (b) of
sub-section (1) a deduction with reference to such cost shall not be allowed under section
80CC.
Case Law:
(i) Benefit under section 54E is available only if there is a transfer of capital asset - For the
purpose of benefit under section 54E, transfer is a condition precedent and when a trans-
action is not treated as a transfer, the assessee is not entitled to the benefit of section 54E.
Thus, since the distribution of assets to shareholders on liquidation of a company is not
treated as a transfer under section 46(1), benefit of section 54E cannot be availed on the
consideration received from such distribution - CIT v. Ruby Trading Co. (P.) Ltd. 124 Taxman
186 .
(e) Capital gain on transfer of long-term capital assets not to be charged in the case of invest
ment in specified securities [Sec. 54EA].
day of April, 2000 (the capital asset so transferred being hereafter in this section referred to
as the original asset) and the assessee has, at any time within a period of six months after
the date of such transfer, invested the whole or any part of the net consideration in any of
the bonds, debentures, shares of a public company or units of any mutual fund referred to
in clause (23D) of section 10 specified by the Board in this behalf by notification in the
Official Gazette (such assets hereafter in this section referred to as the specified securities),
the capital gain shall be dealt with in accordance with the following provisions of this
section, that is to say,—
(a) if the cost of the specified securities] is not less than the net consideration in respect of
the original asset, the whole of such capital gain shall not be charged under section 45;
(b) if the cost of the specified securities is less than the net consideration in respect of the
original asset, so much of the capital gain as bears to the whole of the capital gain the
same proportion as the cost of acquisition of the specified securities bears to the net

Capital Gains
consideration shall not be charged under section 45.

(2) Where the specified securities] are transferred or converted (otherwise than by transfer)
into money at any time within a period of three years from the date of their acquisition,
the amount of capital gain arising from the transfer of the original asset not charged under
section 45 on the basis of the cost of such specified securities as provided in clause (a) or
clause (b) of sub-section (1) shall be deemed to be the income chargeable under the head
“Capital gains” relating to long-term capital assets of the previous year in which the speci-
fied securities are transferred or converted (otherwise than by transfer) into money.
However in a case where the original asset is transferred and the assessee invests the whole or
any part of the net consideration in respect of the original asset in any specified securities and
such assessee takes any loan or advance on the security of such specified securities, he shall be
deemed to have converted (otherwise than by transfer) such specified securities into money on
the date on which such loan or advance is taken.
(3) Where the cost of the specified securities] has been taken into account for the purposes of
clause (a) or clause (b) of sub-section (1), a rebate with reference to such cost shall not be
allowed under section 88.
(f) Capital gain on transfer of long-term capital assets not to be charged in certain cases
[Sec. 54EB]
day of April, 2000] (the capital asset so transferred being hereafter in this section referred
to as the original asset), and the assessee has, at any time within a period of six months
after the date of such transfer invested the whole or any part of capital gains, in any of the
assets specified by the Board in this behalf by notification in the Official Gazette (such
assets hereafter in this section referred to as the long-term specified assets), the capital
gain shall be dealt with in accordance with the following provisions of this section, that is
to say,—
(a) if the cost of the long-term specified asset is not less than the capital gain arising from
the transfer of the original asset, the whole of such capital gain shall not be charged
under section 45 ;
(b) if the cost of the long-term specified asset is less than the capital gain arising from the
transfer of the original asset, so much of the capital gain as bears to the whole of the
capital gain the same proportion as the cost of acquisition of the long-term specified
asset bears to the whole of the capital gain, shall not be charged under section 45.
(2) Where the long-term specified asset is transferred or converted (otherwise than by trans-
fer) into money at any time within a period of seven years from the date of its acquisition,
the amount of capital gains arising from the transfer of the original asset not charged
under section 45 on the basis of the cost of such long-term specified asset as provided in
clause (a), or as the case may be, clause (b) of sub-section (1) shall be deemed to be the
income chargeable under the head “Capital gains” relating to long-term capital assets of
the previous year in which the long-term specified asset is transferred or converted (other-
wise than by transfer) into money.

Explanation.—In a case where the original asset is transferred and the assessee invests the
whole or any part of the capital gain received or accrued as a result of transfer of the original
asset in any long-term specified asset and such assessee takes any loan or advance on the secu-
rity of such specified asset, he shall be deemed to have converted (otherwise than by transfer)
such specified asset into money on the date on which such loan or advance is taken.
(3) Where the cost of the long-term specified asset has been taken into account for the purposes
of clause (a) or clause (b) of sub-section (1), a deduction from the amount of income-tax with
reference to such cost shall not be allowed under section 88.
g) Investment in certain bonds [Sec. 54EC]. If an assessee having LTCG invests in any of the
following assets, the amount invested is eligible for deduction up to a maximum of the
LTCG —
(a) bonds redeemable after three years issued on or after 01.04.2007 by National Highway
Authority of India (NHAI).
(b) bonds redeemable after three years issued on or after 01.04.2007 by Rural Electrification
Corporation Ltd. (RECL).
The investment is to be made within six months from the date of transfer of the original capital
asset. The bonds should not be transferred or converted into money for a period of three years
from the date of acquisition. In case the bonds are transferred within 3 years from the date of
their acquisition, the deduction allowed for investment earlier would be taxed in the year of
such transfer as capital gains. For this purpose it would be considered as transfer even if the
assessee takes any loan or advance on the security of the specified securities. For the invest-
ment in the bonds rebate u/s. 88 will not be available.
Amount of exemption:
(a) if the cost of the long-term specified asset is not less than the capital gain arising from the
transfer of the original asset, the whole of such capital gain but does not exceeding Rs. fifty
lakh shall not be charged under section 45;
(b) if the cost of the long-term specified asset is less than the capital gain arising from the
transfer of the original asset, so much of the capital gain as bears to the whole of the capital
gain the same proportion as the cost of acquisition of the long-term specified asset bears to
the whole of the capital gain, shall not be charged under section 45.
(h) Investment in equity shares [Sec. 54ED]
If an assessee has LTCG from transfer of listed securities before the 1st day of April, 2006 [secu-
rities as defined in Securities, Contracts (Regulation) Act and listed in any recognised Stock
Exchange in India] or unit and invests in acquiring equity shares satisfying the following con-
ditions, the amount invested is eligible for deduction up to a maximum of the LTCG.
(a) the issue is made by a public company formed and registered in India.
(b) the shares forming part of the issue are offered for subscription to the public.
The investment has to be made within six months from the date of the transfer of the listed
security or unit.

Capital Gains
The equity shares should not be sold or otherwise transferred within a period of one year from
the date of their acquisition. In case they are transferred within one year the deduction allowed
in investment would be taxed in the year of such transfer as LTCG.
For the investment in the equity shares rebate u/s. 88 will not be available.
Amount of Exemption :
(a) if the cost of the specified equity shares is not less than the capital gain arising from
the transfer of the original asset, the whole of such capital gain shall not be charged under
section 45;
(b) if the cost of the specified equity shares is less than the capital gain arising from the trans-
fer of the original asset, so much of the capital gain as bears to the whole of the capital gain
the same proportion as the cost of the specified equity shares acquired bears to the whole
of the capital gain shall not be charged under section 45.
(i) Transfer asset and investment in residential income [Sec. 54F].
If an individual or a HUF having LTCG arising out of sale of capital asset other than a residen-
tial house and the assessee has, within a period of one year before or two years after the date on
which the transfer took place purchased, or has within a period of three years after that date
constructed, a residential house, the capital gain shall be dealt with in accordance with the
following provisions of this section,
(a) if the cost of the new asset is not less than the net consideration in respect of the original
asset, the whole of such capital gain shall not be charged under section 45 ;
(b) if the cost of the new asset is less than the net consideration in respect of the original asset,
so much of the capital gain as bears to the whole of the capital gain the same proportion as
the cost of the new asset bears to the net consideration, shall not be charged under section
45:
where, net consideration = full value of consideration – cost of transfer.
In this case, however, cost of the new asset is not changed. But the assessee should not own
more than one residential house in which he has invested as on the date of transfer and also, he
should not purchase/construct any other residential house for a period of 1/3 years from the
date of transfer. In case he owns more than one residential house as on the date of transfer he is
not eligible for this deduction. In case he purchases/constructs a house within 1/3 years from
the date of transfer after getting this deduction, the amount allowed as deduction would be
taxed as capital gains in the year of such purchase/construction.
Case Laws :
(i) Provision is not ultra vires the constitution - Provision of section 54F as applicable to
assessment year 2000-01 and which applies to one residential house, cannot be said to be
discriminatory and violative of fundamental rights on ground that in subsequent years
exemption under section 54F was extended to two residential houses - Abdul Gaffar v.
ITO 154 Taxman 416

(ii) Exemption is not allowable if existing house is extended - Section 54F emphasizes on con-
struction of residential house. The said construction must be real one. It should not be a
symbolic construction. A mere extension of the existing building would not give benefit to
the assessee as contemplated under section 54F. Mere construction by way of extension of
the old existing house would not mean constructing a residential house as contemplated
under section 54F - CIT v. V. Pradeep Kumar 53 Taxman 138
(j) Transfer of fixed asset of industrial undertaking effected to shift it from urban area [Sec.
54G]
The deduction is available to all categories of tax payers. The conditions for claiming the de-
duction are as under :
(i) the transfer is effected in the course of or in consequence of shifting the undertaking from
an urban area to any area other than an urban area.
(ii) asset transferred is machinery, plant, building, land or any right in building or land used
for the business of industrial undertaking in an urban area.
(iii) the capital gain is utilised within one year before or 3 years after the date of transfer (a) for
purchasing new machinery or plant or building or land for tax payer’s business in that
new area; or (b) shifting of the old undertaking and its establishment to the new area; or
(c) incurring of expenditure on such other purposes as specified in the scheme notified for
the purpose.
Deduction from LTCG is given to the extent of the outlay for aforesaid asset and activities.
The unutilized amount of capital gains as on the date on which return of income for the rel-
evant Assessment year is due; must be deposited in a Capital Gains Deposit account and fail-
ure to utilize the amount within the stipulated period it shall be chargeable as capital gains
(long/short term).
The cost of acquisition of the new asset is reduced by the amount of exemption allowed from
capital gains if the new asset is transferred within a period of three year of its purchase or
construction for the purpose of computation of capital gains in respect of the transfer of the
new asset.
(k) Extension of time limit available for acquiring new asset
To claim exemption u/s 54, 54B, 54D, 54EC and 54F as the case may be or under capital gains
scheme, the period of investment will begin from the date when the compensation is received.
Where the compensation is received in instalment, the period of investment in the specified
asset/deposit in capital gains scheme will be considered for each instalment separately. If en-
hanced compensation is received, the period of investment shall be reckoned from the date
when the enhanced compensation is received.
Exemption of capital gains on transfer of assets in cases of shifting of industrial undertak-
ing from urban area to any SEZ
The deduction is available to all categories of tax payers for of shifting of industrial undertak-
ing from urban area to any Special Economic Zone. The conditions for claiming the deduction
are as under :

Capital Gains
(i) the transfer is effected in the course of or in consequence of shifting the undertaking from
an urban area to any Special Economic Zone.
(ii) asset transferred is machinery, plant, building, land or any right in building or land used
for the business of industrial undertaking in an urban area.
(iii) the capital gain is utilised within one year before or 3 years after the date of transfer (a) for
purchasing new machinery or plant or building or land for tax payer’s business in the
SEZ; or (b) shifting of the old undertaking and its establishment to the SEZ; or (c) incur-
ring of expenditure on such other purposes as specified in the scheme notified for the
purpose.
Deduction from LTCG is given to the extent of the outlay for aforesaid asset and activities.
The unutilized amount of capital gains as on the date on which return of income for the rel-
evant Assessment year is due; must be deposited in a Capital Gains Deposit account and fail-
ure to utilize the amount within the stipulated period it shall be chargeable as capital gains
(long/short term).
The cost of acquisition of the new asset is reduced by the amount of exemption allowed from
capital gains if the new asset is transferred within a period of three year of its purchase or
construction for the purpose of computation of capital gains in respect of the transfer of the
new asset.
(h) Extension of time limit available for acquiring new asset
To claim exemption u/s 54, 54B, 54D, 54EC and 54F as the case may be or under capital gains
scheme, the period of investment will begin from the date when the compensation is received.
Where the compensation is received in installment, the period of investment in the specified
asset/deposit in capital gains scheme will be considered for each installment separately. If
enhanced compensation is received, the period of investment shall be reckoned from the date
when the enhanced compensation is received.
(i) Investment Not Made before Due Date for Filing of the Return of Income:
The amount of the capital gain which is not invested by the assessee for the purpose stated in
Section 54, 54B, 54D, 54F, 54G and 54GA before the date of furnishing the return of income
under section 139, the following provisions apply:
(i) The amount intended to be applied under the exemption section shall be deposited by
him before furnishing such return, such deposit being made in any case not later than the
due date applicable in the case of the assessee for furnishing the return of income under
sub-section (1) of section 139, in an account in any such bank or institution as may be
specified in, and
(ii) utilised in accordance with, any scheme which the Central Government may, by
notification in the Official Gazette, frame in this behalf and
(iii) such return shall be accompanied by proof of such deposit; and, for the purposes of sub-
section (1), the amount, if any, already utilised by the assessee for the purchase or con-
struction of the new asset together with the amount so deposited shall be deemed to be the
cost of the new asset :
It is further provided that if the amount deposited as aforesaid is not utilised wholly or partly

for the purpose of investment, then,—
(i) the amount not so utilised shall be charged under section 45 as the income of the previous
year in which the period of three years from the date of the transfer of the original asset
expires; and
(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme
aforesaid.
EXEMPTION LONG TERM CAPITAL GAINS TO NON-RESIDENT [Sec. 115 F]
In the case of an assessee being a non-resident Indian transfers any long term foreign exchange
asset, gains arises on such transfer is exempt if the net consideration is invested within a period
of six months after the date of transfer in the specified foreign exchange asset. If the net consid-
eration is invested partly in the specified foreign exchange asset within the stipulated time, the
exemption is available which is equal to:–
Long term capital gains × Amount invested ÷ Net consideration
Where the new asset is transferred or converted into money within a period of three years from
the date of its acquisition, the exemption granted shall be deemed to be the income chargeable
under the head ‘long term capital gains’ of the pervious year in which the new asset is trans-
ferred or converted into money.
A non-resident Indian may elect not to be governed by the provisions of section 115F for any
assessment year, by submitting his return of income for that assessment year y/s 139 and de-
claring therein that the provisions of section 115F shall not apply to him for that assessment
year. In such a case the income and tax of the non-resident shall be computed like other normal
cases for the assessment year [ sec. 115-I].
WITHDRAWAL OF EXEMPTIONS [Sec. 47A]
Following are the cases where exemptions are allowed by virtue of sec. 47 may be withdrawn
for failure to fulfill certain conditions:-
(i) Where the capital gains arising on the transfer of the capital asset from the holding com-
pany to the subsidiary company or vice-versa was exempt from capital gains by virtue of
sec. 47(iv) and 47(v) and if at any time before the expiry of 8 years from the date of transfer
the capital asset so transferred is converted into stock-in-trade by the transferee company
or the parent company ceases to hold the whole of capital of the subsidiary company, the
amount of capital gains so exempted shall be deemed to be income of the transferor com-
pany in the year in which such transfer took place. [Sec. 47A(1)]
(ii) Where the capital gains arising on transfer of a capital asset in nature of membership of a
recognised stock exchange was exempt by virtue of section 47(xi), shall be chargeable to
tax in the previous year in which it was so transferred, provided the shares allotted to the
transferor are transferred within a period of 3 years. [Sec. 47A(2)]
(iii) Where a firm is succeeded by a company in the business carried on by it as a result of
which the firm sells or otherwise transfer any capital asset or intangible asset to the com-
pany is exempt from capital gains tax. on fulfillment of certain conditions u/s. 47(xiii). If
any of the conditions laid down in sec. 47(xiii) is not complied with the capital gains not
taxed on such transfer, shall be deemed as Profits and gains of the successor company for
the previous year in which the condition is not complied with. [Sec. 47A(3)]

Capital Gain 8

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STUDY NOTE - 8

This Study Note includes

THE PROVISIONS RELATING TO COMPUTATION OF CAPITAL GAINS AND ITS

8.1 CAPITAL ASSET [Sec. 2(14)]

Applied Direct Taxation 109

‘Capital asset’ means property of any kind except the following:

110 Applied Direct Taxation

(i) Equity or preference shares held in a company.

Applied Direct Taxation 111

112 Applied Direct Taxation

Applied Direct Taxation 113

114 Applied Direct Taxation

Applied Direct Taxation 115

d) any transfer by a shareholder, in a business reorganisation, of a capital asset

116 Applied Direct Taxation

Applied Direct Taxation 117

118 Applied Direct Taxation

8.3 VARIOUS PROVISIONS OF THE INCOME TAX ACT FOR

Applied Direct Taxation 119

120 Applied Direct Taxation

CHARGEABILITY [Sec. 45, 46, 46A]

Sec. Mode of transfer Year of chargeability Value of consideration

Applied Direct Taxation 121

Sec. Mode of transfer Year of chargeability Value of consideration

122 Applied Direct Taxation

A DEPRECIABLE ASSET RUPEES REMARKS

COMPUTATION OF CAPITAL GAINS IN CASE OF DEPRECIABLE ASSET

Applied Direct Taxation 123

Immovable Property [Sec. 50C].

124 Applied Direct Taxation

Advance Money Received [Sec 51]

Applied Direct Taxation 125

Written Down Value

Additions During the Year

Short Term Capital Gain

126 Applied Direct Taxation

Full Value of consideration XXXXXXXX

Less: Expenses in connection with the transfer XXX

= Net consideration XXXXXX

Less: Cost of acquisition XXXX

Less: Cost of Improvement XXX

= Gross capital gains XXXXX

Less: Exemption u/s. 54B, 54D and 54G if XXXX

= Net capital gains XXXXXXX

Let us discuss each ingredient of Computation, which is not discussed above :

(i) Goodwill of a business or a trademark or brand name associated with a business or a

Applied Direct Taxation 127

128 Applied Direct Taxation

Applied Direct Taxation 129

Cost of Acquisition for Non-residents

130 Applied Direct Taxation

(2) in relation to any other capital asset:

C OTHER THAN DEPRECIABLE ASSET - LONG TERM

Full Value of consideration XXXXXX

Less: Expenses in connection with the transfer XXX

= Net consideration XXXX

Less :Indexed Cost of acquisition XXX

Less: :Indexed Cost of Improvement XXX

= Gross capital gains XXXX

= Net capital gains XXXXXX

Applied Direct Taxation 131

Let us discuss each ingredient of Computation, which is not discussed above:

132 Applied Direct Taxation