Capital Asset u/s.

2(14)
"capital asset" means property of any kind held by an assessee, whether or not connected with his
business or profession, but does not include following
1.Any stock-in-trade, consumable stores or raw materials held for the purposes of his business or
profession;
2.Personal effects, that is to say, movable property (including wearing apparel and furniture) held for
personal use by the assessee or any member of his family dependent on him, but excludes
a) jewellery
b)archaeological collections
c)drawings
d)paintings
e)sculptures or
3.Any work of art. Agriculture land in India provided that it is not situated a) in any area within the
territorial jurisdiction of a municipality or a cantonment board, having a population of 10,000 or more ;
or b) in any notified area.

Transfer u/s. 2(47)
Transfer, in relation to a capital asset, include sale, exchange or relinquishment of the asset or the
extinguishment of any rights therein or the compulsory acquisition thereof under any law.

Transactions which do not constitute transfer (sec 47)
1. Distribution of capital asset on total or partial partition of HUF.
2. Transfer of capital asset under a gift or will or an irrevocable trust.
3. Transfer of capital asset by a company to its 100 percent subsidiary company.
4. Transfer of capital asset by a company to its 100 percent holding company.
5. Transfer of capital asset in a scheme of amalgamation.
6. Transfer of capital asset by a demerged company to the resulting company.

Not to be considered as transfer
Transfer of any work of art, archaeological, scientific or art collection, book, manuscript,
drawing, painting, photograph or print, to Government/University/National museum/National
Art Gallery/National Archives or any other notified public institution/museum
Conversion of bonds or debentures, debenture-stock or deposit certificates in any form, of a
company into shares or debentures of that company.


Computation of capital gains (48)
The Capital Gains have been divided in two parts under Income Tax Act 1961.
Short term capital gain and
Long term capital gain

1. Short Term Capital Gain

When Capital asset is sold within 36 months (Shares or securities within 12 months) of its
purchase then the gain arising out of its sales after deducting there from the expenses of sale
(Commission etc.) and the cost of acquisition and improvement is treated as short term capital.

2.Long Term Capital Gain

When Capital Asset is held for more than 36 months (12 months in case of shares or securities)
is a long term capital asset and the gain arising from sale of asset is a long term capital gain.
Long term capital gains are arrived at after deducting from the net sale consideration of the
long term capital asset the indexed cost of acquisition and the indexed cost of improvement of
the asset.

Cost of indexation
COI =
Cost of Acquisition X CII of year of Transfer
Cost in inflation inded of year of purchase.



Taxability of short term capital gains
Section 111A of the Income tax Act provides that those equity shares or equity oriented funds
which have been sold in a stock exchange and securities transaction tax is chargeable on such
transaction of sale then the short term capital gain arising from such transaction will be
chargeable to tax @15% from assessment year 2009-10 onwards.

Taxability of short term capital gains
The short term capital gains other than those u/s 111A shall be added to the income of the
assessee and will be taxed normally at slab rates applicable to the assessee.
If an Assessee does the business of buying and selling of shares in that case he cannot take
advantage of section 111A or section 10(38). In this case income will be treated as business
income.

Taxation of Long term capital gains:
The long term capital gains are taxed @ 20% after the benefit of indexation. No deduction is
allowed from the long term capital gains from section 80C to 80U.

Taxation of long term capital gains
Section 112(1) provides that any capital gain arising from a long term capital asset being the
listed securities which are sold outside the stock exchange the long term capital gain shall be
calculated on such securities as below:
a) Tax arrived at @ 20% on such long term capital gain after indexation u/s 48 or
b) Tax arrived at @ 10 % on such long term capital gain without indexation
Whichever is less.

Tax on long term capital gains

The long term capital gain on equity shares or units of equity oriented mutual fund which are
sold in the stock exchange and on which securities transaction tax is paid, is exempt u/s 10(38).



Computation of short term capital gains

1. Find out full value of consideration
2. Deduct the following
a. Expenditure incurred wholly and exclusively in connection with such transfer
b. Cost of acquisition
c. Cost of improvement
3. Balance amount is short term capital gain


Computation of long term capital gains
1. Find out full value of consideration
2. Deduct the following
a. Expenditure incurred wholly and exclusively in connection with such transfer
b. Indexed cost of acquisition
c. Indexed cost of improvement
3. Balance amount is long term capital gain

Capital gains exempt from tax
1. Section 54 Capital gains arising from transfer of residential house.
2. Section 54B capital gains arising from the transfer of land used for agriculture purpose.
3. Section 54D Capital gains on compulsory acquisition of land and building forming part of
industrial undertaking .
4. Section 54 EC Capital gains not to be charged on investment in certain bonds.
5. Section 54ED Capital gains on transfer of certain listed securities / units not to be charged to
tax in certain cases.(up to assessment year 200708).
6. Section 54 F Capital gains on transfer of a long term capital asset other than a house property .
7. Section 54G capital gains on transfer of assets in case of shifting of industrial undertaking
from urban area.
8. Section 54GA Capital gains on transfer of assets in cases of shifting of industrial undertaking
from urban area to any special economic zones .


2
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BASIS OF CHARGE
FOLLOWING CONDITIONS MUST BE SATISFIED TO CONFIRM CHARGEBILITY:
1. There is a capital asset.
2. Assessee should transfer the capital asset.
3. Transfer of capital assets should take place during the previous year.
4. There should be gain or loss on account of such transfer of capital asset.
5. Such gain should not be exempt under section 54, 54B, 54EC, 54F, 54G or 54GA .
If aforesaid conditions are satisfied, capital gain shall be arise and taxed in respective previous year.
CAPITAL ASSETS[sec 2(14)]
Capital assets means any property held by assessee will not include following:
1. Stock in trade held for business.
2. Agricultural land in India not in urban area i.e., an area with population more than 10,000.
3. Items of personal effects, i.e., personal use excluding: iJewellery, precious stones, iii-Archaeological
collections, Drawings, Paintings, Sculptures.
4. Special bearer bonds 1991.(instruments does not exist at present)
5. 6.5% Gold bonds 1977, 7% Gold bonds & National Defence Bonds 1980. (instruments does not exist
at present)
6. Gold Deposit Bonds 1999.
The word property used in section 2(14) includes not only tangible assets but also intangible
assets.
The word property does not mean merely physical property but also includes rights, title or
interest in it.

TYPES OF CAPITAL ASSETS
There are two types of Capital Assets:
1. Short Term Capital Assets (STCA): An asset, which is held by an assessee for less than 36
months, immediately before its transfer, is called Short Term Capital Assets. In other words, an
asset, which is transferred within 36 months of its acquisition by assessee, is called Short Term
Capital Assets.
2. Long Term Capital Assets (LTCA): An asset, which is held by an assessee for 36 months or
more, immediately before its transfer, is called Long Term Capital Assets. In other words, an
asset, which is transferred on or after 36 months of its acquisition by assessee, is called Long
Term Capital Assets.

The period of 36 months is taken as 12 months under following cases:
Equity or Preference shares,
Securities like debentures, government securities, which are listed in recognized stock
exchange,
Units of UTI
Units of Mutual Funds
Zero Coupon Bonds

TYPES OF CAPITAL GAINS
The profit on transfer of STCA is treated as Short Term Capital Gains (STCG).Sec 2(42B)
while that on LTCA is known as Long Term Capital Gains (LTCG). Sec 2(29B)

WHAT IS TRANSFER SEC 2(47)
Transfer in this context includes following:
1. Sale of asset
2. Exchange of asset
3. Relinquishment of asset (means surrender of asset)
4. Extinguishments of any right on asset (means reducing any right on asset)
5. Compulsory acquisition of asset
6. The maturity or redemption of zero coupon bonds


COMPUTATION OF CAPITAL GAIN
The capital gain can be computed by subtracting the cost of capital asset from its transfer
price.
Particulars Amount
Full Value of Consideration -----------
Less: Cost of Acquisition*(COA) -----------
Cost of Improvement*(COI) -----------
Expenditure on transfer -----------
Capital Gains
Less: Exemption U/S 54 ---------------------
Taxable Capital Gains -----------
*To be indexed in case of LTCA









FULL VALUE OF CONSIDERATION
Full value of consideration includes whole sale price or exchange value or compensation
including enhanced compensation received for capital asset in transfer. The following points are
considered in relation to full value of consideration.
1. The consideration may be in cash or kind.
2. The consideration received in kind is valued at its fair market value.
3. It may be received or receivable.
4. The consideration must be actual irrespective of its adequacy.

EXPEDITURE ON TRANSFER
Expenditure incurred wholly and exclusively for transfer of capital asset is called expenditure
on transfer.

It is fully deductible from the full value of consideration while calculating the capital gain.
Examples of expenditure on transfer are :
Commission or Brokerage paid by seller,
Registration fees & cost of stamp papers etc.
Travelling expenses, and litigation expenses.

COST OF ACQUISITION
Cost of Acquisition (COA) means any capital expense at the time of acquiring capital asset
under transfer, i.e., to include the purchase price, expenses incurred up to acquiring date in the
form of registration, storage etc. expenses incurred on completing transfer.
In other words, cost of acquisition of an asset is the value for which it was acquired by the
assessee.
Expenses of capital nature for completing or acquiring the title are included in the cost of
acquisition.

DEEMED COST OF ACQUISITION Under sec 49(1)
Where the capital asset became the property of the assessee in any of the following manner,
the cost of acquisition of asset shall be deemed to be cost for previous owner:
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 dissolution of a firm, body of individuals, or other
association of persons, where such dissolution had taken place at any time before the 1st day of
April, 1987,
5. On any distribution of assets on the liquidation of a company,
6. Under a transfer to a revocable or an irrevocable trust,
7. On a transfer by wholly owned Indian subsidiary company to its holding company or vise-
versa.
8. On conversion of self acquired property of a member of HUF to the Joint family property, etc.
9. On any transfer in a scheme of amalgamation of two Indian(or foreign) companies subject to
certain conditions u/s 47(vi);

COST OF ACQUISITION OF RIGHT SHARES
The price at which the rights issue is made plus amount paid to person renouncing right is
treated as cost of acquisition.
Right Issue is normally at a discount to the market price.

COST OF ACQUISITION OF BONUS SHARES
the cost of acquisition is zero.
In case the bonus shares have been allotted to assessee before 1-4-1981 he can opt for market
value of such shares on 1-4-1981 as cost of acquisition.

COST OF ACQUISITION OF DEPRECIABLE ASSETS Under sec 50
Where full value of the consideration as a result of the transfer of any part or entire block of
assets exceeds the cost of acquisition of that block of depreciable assets, there will be a capital
gain , which will always be a short term capital gain.

INDEXED COST OF ACQUISITION
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 1-4-1981 which ever is later.
Cost Inflation Index(CII), in relation to a previous year, means such index as the central
government may, having regard to 75% of a average rise in the consumer price index for urban
non-manual employees for the immediately preceding previous year to such previous year, by
notification in the official gazette, specified in this behalf.

Asset can be acquired in following two modes:
Mode a) Assets acquired directly by the assessee himself
Cost of acquisition x CII of the year of transfer
CII of the year of acquisition


Mode b) Asset acquired from the previous owner n any mode given u/s 49(1):
Cost of acquisition previous owner x CII of the year of transfer
CII of the year in which the asset is first held by the assessee


COST OF IMPROVEMENT
Cost of improvement is the capital expenditure incurred by an assessee for making any
addition or improvement in the capital asset.
It also includes any expenditure incurred in protecting or curing the title.
Cost of improvement includes all those expenditures, which are incurred to increase the value
of the capital asset.
Any cost of improvement incurred before 1st April 1981 is not considered or it is ignored.
The reason behind it is that for carrying any improvement in asset before 1st April 1981, asset
should have been purchased before 1st April 1981.
If asset is purchased before 1st April we consider the fair market value.
The fair market value of asset on 1st April 1981 will certainly include the improvement made
in the asset.

Indexed Cost of improvement
Indexed Cost of improvement = Cost of acquisition x CII of the year of transfer
CII of the year of improvement

INDEXED COST NOT ALLOWED
1. Transfer of bonds and debenture by company or govt. other than capital indexed bonds
issued by government,
2. Transfer of shares & debentures by nonresident in foreign currency in Indian company.
3. Transfer of undertaking or division in a slump sale,
4. Transfer of offshore funds,
5. Transfer of GDR by non-resident purchased in foreign currency.
6. Transfer of securities by FII.[sec 115AD]


CAPITAL GAIN ON CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE Under sec 45(2)
Up to 1984-85 conversion of capital asset into stock in trade was not treated as transfer & no
capital gain was charged on it.
From 1984-85 The profits or gains arising from the transfer by way of conversion by the owner
of a capital asset into, or its treatment by him as 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 and , for the purposes of section 48, 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 or accruing as a result of the transfer of the capital
asset.

CAPITAL GAIN ON CONVERSION OF STOCK IN TRADE IN CAPITAL ASSET
*HERE WE TAKE SHARES AS VARIOUS ASSETS.
In the absence of a specific provision to deal with this type of situation, two formulas can be
evolved to work out the profits and gains on transfer of assets.
One Formula which had been adopted by the assessing officer, i.e., difference between the
book value of the shares and the market value of the shares on the date of conversion, be taken
as a business income and the difference between the sale price of the shares and the market
value of the shares on the date of conversion, be taken as capital gain.
The other formula which was adopted by the assessee, i.e., the difference between the sale
price of the shares and the cost of acquisition of share, which was the book value on the date of
conversion with indexation from the date of conversion, should be computed as a capital gain.
In the absence of a specific provision, out of these two formulas, the formula which was
favorable to the assessee, should be accepted.

DISTRIBUTION OF CAPITAL ASSETS ON DISSOLUTION OF FIRM,AOP/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
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.
For the purpose of computation of capital gain, fair market value shall be taken as full value of
consideration.