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Income Tax Laws – I

Notes destruction or damage of capital asset. Thus, whenever there is a loss on sale of any capital asset
it will be termed as loss under the head capital gain.
The provisions for computation of Income from capital gains are covered under sections
45 to 55. Section 2(14) defines the term capital gain and section 45, the charging section lays down
basis of change for taxability of capital gain or loss arises on transfer of capital asset.
Taxability of capital gain depends upon the nature of capital gain arises, i.e., short term capital
gain or long term capital gain. The type of capital gain depends upon the period for which the
capital asset is held. The taxability of capital gain shall satisfy the conditions like there should be
capital asset, the asset is transferred by the assessee, such transfer takes place during the previous
year, etc. To give relief to the assessee, the concept of exemption introduced under different
sections.
At the end of this unit, you will learn the conditions to be satisfied for income to be chargeable
under this head, which assets are classified as capital asset, the year in which the capital gains are
chargeable to tax, classification of capital gain into long-term and short-term, which are the
transactions not regarded as transfer, what are the exemptions available in respect of capital
gains and when the assessing officer can make a reference to the valuation officer.

12.1 Capital Gains

Under the Income Tax Act, 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
deemed to be the income of the previous year in which the transfer took place unless such capital
gain is exempted under the prescribed exemptions.
‘Capital gains’ means any profit or gains arising from transfer of a capital asset. If any Capital
Asset is sold or transferred, the profits arising out of such sale are taxable as capital gains in the
year in which the transfer takes place. Capital gains are the difference between the price at which
the capital asset was acquired and the price at which the same asset was sold. In technical terms,
capital gain is the difference between the cost of acquisition and the fair market value on the date
of sale or transfer of asset.

Sections 45 to 55A of the Income-tax Act, 1961 Deal with Capital Gains

Section 45 of the Act, provides that any profits or gains arising from the transfer of a capital asset
effected in the previous year shall, save as otherwise provided in Sections 54, 54B, 54D, 54EC,
54ED, 54F, 54G, 54GA and 54H 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.

Doubts may arise as to whether ‘Capital Gains’ being a capital receipt can be brought to tax as
income. It may be noted that the ordinary accounting canons of distinctions between a capital
receipt and a revenue receipt are not always followed under the Income-tax Act. Section 2(24)(vi)
of the Income-tax Act specifically provides that “Income” includes “any capital gains chargeable
under Section 45(1)”. It may not be out of place to mention here that in the absence of a specific
provision in Section 2(24) capital gains has no logic to be taxed as income.

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Caution However, all capital profits do not necessarily constitute capital gains. For instance,
profits on re-issue of forfeited shares, profits on redemption of debentures, premium on
issue of shares, ‘pagri’ from tenants etc. are capital profits and not capital gains, hence, not
liable to tax. The requisites of a charge to income-tax, of capital gains under Section 45(1)
are:
1. There must be a capital asset.

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