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Unit 12: Income under the Head Capital Gains

The Supreme Court in the case of Vodafone International Holdings B.V vs. Union of India [2012] Notes
204 Taxman 408 held that influence or persuasion of a parent company over its subsidiary could
not be construed as a right in the legal sense.
To supersede this ruling with retrospective effect from 1st April 1962, an Explanation has been
inserted to clarify that ‘property’ includes and shall be deemed to have always included any
rights in or in relation to an Indian company, including rights of management or control or any
other rights whatsoever.

The term ‘property’ appearing in Section 2(14) has not been defined in the Income-tax Act. Even
the Transfer of Property Act does not contain any definition of the term. But, the scope of Section
2(14) is very wide. With the exception of the aforementioned assets, all other assets are included
in the category of capital asset. “Capital asset” includes movable or immovable asset, tangible
or intangible assets, incorporeal rights and chose-in-action. It would also include share of a
partner in a firm, goodwill of a firm, mining rights, industrial licence acquired by consideration,
tenancy right or leasehold right, foreign currency, right to subscribe for shares, the contractual
right of a purchaser to obtain title to an immovable property, etc.
However, with effect from Assessment Year 1988–89, Section 55 is amended to remove this legal
difficulty. It provides that where goodwill is self-generated, the cost of acquisition for
computation of capital gain shall be deemed to be nil and where it has been purchased, the cost
will be taken to be the actual price paid for it. The cost of improvement also in relation to
goodwill is taken to be nil.

The Government has overcome the problem of taxing capital gains on transfer of three other
categories of self generated assets: with effect from the assessment year 1995–96, cost of tenancy
rights, route permits and loom hours would also be deemed to be nil.
From Assessment year 2008–09, the scope of Section 2(14) has been indexed with the introduction
of taxability provision with regards to “personal effects being archaeological collections”.

Notes In a simple terms we can say that any income profit or gains arising from the
transfer of a capital asset is chargeable as capital gains. Now let us understand the meaning
of capital asset. Capital Asset means property of any kind, whether fixed or circulating,
movable or immovable, tangible or intangible, held by the assessees whether or not
connected with his business or profession, but does not include, i.e., Capital Assets exclude:
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 jewellery, costly stones, silver,
gold
4. Special bearer bonds 1991
5. 6.5%, 7% Gold bonds & National Defence Bonds 1980.
6. Gold Deposit Bonds 1999.

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.

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