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Unit 12: Income under the Head Capital Gains

“The inclusion of “capital gains” in the definition of “income” was for the first time Notes
enacted in 1947. It is true that, at the time when section 16(3)(a)(iii) was enacted, the
definition of “income” did not include “capital gains” but capital gains having been
brought within the meaning of “income” in section 2(6C), the expression “income”
as used in section 16(3)(a)(iii) must be construed according to the amended definition
of the word and would, therefore, include capital gains. There is nothing in the
context or language of section 16(3)(a)(iii) of the Act to suggest that capital gains are
excluded from its scope. We see no reason why a restricted interpretation should be
given to the provisions of section 16(3)(a)(iii) as contended for the appellant. On the
contrary, the object of the enactment of the section is to prevent avoidance of tax or
reducing the incidence of tax on the part of the assessee by transfer of his assets to his
wife or minor child.”
8. In the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84
their Lordship of Hon’ble Supreme Court has observed as under:
“As regards the aspect emerging from the expression “attributable to” occurring in
the phrase “profits and gains attributable to the business of” the specified industry
(here generation and distribution of electricity) on which the learned Solicitor-
General relied, it will be pertinent to observe that the legislature has deliberately
used the expression “attributable to” and not the expression “derived from”. It
cannot be disputed that the expression “attributable to” is certainly wider in import
than the expression “derived from”. Had the expression “derived from” been used,
it could have with some force been contended that a balancing charge arising from
the sale of old machinery and buildings cannot be regarded as profits and gains
derived from the conduct of the business of generation and distribution of electricity.
In this connection, it may be pointed out that whenever the legislature wanted to
give a restricted meaning in the manner suggested by the learned Solicitor-General,
it has used the expression “derived from”, as, for instance, in section 80J.”
9. It is, therefore, clear from the above that “income derived from any asset” must
have a direct nexus and should flow from the use of the asset. A profit or gain arising
on the sale of an asset is not “income”. It is a capital realisation. On account of
amendment of the term since 1947, “capital gains” has been included in “income”
and brought to tax. This has been emphasised almost by all High Courts and the
Supreme Court in the above cited decisions. Even the Bombay High Court in the
case of Manubhai A. Sheth (supra) also took similar view. It, therefore, follows that
capital gains is “income” because it is provided in the Statutory provision. Otherwise,
it is not “income”. It is certainly not “income derived” from a capital asset on its
transfer as in transfer the capital is realised. Thus the expression “income derived”
has acquired a definite and restricted meaning. It is consciously used by the legislature
as emphasised by the Supreme Court in the case of Cambay Electric Supply Industrial
Co. Ltd. (supra) and other decisions. Having regard to the above discussion
“investment income” which means income derived from foreign exchange asset
cannot include capital gain arising on transfer of foreign exchange asset for purposes
of Chapter XII-A of the I.T. Act. Realisation of capital through transfer of capital
asset cannot be income derived from the asset. For this reason legislature separately
defined long term capital gain and made specific provision to give it a beneficial
treatment. As stated earlier long term capital gain is defined as one which is not
short term capital gain. It is, therefore, clear that legislature did not intend to give
benefit to short term capital gains although short term capital gains for the purposes
of Income-tax Act remained part of “total income” within the meaning of section
Contd...

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