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CAPITAL ASSET

Subject: TAXATION LAW

Submitted to: - Submitted by:-

Dr. G.p. pandey ADHISH PRASAD

Faculty of Taxation Law Roll no: - 904

Semester: - 7th

Session: - 2013-18

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TABLE OF CONTENTS

1. AIMS & OBJECTIVE.........4

2. REASARCH METHODOLOGY....4

3. SOURCES OF DATA.........................................................................................................4

CHAPTERISATION
i. INTRODUCTION....................................................................................5-7

ii. AMENDMENT IN THE DEFINITION OF CAPITAL


ASSET.................................................................................................8,9

iii. TYPES OF CAPITAL ASSET.........................10-13

iv. PERIOD OF HOLDING CAPITAL ASSET IN DIFFERENT


SITUATION.........................................................................................14,15

v. TRANSFER OF CAPITAL ASSET.....................................................16,17

vi. CONCLUSION..........................................................................................18

BIBLIOGRAPHY..................19

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ACKNOWLEDGEMENT

I am very thankful to everyone who all supported me for I have completed my project effectively
and moreover on time. I am equally grateful to my Taxation Law faculty: Dr. G.P. PANDEY.
He gave me moral support and guided me in different matters regarding the topic. He had been
very kind and patient while suggesting me the outlines of this project and correcting my doubts. I
thank him for his overall supports. Last but not the least, I would like to thank my friends who
helped me a lot in gathering different information, collecting data and guiding me from time to
time in making this project despite of their busy schedules ,they gave me different ideas in
making this project unique.

Thanking you

ADHISH PRASAD

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AIMS & OBJECTIVE-

Researcher, by doing this project shall find out the meaning, types and application of the Capital
Asset.

RESEARCH METHODOLOGY-

Researcher shall emphasize and use the doctrinal method to prepare this project topic.

SOURCES OF DATA-

PRIMARY SOURCES:- SECONDARY SOURCES:-

1. Income Tax Act, 1961 1. Books on Taxation Law

2. Websites

3. Journal

4. Magazines

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CHAPTER 1: INTRODUCTION

Capital asset As defined under Section 2(14) of Income Tax Act, 1961

As per this section capital asset means property of any kind held by an assessee, whether or not
connected with his business or profession, but does not include

(i) any stock in trade, consumable stores or raw materials held for the purposes of his business or
profession

(ii) personal effect, that is to say, movable property (including wearing apparel and furniture)
held for personal us 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
(f) any work of art.

Explanation For the purposes of this sub clause, jewellery includes


(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy
containing one or more of such precious metals, whether or not containing any precious
or semiprecious stone, and whether or not worked or sewn into any wearing apparel
(b) precious or semiprecious stones, whether or not set in any furniture, utensil or other
article or worked or sewn into any wearing apparel

[(iii) agricultural land in India, not being land situate


(a) in any area which is comprised within the jurisdiction of a municipality (whether known
as a municipality, municipal corporation, notified area committee, town area committee,
town committee, or by any other name) or a cantonment board and which has a

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population of not less than ten thousand according to the last preceding census of which
the relevant figures have been published before the first day of the previous year
or

(b) in any area within such distance, not being more than eight kilometres, from the local limits
of any municipality or cantonment board referred to in item (a), as the Central Government may,
having regard to the extent of, and scope for, urbanisation of that area and other relevant
considerations, specify in this behalf by notification in the Official Gazette]

(iv) Gold bond as issued by the central government (these instruments are not is existence now)

(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the
Central Government1

Relevant points on Capital Asset


To qualify as an agriculture land it must be an agriculture land at the time of sale. The relevant
factor for determining depends on the use of land on the date of transfer.

Jewellery for the purpose of capital asset includes following;


Ornaments made of sliver, gold, platinum or any other precious metal or an alloy containing one
or more of such metals, whether or not containing any precious or semi precious stones and
whether or not worked or sewn into any wearing apparel;

Precious or semi precious stones, whether or not set in any furniture, utensil or other articles or
worked or sewn into any wearing apparel.2

1
Section 2(14) of Income Tax Act, 1961
2
http://yourfinancebook.com/capital-asset-defined-section-214/, Accessed on 21/10/2016

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Here are some examples of capital assets: land, building, house property, vehicles, patents,
trademarks, leasehold rights, machinery, jewellery. This includes rights in or in relation to an
Indian company, including rights of management or control or any other right.3
The following are not considered capital assets:
Any stocks or consumables or raw material held for the purpose of Business or
Profession
Personal goods such as clothes, furniture held for personal use.
Agricultural land in India in a rural area
6% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Gold Bonds, 1980
issued by the Central Government
Special Bearer Bonds 1991
Gold Deposit Bond issued under the Gold Deposit Scheme, 19994

3
http://caclub.in/capital-asset-meaning-s-214-income-tax/, Accessed on 20/10/2016
4
http://www.simpletaxindia.net/2012/05/what-is-capital-asset-for-capital-gain.html, Accessed on 21/10/2016

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CHAPTER 2: AMENDMENT IN THE DEFINITION OF
CAPITAL ASSET

1. The provisions contained in clause (14) of section 2 of the Income-tax Act, 1961, before
amendment by the Finance Act, 2013 define the term capital asset as property of any kind held
by an assessee, whether or not connected with his business or profession. Certain categories of
properties including agricultural land have been excluded from this definition. Sub-clause (iii) of
clause (14) of section 2 provides that :-

(a) agricultural land situated in any area within the jurisdiction of a municipality or
cantonment board having population of not less than ten thousand according to last preceding
census, or

(b) agricultural land situated in any area within such distance not exceeding eight kilometers
from the local limits of any municipality or cantonment board as notified by the Central
Government having regard to the extent and scope of urbanization and other relevant
factors, forms part of capital asset.

2. Item (b) of sub-clause (iii) of clause (14) of section 2 has been amended so as to provide that
the land situated in any area within the distance, measured aerially (shortest aerial distance),

(I) not being more than two kilometers, from the local limits of any municipality or
cantonment board referred to in item (a) and which has a population of more than ten
thousand but not exceeding one lakh; or
(II) (II) not being more than six kilometers, from the local limits of any municipality or
cantonment board referred to in item (a) and which has a population of more than one
lakh but not exceeding ten lakh; or
(III) (III) not being more than eight kilometers, from the local limits of any municipality or
cantonment board referred to in item (a) and which has a population of more than ten
lakh, shall form part of capital asset.

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3. The expression population has also been defined to mean population according to the last
preceding census of which the relevant figures have been published before the first day of the
previous year.

4. Similar amendments are also carried out in clause (IA) of section 2 of the Income-tax Act,
1961 relating to the definition of agricultural income and in respect of the definition of urban
land in the Wealth-tax Act, 1957.

5. Applicability These amendments take effect from 1st April, 2014 and accordingly, apply
in relation to Assessment year 2014-15 and subsequent assessment years.5

5
Amendement in the defination of Capital Asset wef A.Y. 2014-15, Accessed on 21/10/2016

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CHAPTER 3: TYPES OF CAPITAL ASSET

1. LONG TERM CAPITAL ASSET


Long term capital asset means a capital asset held by an assessee for more than 36 months
immediately preceding the date of its transfer.6

However in the following cases, if Capital asset is held for more than 12 months it shall be
treated as long term capital asset

The assets are:


Equity or preference shares in a company listed on a recognized stock exchange in India
Securities like debentures, bonds, Govt. securities etc listed on a recognized stock
exchange in India
Units of UTI, whether quoted or not
Units of equity oriented mutual fund, whether quoted or not
Zero coupon bonds, whether quoted or not.
Unlisted Equity or preference shares held in a company (if transfer of such shares takes
place on or before 10th July, 2014)
Units of mutual fund specified under section 10(23D) other than equity oriented fund
(whether quoted or not, if transfer of such shares takes place on or before 10th July,
2014)

Note: With effect from Assessment Year 2017-18, period of holding to be considered as 24
months instead of 36 months in case of unlisted shares of a company,7

6
Taxation Principles And Applications, by Parthasarathi Shome, Lexis Nexis Publication, pg.78

7
http://www.taxdose.com/short-term-and-long-term-capital-assets-income-tax/, Accessed on 24/10/2016

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2. SHORTTERM CAPITAL ASSET.
A capital asset held for not more than 36 months or less is a shortterm capital asset. In other
words, An asset held for less than or for exactly 36 or 12 months will be considered as short term
capital asset. 8

However, some assets are considered shortterm capital assets when these are held for 12 months
or less. This rule is applicable if the date of transfer is after 10th July 2014, irrespective of what
the date of purchase is.

For example, a house property held for more than 3 years is termed as a longterm capital asset,
whereas equity funds are considered shortterm when held for 12 months or less. Debt Funds are

longterm assets when held for more than 36 months.9

Note: With effect from Assessment Year 2017-18, period of holding to be considered as 24
months instead of 36 months in case of unlisted shares of a company,10

In case an asset is acquired by gift, will, succession or inheritance, the period this asset was held
by the previous owner is also included when determining whether it's a short term or a long term
capital asset. In case of Bonus Shares or Rights Shares the period of holding is counted from the
date of allotment of bonus shares or Rights Shares respectively.11

Illustration
Mr. Kumar is a salaried employee. In the month of April, 2010 he purchased a piece of land and
sold the same in December, 2015. In this case, land is a capital asset for Mr. Kumar. He
purchased land in April, 2010 and sold in December, 2015 i.e. after holding it for a period of
more than 36 months. Hence, land will be treated as long-term capital asset.

8
Meaning of Long Term and Short Term Capital Asset TaxAdda (pdf), Accessed on 25/10/2016
9
Income Tax Guide, by Subhash Lakhotia, Lexis Nexis Publication, pg.96
10
http://taxadda.com/income-tax/capital-gain/meaning-of-long-term-and-short-term-capital-asset/, Accessed on
25/10/2016
11
http://www.incometaxindia.gov.in/Documents/Left%20Menu/IND-Income-from-capital-gains.htm, Accessed on
21/10/2016

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Illustration
Mr. Raj is a salaried employee. In the month of April, 2014, he purchased a piece of land and
sold the same in December, 2015. In this case land is a capital asset for Mr. Raj. He purchased
land in April, 2015 and sold it in December, 2015, i.e., after holding it for a period of less than
36 months. Hence, land will be treated as short-term capital asset.

Illustration
Mr. Raj is a salaried employee. In the month of April, 2013 he purchased equity shares of SBI
Ltd. (listed in BSE) and sold the same in December, 2015. In this case shares are capital assets
for Mr. Raj. He purchased shares in April, 2013 and sold them in December, 2015, i.e., after
holding them for a period of more than 12 months. Hence, shares will be treated as long-term
capital assets.

Illustration
[As amended by Finance Act, 2016]
Mr. Kumar is a salaried employee. In the month of April, 2015 he purchased equity shares of
SBI Ltd. (listed in BSE) and sold the same in January, 2016. In this case shares are capital assets
for Mr. Kumar. He purchased shares in April, 2015 and sold them in January, 2016, i.e., after
holding them for a period of less than 12 months. Hence, shares will be treated as short-term
capital assets. 12

Illustration
Mr. Kumar is a salaried employee. In the month of April, 2015 he purchased un-listed shares of
XYZ Ltd. and sold the same in January, 2016. In this case shares are capital assets for Mr. Raj
and to determine nature of capital gain, period of holding would be considered as 36 month as
shares are unlisted. He purchased shares in April, 2015 and sold them in January, 2016, i.e., after
holding them for a period of less than 36 months. Hence, shares will be treated as Short Term
Capital Assets.

12
Law, Practice & Procedure Of Service Tax - As Amended By The Finance Act, 2016, by J.K. Mittal, Lexis Nexis
Publication, pp.121

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Illustration
Mr. Raj is a salaried employee. In the month of April, 2011 he purchased un-listed shares of
XYZ Ltd. and sold the same in December, 2015. In this case shares are capital assets for Mr. Raj
and to determine nature of capital gain, period of holding would be considered as 36 month as
shares are unlisted. He purchased shares in April, 2011 and sold them in December 2015, i.e.,
after holding them for a period of more than 36 months. Hence, shares will be treated as Long
Term Capital Assets.

Illustration
Mr. Vikas is a salaried employee. In the month September, 2013 he purchased unlisted
shares of ABC ltd. and sold the same in May 2016. In this case, shares are sold in assessment
year 2017-18. Hence, period of holding for unlisted shares to be considered as 24 months instead
of 36 months.
Mr. Vikas purchased shares in September 2013 and sold them May 2016, i.e. after holding them
for a period of 24 months or more. Hence, shares will be treated as Long Term Capital Assets.13

13
http://www.taxdose.com/short-term-and-long-term-capital-assets-income-tax/, Accessed on 22/10/2016

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CHAPTER 4: PERIOD OF HOLDING CAPITAL ASSET IN
DIFFERENT SITUATION

DIFFERENT SITUATIONS HOW TO CALCULATE THE PERIOD OF


HOLDING.
Shares held in a company in The period subsequent to the date on which the company
goes into liquidation shall be excluded..
liquidation
Allotment of shares in The period of holding shall be computed from the date of
amalgamated Indian company acquisition of shares in the amalgamating company.
in lieu shares held in
amalgamating company
Right shares The period of holding shall be computed from the date of
allotment of right shares.
Right entitlement The period of holding will be considered from the date of
offer to subscribe to shares to the date when such right
entitlement is renounced by the person.

Bonus shares The period of holding shall be computed from the date of
allotment of bonus shares.
Issue of shares by the resulting The period of holding shall be computed from the date of
company in a scheme of acquisition of shares in the demerged company.14
demerger to the shareholders of
the demerged company

In case of shares as well as trading/clearing rights, the


Membership right held by a period for which the person was a member of the stock
member of recognised stock exchange immediately prior to such demutualization
exchange /corporatization shall be included.

Flat in a cooperative Society The period of holding shall be computed from the date of
allotment of shares in the society.

Sweat equity shares allotted by The period of holding shall be reckoned from the date of
employer allotment or transfer of such equity shares (applicable from
the assessment year 2008-09)

Unit of a business trust [allotted The period of holding shall include the period for which
pursuant to transfer of shares as shares were held by the assessee.
referred to in section 47(xvii)]

14
http://www.incometaxindia.gov.in/Charts%20%20Tables/Treatment_of_income_from_different_sources.html,
Accessed on 31/10/2016

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Units allotted to an assessee The period of holding of such units shall include the period
pursuant to consolidation of two for which the unit or units in the consolidating scheme of the
or more scheme of a mutual mutual fund were held by the assessee.
fund as referred to in Section
47(xviii)

Shares in a company acquired The period of holding of such shares shall be reckoned from
by the nonresident assessee on the date on which a request for such redemption was made.
redemption of Global
Depository Receipts referred to
in Section 115AC(1)(b)

Capital asset which becomes the The period for which the asset was held by the previous
property of the assessee in the owner should be included.15
circumstances mentioned in
section 49(1) read with section
47[i.e., when an asset is
acquired by gift, will,
succession, inheritance or the
asset is required at the time of
partition of family or under a
revocable or irrevocable trust or
under amalgamation, etc.]

15
Treatment of income from different sources (pdf), Accessed on 23/10/2016

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CHAPTER 5: TRANSFER OF CAPITAL ASSET

SECTION 2(47) DEALS WITH TRANSFER OF CAPITAL ASSET


"Transfer, in relation to a capital asset, includes:
(i) Sale, exchange or relinquishment of the asset
(ii) Extinguishment of any rights in relation to a capital asset
(iii) Compulsory acquisition of an asset
(iv) Conversion of capital asset into stock in trade
(v) Maturity or redemption of a zero coupon bond
(vi)Allowing possession of immovable properties to the buyer in part performance of the
contract
(vii) Any transaction which has the effect of transferring an (or enabling the enjoyment of)
immovable property or
(viii) Disposing of or parting with an asset or any interest therein or creating any interest in any
asset in any manner whatsoever.16

TRANSACTIONS WHICH ARE NOT REGARDED AS TRANSFER [SECTION 47]


Following transactions shall not be regarded as transfer (subject to certain condition). Hence,
following transaction shall not be charged to capital gains:
46(1) Distribution of asset in kind by a company to its shareholders at the time of liquidation.
47(i) Distribution of capital asset on total or partial partition of HUF.
47(iii) Transfer of capital asset under a gift or will or an irrevocable trust.
47(vi) Transfer of capital assets in a scheme of amalgamation.
47(vicb) Any transfer of capital asset (being shares) held by a shareholder in the predecessor
cooperative bank if the transfer is made in consideration of the allotment to him of any shares in
the successor cooperative bank in a scheme of business reorganization.
47(vid) Transfer or issue of shares by the resulting company to the shareholders of the demerged
company in a scheme of demerger.

16
Sec. 2(47) of Income Tax Act, 1961

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47(vii) Allotment of shares in amalgamated company in lieu of shares held in amalgamating
company.
47(viia) Transfer of capital assets (being foreign currency convertible bonds or GDR) by a non
resident to an other non resident.
47(viib) Transfer of capital assets (being a Government security carrying periodic payment of
interest) outside India through an intermediary dealing in settlement of securities by a
nonresident to another nonresident.
47(viic) Redemption of capital asset being sovereign gold bond issued by RBI under the
Sovereign Gold Bond Scheme, 2015.
47(ix) Transfer of a capital asset (being work of art, manuscript, painting, etc.) to Government,
University, National museum, etc.
47(x) Transfer by way of conversion of bonds or debentures into shares.
47(xa) Transfer by way of conversion of bonds [as referred to in section.
115AC(1)(a)] into shares or debentures of any company.
47(xi) Transfer by way of exchange of a capital asset being membership of a recognized stock
exchange for shares of a company.
47(xiiia) Transfer of a capital asset being a membership right held by a member of a recognized
stock exchange in India.
47(xiv) Transfer of a capital asset to a company in the case of conversion of proprietary concern
into a company.
47(xv) Transfer involved in a scheme of lending of securities.
47(xvi) Transfer of a capital asset in a transaction of reverse mortgage made under a scheme
notified by the Government.
47(xvii) Transfer of a capital asset (being share of a special purpose vehicle) to a business trust
in exchange of units allotted by that trust to the transferor.
47(xviii) Transfer of units of a mutual fund pursuant to consolidation of two or more schemes of
equity oriented mutual fund or of two or more schemes of a mutual fund other than equity
oriented mutual fund.
47(xix) Transfer of units of a mutual fund from one plan to another pursuant to consolidation of
plans within scheme of mutual funds.17

17
Sec. 47 of Income Tax Act, 1961

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CHAPTER 6: CONCLUSION

After going through various books, online materials and other data sources, the researcher has
concluded that, A capital asset is defined to include property of any kind held by an assessee,
whether connected with their business or profession or not connected with their business or
profession. It includes all kinds of property, movable or immovable, tangible or intangible, fixed
or circulating. Thus, land and building, plant and machinery, motorcar, furniture,jewellery, route
permits, goodwill, tenancyrights, patents, trademarks, shares, debentures, securities,units, mutual
funds, zero-coupon bonds etc. are capital assets.

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BIBLIOGRAPHY

PRIMARY SOURCE: -

STATUTE: -

INCOME TAX ACT, 1961

SECONDARY SOURCE

BOOKS: -

Taxation Principles And Applications, by Parthasarathi Shome, Lexis Nexis Publication


Income Tax Guide, by Subhash Lakhotia, Lexis Nexis Publication
Law, Practice & Procedure Of Service Tax - As Amended By The Finance Act, 2016,
by J.K. Mittal, Lexis Nexis Publication

WEBSITES.

1. http://yourfinancebook.com/capital-asset-defined-section-214/
2. http://caclub.in/capital-asset-meaning-s-214-income-tax/
3. http://www.simpletaxindia.net/2012/05/what-is-capital-asset-for-capital-gain.html
4. http://www.taxdose.com/short-term-and-long-term-capital-assets-income-tax/
5. http://taxadda.com/income-tax/capital-gain/meaning-of-long-term-and-short-term-
capital-asset/
6. http://www.incometaxindia.gov.in/Documents/Left%20Menu/IND-Income-from-
capital-gains.htm
7. http://www.taxdose.com/short-term-and-long-term-capital-assets-income-tax/
8. http://www.incometaxindia.gov.in/Charts%20%20Tables/Treatment_of_income_fro
m_different_sources.html

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