7

Income under the head

“Capital gains” and its
CHAPTER computation
n n n n WHAT IS THE BASIS OF CHARGE [SEC. 45]
92. Any gain arising from the transfer of a capital asset during a previous year is chargeable to tax under the
head “Capital gains” in the immediately following assessment year, if it is not eligible for exemption under
sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA and 54GB†. In other words, capital gain’s tax liability arises only
when the following conditions are satisfied :
Condition 1 There should be a capital asset. See para 93.
Condition 2 The capital asset is transferred by the assessee. For meaning of transfer, see para 94.
Condition 3 Such transfer takes place during the previous year. See para 94.2.
Condition 4 Any profit or gains arises as a result of transfer. For computation of capital gain, see para 95.
Condition 5 Such profit or gains is not exempt from tax under See para 103.
sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA
and 54GB.
If the aforesaid conditions are satisfied, then capital gain is taxable in the assessment year relevant to the
previous year in which the capital asset is transferred. However, in a few cases different rules are applicable.
These cases are narrated briefly in para 101.

n n n n WHAT IS A CAPITAL ASSET [SEC. 2(14)]

93. “Capital asset” is defined by section 2(14).
u Positive list - “Capital asset” means property of any kind, whether fixed or circulating, movable or
immovable, tangible or intangible. Besides, it includes the following –
1. Any rights in or in relation to an Indian company, including rights of management or control or any other
rights whatsoever.
2. Property of any kind held by an assessee (whether or not connected with his business or profession).
3. Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance
with the regulations made under the SEBI Act.
4. Any unit-linked insurance plan (ULIP policy) issued on or after February 1, 2021 to which exemption under
section 10(10D) does not apply (i.e., if insurance premium payable in any previous year during the term of such
policy exceeds Rs. 2.50 lakh).
† Exemption under these sections can be claimed even by an assessee who opts for the alternative tax regime.
246
247 AGRICULTURAL LAND SITUATED IN RURAL AREA n Para 93.3

u Negative list - The following assets are excluded from the definition of “capital assets” –
1. Stock-in-trade (other than securities referred to in point 3 above).
2. Personal effects (movable assets).
3. Agricultural land in a rural area in India.
4. A few gold bonds and special bearer bonds (this point does not have any practical utility).
5. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the
Gold Monetisation Scheme, 2015.
93.1 Stock-in-trade is not a capital asset - Any stock-in-trade (not being securities held by a Foreign
Institutional Investor), consumable stores or raw material held for the purpose of business or profession is not
a capital asset. This is because of the fact that any surplus arising on sale or transfer of stock-in-trade,
consumable stores or raw material is chargeable to tax as business income under section 28. What shall be
included in the term “stock-in-trade” must always be dependent upon the nature of the business of the
taxpayer. For instance, if the taxpayer deals in house properties, then such properties are stock-in-trade and,
consequently, they are not capital asset. If a dealer in properties transfers his stock-in-trade (i.e., house
properties), the resulting profit is business income not capital gains. Conversely, if a doctor transfers a house
property, the resulting income is taxable under the head “Capital gains”.
93.2 Personal effects (being movable assets) are not capital assets - Any movable property (including
wearing apparel and furniture) held for personal use of the owner or for the use of any member of his family
dependent upon him, is not a “capital asset” for the purpose of income under the head “Capital gains”.
However, the following are not “personal effects” (in other words, the following are “capital assets”) even if
these are for personal use—jewellery, archaeological collections, drawings, paintings, sculptures, or any work
of art.

Provisions illustrated
Consider the following cases –
1. X purchased a computer for his personal use at his residence for Rs. 34,000 during 2021-22. He recently sells it for
Rs. 44,000. Personal computer is treated as “personal effects”. Consequently, it is not a capital asset. Surplus of
Rs. 10,000 cannot be taxed under the head “Capital gains”. Since it is capital profit, it cannot be taxed under any
other head of income (this income of Rs. 10,000 will not be chargeable to tax at all). This rule is applicable on transfer
of any other movable personal effects (not being jewellery, archaeological collections, drawings, paintings, sculp-
tures, or any work of art). For instance, on transfer of personal car, personal garments, personal furniture, personal
household goods, nothing is chargeable to tax.
2. Personal jewellery/house property/immovable asset/archaeological collections, drawings, paintings, sculptures
or any work of art are capital assets. Suppose, an individual purchases jewellery/house property/immovable
asset/archaeological collections, drawings, paintings, sculptures or any work of art for his personal use or for the
use of his family members. Although these are purchased for personal purposes, these are not taken as “personal
effects” (by default such items are not taken as personal effects). Consequently, these are capital asset. Any surplus,
which arises on transfer of such capital asset, is taxable under section 45 under the head “Capital gains”.

93.3 Agricultural land situated in rural area is not a capital asset - Agricultural land in India in a rural
area† is not capital asset.

Provisions illustrated
Consider the following cases –
1. X, a farmer, transfers a piece of agricultural land situated in a village (population : 6,000) in Madhya Pradesh.
Since this agricultural land is situated in a rural area, any surplus on its transfer cannot be taxed under the head
“Capital gains”. Nor can it be taxed under any other head of income. It will be a tax-free income.
†Rural area for the above purpose is any area which is outside the jurisdiction of a municipality or cantonment board having a
population of 10,000 or more and also which does not fall within distance (to be measured aerially) given below –
2 kilometers from the local limits of municipality/ If the population of the municipality/cantonment board is more
cantonment board than 10,000 but not more than 1 lakh
6 kilometers from the local limits of municipality/ If the population of the municipality/cantonment board is more
cantonment board than 1 lakh but not more than 10 lakh
8 kilometers from the local limits of municipality/ If the population of the municipality/cantonment board is more
cantonment board than 10 lakh
For the above purpose, “population” means the population according to the last preceding census of which the relevant figures have
been published before the first day of the previous year.
Para 93.4 n INCOME UNDER CAPITAL GAINS AND ITS COMPUTATION 248

2. The above rule is equally applicable if X is not a farmer, but the land which is transferred is used for agricultural
purposes either by X or by any other person authorized by X.
3. If agricultural land is situated in a village which comes within a municipality, then population of the municipality
shall be considered (and not of village). In such a case if population of the municipality exceeds 10,000, then
agricultural land is a capital asset, even if population of the village is less than 10,000.

93.4 Short-term/long-term capital assets - “Short-term capital asset” means a capital asset held by an
assessee for not more than 36 months, immediately prior to its date of transfer. In other words, if a capital asset
is held by an assessee for more than 36 months, then it is known as “long-term capital asset”.
u When such period is taken as 12 months/ 24 months - If a capital asset is transferred after 36 months, it is known
as long-term capital asset. However, in the following cases a capital asset becomes long-term capital asset if it
is transferred after 12 months or 24 months –
u Category A - Period of holding more than 12 months (if transfer takes place after July 10, 2014) –
1. Equity or preference shares in a company (listed in a recognised stock exchange in India).
2. Securities (like debentures, bonds, Government securities, derivatives, etc.) listed in a recognised stock exchange
in India.
3. Units of UTI (whether quoted or not).
4. Units of an equity oriented mutual fund (whether quoted or not).
5. Zero coupon bonds (whether quoted or not).
u Category B - Period of holding more than 24 months–
1. Equity or preference shares in a company (unlisted) (if transfer takes place on or after April 1, 2016).
2. Immovable property (being land or building or both) (if transfer takes place on or after April 1, 2017).

u Why capital assets are divided in short/long-term assets - The tax incidence under the head “Capital gains”
depends upon whether the capital gain is short-term or long-term. Long-term capital gain is generally taxable
at a lower rate. If the asset transferred is a short-term capital asset, capital gain will be short-term capital gain.
Conversely, long-term capital gain arises on transfer of a long-term capital asset.

nnnn Problems
93.1-P1 State, giving reason, whether the asset is short-term or long-term in the cases given below —
1. X purchases a house property on March 10, 2020 and transfers it on June 6, 2021.
2. Y purchases listed shares in an Indian company on March 10, 2020 and transfers it on June 6, 2021.
3. Z acquires units of an equity oriental mutual fund on July 7, 2020 and he transfers these units on July 10, 2021.
4. A purchases diamonds on September 12, 2018 and gifts the same to his friend B on December 31, 2019. B transfers the asset
on October 20, 2021.
5. C purchases unlisted shares in a company through a NSE broker (date of purchase by the broker : November 21, 2019; the
company transfers shares in the name of C : January 5, 2020). These shares are transferred by C on December 20, 2021.
Solution :

Taxpayer Asset Minimum period Period of holding Short-term or

to become long- long-term
term capital asset
X House property 24 months + March 10, 2020 to June 6, 2021 (i.e., Short-term
14 months and 27 days)
Y Listed Shares 12 months + 14 months and 27 days Long-term
Z Units of a equity 12 months + 12 months and 3 days Long-term
oriented mutual fund
B Diamonds 36 months + September 12, 2018 to October 20, Long-term
2021
C Unlisted shares 24 months + November 21, 2019 to December 20, Long-term
2021
Notes—
1. If an asset is acquired by gift, will, etc. [i.e., circumstances mentioned under section 49(1)—see para 101.1], then the
period of holding of the previous owner is also taken into consideration.
2. In the case of shares, the purchase date by the broker is taken as the date of acquisition.
249 CERTAIN TRANSACTIONS NOT INCLUDED IN TRANSFER n Para 94.1

n n n n WHAT IS TRANSFER OF CAPITAL ASSET

94. Transfer, in relation to a capital asset, includes sale, exchange or relinquishment of the asset or the
extinguishment of any rights therein or the compulsory acquisition thereof under any law [sec. 2(47)]‡.
u The following points should be noted –
1. The transaction of lending shares of some distinctive numbers and receiving back shares of some other
numbers is not “exchange” of assets within the meaning of “transfer” as defined in section 2(47)— Circular No.
751, dated February 10, 1997.
2. Extension of duration of fixed maturity plan of a closely ended mutual fund, is not a transfer.
3. “Transfer” includes relinquishment of the asset or the extinguishment of any right thereon. A relinquish-
ment takes place when the owner withdraws himself from the property and abandons his rights thereto. It
presumes that the property continues to exist after the relinquishment.
4. Redemption of preference shares is transfer.
5. If there is a reduction of share capital by a company by paying a part of capital to its shareholders, it would
result in “extinguishment” of proportionate right in shares held by shareholders and chargeable to capital
gain’s tax in the hands of shareholders.
94.1 Certain transactions not included in transfer - For the purpose of section 45, the following transactions
are not regarded as transfers (in other words, in the following cases†, there is no capital gain) –
1. Distribution of assets in kind by a company to its shareholders on its liquidation.
2. Any distribution of capital assets in kind by a Hindu undivided family to its members at the time of total or
partial partition.
3. Any transfer of capital asset under a gift or a will or an irrevocable trust (exception — gift of ESOP* shares is
chargeable to tax).
4. Transfer of capital asset between holding company and its 100 per cent subsidiary company, if the
transferee-company is an Indian company.
5. Transfer of capital asset in the scheme of amalgamation/demerger, if the transferee-company is an Indian
company.
6. Transfer of shares in amalgamating company/demerged company in lieu of allotment of shares in amal-
gamated company/resulting company in the above case.
7. Transfer of capital asset in a scheme of amalgamation of a banking company with a banking institution.
8. Any transfer in a business reorganization, of a capital asset by the predecessor co-operative bank to the
successor co-operative bank or the converted banking company.
9. Transfer of shares in an Indian company held by a foreign company to another foreign company in a scheme
of amalgamation/demerger of the two foreign companies, if a few conditions are satisfied.
10. Transfer of a capital asset by a non-resident of foreign currency convertible bonds or Global Depository
Receipts to another non-resident if the transfer is made outside India and if a few conditions are satisfied.
11. Transfer by an individual of Sovereign Gold Bond (issued by RBI under the Sovereign Gold Bond Scheme,
2015) by way of redemption.
12. Transfer of any work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting,
photograph or print, to the Government or a University or the National Museum, National Art Gallery,
National Archives or any other notified public museum or institution.
13. Any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificate in any
form, of a company into shares or debentures of that company.
14. Transfer by way of conversion of preference shares of a company into equity shares of that company.
15. Land transferred by a sick industrial company, if a few conditions are satisfied.
16. Transfer of a capital asset by a private company/unlisted public company to a limited liability partnership
in the case of conversion of company into LLP, if a few conditions are satisfied.
17. Transfer of capital assets at the time of conversion of a firm/sole proprietary concern in a company, if a few
conditions are satisfied.
18. Any transfer involved in a scheme for lending of any securities, if a few conditions are satisfied.
19. Any transfer of capital asset in a reverse mortgage.

*In the case of gift of ESOP shares, fair market value on the date of gift is taken as full value of consideration.
† Provisions of sections 46 and 47 are given in brief (keeping in view the requirement of undergraduate/IPC students).
‡ The definition of “transfer” under section 2(47) shall also apply for the purpose of computation of tax under section 115BBH
pertaining to income from transfer of any virtual digital asset (whether capital asset or not).
Para 94.2 n INCOME UNDER CAPITAL GAINS AND ITS COMPUTATION 250

20. Transfer of a capital asset (being a Government security carrying periodic payment of interest) made
outside India through an intermediary dealing in settlement of securities by a non-resident to another non-
resident.
21. 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.
22. Any transfer by a unitholder of units held by him in the consolidating scheme of a mutual fund, made in
consideration of the allotment to him of units in the consolidated scheme of the mutual fund, if the consolida-
tion is of two or more schemes of equity oriented fund or of two or more schemes of a fund other than equity
oriented fund.
23. Transfer by a unitholder of units held by him in the consolidating plan of a mutual fund scheme, made in
consideration of the allotment to him of units, in the consolidated plan of that scheme of the mutual fund.
24. Transfer by a unitholder of units held by him in the consolidating plan of a mutual fund scheme, made in
consideration of the allotment to him of units, in the consolidated plan of that scheme of the mutual fund.
25. Transfer of capital asset [being bonds/GDR referred to in section 115AC(1) or rupee denominated bond of
an Indian company or derivative or notified securities made by a non-resident on a recognised stock exchange
located in any international financial services centre and where the consideration is paid/payable in foreign
currency.
94.2 Transfer when complete and effective - Generally, capital gain is taxable in the year in which capital
asset is transferred. Different rules are applicable in case of movable/immovable assets to find out when a
capital asset is “transferred”.
u Immovable property when documents are registered - Title to immovable assets will not pass till the conveyance
deed is executed or registered.
u Immovable property when documents are not registered - Even if the documents are not registered but the
following conditions of section 53A of the Transfer of Property Act are satisfied, ownership in an immovable
property is “transferred”—
a. there should be a contract in writing;
b. the transferee has paid consideration or is willing to perform his part of the contract; and
c. the transferee should have taken possession of the property.
When these conditions are satisfied, the transaction will constitute “transfer” for the purpose of capital gains.
u Movable property - Title to a movable property passes at the time when property is delivered pursuant to a
contract to sell.

nnnn Problem
94.2-P1 State, giving reasons, the assessment year for which capital gain is chargeable to tax in the cases given below —
1. X sells a house property to Y as per sale deed dated March 30, 2022. The documents are, however, registered on April 6, 2022.
2. Z sells a house property to A as per agreement to sale dated May 6, 2021. A pays the consideration on the same day. The possession
is given on June 1, 2021. The sale deed is yet to be registered.
3. B sells shares to C on March 1, 2022. Transfer deed is signed on the same day. Share certificates are delivered at the time of signing
the transfer deed. Shares are, however, transferred in the name of C in the records of the company on May 10, 2022.
Solution :
1. In the case of immovable property, ownership is transferred when sale deed is registered. In such a case, “transfer”
takes effect from the date of execution of the sale deed (and not from the date of registration)— CIT v. Ghaziabad Engg.
Co. (P.) Ltd. [2001] 116 Taxman 268 (Delhi). Therefore, in this case transfer takes place during the previous year 2021-
22 and, consequently, capital gain is taxable for the assessment year 2022-23.
2. Even if sale deed is not registered, an immovable property is transferred when the three conditions of section 53A
of the Transfer of Property Act [see para 94.2] are satisfied. The three conditions are satisfied on June 1, 2021. Therefore,
capital gain is taxable for the assessment year 2022-23.
3. When a movable property is delivered pursuant to a contract to sell, the ownership is transferred. In this case,
ownership is transferred on March 1, 2022 and, consequently, capital gain is taxable for the assessment year 2022-23.

n n n n CAPITAL GAINS - HOW COMPUTED [SEC. 48]

95. Computation of capital gain depends upon the nature of capital asset transferred, viz., short-term capital
asset or long-term capital asset. Capital gain arising on transfer of a short-term capital asset is short-term
251 CAPITAL GAINS EXEMPT FROM TAX U/SS 10 & 115JG n Para 95.2

capital gain, whereas transfer of long-term capital asset generates long-term capital gain. The tax incidence is
generally higher in the case of short-term capital gain as compared to long-term capital gain.
The method of computation of short-term and long-term capital gain is as follows :
Computation of short-term capital gain Computation of long-term capital gain
1. Find out full value of consideration [see para 96] 1. Find out full value of consideration [see para 96]
2. Deduct the following : 2. Deduct the following :
a. expenditure incurred wholly and exclusively in con- a. expenditure incurred wholly and exclusively in connec-
nection with such transfer [see para 97]; tion with such transfer [see para 97];
b. cost of acquisition [see para 98]; and b. indexed cost of acquisition—see para 100 [in some
cases cost of acquisition is deducted — see para 95.1];
and
c. cost of improvement [see para 99]. c. indexed cost of improvement—see para 100 [in some
cases cost of improvement is deducted — see para
95.1].
3. From the resulting sum deduct the exemption provi- 3. From the resulting sum deduct the exemption provided
ded by sections 54B, 54D, 54G and 54GA [see para 103] by sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA and
54GB [see para 103]
4. The balancing amount is short-term capital gain. 4. The balancing amount is long-term capital gain.

Notes –
1. Securities transaction tax is not deductible while computing income under the head “Capital gains”.
2. From the assessment year 2021-22, amount chargeable to tax under section 45(4) in the hands of specified entity
(which is attributable to the capital asset being transferred by the specified entity) (calculated as per rule 8AB) shall
be deducted to compute long-term or short-term capital gains [see para 101.7].

95.1 When the benefit of indexation is not available in the case of long-term capital asset - In the
following cases, the benefit of indexation is not available even if a long-term capital asset is transferred—
1. Bonds or debentures* [other than (a) capital indexed bonds issued by the Government or (b) Sovereign Gold
Bond issued by RBI under the Sovereign Gold Bond Scheme, 2015].
2. Shares in, or debentures of, an Indian company acquired by utilizing convertible foreign exchange.
3. Equity share in a company or a unit of equity oriented mutual fund or a unit of a business trust referred to in
section 112A [see para 104.2]
4. Depreciable asset (however, in the case of a power generating unit eligible for depreciation on straight line
basis, indexation benefit is available).
5. Undertaking/division transferred by way of slump sale as covered by section 50B.
6. Units, GDR, securities purchased in foreign currency as given in sections 115AB, 115AC, 115ACA and
115AD.
In these 6 cases, indexation benefit is never available (there is no option available to a taxpayer).
95.2 Capital gains exempt from tax under sections 10 and 115JG - In the cases given below, capital gains
are not chargeable to tax. Conversely, in the cases given below if assets are transferred at a loss, such capital
loss is not taken into consideration.
95.2-1 CAPITAL GAIN IN THE CASE OF INSURANCE POLICY [SEC. 10(10D)] - Amount received under a life insurance
policy (including bonus) is exempt from tax except in the cases given below –
1. Any payment under a keyman insurance policy.
2. Any payment under section 80DD(3) or section 80DDA(3).
3. Any payment under insurance policy issued during April 1, 2003 to March 31, 2012 where annual insurance
premium is more than 20 per cent of capital sum assured.
4. Any payment under insurance policy issued after March 31, 2012 where annual insurance premium is more
than 10 per cent of capital sum assured.
5. Any payment under insurance policy issued after March 31, 2013 to a person covered under section 80U or
80DDB where annual insurance premium is more than 15 per cent of capital sum assured.
6. Any payment under unit-linked insurance policy, issued on or after February 1, 2021, if the amount of
premium payable for any of the previous year during the term of such policy exceeds Rs. 2,50,000 [fourth proviso
to section 10(10D)].

*Preference shares (redeemable or non-redeemable) are not bonds or debentures and indexation benefit is available.
Para 95.2 n INCOME UNDER CAPITAL GAINS AND ITS COMPUTATION 252

u Other points - The following points are noted –

1. If the premium is payable, by a person, for more than one unit-linked insurance policies, issued on or after
February 1, 2021, the exemption under section 10(10D) shall apply only with respect to those unit-linked
insurance policies, where the aggregate amount of premium does not exceed Rs. 2,50,000 in any of the previous
year during the term of any of those policies [fifth proviso to section 10(10D)].
2. Amount received on the death of a person in respect of insurance policy is exempt from tax in all cases [except
in the case of keyman insurance policy and payment under section 80DD(3) or section 80DDA(3)].
95.2-2 CAPITAL GAIN ON TRANSFER OF US 64 [Sec. 10(33)] - Any income arising from the transfer of a capital asset
being a unit of US 64 is not chargeable to tax where the transfer of such assets takes place on or after April 1, 2002.
This rule is applicable whether the capital asset (US64) is long-term capital asset or short-term capital asset.
95.2-3 LONG-TERM CAPITAL GAIN ON TRANSFER OF BSE-500 EQUITY SHARES [Sec. 10(36)] - This exemption is available
if the following conditions are satisfied –
1. Capital gain arises on transfer of long-term equity shares (being shares in a BSE-500 Index of the Bombay Stock
Exchange, as on March 1, 2003).
2. These shares were purchased on or after March 1, 2003 but before March 1, 2004.
3. Capital gain arises on transfer of these shares in a recognized stock exchange.
95.2-4 CAPITAL GAIN ON COMPULSORY ACQUISITION OF URBAN AGRICULTURE LAND [SEC. 10(37)] - Section 10(37) is
applicable if the following conditions are satisfied—
1. The assessee is an individual or a Hindu undivided family.
2. He or it owns an agriculture land situated in urban area mentioned in section 2(14)(iii)(a)/(b).
3. There is transfer of the agriculture land by way of compulsory acquisition or the consideration for transfer is
approved or determined by the Central Government (not by a State Government) or RBI.
4. The agriculture land was used by the assessee (and/or his parents if the land was owned by an individual)
for agricultural purposes during 2 years immediately prior to the date of transfer.
5. The asset may be long-term capital asset or short-term capital asset.
6. Capital gain arises from compensation (and/or additional compensation) or consideration which is received
by the assessee after March 31, 2004.
u If the above conditions are satisfied, capital gain (short-term or long-term) is exempt from tax.

95.2-5 CAPITAL GAIN ARISING UNDER LAND POOLING SCHEME OF ANDHRA PRADESH GOVERNMENT [SEC. 10(37A)] -
In Land pooling scheme (of Andhra Pradesh Government), the compensation in the form of reconstituted plot
or land is provided to landowners. For this scheme, capital gain exemption is available (from the assessment year
2015-16) under section 10(37A) if the following conditions are satisfied –
1. Taxpayer is an individual/Hindu undivided family.
2. He/it owns land or building or both on June 2, 2014.
3. The above land/building is transferred under the Andhra Pradesh Capital City Land Pooling Scheme, 2015.
4. If the above conditions are satisfied, capital gains arising from following transfer shall not be chargeable to
income-tax –
- Transfer of capital asset (being land or building or both) under land pooling scheme.
- Sale of land pooling ownership certificate issued under the above land pooling scheme (such certificate is
given to the land owner in lieu of land transferred under the scheme).
- Sale of reconstituted plot or land by said persons within 2 years from the end of the financial year in which
the possession of such plot or land was handed over to the said persons.
95.2-6 LONG-TERM CAPITAL GAIN ON TRANSFER OF SECURITIES IN CASES COVERED BY SECURITIES TRANSACTION
TAX [SEC. 10(38)] - Exemption under section 10(38) is not available from the assessment year 2019-20. Long-term
capital gain is taxable according to the provisions of section 112A [see para 104.2].
95.2-7 COMPENSATION UNDER SECTION 96 OF RFCTLARR ACT, 2013 - Capital gain arising out of any award/
agreement under Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and
Resettlement Act, 2013, is exempt from tax.
95.2-8 CAPITAL GAIN EXEMPTION UNDER SECTION 115JG(1) - Under section 115JG(1) capital gains which arise on
conversion of an Indian branch of a foreign bank into an Indian subsidiary, is not chargeable to tax. The
exemption is available only if the conversion takes place in accordance with the scheme framed by RBI and
subject to the conditions notified by the Central Government.
253 INDEXED COST OF ACQUISITION/IMPROVEMENT n Para 100

n n n n WHAT IS FULL VALUE OF CONSIDERATION [SEC. 48]

96. Full value of consideration is the consideration received or receivable by the transferor in lieu of assets, which
he has transferred. Such consideration may be received in cash or in kind. If it is received in kind, then fair market
value of such assets is taken as full value of consideration. Full value of consideration does not mean market
value of that asset which is transferred.
u Adequacy of consideration - Adequacy or inadequacy of consideration is not a relevant factor for the purpose of
determining full value consideration. However, in the case of transfer of land or building (or both), if stamp duty
value is more than 110 per cent of sale consideration, the stamp duty value is taken as full value of consideration.
u Receipt of consideration - It makes no difference whether (or not) “full value of consideration” is received during
the previous year. Even if consideration is not received, capital gain is chargeable to tax in the year of transfer.
u If consideration is not determinable - Where in the case of a transfer, consideration for the transfer of a capital
asset(s) is not determinable, then for the purpose of computing capital gains, the fair market value of the asset
shall be taken to be the full market value of consideration [sec. 50D].

n n n n HOW TO FIND OUT EXPENDITURE ON TRANSFER

97. Expenditure incurred wholly and exclusively in connection with transfer of capital asset is deductible from
full value of consideration. The expression “expenditure incurred wholly and exclusively in connection with
such transfer” means expenditure incurred which is necessary to effect the transfer.
Examples of such expenses are : brokerage or commission paid for securing a purchaser, cost of stamp,
registration fees borne by the vendor, travelling expenses incurred in connection with transfer, litigation
expenditure for claiming enhancement of compensation awarded in the case of compulsory acquisition of
assets.

n n n n WHAT IS COST OF ACQUISITION

98. 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 to the property are includible in the cost of acquisition. Interest on money
borrowed to purchase asset is part of actual cost of asset.
The amount paid for discharge of a mortgage is part of “cost of acquisition”, if the mortgage was not created by
the transferor. For instance, on June 1, 2017, X took a loan of Rs. 5 lakh by mortgaging his house property. X could
not repay the loan during his lifetime and after his death on July 2, 2019, the property (with mortgage) is
transferred to Mrs. X. Mrs. X transfers the property on May 2, 2021 and before transfer, a sum of Rs. 7.2 lakh is
paid to clear the mortgage. Rs. 7.2 lakh will be deductible as part of cost of acquisition of the property while
calculating capital gains in the hands of Mrs. X. If, however, loan is taken by Mrs. X, then repayment of loan will
not be deductible as part of cost of acquisition of the property while calculating capital gains in the hands of
Mrs. X.

n n n n WHAT IS COST OF IMPROVEMENT

99. Cost of improvement is capital expenditure incurred by an assessee in making any additions/improve-
ment to the capital asset. It also includes any expenditure incurred to protect or complete the title to the capital
assets or to cure such title. Any expenditure incurred to increase the value of the capital asset is treated as cost
of improvement.
u Improvement cost incurred before April 1, 2001 - Cost of improvement incurred before April 1, 2001 is never
taken into consideration. This rule does not have any exception.

n n n n HOW TO CONVERT COST OF ACQUISITION/IMPROVEMENT INTO INDEXED COST OF

ACQUISITION/IMPROVEMENT
100. Indexed cost of acquisition is calculated as follows –

Cost of acquisition Cost inflation index for the year in

× which the asset is transferred
Cost inflation index (CII) for the year in which asset was first held
by the assessee* or 2001-02, whichever is later

*or the previous owner in cases specified under section 49(1) [see para 101.1].
Para 101 n INCOME UNDER CAPITAL GAINS AND ITS COMPUTATION 254

u Indexed cost of improvement is calculated as follows –

Cost of improvement Cost inflation index for the year in

× which the asset is transferred
CII for the year in which improvement took place

u Cost inflation index for different previous years –

Previous year CII Previous year CII Previous year CII Previous year CII
2001-02 100 2007-08 129 2013-14 220 2019-20 289
2002-03 105 2008-09 137 2014-15 240 2020-21 301
2003-04 109 2009-10 148 2015-16 254 2021-22 317
2004-05 113 2010-11 167 2016-17 264 2022-23 331
2005-06 117 2011-12 184 2017-18 272
2006-07 122 2012-13 200 2018-19 280

nnnn Problem
100-P1 X transfers the following capital assets –
House property Gold Debentures
Date of acquisition April 20, 2003 July 20, 2019 March 1, 2007
Date of transfer January 1, 2022 December 20, 2021 June 15, 2021
Sale consideration (in Rs.) 18,50,000 8,00,000 12,00,000
Stamp duty value (in Rs.) 21,00,000 – –
Cost of acquisition (in Rs.) 87,000 6,40,000 9,50,000
Cost of improvement incurred in 2015-16 (in Rs.) 1,10,000 – –
Expenditure on transfer (in Rs.) 15,000 2,000 1,000
Determine the amount of capital gain chargeable to tax from the assessment year 2022-23.
Solution : Income under the head “Capital gain” shall be calculated as follows –
House property Gold Debentures
Rs. Rs. Rs.
Full value of consideration (*stamp duty value) 21,00,000* 8,00,000 12,00,000
Less:
Cost of acquisition – 6,40,000 9,50,000
Indexed cost of acquisition 2,53,018 – –
Indexed cost of improvement 1,37,283 – –
Expenditure on transfer 15,000 2,000 1,000
Long-term capital gain 16,94,699 – 2,49,000
Short-term capital gain – 1,58,000 –

Notes—
1. Debentures are long-term capital assets in the given problem. Even then indexation benefit is not available.
2. Gold is short-term capital asset (period of holding is not more than 36 months).
3. In the case of transfer of a house property, if stamp duty value exceeds 110% of sale consideration, then stamp
duty value is taken as “full value of consideration”.
4. Indexed cost of acquisition of house property is Rs. 2,53,018 (i.e., Rs. 87,000 × CII of 2021-22 : 317 ÷ CII of 2003-04 :
109).
5. Indexed cost of improvement of house property is Rs. 1,37,283 (i.e., Rs. 1,10,000 × CII of 2021-22 : 317 ÷ CII of
2015-16 : 254).

n n n n CAPITAL GAIN IN SPECIAL CASES - HOW TO FIND OUT

101. In the following cases, the method of computation is different from what is discussed in the above
paras –
255 COST TO PREVIOUS OWNER n Para 101.1

101.1 Cost to the previous owner [Sec 49(1)] - If a person has acquired a capital asset in the circumstances
specified under section 49(1), then to calculate capital gain at the time of transfer of such asset cost to the
previous owner is taken as cost of acquisition. This rule is always applicable and does not have any exception.
Circumstances specified by section 49(1) are as follows–
a. acquisition of property on any distribution of assets on the total or partial partition of a Hindu undivided
family ;
b. acquisition of property under a gift or will ;
c. acquisition of property —
i. by succession, inheritance or devolution, or
ii. 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 before April 1, 1987, or
iii. on any distribution of assets on the liquidation of a company, or
iv. under a transfer to a revocable or an irrevocable trust, or
v. by a wholly-owned Indian subsidiary company from its holding company, or
vi. by an Indian holding company from its wholly-owned subsidiary company, or
vii. under a scheme of amalgamation, or
viii. under a scheme of demerger; or
ix. under a scheme of conversion of private company/unlisted company into LLP; or
x. on any transfer in the case of conversion of firm/sole-proprietary concern into company; or
xi. on any transfer, in relocation, of a capital asset by the original fund to the resulting fund which comes
under section 47(viiac)/(viiad); or
xii. on any transfer which comes under section 47(viiae)/(viiaf); or
d. acquisition of property, by a Hindu undivided family where one of its members has converted his self-
acquired property into joint family property after December 31, 1969.
u Other points - The following points should be duly considered —
1. No option - If a capital asset was acquired in any one of the modes given above, then cost to the previous
owner shall be taken as “cost of acquisition” for the purpose of calculating capital gain at the time of its
transfer. There is no option in this regard.
2. Last previous owner - Where the previous owner has acquired the property in the aforesaid manner, the
previous owner of the property means the last previous owner who had acquired the property by means other
than those discussed above. Cost of any improvement of the asset borne by the previous owner, or the
assessee, will be added to such cost.

Provisions illustrated
X purchases a capital asset in November 2020 for Rs. 40,000. He transfers this asset to his friend Y by gift during
December 2020. Y dies during March 2021 and the asset is transferred by his Will to Mrs. Y. Mrs. Y transfers this
property during June 2021 for a consideration of Rs. 90,000. To calculate capital gain in the hands of Mrs. Y, cost of
acquisition of the capital assets to X (i.e., Rs. 40,000) will be considered and capital gain will be Rs. 50,000.

3. Period of holding of previous owner - In order to find out whether the capital asset is short-term or long-term in
the above cases, the period of holding of the previous owner shall be taken into consideration.
4. Indexation - The benefit of indexation will be available from the year in which the asset was first held by the
previous owner*.

nnnn Problem
101.1-P1 X purchases gold on April 15, 2010 for Rs. 1,00,000. He transfers this gold by gift to his friend Y on January 20, 2017
(market value of gold: Rs. 1,40,000). Y transfers gold for Rs. 4,90,000 on May 16, 2021. Find out capital gain chargeable to tax
in the hands of X and Y.

*The Bombay High Court in CIT v. Manjula J. Shah [2012] 204 Taxman 691 has held that indexed cost of acquisition has to be computed
with reference to the year in which the previous owner first held the asset and not the year in which the current assessee became
the owner of asset. Practical problems are solved in the book on the basis of this ruling of Bombay High Court.
Para 101.2 n INCOME UNDER CAPITAL GAINS AND ITS COMPUTATION 256

Solution :
Capital gain in the hands of X - X has transferred gold on January 20, 2017 by gift. Transfer by gift is not treated as
“transfer” for the purpose of calculating capital gain. Consequently, in the hands of X nothing is chargeable to tax.
Capital gain in the hands of Y - Since the asset was acquired by Y by gift, which is covered by section 49(1), cost the
previous owner will be taken as cost of acquisition and period of holding by the previous owner will be considered
to find out whether the capital asset is short term and long term. Period of holding is more than 36 months (i.e.,
difference between April 15, 2010 and May 16, 2021). In the hands of Y, the asset is long term capital asset. Moreover,
indexation benefit will be available from April 15, 2010* (i.e., previous year 2010-11 when the asset was first held by
X). Capital gain in the hands of Y will be calculated as follows–
Rs.
Sale consideration 4,90,000
Less: Indexed cost of acquisition (Rs. 1,00,000 × CII of 2021-22: 317 ÷ CII of 2010-11 : 167) 1,89,820
Long term capital gain 3,00,180

101.2 Cost of acquisition being the fair market value as on April 1, 2001 - In the following cases, the
assessee may take at his option, either actual cost or the fair market value of the asset as on April 1, 2001 as cost
of acquisition :
a. where the capital asset became the property of the assessee before April 1, 2001; or
b. where the capital asset became the property of the assessee by any mode referred to in section 49(1) and the
capital asset became the property of the previous owner before April 1, 2001.

Provisions illustrated
Suppose X purchases preference shares on April 30, 1990 @ Rs. 40 per share. Fair market value on April 1, 2001 is
Rs. 90 per share. If he sells the shares in 2021-22 at the rate of Rs. 200 per share, he has an option. He can either take
the actual cost of Rs. 40 per share as cost or, fair market value on April 1, 2001, i.e., Rs. 90 per share. As the fair market
value on April 1, 2001 is higher, the resulting capital gain will be lower if it is taken as the cost of acquisition.

u The following points should be duly considered —

1. In the case of land and building, fair market value on April 1, 2001 cannot exceed stamp duty value
(wherever available) of such assets on April 1, 2001.
2. Adopting fair market value on April 1, 2001 (in place of actual cost of acquisition) is optional. An assessee may
(or may not) opt for it.
3. The option is available only when an asset was acquired by the assessee [or by the previous owner in case
section 49(1) is applicable] before April 1, 2001.
4. When option is available, the cost of the asset or fair market value as on April 1, 2001, whichever is higher, is
taken as the cost of acquisition.
5. The option is not available in the case of depreciable assets.
6. Further option is not available in respect of transfer of a capital asset being goodwill of a business or profession;
trade mark/brand name associated with a business; right to manufacture, produce or process any article or
thing; right to carry on business/profession; tenancy right; route permits or loom hours (whether self generated
or otherwise).

nnnn Problem
101.2-P1 Find out capital gain chargeable to tax in the following cases –
House Silver Diamond
Date of acquisition May 20, 1989 March 10, 1999 May 1, 2003
Date of transfer April 29, 2021 June 10, 2021 August 12, 2021
Rs. Rs. Rs.
Sale consideration 14,00,000 8,00,000 8,10,000
Stamp duty value 16,50,000 – –
Cost of acquisition 95,000 58,000 70,000

*The Bombay High Court in CIT v. Manjula J. Shah [2012] 204 Taxman 691 has held that indexed cost of acquisition has to be computed
with reference to the year in which the previous owner first held the asset and not the year in which the current assessee became
the owner of asset. Practical problems are solved in the book on the basis of this ruling of Bombay High Court.
257 CAPITAL GAIN IN CASE OF TRANSFER OF DEPRECIABLE ASSETS n Para 101.3

House Silver Diamond

Fair market value on April 1, 2001 90,000 60,000 84,000
Cost of construction of first floor (in 1999-00) 18,000 – –
Cost of construction of second floor (in 2014-15) 40,000 – –
Solution :
House Silver Diamond
Whether option of using fair market value on April 1, 2001 is available Yes Yes No
Whether fair market value on April 1, 2001 is more than actual cost of
acquisition and should it be adopted No Yes –
Rs. Rs. Rs.
Full value of consideration (stamp duty value is taken in the case of
house, as it exceeds 110% of sale consideration) 16,50,000 8,00,000 8,10,000
Less:
Indexed cost of acquisition 3,01,150 1,90,200 2,03,578
Indexed cost of improvement 52,833 – –
Long-term capital income 12,96,017 6,09,800 6,06,422
Notes—
1. Indexed cost of acquisition of house - Fair market value on April 1, 2001 is less than actual cost of acquisition. It should
not be taken as cost of acquisition. Consequently, cost of acquisition of Rs. 95,000 is taken. Cost inflation index (CII)
of the year of transfer of 2021-22 is 317. CII of the year of acquisition (i.e., 1999-00 or 2001-02, whichever is later) is 100.
Indexed cost of acquisition is Rs. 3,01,150 (i.e., Rs. 95,000 × 317 ÷ 100).
2. Indexed cost of improvement of house - Any cost of improvement which is incurred prior to April 1, 2001 is never taken
into consideration. Cost of improvement incurred during 1999-00 will be ignored. Improvement cost incurred in
2014-15 is Rs. 40,000. CII of 2014-15 is 240. Indexed cost of improvement is Rs. 52,833 (i.e., Rs. 40,000 × 317 ÷ 240).
3. Indexed cost of acquisition of silver- Fair market value on April 1, 2001 is more than actual cost of acquisition. It should
be taken as cost of acquisition. Consequently, cost of acquisition of Rs. 60,000 is taken. Cost inflation index (CII) of the
year of transfer of 2021-22 is 317. CII of the year of acquisition (i.e., 1998-99 or 2001-02, whichever is later) is 100.
Indexed cost of acquisition is Rs. 1,90,200 (i.e., Rs. 60,000 × 317 ÷ 100).
4. Indexed cost of acquisition of diamond - Fair market value on April 1, 2001 cannot be adopted, as diamond was
acquired on or after April 1, 2001. Cost of acquisition is Rs. 70,000. Cost inflation index (CII) of the year of transfer of
2021-22 is 317. CII of the year of acquisition (i.e., 2003-04) is 109. Indexed cost of acquisition is Rs. 2,03,578 (i.e., Rs.
70,000 × 317 ÷ 109).

101.3 Capital gain in the case of transfer of depreciable assets [Sec. 50] - The following rules† are
applicable –
u Capital gain arises only in two cases - If a depreciable asset is transferred, capital gain (or loss) will arise only in
the following two cases –
1. When on the last day of the previous year written down value of the block of assets is zero [sec. 50(1)].
2. When the block of assets is empty on the last day of the previous year [sec. 50(2)].
In no other case capital gain is chargeable to tax, when a depreciable asset is transferred. This rule is equally
applicable whether depreciation is allowed in the current year (or any of earlier years).
u Cost of acquisition - In the above two cases, cost of acquisition shall be the aggregate of the following–

Step 1 Find out written down value of block of assets at the beginning of the previous year††.
Step 2 Add : Actual cost‡ of any asset(s) falling within that block of asset acquired by the assessee during the
previous year (whether put to use or not).

†These rules are not applicable in the case of transfer of assets by a power generating unit which claims depreciation on straight line
basis.
‡Where an assessee incurs any expenditure for acquisition of any depreciable asset in respect of which a payment (or aggregate of
payments made to a person in a day), otherwise than by an account payee cheque/draft or use of electronic clearing system through
a bank account (or through prescribed electronic mode#), exceeds Rs. 10,000, such payment shall not be eligible for this purpose.
# As per rule 6ABBA, prescribed modes of electronic payment are : (a) credit card, (b) debit card, (c) net banking, (d) IMPS (Immediate
Payment Service), (e) UPI (Unified Payment Interface), (f) RTGS (Real Time Gross Settlement), (g) NEFT (National Electronic Funds
Transfer) and (h) BHIM (Bharat Interface for Money) Aadhaar Pay.
†† Where goodwill of a business or profession forms part of a block of asset for the assessment year 2020-21 and depreciation thereon
has been obtained by the assessee, the written down value of that block of asset and short-term capital gain, if any, shall be
determined as per rule 8AC. For this purpose, reduction of the amount of goodwill of a business/profession, from the block of asset
shall be deemed to be transfer.
Para 101.3 n INCOME UNDER CAPITAL GAINS AND ITS COMPUTATION 258

u Always short-term - On transfer of depreciable assets gain (or loss) is always short-term capital gain (or loss).
It can never be treated as long-term capital gain (or loss).

nnnn Problems
101.3-P1 X Ltd owns two plants – A and B (depreciation rate: 15 per cent, depreciated value of the block on April 1, 2021 : Rs.
8,16,000). On June 1, 2021, it purchases Plant C (old) (depreciation rate: 15 per cent) for Rs. 1,00,000. On November 5, 2021,
it transfers Plant A for Rs. 1,30,000 (expense on transfer: Rs. 500). Plant A was purchased for Rs. 45,000 in 2016. Find out the
amount of depreciation and capital gain for the assessment year 2022-23.
Solution : Depreciation will be calculated as follows–
Rs.
Depreciated value of the block consisting of Plants A and B on April 1, 2021 8,16,000
Add: Actual cost of Plant C (old) purchased during the previous year 2021-22 1,00,000
Less: Sale proceeds of Plant A transferred during the previous year 2021-22 (–) 1,30,000
Written down value on March 31, 2022 7,86,000
Depreciation (15% of Rs. 7,86,000) 1,17,900
Capital gain on transfer of Plant A - In the case of transfer of depreciable asset, capital gain (or loss) arises only if on the
last day of previous year, the written down value of the block of assets is zero or the block of assets is empty. In this
case written down value is not zero (it is Rs. 7,86,000). Nor is the block empty on March 31, 2022 (the block has Plants
B and C). Consequently, there is no capital gain on transfer of Plant A.
101.3-P2 Suppose in problem 101.3-P1, Plant A is transferred for Rs. 9,50,000. What would be the amount of capital gain/
depreciation?
Solution : Depreciation will be calculated as follows–
Rs.
Depreciated value of the block consisting of Plants A and B on April 1, 2021 8,16,000
Add: Actual cost of Plant C (old) purchased during the previous year 2021-22 1,00,000
Total 9,16,000
Less: Sale proceeds of Plant A transferred during the previous year 2021-22 (it cannot exceed
Rs. 9,16,000) (–) 9,16,000
Written down value on March 31, 2022 Nil
Depreciation Nil
Capital gain on transfer of Plant A - In this case, written down value of the block of assets is zero on the last day of the
previous year. Consequently, capital gain can be computed. For this purpose, cost of acquisition is Rs. 9,16,000 (i.e.,
the opening balance of the block on the first day of the previous year : Rs. 8,16,000 + assets falling in the block purchased
during the previous year : Rs. 1,00,000). Capital gain shall be calculated as follows–
Rs.
Full value of consideration of Plant A 9,50,000
Less:
Cost of acquisition (Rs. 8,16,000 + Rs. 1,00,000) 9,16,000
Expenses of transfer 500
Short-term capital gain 33,500
101.3-P3 Suppose in problem 101.3-P1, Plant A is transferred for Rs. 20,000 on November 5, 2021, Plant B is transferred on
December 1, 2021 for Rs. 15,000 and Plant C is transferred for Rs. 25,000 on January 1, 2022. Expenditure on transfer of these
plants is Rs. 1,650. Find out the amount of depreciation and capital gain for the assessment year 2022-23.
Solution : Depreciation will be calculated as follows –
Rs.
Depreciated value of the block consisting of Plants A and B on April 1, 2021 8,16,000
Add: Actual cost of Plant C (old) purchased during the previous year 2021-22 1,00,000
Less: Sale proceeds of Plants A, B and C transferred during the previous year 2021-22
(Rs. 20,000 + Rs. 15,000 + Rs. 25,000) (–)60,000
Written down value on March 31, 2022 (but block is empty) 8,56,000
Depreciation Nil
Depreciated value of the block on April 1, 2022 Nil
Capital gain on transfer of Plants A, B and C - In this case, block of assets is empty on the last day of the previous year.
Consequently, capital gain can be computed. For this purpose cost of acquisition is Rs. 9,16,000 (i.e., the opening
259 WHEN ADVANCE MONEY WAS FORFEITED EARLIER n Para 101.4

balance of the block on the first day of the previous year: Rs. 8,16,000 + assets falling in the block purchased during
the previous year: Rs. 1,00,000). Capital gain shall be calculated as follows–
Rs.
Full value of consideration of Plants A, B and C 60,000
Less:
Cost of acquisition (Rs. 8,16,000 + Rs. 1,00,000) 9,16,000
Expenses of transfer 1,650
Short-term capital loss (–)8,57,650
Note - Suppose, Plants A, B and C are transferred for an aggregate consideration which is more than Rs. 9,17,650
(assume that it is Rs. 10,00,000), then depreciation will remain as zero, but short-term capital gain of Rs. 82,350 [i.e.,
full value of consideration : Rs. 10,00,000 – Cost of acquisition : Rs. 9,16,000 – expenditure on transfer : Rs. 1,650] will
be chargeable to tax.

101.4 When advance money was forfeited earlier [Sec. 51] - In the course of negotiations for transfer of a
capital asset, the assessee (i.e., transferor) received advance money. Later on the prospective purchaser could
not pay the balance consideration and the advance money is retained or forfeited by the assessee or advance
money is forfeited by the assessee because of some other reason. The tax treatment of advance money so
forfeited or retained by the assessee is as follows –
1. If advance money is forfeited during the previous year 2013-14 (or any earlier previous year) - It is not taxable in the
hands of recipient till the capital asset (in respect of which advance money was received and forfeited) is
transferred. If capital asset is not transferred during his lifetime, advance money forfeited by him will not be
chargeable to tax. Conversely, if the capital asset is transferred during his lifetime, the advance money will be
deducted from the cost for which the asset was acquired or the written down value or the fair market value, as
the case may be, in computing the cost of acquisition.
2. If advance money is forfeited during the previous year 2014-15 (or any subsequent previous year) - It is taxable in the
hands of recipient under section 56(2)(ix) under the head “Income from other sources” in the year in which
advance money is forfeited. Consequently, it will not be deducted from cost of acquisition when the capital
asset is ultimately transferred.

nnnn Problem
101.4-P1 X purchased a house property on September 18, 2002 for Rs. 1,00,000. On April 4, 2003, he entered into an
agreement to sell the house to A for Rs. 6,50,000 (after receiving an advance of Rs. 10,000). On A’s failure to pay the balance
within the stipulated period of 45 days, X forfeited the advance money. X died on October 12, 2003 and Mrs. X (as per his
will) got the property.
Mrs. X enters into an agreement on January 13, 2005 to sell the property to B after receiving advance of Rs. 80,000 and on B’s
failure to pay the balance within 2 months, as per the agreement, the advance money is forfeited by Mrs. X. Further, Mrs. X
enters into an agreement on April 6, 2020 to transfer the property to C after receiving advance of Rs. 1,00,000. C could not
pay the balance consideration within the stipulated period of 45 days and Mrs. X forfeits the advance money.
Mrs. X ultimately sells the property to Y on June 26, 2021 for Rs. 42,90,000. Find out the tax consequences in the hands of
X and Mrs. X for different assessment years. Also calculate net income of Mrs. X for the assessment year 2022-23, on the
assumption that she is a businesswoman and her income from business is Rs. 20,00,000.
Solution :
Forfeiture of advance money of Rs. 10,000 by X during the previous year 2003-04 - Since property is not transferred
during the lifetime of X, advance forfeited by him is not taxable. It is not even deducted from cost of acquisition
while calculating capital gain in the hands of Mrs. X.
Forfeiture of advance money of Rs. 80,000 by Mrs. X during the previous year 2004-05 - Rs. 80,000 will not be taxable in
the previous year 2004-05. However, it will be deducted from cost of acquisition while calculating capital gain on
transfer of the property in the hands of Mrs. X.
Forfeiture of advance money of Rs. 1,00,000 by Mrs. X during the previous year 2020-21 - Advance money is forfeited
during the previous year 2020-21. It will be taxable in the hands of Mrs. X under section 56(2)(ix) under the head
“Income from other sources” for the previous year 2020-21 (assessment year 2021-22).
Computation of capital gain of Mrs. X for the assessment year 2022-23 –
Rs.
Full value of consideration 42,90,000
Indexed cost of acquisition [cost of acquisition : Rs. 20,000 (see Note) × CII of 2021-22 : 317 ÷
CII of 2002-03 : 105] 60,381
Long-term capital gain 42,29,619
Para 101.5 n INCOME UNDER CAPITAL GAINS AND ITS COMPUTATION 260

Rs.
Computation of income of Mrs. X for the assessment year 2022-23 –
Business income 20,00,000
Long-term capital gain 42,29,619
Net income 62,29,619
Note - Cost of acquisition of the property in the hands of Mrs. X is Rs. 20,000. It is calculated as follows –
Cost of acquisition to the previous owner (as Mrs. X got the property after the death of her
husband as per his will) 1,00,000
Less: Amount forfeited by X (amount forfeited by the previous owner is not to be considered) Nil
Less: Amount forfeited by Mrs. X during the previous year 2004-05 80,000
Less: Amount forfeited by Mrs. X during the previous year 2020-21 (it is taxable in the hands of
Mrs. X as income from other sources, for the assessment year 2021-22, consequently, it is not to
be deducted from cost of acquisition) Nil
Cost of acquisition 20,000

101.5 Conversion of capital asset into stock-in-trade - If capital asset is converted into stock-in-trade during
a previous year relevant to the assessment year 1985-86 (or any subsequent year), the following special rules
are applicable–
1. It will be assumed that capital asset is transferred in the year in which conversion takes place.
2. Fair market value of the asset on the date of conversion will be taken as full value of consideration.
3. However, capital gain will not be taxable in the year of conversion. It will be taxable in the year in which
stock-in-trade is transferred.

nnnn Problem
101.5-P1 X converts his capital asset (acquired on June 10, 2002 for Rs. 70,000) into stock-in-trade on May 10, 2017 (fair
market value : Rs. 4,80,000) and subsequently sells the stock-in-trade so converted for Rs. 18,00,000 on July 20, 2021.
Determine the amount of assessable profits.
Solution : Since capital asset in this case is converted into stock-in-trade during the previous year 2017-18, it will be
treated as “transfer” for the assessment year 2018-19. However, such capital gains will be taxable for the assessment
year 2022-23 (i.e., relevant to the previous year in which stock-in-trade is transferred). The asset was acquired on
June 10, 2002 and it is transferred (i.e., converted into stock-in-trade) on May 10, 2017. The time gap is more than 36
months. The asset will be treated as long-term capital asset. Long-term capital gain is chargeable to tax for the
previous year 2021-22 (i.e., the assessment year 2022-23) as follows –
Rs.
Full value of consideration (i.e., fair market value on the date of conversion) 4,80,000
Less : Indexed cost of acquisition (i.e., Rs. 70,000 × CII of the year of conversion of 2017-18 : 272 ÷ CII
of the year of acquisition of 2002-03 : 105) 1,81,333
Long-term capital gain 2,98,667
Apart from long-term capital gain, X will have to pay tax on business income for the assessment year 2022-23 which
comes to Rs. 13,20,000 (i.e., Rs. 18,00,000 – fair market value at the time of conversion : Rs. 4,80,000).
Note - The mode of computation of capital gain given above is applicable only if the capital asset is converted into
stock-in-trade during a previous year relevant to the assessment year 1985-86 (or any subsequent year). If, however,
capital asset is converted into stock-in-trade during a previous year relevant to the assessment year 1984-85 (or any
earlier year), then capital gain will not be chargeable to tax. Suppose, an asset is converted into stock-in-trade on
March 1, 1984, capital gain will not be chargeable to tax.

101.6 Transfer of capital asset by a partner to a firm - A capital asset is transferred by a partner to his
partnership firm by way of his capital contribution (or otherwise). It is treated a “transfer” and capital gain will
be taxable in the hands of the partner. The amount recorded in the books of account is taken as full value of
consideration. This rule is also applicable when a member transfers a capital assets to his association of persons
or body of individuals.
261 TRANSFER OF CAPITAL ASSET TO ITS PARTNER n Para 101.7

nnnn Problem
101.6-P1 X, Y and Z form a partnership firm. Soon after formation of the firm, X brings a house property as his capital
contribution on August 20, 2021. On the date of transfer fair market value of the house is Rs. 20,00,000. However, the amount
recorded in the books of firm is Rs. 18,00,000. The house was purchased by X in 2005-06 for Rs. 2,50,000. Find out the amount
of capital gain.
Solution : Capital gain will be taxable in the hands of X for the assessment year 2022-23 –
Rs.
Full value of consideration (i.e., amount recorded in the books of account of the firm) 18,00,000
Less: Indexed cost of acquisition (Rs. 2,50,000 × 317 ÷ 117) 6,77,350
Long-term capital gain 11,22,650

101.7 Transfer of capital asset by a firm to its partner [Secs. 9B and 45(4)] - Section 9B has been inserted
and section 45(4) has been substituted by the Finance Act, 2021 (with effect from the assessment year 2021-22)
to cover cases when money/capital asset/stock-in-trade are given by a firm to a partner at the time of dissolution
or reconstitution of the firm.

Provisions illustrated
Consider the following cases in order to understand provisions of sections 9B and 45(4) –
u Case 1 - X and Y are equal partners of XY & Co. (a partnership firm). The firm is dissolved on December 31, 2021.
Credit balance in the capital account of X and Y on the date of dissolution is Rs. 35 lakh and Rs. 45 lakh respectively.
To settle partners’ account at the time of dissolution, X is paid Rs. 35 lakh by cheque. A plot of land owned by firm
is given to Y (fair market value on the date of dissolution: Rs. 45 lakh, cost of acquisition: Rs. 38 lakh, date of
acquisition: September 15, 2020).
In this case, short-term capital gain of Rs. 7 lakh (i.e., Rs. 45 lakh – Rs. 38 lakh) on transfer of land by the firm to Y is
taxable in the hands of firm by virtue of section 9B.
u Case 2 - A, B and C are partners of A & Co. (a partnership firm). B retires from the firm on November 30, 2021
(credit balance in his capital account : Rs. 18 lakh, there is no revaluation of assets in the firm). At the time of his
retirement, B is paid through NEFT Rs. 38 lakh (as final settlement of his account including share of B in goodwill of
the firm).
In this case, B gets Rs. 20 lakh in excess of his credit account balance. It is income of B. However, by virtue of deeming
provision of section 45(4), the income of Rs. 20 lakh will be taxable in the hands of the firm (and not in the hands
of B).

In order to understand sections 9B and 45(4), a few definitions are relevant (which are given below) –
u Specified entity - For the purpose of sections 9B and 45(4), specified entity means a firm or other association of
persons or body of individuals (not being a company or a co-operative society).
u Specified person - Specified person means a person who is partner of a firm or member of other association of
persons or body of individuals (not being a company or a co-operative society) in any previous year.
u Reconstitution of specified entity - “Reconstitution of specified entity” means, where—
- one or more of its partners (or members) of such specified entity ceases to be partners (or members); or
- one or more new partners (or members) are admitted in such specified entity in such circumstances that one
or more of the persons who were partners (or members) of the specified entity, before the change, continue
as partner or partners (or member or members) after the change; or
- all the partners (or members) of such specified entity continue with a change in their respective share or in
the shares of some of them.
u Self-generated goodwill - “Self-generated goodwill/asset” means goodwill/asset, which has been acquired
without incurring any cost for purchase or which has been generated during the course of the business or
profession
101.7-1 INCOME ON RECEIPT OF CAPITAL ASSET OR STOCK-IN-TRADE BY PARTNER FROM FIRM [SEC. 9B] - The
provisions of section 9B are as follows –
u Conditions to invoke section 9B - In connection with dissolution or reconstitution of specified entity (i.e., firm/
AOP/BOI), the specified entity gives capital asset/stock-in-trade to specified person (i.e., partner/member). In
such a case, specified entity shall be deemed to have transferred such capital asset or stock-in-trade (or both) to
the specified person.
Para 101.7 n INCOME UNDER CAPITAL GAINS AND ITS COMPUTATION 262

u How and when income is taxable - Such deemed income will be taxable in the previous year in which the capital
asset/stock-in-trade are received by the specified person. It will be taxable in the hands of specified entity as
business income under section 28 (in the case of stock-in-trade) and as capital gains under section 45(1) (in the
case of capital asset). The fair market value of the capital asset/stock-in-trade on the date of receipt by the
specified person shall be deemed to be the full value of the consideration received or accruing as a result of such
deemed transfer.
101.7-2 RECEIPT OF MONEY OR CAPITAL ASSET BY PARTNER FROM FIRM AT THE TIME OF RECONSTITUTION OF FIRM
[SEC. 45(4)] - Section 45(4) is applicable if a specified person (i.e., partner/member) receives during the previous
year any money or capital asset from a specified entity (i.e., firm/AOP/BOI) in connection with the reconstitu-
tion of such specified entity. In such a case, any profits or gains arising from receipt of such money by the specified
person shall be chargeable to income-tax in the hands of specified entity under section 45(4) under the head
“Capital gains”. It shall be deemed to be the income of such specified entity of the previous year in which such
money or capital asset were received by the specified person.
u Mode of computation of capital gain - Capital gains under section 45(4) shall be calculated as follows –

A=B+C–D

Where,
A = Income chargeable under section 45(4) in the hands of specified entity under the head “Capital gains”.
B = Value of any money received by the specified person from the specified entity on the date of such receipt.
C = The fair market value of the capital asset received by the specified person from the specified entity on the
date of such receipt.
D = The amount of balance in the capital account (represented in any manner) of the specified person in the books
of account of the specified entity at the time of its reconstitution.
u Other points - The following points should be noted –
1. If the value of “A” in the above formula is negative, its value shall be deemed to be zero.
2. Balance in the capital account of the specified person in the books of account of the specified entity is to be
calculated without taking into account the increase in the capital account of the specified person due to
revaluation of any asset or due to self-generated goodwill or any other self-generated asset.
3. “Reconstitution of specified entity” shall have the meaning given in section 9B.
4. Consequential amendment is also made in section 48 to provide that in case of specified entity, the amount
included in the total income of such specified entity under section 45(4) which is attributable to the capital asset
being transferred, shall be reduced from the full value of the consideration to compute income charged under
the head “Capital gains”. This is to be calculated in the manner prescribed by rule 8AB.
5. For the purpose of this section, “self-generated goodwill” and “self-generated asset” mean goodwill/asset,
which has been acquired without incurring any cost for purchase or which has been generated during the course
of the business or profession.
6. When a capital asset is received by a specified person from a specified entity in connection with the
reconstitution of such specified entity, the provisions of section 45(4) shall operate in addition to the provisions
of section 9B and tax liability under these provisions shall be worked out independently.

nnnn Problem
101.7-P1 X, Y and Z are three partners of XY Associates, a partnership firm. X retires on June 27, 2021 and after his retirement,
business of the firm will be operated by Y and Z. Capital account balance of X on June 27, 2021 is Rs. 20 lakh ( there is no revaluation
of assets in books of firm at any time after 1995-96 when X joined the firm as a partner). To settle the balance of Rs. 20 lakh lying
in the capital account of X, the firm gives the following –
- Cash payment of Rs. 1,00,000.
- Stock-in-trade (fair market value on June 27, 2021 : Rs. 40,000, purchased on April 6, 2021 for Rs. 10,000).
- Plot of land (fair market value on June 27, 2021 : Rs. 18,60,000, book value : Rs. 18,60,000, acquired during 1985-86 for Rs.
60,000, fair market value on April 1, 2001 : Rs. 1,10,000).
Find out the tax consequences in the aforesaid case for the assessment year 2022-23.
263 TRANSFER OF CAPITAL ASSET TO ITS PARTNER n Para 101.7

Solution : Income will be taxable in the hands of XY Associates under section 9B read with sections 28 and 45(1) as
follows –

Plot of land Stock-in-trade

Rs. Rs.
Full value of consideration in the hands of firm (being fair market value of assets
at the time of dissolution) 18,60,000 40,000
Less: Indexed cost of acquisition (Rs. 1,10,000 × 317 ÷ 100) 3,48,700 —
Less: Cost of purchase of stock — 10,000
Long-term capital gain for the assessment year 2022-23 under section 9B, read
with section 45(1) taxable in the hands of XY Associates 15,11,300 —
Business income for the assessment year 2022-23 under section 9B, read with
section 28(i) taxable in the hands of XY Associates — 30,000

101.7-P2 X, Y and Z are partners (profit sharing ratio being 4 : 3 : 3) of Shyam Associates, a registered partnership firm. Balance
sheet of the firm as on November 30, 2021 is as follows –

Rs. Rs.
Capital account of X 3,00,00,000 All assets (other than goodwill and cash/
Capital account of Y 1,60,00,000 bank balance) 13,28,85,000
Capital account of Z 6,00,00,000 Cash in hand/bank balance 26,15,000
Sundry creditors and other liabilities 2,95,00,000
13,55,00,000 13,55,00,000

Y retires from the firm on November 30, 2021 (estimated value of the firm’s self-generated goodwill is Rs. 20,00,00,000). Y is paid
Rs. 7,60,00,000 (i.e., 30 per cent of goodwill + capital account balance) on his retirement. The firm is continued by the remaining
partners X and Z (profit sharing ratio being 4 : 3). Overdraft is taken from SBI to finance retirement payment to Y. Capital account
of Y (as on November 30, 2021) includes Rs. 40,00,000 being transferred from revaluation surplus on January 10, 2016.
Discuss the tax consequences in the above case. The Assessing Officer wants to invoke section 45(4) in this case. However, Shyam
Associates, the assessee firm, is of the view that there is no transfer of goodwill from the firm, as even after the retirement of Y,
the firm remains the owner of goodwill.
Solution : Balance in capital account of Y (after excluding revaluation reserve) is Rs. 1,20,00,000. Share of self-
generated goodwill and cash/bank payment to him is Rs. 7,60,00,000. Section 45(4) can be invoked in this case as
follows –

Rs.
Money received Y (B) 7,60,00,000
Balance in capital account (D) 1,20,00,000
Capital gain (deemed as long-term capital gain of partnership firm for the assessment year
2022-23) (i.e., B + C – D) 6,40,00,000

101.7-P3 In the above case, Shyam Associates (having X and Z as partners) transfers goodwill (self-generated) of the business
to an outsider (i.e., H Ltd.) on August 20, 2022 for Rs. 24,00,00,000. Expenditure on transfer incurred by firm is Rs. 3,00,000.
The firm wants to know tax consequences.
Solution :

Rs.
Full value of consideration on transfer of self-generated goodwill 24,00,00,000
Less:
- Cost of acquisition of self-generated goodwill Nil
- Cost of improvement Nil
- Expenditure on transfer incurred by firm 3,00,000
- Amount included in total income as capital gain under section 45(4) in the hands of
assessee for the assessment year 2022-23 (i.e., Rs. 6,40,00,000 – Rs. 40,00,000) 6,00,00,000
Long-term capital gain of Shyam Associates for the assessment year 2023-24 17,97,00,000
Para 101.8 n INCOME UNDER CAPITAL GAINS AND ITS COMPUTATION 264

101.8 Compulsory acquisition of a capital asset - The special rules given below are applicable where the
Government has acquired an asset of a person by way of compulsory acquisition. These rules are also
applicable when consideration is approved or determined by the Central Government or RBI (even if there is
no compulsory acquisition).
u Initial compensation - Initial compensation† is taken as full value of consideration. Capital gain is chargeable
to tax in the year in which the initial compensation (or part thereof) is first received. Indexation benefit is,
however, available up to the year in which the asset is compulsorily acquired.
u Additional compensation - If a Court/Tribunal/authority enhances compensation, it will be taxable in the year
in which enhanced compensation or additional compensation is received. For this purpose cost of acquisition
and cost of improvement are taken as nil. However, litigation expenses or incidental expenditure for obtaining
additional compensation is deductible.
If the enhanced compensation is received by any other person (because of the death of the transferor or for any
other reason), it is taxable as income of the recipient. Where such amount of the compensation is subsequently
reduced by any court, Tribunal or other authority, the capital gain of that year, in which the additional
compensation received was taxed, shall be recomputed accordingly.

nnnn Problem
101.8-P1 The Central Government acquires a house property owned by X on October 17, 2015. This property was purchased
on April 10, 2007 for Rs. 3,00,000. The Central Government awards Rs. 16,00,000 as compensation out of which Rs. 1,00,000
is received on May 4, 2021 and Rs. 15,00,000 is received on April 1, 2022. Expenditure incurred by X for getting compensation
fixed : Rs. 2,000. Being aggrieved against the award, X files an appeal. The Bombay Court, as per order dated August 1, 2023,
enhanced the compensation from Rs. 16,00,000 to Rs. 28,00,000 (legal expenditure incurred in Court’s proceedings : Rs. 10,000).
X receives the additional compensation of Rs. 12,00,000 on April 15, 2024. Compute the income under the head “Capital gains”.
Does it make any difference if the additional compensation is received by X’s son after the death of X ?
Solution : Assessment year 2022-23, i.e., relevant to the previous year 2021-22 in which initial compensation (or part thereof)
is received for the first time
Rs.
Full value of consideration (i.e., initial compensation) 16,00,000
Less: Indexed cost of acquisition (i.e., Rs. 3,00,000 × CII of year of compulsory acquisition of 2015-16 :
254 ÷ CII of year of purchase of 2007-08 : 129) 5,90,698
Less: Expenses 2,000
Long-term capital gain 10,07,302
Assessment year 2025-26 (i.e., relevant to the previous year 2024-25 in which additional compensation is received) –
Full value of consideration (i.e., additional compensation) 12,00,000
Less :
Cost of acquisition Nil
Cost of improvement Nil
Expenditure 10,000
Long-term capital gain 11,90,000
Note : If the additional compensation is received by X’s son, it will be taxable in the hands of son.

101.9 Capital gain on transfer of shares/debentures in the hands of non-residents - If a non-resident

acquires shares in, or debentures of, an Indian company by utilizing foreign currency, the gain will be
calculated in the same foreign currency, which was initially utilized in acquiring shares/debentures. After
calculating capital gain in foreign currency, it will be converted into Indian currency.
The aforesaid rule is not optional but it is compulsory and applicable whether the asset is short-term or long-
term. The benefit of indexation is not available, even if the asset is long-term.

nnnn Problem
101.9-P1 X, a non-resident foreign citizen, remits US $ 60,000 to India on March 10, 2017. The amount is partly utilised on
April 25, 2017 for purchasing 40,000 preference shares in Indian Sugars and Chemicals Ltd. at the rate of Rs. 34 per share
(brokerage paid : Re. 1 per share). Shares in Indian Sugars and Chemicals Ltd. are transferred on April 20, 2021 @ Rs. 90 per share
(brokerage paid @ Rs. 1.55 per share on June 30, 2021).

† However, the amount of compensation received in pursuance of an interim order of the court, Tribunal or other authority shall
be chargeable to tax in the previous year in which the final order of such court, Tribunal or other authority is made.