CAPITAL GAINS

The term capital gain refers to the increase in the value of a capital asset when it is sold Put
simply, a capital gain occurs when you sell an asset for more than what you originally paid
for it.
Almost any type of asset you own is a capital asset whether that's a type of investment (like a
stock, bond, or real estate) or something purchased for personal use (like furniture or a boat).
Capital gains are realized when you sell an asset by subtracting the original purchase price
from the sale price. The Internal Revenue Service (IRS) taxes individuals on capital gains in
certain circumstances.
As noted above, capital gains represent the increase in the value of an asset. These gains are
typically realized at the time that the asset is sold. Capital gains are generally associated with
investments, such as stocks and funds, due to their inherent price volatility. But they can also
be realized on any security or possession that is sold for a price higher than the original
purchase price, such as a home, furniture, or vehicle.

What is a Capital Asset?

The Capital Gains Tax is levied on the amount which is received as profit through the sale or
transfer of Capital Asset, thus, to explore the concept of Capital Gains Tax, it is very
imperative to understand, what is Capital Asset?
According to section 2(14) of the Income Tax Act, Capital Asset includes:
(a) property of any kind which is held by an assessee, and it is irrelevant whether or not it is
connected with his business or profession.
(b) Any kind of securities held by a Foreign Institutional Investor [as per defined under the
clause{a} of the explanation to Section 115AD which has invested in such securities by the
regulations made under the Securities and Exchange Board of India (SEBI) Act, 1992.
However, it is to be noted that there are certain items excluded from the definition of ‘Capital
Asset’ which are as follows:
(i) any stock-in-trade [other than the securities referred to in sub-clause {b} as mentioned
above], consumable stores or raw materials held for his business or profession.
(ii) personal effects, this refers to any kind of movable property (including wearing apparel
and furniture) held by the taxpayer for his personal use or for the use of any of his family
members who are dependent upon him, but this excludes:
(a) jewellery;
(b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art.
The term “jewellery” as mentioned above includes:
any kind of ornament which is made up of platinum, gold, silver or any other precious metal
or an alloy which is made up of one or more of such precious metals, such alloy may or may
not contain any precious or semi-precious stone, and it may or may not be sewn into any
wearing apparel.
any kind of precious or semi-precious stone, which may or may not be set into any furniture,
utensil, or any other article, or sewn into any wearing apparel.

iii) Agricultural land in India, which should not be situated:

within such an area which comes under 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 the population of such area
should not be less than 10,000;
any area which falls within the range of the distance measured aerially, taking into
consideration that such area should not be:
 more than 2 kilometres away from the local limits of any municipality or cantonment
board referred to in item (a) and it should have a population of more than 10,000 but
not exceeding 1 lakh; or
 more than 6 kilometres away from the local limits of any municipality or cantonment
board referred to in item (a) and it should have a population of more than 1 lakh but
not exceeding 10 lakhs; or
 more than 8 kilometres, from the local limits of any municipality or cantonment board
referred to in item (a) and it should have a population of more than 10 lakhs.

Long-Term Capital Asset

Assets that are owed for more than 36 months are termed as Long-Term Capital Assets.
However, there are certain assets which are considered as Long-Term Capital Asset if they
are held for more than 12 months, these assets include:
 Based mutual funds (whether quoted or not);
 Equity Zero Coupon bonds (whether quoted or not);
 Equity and Preference shares which are listed and recognized by a stock exchange of
India;
 Other securities like debentures, bonds, etc., which are listed and recognized by a
stock exchange of India;
 UTI (Unit Trust of India) units (whether quoted or not).
Short-Term Capital Asset
The capital assets which are held by an individual for 36 months or less are termed as Short-
Term Capital Asset. However, there has been a reduction in the period pertinent from the
financial year 2017-18, wherein, immovable property like building, land, house, etc which
are owned for less than 24 months would be considered as Short-Term Capital Asset.

Capital Gains Tax

The concept of Capital Gains Tax was introduced in the Indian Tax Regime in 1997 and since
then it has gone through many transitions over time. The understanding of this tax is relevant
for a common man or a billionaire as it covers a wide range of taxation aspects. The Capital
Gains Tax is contained under the Income Tax Act, 1961 and has gone through many
amendments since the time it was stemmed. Whether an individual is investing his/her capital
income in a new house or selling an old one or investing their gains from the sale of any
residential property into any securities, etc., they need to be aware of the notion of Capital
Gains which revolves around these phenomena.
The Capital Gains Tax is divided into two types or categories; Short-Term Capital Gains Tax
and Long-Term Capital Gains Tax.

Exemptions under capital gains tax

There are certain exemptions laid down in the Income Tax Act which allow the individuals to
pay lower taxes on the income they earn through the sale of capital assets and it thus helps
them to safeguard a part of their capital gain by availing benefits given by such exemptions.
An individual must be aware of these exemptions to benefit from them.
Firstly, to avail certain exemptions under the Long-Term Capital Gains, an individual need to
fulfil some age and income criteria, which are as follows:
 Individuals who are a resident of India having an annual income of Rs. 5 Lakhs and
are of the age of 80 years or above.
 Individuals who are a resident of India having an annual income of Rs. 2.5 Lakhs and
are below the age of 60 years.
 Individuals who are a resident of India having an annual income of Rs. 3 Lakhs and
are of the age of 60 years or above.
 A Hindu Undivided Family having an annual income of Rs. 2.5 Lakhs.
 Individuals who are not residents of India having an annual income of Rs. 2.5 Lakhs.

Let us understand this concept better with an Illustration:

Mr. Raj is a 40-year-old resident of India with an annual income of Rs. 2.5 Lakhs. On selling
his old property which he had owned for 9 years, he made a Long-Term Capital Gain of Rs.
3.5 Lakhs. Now, his Long-Term Capital Gains will be adjusted against his income which will
give a net result of Rs. 1 Lakh, and now the suitable Long-Term Capital Gains tax rate would
be applied to such adjusted amount of Rs. 1 Lakh.

CASE BRIEF OF NAVIN CHANDRA MAFATLAL V. CIT

FACTS
This appeal is directed against the judgment pronounced on the 7th September, 1951, by the
High Court of Judicature at Bombay on a reference made at the instance of the appellant
under section 66(1) of the Indian Income-tax Act, 1922. By an, assessment order dated the
31st March, 1948, the appellant was assessed by the Income-tax Officer, Bombay, for the
assessment year 1947-1948 on a total income of Rs. 19,66,782 including a sum of Rs.
9,38,011 representing capital gains assessed in the hands of the appellant under section 12-B
of the Act. The said amount of capital gains was earned by the appellant in the following
circumstances. The assessee had a half share in certain immovable properties situate in
Bombay which were sold by the assessee and his coowners during the relevant accounting
year which was the calendar year ending on the 31st December, 1946, to a private limited
company known as Mafatlal Gagalbhai & Company Ltd. The profits on the sale of the said
properties amounted to Rs. 18,76,023 and the appellants half share therein came to the sum of
Rs. 9,38,011 which was included in the assessment under section 12-B.
In April, 1948, the appellant appealed from the said order to the Appellate Assistant
Commissioner contending that section 12-B of the Act authorising the levy of tax on capital
gains was ultra vires the Central Legislature. The Appellate Assistant Commissioner by his
order dated the 5th April, 1949, dismissed the appeal. A further appeal to the Income-tax
Appellate Tribunal was dismissed by its order dated the 30th June 1950.
Being aggrieved by the order of the Appellate Tribunal the appellant applied to it under
section 66(1) of the Act for raising certain questions of law.

ISSUE RAISED
1. Whether the imposition of a tax under the head " capital gains " by the Central Legislature
was ultra vires?
2. Whether the imposition was in any way invalid on the ground that it was done by
amending the Indian Income-tax Act?
3. Whether “capital gains” should be included in the term “income”?
Judgement

Analysis
Section 12b of the act clearly provides that sale, transfer or relinquishment of any asset after
31.3.1956 will be taxed under the head Capital gains. Hence, the appellant had right to raise
the contention of the order of the tribunal being Ultra Vires. However, in the reference, the
High Court still answered in the negative relying upon the case of J.N. Duggan vs
Commissioner of Income-Tax, ... on 7 September, 1951, where it was held that the sale,
relinquishment or transfer of any capital asset after 31.3.1946 will be taxed.
The High Court having the power to decide the question of law in a particular case was right
in taking the decision referring to one of its precedents.
Thus, the assesse could have taken deductions on the basis of actual cost of capital invested
by him, but could not avoid tax liability under this case.