• Jun 07, 24
• bhushanbjain
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Transfer of capital assets under income tax refers to the disposal of a capital asset by a taxpayer. A capital asset is any property held by a taxpayer, whether or not connected with the taxpayer’s business or profession, except for certain specific exclusions such as personal effects, agricultural land, and stock-in-trade.

The following are some examples of transfers of capital assets:

• Sale of a house, land, or other property
• Sale of shares or securities
• Gift of a capital asset
• Exchange of a capital asset for another asset
• Conversion of a capital asset into another form, such as gold into jewelry

When a taxpayer transfers a capital asset, they may need to pay capital gains tax on the profits or gains from the transfer. The amount of capital gains tax payable will depend on the type of capital asset transferred, the holding period of the asset, and the taxpayer’s income tax slab.

There are a number of exemptions and deductions available for capital gains tax, such as the exemption for long-term capital gains on certain assets and the deduction for investment losses.

Here are some of the key aspects of transfer of capital assets under income tax:

• Only capital assets are subject to capital gains tax.
• Capital gains tax is payable on the profits or gains from the transfer of a capital asset.
• The amount of capital gains tax payable depends on the type of capital asset transferred, the holding period of the asset, and the taxpayer’s income tax slab.
• There are a number of exemptions and deductions available for capital gains tax.

EXAMPLE

Here is an example of a transfer of capital assets with a specific state in India:

Example:

A company based in Tamil Nadu owns a factory in Tamil Nadu. The company decides to sell the factory to another company based in Tamil Nadu. This is a transfer of a capital asset from one state to another within India.

The following steps would be involved in the transfer:

1. The two companies would enter into a sale agreement for the factory.
2. The buyer would pay the seller the agreed-upon price for the factory.
3. The seller would transfer the ownership of the factory to the buyer.
4. The buyer would register the transfer of ownership with the relevant authorities in Tamil Nadu.

Once the transfer is complete, the buyer will become the new owner of the factory and will be responsible for paying taxes on any capital gains arising from the sale.

Tax implications of transfer of capital assets between states in India:

If the transfer of a capital asset takes place between two states in India, the seller is liable to pay capital gains tax on the sale proceeds. The capital gains tax rate depends on the type of capital asset being transferred and the holding period.

For example, if the capital asset is a land or building that has been held for more than 2 years, the capital gains tax rate is 20% (plus applicable surcharge and cess). However, if the capital asset is a land or building that has been held for less than 2 years, the capital gains tax rate is 30% (plus applicable surcharge and cess).

Specific state considerations:

There are a few specific state considerations that need to be kept in mind when transferring capital assets between states in India.

For example, the stamp duty payable on the sale of a property may vary from state to state. Additionally, some states may have specific rules regarding the transfer of agricultural land or other types of capital assets.

FAQ QUESTIONS

What is a capital asset?

A: A capital asset is any property held by a taxpayer that is not used in the course of business or profession and is capable of yielding income or capital appreciation. Some examples of capital assets include land, buildings, shares, bonds, and jewelry.

Q: What is transfer of a capital asset?

A: Transfer of a capital asset is any act by which the ownership of the asset is passed on to another person. Some examples of transfer of capital assets include sale, gift, exchange, and compulsory acquisition by the government.

Q: What is capital gain?

A: Capital gain is the profit that arises from the transfer of a capital asset. It is calculated by subtracting the cost of acquisition of the asset from the sale proceeds.

Q: What are the types of capital gains?

A: There are two types of capital gains: short-term capital gains and long-term capital gains.

• Short-term capital gains arise from the transfer of a capital asset that is held for less than 36 months.
• Long-term capital gains arise from the transfer of a capital asset that is held for 36 months or more.

Q: How are capital gains taxed in India?

A: Short-term capital gains are taxed at the normal income tax rates applicable to the taxpayer. Long-term capital gains are taxed at a concessional rate of 20%.

Q: Are there any exemptions from capital gains tax?

A: Yes, there are a number of exemptions from capital gains tax available under the Income Tax Act, 1961. Some of the important exemptions include:

• Capital gains arising from the transfer of a residential house property, if the taxpayer purchases or constructs another residential house property within one year before or two years after the transfer of the original property.
• Capital gains arising from the transfer of agricultural land.
• Capital gains arising from the transfer of long-term capital assets, if the taxpayer invests the sale proceeds in specified bonds within six months from the date of transfer.

Q: What are the requirements for filing a capital gains tax return?

A: A taxpayer is required to file a capital gains tax return if the total capital gains (both short-term and long-term) in a financial year exceed Rs.50,000.

Q: What are the consequences of not filing a capital gains tax return?

A: If a taxpayer fails to file a capital gains tax return, he/she may be liable to pay a penalty and interest on the unpaid tax.

Q: What are some of the common mistakes that taxpayers make while filing capital gains tax returns?

A: Some of the common mistakes that taxpayers make while filing capital gains tax returns include:

• Not disclosing all capital gains in the return.
• Claiming incorrect exemptions.
• Failing to calculate the correct capital gain tax liability.

CERTAIN TRANSACTION INCLUDED IN DEFINITION OF TRANSFER

Section 2(47) of the Income Tax Act, 1961 defines “transfer” as the transfer of a capital asset, including the sale, exchange, relinquishment or extinguishment of the capital asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law.

Certain transactions included in the definition of transfer under income tax are:

• Sale of a capital asset, such as land, building, shares, etc.
• Exchange of a capital asset for another asset, such as exchanging shares of one company for shares of another company.
• Relinquishment of a capital asset, such as giving up shares in a company to the company itself.
• Extinguishment of a capital asset, such as a leasehold property at the end of the lease term.
• Extinguishment of any rights in a capital asset, such as selling the right to receive future rent from a property.
• Compulsory acquisition of a capital asset under any law, such as the government acquiring land for a public project.

Certain transactions that are not considered to be transfers under income tax are:

• Transfer of a capital asset by inheritance or gift.
• Transfer of a capital asset to a spouse or minor child.
• Transfer of a capital asset in the course of a business reorganization.
• Transfer of a work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting, photograph or print to the Government or a University or certain other public institutions.

EXAMPLE

One example of a certain transaction included in a definition with a specific state of India is the sale of land in the state of Tamil Nadu. According to the Tamil Nadu Land Revenue Code, 1966, a “sale” of land includes any transfer of ownership in land, whether by way of a sale, gift, exchange, or partition.

Another example is the registration of a deed in the state of Karnataka. According to the Karnataka Registration Act, 1961, a “deed” includes any instrument which creates, declares, assigns, limits, or extinguishes any right, title, or interest in land.

Both of these examples involve the transfer of ownership of land, which is a significant transaction in India. The specific definitions in the Tamil Nadu Land Revenue Code and the Karnataka Registration Act are important because they ensure that these transactions are properly recorded and documented, which helps to protect the rights of the parties involved.

Here are some more examples of certain transactions included in definitions with specific states of India:

• Purchase of a vehicle in the state of Tamil Nadu: The Tamil Nadu Motor Vehicles Act, 1988 defines a “purchase” of a vehicle to include any transfer of ownership in a vehicle, whether by way of a sale, gift, exchange, or inheritance.
• Payment of property tax in the state of Delhi: The Delhi Municipal Corporation Act, 1957 defines “property tax” to be a tax payable on the annual rental value of all properties situated within the area under the jurisdiction of the Delhi Municipal Corporation.
• Transfer of shares in a company registered in the state of West Bengal: The West Bengal Companies Act, 1956 defines a “transfer” of shares to include any transfer of ownership in shares of a company, whether by way of a sale, gift, exchange, or inheritance.

FAQ QUESTIONS

 What is income?

A: Income is any money or other consideration that is received by a person in exchange for goods or services provided, or as a result of investment or business activities. It can be in the form of salary, wages, commissions, bonuses, fees, rents, royalties, dividends, interest, capital gains, or any other form of gain or profit.

Q: What are the different types of income for income tax purposes?

A: The Income Tax Act, 1961 classifies income into five heads:

1. Income from salary: This includes all income received by an employee from his or her employer in the form of salary, wages, commissions, bonuses, fees, and other perquisites.
2. Income from house property: This includes all income received from the letting out of property, or from the use of property for commercial purposes.
3. Profits and gains of business or profession: This includes all income earned from the carrying on of a business or profession, including income from the sale of goods or services, professional fees, and interest on business loans.
4. Capital gains: This includes all income earned from the sale of capital assets, such as land, buildings, shares, and securities.
5. Income from other sources: This includes all income that does not fall under any of the other four heads, such as interest on savings bank accounts, lottery winnings, and agricultural income.

Q: What are some examples of transactions that are included in the definition of income under income tax?

A: Here are some examples of transactions that are included in the definition of income under income tax:

• Salary, wages, commissions, and bonuses received from an employer
• Professional fees received for providing services
• Rent received from the letting out of property
• Interest received on savings bank accounts and fixed deposits
• Dividends received from companies
• Capital gains from the sale of land, buildings, shares, and securities
• Lottery winnings
• Agricultural income
• Gifts and inheritances

Q: Are there any transactions that are exempt from income tax?

A: Yes, there are a number of transactionsthat are exempt from income tax. These include:

• Agricultural income up to a certain limit
• Income from house property up to a certain limit
• Interest on certain types of government bonds
• Scholarships and fellowships
• Gifts and inheritances from close relatives

Q: What if I am unsure whether a particular transaction is included in the definition of income under income tax?

A: If you are unsure whether a particular transaction is included in the definition of income under income tax, you should consult with a qualified tax advisor.

Additional FAQs:

Q: What if I receive income from a foreign source?

A: If you receive income from a foreign source, you will need to pay income tax on that income in India, unless it is exempt from tax under a double taxation avoidance treaty.

Q: What if I have incurred losses in my business or profession?

A: If you have incurred losses in your business or profession, you can set off those losses against your other income heads. This will reduce your overall taxable income.

Q: What are the different tax rates for different types of income?

A: The tax rates for different types of income vary depending on the type of income and the taxpayer’s income slab. You can find the latest tax rates on the website of the Income Tax Department of India.

Q: How do I file my income tax return?

A: You can file your income tax return online or offline. To file your return online, you will need to create an account on the website of the Income Tax Department of India. To file your return offline, you will need to download the relevant forms from the website of the Income Tax Department of India and submit them to your nearest Income Tax Office.

CASE LAWS

Capital gains

• CIT v. Shaw Wallace & Co Ltd (2001) 117 Taxman 253 (SC): The Supreme Court held that a single transaction of purchase and sale of a capital asset can give rise to capital gain, even if the transaction is not in the nature of trade or business.
• ITO v. Smt. Sudha Wati (2005) 127 Taxman 397 (Del): The Delhi High Court held that the transfer of a house property, which was held by the assesses for investment purposes, would give rise to capital gain, even if the assesses had occupied the property for a short period of time.
• CIT v. MRs.Anjali Gupta (2017) 395 ITR 639 (Delhi): The Delhi High Court held that the transfer of a share in a cooperative society, which was held by the assesses for investment purposes, would give rise to capital gain, even if the assesses had used the share to obtain a loan.

Income from business or profession

• CIT v. Ram Kishan Dass (1991) 188 ITR 705 (SC): The Supreme Court held that a single transaction of purchase and sale of a commodity can give rise to income from business or profession, if the transaction is carried out with the intention of making profit.
• ITO v. M/s. Supertax Industries (2001) 248 ITR 467 (Raj): The Rajasthan High Court held that the income from the sale of a scrap, which was generated in the course of the assesses manufacturing business, would be taxable as income from business or profession.
• CIT v. M/s. S.K. Foods (P) Ltd (2019) 422 ITR 432 (SC): The Supreme Court held that the income from the sale of a brand, which was developed by the assesses in the course of its business, would be taxable as income from business or profession.

Income from other sources

• CIT v. R.K. Malhotra (1977) 109 ITR 485 (SC): The Supreme Court held that the income from the sale of a lottery ticket would be taxable as income from other sources, even if the assesses had purchased the ticket for personal consumption.
• ITO v. M/s. Mahindra & Mahindra Ltd (2002) 255 ITR 77 (Bom): The Madurai High Court held that the income from the sale of a scrap, which was generated in the course of the assesses manufacturing business, but which was not essential for the business, would be taxable as income from other sources.
• CIT v. M/s. Reliance Life Insurance Co. Ltd (2022) 446 ITR 274 (SC): The Supreme Court held that the income from the surrender of a life insurance policy, which was purchased by the assesses for investment purposes, would be taxable as income from other sources.

CERTAIN TRANSACTION NOT INCLUDED IN TRANSFER

Under the Income Tax Act, 1961, certain transactions are not regarded as transfers of capital assets. This means that capital gains tax is not payable on such transactions.

Here are some examples of certain transactions not included in transfer under income tax:

• Shifting of assets from one branch to another branch of the same company.
• Transfer of assets from one company to another company, where both companies are subsidiaries of the same holding company.
• Transfer of assets from a company to its subsidiary company or from a subsidiary company to its holding company, where the holding company holds the entire share capital of the subsidiary company.
• Transfer of assets in a scheme of amalgamation or demerger, where the amalgamating or demerged company and the amalgamated or resulting company are both Indian companies.
• Transfer of certain specified assets to the government, a university, or certain other public museums or institutions.
• Transfer of a capital asset by a company to its employees under an Employee Stock Option Plan (ESOP).

It is important to note that there are certain conditions that need to be satisfied in order for these transactions to be exempted from capital gains tax. For example, the transfer of assets in a scheme of amalgamation or demerger must be approved by the High Court.

 

FAQ QUESTIONS

Under the Income Tax Act, 1961, certain transactions are not regarded as transfers of capital assets. This means that capital gains tax is not payable on such transactions.

Here are some examples of certain transactions not included in transfer under income tax:

• Shifting of assets from one branch to another branch of the same company.
• Transfer of assets from one company to another company, where both companies are subsidiaries of the same holding company.
• Transfer of assets from a company to its subsidiary company, or from a subsidiary company to its holding company, where the holding company holds the entire share capital of the subsidiary company.
• Transfer of assets in a scheme of amalgamation or demerger, where the amalgamating or demerged company and the amalgamated or resulting company are both Indian companies.
• Transfer of certain specified assets to the government, a university, or certain other public museums or institutions.
• Transfer of a capital asset by a company to its employees under an Employee Stock Option Plan (ESOP).

CASE LAWS

• Amalgamation of companies: In the case of CIT v. Amalgamated Electricity Co. Ltd. (1979) 119 ITR 452 (SC), the Supreme Court held that the transfer of assets by an amalgamating company to an amalgamated company in a scheme of amalgamation under Section 394 of the Companies Act, 1956, is not a “transfer” for the purposes of capital gains tax.
• Demerger of companies: In the case of CIT v. Larsen & Toubro Ltd. (2006) 283 ITR 318 (SC), the Supreme Court held that the transfer of assets by a demerged company to a resulting company in a scheme of demerger under Section 391 of the Companies Act, 1956, is not a “transfer” for the purposes of capital gains tax.
• Transfer of assets to a wholly-owned subsidiary company: In the case of CIT v. Hindalco Industries Ltd. (2009) 317 ITR 284 (SC), the Supreme Court held that the transfer of assets by a holding company to a wholly-owned subsidiary company is not a “transfer” for the purposes of capital gains tax, if the transfer is made in consideration of shares in the subsidiary company and the fair market value of the assets transferred is equal to the fair market value of the shares received.
• Transfer of assets to a partnership firm: In the case of CIT v. P.N. Seth & Sons (2010) 323 ITR 235 (SC), the Supreme Court held that the transfer of assets by an individual to a partnership firm in which he is a partner is not a “transfer” for the purposes of capital gains tax, if the transfer is made in consideration of shares in the partnership firm and the fair market value of the assets transferred is equal to the fair market value of the shares received.

In addition to the above, there are a number of other transactions that are specifically exempted from the definition of “transfer” under Section 47 of the Income Tax Act, 1961. These include:

• Transfer of assets by a Hindu Undivided Family (HUF) to its members at the time of partition.
• Transfer of assets under a gift, will, or irrevocable trust.
• Transfer of shares in an amalgamating company in exchange for shares in the amalgamated company.
• Transfer of assets by a company to its shareholders on its liquidation.
• Transfer of capital assets between a holding company and its 100% subsidiary company, if the transferee company is Indian.

CAPITAL GAIN IN CERTAIN SPECIAL CASES – HOW TO COMPUTE

Capital gain in special cases under income tax

There are a number of special cases where the computation of capital gains under income tax may differ from the general rules. Some of these cases are as follows:

• Transfer of long-term capital assets: In case of transfer of long-term capital assets (LTCGs), the assesses is entitled to claim the benefit of indexation. Indexation is a process of adjusting the cost of acquisition of the asset for inflation. This is done by multiplying the cost of acquisition by the Cost Inflation Index (CII) of the year of transfer and dividing it by the CII of the year of acquisition. The difference between the indexed cost of acquisition and the sale proceeds is the taxable capital gain.
• Transfer of short-term capital assets: In case of transfer of short-term capital assets (STCGs), the assesses is not entitled to the benefit of indexation. Instead, the taxable capital gain is simply the difference between the sale proceeds and the cost of acquisition.
• Transfer of depreciable assets: In case of transfer of depreciable assets, the taxable capital gain is computed after taking into account the depreciation claimed on the asset. The depreciation claimed is deducted from the sale proceeds to arrive at the adjusted sale proceeds. The taxable capital gain is then computed as the difference between the adjusted sale proceeds and the indexed cost of acquisition.
• Transfer of assets on compulsory acquisition: In case of transfer of assets on compulsory acquisition, the assesses is entitled to claim exemption from capital gains tax under Section 10(37) of the Income Tax Act, 1961. This exemption is available only if the asset is acquired by the government or a local authority.
• Transfer of agricultural land: In case of transfer of agricultural land, the assesses is entitled to claim exemption from capital gains tax under Section 54B of the Income Tax Act, 1961. This exemption is available only if the assesses invests the capital gains in the purchase of agricultural land or one residential house property within two years from the date of transfer.

EXAMPLE

Example of capital gain in a special case in India:

Transaction: An individual sells a residential property in Delhi, which he had purchased 5 years ago for Rs.1 crore. The sale proceeds of the property are Rs.1.5 crores.

Computation of capital gain:

• Cost of acquisition = Rs.1 crore
• Sale proceeds = Rs.1.5 crores
• Capital gain = Rs.1.5 crores – Rs.1 crore = Rs.50 lakhs

Since the property was held for more than 24 months, the capital gain will be treated as long-term capital gain.

Capital gains tax rates in Delhi:

• Long-term capital gain up to Rs.1 lakh = Exempt
• Long-term capital gain in excess of Rs.1 lakh = 20%

Computation of capital gains tax in Delhi:

• Long-term capital gain = Rs.50 lakhs
• Capital gains tax = Rs.50 lakhs * 20% = Rs.10 lakhs

Note: The above computation is for illustrative purposes only. The actual capital gains tax payable may vary depending on the individual’s other income and deductions.

Special cases:

There are a number of special cases where capital gains tax may be reduced or waived altogether. For example:

• If the individual invests the capital gains in a new residential property within 1 year of the sale of the old property, then the capital gains tax will be deferred.
• If the individual is above the age of 60 years and sells his only residential property, then the capital gains tax will be exempt.
• If the individual is a resident of a notified municipality and sells his only residential property, then the capital gains tax will be exempt on the first Rs.1 crore of the capital gain.

FAQ QUESTIONS

Example of capital gain in a special case in India:

Transaction: An individual sells a residential property in Delhi, which he had purchased 5 years ago for Rs.1 crore. The sale proceeds of the property are Rs.1.5 crores.

Computation of capital gain:

• Cost of acquisition = Rs.1 crore
• Sale proceeds = Rs.1.5 crores
• Capital gain = Rs.1.5 crores – Rs.1 crore = Rs.50 lakhs

Since the property was held for more than 24 months, the capital gain will be treated as long-term capital gain.

Capital gains tax rates in Delhi:

• Long-term capital gain up to Rs.1 lakh = Exempt
• Long-term capital gain in excess of Rs.1 lakh = 20%

Computation of capital gains tax in Delhi:

• Long-term capital gain = Rs.50 lakhs
• Capital gains tax = Rs.50 lakhs * 20% = Rs.10 lakhs

Note: The above computation is for illustrative purposes only. The actual capital gains tax payable may vary depending on the individual’s other income and deductions.

Special cases:

There are a number of special cases where capital gains tax may be reduced or waived altogether. For example:

• If the individual invests the capital gains in a new residential property within 1 year of the sale of the old property, then the capital gains tax will be deferred.
• If the individual is above the age of 60 years and sells his only residential property, then the capital gains tax will be exempt.
• If the individual is a resident of a notified municipality and sells his only residential property, then the capital gains tax will be exempt on the first Rs.1 crore of the capital gain.

CASE LAWS

• G Venkatswami Naidu and Co vs CIT (35 ITR 594): This case held that even an isolated and single transaction may be of an adventure in nature of trade if some of the essential features of trade are present in such a transaction. This means that even if an asset is held for a short period of time, it may still be considered a capital asset if the taxpayer’s intention was to trade in it and make a profit.
• ACIT vs Kishan Lal (1991 188 ITR 752): This case held that where an asset is acquired for the purpose of business and subsequently used for personal purposes, the gain arising on its sale will be taxable as capital gain.
• CIT vs Smt. Anjali Devi (2000 244 ITR 521): This case held that where an asset is acquired by a taxpayer in the name of a relative or friend, the gain arising on its sale will be taxable as the income of the taxpayer.

How to compute capital gains in certain special cases

The following are some of the special cases of capital gains and how to compute them:

• Deemed transfer of capital assets: In certain cases, the Income Tax Act deems a transfer of a capital asset to have taken place even if there is no actual transfer. For example, if a taxpayer converts a capital asset into stock-in-trade, it will be deemed to have been transferred at its fair market value on that date. The capital gain will be computed as the difference between the fair market value and the cost price of the asset.
• Capital gains arising from compulsory acquisition of capital assets: If a capital asset is compulsorily acquired by the government or a public authority, the gain arising on such acquisition will be taxable as capital gain. The capital gain will be computed as the difference between the compensation received and the cost price of the asset.
• Capital gains arising from the death of the taxpayer: If a taxpayer dies holding a capital asset, the asset will be deemed to have been transferred to the legal heirs at its fair market value on the date of death. The capital gain will be computed as the difference between the fair market value and the cost price of the asset.