Detailed Guide on Capital Gains Taxation | Section 45 to Section 55A | Case Laws

Capital Gains Taxation refers to the tax imposed on the profit realized from the sale of a non-inventory asset, such as stocks, bonds, real estate, or other investments. It is an important consideration for investors and individuals selling valuable assets, requiring careful planning and compliance to optimize tax liabilities.

Table of Contents

1. Basis of Charge: [Sec. 45(1)]
2. Definition of ‘Capital Asset’: [Sec. 2(14)]
3. Determining whether an asset is Stock-in-trade or Capital asset
4. Items of precious metals; to what extent constitutes Jewellery
5. Short Term Capital Asset: [Sec. 2(42A)]
6. Long Term Capital Asset: [Sec. 2(29AA)]
7. Types of Capital Gain
8. Tax on Short Term Capital Gains where STT is charged: [Sec. 111A]
9. Tax on Long Term Capital Gains : [Sec. 112]
10. Option to Tax LTCG @ 10% without Indexation for Specified Securities: (First proviso to Sec. 112)
11. Deductions under Chapter VI-A not allowed against any LTCG: [Sec. 112(2)]
12. Tax on LTCG on transfer where STT is charged: [Sec. 112A]
13. Definition of Transfer: [Sec. 2(47)]
14. Transactions not regarded as Transfer: [Secs. 46 and 47]

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1. Basis of Charge: [Sec. 45(1)]

Any profits and gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to tax under the head ‘Capital Gains’ in the previous year in which transfer took place unless such capital gain is exempt under sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA and 54H.

2. Definition of ‘Capital Asset’: [Sec. 2(14)]

Capital Asset means

• property of any kind held by an assessee, whether or not connected with his business or profession,
• any Securities held by a Foreign Institutional Investor (FII) which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992,
• any Unit Linked Insurance Policy (ULIP) issued on or after 01.02.2021 to which exemption u/s 10(10D) does not apply on account of:

1. 1. premium payable exceeding ` 2,50,000 for any of the previous years during the term of such policy; or
   2. the aggregate amount of premium exceeding ` 2,50,000 in any of the previous years during the term of any such ULIP(s), in a case where premium is payable for more than one ULIP issued on or after 01.02.2021. [Inserted by Finance Act, 2021]

but does NOT include:

• Any stock-in-trade [other than the securities referred to in sub-clause (b) above], consumable stores or raw materials held for the purposes of his business or profession;

Note: Securities held by FIIs (Foreign Institutional Investors) shall always be regarded as capital asset, whether held as stock-in-trade or as investment by the FIIs.

• Personal effects of movable nature (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, other than

1. 1. Jewellery;
   2. Drawings;
   3. Painting;
   4. Archaeological collections;
   5. Sculptures; or
   6. Any work of art.

• Agricultural land in India, not being land situated –

1. 1. a. in any area which is comprised within the jurisdiction of a municipality or a cantonment board and which has a population of not less than 10,000; or
   2. b. in any area within the distance, measured aerially–

1. 1. 1. not being more than 2 kms, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than 10,000 but not exceeding 1,00,000; or
      2. not being more than 6 kms, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than 1,00,000 but not exceeding 10,00,000; or
      3. not being more than 8 kms, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than 10,00,000;

• Special Bearer Bond, 1991, issued by the Central Government;
• Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or Deposit Certificates issued under the Gold Monetisation Scheme, 2015 notified by the Central Government.

Reason for including Unit linked insurance policies in the definition of Capital Asset u/s 2(14): The Finance Act, 2021 had inserted 4th and 5th proviso to Sec. 10(10D) to provide an upper limit of ` 2,50,000 in respect of premium payable for unit linked insurance policy. If the premium payable exceeds ` 2,50,000 for any of the previous year during the term of the policy, then the exemption u/s 10(10D) shall not be available. Accordingly, for taxing the amount receivable at the time of sale/redemption of ULIPs, the Finance Act, 2021 had included such ULIPs, to which exemption u/s 10(10D) shall not be available, within the scope of capital asset and provide for deemed taxation of profit and gains from the redemption of ULIP as capital gains by inserting Sec. 45(1B). In short, where the exemption u/s 10(10D) does not apply to unit linked insurance policy on account of applicability of 4th and 5th proviso, such ULIP will be treated as capital asset u/s 2(14) and shall be taxable as capital gains as per the provisions of Sec. 45(1B).

Explanation to Sec. 2(14)

To nullify the judgment of SC in Vodafone International Holdings B.V. v. Union of India (2012), an Explanation has been inserted by the Finance Act, 2012, which clarifies as under:

For the removal of doubts, it is hereby clarified that ‘property’ includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.

3. Determining whether an asset is Stock-in-trade or Capital asset

The determination of the issue that whether an asset will be regarded as a Capital asset or stock-in-trade does not depend upon the nature of article, but the manner in which it is held.

For example, a dealer in real estate holds a piece of land or house property as stock-in-trade. But it will be a capital asset in the hand of a person who holds it as an investment and derives income from leasing and renting of the property.

The question whether the shares are held as an investment so as to attract capital gain on its sale or as a trading asset to give rise to business income is not a pure question of law but essentially a question of fact. The character of a transaction cannot be determined solely on the application of any abstract rule, principle or test but must depend upon all the facts and circumstances of the case. The facts that may be considered while determining the same are the magnitude and frequency of buying and selling of shares, the period of holding of such shares, ratio of sales to purchases and the total holdings, etc. Mere classification of shares in the books of account of the assessee is not relevant for determining the nature of income for income-tax purposes.

[PVS Raju v. ACIT (2012) 340 ITR 75 (AP)]

Surplus on sale of shares or securities taxable as ‘Business Income’ or ‘Capital Gains’?

[Circular No. 06/2016, dated 29.02.2016]

Over the years, the courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock-in-trade. The CBDT has also, through various circulars and instructions, summarized the said principles for guidance of the field formations. But, however, disputes continue to exist on the application of these principles.

In this background, while recognizing that no universal principle in absolute terms can be laid down to decide the character of income from sale of shares and securities (i.e. whether the same is in the nature of capital gain or business income), the CBDT has, with a view to reduce litigation and uncertainty in the matter, in partial modification to the Circulars issued earlier, further instructed vide Circular No. 06/2016 dated 29.02.2016 that the Assessing Officers in holding whether the surplus from sale of listed shares or securities would be treated as Capital Gain or Business Income, shall take into account the following:

• If the assessee opts to treat such shares and securities as stock in trade, the income arising from transfer of such shares/securities would be treated as its business income,
• Where the assessee desires to treat the income arising from the transfer of listed shares or securities held for more than 12 months as Capital Gains, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years;
• In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the Circulars issued by the CBDT.

As per an instruction issued by CBDT on 2nd May, 2016 as regard unlisted shares, irrespective of the period of holding, it shall be treated as Capital asset.

4. Items of precious metals; to what extent constitutes Jewellery

As per Explanation 1 to section 2(14), jewellery includes:

• ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;
• precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.

It may be noted that as per the definition given above only ornaments made of precious metal are included. Thus, items made of precious metals, other than ornaments, can be treated as personal effects provided they are commonly and ordinarily used or intended to be used for personal or household use by the assessee or any dependent member of his family.

Gold utensils cannot be regarded as of personal effects and thereby they are capital assets. Capital gains shall arise on sale of gold utensils. It is a tradition in Indian families to use silver utensils for various occasions but there is no such tradition to use gold utensils.

4.1 Judicial Decisions

CIT v. Benarashilal Kataruka (1990) 185 ITR 493 (Cal.)

Items of silverware including dinner plates of different sizes, finger bowls, and jugs were held to be personal effects.

The High Court held that silver utensils, in the given case, consisted of thalis, katoris, jugs, etc. are meant for personal use although not used daily. The main factor in deciding whether an article constitutes personal effect is the nature of the article. Therefore, in the present case, silver utensils constitute personal effects and no capital gains will arise on the sale of silver utensils.

But at the same time, in the case of Ramanathan Chettiar v. CIT (1985) (Mad.), it was held that a large number of the same type of silver articles cannot be treated as having been held for personal use and the assessing authority has to find out as to what are the articles which should reasonably be held by the assessee for personal use.

Maharaja Rana Hemanth Singhji v. CIT (1976) 103 ITR 61 (SC)

Only those effects can be legitimately said to be personal which pertain to the assessee’s person. In other words, an intimate connection between the effect and the person of the assessee must be shown to render them ‘personal effects’. In this case, the Supreme Court held that the gold sovereigns, silver coins and silver bars have been used for puja of the deities as a matter of pride or ornamentation and it is difficult to understand how such use can be characterized as personal use. Therefore, capital gains are taxable in the present case.

Loose diamonds held by an assessee are not personal effects and thus, are capital assets.

CIT v. Saroj Goenka (1983) 140 ITR 88 (Chen.)

5. Short Term Capital Asset: [Sec. 2(42A)]

Any capital asset held by the assessee for a period of not more than 36 months immediately preceding the date of its transfer, is referred as short term capital asset.

However, following assets shall be treated as short term capital asset if they are held for:

Not more than 12 months	Not more than 24 months
(a) Securities (other than unit) listed in a recognized stock exchange in India, (b) Units of UTI, (c) Units of an equity oriented mutual fund, (d) Equity oriented ULIP which are treated as capital asset u/s 2(14) (e) Zero Coupon bond.	(a) Unlisted shares and (b) Immovable property, being land or building or both.
immediately preceding the date of its transfer

Units of specified mutual fund acquired on or after 1.4.2023 and market linked debentures would always be deemed as short term capital assets irrespective of the period of holding.

Note: The Period of holding and the period of ownership need not be same. Explanations to Sec. 2(42A) deal with different cases where the period of holding is determined by excluding or including specified periods, as provided therein. These provisions are explained further with the relevant sections.

6. Long Term Capital Asset: [Sec. 2(29AA)]

It means a capital asset which is not a short term capital asset.

An asset which is sold the very next day after the period of 12/24/36 months is over, would be treated as long-term capital asset by including both the date on which the asset is acquired and the date on which the asset is transferred for computing period of holding.

Bharti Gupta Ramola v. CIT [2012] (Delhi)

7. Types of Capital Gain

Short Term Capital Gain [Sec. 2(42B)]: Capital gain arising on the transfer of short term capital asset.

Long Term Capital Gain [Sec. 2(29B)]: Capital gain arising on the transfer of long term capital asset.

Tax Rates on Capital Gains

Short Term Capital Gains: Short Term Capital Gains is taxable at the regular income-tax rate applicable to the assessee, except in the case covered under section 111A as below.

8. Tax on Short Term Capital Gains where STT is charged: [Sec. 111A]

(1) Where the total income of an assessee includes any Short Term Capital Gains from the transfer of a short term capital asset, being:

• an equity share; or
• unit of an equity oriented mutual fund or ULIP to which exemption u/s 10(10D) does not apply, or
• unit of business trust;

and such transaction is chargeable to Securities Transaction Tax (STT),

the tax payable shall be the aggregate of:

1. tax @ 15% on such short term capital gains; and
2. regular income-tax on the balance income.

Note: Section 111A is applicable only if the sale transaction is chargeable to STT. In respect of equity shares, STT is payable only in respect of transactions on a recognized stock exchange in India. STT is also payable on sale of unlisted equity shares under an offer for sale to public included in public offer.

Provided that in the case of a Resident Individual or Resident HUF, where the total income as reduced by such short term capital gains is below the maximum amount which is not chargeable to income-tax, then, such short term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such short term capital gains shall be @ 15%.

Example: Total income of Mr Ashish for A.Y. 2024-25 is ` 6,00,000 including short term capital gain of ` 4,60,000 on transfer of equity shares on which STT was levied. Tax u/s 111A shall be on following amount:

STCG referred in Sec. 111A – [Basic Exemption limit – (total income other than STCG as per Sec.111A)]

= ` 4,60,000 – [ ` 2,50,000 – (` 6,00,000 – ` 4,60,000)]

= ` 4,60,000 – [ ` 2,50,000 – ` 1,40,000]

= ` 4,60,000 – ` 1,10,000 = ` 3,50,000

Tax under Sec. 111A @ 15% on ` 3,50,000 = ` 52,500 and Tax on regular income is Nil.

Provided further that this section shall also apply on transaction undertaken in foreign currency on a recognised stock exchange located in an International Financial Services Centre (IFSC), even if STT is not paid on such transaction.

[For Details on Taxation of transactions under International Financial Services Centre (IFSC) refer at the end of the Chapter ‘Miscellaneous Topics’]

(2) Where the gross total income includes any STCG referred to in this section, the deduction under Chapter VI-A shall be allowed from the gross total income as reduced by such capital gains i.e. deductions under sections 80C to 80U shall not be allowed from STCG referred u/s 111A.

9. Tax on Long Term Capital Gains : [Sec. 112]

Where the total income of an assessee includes Long Term Capital Gains, then the tax payable by the assessee, as per section 112(1), shall be the aggregate of:

• In case of a Resident Individual or Resident HUF:

1. 1. tax @ 20% on Long Term Capital Gains included in total income; and
   2. regular income-tax on the total income as reduced by Long Term Capital Gains, had the total income as so reduced been his total income; and:

Provided that in the case of a Resident individual or Resident HUF, where the total income as reduced by long term capital gains is below the maximum amount which is not chargeable to income-tax, then, long term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of long term capital gains shall be @ 20%.

• In case of a Domestic Company:

1. 1. tax @ 20%on Long Term Capital Gains included in total income; and
   2. regular income-tax on the balance income.

• In case of a Non-resident (not being a company) or a Foreign Company:

1. 1. tax @ 20%on long term capital gains included in total income; other than the LTCG on unlisted securities or shares of closely held company referred to in (ii)below; and
   2. tax @ 10%on Long Term Capital Gains on transfer of Unlisted Securities or Shares of Closely Held Company (e.company in which the public are not substantially interested) computed without giving effect to the 1st Proviso and 2nd Proviso to section 48;
   3. regular income-tax on the balance income.

Note: In case of a non-resident individual, the benefit of exemption slab is NOT available for all categories  of LTCG, STCG referred in sec. 111A and certain incomes referred in sec. 115A.

 Example:

If the Taxable Income (other than Long Term Capital Gain) is ` 1,50,000 and Long Term Capital Gain is ` 1,90,000. Tax liability for a resident individual and for a non-resident individual shall be calculated as under [Ignore Sec. 115BAC]:

In case of Resident Individual:

Total Taxable Income other than Long Term Capital Gain	` 1,50,000
Maximum Exemption Limit	` 2,50,000
Income which falls short from Basic Exemption Limit	` 1,00,000

 Tax will be computed as under:

On Total Income other than Long Term Capital Gain (` 1,50,000 x Nil)	Nil
Tax on Long Term Capital Gain will be [(` 1,90,000 – ` 1,00,000) x 20%]	` 18,000
Less: Rebate u/s 87A	` 12,500
	` 5,500
Add: Health & Education Cess @ 4%	` 220
Total tax liability	` 5,720

In case of Non-Resident Individual:

Total Taxable Income other than Long Term Capital Gain	` 1,50,000
Long Term Capital Gain	` 1,90,000
Tax will be computed as under:
On Total Income other than Long Term Capital Gain (` 1,50,000 × Nil)	Nil
Tax on Long Term Capital Gain (` 1,90,000 × 20%)	` 38,000
Add: Health & Education Cess @ 4%	` 1,520
Total tax liability	` 39,520

10. Option to Tax LTCG @ 10% without Indexation for Specified Securities: (First proviso to Sec. 112)

Where tax payable on income arising from transfer of long term capital asset, being:

• listed securities (other than units), or
• zero coupon bonds,

exceeds 10% of the amount of capital gains computed before giving effect to 2nd proviso to section 48 (i.e. indexation), then such excess shall be ignored for computing tax payable by the assessee.

In other words, tax on long term capital gains arising from transfer of listed securities (other than units) or zero coupon bonds shall be lower of the following:

• tax @ 20% on LTCG after indexation; OR
• tax @ 10% on LTCG but without giving the benefit of indexation.

11. Deductions under Chapter VI-A not allowed against any LTCG: [Sec. 112(2)]

The Gross Total Income (GTI) shall be reduced by Long Term Capital Gains, if any included, and deduction under Chapter VI-A shall be allowed as if the GTI so reduced were the gross total income of the assessee.

12. Tax on LTCG on transfer where STT is charged: [Sec. 112A]

Notwithstanding anything contained in section 112, where the capital gains arises from the transfer of long term capital asset being:

• equity share in a company or
• unit of equity oriented mutual fund or unit linked insurance policies to which exemption u/s 10(10D) does not apply, or
• unit of business trust,

the tax payable on such long term capital gains exceeding ` 1,00,000 shall be 10%, if the STT has:

• in a case where the long-term capital asset is in the nature of an equity share in a company, been paid on acquisition and transfer of such capital asset; or
• in a case where the long-term capital asset is in the nature of a unit of an equity oriented mutual fund or a ULIP to which exemption u/s 10(10D) does not apply or a unit of a business trust, been paid on transfer of such capital asset:

Provided that in case of an individual or a HUF, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax.

This section shall also be applicable in case of a transfer undertaken on a recognised stock exchange located in any International Financial Services Centre (IFSC) and consideration for which is paid or payable in foreign currency, even if STT has not been paid on such transfer.

The Central Government may, by notification in the official gazette, specify the nature of acquisition of equity share where this section shall be applicable even if the STT has not been paid on its acquisition.

Points to Note:

• Where the gross total income of an assessee includes any long-term capital gains u/s 112A, deduction under Chapter VI-A shall be allowed from GTI as reduced by such capital gains.
• Where the total income of an assessee includes any long-term capital gains u/s 112A, the rebate u/s 87A shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains.

The following are the transactions where benefit of Sec. 112A shall not be available, if STT was not paid at the time of acquisition:

[Notification 60/2018, dated 01.10.2018]

The condition of payment of STT on acquisition of equity shares shall not apply to equity shares acquired before 01.10.2004. For equity shares acquired on or after 01.10.2004, section 112A shall not apply to the following acquisition where STT has not been paid.

• Where acquisition of existing listed equity share in a company whose equity shares are not frequently traded in a recognised stock exchange is made through a preferential issue other than acquisition of listed equity shares in a company:

1. 1. which has been approved by Supreme Court, High Court, NCLT, SEBI or RBI in this behalf;
   2. by any non-resident as per foreign direct investment guidelines issued by the Government;
   3. by an investment fund referred to in clause (a) of Explanation 1 to section 115UB or a venture capital fund referred to in clause (23FB) of section 10 or a Qualified Institutional Buyer;
   4. through preferential issue to which the provisions of Chapter VII of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 does not apply.

• Where transaction for acquisition of existing listed equity share in a company is not entered through recognised stock exchange other than the following acquisition of listed equity shares in a company made as per Securities Contracts (Regulation) Act, 1956, if applicable:

1. 1. acquisition through an issue of share by a company other than the issue referred to in clause (a);
   2. acquisition by scheduled banks, reconstruction or securitisation companies or public financial institutions during their ordinary course of business;
   3. acquisition which has been approved by Supreme Court, High Courts, NCLT, SEBI or RBI in this behalf;
   4. acquisition under employee stock option scheme or employee stock purchase scheme framed under the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999;
   5. acquisition by any non-resident as per foreign direct investment guidelines of the Government;
   6. where acquisition of shares of company is made under SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 2011;
   7. acquisition from the Government;
   8. acquisition by an investment fund referred to in Explanation 1 to section 115UB(a) or a venture capital fund referred to in Sec. 10(23FB) or a Qualified Institutional Buyer;
   9. acquisition by mode of transfer referred to in section 47 or 50B or 45(3) or 45(4), if the previous owner of such shares has not acquired them by any mode referred to in clause (a) or clause (b) or clause (c) [other than the transactions referred to in the proviso to clause (a) or clause (b)].

• Acquisition of equity share of a company during the period beginning from the date on which the company is delisted from a recognised stock exchange and ending on the date immediately preceding the date on which the company is again listed on a recognised stock exchange as per the Securities Contracts (Regulation) Act, 1956 read with SEBI Act, 1992 and the rules made thereunder.

13. Definition of Transfer: [Sec. 2(47)]

Transfer, in relation to capital asset, includes:

1. the sale, exchange or relinquishment of the capital asset; or
2. the extinguishment of any rights therein; or
3. the compulsory acquisition thereof under any law; or
4. where the capital asset is converted by the owner into, or is treated by him, as stock-in-trade of a business carried on by him, such conversion or treatment; or
5. the maturity or redemption of Zero Coupon Bonds; or
6. any transaction involving the allowing the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882; or
7. any transaction (whether by way of becoming a member of, or acquiring shares in a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of any immovable property.

On reduction of share capital, payment made by the company to the shareholders towards such reduction shall be treated as an extinguishment of right in shares held by shareholders. Consequently, reduction of share capital is subject to capital gain.

Kartikeya Sarabhai v. CIT (1997) 228 ITR 163 (SC)

Redemption of Preference shares amounts to transfer and taxable to the shareholder. There is a relinquishment of rights in shares which amount to transfer resulting in capital gains.

Anarkali Sarabhai v. CIT (1982) 224 ITR 422 (SC)

13.1 Explanation 2 to Sec. 2(47)

To nullify the judgment of SC in Vodafone International Holdings B.V. v. Union of India (2012), an Explanation has been inserted by the Finance Act, 2012, which clarifies as under:

‘Transfer’ includes and shall be deemed to have always included:

1. disposing of or parting with an asset or any interest therein, or
2. creating any interest in any asset in any manner whatsoever,

• • directly or indirectly, absolutely or conditionally, voluntarily or involuntarily,
  • by way of an agreement (whether entered into in India or outside India) or otherwise.

The above transaction will be deemed as Transfer notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India.

Seshasayee Steels (P.) Ltd. v. ACIT [2020] 421 ITR 46 (SC)

Any transaction which enables the enjoyment of immovable property will be considered as enjoyment as a purported owner thereof for being treated as a “transfer” of a capital asset u/s 2(47)(vi).

Facts: The assessee (land owner) entered into an “agreement to sell” with a builder (V Ltd.) which provided that both parties were entitled to specific performance of the agreement. Under the agreement, the assessee gave permission to the builder to start construction on the land. Pursuant to the agreement, a power of attorney was given by the assessee to a director of the builder-company to execute, and join in execution of, the sale agreements or sale deeds in respect of the subject property after developing it into flats. The A.O. opined that such transaction enables the enjoyment of immovable property to be considered as enjoyment as a purported owner thereof for being treated as a “transfer” of a capital asset u/s 2(47)(vi) and levy tax on capital gains arising therefrom.

Decision: The Supreme Court took note of the decision in CIT v. Balbir Singh Maini (2018) where it was held that any transaction which has the effect of transferring or enabling the enjoyment of any immovable property would come within the purview of section 2(47)(vi). It is clear that any transaction which enables the enjoyment of immovable property must be enjoyment as a purported owner thereof. The idea is to bring within the tax net, transactions, where, though title may not be transferred in law, there is, in substance, a transfer of title in fact. The Supreme Court held that the assessee’s rights in the said immovable property were extinguished on the receipt of the last cheque, and hence, it is a transfer in relation to the capital asset and capital gains tax liability would be attracted.

14. Transactions not regarded as Transfer: [Secs. 46 and 47]

Following transactions are not regarded as transfer for purposes of capital gains and therefore not taxable under Capital Gains:

Sec. 46(1): Where the assets of a company are distributed to its shareholders on liquidation of the company, such distribution shall not be regarded as transfer by the company.

Sec. 47: [Under the following clauses of section 47; transactions are not regarded as transfer]

• any distribution of capital assets on the total or partial partition of an HUF;
• any transfer of a capital asset under a gift, will or an irrevocable trust:

Provided that where capital asset, being shares, debentures or warrants allotted by a company, directly or indirectly, to its employees under the ESOP or ESOS of the company are transferred by such employee under a gift or an irrevocable trust then this clause shall not apply i.e. it shall be regarded as transfer.

Further, as per 6th Proviso to section 48, the FMV of such shares, debentures or warrants on the date of transfer by employee shall be deemed to be the full value of consideration.

• any transfer of a capital asset by a holding company to its 100% subsidiary company, being an Indian company;
• any transfer of a capital asset by a 100% subsidiary company to its holding company, being an Indian company;

Note: For the purpose of clauses (iv) and (v): The whole of the share capital of the subsidiary company should be held by the holding company or any of its nominees. Exemption may be withdrawn if conditions laid down in Sec. 47A(1) are not complied with. If the transfer of capital asset is made as stock-in-trade, then clauses (iv) and (v) shall not apply and it will be regarded as transfer.

• any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the Indian amalgamated company;
• any transfer, in a scheme of amalgamation, of shares held in an Indian company by the amalgamating foreign company to the amalgamated foreign company, if –

1. 1. at least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company, and
   2. such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated;

• any transfer, in a scheme of amalgamation of a banking company with a banking institution sanctioned and brought into force by the CG under section 45(7) of the Banking Regulation Act, 1949, of a capital asset by the banking company to the banking institution;
• any transfer, in a scheme of amalgamation, of a capital asset, being a share of a foreign company, referred to in Explanation 5 to section 9(1)(i), which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the amalgamating foreign company to the amalgamated foreign company shall not be regarded as transfer, if –

1. 1. at least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company; and
   2. such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated;

• any transfer, in a demerger, of a capital asset by the demerged company to the Indian resulting company;
• any transfer, in a demerger, of a capital asset, being a share or shares held in an Indian company, by the demerged foreign company to the resulting foreign company, if –

1. 1. the shareholders holding not less than 75% in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company; and
   2. such transfer does not attract tax on capital gains in the country, in which the demerged foreign company is incorporated:

Provided that the provisions of Sections 230 to 232 of the Companies Act, 2013 shall not apply in case of demergers referred to in this clause;

• any transfer, in a business reorganization, of a capital asset by the predecessor co-operative bank to the successor co-operative bank or to the converted banking company;
• any transfer by a shareholder, in a business reorganisation, of a capital asset being a share or shares held by him in the predecessor co-operative bank if the transfer is made in consideration of the allotment to him of any share or shares in the successor co-operative bank or to the converted banking company;
• any transfer in a demerger, of a capital asset, being a share of a foreign company, referred to in Explanation 5 to section 9(1)(i), which derives, directly or indirectly, its value substantially from the shares of an Indian company, held by the demerged foreign company to the resulting foreign company shall not be regarded as transfer, if, –

1. 1. the shareholders, holding not less than 75% in value of the shares of the demerged foreign company, continue to remain shareholders of the resulting foreign company; and
   2. such transfer does not attract tax on capital gains in the country in which the demerged foreign company is incorporated:

Provided that the provisions of sections 230 to 232 of the Companies Act, 2013 shall not apply in case of demergers referred to in this clause;

• any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of demerged company, if the transfer or issue is made in consideration of demerger of undertaking;
• any transfer, by a shareholder in a scheme of amalgamation, of shares held by him in the amalgamating company, if:

1. 1. the transfer is made in consideration of allotment to him of any share or shares in amalgamated company except where the shareholder itself is the amalgamated company, and
   2. the amalgamated company is an Indian company;

If the consideration for transfer of shares in amalgamating company is discharged in any other form along with the shares in the amalgamated company, then exemption under section 47 will not be available. This is so because composite consideration is not contemplated by this clause. If shareholder of amalgamating company receives shares and also cash, debenture, etc. from amalgamated company, then capital gain shall not be exempt in the hands of shareholder. [Gautam Sarabhai Trust Case]

• any transfer of Foreign Currency Convertible Bonds (FCCB’s) or Global Depository Receipts (GDR’s) referred to in sec. 115AC(1) i.e. bonds/GDRs/bonds or shares of a public sector company purchased in foreign currency, made outside India by a non-resident to another non-resident;
• any transfer, made outside India, of a capital asset being Rupee Denominated Bond of an Indian company issued outside India, by a non-resident to another non-resident;
• any transfer of a capital asset, being:

1. 1. bond or GDR referred to in Sec. 115AC(1)
   2. rupee denominated bond of an Indian Company
   3. derivative
   4. such other securities as may be notified by the Central Government in this behalf made by a non-resident on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in foreign currency.

Notification No. 16/2020 and Notification No. 89/2022:

The Central Government has notified the following securities for the above sub-clause (d) namely:

1. Foreign Currency Denominated Bond
2. unit of Mutual Fund
3. unit of Business Trust
4. Foreign Currency Denominated Equity Share
5. unit of Alternative Investment Fund
6. Bullion Depository Receipt with underlying bullion
7. unit of Investment Trust
8. unit of a Scheme
9. unit of a Exchange Traded Fund (ETF) launched under IFSC Authority (Fund Management) Regulations, 2022,

which are listed on RSE in any International Financial Services Centre as per the regulations made by SEBI under the SEBI Act, 1992 or the International Financial Services Centres Authority under the International Financial Services Centres Authority Act, 2019.

• any transfer, in a relocation, of a capital asset by the original fund to the resulting fund;
• any transfer by a shareholder or unit holder or interest holder, in a relocation, of a capital asset being a share or unit or interest held by him in the original fund in consideration for the share or unit or interest in the resultant fund.

‘Original fund’ means:

• a fund established or incorporated or registered outside India, which collects funds from its members for investing it for their benefit and fulfils the following conditions:

1. 1. the fund is not a person resident in India;
   2. the fund is a resident of a country or specified territory with which an agreement u/s 90(1) or Sec. 90A(1) has been entered into; or is established or incorporated or registered in a country or a specified territory as may be notified by the Central Government in this behalf;
   3. the fund and its activities are subject to applicable investor protection regulations in the country or specified territory where it is established or incorporated or is a resident; and
   4. fulfils such other conditions as may be prescribed; or

• an investment vehicle, in which Abu Dhabi Investment Authority is the direct or indirect sole shareholder or unit holder or beneficiary or interest holder and such investment vehicle is wholly owned and controlled, directly or indirectly, by the Abu Dhabi Investment Authority or the Government of Abu Dhabi; or
• a fund notified by CG in this behalf subject to such conditions as may be specified.

[Substituted by Finance Act, 2023 w.e.f. A.Y. 2023-24]

‘Relocation’ means transfer of assets of the original fund, or of its wholly owned Special Purpose Vehicle (SPV), to a resultant fund on or before 31.03.2025, where consideration for such transfer is discharged in the form of share or unit or interest in the resulting fund to:

1. shareholder or unit holder or interest holder of the original fund, in the same proportion in which the share or unit or interest was held by such shareholder or unit holder or interest holder in such original fund, in lieu of their shares or units or interests in original fund; or
2. the original fund, in the same proportion as referred to in sub-clause (i), in respect of which the share or unit or interest is not issued by resultant fund to its shareholder or unit holder or interest holder.

‘Resultant fund’ means a fund established or incorporated in India in the form of a trust or company or LLP, which:

1. has been granted a certificate of registration as a Category I or Category II or Category III AIF, and is regulated under the SEBI (AIF) Regulations, 2012 made under the SEBI Act, 1992 or regulated under the IFSC Authority (Fund Management) Regulations, 2022 made under the IFSC Authority Act, 2019; and
2. is located in any IFSC as referred to in Sec. 80LA(1A).

[Amended by Finance Act, 2023]

• any transfer of capital asset by India Infrastructure Finance Company Limited to an institution established for financing the infrastructure and development, set up under an Act of Parliament and notified by the C.G. for this purpose;
• any transfer of capital asset, under a plan approved by C.G., by a public sector company to another public sector company as notified by the C.G. or to the C.G. or to a S.G.;

For the purpose of this clause, the C.G. has notified the transfer of capital asset from NTPC Limited, being transferor public sector company, to NTPC Green Energy Limited, being transferee public sector company, under the plan approved by C.G. on 21.03.2022, to be exempt.

• any transfer of a capital asset, being a Government Security carrying a periodic payment of interest, made outside India through an intermediary dealing in settlement of securities, by a non-resident to another non-resident;
• any transfer of Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015, by way of redemption, by an assessee being an individual;
• any transfer of a capital asset, being conversion of gold into Electronic Gold Receipt issued by a Vault Manager, or conversion of Electronic Gold Receipt into gold;

[Inserted by Finance Act, 2023 w.e.f. A.Y. 2024-25]

Reason for Inserting clause (viid): Pursuant to the announcement about Gold Exchange, SEBI has been made the regulator of the entire ecosystem of the proposed gold exchange. Accordingly, SEBI has come out with a detailed regulatory framework for spot trading in gold on existing stock exchanges through the instrument of Electronic Gold Receipts (EGR). In order to promote the concept of Electronic Gold, the Finance Act, 2023 has inserted clause (viid) to Sec. 47 to exclude the conversion of physical form of gold into EGR and vice versa by a SEBI registered Vault Manager from the purview of ‘transfer’ for the purposes of Capital gains.

• any transfer of a capital asset, being 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 such other public museum or institution, as may be notified by the CG in the Official Gazette to be of national importance, or to be of renown throughout any State or States;
• any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificates in any form, of a company into shares or debentures (including FCCB’s) of that company;
• any transfer by way of conversion of bonds referred to in section 115AC(1)(a) i.e. Foreign Currency Exchangeable Bonds (FCEB) into shares or debentures of any company;
• any transfer by way of conversion of preference shares of a company into equity shares of that company;
• any transfer of a capital asset, being land of a sick industrial company, made under a scheme prepared and sanctioned u/s 18 of Sick Industrial Companies (Special Provisions) Act, 1985 where such sick industrial company is being managed by its workers’ co-operative;

However, transfer should be made during the period commencing from the P.Y. in which the said company has become a sick industrial company u/s 17(1) of that Act and ending with the P.Y. during which entire net worth of such company becomes equal to or exceeds the accumulated losses.

• any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm; or

any transfer of capital asset to a company in the course of demutualisation or corporatisation of a recognized stock exchange in India as a result of which an association of persons or body of individuals is succeeded by such company:

Provided the following conditions are satisfied:

1. 1. All the assets and liabilities of the firm or AOP/BOI as the case may be, relating to the business immediately before the succession become the assets and liabilities of the company;
   2. All the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the succession;
   3. The partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company;
   4. The aggregate of the shareholding in the company of the partners of the firm is not less than 50% of the total voting power in the company and their shareholding continues to be as such for a period of 5 years from the date of the succession; and
   5. The demutualisation or corporatisation of a recognized stock exchange in India is carried out in accordance with a scheme of corporatisation which is approved by the SEBI.

Points to Note: Business profits are not exempt. Therefore, the profit on sale of stock-in-trade by the firm to the company shall be taxable in the hands of the firm as business profits. As per ICDS, in case of dissolution of a partnership firm or AOP or BOI, notwithstanding whether business is discontinued or not, the inventory on the date of dissolution shall be valued at the Net Realisable Value. Exemption u/s 47(xiii) is applicable for a partnership firm carrying on business. Exemption is NOT applicable where the firm is carrying on profession.

• any transfer of a capital asset, being a membership right held by a member of a recognized stock exchange in India, for acquisition of shares and trading or clearing rights acquired by such member in that recognized stock exchange in accordance with a scheme for demutualisation or corporatisation which is approved by the SEBI;
• any transfer of a capital asset or intangible asset by a private company or an unlisted public company to an LLP; or any transfer of share(s) held in the company by a shareholder – as a result of conversion of the company into an LLP:

Provided following conditions are satisfied:

1. 1. All the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the LLP;
   2. All the shareholders of the company immediately before the conversion become the partners of the LLP and their capital contribution and profit sharing ratio in the LLP are in the same proportion as their shareholding in the company on the date of conversion;
   3. The shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the LLP;
   4. The aggregate of the profit sharing ratio of the shareholders of the company in the LLP shall not be less than 50% at any time during the period of 5 years from the date of conversion;
   5. The total sales, turnover or gross receipts in business of the company in any of the 3 P.Y. preceding the P.Y. in which the conversion takes place does not exceed ` 60 lakhs;
   6. The total value of the assets as appearing in the books of account of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed ` 5 crores; and
   7. No amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of 3years from the date of conversion.

• Where a sole proprietary concern is succeeded by a company in the business; if the following conditions are satisfied:

1. 1. All the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company;
   2. The shareholding of the sole proprietor in the company is not less than 50%, of the total voting power in the company and his shareholding continues to remain as such for a period of 5 years from the date of the succession; and
   3. The sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company;

• any transfer in a scheme for lending of any securities under an agreement or arrangement, which the assessee has entered into with the borrower of such securities and which is subject to the guidelines issued by the SEBI or RBI, in this regard;
• any transfer of a capital asset in a transaction of reverse mortgage under a scheme made and notified by the Central Government;

Concept of Reverse Mortgage Scheme: Reverse Mortgage, a financial planning scheme benefits retired citizen who owns Residential House Property, but are in need of regular flow of income. Here, the retired citizen can mortgage his house with the bank or the Finance Company, in return for a lump sum amount or for a regular monthly/quarterly/annual income. They can continue to live in the house and receive regular income without the burden of repaying the loan. The Bank recovers the loan along with the accumulated interest by selling the house after the death of the borrower. The excess amount will be given to the legal heirs. However, before resorting to the sale of the house, preference is given to the legal heirs to repay the loan and interest and get the mortgaged property released. Note: Tax Benefits under Reverse Mortgage Scheme: Transfer of Capital Asset in Reverse Mortgage scheme is not a transfer for the purpose of Capital Gains and thus exempt vide Sec. 47(xvi). Further, the amount received by Senior Citizen as loan, either in lump sum or in instalments, is exempt u/s 10(43).

• any transfer of a capital asset, being share of a Special Purpose Vehicle (SPV) to a business trust in exchange of units allotted by that trust to the transferor;
• any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating scheme of a mutual fund in consideration for allotment of a capital asset, being a unit or units, in the consolidated scheme of the mutual fund;
• any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating plan of a mutual fund scheme in consideration of the allotment of a capital asset, being a unit or units, in the consolidated plan of that scheme of the mutual fund;
• any transfer of a capital asset, being an interest in a joint venture, held by a public sector company, in exchange of shares of a company incorporated outside India by the Government of a foreign State, as per the laws of that foreign State.

‘Joint venture’ shall mean a business entity, as may be notified by the Central Government.

[Inserted by Finance Act, 2023 w.e.f. A.Y. 2023-24]