“Capital asset” is defined to include property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible.Positive list – It includes the following:
- “Property” includes any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.
- 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 which has invested in such securities in accordance with the regulations made under the SEBI Act (applicable with effect from assessment year 2015-16).
Negative list – The following assets are excluded from the definition of “capital assets”:
Assets not treated as “capital asset”
| Exception 1 | Any stock-in-trade, consumable stores or raw material held for the purposes of business or profession [but other than securities] |
| Exception 2 | Personal effects of the assessee, that is to say, movable property including wearing apparel and furniture held for his personal use or for the use of any member of his family dependent upon him |
| Exception 3 | Agricultural land in India situated in a rural area. |
| Exception 4 | 6½ per cent Gold Bonds, 1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government or (with effect from the assessment year 2016-17) deposit certificates issued under the Gold Monetisation Scheme, 2015. |
| Exception 5 | Special Bearer Bonds, 1991. |
| Exception 6 | Gold Deposit Bonds issued under Gold Deposit Scheme, 1999. |
Property of any kind is a capital asset – Property of any kind held by an assessee [except the six cases enumerated above] is a capital asset for the purpose of the Income-tax Act. It includes movable assets, immovable assets, tangible/intangible assets, incorporeal rights, and chooses in action. The term “property” is a term of the widest import and subject to any limitation which the context may require, it signifies every possible interest which a person can clearly hold and enjoy—Ahmed G.H. Ariff v. CWT [1970] 76 ITR 471 (SC). Property transferred must be a capital asset on the date of transfer. It is not necessary that it should have been capital asset also on the date of its acquisition by the assessee—Arun Sunny v. CIT [2009] 184 Taxman 498 (Ker.).
The Supreme Court in the case of Vodafone International Holdings B.V. v. Union of India [2012] 204 Taxman 408 held that influence/persuasion of a parent company over its subsidiary could not be construed as a right in the legal sense. To supersede this ruling, an Explanation is inserted by the Finance Act, 2012 below section 2(14) (with retrospective effect from April 1, 1962)* to clarify that “property” includes any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.
In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as capital gain, 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. Moreover, these principles shall not apply in cases where genuineness of transaction itself is questionable (such as bogus claims of long-term capital gain/short-term capital loss or any other sham transactions) – Circular No. 6/2016,† dated February 29, 2016. Similarly, CBDT has decided that the income arising from transfer of unlisted shares would be considered under the head “Capital gains”, irrespective of period of holding, with a view to avoid disputes/litigation and to maintain uniform approach – Letter F.No.225/12/2016/ITA.II, dated May 2, 2016.
Stock-in-trade, raw material, etc., is not a capital asset [Sec. 2(14)(i)] – By virtue of section 2(14)(i), 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.
Personal effects being movable property are not capital assets [Sec. 2(14)(ii)] – Personal effects are not capital assets under section 2(14)(ii), if the following conditions are satisfied :
- It should be movable property (including wearing apparel and furniture).
- It should be held for personal use by the assessee or any member of his family dependent on him.
- It should not be jewellery, archaeological collections, drawings, paintings, sculptures, or any work of art.
Judicial Rulings – One should also keep in view the following judicial pronouncements:
- Must be intended for personal and household use – Gold and silver coins and bars used for puja of deities as a matter of pride or ornamentation and normally not intended for personal or household use are not “personal effects” and are, therefore, treated as capital assets—Maharaja Rana Hemant Singhji CIT [1976] 103 ITR 61 (SC). A property intended for personal or household use (may be for ceremonial occasions only), is always a “personal effects”. For instance, clothes meant for use at weddings or formal occasions are not used daily. Yet, they are stitched for personal use of the wearer. As such, they would form a part of his personal effects—CIT v. H.H. Maharani Usha Devi [1998] 98 Taxman 309 (SC). Likewise, silver utensils held by an assessee which are not in use ordinarily and normally by the assessee, but only on certain occasions are personal effects—Jayantilal A. Shah v. K.N. Anantharama Aiyar, CIT [1985] 23 Taxman 14 (Bom.).
- Furniture – Furniture can be said to be movables held for personal use—CIT Sitadevi N. Poddar [1984] 17 Taxman 345 (Bom.).
- Stamp – A foreign stamp collection is not a personal effect—Tibbils Federal Ins. Co., D.C. Mun App. 119 A. 2d. 114, 115.
- Car, scooter – Personal effects include car, cycle, scooter, motor-cycle owned and used by the taxpayer—Tormey v. Tormey [1935] VLR 300, Re. Fortlage, Ross v. Fortlage [1916] 60 Sol. Jo 527, Re. Pridham [1953] 1 DLR 782, Re. Liverton v. Liverton [1954] NZLR 612.
- Securities – Securities are not personal effects—In re. Burnside’s Will 59 NYS 2d. 829, 831, 185, Misc. 808.
- Loose diamonds – Loose diamonds held by an assessee are not personal effects—CIT Saroj Goenka [1983] 140 ITR 88 (Mad.).
- Goats – Where the assessee purchases 1172 goats and holds them mainly for grazing on its lands and for procuring their wastes as natural manure to increase agricultural production, goats held by the assessee cannot be said to be personal effects of the assessee— Kalirajan v. ITO [2001] 77 ITD 31 (Mad.).
Jewellery – “Jewellery” is a capital asset. “Jewellery” for this purpose includes the following :
- ornaments made of silver, gold, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stones and whether or not worked or sewn into any wearing apparel ;
- precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.
Agricultural land situated in rural area is not a capital asset – Agricultural land in India is not a capital asset provided it is situated in a rural area.
a. Rural area – Rural area for the above purpose is as follows –
- From the assessment year 2014-15 – 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 kilometres from the local limits of municipality/cantonmentboard | If the population of the municipality/cantonment board is more than 10,000 but not more than 1 lakh |
| 6 kilometres from the local limits of municipality/cantonment board | If the population of the municipality/cantonment board is more than 1 lakh but not more than 10 lakh |
| 8 kilometres from the local limits of municipality/cantonment board | If the population of the municipality/cantonment board is more 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.
- Up to the assessment year 2013-14 – 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 such notified* distance [up to 8 kilometres – see Notification No. SO 10(E), dated January 6, 1994] from the local limits of such municipality or cantonment board.
- For the period prior to the assessment year 2014-15, the Bombay High Court in the case of CIT Nitish Rameshchandra Chordia [2015] 57 taxmann.com 394 held that the distance between the municipal limit and the agricultural land is to be measured having regard to the shortest road distance. The Board has accepted the ruling of High Court and the issue has not been further contested—Circular No.17/2015, dated October 6, 2015.
- 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—M. Omer Khan v. CIT [1992] 63 Taxman 533 (SC).
What is agricultural land – In order to qualify for “agricultural land in India’’, it is not necessary that land was once agricultural land. It must be agricultural land at the time of sale—T.S.M.O. Mohamed Othuman v. CIT [1957] 31 ITR 480 (Mad.). True test to be applied for the purpose of determining whether a particular land is agricultural land or not is first to ascertain what is the use to which the land is being actually put. If it is being used for agricultural purpose or even if the agricultural use has ceased but it is apparent that the land is meant to be used for agricultural purpose, it would be agricultural land—Ranchhodbhai Bhaijibhai Patel v. CIT [1971] 81 ITR 446 (Guj.).
Where land is under agricultural operation on date of sale, it is taken as “agriculture land” and it matters very little how the subsequent purchaser intends land in question to be put to use—M.S. Srinivasa Naicker v. ITO [2007] 292 ITR 481 (Mad.), CIT v. Heenaben Bhadresh Mehta [2018] 96 taxmann.com 164 (Guj.). Likewise, if rural agricultural land is transferred to non-agriculturist (which is in breach of law prevailing in the concerned State), the character of land will not be changed and land will continue as agricultural land—CIT v. Rajshibhai Meramanbhai Odedra [2014] 222 Taxman 72 (Guj.).
Factors to be considered while determining whether a particular land is agricultural land or not – The Gujarat High Court in CIT v. Siddharth J. Desai [1982] 10 Taxman 1 laid down the following guiding factors to be considered while determining the nature and character of the land :
- Whether the land was classified in the revenue record as agricultural and whether it was subject to the payment of land revenue, but this factor alone will not be conclusive.
- Whether the land was actually or ordinarily used for agricultural purposes at or about the relevant time.
- Whether such user of the land was for a long period or whether it was of a temporary character or by way of stop-gap arrangement.
- Whether the income derived from the agricultural operations carried on in the land bore any rational proportion to the investment made in purchasing the land.
- Whether the land, on the relevant date, had ceased to be put to the agricultural use ; if so, whether it was put to an alternative use ; whether, such cesser and/or alternative user was of a permanent or temporary nature.
- Whether the land, though entered in revenue record, had never been actually used for agriculture, whether the owner meant or intended to use it for agricultural purposes.
- Whether the land itself was developed by plotting and providing roads and other facilities.
- Whether there were any previous sales of portions of the land for non-agricultural use.
All these factors would not be present or absent in any case. In each case, one or more of these factors may make appearance and the ultimate decision will have to be reached on a balanced consideration of the totality of circ*mstances.
Gold Bonds are not capital assets – 6½ per cent Gold Bonds, 1977 ; 7 per cent Gold Bonds, 1980, and National Defence Gold Bonds, 1980, issued by the Central Government are not capital assets. It is not necessary that the assessee should be the initial subscriber to the Gold Bonds.
Special Bearer Bonds, 1991 – Special Bearer Bonds, 1991, issued by the Central Government are not capital assets by virtue of section 2(14)(v). In order to avail the benefit of section 2(14)(v), it is not necessary that the assessee should be the initial subscriber of these bonds.
Gold Deposit Bonds, 1999 – Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999, notified by the Central Government are not capital assets by virtue of section 2(14)(vi) from the assessment year 2000-01.
There are two types of capital assets—long-term capital asset and short-term capital asset. The following provisions may be noted—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”.Exceptions – Generally, holding period should be more than 36 months to become long-term capital asset. However, in the following cases, the period of holding should be more than the period given below to become long-term capital asset –
| If transfer takes place – | ||||
| On or after April 1, 2017 | During the previous year 2016-17 | After July 10, 2014 but before April 1, 2016 | On or before July 10, 2014 | |
| Equity or preference shares in a company (listed) | 12 months + | 12 months + | 12 months + | 12 months + |
| Equity or preference shares in a company (unlisted) | 24 months + | 24 months + | 36 months + | 12 months + |
| Immovable property (being land or building or both) | 24 months + | 36 months + | 36 months + | 36 months + |
| Securities (like debentures, bonds, government securities, derivatives, etc.) (listed) | 12 months + | 12 months + | 12 months + | 12 months + |
| Units of UTI (listed or unlisted) | 12 months + | 12 months + | 12 months + | 12 months + |
| Units of equity oriented mutual fund (listed or unlisted) | 12 months + | 12 months + | 12 months + | 12 months + |
| Units of debt oriented mutual fund (listed or unlisted) | 36 months + | 36 months + | 36 months + | 12 months + |
| Zero coupon bonds (listed or unlisted) | 12 months + | 12 months + | 12 months + | 12 months + |
How to determine period of holding?
The period of holding shall be determined as follows :
| Different situations | How to calculate the period of holding |
| Shares held in a company in liquidation | The period subsequent to the date on which the company goes into liquidation shall be excluded. |
| Capital asset which becomes the property of the assessee mention in section 49(1) read with section 2(42A)/47 [i.e., when an asset is acquired by gift, will, succession, inheritance or the asset is acquired at the time of partition of family or under a revocable or irrevocable trust or under amalgamation, etc.] | The period for which the asset was held by the previous owner should be included |
| Conversion of inventory into a capital asset | The period shall be reckoned from the date of its conversion into capital asset (applicable from the assessment year 2019-20) |
| Allotment of shares in amalgamated Indian company in lieu of shares held in amalgamating company | The period of holding shall be counted from the date of acquisition of shares in the amalgamating company. |
| Right shares | The period of holding shall be counted from the date of allotment of right shares. |
| Right entitlement | The period of holding will be considered from the date of offer to subscribe to shares to the date when such right entitlement is renounced by the person. |
| Bonus shares | The period of holding shall be counted from the date of allotment of bonus shares. |
| Issue of shares by the resulting company in a schemeof demerger to the shareholders of the demerged company | The period of holding shall be counted from the date of acquisition of shares in the demerged company |
| Flat in a co-operative society | The period of holding shall be counted from the date of allotment of shares in the society—CIT v. Jindas Panchand Gandhi [2005] 279 ITR 552 (Guj.) |
| Sweat equity shares allotted by employer | The period of holding shall be reckoned from the date of allotment or transfer of such equity shares |
| Unit of a business trust [allotted pursuant to transfer of shares as referred to in section 47(xvii)] | The period of holding shall include the period for whichshares were held by the assessee |
| Units which become the property of the assessee in consideration of transfer referred to in section 47(xviii) | The period of holding shall include the period for which theunit or units in the consolidating scheme of the mutual fund were held by the assessee |
| Shares in a company [acquired by the non-resident assessee on redemption of Global Depository Receipts referred to in section 115AC(1)(b) held by such assessee] | The period shall be reckoned from the date on which a request for such redemption was made. |
| Conversion of bonds or debentures, debenture-stock or deposit certificates in any form of a company into shares or debentures of that company certificate | The period of holding shall be considered from the date ofacquisition of bond, debenture, debenture-stock or deposit |
| Asset disclosed under Income Declaration Scheme, 2016 | – Immovable property (evidenced by a deed registered with a State Government) : Period of holding shall be considered from the date of acquisition – Any other asset : Period of holding shall be reckoned from June 1, 2016 |
| Conversion of a branch of a foreign company into Indian subsidiary company of the foreign bank within the parameters of section 115JG | In the case of a capital asset which became the property of the Indian subsidiary company, there shall be included the period for which the asset was held by the said branch of the foreign company [and by the previous owner, if any, who has acquired the capital asset by a mode of acquisition referred to in section 49(1)(i)/(ii)/(iii)/(iv)] |
| Conversion of preference shares into equity shares | The period of holding shall be considered from the date of acquisition of preference shares (applicable from the assessment year 2018-19) |
| Units held by an assessee 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 | Period of holding shall also include the period for which the units in the consolidating plan of the mutualfund scheme were held by him (applicable from the assessment year 2017-18) |
| Units held by an assessee in segregated portfolio referred to in section 49(2AG) | Period of holding shall also include the period for which the original units in the main portfolio were held by the assessee (applicable from the assessment year 2020-21) |
| Transactions in shares and securities not given above— | |
| 1. Date of purchase (through stock exchanges) of shares/ securities | Date of purchase by broker on behalf of investor. |
| 2. Date of transfer (through stock exchanges) of shares and securities | Date of broker’s note provided such transactions are followed up by delivery of shares and also the transfer deeds. |
| 3. Date of purchase/transfer of shares/securities (transaction taken place directly between parties and not through stock exchanges) | Date of contract of sale as declared by parties provided it is followed up by actual delivery of shares and the transfer deeds. |
| 4. Date of purchase/sale of shares/securities purchased in several lots at different points of time but delivery taken subsequently and sold in parts | The first-in-first-out (FIFO) method shall be adopted to reckon the period of the holding of the security, in cases where the dates of purchase and sale cannot be correlated through specific number of the scrips. In other words, the assets acquired last will be taken to be remaining with the assessee while assets acquired first will be treated as sold. |
| Transfer of a security by a depository (i.e., demat account) | The period of holding shall be determined on the basis of the first-in-first-out method |
Example 1 – X holds 1,000 shares in A Ltd. (date of purchase being June 10, 1997). A Ltd. has two undertakings. One of the undertakings is transferred to B Ltd. in a scheme of demerger. Under the scheme of demerger, on May 6, 2019, B Ltd. issues shares to the shareholders of A Ltd. Consequently, on May 6, 2019, X gets 400 shares in B Ltd. In this case, if X transfers shares in B Ltd., then the period of holding shall be counted from June 10, 1997.
Example 2 – X is a member of DEL Stock Exchange. He purchased the membership ticket on March 2, 1956. The Stock Exchange is converted into a company on November 1, 2019. Consequently, on November 1, 2019, X is allotted 1,000 shares in DEL Stock Exchange Ltd. and a ticket to trade in DEL Stock Exchange Ltd. If X transfers shares in (or ticket to trade in) DEL Stock Exchange Ltd., then period of holding shall be calculated from March 2, 1956.
Other Judicial Pronouncements – One should also keep in view the following judicial pronouncements :
- Shares in a company entitling right of occupancy in a flat – Where the assessee held certain shares in a company by virtue of which a right of occupancy in a flat is conferred on him, these shares cannot be treated as a ‘share’ mentioned in proviso to section 2(42A) and as such where such shares are sold after being held for a period of less than 36 months, gain arising therefrom is to be treated as short-term capital gain—ITO v. Nayana K. Shah [2000] 74 ITD 419 (Mum.).
- Transfer of land after construction of building – The Calcutta Bench of the Tribunal in the case of CIT v. Sri Sekhar Gupta [2001] 114 Taxman 122 held that the land is an independent and identifiable capital asset and it continues to remain as an identifiable capital asset even after construction of the building. In this case, the Bench approved the capital gains calculations separately for land and building after splitting up the sale consideration for the land and building. The same view is taken by the Rajasthan High Court in CIT v. Vimal Chand Golecha [1993] 201 ITR 442 and later by the Madras High Court in CIT v. Dr. D.L. Ramachandra Rao [1999] 236 ITR 51 and CIT v. T.C. Itty Ipe. [2001] 119 Taxman 137.
- Transfer of depreciable asset – In the case of transfer of a depreciable asset (other than an asset used by a power generating unit eligible for depreciation on straight line basis), capital gain (if any) is taken as short-term capital gain, irrespective of period of holding.
- Conversion of stock-in-trade into capital asset – When stock-in-trade is converted into a capital asset and thereafter such capital asset is transferred, the holding period of such asset would commence from the date when stock-in-trade was acquired by the assessee and not from the date when the same was converted into a capital asset—Kalyani Exports & Investment (P.) Ltd. v. CIT [2001] 78 ITD 95 (Pune) (TM). However, in the case of CIT v. Abhinandan Investment Ltd. [2015] 63 taxmann.com 263, the Delhi High Court held that the holding period shall be considered from the date when the stock-in-trade was converted into capital asset.
- Allotment of flat/plot by a housing board – In the case of allotment of a flat/plot by a housing board (like DDA, HUDA) the period of holding will be determined from the date of allotment (not from the date when possession is given or when conveyance deed is signed)—Madhu Kaul v. CIT [2014] 225 Taxman 86 (Punj. & Har.), Jitendra Mohan v. ITO [2007] 11 SOT 594 (Delhi), CIT v. K. Ramakrishnan [2014] 224 Taxman 139 (Delhi). Contrary ruling—Gulshan Malik v. CIT [2014] 223 Taxman 243 (Delhi).
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 short-term, capital gain will be short-term capital gain. Conversely, long-term capital gain arises on transfer of long-term capital asset.
[Illustration]
State, giving reason, whether the asset is short-term or long-term in the cases given below—
- X purchases a house property on March 10, 2018 and transfers it on June 6, 2020.
- Y purchases non-listed shares in an Indian company on March 10, 2018 and transfers it on August 6, 2020.
- Z acquires units of a debt oriented mutual fund on July 17, 2019 and he transfers these units on July 20, 2020.
- A purchases diamonds on September 12, 2017 and gifts the same to his friend B on December 31, 2018.
B transfers the asset on October 20, 2020. - B purchases non-listed shares in a company through a broker (date of purchase by the broker : November 21,
2018; the company transfers shares in the name of B : January 5, 2019). These shares are transferred by B on December 20, 2020.
Solution :
| Taxpayer | Asset | Minimum periodto become long-term capital asset | Period of holding | Short-term orlong-term |
| X | House property | 24 months + | March 10, 2018 to June 6, 2020 (i.e., 26 months and 27 days) | Long-term |
| Y | Non-listed shares | 24 months + | 26 months and 27 days | Long-term |
| Z | Units of a debt oriented mutual fund | 36 months + | 12 months and 3 days | Short-term |
| B | Diamonds | 36 months + | September 12, 2017 to October 20, 2020 | Long-term |
| B | Non-listed shares | 24 months + | November 21, 2018 to December 20, 2020 | Long-term |
Notes :
- If an asset is acquired by gift, will, etc. [i.e., circ*mstances mentioned under section 49(1), then the period of holding of the previous owner is also taken into consideration.
- In the case of shares, the purchase date by the broker is taken as the date of acquisition.
