Capital gains – asset must be a capital asset at the time of sale – a point of view.

[DEVKUMAR KOTHARI]

Relevant provisions:

Section 2 (13)- definition of business,

Section 2(14) - definition of capital asset,

Section 2 (36)- definition of profession.

Section 32 – depreciation.

Section 45(2)- provision to indicate option of assessee to treat a capital asset as stock-in-trade.

Section 50 - depreciable business  assets are also capital assets.

Section 28 – business income.

Section 56 – income from other sources.

Income-tax Act, 1961

2. In this Act, unless the context otherwise requires,-

(14) ⁵⁰[“capital asset” means-

(a) property of any kind held by an assessee, whether or not connected with his business or profession;

(b) any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992, [15 of 1992.]

⁶¹[(c) any unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth proviso thereof;]    

but does not include-

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

³⁰[(ii) personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes-

(a) jewellery;

(b) archaeological collections;

(c) drawings;

(d) paintings;

(e) sculptures; or

(f) any work of art.

⁵¹[Explanation 1].-For the purposes of this sub-clause, "jewellery" includes-

(a) ornaments made of gold, silver, 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 stone, and whether or not worked or sewn into any wearing apparel;

(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;]

⁵²[Explanation 2.-For the purposes of this clause-

(a) the expression “Foreign Institutional Investor” shall have the meaning assigned to it in clause (a) of the Explanation to section 115AD;

(b) the expression “securities” shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956;’[42 of 1956] ]

³¹[(iii) agricultural land in India, not being land situate-

(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand ⁴⁷[***] ; or

⁴⁸[(b) in any area within the distance, measured aerially,-

(I) not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or

(II) not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not exceeding ten lakh; or

(III) not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten lakh.

Explanation.-For the purposes of this sub-clause, “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]]

³²[(iv) 6½ per cent Gold Bonds, 1977, ³³[or 7 per cent Gold Bonds, 1980,] ³⁴[or National Defence Gold Bonds, 1980,] issued by the Central Government ;]

³⁵[(v) Special Bearer Bonds, 1991, issued by the Central Government ;]

³⁶[(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 ⁵⁷[ or deposit certificates issued under the Gold Monetisation Scheme, 2015 ] notified by the Central Government ;]

⁴³[Explanation.-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;';

A broad analysis:

From the above definition, we find that:

The above clause falls under “definitions” and is subject to the context.

However, a meaning has been given by use of expression “capital asset” means-  Therefore it can be said that it gives  a ‘definite meaning’ and , the language used is peremptory.

The definition can be divided in the following parts:

a. items included.

b. items included for specific type of persons.

c. items excluded.

Items excluded and day from which excluded:

A property may be a capital asset at a point of time but it can cease to be a capital asset on happening of  some  event. For example, on conversion of capital asset into stock in trade, it ceases to be a capital asset.

An excluded property may be included in meaning of capital asset e.g  on  conversion of  specified  rural agricultural land into nonagricultural land or  due to area  coming into limits of  municipal area etc.

A garment dealer hold dresses as stock-in-trade, when he draws from  stock  some dresses  for personal use or use by family members then such dresses becomes his personal effect, and still remain non capital assets.

Suppose from his dresses used as personal effect , some of dresses becomes popular due to wearing on some special events and becomes collectible items, and is appreciated then on such event, when he decides to dispose off such dresses and realize capital such dresses becomes capital asset.

When any item of personal effect is put for sale, it no longer remain a personal effect. Because once he decides to sell any item and put it for sale it is no longer a personal effect. The decision to sell may be voluntary or compelled due to circumstances, it will make no difference. Because once it is decided to part with, it is no longer a personal effect. Even if any item of personal effect is kept apart for charity, it no longer remain ‘personal effect’. For example , old dresses kept apart to give to poor people, are no longer personal effect.

Capital gains:

Holding and carrying of capital assets do not result into capital gains. Capital gains may arise arises only when a transfer take place for a  consideration (or deemed consideration) , if any.

The event of capital gains taxability is transfer. Dates relevant are the date of acquisition and the  date of transfer. Both dates are definite dates of acquisition and date of transfer.

Therefore, to attract ‘ capital gains’  the property should be a capital asset at the time of transfer. Whether it was not a capital asset at the time of acquisition or at any time thereafter would not be relevant. If it was not a capital asset at the time of transfer then ‘capital gains’ tax will not be attracted even if at the time of acquisition or during intervening / holding period it was a capital asset.

Cases where sale of  personal effect was accepted as not taxable:

There are many cases in which gain on  sale of ‘personal effect’ was held  not taxable under head ‘capital gains’. However, revenue did not raise contention that when it was put for sale or kept apart for sale or put to auction  or advertised for sale,  it no longer remained a personal effect and it was a capital asset. For example case of COMMISSIONER OF INCOME-TAX VERSUS HH MAHARANI USHA DEVI - 1998 (5) TMI 5 - SUPREME COURT some jewellery out of heir loom was held personal effect and it was held that sale did not give rise to capital gains.

 And many other cases can be found on this website. In these cases disputes was on issue of whether it was a personal effect based on its use, frequency of use etc. neither revenue ( in case of capital gains)  nor assesse ( Claiming loss)  raised contention that when it was put to sale, it was not a personal effect and it was capital asset.

Transfer of car used for personal use only:

There are cases in which motor care used for personal use only have been considered as sale of personal effect therefore, loss on sale of such car has not allowed under head ‘capital gains’ for example a  recent judgment reported as

PIYUSHKUMAR RAVJIBHAI DEDANIA, VERSUS. PRINCIPAL COMMISSIONER OF INCOME TAX-1, RAJKOT - 2024 (6) TMI 972 - ITAT RAJKOT

Other aspects:

 Usually motor  cars are held  a long time.

Even personal cars are sometimes used for business and / or profession and sometimes allowed to be used by others for some consideration. In such cases , depending on circumstances car expenses becomes partly  eligible for deduction, depreciation can also be allowable if there is income earned ( and offered for taxation).

Over a long period of time during which car is held other relevant provisions , as listed earlier  might become applicable.

Therefore, one can plan activities and disclose properly to put forth truth and substantiate claim.

Earlier article on related aspects.

Capital asset -investment activity is vocation or business being an adventure or concern in nature of commerce. Income/ loss from such activity will fall under different heads of income.