Capital Asset Section 2(14) – Capital Gains
The following article deals with the Capital Asset in Capital Gains. Capital comes under the section 2(14) of the Income tax act. Profits or gains arising from the transfer of a capital asset made in a previous year is taxable as capital gains under the head “Capital Gains”. The important ingredients for capital gains are, therefore,
- existence of a capital asset,
- Transfer of such capital asset and
- Profits or gains that arise from such transfer.
Capital Asset Section 2(14)
Unless the gain is relatable to a capital asset there can be no charge to capital gains tax. Section 2(14) of the Income-tax Act defines the term “capital asset” to mean:
(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,
but does not include –
(i) any stock-in-trade, consumable stores or raw-materials held for the purposes of his business or profession;
(ii) personal effects that is to say, movable property (including wearing apparel and furniture but excluding jewellery) held for personal use by the assessee or any member of his family dependent on him. Jewellery includes 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 and precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;
(iii) agricultural land in India, not being land situate (a) within the jurisdiction of a municipality or a contonment board and which has a population of not less than 10,000, or (b) in any area within the distance, measured aerially, –
- not being more than two kilometers , 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
- ) not being more than six kilometers, 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
- not being more than eight kilometers, 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;
(iv) 6½ per cent Gold Bonds, 1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government;
(v) Special Bearer Bonds 1991 issued by the Central Government.
(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government. Or deposit certificates issued under gold monetisation scheme, 2015 – Amendment vide Finance Act, 2016
Any security held by foreign institutional investor which has invested in such security in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 would be treated as capital asset only so that any income arising from transfer of such security by a Foreign Portfolio Investor (FPI) would be in the nature of capital gain.
The Supreme Court in the case of Vodafone International Holdings B.V vs. Union of India  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 with retrospective effect from 1st April 1962, an Explanation has been inserted to clarify 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.
The term property appearing in Section 2(14) has not been defined in the Income-tax Act. Even the Transfer of Property Act does not contain any definition of the term. But, the scope of Section 2(14) is very wide. With the exception of the aforementioned assets, all other assets are included in the category of capital asset. “Capital asset” includes movable/immovable asset, tangible/intangible assets, incorporeal rights and chose-in-action. It would also include share of a partner in a firm, goodwill of a firm, mining rights, industrial licence acquired by consideration, tenancy right or leasehold right, foreign currency, right to subscribe for shares, the contractual right of a purchaser to obtain title to an immovable property, etc. Some of the judicial rulings in this context are as follows:
Property is a term of widest importance and subject to any limitation which the context may require, it signifies every possible interest which a person can hold and enjoy [Ahmed G.H. Arif v. C.W.T. (1970) 76 ITR 471 (SC)].
Even business interest would be brought within the term property [C.I.T. v. Krishna Warrier (1964) 53 ITR 176 (SC)]. Even the business undertaking as a whole would fall within the definition of the term ‘property’ in Section 2(14) of the Act. [R.C. Cooper v. Union of India AIR 1970 (SC) 564]. The Gujarat High Court has rightly summed up as follows: The words “property of any kind”, are words of widest amplitude. They exclude any limitation which may be sought to be introduced for the purpose of restricting the applicability of the definition. The adverbial clause “whether or not connected with his business or profession” also emphasizes the width and amplitude of the definition. Every kind of property held by an assessee, whatever be it’s nature or character, is within the connotation of the expression ‘capital asset’ provided, of course, it does not fall within the excepted categories specified in clauses (i) to (vi).
Cost of Self generated Capital Assets:
The Madras High Court in C.I.T. v. V.K. Rathnam Nadar (1969) 71 ITR 433 held that capital gain arises only on the transfer of capital asset which had actually cost something to the assessee. Such actual cost in the context of the Income-tax Act being cost in terms of money, it cannot apply to transfer of capital asset which did not cost anything to the assessee in terms of money in its creation or acquisition. In other words, though self generated asset like goodwill is a capital asset in general law, its sale or transfer would not attract tax on capital gains in the hands of the person who has created it by carrying on his business or profession, as the coming into existence or growth of self-created assets does not cost anything in terms of money. The Delhi, Calcutta, Kerala and Karnataka High Courts have taken the same view
However, with effect from Assessment Year 1988-89, Section 55 is amended to remove this legal difficulty. It provides that where goodwill is self-generated, the cost of acquisition for computation of capital gain shall be deemed to be nil and where it has been purchased, the cost will be taken to be the actual price paid for it. The cost of improvement also in relation to goodwill be taken to be nil.
The Government has overcome the problem of taxing capital gains on transfer of three other categories of self generated assets: with effect from the assessment year 1995-96, cost of tenancy rights, route permits and loom hours would also be deemed to be nil.
From Assessment year 2008-09, the scope of Section 2(14) has been expanded with the introduction of taxability provision with regards to “personal effects being archeological collections”.