Section 45(1): Meaning of Basis of charge under Capital Gain

By | June 16, 2016

As defined u/s 45(1)  of the Income Tax Act— 

Any profits or gains arising from the transfer of a capital asset effected in the previous year shall have as otherwise provided in S. 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head “Capital gains”, and shall be deemed to be the income of the previous year in which the transfer took place.

According to S. 45(1A), Notwithstanding anything contained in sub-section (1), where any person receives at any time during any previous year any money or other assets under an insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of—

  1. flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature;         or
  2.  riot or civil disturbance; or
  3. accidental fire or explosion; or
  4. action by an enemy or action taken in combating an enemy (whether with or without a declaration of war),

then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of S. 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset.

Explanation.—For the purposes of this sub-section, the expression “insurer” shall have the meaning assigned to it in clause (9) of S. 2 of the Insurance Act, 1938 (4 of 1938).

ChargeabilityExemptionsNotesCapital Assets
Any profit or gain arising from the transfer of “Capital Assets” during the previous year is chargeable to the tax under the head of “capital gains”S. 54, 54B, 54D, 54EC, 54F, 54G, and 54GA.– There should be a capital assets
– Capital assets is transferred by assessee
– A profit or gain arises as a result of “Transfer”
Property of any kind (all assets + securities of FII- Foreign Institutional Investors as per rules and regulations of SEBI) held by assessee, whether or not connected with his business or profession is called capital asset.

Except following:
1. held as stock in trade for business
2. Agricultural Land in India provided not situated:
– in any area within the territorial jurisdiction of a municipality or a cantonment board having population of 1000 or more; or
– in any notified area (with in 8 KM from municipality stated above.)
3. 6 1/2% gold bonds, 1977 or 7% Gold bond 1980 or National Defence Gold Bonds 1980 issued by Central Govt.
4. Special Bearer Bonds, 1991
5. Gold Bonds under Gold Deposit Scheme, 1999
6. Personal Effect of the Assessee- movable property including wearing apparel and furniture held for his personal use or for use of his family dependents (except  Jewellery, Archaeological Collection, Drawings, Paintings, Sculptures or any work of art)

Thus, As per S. 45—

  • Any profit or gain
  • on transfer
  • of capital asset
  • is taxable under Income from Capital Gain
  • in year of transfer
  • except
  • when exempt u/s 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H.
Capital gain is applicable on certain assets only called Capital Asset and not all assets.
It is applicable on transfer which not only includes sale of asset.
It is taxable in year asset transferred or sold and not purchased.
There can be profit or loss on sale of capital asset.
Exemption of capital gain are mentioned in S. 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H.
Profit/loss from capital asset=Transfer of capital asset + Not exempted.

Related Cases:

S. 2(28A), 2(47), 45(1) & 48 of IT Act, 1961—Capital gain—A close reading of S. 2(28A) would make it clearly understanding that to call an amount received as interest, at least one of the conditions should be satisfied, namely, the same should have been received as a due on account of any money either borrowed or debt incurred. Therefore, the amount in question received by the Official Liquidator as per the orders of the Company Court, though repeatedly referred to as interest, for the purpose of assessment of income tax, it is part of sale consideration and same cannot be treated as income from other sources as defined in S. 56 but said amount should be treated only as capital gain u/s 45 of the Act for purpose of assessment—Cauvery Spinning & Weaving Mills Ltd. (In Liquidation) vs. CIT (2011) 238 CTR 55 (Mad)

S. 45(1), 50C & 54E of IT Act, 1961—Capital gain—S. 54F is an exemption provision and a complete code in itself. Since it is a complete code in itself, the computation of eligible exemption has to be worked out within its framework  as far as possible. Being an exemption provision, beneficial interpretation has to be given. The “capital gains” and the “net consideration” have to be worked out within the framework of S. 54F, without imposing any fiction created by any other section. Thus the capital gains arising from the transfer of any long-term capital asset for the purpose of S. 54F have to be worked out applying S. 48 without imposing S. 50C into it—Goul Mahadevappa vs. ITO (2011)TTJ 489 (ITAT-Bang)

S. 45(1) & 48 of IT Act, 1961—Capital gain—U/s 48 it is provided that capital gains shall be computed by deducting from the “full value of the consideration” received or accruing as a result of transfer, the expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the asset and cost of improvement thereto if any. Since there is no evidence to show that the assessee has received any consideration over and above that stated in the sale deed pertaining to land sold, no addition is merited by disregarding the “full value of the consideration” declared by the assessee—ITO vs. AMARJIT SINGH [2010] 128 TTJ 82 (UO)(CHD)

S. 2(29A), (42A), 45(1) 48 of IT Act, 1961—Capital gain—For the purpose of S. 48 of the Act, one must keep in mind an important principle that chargeability and computation have to go hand in hand. the right to subscribe for additional offer of shares/debentures comes into existence only when the company decides to come out with the rights offer. Computation is an integral part of chargeability under the Act—Navin Jindal vs. ACIT [2010] 320 ITR 708 (SC)

S.2(14), 2(47), 45(1) & 45(4) of IT Act, 1961—Capital gain—Profit received by the assessee partner on notional basis by deducting 40 per cent from two years average profit for the period of pendency of dissolution of the firm under the direction of the Court is to be treated as revenue receipt—B. Raghurama Prabhu Estate Executrix, Smt. M. Kaveri Bai vs. JIT (2011) 239 CTR 274 (Kar)

S. 45 (1) & 55 (2)(a) of IT Act, 1961—Tax avoidance—When a company makes an attempt to evade tax, the authorities are duty bound to lift the corporate veil and find out the real intention behind the same—Indo Tech. Electric Co. vs. DCIT (2011) 237 CTR 227 (Mad)

S. 2(29B), 2(42B) & 45(1) of IT Act, 1961—Capital gain—The capital gain arising out of the sale of the leasehold interest in the land in incomplete building will have to be bifurcated into the gain arising out of a sale of lease hold interest in the land and sale of the complete building—CIT vs. Hindustan Hotels Ltd. & Anr. (2011) 237 CTR 32 (Bom.)

S. 45(1), 47(iii), 92 & 139 of IT Act, 1961—Capital gain—When there is chargeability under IT Act notwithstanding that no tax may be payable, there is an obligation to file a return u/s 139 of the Act. In the absence of any income accruing from the transfer of shares, provisions of S. 92 to 92F relating to transfer pricing are not applicable—Deere & Company, In re. (2011) 241 CTR 497 (AAR)

S. 28(i), 45(1) & 45(2) of the IT Act, 1961—Capital gain—The provisions laid down u/s 45(2) of the Act are applicable only in the case where investment is converted into stock-in-trade and not vice versa—ACIT vs. Bright Star Investment Pvt. Ltd.

S. 2(47)(v), 45(1) of the IT Act, 1961—Capital gain—ITO vs. Mahesh Nemichandra Ganeshwade & ORS [2012] 147 TTJ 488 (ITAT-PUNE)

S. 45(1), 260A of IT ACT, 1961—Capital Gain—Commissioner of Income-tax vs. Bharti Overseas Trading Co. [2012] 249 CTR 554 (DELHI)


As Per Section 45(1), of the Income Tax Act, 1961-

Capital gains.

45(1). Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections[54, 54B,54D, 54E, 54EA, 54EB, 54F , 54G and 54H], be chargeable to income-tax under the head “Capital gains”, and shall be deemed to be the income of the previous year in which the transfer took place.

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