Capital Asset under Income Tax Act –  Section 2(14)

Definition of capital asset in section 2(14) of the Act

“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),

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 ;

(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.

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.

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);]

(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; or

(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;

(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 or deposit certificates issued under the Gold Monetisation Scheme, 2015 notified by the Central Government.

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;

Capital Asset : Date of Transfer is relevant

The character of asset sold must be with reference to the date of its transfer and not the receipt of compensation. A piece of land at the time of transfer may be agricultural and at the time of actual receipt of compensation on compulsory acquisition, it may be a capital asset covered by section 2(14). Since the character of the asset at the time of transfer was not covered by the definition of section 2(14), it could not be taxed by considering its nature at the time of receipt of compensation [A.R. Dahiya v. Asstt. CIT [2004] (Punj. & Har.); ITO v. Chaman Lal Nagpal[2006] 7 SOT 887 (Asr. – Trib.)].

Capital Asset : Judgments

Goodwill

Goodwill of a business, though intangible, is a capital asset. [Haji Abdul Kader Sahib v. CIT [1961] 42 ITR 296 (Ker.)].

Tenancy right 

Tenancy right is also a capital asset and on transfer, liability to capital gains would arise. [A. Gasperv. CIT [1979] 117 ITR 581 (Cal.)].

Lease right

A lease consists of a right of possession cum use of property owned by some other person. It is an outcome of the divesting of ownership from physical possession. The general right of the owner to be in possession and enjoyment of the property could be regarded as a capital asset, though that is also one of the incidents of ownership as any other right in the property of a owner. The leasing out of a capital asset for exploitation by the lessee like mining lease amounts to transfer of capital asset. [A.R. Krishnamurthy & A.R.Rajagopalan v. CIT [1982] 133 ITR 922 (Mad.); Rajendra Mining Syndicatev. CIT [1961] 43 ITR 460 (AP)].

Sub-lease of leasehold right was held as chargeable to capital gains.Mrs. G. Seetha Kamrajj v. CIT [2007] (AP)

Route permits

Route permits for plying buses issued by authorities under the Motor Vehicles Act are property. Any consideration by way of compensation for the deprivation of its use by acquisition is chargeable to tax as capital gains. Such route permits have value and surplus arising on their transfer is liable to be assessed as capital gains. [Addl. CIT v. Ganapathi Raju Jegi, Sanyasi Raju [1979] 119 ITR 715 (AP)/S.Vaidyanathaswami v. CIT [1979] 119 ITR 369 (Mad.)/CIT v. Shri Venkateswara Bus Union[1979] 119 ITR 507 (Mad.)].

Right to subscribe for shares

A right to subscribe for shares is a property and therefore falls within the meaning of section 2(14). [Hari Bros. (P.) Ltd. v. ITO [1964] 52 ITR 399 (Punj.)]. Recognizing the fact that the right to subscribe for shares is a capital asset which can be transferred also, Explanation 1 to section 2(42A) was inserted w.e.f. 1-4-1995 which says that right to subscribe to financial asset and transfer of such right to subscription is chargeable to capital gains.

Trees

Standing trees on agricultural lands are not ‘agricultural land in India’ within the meaning of section 2(14)(iii).They constitute ‘property of any kind’ mentioned in section 2(14) and are capital assets. [Travancore Tea Estates Co. Ltd. v. CIT [1974] 93 ITR 314 (Ker.)].

Once the sale value of shade trees grown for tea bushes are treated and assessed as agricultural income under the provisions of the Agricultural Income-tax Act, the same cannot be treated as capital receipts and charged to tax as capital gains, under the Income-tax Act, 1961. [CIT v. Balmore Estates (P.) Ltd. [1987] 164 ITR 687 (Mad.)].

Sale of agricultural land with standing trees

Rubber trees so long as they remain on the land form part of the agricultural land and transfer of the agricultural land with the standing rubber trees thereon does not constitute a separate capital asset. [CIT v. Alanickal Co. Ltd [1986] 158 ITR 630 (Ker.), CIT v. Rajagiri Rubber & Produce Co. Ltd[1990] 182 ITR 393 (Ker.)/CIT v. Travancore Rubbers Ltd. [1990] 183 ITR 417 (Ker.)]

In CIT v. M. Ramaiah Reddy [1986] 158 ITR 611 the Karnataka High Court has held that where the land with trees thereon is compulsorily acquired, compensation paid for trees cannot be treated as agricultural income under section 2(1A) and the whole of the compensation paid for land as well as trees thereon is to be considered for computing capital gains.

Foreign currency

E.I.D. Parry Ltd. v. CIT[1988]  (Mad.) it was held that the term ‘exchange’ falling within the definition of ‘transfer’ in section 2(47) deals with exchange of capital asset and does not cover ‘exchange of Indian currency for foreign currency’ and hence held that the gain on devaluation is not taxable as capital gain.

Stock of spares

Stock of spares which are not required immediately to work or exploit a capital asset and which can only be used in the future, have to be treated as capital assets. [CIT v. Kasturi & Sons Ltd. [1985] 152 ITR 748 (Mad.)]. In this case, the assessee acquired aircrafts for Rs. 6.5 lakhs and also stores, spare engines and propellers for Rs. 3.25 lakhs. The spare engine was not capitalized in the books of account and no depreciation thereon was claimed. As and when the spares were used it was charged to profit and loss account. Subsequently, when the aircraft was sold, the assessee sold spares etc. resulting in loss. The court held the stock of spares kept by the assessee is a capital asset and loss arising on their sale is a capital loss. It was held that where the spares had not been used but had been stored for future use and when the necessity for their user had ceased as the aircraft was sold, then any loss arising out of the sale of such unnecessary spares could only be treated as a capital loss.

Government bonds

Profit earned on surrender of M.P. State Development Loan Bonds is liable to be taxed as capital gains of the assessee if the bonds were held as capital asset. [Madhya Pradesh Financial Corporationv. CIT [1981] 132 ITR 884 (MP)]. Surplus received on sale of Jagir Bonds, which were issued to give compensation for resumption of Jagir, is a capital receipt and the same is liable to capital gains tax. [CIT v. Jitendre Singh [1988] 170 ITR 487 (Raj.)].

Right to sue for damages

The right to sue for damages is not an actionable claim. It cannot be assigned and its transfer is opposed to public policy. As such, it will not be correct to say that such a right constitutes a capital asset which in turn has to be an interest in ‘property of any kind’. [CIT v. Abbasbhoy A. Dehgamwalla[1991] 59 (Bom.)]

Registered Patent

the transfer of patent of technical know-how attracts liability to capital gains tax inspite of the difficulty in ascertaining its cost. [Albright & Wilson Ltd. v. ITO [1984] 8 ITD 57 (Bom. – Trib.)].