Capital Asset under Income Tax Act

Definition of Capital Asset under Income Tax Act

Section-45(1) of the Income Tax Act, 1961 is the charging section for the purposes of "Capital Gains". According to this section, following four conditions should be satisfied for attracting taxability as "Capital Gains". These are as below:-
(a) There should be a capital asset i.e. the asset which has been transferred should be a capital asset on the date such transfer is made.
(b) Transfer of such capital asset should have been made.
(c) Transfer should have been made in the previous year.
(d) There should be profits or gains as a result of the transfer.

Therefore, it becomes important to understand the meaning of the term 'Capital Asset' as defined under the Income Tax Act, 1961. According to Section-2(14) of the Income Tax Act, the term 'Capital Asset' include:-
(a) Property of any kind held by an assessee, whether or not connected with his business or profession.
Explanation:- "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 the rights whatsoever.

(b) Any securities held by a FII which has invested in such securities in accordance with SEBI regulations.

Note:-
(1) Property of any kind covers all properties whether held for the purpose of business or not. Thus, if any asset held in business (except stock) is sold, capital gain may arise thereon as per the provisions of the Income Tax Act.
(2) FIIs frequently buy and sell shares in Indian stock markets. The income arising from stock of securities held by them shall be chargeable to "Capital Gains" and not as a business income and FIIs will get benefit of sections 111A, 112 and 112A.

Exclusions of Capital Asset

According to Section- 2(14), following are not considered as 'Capital Asset' for the purposes of taxability under "Capital Gains":-
(a) Any stock in trade [other than securities referred to in sub clause (b)], consumable stores, raw materials held for business purposes.
(b) Personal effects i.e. moveable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependant on him but excludes- jewellery, archaeological collections, drawings, paintings, sculptures or any work of art.
(c) Gold Deposit Bonds under the Gold Deposit Scheme, 1999; or Deposit Certificates issued under the Gold Monetisation Scheme, 2015.
(d) Rural agriculture land in India.

Note:-
(1) If a person other than FIIs hold shares as a stock in business, such stock will not be treated as a capital asset for the purpose of income tax. Rather income from sale of such shares is covered under the head "Income from Business or Profession".

(2) Immoveable property (other than stock) is always a capital asset (whether held for business use or personal use). Thus, even if a person is holding an immoveable property for personal use, it will be treated as a capital asset. But if any moveable asset is held for personal use, it will not be a capital asset as such no capital gain arises on sale of moveable property held for personal use.

(3) Following moveable properties (held for personal use) shall always be treated as "Capital Asset":-

• Jewellery
• Drawings & Paintings
• Sculptures
• Archaeological collections
   

(4) Thus, if an assessee sells paintings or jewellery used in his household, it will be subjected to capital gain tax.

(5) Rural agricultural land in India is not a capital asset. Therefore, no capital gain liability arises in case of transfer of rural agriculture land. However, urban agriculture land in India is a capital asset.

Urban Agriculture Land under Income Tax Act

Urban Agriculture Land means agricultural land situated in India-

(a) In area falling within the jurisdiction of a municipality, municipal corporation, town area or cantonment board which has a population above 10,000;  OR
(b) Measured aerially (shortest aerial distance):-

(i) Within 2 kms. from local limits of any municipality or cantonment board having a population more than 10,000 but not more than 1 Lakh; or
(ii) Within 6 Kms. From local limits of any municipality or cantonment board having a population more than 1 Lakh but not more than 10 Lakhs; or
(iii) Within 8 Kms. From local limits of any municipality or cantonment board having a population more than 10 Lakhs;