Income From Capital Gain

Section 2(47) of the Income Tax Act, defines transfer in relation to a capital asset, and it includes

• The sale, exchange or relinquishment of the asset.
• The extinguishment of any rights therein.
• In a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment.
• Any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882(4 of 1882).
• Any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.
• Explanation - For the purposes of sub-clauses (v) and (vi), ''immovable property'' shall have the same meaning as in clause (d) of section 269UA]

Transactions which are not deemed to be transfer for the purposes of capital gains
The Income Tax Act also exempts certain transactions from being covered under the definition of transfer. These are more specifically contained in section 46 & 47 of the Income Tax Act. In brief the transactions not regarded as transfer are as under :-

1. Where the assets of a company are distributed to its share holders upon its liquidation, the distribution is not regarded as transfer. However where a share holder receives any money or other assets on the date of distribution which exceeds the amount of dividend within the meaning of section 2(22)(c), the excess is chargeable under the head capital gains.
2. Any distribution of capital assets on the total or partial partition of a huf is not regarded as transfer
3. Where a capital asset is transferred under the gift or will or an irrevocable trust, the transaction is not of the nature of transfer as per the Income Tax Act.
4. The transfer of a capital asset to an Indian subsidiary company by a parent company or its nominees who hold the entire share capital of the Indian subsidiary company is not regarded as transfer.
5. Any transfer of a capital asset by a wholly owned subsidiary company to its Indian holding company is also not regarded as transfer for the purposes of capital gains. TopHowever in respect of (d) & (e) above the transfer of a capital asset as stock in trade is covered by the provisions of capital gains.
6. Any transfer in a scheme of amalgamation of a capital asset by the amalgamating company to an Indian amalgamated company is also not a transfer for the purposes of capital gains.
7. In the case where the amalgamating and the amalgamated companies are both foreign companies, the transfer of shares held in the Indian company by the foreign amalgamating company to the foreign amalgamated company is not regarded as a transfer for the purposes of capital gains if at least 25% of the share holders of the amalgamating foreign company continue to remain share holders of the amalgamated foreign company and if such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated..
8. Any transfer by a share holder, in a scheme of amalgamation, of share or shares held by him in the amalgamating company in consideration of the allotment of any share or shares in the amalgamated Indian company is not regarded as a transfer for the purposes of capital gains.
9. Where a non resident transfers any bond or shares of an Indian company which were issued in accordance with any scheme notified by the Central Government for the purposes of section 115AC or where the non resident transfer any bonds or shares of a public sector company sold by the government and purchased by the non resident in foreign currency is not regarded as a transfer for the purposes of capital gains . However this is so only when the transfer of the capital asset is made outside India by the non resident to another non resident.
10. Where any assessee transfers any work of art, archaeological or art collection, book, manuscriptt, drawing , painting, photograph or print to a University, the National Museum, the National Art Gallery, the National Archives, to the Government or any other notified institution of national importance is not considered as transfer for the purposes of capital gains.
11. Any transfer by way of conversion of a company's bonds or debentures, debenture-stock or deposit certificates in any form into shares and debentures of that company is not regarded as transfer for the purpose of capital gains.
12. Where a non corporate person transfers its membership of a recognised stock exchangeTop in India to a company in exchange of shares allotted by that company is not regarded as a transfer for the purposes of capital gains provided that such transfer was made on or before 31st day of December, 1998.
13. Any transfer of a land of a sick industrial company which is being managed by it s Worker's Cooperative is not regarded as transfer for the purposes of capital gain if the transfer is made under a scheme prepared and sanctioned under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985. This exemption is operative only in the period commencing from the previous year in which the said company became a sick industrial company under section 17(1) of that act and ending with the previous year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses. The net worth is defined in the Sick Industrial Companies Act.
14. With effect from 1-4-99 the process of sale or transfer of any capital or intangible asset of a firm is not regarded as a transfer for the purposes of capital gains where it is on account of the succession of the firm by a company in the business carried on by it. This exemption is dependent on the following conditions :-
    1. all the assets and liabilities of the firm before the succession and relating to the business should become the assets and liabilities of the company.
    2. All the partners of the firm before the succession should become share holders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of succession.
    3. The partners of the firm should not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by allotment of shares in the company.
    4. The aggregate share holding in the company by the partners should be more than 50% of the total voting power for a period of 5 years from the date of succession.
15. With effect from 1-4-99 where a sole proprietary concern is succeeded by a company in the business carried on by it and as a result of which the sole proprietary concern sells or transfers any capital asset or intangible asset to the company, such transfer shall not be regarded as transfer for the purposes of capital gains. This exemption is available only if the following conditions are fulfilled:-
    1. All the assets and liabilities of the business of the sole proprietary concern should become the assets and liabilities of the company.
    2. The share holding of the sole proprietor should be more than 50% of the total voting power in the company for a period of 5 years from the date of succession.
    3. The sole proprietor should not receive any consideration or benefit, directly or Topindirectly, in any form or manner, other than by way of allotment of shares in the company.
16. With effect from 1-4-99 any transfer in a scheme for lending of any securities under an agreement or arrangement which the assessee enters into with the borrower of such securities subject to the guidelines issued by the Securities and Exchange Board of India is not regarded as a transfer for the purposes of capital gains.

    where in the transaction of lending shares of some distinctive numbers and receiving back shares of some other numbers is the result, the same would not be considered as exchange of asset within the definition of capital asset since the meaning of the word exchange necessarily involves exchange of two different assets. Thus where the asset received back is not different from what was lent in the above scheme of lending, no transfer is there for the purposes of capital gain as long as the assets received back represent the same fraction of the ownership of the company