SECTION 45
 
CAPITAL GAINS - CHARGEABLE AS
[SEC. 45]

GENERAL PRINCIPLES

Concept of double taxation does not apply to gifts - The fact that the assessee has suffered taxation under the Gift-tax Act in respect of a transaction does not affect the question of it being taxed under the Income-tax Act in respect of the same transaction under section 45 - CIT v. Shyam Narain Mehrotra [1980] 122 ITR 313 (Cal.).

Findings in gift-tax proceedings are not binding - The income-tax department is not a party in the gift-tax proceedings, and hence any order passed therein will not be binding on the ITO while he is making assessment against another assessee under the Income-tax Act - CIT v. H.C. Gupta [1975] 100 ITR 244 (All.).

Practical obstacle in valuation is not a relevant factor - A mere practical obstacle to the valuation cannot defeat the charge of tax in respect of the capital gains which have arisen. If valuation by inspection and empirical examination is not possible, the other methods of valuation have to be adopted. One has then to go by the book value or go by the market value as on the date of acquisition with such adjustments as the circumstances of the case may call for - Shahdara (Delhi) Saharanpur Light Railway Co. Ltd. v. CIT [1994] 208 ITR 882 (Cal.).

Deemed gift v. capital gains - If gift-tax is charged with respect to a particular transaction on the basis that it is deemed gift, then the same transaction cannot be treated as subject to the capital gains - CIT v. Jagdamba Charity Trust [1986] 158 ITR 157 (Delhi).

CAPITAL GAINS v. BUSINESS PROFITS

Connection with business asset will not convert profit into business income - The fact that capital gains are connected with the capital assets of a business will not make them the profits of the business - CIT v. Express Newspapers Ltd. [1964] 53 ITR 250 (SC).

TRANSFER OF ASSET

Transfer can apply even to part of an asset - The words ‘the transfer of a capital asset’ occurring in section 45 cannot be interpreted as a transfer of the entire capital asset and not a part of the same - National Products v. CIT [1987] 163 ITR 632 (Kar.).

Transfer of firm’s business to a company - Any surplus arising from the transfer of a going concern from a firm to a company in which all the erstwhile partners of the firm became shareholders of the company was liable to be assessed to capital gains in the status of body of individuals and not in the status of association of persons - Artex Mfg. Co. v. CIT [1981] 131 ITR 559 (Guj.).

ACCRUAL OF GAINS

A sale or transfer must have taken place - Capital gains accrue only if there is a sale or any other transfer of the capital asset. If the assessee, even in the face of a registered sale deed, is able to prove by cogent evidence and satisfy the Tribunal that no sale in fact took place, the Tribunal has to come to the conclusion that there was no capital gain - Hira Lal Ram Dayal v. CIT [1980] 122 ITR 461 (Punj. & Har.).

Assessee must have acquired the right to receive profits - Capital gains tax is attracted the moment the assessee has acquired the right to receive the profits and it is not necessary that the assessee should have actually received the profits. What the parties did subsequent to the year will not have any bearing on the liability to tax in respect of that year. If it subsequently happens that the money is not actually received, that would be a capital loss arising in the year when the money became irrecoverable - T.V. Sundaram Iyengar & Sons Ltd. v. CIT [1959] 37 ITR 26 (Mad.).

Gains must be ascertainable - Capital gains have to be included only at the time they are ascertained. It cannot arise at any earlier date if it is not known. The question of capital gains is inter-related with quantification of the amounts. If there are gains, they should be known - R. Dalmia v. CIT [1982] 133 ITR 169 (Delhi).

YEAR OF TAXABILITY

Date of execution of registered deed is relevant - In order to attract section 45, it should be established that, by the transfer, the title to the property stands passed to the purchaser. If what was sold was immovable property, it should further be established that the same was conveyed by a registered deed. It is the date of execution of the registered deed, and not the date of delivery of possession, that will be relevant in such circumstances, for on that date alone the title to property passes - CIT v. F.X. Periera & Sons (Travancore) (P.) Ltd. [1990] 184 ITR 461 (Ker.).

Entries in account books are not relevant - The date of sale or transfer is the date when the sale or transfer takes place, and for the purpose of determining that date, entries in the account books are irrelevant - Alapati Venkataramiah v. CIT [1965] 57 ITR 185 (SC).

In compulsory acquisition cases date of taking over possession by Government is relevant - Where lands are acquired under the Land Acquisition Act, the date on which possession is taken by Government under section 16 of that Act alone is relevant for purposes of section 45 of the Income-tax Act, and not the date on which final notification was issued under section 6 of the Land Acquisition Act communicating the Government’s intention to acquire the land - Buddiah v. CIT [1985] 155 ITR 277 (Kar.)/Harish Chandra v. CIT [1985] 154 ITR 478 (Delhi)/Syed Abdul Basir v. CIT [1988] 170 ITR 566 (Raj.)/Addl. CIT v. New Jehangir Vakil Mills Co. Ltd. [1979] 117 ITR 849 (Guj.).

Where the award for compensation was made by the Special Land Acquisition Officer on 3-2-1971 but the Government took possession of the lands through private negotiations in December 1970 itself, the transfer must be treated as having taken place on the date of the award, viz., 3-2-1971 only - CIT v. Purshottambhai Maganbhai Hatheesingh (HUF) [1985] 156 ITR 150 (Guj.).

Until the award was made, there would not be any passing of the property or legal vesting of the same in the Government. The fact that possession had been handed over to the Government earlier would have no relevance to the passing of the property or the vesting of it - M.B. Karmarkar and P.L. Gokhale v. CIT [1984] 150 ITR 234 (Bom.).

FIRMS/PARTNERS *

Firm is also an assessable legal entity - A firm cannot in law deny its liability to tax in respect of capital gains on the ground that it is not a legal entity capable of owning a capital asset - Pearl Woollen Mills v. CIT [1980] 123 ITR 658 (Punj. & Har.)/ K.I. Viswambharan & Bros. v. CIT [1973] 91 ITR 588 (Ker.) (FB).

Registered document is necessary - When a firm owns certain properties, a registered document will be necessary to transfer firm’s interest in such properties in favour of partners, and mere book entries will not be sufficient to effect such a transfer. - CIT v. Dadha & Co. [1983] 142 ITR 792 (Mad.).

Relinquishment by partner through book entries is a sale - Where, through an instrument executed by two partners of a firm, one of them released and relinquished in favour of the other his rights and interest in a building and some land owned by the firm, for a specified consideration which was adjusted in the firm’s books, there was a sale by the firm in favour of a partner attracting section 45 - CIT v. Bharani Pictures [1981] 129 ITR 244 (Mad.).

Reconstitution of firm by retirement of partner or induction of new partner will not result in transfer of capital asset - When new partners are admitted to a firm, what happens is that the rights of the existing partners are reduced and a right is created in favour of the newly introduced partners. But the ownership of the property does not change even with the change in the constitution of the firm. As long as there is no change in the ownership of the firm and its properties merely for the simple reason that the partnership of the firm stood reconstituted, there is no transfer of capital asset. Likewise, if a partner retires he does not transfer any right in the immovable property in favour of the surviving partners because he has no specific right with respect to the properties of the firm. What transpires is the right to share the income of the properties stood transferred in favour of the surviving partners, and there is no transfer of ownership of the property in such cases. Therefore, when a partnership is reconstituted by adding a new partner, there is no transfer of assets within the meaning of section 45(4) - CIT v. Kunnamkulam Mill Board [2002] 125 Taxman 802/257 ITR 544 (Ker.).

LAND

Conversion of land into sites and then sale of sites at the best price, will result in capital gains only - Development of land into building sites with a view to realise the best price, without anything more, is consistent with the realisation of the capital investment, and the surplus received will not be a trading or business profit but only capital gains - CIT v. MLM. Mahalingam Chettiar [1977] 107 ITR 236 (Mad.).

LOOM HOURS

Sale of loom hours will not give rise to capital gains - Money received by an assessee on sale of loom hours would be revenue receipt and not capital gain, and would be taxable as income from business - Kinison Jute Mills Co. Ltd. v. CIT [1989] 45 Taxman 366 (Cal.).

SHARES

Surplus on sale of shares is capital gains in specified cases - Where an assessee who was not engaged in the business of purchase and sale of shares acquired right shares in a company with a view to retain its controlling interest in the company, and later sold those shares, the surplus would be treated as capital gains only and not as profits arising from an adventure in the nature of trade - CIT v. Guest Keen & Nettlefold Ltd. [1978] 115 ITR 205 (Cal.).

Surplus arising on sale of shares by an investment company is capital gain, and not business profit - CIT v. Sugar Dealers [1975] 100 ITR 424 (All.).

Reduction of share capital - Amount distributed by a company on reduction of its share capital has two components, viz., distribution attributable to accumulated profits and distribution attributable to capital and to the extent of accumulated profits in hands of company, (whether such accumulated profits are capitalised or not), return to shareholder on reduction of his share capital would be taxable as dividend in his hands and only balance may be subject to tax as capital gains if they accrue. Where assessee had been paid not merely cash but had also been given a property for reduction in value of his shares, while computing capital gains out of total amounts so received including value of property received, portion attributable to accumulated profits would have to be deleted - CIT v. G. Narasimhan [1999] 102 Taxman 66 (SC).

TREES

Sale proceeds of trees of spontaneous growth will not result in capital gains - Trees of spontaneous growth are such trees which are not sown. They grow naturally. If that be so, then the sale proceeds of such a tree will not bring in any profit or gain and as such will not be taxable as capital gains - CIT v. Suman Tea & Plywood Industries (P.) Ltd. [1997] 226 ITR 34/94 Taxman 305 (Cal.).

Sale of old unyielding rubber trees will not result in capital gains - Capital gains could not be said to accrue when old and unyielding rubber trees were sold - Kalpetta Estate Ltd. v. CIT [1996] 87 Taxman 281 (SC).

Shade trees - Given regard to the wide definition of the expression ‘capital asset’ in section 2(14), there is no reason why shade trees growing in a coffee estate should not be deemed to be covered by the said expression. It was not possible to say that no cost of acquisition could at all be conceived or envisaged in respect of a capital asset like the shade trees purchased as a part and parcel of a yielding Coffee Estate - Emerald Valley Estates Ltd. v. CIT [1996] 88 Taxman 335 (Kar.).

SALE OF BUSINESS - Where business is sold as a going concern valuing plant and machinery, etc., surplus arising over and above difference between written down value and actual cost has to be taxed under section 45 - CIT v. Artex Mfg. Co. [1997] 93 Taxman 357/227 ITR 260 (SC).

When the parties arrived at a figure for transfer of business as a whole, and when the buyer took over the business including the seller’s liabilities, and where the liabilities taken over exceed the value of the assets, the value of the liabilities arrived at by the parties would be a part of the consideration for the transfer. When considering the question whether the consideration for the transfer can be attributed to a particular asset transferred to the buyer, it has to be determined whether a portion of the consideration can be attributed to a particular asset. When the entire business is sold as a going concern, it is impermissible to ignore the liability taken over by the buyer and disregard the same as not forming a part of the consideration - CIT v. S. Natarajan [1998] 149 CTR (Mad.) 326.

SUB-SECTION (4)

Section 45(1) v. Section 45(4) - Section 45(1) and section 45(4) are mutually exclusive - CIT v. Texspin Engg. & Mfg. Works [2003] 129 Taxman 1/263 ITR 345 (Bom.).

Where firm is succeeded by company - In case a company succeeds a firm, firm being treated as company under provisions of Part IX of Companies Act, there is no transfer and neither section 45(1) nor section 45(4) is attracted - CIT v. Texspin Engg. & Mfg. Works [2003] 129 Taxman 1/263 ITR 345 (Bom.).

Admission of new partner - When a partnership is reconstituted by adding a new partner, there is no transfer of assets within the meaning of section 45(4) - CIT v. Kunnamkulam Mill Board [2002] 125 Taxman 802/257 ITR 544 (Ker.).

Section 45(4) also covers cases of subsisting partners transferring assets in favour of retiring partners - The word ‘otherwise’ used in section 45(4) takes into its sweep not only the cases of dissolution but also the cases of subsisting partners of a partnership, transferring assets in favour of a retiring partner - CIT v. A.N. Naik Associates [2004] 136 Taxman 107 (Bom.).

Section 45(4) would apply only if the trustees constitute AOP - Where trustees could not be assessed as AOP, profit arising from transfer of capital assets of trust on dissolution would not be charged to tax under section 45(4) - L.R. Patel Family Trust v. ITO [2003] 129 Taxman 720/262 ITR 520 (Bom.).

Other illustrations - Where assessee-firm was dissolved and all its assets were taken over by one partner at book value, Assessing Officer was justified in taking market value of assets so transferred for purpose of capital gains tax as per section 45(4) and assessee-firm’s claim that consideration that was received by assessee-firm should be treated as fair market value was rightly rejected - Rajlaxmi Trading Co. v. CIT [2001] 117 Taxman 50/250 ITR 581 (AP).

Where there was a dissolution of firm by operation of law by reason of section 42(c) of the Partnership Act but this was not followed by the transfer of capital assets by way of distribution of capital assets on the dissolution of the firm, since no transfer had taken place, no capital gains could be said to arise under section 45(4) - CIT v. Vijayalakshmi Metal Industries [2002] 256 ITR 540/[2003] 132 Taxman 49 (Mad.).

SUB-SECTION (5)

Interest under section 28 of Land Acquisition Act, additional amount under section 23(1A) and solatium under section 23(2) of said Act form part of enhanced compensation under section 45(5)(b); even in cases where pending appeal, Court/Tribunal/authority before which appeal is pending, permits claimant to withdraw against security, or otherwise enhanced compensation (which is in dispute), the same is liable to be taxed under section 45(5) - Section 45(5) deals with transfer(s) by way of compulsory acquisition and not by way of transfers by way of sales, etc., covered by section 45(1). Secondly, section 45(5) talks about enhanced compensation or consideration which in terms of Land Acquisition Act, 1894, results in payment of additional compensation. It is true that ‘interest’ is not compensation. It is equally true that section 45(5) of the 1961 Act refers to compensation. But, one has to go by the provisions of the 1894 Act which awards ‘interest’ both as an accretion in the value of the lands acquired and interest for undue delay. Interest under section 28, unlike interest under section 34, is an accretion to the value; hence it is a part of enhanced compensation or consideration which is not the case with interest under section 34 of the 1894 Act. So also additional amount under section 23(1A) and solatium under section 23(2) of the 1894 Act form part of enhanced compensation under section 45(5)(b). Section 45(5), read as a whole, including clause (c), not only deals with reworking but also with the change in the full value of the consideration (computation) and since the enhanced compensation/consideration (including interest under section 28 of the 1894 Act) becomes payable/paid under the 1894 Act at different stages, the receipt of such enhanced compensation/consideration is to be taxed in the year of receipt subject to adjustment, if any, under section 155(16), later on. Hence, the year in which enhanced compensation is received is the year of taxability. Consequently even in cases where pending appeal, the Court/Tribunal/Authority before which appeal is pending, permits the claimant to withdraw against security or otherwise the enhanced compensation (which is in dispute), the same is liable to be taxed under section 45(5). This is the scheme of section 45(5) and section 155(16). Even before the insertion of section 45(5)(c) and section 155(16) with effect from 1-4-2004, the receipt of enhanced compensation under section 45(5)( b) was taxable in the year of receipt which is only reinforced by insertion of clause (c) because the right to receive payment under the 1894 Act is not in doubt. It is important to note that compensation, including enhanced compensation/consideration under the 1894 Act is based on the full value of property as on date of notification under section 4 of that Act. When the Court/Tribunal directs payment of enhanced compensation under section 23(1A), or section 23(2) or under section 28 of the 1894 Act it is on the basis that award of the Collector or the Court, under reference, has not compensated the owner for the full value of the property as on date of notification - CIT v. Ghanshyam (HUF) [2009] 182 Taxman 368/315 ITR 1 (SC).

Section 45 refers to compensation determined as per award of Collector - Words ‘the compensation awarded’ in the first instance occurring in clause (a) of sub-section (5) refer to compensation determined by the Collector as per his award and the words ‘such compensation or part thereof...received by the assessee’ occurring in the said clause refer to amounts received pursuant to the award passed by the Collector, and not the amount received earlier to the award - CIT v. C.P. Lonappan & Sons [2004] 134 Taxman 757 (Ker.).

Where any amount is received after stay of award in pursuance of an interim order - If any amount is received after stay of award, in pursuance of an interim order as a payment subject to final result, it will not be an amount received as enhanced compensation contemplated under section 45(5)(b), but only an interim payment received subject to final decision - Chief CIT v. Smt. Shantavva [2004] 136 Taxman 678 (Kar.).

When asset is not ‘capital asset’ at the time of transfer - If at the time of transfer the asset does not fall within the definition of ‘capital asset’, there is no occasion to treat the enhancement of compensation in a subsequent year as capital gain under section 45(5). The question whether an asset is a capital asset or not has to be determined in the year in which the asset is acquired or any compensation or part thereof is first received. Where the revenue has accepted that the land in question was agricultural land not falling within the definition of capital asset at the time when compensation was first received, revenue could not be permitted to open this question in a subsequent year when the enhanced compensation was received and to take a contrary view in respect of the same asset - A.R. Dahiya v. Asstt. CIT [2004] 141 Taxman 449 (Punj. & Har.).

Mere claim for enhanced compensation will not suffice - The streamlining of the provision of section 45 amply makes it clear that the assessability of the enhanced compensation chargeable under the head ‘Capital gains’ is only with reference to the previous year in which such amount is received on a final settlement of the quantum of compensation by the Court. Mere claim cannot be regarded as a receipt to attract provisions of section 45(5)(b). Where claim for enhanced compensation is under dispute and same is pending during assessment year under consideration, conditional receipt does not bestow character of income under section 45(5)(b) - K. Mahendar v. CIT [2008] 303 ITR 245 (Mad.).

In case of interim order - Even if compensation is enhanced by interim order, it will be taxable on receipt basis under section 45(5)(b) - C.P. Jacob v. Asstt. CIT [2008] 174 Taxman 154 (Ker.).

Others - Where pending appeals filed against award of compensation for acquisition of land, assessee withdrew award amounts as per interim order of Calcutta High Court, amount received by assessee could not be assessed before appeals pending before Calcutta High Court reached their finality - Anil Kumar Forma (HUF) v. CIT [2007] 163 Taxman 182/289 ITR 245 (Mad.).