What Is A Capital Asset?

For the purposes of bringing to tax any gain under the head “capital gain”, the item transferred must be a capital asset. Hence its defmition becomes very important. As per Section 2(14) of the IT Act, 1961 it is defined as property of any kind held by an assessee whether or not connected with his business or profession, but not including:


(i)      Any stock-in-trade and raw materials held for the purposes of his business or profession;

(ii)     Personal effects, i.e. to say, movable property (including wearing apparel and furniture, but excluding jewellery, archaeological collections, drawings, paintings, sculptures and any work of art) held for personal use by the assessee or any member of his family dependant on him;

 

(iii) Agricultural land in India not being situated within the jurisdicdon of a municipality or within 8 km. of a municipality as may be notified;


(iv) Gold bonds;


(v) Special Bearer Bonds, 1991; and


(vi) Gold Deposit Bonds.


The most important item that should be noted in this regard is “personal effects” like silver utensils, wearing apparel, etc. which are not treated as capital assets.


Capital assets are of two types:

  1. long-term capital assets and
  2. short-term capital assets.

 

Under Section 2(42A) a “short-term capital” asset means a capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer.

 

However, in the case of a share held in a company or any other security listed in a recognised stock exchange in India or a unit of UTI or a unit of an approved mutual fund, the words “12 months” would be substituted for the words “36 months”.

 

Where any capital asset is held by an assessee in the case of a share held in a company in liquidation, the period subsequent to the date on which the company goes into liquidation would be excluded.

 

In the case of a capital asset which becomes the property of the assessee, say, by gift or by will or by partition of an HUF, etc., the period for which the asset was held by the previous owner referred in Section 49(1) would also be included.

 

In the case of a capital asset being a share or any financial asset subscribed to by the assessee on the basis of his right to subscribe to such financial assets or subscribed to by the person in whose favour the assessee has renounced his right to subscribe to such financial assets, the period would be reckoned from the date of allotment of such financial asset.

 

As regards a capital asset being a right to subscribe to any financial asset popularly known as right entitlements, which is renounced in favour of any other person, the period would be reckoned from the date of the offer of such right by the company or institution, as the case may be, making such offer. Thus the amount received on the renunciation of right share would normally be taxable as a short-term capital gain. As regards bonus shares, the cost price would be treated as “nil”. The asset which is not a short-term capital asset is regarded as a long-term capital asset which results in long-term capital gains, on its transfer as is described below.


As per Finance Act, 2005 Zero coupon bonds would be treated as a capital asset and the long-term capital gains arising thereon would be taxable at the rate of 10% without Indexation and at the rate of 20% with Indexation.


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