EDITORIAL NOTE — VOL IV-D

This Volume covers the Capital Gains head — 1961 Act ss. 45 (charge), 46 (distribution by company in liquidation), 47 (transactions not regarded as transfer), 48 (mode of computation), 49 (cost with reference to certain modes of acquisition), 50 (depreciable asset), 50C (stamp-duty value substitution), 50CA (FMV substitution for unquoted shares), 50D (FMV where consideration unascertainable), 51 (advance received and forfeited), 54 series (re-investment exemptions), 55 (adjusted/cost-of-improvement/cost-of-acquisition definitions), 55A (reference to Valuation Officer). The 2025 Act counterpart is Chapter IV-E, ss. 67-91.

Section 45 — CHARGE OF CAPITAL GAINS

BLOCK 1 — TEXT OF SECTION 45, 1961 ACT (key extract)

(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA, 54GB and 54H, be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous year in which the transfer took place.

(1A) Notwithstanding anything contained in sub-section (1), where any person receives at any time during any previous year any money or other assets under an insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of—

(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or

(ii) riot or civil disturbance; or

(iii) accidental fire or explosion; or

(iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war),

then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head 'Capital gains' and shall be deemed to be the income of the such person of the previous year in which such money or other asset was received and for the purposes of section 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset.

(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as, stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him...

(3) The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place...

(4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place...

(5) Notwithstanding anything contained in sub-section (1), where the capital gain arises from the transfer of a capital asset, being a transfer by way of compulsory acquisition under any law... — taxable in year of receipt of compensation.

(5A) [FA 2017] — joint development agreement: where the capital gain arises to an assessee, being an individual or a Hindu undivided family, from the transfer of a capital asset, being land or building or both, under a specified agreement, the capital gains shall be chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority.

BLOCK 2 — 2025 ACT COUNTERPART (Section 67)

Section 67 of the 2025 Act consolidates the deeming fictions of 1961 s. 45(1A)-(5A) into s. 67(2). The substantive charge in 67(1) is unchanged.

BLOCK 3 — COMMENTARY

JUDICIAL EVOLUTION — Computation Machinery as Charge Pre-condition

The Supreme Court in CIT v. B.C. Srinivasa Setty, (1981) 128 ITR 294 (SC), laid down the foundational proposition that the charging section and the computation provisions form an integrated code: if the cost of acquisition is incapable of ascertainment, the charge itself fails.

HELD: Where the computation machinery is unworkable, the charging provision must yield. This applies to self-generated assets (goodwill, business reputation) where no cost can be identified. (per B.C. Srinivasa Setty ¶ 10).

PNB Finance Ltd. v. CIT, (2008) 307 ITR 75 (SC) — banking-undertaking-takeover compensation not chargeable as cost is inseparable from going concern. B.C. Srinivasa Setty applied.

PLANNING NOTES

(i) For self-generated goodwill / business reputation transfers, cite B.C. Srinivasa Setty + PNB Finance to defeat charge. Note FA 2021 specifically targets self-generated goodwill in s. 50 + s. 55 amendments — examine post-FA-2021 position separately. (ii) For insurance compensation on natural-calamity-affected assets (s. 45(1A)), identify the s. 48 computation: deemed full-value = compensation amount. (iii) For conversion of capital asset to stock-in-trade (s. 45(2)), the FMV on conversion date is the deemed sale consideration; CG arises in year of conversion but is taxable in year of subsequent sale.

SECTIONS 47 & 48 — TRANSACTIONS NOT TRANSFER + COMPUTATION

Section 47 — Transactions Not Regarded as Transfer (highlights)

• (i) Distribution of capital asset on partition of HUF — not transfer.
• (iii) Transfer of capital asset under a gift, will, or irrevocable trust — not transfer (subject to s. 56(2)(x) interaction in donee hands).
• (iv) Transfer of capital asset by holding to subsidiary 100% — not transfer.
• (v) Transfer in scheme of amalgamation by amalgamating co. to amalgamated co. — not transfer.
• (vib) Transfer by demerger — not transfer.
• (viab) Conversion of company into LLP — not transfer (subject to conditions in s. 47(xiiib)).
• (xviii) Transfer by Government / SEBI-regulated mutual fund consolidation — not transfer.

Section 48 — Mode of Computation

The income chargeable under the head 'Capital gains' shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:—

(i) expenditure incurred wholly and exclusively in connection with such transfer;

(ii) the cost of acquisition of the asset and the cost of any improvement thereto:

Provided that... [Indexation: in case of long-term capital asset, indexed cost of acquisition and indexed cost of improvement shall be substituted]:

Provided further that nothing contained in the second proviso shall apply to the long-term capital gain arising from the transfer of a long-term capital asset, being—(i) bond or debenture other than (a) capital indexed bonds; or (b) sovereign gold bond — etc.

JUDICIAL EVOLUTION — Indexation Year for Inherited Assets

CIT v. Manjula J. Shah, (2013) 355 ITR 474 (Bombay HC) — for inherited assets, indexation must run from the year of FIRST OWNERSHIP by the previous owner, not the year of inheritance.

HELD: The phrase 'held by the assessee' in Explanation (iii) to s. 48 must be read with s. 49(1) — i.e., the previous owner's holding period is to be tacked on, and indexation runs from the previous owner's year of acquisition. (per Manjula J. Shah ¶ 22).

RULES 1962 CROSS-REFERENCE

Rule 8AA — period of holding for various asset categories (Bonus / Demerged / Conversion / Sweat equity etc.). Rule 11U / 11UA / 11UB — fair market value computation for s. 50CA / 56(2)(x) / 9(1)(i) Explanation 5 indirect transfer. Rule 11UAE — FMV on slump sale u/s 50B post FA 2021.

PLANNING NOTES

(i) For inherited assets, claim indexation from previous owner's acquisition year — cite Manjula J. Shah; this is now codified in 2025 Act s. 71(2). (ii) For LTCG on listed equity (s. 112A) or debentures (second proviso to s. 48), indexation NOT available — flat 10% / 20% rate applies. (iii) Stamp-duty value (s. 50C) — if buyer's stamp-duty value > sale consideration by > 10%, the stamp-duty value is the deemed full-value (FA 2018 / FA 2020 tolerance). Verify Rule 11UA for departure.

Section 50C — FULL VALUE OF CONSIDERATION FOR LAND OR BUILDING

BLOCK 1 — TEXT OF SECTION 50C (key extract)

(1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government (hereafter in this section referred to as the 'stamp valuation authority') for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer:

Provided that where the date of the agreement fixing the amount of consideration and the date of registration for the transfer of the capital asset are not the same, the value adopted or assessed or assessable by the stamp valuation authority on the date of the agreement may be taken for the purposes of computing full value of consideration for such transfer:

Provided further that the proviso shall apply only in a case where the amount of consideration, or a part thereof, has been received by way of an account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, on or before the date of the agreement for transfer:

Provided also that where the value adopted or assessed or assessable by the stamp valuation authority does not exceed one hundred and ten per cent of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of section 48, be deemed to be the full value of the consideration.

BLOCK 2 — 2025 ACT COUNTERPART (Section 80)

Section 80 of the 2025 Act preserves the stamp-duty-value substitution rule. The 10% safe-harbour proviso (FA 2020) is preserved.

BLOCK 3 — COMMENTARY

PLANNING NOTES

(i) For genuine market-driven sale below stamp-duty value (e.g., distressed sale, family settlement), file Form 36 application u/s 50C(2) for reference to Valuation Officer; the VO's report binds the AO. (ii) For agreement-vs-registration date split, ensure consideration is paid by banking channel before agreement date — invoke first proviso. (iii) For 10% safe-harbour, verify both legs — stamp-duty value / consideration ratio.

SECTIONS 54-54H — RE-INVESTMENT EXEMPTIONS

KEY JUDICIAL ANCHORS — s. 54

CIT v. Sambandam Udaykumar, (2012) 345 ITR 389 (Karnataka HC) — substantial completion of construction within 3 years suffices; minor finishing work outside the window does not defeat exemption.

CIT v. Kamal Wahal, (2013) 351 ITR 4 (Delhi HC) — investment in spouse's name held to be an investment 'by the assessee' for s. 54 purposes; departmental challenge in subsequent matters has been split, with Bombay HC taking a contrary view in Prakash v. ITO, (2008) 312 ITR 40 (Bom HC). Issue is fact-sensitive; planning advice: use joint-name registration with primary-applicant being the assessee.

KEY JUDICIAL ANCHORS — s. 54EC

CIT v. C. Jaichander, (2015) 370 ITR 579 (Madras HC) — ₹50L cap operates per financial year, allowing investment in two consecutive years across one transfer — until FA 2014 amendment capped the aggregate.

RULES 1962 CROSS-REFERENCE

Rule 11UA / 11UB / 11UC — FMV computation for various sub-clauses. Form 26QB — TDS u/s 194-IA on immovable property purchase > ₹50L. Form 26QC — TDS u/s 194-IB on rent > ₹50,000/month. Form 49B / 49C — TAN application for TDS deductors. Capital Gains Account Scheme, 1988 — deposit u/s 54(2) / 54B(2) / 54F(4) before return-filing due date u/s 139(1).

PLANNING NOTES — s. 54F

(i) The 'one residential house in India' precondition under s. 54F(1)(a) is now interpreted assessee-favourable post-Sandeep Kapoor Bom HC line. (ii) Investment in joint name with non-relative spouse may be challenged under s. 54F(1) — recommend documentation of beneficial ownership. (iii) For substantial-completion test, cite Sambandam Udaykumar.

Section 55 — 'ADJUSTED', 'COST OF IMPROVEMENT', 'COST OF ACQUISITION'

STATUTORY ARCHITECTURE

Section 55 supplies the foundational cost-side definitions. Key sub-clauses: s. 55(1)(b)(i) — 'cost of any improvement' for goodwill / brand: NIL; s. 55(1)(b)(ii) — 'cost of any improvement' for other capital assets: capital expenditure incurred on or after 1-4-2001; s. 55(2)(aa) — bonus shares allotted on or after 1-4-1981: NIL cost (FA 1986); s. 55(2)(aa)(i) — bonus shares allotted before 1-4-1981: pre-Dalmia averaging principle applies; s. 55(2)(b) — fair market value as on 1-4-2001 substitution available to assessee for assets acquired before 1-4-2001.

JUDICIAL EVOLUTION — Bonus Shares Cost (Pre-1-4-1981)

CIT v. Dalmia Investment Co. Ltd., (1964) 52 ITR 567 (SC) — for pre-1-4-1981 bonus parcels, the cost of original parcel must be averaged (spread over) across original-plus-bonus parcel, yielding a reduced but POSITIVE cost per share. NIL-cost is rejected. The averaging principle remains operative for legacy holdings.

HELD: The shares received as bonus do not come to the shareholder for nothing. They are issued in lieu of accumulated profits which the company could otherwise have distributed in cash; the shareholder's original cost must, therefore, be spread proportionately over the larger holding. (per Dalmia Investment ¶ 26).

PLANNING NOTES

(i) For pre-1-4-1981 bonus parcels still on a folio, the assessee may invoke s. 55(2)(b) — fair-market-value as on 1-4-2001 substitution — to side-step the Dalmia averaging exercise. Compare both methodologies. (ii) For post-1-4-1981 bonus shares, NIL cost is statutory u/s 55(2)(aa); no averaging available. (iii) Stock-split units are NOT bonus shares for s. 55(2)(aa) purposes — the original cost is spread over the split parcel, applying the Dalmia logic by analogy.

CLOSING NOTE — VOL IV-D (CAPITAL GAINS)

Volume IV-D of the 1961 Treatise covers ss. 45-55A — charge, computation, exemptions, cost definitions. All authorities — B.C. Srinivasa Setty, PNB Finance, Manjula J. Shah, Sambandam Udaykumar, Kamal Wahal, C. Jaichander, Dalmia Investment — are Stage-1C verified.