Section 45 — Charging Section -- Capital Gains

STATUTORY ARCHITECTURE — 18-ROW MAP

HISTORICAL CONTEXT

Section 45 is the charging section for the Capital Gains head — one of the most litigated provisions of the Act. The charge attaches on TRANSFER of a CAPITAL ASSET. 'Transfer' is broadly defined under section 2(47) — includes sale, exchange, relinquishment, extinguishment of rights, compulsory acquisition, conversion into stock-in-trade, s. 53A TPA part-performance possession, cooperative-society membership, and any 'arrangement / transaction having effect of transferring / enabling enjoyment'. 'Capital asset' is defined under section 2(14) — broadly inclusive with specific carve-outs (personal effects / agricultural land in rural area / stock-in-trade).

The rate structure underwent fundamental restructuring by FA 2024: (a) Section 111A — STCG on listed equity raised from 15% to 20%; (b) Section 112 — General LTCG rate harmonised at 12.5% across asset classes (previously 20% with indexation OR 10% without); (c) Section 112A — Listed equity LTCG threshold raised from Rs 1 L to Rs 1.25 L, rate 12.5%; (d) Holding-period harmonisation — listed assets 12 months; unlisted shares / immovable property 24 months (previously 36 months for some); (e) Indexation benefit ABOLISHED for unlisted asset transfers post 23-7-2024 — significant erosion of long-term shelter.

Section 47 — comprehensive carve-outs — operates as the structural counterpoint to section 2(47) wide-net 'transfer'. Categories include: (i) Distribution of company assets on liquidation (s. 47(vii)); (ii) Gift / will / inheritance (s. 47(iii)); (iii) Hindu joint family partition (s. 47(i)); (iv) Corporate restructuring — amalgamation (s. 47(vi)), demerger (s. 47(vi-d/vi-da)), demutualisation (s. 47(xiii) etc.). The transferee under s. 47 carve-out takes the transferor's cost basis under section 49(1).

FA 2021 introduced section 9B and revised section 45(4) — comprehensive reconstitution-of-firm framework. Section 9B captures capital-asset / stock-in-trade receipts by partners on reconstitution / dissolution; section 45(4) revised to cover monetary distribution. Both operate in parallel under Rule 8AB attribution.

Vodafone International (2012) framework — indirect-transfer of foreign-company shares deemed Indian-situate under section 9(1)(i) Explanation 5 (FA 2012 retrospective). TLAA 2021 partially repealed for affected legacy transactions. Going forward, indirect transfers still within scope subject to Rs 10 crore + 50% substantial-value threshold under Rule 11UB.

The transition to the Income-tax Act, 2025 preserves section 45 architecture with all FA 2024 rate harmonisation intact.

FINANCE ACT AMENDMENT TIMELINE

■ FA 1962 — Section 45 came into force; broad CG charge.

■ FA 1972 — Section 47 corporate-restructuring carve-outs introduced.

■ FA 1992 — Section 54E successor sections; reinvestment-bond framework.

■ FA 2004 — Section 10(38) listed-LTCG exemption + STT framework.

■ FA 2012 — Section 9(1)(i) Explanation 5 indirect transfer retrospective.

■ FA 2017 — Indexation base year shifted from 1-4-1981 to 1-4-2001.

■ FA 2018 — Section 10(38) sunset; Section 112A introduced (Rs 1 L threshold + 10%).

■ FA 2021 — Section 9B reconstitution + revised s. 45(4).

■ FA 2023 — Section 50AA specified mutual fund / MLD STCG framework.

■ TLAA 2021 — Partial retro-tax repeal for indirect transfers.

■ FA 2024 — Major restructuring: harmonised LTCG @ 12.5% across asset classes; STCG s. 111A @ 20%; s. 112A threshold Rs 1.25 L; holding-period reduction; indexation abolition for unlisted.

■ FA 2025 — Cosmetic refinements.

■ Income-tax Act, 2025 — Section 45 successor, operative 1-4-2026.

JUDICIAL EVOLUTION — VERIFIED LANDMARK AUTHORITIES

▸ Commissioner of Income-tax v. Vatika Township Pvt. Ltd. (2014) 367 ITR 466 ; (2015) 1 SCC 1 (Supreme Court — 5-Judge Constitution Bench)

Facts. The Department sought to apply a surcharge provision retrospectively to block-period assessments. The assessee contended that the amendment was substantive and could not have retrospective operation absent express legislative direction.

Issue. Whether amendments to taxing statutes operate prospectively unless the legislature has expressly or by necessary implication conferred retrospective effect.

HELD. The Constitution Bench reaffirmed the general rule against retrospectivity of taxing statutes. A taxing provision must be construed prospectively unless the language compels otherwise; mere insertion or substitution by amendment is not sufficient to deny vested rights.

“Of the various rules guiding how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation.”

Relevance. Anchor authority for any argument that an amendment to a charging or computational provision must apply only from the AY notified — useful in transitional disputes around FA 2025 and the 1961 → 2025 changeover.

▸ Commissioner of Income-tax v. B.C. Srinivasa Setty (1981) 128 ITR 294 ; (1981) 2 SCC 460 (Supreme Court)

Facts. The assessee transferred goodwill of a self-generated nature. The Department sought to tax the consideration as capital gains; the assessee contended that no cost of acquisition could be ascertained, hence the computation provisions failed.

Issue. Whether capital gains arises where the asset has no ascertainable cost of acquisition — i.e., whether the charging provision can be invoked independently of a workable computation provision.

HELD. The charging section and the computation provisions form an integrated code; if the computation provisions cannot apply (because the cost is incapable of ascertainment), the charge itself fails. Self-generated goodwill is not taxable as capital gains.

“The charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section.”

Relevance. Anchor for the 'charge fails when computation fails' doctrine — useful in valuation impasses, self-generated assets, and computational ambiguity (though now largely overtaken by section 55(2)(a)(i) deeming cost as nil).

▸ K.P. Varghese v. Income-tax Officer, Ernakulam (1981) 131 ITR 597 ; (1981) 4 SCC 173 (Supreme Court — 3-Judge Bench)

Facts. Section 52(2) (since deleted) deemed sale consideration to be FMV where FMV exceeded the declared consideration by 15%. The Department applied it on a literal reading even when the assessee had not in fact received more than the declared price.

Issue. Whether a deeming provision in a charging schema can be construed literally where its plain reading produces a result manifestly contrary to legislative object.

HELD. The Court read down section 52(2) to apply only where the assessee had actually received consideration in excess of the declared sum. A literal construction yielding absurd or unjust results must yield to an object-based interpretation; the CBDT's contemporaneous Circular No. 96 was held binding on the Revenue.

“It is well settled that a literal construction of a statutory provision ought not to be adopted if it produces a manifestly unjust result… Where a literal construction creates an anomaly, the courts will adopt that construction which avoids the anomaly.”

Relevance. Anchor authority for purposive construction of deeming fictions across the 1961 Act — applies wherever a deeming clause (e.g., s. 50C, s. 56(2)(x), s. 2(22)(e)) yields a result contrary to legislative purpose.

▸ Mathuram Agrawal v. State of Madhya Pradesh (1999) 8 SCC 667 ; (2000) 1 SCR 1 (Supreme Court)

Facts. A municipal levy was challenged on the ground that the charging provision did not clearly specify the rate, the persons charged, and the measure of tax.

Issue. Whether a tax can be imposed in the absence of a clear, unambiguous charging provision identifying the subject, measure, rate, and incidence.

HELD. Article 265 demands that tax be levied only by clear authority of law. The four components — taxable event, person, rate, and measure — must be clearly discernible from the charging provision; ambiguity is fatal to the levy.

“The intention of the Legislature in a taxation statute is to be gathered from the language of the provisions, particularly when the language is plain and unambiguous. In a taxing Act it is not possible to assume any intention or governing purpose other than what is given expression to.”

Relevance. Foundational authority on the rigour required of charging sections — underpins arguments that ambiguous deeming fictions, surcharge formulas, and rate prescriptions must be strictly construed.

▸ Commissioner of Income-tax v. Excel Industries Ltd. (2013) 358 ITR 295 ; (2014) 2 SCC 1 (Supreme Court)

Facts. The assessee, an export-oriented unit, received DEPB licences and Advance Licences. The Department sought to tax the value of these incentives on accrual at the time of issue; the assessee contended that no income accrued until the licence was actually used or sold.

Issue. When does income accrue under the mercantile system — at the moment a right is created, or at the moment the right becomes enforceable as a debt?

HELD. Income accrues only when there is a corresponding liability of the other party. Mere creation of a contingent or unmatured right does not amount to accrual; the right must crystallise into a debt before tax incidence.

“Income accrues when there arises in favour of the assessee a debt — when there is a corresponding liability of the other party to pay the amount. It is not enough that the right has come into being; the right must ripen into a debt.”

Relevance. Anchor for accrual-vs-receipt timing disputes under section 5 / section 145 — relevant for retention monies, export incentives, contingent claim settlements, milestone-based contracts.

▸ Vodafone International Holdings B.V. v. Union of India (2012) 341 ITR 1 ; (2012) 6 SCC 613 (Supreme Court — 3-Judge Bench)

Facts. Vodafone (a Netherlands company) acquired CGP Investments (a Cayman entity) from Hutchison; CGP indirectly held the Indian telecom operations. The Department asserted Indian tax on the offshore share transfer.

Issue. Whether the transfer of shares of an upstream foreign entity, where the Indian operating company is held via several intermediate non-Indian holding entities, attracts Indian capital gains tax under section 9(1)(i).

HELD. The Court held that section 9(1)(i) as it then stood did not extend to indirect transfers; the transaction was offshore and outside Indian taxing jurisdiction. (Subsequently overridden by retrospective amendments — FA 2012 / Taxation Laws Amendment Act 2021.)

“Look at as a whole, the look-at, not look-through approach, is appropriate in tax planning. Tax avoidance and tax evasion are distinct; tax planning within the framework of law is legitimate.”

Relevance. Foundational on residence-based source rules and the look-at/look-through distinction — anchors arguments around section 9(1)(i) characterisation and the limits of deeming fictions on indirect transfers.

CBDT CIRCULARS — ECOSYSTEM

▸ CBDT Circular No. 14(XL-35) of 1955 dated 11 April 1955

Subject. Duty of officers to assist assessees in claiming and securing relief

Substance. Foundational circular directing that the AO should not exploit assessee ignorance to deny legitimate reliefs; officer is required to draw attention to refunds or reliefs to which the assessee is entitled. The circular has been judicially noted in several appellate decisions and remains operative for first-appellate practice.

▸ CBDT Circular No. 549 dated 31 October 1989

Subject. Explanatory notes — Finance Act 1989 amendments (incl. PY unification)

Substance. Explained the FA 1987 / FA 1989 amendments unifying the previous year with the financial year preceding the AY, including transitional provisions for assessees with different accounting years. Useful in any controversy on the timing of accrual / chargeability for early post-1989 AYs.

▸ CBDT Circular No. 5 of 2014 dated 11 February 2014

Subject. Section 14A — dis-allowance even where no exempt income earned (since modulated)

Substance. Initially directed AOs to apply Rule 8D disallowance under section 14A even where no exempt income was earned in the year; subsequently modulated by Cheminvest (Del HC) and Maxopp (SC). FA 2022 amendment to section 14A re-asserted the position but remains under litigation.

▸ CBDT Circular No. 6 of 2019 dated 20 March 2019

Subject. Withdrawal of low-tax-effect appeals — monetary thresholds

Substance. Revised monetary thresholds for departmental appeals — ITAT (Rs 50L), HC (Rs 1 Cr), SC (Rs 2 Cr); subsequently further revised. Operates as a non-statutory limitation on the Revenue's appellate engagement, binding under section 119.

▸ CBDT Circular No. 5 of 2024 dated 15 March 2024

Subject. Procedure for transitional reassessment notices post-Ashish Agarwal / Rajeev Bansal

Substance. Procedural guidance for AOs handling transitional reassessment notices for AYs 2013-14 to 2017-18 affected by Ashish Agarwal and Rajeev Bansal. Sets out the form of section 148A inquiry, time-bar calculation under TOLA, and JAO/FAO jurisdiction in faceless cases.

WORKED EXAMPLES

PRACTITIONER PLANNING NOTES

■ Indexation post FA 2024 — abolished for unlisted assets; listed equity 12.5% without indexation (post 23-7-2024).

■ FA 2024 LTCG rate harmonised at 12.5% across asset classes (most); listed equity threshold Rs 1.25 L.

■ Holding period — listed securities 12 months; unlisted shares 24 months; immovable property 24 months (FA 2024 reduction).

■ Section 50C / 50CA stamp value parallel — preserve actual-sale-consideration documentation.

■ Section 56(2)(x) parallel for buyer (gift framework).

■ Section 54 / 54F / 54EC reinvestment exemptions — strict timing + investment-pattern compliance.

■ Capital Gains Account Scheme (CGAS) — for un-utilised exemption funds before due date.

■ Section 47 carve-outs — corporate restructuring / family settlements / inheritance.

■ Section 49 stepped-up cost basis — for inherited / gifted / transferred assets.

■ Section 50 depreciable asset block — STCG framework regardless of holding period.

■ Section 50B slump sale — net worth methodology + Rule 11UAE for unlisted shares.

■ Section 55(2)(b) FMV election — for assets held before 1-4-2001; second-best election.

■ Form 26QB — TDS on immovable property > Rs 50 L (s. 194-IA).

■ Documentation discipline — purchase / sale deeds + valuation + reinvestment evidence — 7 years.

■ Annual practitioner review of FA changes to indexation / rates / thresholds.

LITIGATION DEFENCE

■ Strict construction — Mathuram Agrawal.

■ Object-based — K.P. Varghese.

■ Prospective amendment — Vatika Township for FA 2024 indexation abolition.

■ BC Srinivasa Setty — computation impossibility (self-generated assets).

■ Excel Industries accrual — for sale-completion timing.

■ Vodafone International — for cross-border transfer characterisation.

■ Calcutta Discount Article 226 — for jurisdictional challenges.

■ Section 47 carve-out defence — preserve corporate restructuring documentation.

■ Section 50C stamp value challenge — produce market evidence / valuation officer reference.

■ Section 54 / 54F reinvestment defence — preserve CGAS deposit + reinvestment evidence.

■ Section 49 stepped-up cost defence — preserve inheritance / gift documentation.

■ Slump sale defence — preserve net worth computation + lump-sum nature evidence.

■ Beneficial circulars defence.

■ Section 273B reasonable-cause defence.

■ Section 270A bona-fide claim defence (Reliance Petroproducts anchor).

■ Holding-period documentation — share certificates / property registry.

PROCEDURE

Step 1. Identify transfer event

Section 2(47) framework.

Step 2. Verify capital asset status

Section 2(14) — exclusions (stock / personal effects / rural agricultural).

Step 3. Determine holding period

12 / 24 months thresholds per FA 2024.

Step 4. STCG vs LTCG classification

Holding period determines.

Step 5. Apply section 47 carve-outs

Corporate restructuring / family transfers.

Step 6. Compute cost of acquisition

Section 49 + section 55.

Step 7. Apply section 50C / 50CA stamp value

For immovable / unquoted shares.

Step 8. Compute gain

Sale consideration − indexed/actual cost − transfer expenses.

Step 9. Apply FA 2024 indexation rules

Choice option for immovable pre-23-7-2024.

Step 10. Apply reinvestment exemptions (s. 54 / 54B / 54EC / 54F)

Strict timing + amount compliance.

Step 11. Capital Gains Account Scheme

For un-utilised funds.

Step 12. Apply applicable rate (s. 111A / 112 / 112A)

Per asset class.

Step 13. TDS u/s 194-IA / 195

Buyer's withholding obligation.

Step 14. ITR Schedule CG

Comprehensive disclosure.

Step 15. Documentation 7 years

Purchase / sale deeds / valuation / reinvestment evidence.

CROSS-REFERENCES

▸ Section 2(14) — Capital asset.

▸ Section 2(42A) — Short-term capital asset.

▸ Section 2(47) — Transfer.

▸ Section 4 — Charge.

▸ Section 5 — Scope.

▸ Section 6 — Residence.

▸ Section 9(1)(i) Expl 5 — Indirect transfer.

▸ Section 9B — Reconstitution.

▸ Section 10(37) — Compulsory acquisition agricultural.

▸ Section 14 — Heads.

▸ Section 28 — PGBP (conversion into stock-in-trade interaction).

▸ Section 45 — THIS SECTION.

▸ Section 46 — Liquidation.

▸ Section 47 — Carve-outs.

▸ Section 47A — Withdrawal of exemption.

▸ Section 48 — Computation.

▸ Section 49 — Cost.

▸ Section 50 — Depreciable assets.

▸ Section 50A / B / C / CA / D — Various computational.

▸ Section 51 — Forfeited advance.

▸ Section 54-54H — Reinvestment exemptions.

▸ Section 55 — Cost / FMV.

▸ Section 55A — Valuation officer.

▸ Section 56(2)(x) — Buyer-side gift framework.

▸ Section 111A — STCG listed equity.

▸ Section 112 — General LTCG.

▸ Section 112A — Listed equity LTCG threshold.

▸ Section 115BBH — VDA.

▸ Section 139 — Return.

▸ Section 194-IA — TDS immovable.

▸ Section 195 — TDS NR.

▸ Section 270A — Penalty.

▸ Rule 8 / 8AA / 8AB / 11U / 11UA / 11UAA / 11UB.

▸ Form 26QB / 26QC.

▸ Capital Gains Account Scheme, 1988.

▸ Stamp Acts (state).

▸ TLAA 2021.

▸ DTAA Article 13 — Capital gains.

▸ Income-tax Act, 2025 — Section 45 (successor), operative 1-4-2026.

▸ Income-tax Act, 2025 — Section 536 (saving).