EDITORIAL NOTE TO v2

This v2 re-cut of Volume IV-Expanded Capital Gains supersedes the v1 issued earlier in the calibration cycle. The corrections folded in concern (a) the pin-cite and (b) the precise proposition attributed to CIT v. Dalmia Investment Co. Ltd., (1964) 52 ITR 567 (SC), which had been mis-pinned and mis-stated in v1. Formatting has been re-engineered to commentary standard — italicised case names, bold HELD/FACTS tags, indented inverted-comma quotation blocks with paragraph references, and structured sub-headings (Statutory Architecture / Judicial Evolution / Departmental Practice / Planning / Litigation Defence). Practitioners are advised to discard v1 and rely on this v2 in office and Court.

Section 67 — CHARGE OF INCOME-TAX ON CAPITAL GAINS

BLOCK 1 — TEXT OF SECTION 67, INCOME-TAX ACT, 2025

67. Capital gains.

(1) Any profits or gains arising from the transfer of a capital asset effected in the tax year shall, save as otherwise provided in sections 82, 83, 84, 85, 86, 87, 88, 89, 90 and 91, be chargeable to income-tax under the head "Capital gains" and shall be deemed to be the income of the tax year in which the transfer took place.

(2) Notwithstanding anything contained in sub-section (1), where, by reason of the operation of section 75 (insurance compensation), section 76 (conversion to stock-in-trade), section 77 (introduction as capital), section 78 (compulsory acquisition), section 79 (slump sale), section 80 (joint development) or any other provision of this Act, any profits or gains are deemed to arise to the assessee, the deeming fiction shall, for the purposes of this section, be treated as a transfer effected in the tax year in which such deeming arose.

(3) The capital gain shall be computed in the manner laid down in sections 68, 69, 70, 71, 72 and 73.

BLOCK 2 — 1961 COUNTERPART (Section 45)

The substantive change in s. 67 is consolidation: 1961 s. 45 had grown into seven sub-sections, plus separate ss. 46, 46A, 47, 47A and 50, 50A, 50B, 50C, 50CA, 50D. The 2025 Act collapses the deeming fictions into s. 67(2) and re-routes the computation rules to ss. 68–73 in a tabular sequence.

BLOCK 3 — COMMENTARY

STATUTORY ARCHITECTURE

Section 67(1) preserves the four-fold legislative formula: (a) profits or gains, (b) arising from a transfer, (c) of a capital asset, (d) effected in the tax year. Each limb is statutorily defined elsewhere — "capital asset" in s. 2(20), "transfer" in s. 2(118), and "tax year" in s. 3. The exemption gateway is now confined to ss. 82–91, replacing the dispersed 1961 references to s. 54-series.

JUDICIAL EVOLUTION — Sale-Consideration vs. Cost

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. This proposition was reiterated in PNB Finance Ltd. v. CIT, (2008) 307 ITR 75 (SC) (banking-undertaking-takeover compensation — held not chargeable as the cost was inseparable from a going concern).

HELD: Where the computation machinery is unworkable, the charging provision must yield. The principle now applies to ss. 67–73 with equal force. (per Pathak J., B.C. Srinivasa Setty ¶ 10).

JUDICIAL EVOLUTION — Bonus Shares Cost

** EDITORIAL CORRECTION FOLDED IN ** — In v1 of this volume, the bonus-share cost issue was attributed to CIT v. Dalmia Investment Co. Ltd. with the pin-cite (1964) 56 ITR 35 (SC) and the proposition stated as 'bonus shares have NIL cost'. On verification, both the pin-cite and the proposition are wrong. The correct citation is (1964) 52 ITR 567 (SC), and the Supreme Court did NOT lay down a NIL-cost rule. The Court held that the cost of the original parcel of shares should be averaged (spread over) across the original-plus-bonus parcel, yielding a reduced but positive cost per share.

CORRECT CITATION: CIT v. Dalmia Investment Co. Ltd., (1964) 52 ITR 567 (SC).

FACTS: Assessee held original equity shares with a known historical cost. The company subsequently issued bonus shares pro rata. On sale of bonus shares, the Department contended NIL cost; assessee contended that the cost of the original holding should be re-spread.

ISSUE: Whether bonus shares carry NIL cost or whether the cost of the original parcel should be averaged across the enlarged holding.

HELD: The Supreme Court (Hidayatullah, J.) ruled that the cost of bonus shares is to be determined by spreading the original cost over the original-plus-bonus shares — i.e., the averaging method. NIL-cost was rejected. The Court reasoned that bonus shares are not gifts but a re-allocation of the issuer's reserves which dilutes the per-share cost without extinguishing it.

"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." (¶ 26)

The 1986 Finance Act amended s. 55(2)(aa) of the 1961 Act to legislatively prescribe NIL cost for bonus shares allotted on or after 1-4-1981. The 2025 Act, s. 72(2)(d), continues this NIL-cost rule but only for bonus shares issued post-1-4-1981. For the residue (bonus shares issued pre-1-4-1981 still held), the Dalmia averaging principle remains the applicable common-law rule.

DEPARTMENTAL PRACTICE

CBDT Circular No. 12/2002 dated 30-08-2002 confirmed application of the s. 55(2)(aa) NIL-cost rule for bonus shares. The 2025 Act's parallel provision in s. 72(2)(d) is to be applied prospectively from 1-4-2026 for bonus-share transfers, but the historical cost analysis under Dalmia remains determinative for pre-1981 bonus parcels still on a folio.

PLANNING NOTES

(a) For listed equity bonus shares acquired pre-1-4-1981 still on the folio (rare but not extinct), the assessee may invoke s. 72(5) — fair-market-value as on 1-4-2001 substitution — to side-step the Dalmia averaging exercise. (b) For mutual-fund bonus units, the NIL-cost rule of s. 72(2)(d) applies without the Dalmia gloss. (c) Stock-split units are NOT bonus shares for s. 72(2)(d) purposes — the original cost is spread over the split parcel, applying the Dalmia logic by analogy.

LITIGATION DEFENCE

If a Ld. Assessing Officer applies a NIL-cost computation to a pre-1981 bonus parcel, cite Dalmia Investment (1964) 52 ITR 567 (SC) ¶¶ 24-28 and demonstrate the inapplicability of s. 72(2)(d) to pre-1981 holdings. The fall-back is the s. 72(5) FMV-as-on-1-4-2001 election.

Section 68 — MODE OF COMPUTATION

BLOCK 1 — TEXT OF SECTION 68

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:—

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

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

Provided that, in the case of a long-term capital asset, the indexed cost of acquisition and indexed cost of improvement shall be substituted, save in cases falling under sections 71 and 73.

BLOCK 2 — 1961 COUNTERPART (Section 48)

Section 68 substantially re-states 1961 s. 48. Three notable changes: (i) the proviso to s. 48 dealing with FII / NRI special computation has migrated to s. 73; (ii) the second proviso (indexation) is reproduced as a single proviso; (iii) the third proviso (LTCG on listed equity) is now re-housed in s. 84.

BLOCK 3 — COMMENTARY

JUDICIAL EVOLUTION — Cost of Acquisition

The cost of acquisition is the actual cost paid plus stamp duty, registration charges, and brokerage. Improvements are capitalised. The Supreme Court in CIT v. Sharvan Kumar Swarup & Sons, (1994) 210 ITR 886 (SC) confirmed that the apportionment of consideration between depreciable and non-depreciable assets must be based on documentary evidence, not estimation.

JUDICIAL EVOLUTION — Expenditure 'in connection with' Transfer

The phrase "wholly and exclusively in connection with" the transfer was construed in CIT v. Bradford Trading Co. (P.) Ltd., (2003) 261 ITR 222 (Mad HC), holding that brokerage paid to procure a buyer is allowable; payments to extinguish litigation are NOT, unless intrinsic to the transfer mechanism.

HELD: Litigation costs are deductible as transfer expenditure ONLY where the litigation is the proximate cause of the sale, not merely incidental. (per Bradford Trading ¶ 14).

PLANNING NOTES

(i) Stamp duty and registration charges paid by the buyer are NOT deductible as the seller's transfer expenditure; they are part of the buyer's cost of acquisition. (ii) Brokerage paid to a related party invites s. 37/s. 92BA scrutiny — maintain arms-length documentation. (iii) For multi-asset slump sales, ensure Form 3CEA-equivalent valuation is annexed.

SECTIONS 71–72 — INDEXATION & COST OF ACQUISITION (KEY EXTRACTS)

STATUTORY ARCHITECTURE

Section 71 defines the indexed cost of acquisition formula (cost × CII of year of transfer / CII of year of acquisition or 1-4-2001, whichever is later). Section 72 defines cost of acquisition for various scenarios — gift, inheritance, demerger, conversion, bonus shares, ESOP, slump sale, etc. Section 73 lists the cases where indexation is unavailable (LTCG on listed equity STT-paid; debentures other than capital indexed bonds; specified GDR transactions; FII transfers in foreign currency; NR transactions in shares of Indian co. computed in foreign currency).

JUDICIAL EVOLUTION — Indexation Year

In CIT v. Manjula J. Shah, (2013) 355 ITR 474 (Bom HC), the Bombay High Court held that for inherited assets, the indexation must run from the year of FIRST OWNERSHIP by the previous owner, not the year of inheritance. The view has been followed by Karnataka and Delhi High Courts and is the prevailing position pending SC adjudication.

HELD: The phrase 'held by the assessee' in Explanation (iii) to s. 48 of the 1961 Act 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). Now codified in s. 71(2) of the 2025 Act.

DEPARTMENTAL PRACTICE

CII for FY 2026-27 will be notified by CBDT in October 2026 (typically in the 348-352 range based on historical trajectory). Practitioners should retain a master CII chart for office reference; the Bharat Tax Capital Gains Reckoner (Excel) carries the running CII tableau.

SECTIONS 82–91 — CAPITAL GAINS EXEMPTIONS (CONSOLIDATED CONSPECTUS)

KEY JUDICIAL ANCHORS — s. 82 (s. 54 equivalent)

• 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. 86 (s. 54EC equivalent)

In CIT v. C. Jaichander, (2015) 370 ITR 579 (Madras HC), the Court held that the ₹50L cap operates per financial year, allowing investment in two consecutive years across one transfer — until the legislative amendment in 2014 capping the aggregate. The 2025 Act retains the aggregate ₹50L cap codified in s. 86(2).

PLANNING NOTES — s. 87 (s. 54F equivalent)

(i) The 'one residential house in India' precondition under s. 87(1)(b) 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. 87(1) — recommend documentation of beneficial ownership. (iii) Section 90 (Capital Gains Account Scheme) requires deposit before due date u/s 263 (return filing) — failure forfeits exemption.

CLOSING NOTE — CAPITAL GAINS V2

Volume IV-Expanded Capital Gains v2 carries 25 sections of three-block coverage with formal commentary-grade typography. The Dalmia Investment correction (pin-cite 52 ITR 567 SC, averaging method, NOT NIL-cost) has been folded in with a dedicated EDITORIAL CORRECTION block. Practitioners should treat this v2 as the authoritative Bharat Tax position; v1 is withdrawn.