The Income-tax Act defines "Capital Asset" as property of any kind held by an assessee, whether or not connected with business of profession. This may include various kinds of properties such as real estate, equity shares, bonds, jewellery, paintings, art etc.
The Act excludes some properties from the definition of capital asset and therefore the profit or surplus arising thereof is not taxable as capital gains. These are
- Assets held as stock-in-trade for businesses. Thus when a builder sells flats the income is not taxable capital gains but is taxable as business income as the assets are held by him not as investment but as stock.
- Personal effect or moveable properties like car, jewellery, drawings, paintings, sculptors, archaeological collections and any work of art.
- Agricultural land in India situated beyond some kilometres from the limits of municipality.
The income from capital gains arises upon transfer of an asset which is held as an investment or a capital asset as such.What is Transfer of capital asset?
Section 2 (47) of the Income-tax Act defines “Transfer” in a most comprehensive manner. The Act brings into its field all kinds of transfers so as to include sale, exchange, relinquishment of an asset or extinguishment of rights in an asset, etc. Therefore capital gains would arise on all situations where the asset held has been disposed off in any manner, whatsoever. Capital gains also arise if there is conversion of capital asset into stock-in-trade.
This situation arises when a person decides to do business with the investment. For example, after making several investments in shares a person decide to do so much of activities that leads to a regular business. Therefore any activity which results in disposal of asset is covered within the meaning of the word ‘transfer’ and consequently capital gains arise. It also covers exchange of assets and would cover a transaction involving redevelopment of properties where the owners get new properties in exchange for old ones.How to determine to cost of property?
Cost of acquisition of asset would include the price paid to the seller of the property and all such expenses that are incurred to take possession of the property or transfer the property in your name. Therefore expenses like Loan processing fee, the brokerage, the stamp duty can all be added to the cost of the property. Any other expenses that can be directly attributed to the purchase of the property they would constitute cost of the property. Cost of renovation and restoration would classify as cost of improvements and would be taken as cost for the purpose of arriving at capital gains.