What is a Capital Asset for Capital Gains Tax with Case Laws

Table of Content

1. Scheme of the Definition in Clause (14) of Section 2
2. Property of any kind held by the Assessee

1. Scheme of the Definition in Clause (14) of Section 2

• • Property of any kind held by the assessee is capital asset unless it falls within the exclusions in sub-clauses (i) to (vi).
  • Any securities held by FIIs will be regarded as capital assets without testing them for falling in exclusions
  • Any unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth proviso thereof.
  • Certain items which fall in exclusions will not be so excluded and will be regarded as capital assets.

The term “Property” is clarified by Explanation to clause (14).

Thus,

• • There is a positive list of items specifically covered in scope of the term “capital assets”.
  • There is a negative list of items-items specifically excluded from scope of the term “capital assets”.

1.1 Positive List-Items specifically covered in the scope of the term ‘capital asset’

• • Property of any kind held by the assessee [sub-clause(a)]
  • Any securities held by a FII [sub-clause(b)]
  • Any unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth proviso thereof
  • Jewellery (other than held as stock-in-trade) [item (a) of sub-clause(ii)]
  • Archaeological collections (other than held as stock-in-trade) [item (b) of sub-clause (ii)]
  • Drawings (other than held as stock-in-trade) [item (c) of sub-clause (ii)]
  • Paintings (other than held as stock-in-trade) [item (d) of sub-clause (ii)]
  • Sculptures (other than held as stock-in-trade) [item (e) of sub-clause(ii)]
  • Any work of art (other than held as stock-in-trade) [item (f) of sub-clause (ii)]

1.2 Negative List-Assets specifically excluded from scope of the term ‘capital asset’

• • Any stock-in-trade (other than securities held by FIIs) [sub-clause (i)]
  • Consumable stores or raw materials [sub-clause (i)]
  • Personal effects [sub-clause (ii)] other than items excluded by items (a) to (f) of sub-clause (ii)
  • Agricultural land situated in India other than in urban area [sub-clause(iii)]
  • 6.5% Gold Bonds, 1977, issued by the Central Govt. [sub-clause (iv)]
  • 7% Gold Bonds, 1980, issued by the Central Govt. [sub-clause (iv)]
  • National Defence Gold Bonds,1980, issued by the Central Govt. [sub-clause (iv)]
  • Special Bearer Bonds, 1991, issued by the Central Govt. [sub-clause (v)]
  • Gold Deposit Bonds issued under Gold Deposit Scheme, 1999 [sub-clause (vi)]
  • Deposit Certificates issued under the Gold Monetisation Scheme, 2015 [sub-clause (vi)]

1.3 Judicial interpretations of the definition of ‘capital asset’

The following judicial interpretations of the definition of ‘capital asset’ in clause (14) are noteworthy:

• • A ‘capital asset’ means property of any kind held by an assessee whether or not connected with his business or profession but does not include what is defined under sub-clauses (i) to (vi) of section 2(14) namely the definition clause of capital asset. A right to construct additional storeys on account of increase in available floor space index (FSI) is a capital asset and an assignment of the same is a capital receipt. However, where no consideration is paid and such right is not embedded in land, it would not be liable to tax as capital gains. [CIT v. Dinesh D. Ranka [2016] 68 taxmann.com 255/380 ITR 440/[2015] 280 CTR 224 (Kar.)]
  • The expression ‘capital asset’ has an all-embracing connotation and includes every kind of property as generally understood except those that are exclusively excluded from the definition. Thus, it includes every conceivable thing, right or interest or liability. [Shakti Insulated Wires Ltd. v. Jt. CIT [2003] 87 ITD 56 (Mum. – Trib.)]
  • The definition of ‘capital assets’ as provided in section 2(14) is an inclusive one, which brings within its ambit property of any kind held by the assessee, except what has been expressly excluded by sub-clauses (i) to (vi) thereunder; thus, the expression ‘capital asset’ has a wide connotation. [Jt. CIT v. Graphite India Ltd. [2004] 89 ITD 415 (Kol. – Trib.)]
  • The ITAT Mumbai Bench in the case of Asian PPG Industries Ltd v. Deputy CIT [2010] 38 SOT 114 (Mum. – Trib.) held that “according to section 2(14) of the Act, the word ‘capital asset’ means, ‘property of any kind held by an assessee’. Therefore, it does not necessarily mean that the property, which the assessee holds, must be his own. As per the definition of capital assets under section 2(14) of the Act, any kind of property held by an assessee would come within the definition of ‘capital asset’. It is not possible to read the definition of ‘capital asset’ in a restrictive manner to mean that the property which the assessee owned by himself alone would come within the meaning of ‘capital asset’. In the case under consideration the agreement was executed, consideration was paid and possession of the plot was taken by the assessee. The assessee was having rights in the said plot which is evident from the fact that after sub division of plot, one of the portions of plot was given to M/s Lucas TVS Ltd. vide agreement dated 11-3.2004 wherein the assessee was one of the parties along with MIDC and consent of the assessee was taken. Under the circumstances surrender of rights of the assessee referred to above would amount to extinguishment of his rights in the land/ capital asset and therefore, it attracts capital gains/ loss.”
  • The ITAT Delhi Bench in the case of Asstt. CIT v. Smt. Shabnam Sachdev [2013] 32 taxmann.com 22/141 ITD 730 (Delhi – Trib.) held that long-term advance booking of hotel suite, which gave assessee perpetual right of possession and right to transfer same, was a capital asset. In this case the assessee had long-term advance booking of a hotel suite permanently reserved for her use. During the assessment year 2007-08, she transferred such advance booking for a certain sum and claimed the resultant surplus as long-term capital gains after deducting indexed cost of acquisition consisting of instalments of security deposit and maintenance charges. The Assessing Officer did not hold long term advance booking to be capital asset and taxed it as income from other sources, deducting only amount of instalments thereby disallowing maintenance charges as the same had been allowed in earlier years as deduction from rent under section 24(a) of the Act. The Commissioner of Income-tax (Appeals) however allowed the claim of the assessee treating the long-term booking as capital asset, even though he did not allow deduction of maintenance charges. The Commissioner of Income-tax (Appeals) relied on the decision of the Karnataka High Court in the case of Syndicate Bank Ltd. v. Addl. CIT [1985] 155 ITR 681/[1986] 29 Taxman 32(Kar.) wherein it was held that “the term capital asset as defined in section 2(14) of the Income-tax Act, 1961 has a wide meaning and includes every kind of property as generally understood except those that are expressly excluded in the definition. A business undertaking as a whole would constitute a capital asset within the meaning of s. 2(14).” The Commissioner of Income-tax (Appeals) also relied on the decision of the Madras High Court in the case of Madathil Bros. v. Deputy CIT [2008] 301 ITR 345 (Mad.) for the proposition that the definition of ‘capital asset’ under the Income Tax Act, referring to ‘property of any kind’ would carry no words of limitation. The Commissioner of Income-tax (Appeals) also referred to the definition of ‘capital asset’ which uses the property of any kind ‘held’ by an assessee in contradistinction to the word ‘owner’ or ‘owned’ for arriving at a decision favourable to the assessee. The Tribunal confirmed the order of the Commissioner of Income-tax (Appeals) by holding at para.12 of its order that “the exclusive right of possessing, enjoying and disposing off a thing comes within the term of ‘property’. The assessee had perpetual right of possession of suite and was entitled to transfer the same by virtue of seventh covenant noted above. Therefore, long-term advance booking by virtue of which assessee got right to possession was ‘capital asset’ within the definition of section 2(14) and, therefore, on transfer of the same long-term capital gain accrued to the assessee and assessee was, accordingly, entitled to indexation of cost of acquisition.”

1.4 Asset must be a ‘capital asset’ at the time of transfer

Section 45 is the charging provision which prescribes that the profits and gains from transfer of capital asset effected in the previous year shall be chargeable to income-tax under the head ‘Capital gains’ and it deems the capital gain to be the income of the previous year in which the transfer takes place.

Under the charging section, the crucial requirements are that there must be a transfer and the transfer must be of a capital asset. The implication is that at the time of the transfer the subject of the transfer must be a capital asset. – M. Venkatesan  v. CIT [1984] 16 Taxman 240/[1983] 144 ITR 886/(Mad.)

The character of asset sold must be with reference to the date of its transfer and not the receipt of compensation. A piece of land at the time of transfer may be agricultural and at the time of actual receipt of compensation on compulsory acquisition, it may be a capital asset covered by section 2(14). Since the character of the asset at the time of transfer was not covered by the definition of section 2(14), it could not be taxed by considering its nature at the time of receipt of compensation [A.R. Dahiya v. Asstt. CIT [2004] 141 Taxman 449 (Punj. & Har.); ITO v. Chaman Lal Nagpal [2006] 102 TTJ 890 (Asr. – Trib.)].

2. Property of any kind held by the Assessee

The following points are noteworthy as regards the expression ‘property of any kind held by the assessee’:

• • The word ‘property’, used in section 2(14) of the Act, is a word of the widest amplitude and the definition has re-emphasised this by use of the words ‘of any kind’. Thus, any right which can be called property will be included in the definition of ‘capital assets.’
  • The term ‘property of any kind’ excludes only those items of property expressly excluded from the scope of the term ‘capital asset’ by sub-clauses (i) to (vi) of clause (14)
  • The other limitation in the width of the expression is the words ‘held by the assessee’.

2.1 Property

There is no definition of ‘property’ in the Act except the inclusive definition in Explanation below sub-clause (vi) of clause (14). The said Explanation clarifies that the scope of the term ‘property’ (and consequently the scope of the term ‘capital asset’) includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.

It has been judicially held that a property is a bundle of rights which the owner can lawfully exercise to the exclusion of all others and is entitled to use and enjoy as he pleases provided, he does not infringe any law of the State. It can be either corporeal or incorporeal. Once something is determined as property it becomes a capital asset unless it figures in the exceptions mentioned in sub-clauses (i) to (vi) or the Capital Gains is specifically exempted. [How to compute capital gains booklet]

Thus,

• • The term ‘property’ in clause (14) is a very wide term
  • The term specifically includes any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.
  • Mere power of persuasion of a holding co. over its subsidiary is not ‘property’ as laid down by SC in Vodafone ruling
  • The width of the term ‘property’ is curtailed by specific exclusions in sub-clauses (i) to (vi)
  • Rights/properties not transferable in terms of section 6 of the Transfer of Property Act,1882. These will not be ‘property’ and ‘capital assets’

The following is an illustrative list of items held by courts to be “property” and hence “capital asset”:

• •  Booking rights or rights to purchase or rights to obtain title of property
  • Fixed Deposits
  • Leasehold rights
  • Mortgage
  • Right to obtain conveyance of property
  • Route Permits
  • Running business
  • Share in firm
  • Tenancy right
  • Undertaking
  • Stock Exchange Membership card
  • Derivatives
  • Right to subscribe for shares
  • Foreign currency
  • Stock of spares
  • Government Bonds
  • Intangible assets
  • Building
  • House of which assessee is in possession after full payment but assessee not registered owner
  • Mesne Profits
  • Rights under purchase agreement
  • Goodwill
  • Transferable Development Rights (TDRs)
  • A Sub-tenancy
  • Stock Option
  • Loan given by assessee to its subsidiary company
  • Right, title and interest in plot allotted by MIDC
  • Allotment right in a flat for which 90% payment made but possession not taken

The following is an illustrative list of items held by courts to be not “capital asset”

• • Indira Vikas Patra
  • Right to sue

2.1(a) ‘Property’ is a very wide term – Stroud’s Judicial Dictionary defines ‘property’ as under:

“Property” is the generic term for all that a person has dominion over and its two main divisions are real and personal. See Re Earnshaw-Wall [1894] 3 Ch. 156; Care should be taken to distinguish “property” from the “power” of a person to appoint to himself. See Re Bradshaw [1902] 1 Ch. 447. “Property” is a comprehensive term indicative of every possible interest which a party can have. See Morrison v. Hoppe, 4 D.G. & S. 234; Termes de la Ley; Cowel.

Property has also been defined as the right and interest which a man has in lands and chattels to the exclusion of others. The term “property “is a generic term of extensive application, and while strictly speaking, it means only the right which a person has in relation to something, or that dominion or indefinite right of user and disposition which one may lawfully exercise over particular things or objects, it is frequently used to denote the subject of the property, or thing itself which is owned or in relation to which the right of property exists. In the former sense it extends to every species of valuable right or interest, in either real or personal property, or in easements, franchises, and incorporated hereditaments, and in the later to everything which is the subject of ownership, or to which the right of the property may legally attach, or in other words every class of acquisitions which a man can own or have interest in. [refer page 1559 of Sri. P. Ramanatha Aiyar’s fifth edition of “The Law Lexicon.”]

The term “property” is construed to signify the subject-matter over which the right of ownership or any lesser right carved out of ownership (e.g., mortgage right, leasehold right etc.) is exercised. [P.V. George v. Jayems Engineering Co. (P) Ltd. [1990] 2 Comp. LJ 62(Mad.)]

The following judicial rulings on scope of the word ‘property’ are relevant:

• •  The word ‘property’, used in section 2(14) of the Act, is a word of the widest amplitude and the definition has re-emphasised this by use of the words ‘of any kind’. Thus, any right which can be called property will be included in the definition of ‘capital assets’. A contract for sale of land is capable of specific performance. It is also assignable. A right to obtain conveyance of immovable ‘property’ is clearly a ‘property’ as contemplated by section 2(14). [CIT v. Tata Services Ltd. [1979] 1 Taxman 427/[1980] 122 ITR 594 (Bom.)]
  • ‘Property’ is a word of the widest import and signifies every possible interest which a person can hold or enjoy except those specifically excluded. [Bafna Charitable Trust v. CIT  [1998] 101 Taxman 244/230 ITR 864 (Bom.)]
  • The term ‘property’ though has no statutory meaning but is of widest import and, subject to any limitation which the context may require, it signifies every possible interest which a person can acquire, hold or enjoy. [Jt. CIT v. Graphite India Ltd. [2004] 89 ITD 415 (Kol. – Trib.)]
  • The word ‘property’ used in section 2(14) is a word of the widest amplitude. Thus, any right which could be called property has been brought within the ambit of the definition of ‘capital assets’. [Asstt. CIT v. Smt. Hansaben B. Mehta [2004] 90 ITD 44 (Mum. – Trib.)]
  • The expression ‘property’ is a term of wide connotation and it is not only the thing which is the subject-matter of ownership but includes also the dominium of the right of ownership. The expression is indicative and descriptive of every possible interest which a person can have. It embraces within its purview both corporeal and incorporeal rights. Thus, the ‘property’ would comprise of bundle of rights and interests which a person may conceivably hold and enjoy or such rights which a person may lawfully exercise to the exclusion of others or which he is entitled to use and enjoy as he pleases provided, he does not infringe any law of the State. The expression ‘property’ would take in both tangible and intangible assets. Right acquired on allotment of an industrial plot falls within the expression ‘property of any kind’ used in section 2(14) and is, consequently, a capital asset. [Indian Aluminium Cables Ltd. v. Dy. CIT [2000] 73 ITD 109 (Delhi – Trib.)]
  • The terms ‘property’ can be defined as a thing which can be owned or a right to goods and land. The property must be definable and identifiable by the third parties capable in the nature of assumption by third parties and have some degree of permanence or stability. In National Provincial Land v. Annsworth [1965] AC 1175, the property was held as a foundation of expectation of deriving certain advantages from the things said to be possessed. It is also defined as an aggregate of rights having money value. It includes money and all other property, real or personal, including things in action and other intangible property. Thus, property, in sum and substance can be defined as a bundle of rights. Section 2(14) defines the capital asset also property of any kind held by the assessee and only excludes from its realm, certain properties mentioned in the section. Thus, it takes into its conspectus all the rights associated with the land, which will essentially include the developmental rights which were only identified by Development Control Rules. [Shakti Insulated Wires Ltd. v. Jt. CIT [2003] 87 ITD 56 (Mum. – Trib.)]
  • The word ‘property’ used in section 2(14) is a word of the widest amplitude and the definition has re-emphasized this by use of the words ‘of any kind’. Thus, any right which can be called ‘property’ would be included in the definition of ‘capital asset’. [Shakti Insulated Wires Ltd. v. Jt. CIT [2003] 87 ITD 56 (Mum. – Trib.)]
  • The word ‘property’ is of widest amplitude which also includes the right and interest of a person in a particular asset. Every possible interest which a person can clearly hold or enjoy in an asset can be termed as ‘property’ within the definition of capital asset. [Nila V. Shah (Mrs.) v. CIT [2012] 21 taxmann.com 324/51 SOT 461 (Mum. – Trib.)]
  • It has been held by the Calcutta High Court in the case of CIT v. National Insurance Co. Ltd. [1978] 113 ITR 37, that property is a bundle of rights which the owner can lawfully exercise to the exclusion of others. The owner is entitled to use and enjoy such property as he pleases provided, he does not infringe on any law of the State.
  • Property as observed by the Supreme Court in the case of Ahmed G.H. Arif v. CWT [1970] 76 ITR 471, is a term of widest import and subject to any limitation which the context may require, it signifies every possible interest which a person can clearly hold and enjoy[ also refer to J.K. Trust v. CIT [1957] 32 ITR 535 (SC), Pandit Lakshmi Kant Jha v. CWT [1973] 90 ITR 97 (SC) and Mata Din Kasodhan v. Kazim Hussain [1981] ILR 13 All 432 (FB).
  • The Supreme Court as early as 16^th April, 1954 through a decision (consisting of 7 Hon’ble Judges) rendered in the case of Commissioner, Hindu Religious and Endowments v. Lakshmindra Tirtha Swamiar [1954] 1 SCR 1005 held that “there is no reason why the word “property” should not be given a liberal and wide connotation and should not be extended to those well-recognised types of interests which have the insignia or characteristic of proprietary right.
  • It has been held by the Bombay High Court in the case of CIT v. Tata Services Ltd. [1980] 122 ITR 594/[1979] 1 Taxman 427 (Bom.) that the word “property” used in section 2(14) of the Act is a word of the widest amplitude. The definition has re-emphasised this by the use of the words “of any kind” and that any right which can be called property will be included in the definition of “capital asset”. In this case it was held that assignment of the assessee’s right, title and interest under the agreement is transfer.
  • It has been held by the Madras High Court in the case of Perumal Ammal v. Perumal Naicker AIR 1921 Mad 137 that the term property includes “book-debts”.

2.1(b) Property includes any rights in or in relation to an Indian Company Omit – There is no definition of ‘property’ in the Act except the inclusive definition in Explanation below sub-clause (vi) of clause (14). The said Explanation clarifies that the scope of the term ‘property’ (and consequently the scope of the term ‘capital asset’) includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever. The Explanation was inserted by the Finance Act, 2012 with retrospective effect from 01.04.1962 so as to overcome he ruling in Vodafone International Holdings B.V. v. UOI  [2012] 17 taxmann.com 202/24 Taxman 408 (SC) wherein it was held that:

• • A controlling interest is an incident of ownership of shares in a company, something which flows out of the holding of shares. A controlling interest is, therefore, not an identifiable or distinct capital asset independent of the holding of shares. The control of a company resides in the voting power of its shareholders and shares represent an interest of a shareholder which is made up of various rights contained in the contract embedded in the Articles of Association. The right of a shareholder may assume the character of a controlling interest where the extent of the shareholding enables the shareholder to control the management. Shares and the rights which emanate from them, flow together and cannot be dissected.
  • A legal right is an enforceable right. Enforceable by a legal process. The question is what is the nature of the “control” that a parent company has over its subsidiary. It is not suggested that a parent company never has control over the subsidiary. For example, in a proper case of “lifting of corporate veil”, it would be proper to say that the parent company and the subsidiary form one entity. But barring such cases, the legal position of any company incorporated abroad is that its powers, functions and responsibilities are governed by the law of its incorporation. No multinational company can operate in a foreign jurisdiction save by operating independently as a “good local citizen”. A company is a separate legal persona and the fact that all its shares are owned by one person or by the parent company has nothing to do with its separate legal existence. If the owned company is wound up, the liquidator, and not its parent company, would get hold of the assets of the subsidiary. In none of the authorities has the assets of the subsidiary been held to be those of the parent unless it is acting as an agent. Thus, even though a subsidiary may normally comply with the request of a parent company it is not just a puppet of the parent company. The difference is between having power or having a persuasive position. Though it may be advantageous for parent and subsidiary companies to work as a group, each subsidiary will look to see whether there are separate commercial interests which should be guarded.
  • When there is a parent company with subsidiaries, is it or is it not the law that the parent company has the “power” over the subsidiary. It depends on the facts of each case. For instance, take the case of a one-man company, where only one man is the shareholder perhaps holding 99% of the shares, his wife holding 1%. In those circumstances, his control over the company may be so complete that it is his alter ego. But, in case of multinationals it is important to realise that their subsidiaries have a great deal of autonomy in the country concerned except where subsidiaries are created or used as a sham. Of course, in many cases the courts do lift up a corner of the veil but that does not mean that they alter the legal position between the companies.
  • The directors of the subsidiary under their articles are the managers of the companies. If new directors are appointed even at the request of the parent company and even if such directors were removable by the parent company, such directors of the subsidiary will owe their duty to their companies (subsidiaries). They are not to be dictated by the parent company if it is not in the interests of those companies (subsidiaries). The fact that the parent company exercises share-holders’ influence on its subsidiaries cannot obliterate the decision-making power or authority of its (subsidiary’s) directors. They cannot be reduced to be puppets.
  • The decisive criteria is whether the parent company’s management has such steering interference with the subsidiary’s core activities that subsidiary can no longer be regarded to perform those activities on the authority of its own executive directors.
  • Applying the test of enforceability, influence/persuasion cannot be construed as a right in the legal sense. One more aspect needs to be highlighted. The concept of “de facto” control, conveys a state of being in control without any legal right to such state. This aspect is important while construing the words “capital asset” under the income-tax law. As stated earlier, enforceability is an important aspect of a legal right.
  • Applying the test of enforceability, influence/persuasion of parent company over its subsidiary cannot be construed as a right in the legal sense since capital asset covers ‘property’ of any description and a right has to be legally enforceable to be ‘property’ and ‘capital asset’ within the meaning of section 2(14).

While the Explanation makes “any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever” a distinct and independent capital asset-distinct from the shares from which they are derived, it does nothing to change the Supreme Court’s interpretation of the word ‘right’. A mere power of persuasion cannot be a “right”. Legal enforceability is the soul of a right. It appears that the retrospective amendment does nothing to change the definition of ‘right’ so as to include power of persuasion of a holding company over its subsidiary.

Though the Taxation Laws (Amendment) Act 2021 received the assent of the President on 13^th August 2021 as per which the tax demand as per the retrospective amendment as a result of the decision of the Supreme Court in the case of Vodafone International Holdings B.V. (supra) was given a go-by the amendments now made, still the amended provisions made by the Finance Act 2012 stand as on date.

The purpose of this amendment Act 2021 was explained in the Statement of objects and reasons by the Taxation Laws (Amendment) Bill 2021-Bill 120 of 2021 as under-

“The issue of taxability of gains arising from the transfer of assets located in India through the transfer of the shares of a foreign company (hereinafter referred to as “indirect transfer of Indian assets”) was a subject matter of protracted litigation. Finally, the Supreme Court in 2012 had given a verdict that gains arising from indirect transfer of Indian assets are not taxable under the extant provisions of the Act.

2. As the verdict of the Supreme Court was inconsistent with the legislative intent, the provisions of the Income-tax Act, 1961 were amended by the Finance Act, 2012 with retrospective effect, to clarify that gains arising from sale of share of a foreign company is taxable in India if such share, directly or indirectly, derives its value substantially from the assets located in India. The Finance Act, 2012 also provided for validation of demand, etc., under the Income-tax Act, 1961 for cases relating to indirect transfer of Indian assets.

3. Pursuant thereto, income-tax demand had been raised in seventeen cases. In two cases assessments are pending due to stay granted by High Court. Out of the said seventeen cases, arbitration under Bilateral Investment Protection Treaty with United Kingdom and Netherlands had been invoked in four cases. In two cases, the Arbitration Tribunal ruled in favour of taxpayer and against the Income Tax Department.

4. The said clarificatory amendments made by the Finance Act, 2012 invited criticism from stakeholders mainly with respect to retrospective effect given to the amendments. It is argued that such retrospective amendments militate against the principle of tax certainty and damage India’s reputation as an attractive destination. In the past few years, major reforms have been initiated in the financial and infrastructure sector which has created a positive environment for investment in the country. However, this retrospective clarificatory amendment and consequent demand created in a few cases continues to be a sore point with potential investors. The country today stands at a juncture when quick recovery of the economy after the COVID-19 pandemic is the need of the hour and foreign investment has an important role to play in promoting faster economic growth and employment.

5. The Bill proposes to amend the Income-tax Act, 1961 so as to provide that no tax demand shall be raised in future on the basis of the said retrospective amendment for any indirect transfer of Indian assets if the transaction was undertaken before 28th May, 2012 (i.e., the date on which the Finance Bill, 2012 received the assent of the President). It is further proposed to provide that the demand raised for indirect transfer of Indian assets made before 28th May, 2012 shall be nullified on fulfilment of specified conditions such as withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking to the effect that no claim for cost, damages, interest, etc., shall be filed. It is also proposed to refund the amount paid in these cases without any interest thereon. The Bill also proposes to amend the Finance Act, 2012 so as to provide that the validation of demand, etc., under section 119 of the Finance Act, 2012 shall cease to apply on fulfilment of specified conditions such as withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking that no claim for cost, damages, interest, etc., shall be filed.

6. The Bill seeks to achieve the aforesaid objectives.”

2.1(c) Rights/properties not transferable in terms of section 6 of the Transfer of Property Act, 1882 not be ‘property’ and ‘capital assets’

Section 6 of the Transfer of Property Act, 1882 is relevant as it provides that Property of any kind may be transferred, except as otherwise provided by this Act or by any other law for the time being in force. The said section 6 further provides as under:

(a)  The chance of an heir-apparent succeeding to an estate, the chance of a relation obtaining a legacy on the death of a kinsman, or any other mere possibility of a like nature, cannot be transferred.

(b)  A mere right of re-entry for breach of a condition subsequent cannot be transferred to anyone except the owner of the property affected thereby.

(c)  An easement cannot be transferred apart from the dominant heritage.

(d)  An interest in property restricted in its enjoyment to the owner personally cannot be transferred by him. A right to future maintenance, in whatsoever manner arising, secured or determined, cannot be transferred.

(e)  A mere right to sue cannot be transferred.

(f)  public office cannot be transferred, nor can the salary of a public officer, whether before or after it has become payable.

(g)  Stipends allowed to military, naval, air force and civil pensioners of the Government and political pensions cannot be transferred.

(h)  No transfer can be made (1) insofar as it is opposed to the nature of the interest affected thereby, or (2) for an unlawful object or consideration within the meaning of section 23 of the Indian Contract Act, 1872, or (3) to a person legally disqualified to be transferee.

(i)  Nothing in this section shall be deemed to authorise a tenant having an untransferable right of occupancy, the farmer of an estate in respect of which default has been made in paying revenue, or the lessee of an estate, under the management of a Court of Wards, to assign his interest as such tenant, farmer or lessee.

The term ‘property’ may have a very wide connotation. However, in the context of taxation of capital gains, it appears that it should be something capable of being transferred. It would appear that the items of property specified in (a) to (i) above which are not transferable as per section 6 of the Transfer of Property Act, 1882 are not capital assets. In CIT v. Abhasbhoy A. Dehgamwalla [1991] 59 Taxman 498/[1992] 195 ITR 28 (Bom.), it was held that section 6 of the Transfer of Property Act which uses the same expression ‘property of any kind’ in the context of transferability makes an exception in the case of a mere right to sue [clause (e) of section 6].

The decisions thereunder make it abundantly clear that the right to sue for damages is not an actionable claim. It cannot be assigned. Transfer of such a right is as much opposed to public policy as is gambling in litigation. As such, it will not be quite correct to say that such a right constitutes a ‘capital asset’ which in turn has to be ‘an interest in property of any kind’.

The ITAT Mumbai Bench in the case of Asstt. CIT v. Anil Gulabdas Shah in ITA No. 5134/Mum/2017 & CO. No. 319/Mum/2018- Assessment Year 2012-13- Date of order 9^th August, 2019 held that “right to sue may be considered for the purpose of capital gains within the terms of section 45 of the IT Act which is a charging section. However, the charging section and the computation provisions under Section 48 of the Act must go together. The Apex Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294/5 Taxman 1 (SC) had considered this issue and held that 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 fail within the charging section”. The Apex Court also held that “none of the provisions pertaining to the head ‘capital gains’ suggests that they include an asset in the acquisition of which no cost of acquisition at all can be conceived”. It is clear that if right to sue is considered as a capital asset covered under the definition of transfer within the meaning of section 2(47) of the IT Act, its cost of acquisition cannot be determined. In the absence of such cost of acquisition, the computation provisions failed and capital gains cannot be calculated. Therefore, “right to sue” cannot be subjected to income tax under the head ‘capital gains.’ Above point of view is extensively discussed in the case of Aberdeen Claims Administration Inc by the Authority for Advance Rulings (Income Tax), New Delhi [2016] 65 taxmann.com 246 (AAR-New Delhi.) and order of the Jaipur Bench in the case of Satyam Food Specialities (P.) Ltd. v. Deputy CIT [2015] 57 taxmann.com 194/68 SOT 449 (Jp. – Trib.)”

2.2 ‘Held by assessee’

Emphasis is not on ownership but on ‘holding and enjoying’. The definition of ‘capital asset’ under the Income-tax Act, referring to ‘property of any kind’ carries no words of limitation. The definition is of wide amplitude to include every possible interest that a person may hold and enjoy. The definition of ‘capital asset’ refers to property of any kind ‘held’ by an assessee. In contradistinction to the word ‘owner’ or ‘owned’ definition uses the phrase ‘held’ – Madathil Brothers v. Dy. CIT [2008] 301 ITR 345 (Mad.).

2.3 Booking rights or rights to purchase or rights to obtain title of property is capital asset

Booking rights or rights to purchase or rights to obtain title of property is capital asset. – CIT v. Ram Gopal [2015] 55 taxmann.com 536/230 Taxman 205 (Delhi).

The ITAT Delhi Bench in the case of Shiv Kumar Jatia v. ITO [2021] 127 taxmann.com 179/190 ITD 181 (Delhi – Trib.) held that rights or interests in a property are transferable capital assets and hence, booking rights or rights to purchase apartment or rights to obtain title to apartment are also capital assets that can be transferred.

2.4 Fixed deposits are capital assets

Fixed deposit either with banks or with a public sector company is not an excluded asset under the definition of ‘capital assets’ under section 2(14) – CIT v. East India Charitable Trust [1994] 73 Taxman 380 (Cal.).

2.5 Leasehold rights is capital asset

Limited right given to lessee to hold and possess facilities (plant and machinery) leased to it for a limited period of ten years, with further restriction on sub-letting it or transferring any right or interest therein to anyone without permission of lessor and with lease agreement making it explicit that at end of lease period facilities leased to it would revert to lessor could not be held as capital asset within meaning of section 2(14) – Teletube Electronics Ltd. v. CIT  [2015] 61 taxmann.com 350/235 Taxman 111 (Delhi).

A lease consists of a right of possession cum use of property owned by some other person. It is an outcome of the divesting of ownership from physical possession. The general right of the owner to be in possession and enjoyment of the property could be regarded as a capital asset, though that is also one of the incidents of ownership as any other right in the property of a owner. The leasing out of a capital asset for exploitation by the lessee like mining lease amounts to transfer of capital asset. [A.R. Krishnamurthy & A. R. Rajagopalan v. CIT [1981] 6 Taxman 289/[1982] 133 ITR 922 (Mad.); Rajendra Mining Syndicate v. CIT [1961] 43 ITR 460 (AP)].

2.5(a) Lease for 99 years: In R. K. Palshikar (HUF) v. CIT [1988] 38 Taxman 166/172 ITR 311 (SC) the assessee-HUF had agricultural land. It developed the land and converted it into a housing site. The assessee leased out the plots carved out for a period of 99 years and received ‘salami’ or premium. The ITO levied capital gains tax on the assessee. The latter’s contentions that only leasehold rights had been conferred and, therefore, section 12B of the 1922 Act did not come into play, was rejected. The Supreme Court held that as the lease was for a long period, namely, 99 years, it would appear that under the lease in question the assessee had parted with an asset of an enduring nature, namely, the right to possession and enjoyment of the property leased for a period of 99 years subject to certain conditions on which the respective leases could be terminated. A premium had been charged by the assessee and in these circumstances, it could not be said that the provisions of section 12B could not be brought into play. The grant of lease in question, amounted to a transfer of capital asset as contemplated under section 12B and capital gains tax was chargeable on the premium received by the assessee.

2.5(b) Sub-lease of capital asset: In Mrs. G. Seetha Kamrajj v. CIT [2007] 165 Taxman 117 (AP) the assessee took a building for 99 years’ lease from her husband. The lease provided a premium payment at the commencement and monthly rent thereafter. In less than 2 years after obtaining leasehold rights, it was sub-leased for 97 years and 5 months for a lump sum consideration of ` 4.30 lakhs. The assessee contended that it was only a sub-lease and she did not have ownership of property being the subject-matter. The Assessing Officer held that the lease right of the assessee is an asset and on alienation, she has received ` 4.30 lakhs which was neither eligible for interest nor refundable and hence the transaction was subjected to capital gains. Since the leasehold right was held for less than 36 months, it was taxed as short-term capital gain. The contention of the revenue was upheld by the court for the reason that the nomenclature used or the manner in which the lease deed is drafted cannot change the nature of transaction. Accordingly, the sub-lease of leasehold right was held as chargeable to capital gains.

2.6 A mortgage is a capital asset

A mortgage is a capital asset because by the mortgage there is a transfer of interest in the property mortgaged from the mortgagor to the mortgagee – Bafna Charitable Trust v. CIT [1998] 101 Taxman 244/230 ITR 864 (Bom.).

2.7 Right to obtain conveyance of property is a ‘property’

In CIT v. Vijay Flexible Containers [1990] 48 Taxman 86 (Bom.) the Bombay High Court observed that the right to obtain conveyance of immovable property falls within the expression ‘Property of any kind’ used in section 2(14) and is, therefore, a capital asset. Under an agreement for sale the assessee acquired a right to have immovable property conveyed to him. He is, under the law, entitled to exercise that right not only against the vendor but also against a transferee with notice or a gratuitous transferee. He can assign that right. What he acquired under the agreement for sale is a property within the meaning of the Act and consequently a capital asset. He may file a suit in the court against the vendors and seek specific performance of the agreement or damages for the breach. If a settlement is arrived at under which the assessee gives up his right to seek specific performance and take only damages, the giving up of the right to claim specific performance by conveyance to him of immovable property is relinquishment of a right in ‘capital asset’. Accordingly, it is a transfer of capital asset within the meaning of the Act. [See also CIT v. Smt. Laxmidevi Ratani [2005] 147 Taxman 642/[2008] 296 ITR 363 (MP)].

The right to obtain a conveyance of immovable property falls within the expression ‘property of any kind’ used in section 2(14) and consequently it is a capital asset. It is because the expression ‘property of any kind’ is of wide import. When this expression is read along with the expression defined in section 2(47)(ii) i.e., ‘extinguishment of any rights therein’, the giving up of a right of specific performance by the assessee to get conveyance of immovable property in lieu of receiving consideration, results in the extinguishment of the right in property, thereby attracting the rigor of section 2(14) read with section 2(47). Giving up of a right to claim specific performance by conveyance in respect to an immovable property, amounts to relinquishment of the capital asset. Therefore, there was a transfer of capital asset within the meaning of the Act. The payment of consideration under the agreement of sale, for transfer of a capital asset, is the cost of acquisition of the capital asset. Therefore, in lieu of giving up the said right, any amount received, constitutes capital gain and it is exigible to tax. [Chandrashekar Naganagouda Patil  v. Deputy Commissioner of Income Tax, Circle 6(2)(1), Bangalore [2020] 117 taxmann.com 520/183 ITD 457 (Bang. – Trib.)]

2.8 Route permits are capital assets

Route permits for plying buses issued by authorities under the Motor Vehicles Act are property for the deprivation of which compensation is payable to the permit holder and, hence, such route permits are capital assets in the hands of the assessee-transport company – Addl. CIT v. Ganapathi Raju Jegi, Sanyasi Raju [1979] 119 ITR 715 (AP)/S. Vaidyanathaswami v. CIT [1979] 119 ITR 369 (Mad.).

2.9 Running business is a capital asset

A business as a going concern would constitute a capital asset – CIT v. F.X. Periera & Sons (Travancore)(P.) Ltd. [1990] 184 ITR 461/[1991] 55 Taxman 242 (Ker.).

2.10 Share in firm is a capital asset

Share of a partner is a partnership concern is a capital asset and its transfer will give rise to capital gains – V. Rangaswami Naidu v. CIT [1957] 31 ITR 711 (Mad.).

The Apex Court in Sunil Siddharthbhai v. CIT [1985] 23 Taxman 14W/156 ITR 509 (SC) has observed that when a partner contributes a capital asset into the firm, he gives up his exclusive interest and enters the partnership and it is reduced on such entry into a shared interest. Thereafter he possesses no exclusive or excessive interest in the asset contributed to the firm. Similarly, during the subsistence of partnership no extra ownership/interest could be held by a partner or partners and it is held jointly by all the partners. Hence, partners hold shared interest in all the assets of the firm and there could be no transfer on the change in constitution of the firm. Similar view was expressed in B.T. Patil & Sons v. CGT [2001] 114 Taxman 301/247 ITR 588 (SC).

2.11 Tenancy right is property

A tenancy right is a capital asset – Asstt. CIT v. G.C. Shah & Co. [2015] 58 taxmann.com 49 (Guj.).

2.12 An undertaking is a capital asset

‘Capital asset’ will definitely include an ‘undertaking’ – Indian Bank Ltd. v. CIT [1985] 22 Taxman 479/153 ITR 282 (Mad.).

2.13 Stock exchange membership card is a ‘capital asset’

Where on account of chronic default, stock exchange declared assessee, its member, as defaulter, terminated his membership and sold his stock exchange membership card in an auction, stock exchange card of assessee sold by stock exchange was ‘capital asset’ attracting tax on profit arising out of sale of same under section 45 – CDR. P.J. Mathew v. ITO [2010] 188 Taxman 376 (Ker.).

2.14 Indira Vikas Patra is not a capital asset

Indira Vikas Patra is not a capital asset and repayment of deposited amount with interest on maturity by Post Office cannot be treated as consideration for transfer of IVP by holder – Dr. R.P. Patel v. CIT [2009] 182 Taxman 305 (Ker.).

2.14(a) NSS is a not a capital asset

It is clear from a combined reading of section 80CCA(now extinct)  of the Act and National Savings Scheme Rules, 1987, it is abundantly clear that deposit in NSS account does not amount to purchase of capital asset and similarly withdrawal from NSS account is not money received on transfer of capital asset and since no specific section is provided under which money withdrawn from NSS account is to be taxed, withdrawals are to be taxed as income from other sources and not as capital gain- Mrs. Uma Borkar v. ITO [2002] 83 ITD 453 (Mum. – Trib.)

2.15 Right to sue is not a capital asset

Section 6 of the Transfer of Property Act which uses the same expression ‘property of any kind’ in the context of transferability makes an exception in the case of a mere right to sue. The decisions thereunder make it abundantly clear that the right to sue for damages is not an actionable claim. It cannot be assigned. Transfer of such a right is as much opposed to public policy as is gambling in litigation. As such, it will not be quite correct to say that such a right constitutes a ‘capital asset’ which in turn has to be ‘an interest in property of any kind’ – CIT v. Abhasbhoy A. Dehgamwalla [1991] 59 Taxman 498/[1992] 195 ITR 28 (Bom.).

‘Right to sue is a right in personam which cannot be transferred and, thus, amount received as compensation in lieu of said right is not chargeable to tax u/s 45. Section 6 of the Transfer of Property Act which uses the same expression ‘property of any kind’ in the context of transferability makes an exception in the case of a mere right to sue. The judicial decisions thereunder make it abundantly clear that the ‘right to sue’ for damages is not an actionable claim. It cannot be assigned. Transfer of such a right is opposed to public policy as it would tantamount to gambling in litigation. Hence, such a ‘right to sue’ does not constitute a ‘capital asset’. Notwithstanding widest import assigned to the term ‘property’ which signifies every possible interest which a person can hold and enjoy, the ‘ right to sue’ was a right in personam and such right could not certainly be transferred. In order to attract the charge of tax on capital gains, the sine qua non is that the receipt must have originated in a ‘transfer’ within the meaning of section 45, read with section 2(47) of the Act. In the absence of its transferability, the compensation/damages received by assessee is not assessable as capital gains. In view of aforesaid, it is held that the receipt towards compensation in lieu of ‘right to sue’ is of capital nature which is not chargeable to tax under section 45 of the Act-Bhojison Infrastructure (P.) Ltd. v. ITO [2018] 99 taxmann.com 26/173 ITD 436 (Ahd. – Trib.)

Where pursuant to cancellation of land development agreement, amount received by assessee was in excess of advance and same was on account of compensation for extinction of its right to sue landowner, since said receipt was not in ordinary course of its business, same was to be construed as capital receipt not liable to tax-Chheda Housing Development Corpn. v. Additional Commissioner of Income-tax, 32(1), Mumbai [2019] 110 taxmann.com 56/179 ITD 154 (Mum. – Trib.)

2.15(a) Derivatives are not capital assets except when held by FPIs

CBDT has clarified that derivatives (futures and options) are not treated as capital asset and the income arising from the transfer of derivatives is treated as business income and liable for a normal rate of tax for domestic investors.

However, in the case of foreign portfolio investors (FPIs), derivatives are treated as capital assets and the gains arising from the transfer of the same would be treated as capital gains [see also Para 7.6].

2.16 Right to subscribe for shares

A right to subscribe for shares is a property and therefore falls within the meaning of section 2(14). [Hari Bros. (P.) Ltd. v. ITO [1964] 52 ITR 399 (Punj. & Har.)]. Recognizing the fact that the right to subscribe for shares is a capital asset which can be transferred also, Explanation 1 to section 2(42A) clarifies that right to subscribe to financial asset and transfer of such right to subscription is chargeable to capital gains.

2.17 Trees do not constitute separate capital asset distinct from the land until they are cut and removed

Standing timber is very much immovable property as the land itself. Trees being things attached to the earth constitute part and parcel of the land until they are cut and removed. When the land with the standing trees is transferred, the sale is an integral one in respect of that asset only and it cannot involve a separate sale of the trees as a distinct asset. A bifurcation of the asset can happen, if at all, only when the trees are sold separately after being cut and the right over the soil is retained by the owner. Where the land is agricultural land and it is sold along with standing trees thereon, the sale is only in respect of agricultural land of which the trees form an integral part.

Rubber trees so long as they remain on the land form part of the agricultural land and transfer of the agricultural land with the standing rubber trees thereon does not constitute a separate capital asset. [CIT v. Alanickal Co. Ltd. [1986] 28 Taxman 504/158 ITR 630 (Ker.), CIT v. Rajagiri Rubber & Produce Co. Ltd. [1990] 182 ITR 393 (Ker.)/CIT v. Travancore Rubbers Ltd. [1990] 52 Taxman 441/183 ITR 417 (Ker.)]. In CIT v. M. Ramaiah Reddy [1986] 24 Taxman 764/158 ITR 611 (Kar.) the Karnataka High Court has held that where the land with trees thereon is compulsorily acquired, compensation paid for trees cannot be treated as agricultural income under section 2(1A) and the whole of the compensation paid for land as well as trees thereon is to be considered for computing capital gains.

2.18 Foreign currency

In the case of Kirloskar Asea Ltd. v. CIT [1979] 1 Taxman 290/117 ITR 82 (Kar.), the assessee entered into a collaboration agreement with a foreign company who contributed its share of capital in foreign currency. The amount was credited to the account of the assessee held in a bank in foreign country for the purpose of acquiring machinery after obtaining permission of the Government of India. Only a part of the amount was used for import of machinery and the balance was remitted subsequently into India. On remittance the assessee received ` 2.99 lakhs excessively due to exchange difference. The court held that it is taxable as capital gain. However, in E.I.D. Parry Ltd. v. CIT [1988] 38 Taxman 84 (Mad.) it was held that the term ‘exchange’ falling within the definition of ‘transfer’ in section 2(47) deals with exchange of capital asset and does not cover ‘exchange of Indian currency for foreign currency’ and hence held that the gain on devaluation is not taxable as capital gain. It is submitted that the decision of the Madras High Court seems to be the better view.

2.19 Stock of spares

Stock of spares which are not required immediately to work or exploit a capital asset and which can only be used in the future, have to be treated as capital assets. [CIT v. Kasturi & Sons Ltd. [1985] 21 Taxman 260/152 ITR 748 (Mad.)].

2.20 Government bonds

Profit earned on surrender of M.P. State Development Loan Bonds is liable to be taxed as capital gains of the assessee if the bonds were held as capital asset. [Madhya Pradesh Financial Corporation v. CIT [1981] 132 ITR 884 (MP)]. Surplus received on sale of Jagir Bonds, which were issued to give compensation for resumption of Jagir, is a capital receipt and the same is liable to capital gains tax. [CIT v. Jitendre Singh [1987] 34 Taxman 159/ [1988] 170 ITR 487 (Raj.)].

2.21 Intangible Assets

Where know-how is patented, it is a capital asset [Albright & Wilson Ltd. v. ITO [1984] 8 ITD 57 (Bom. – Trib.)]. In terms of section 55(2)(a), as substituted by the Finance Act, 2021 with effect from assessment year 2021-22, the cost of acquisition of the following self-generated intangible assets shall be ‘NIL’. (i) goodwill of a business or profession; (ii) trademark or brand name associated with a business or profession; (iii) right to manufacture, produce or process any article or thing; (iv) any right to carry on any business or profession; (v) tenancy rights; (vi) stage carriage permits; and (vii) loom hours.

2.22 Building

In Third ITO v. Ramanlal Vithaldas & Co. [1984] 8 ITD 120 (Bom. – Trib.), the facts were that the assessee-firm purchased a building situated near its shop and paid ` 90,000 to tenants of two shops to have them vacated. Thereafter the shops were used by the assessee for its own business for over 36 months and then reassigned to another party, without transfer of ownership, for a consideration of ` 1,51,000. The Tribunal held that the said building would fall within the definition of ‘capital asset’ as defined in section 2(14) and income arising out of the transfer of the right of possession in a portion of the building would be taxable as capital gain.

2.23 House of which assessee in possession after paying full consideration but assessee not registered owner

In ITO v. Amrit Narain [1987] 28 TTJ (Delhi – Trib.) 622 the assessee sold a house and later acquired another residential house for a total consideration of ` 12.21 lakhs. The Assessing Officer refused to give exemption under section 54 of the Act for the reinvestment on the reasoning that the house transferred was not in the name of the assessee and the profit arising from the sale could not be taxed under the head ‘Capital gains’ but to be taxed under the head ‘other sources.’ The Tribunal held that for taxing a capital gain under section 45 of the Act the reference is not to the ownership of the asset but with regard to the transfer of a capital asset. All that required to be seen is whether the subject matter of transfer is a capital asset or not. The assessee had paid the full amount and was in rightful possession of the property sold and on transfer the gain arising is a capital gain and hence could not be assessed under the head ‘other sources’.

2.24 Mesne profits

2.24(a) Section 2(12) of the Code of Civil Procedure Code provides that “Mesne Profits” of property means those profits which the person in wrongful possession of such property actually received or might with the ordinary diligence have received therefrom, together with interest on such profits but shall not include profits due to improvement made by the person in wrongful possession.

2.24(b) The Delhi High Court in the case of Phiraya Lal alias Piara Lal v. Jia Rani AIR 1973 Del 186 held that “ when damages are claimed in respect of wrongful occupation of immovable property on the basis of the loss caused by the wrongful possession of the trespasser to the person entitled to the possession of the immovable property, these damages are called Omit “mesne profits.””

2.24(c) The Supreme Court in the case of Nazir Mohamed v. J. Kamala 2020 Latest Caselaw 473 SC Judgment Date 27^th Aug 2020 opined as under-

“Mesne profits” are profits which a person in wrongful possession of property might have derived, but would not include profits due to improvements.”

2.24(d) The Andhra Pradesh High Court in the case of CIT v. J.D. Italia [1983] 12 Taxman 60/141 ITR 948 (AP) observed that “the name or label given by a party to a particular amount is not conclusive. An assessee by giving a convenient label cannot escape the true incidence of tax under law. Similarly, merely because an assessee uses a wrong or inappropriate expression, he should not be made liable on that account, if, in law, he is not so liable” held that “ when somebody unauthorizedly occupied the assessee’s land for recovery of which the assessee filed suit and a compromise was entered into between the parties, whereby the assessee waived his right in land and received from the encroacher a certain amount for suit land, legal expenses and a sum of ` 40,000/- described as ‘interest’ without specifying rate of interest or date from which it accrued the same was not taxable.”

2.24(e) In the case which arose before the Kerala High Court in Achuthan Pillai and Co. v. CIT [2000] 109 Taxman 428/238 ITR 458 (Ker.) the Managing partner ‘AP’ of the assessee-firm was granted on lease a piece of land and he constructed certain buildings on this land and leased out the same to ‘V’. Later on, AP assigned his entire right, title and interest in the leased-out premises to the assessee-firm. Some dispute arose and as per civil court’s decree ‘V’ was directed to handover the vacant possession of disputed property and pay mesne profits. The Assessing Officer brought to tax the mesne profit received by the assessee-firm as revenue receipt while the Tribunal held that amount to be capital gains as there was transfer of capital asset. The question that arose before the High Court was “Whether by lease of building, only right to use and possession of building was transferred to lessee while ownership in building continued to remain in assessee-firm and, hence, there was no transfer of capital assets?” The High Court answered in the affirmative by holding that the finding of the Tribunal was entirely erroneous in law and mesne profits do not constitute capital gains.

The High Court finally held at para.6 as under-

“The view which we have taken is fully fortified by a decision of this Court in Mrs. Annamma Alexander [1991] 58 Taxman 47/191 ITR 551 (Ker.) in which a Division Bench held that the fact that mesne profits are estimated with reference to the profits which the person in wrongful possession of such property actually received or would have ordinarily received for the purpose of computation or determination of the compensation will not in any way render them as ‘income’ or a revenue receipt.”

2.24(f) The ITAT Special Bench (Mumbai) in the case of Narang Overseas (P.) Ltd. v. Asstt. CIT [2008] 111 ITD 1 (Mum. – Trib.) (SB) [consisting of 5 Hon’ble Members] held that “mesne profits received by assessee for wrongful deprivation of use and occupation of property constitutes capital receipt not chargeable to tax.”

This is what the Special Bench speaking through Hon’ble Judicial Member observed as to what was the impact of Supreme Court’s judgment in P. Mariappa Goundar vs. CIT [1998] 232 ITR 2 (SC) in the following words-

“A judgment of the Court has to be understood in the context of the question arose before the Court, the arguments made by the parties, the provisions of enactment considered by the Court, etc. A decision of the Court takes its colour from the question involved in the case in which it is rendered and while applying the decision to a later case the Courts must carefully try to ascertain the true principle laid down by the decision. [Para 6]

The judgment of the Supreme Court in P. Mariappa Gounder (supra) shows that the Supreme Court was only concerned with one issue relating to the year of taxability of mesne profit, i.e., whether it was, taxable in the assessment year 1963-64 or assessment year 1964-65. The issue whether mesne profit constituted revenue receipt or capital receipt was not before the Supreme Court as was apparent from the question posed before it for adjudication, the contentions raised by the respective parties as well as the operational part of the judgment. The decision given by the Apex Court is binding on all the subordinate Courts as well as other authorities across the country in view of the provisions of article 141 of the Constitution. What is binding is the decision given by the Court after considering the facts of the case, the question referred before it and the arguments made by the parties. Hence, it cannot be said that the Apex Court gave any decision regarding the nature of the receipt by way of mesne profit. The decision of the Madras High Court regarding the nature of receipt remained unaffected by the judgment of the Apex Court. [Para 16]

Any part of the judgment of the High Court which is not challenged before the Apex Court remains unaffected and to that extent it does not become the part of the judgment of the Apex Court. It has been repeatedly observed by the Supreme Court that a decision is only an authority for what it actually decides. What is of the essence in a decision is its ratio and not every observation found therein nor what logically follows from the various observations made in it. Therefore, it could be said that in P. Mariappa Gounder (supra) the Supreme Court adjudicated the issue regarding the nature and character of the mesne profit. The judgment of the Apex Court was restricted only to the issue regarding the year of taxability. [Para 21]

That judgment, therefore, could not be said to be an authority for the proposition that nature of mesne profits is revenue receipts chargeable to tax. Accordingly, the contention of the revenue that the issue regarding the nature of mesne profits was covered by the decision of the Supreme Court could not be accepted. [Para 23]

Consequently, the Commissioner (Appeals) was not justified in holding that the Apex Court impliedly upheld the finding of the Madras High Court that mesne profits was tantamount to revenue receipt chargeable to tax. [Para 31]”

2.24(g) This decision of the Special Bench in the case of Narang Overseas (P.) Ltd. (supra) was followed by the ITAT Kolkata Bench in the case of Talwar Bro. (P.) Ltd v. ITO [2019] 109 taxmann.com 398/178 ITD 818 (Kol. – Trib). The Kolkata Bench also followed the decision of the jurisdictional High Court in the case of CIT v. Lila Ghosh [1993] 71 Taxman 72 (Cal.). wherein it was held that “Since the mesne profits were only damages for loss of property or goods, these were not in the nature of revenue receipts. In the instant case, the receipt of amount representing mesne profits received by the assessee was in the nature of damages and, therefore, capital receipt”.

2.24(h) The facts obtaining in the case decided by the ITAT Kolkata Special Bench in the case of Sushil Kumar & Co. v. Jt. CIT [2004] 88 ITD 35 (Kol.  – Trib.) (SB) were that a suit filed by the assessee for breach of leave and licence agreement by lessee ended in compromise decree which, inter alia, provided for continued occupation of leased premises on payment of monthly compensation besides deposit and mesne profit for a specified period. The question that arose before the Special Bench was “whether since in the instant case the parties to suit had utilized process of Court to obtain a decree on mutual terms and conditions, the term ‘mesne profit’ used in consent decree, did not become binding for revenue authorities or appellate authorities?”. The Special Bench answered “yes” in the sense that it held that “the amount granted to the assessee did not fall within the definition of ‘mesne profit’ as per section 2(12) read with order XX, rule 12 of the Code of Civil Procedure, 1908 and thus the amount received by the assessee was not for any wrongful possession of the property not falling within the ambit of mesne profit.” It was therefore held that “the said sum was rightly brought to tax as revenue receipt.” The Special Bench further held that “even if the said sum was mesne profit, the same having been received from lessee for user of property was liable to tax as a revenue receipt.”

The Special Bench distinguished the decision of the jurisdictional High Court in the case of Smt. Lila Ghosh (supra) at para.36 in the following words-

“We have pointed out earlier that the decision of the Calcutta High Court in the case of Smt. Lila Ghosh (supra) is not an authority for the proposition that mesne profits are not liable to tax under all the circumstances. The nature of mesne profits shall have to be determined with reference to the claim made by the plaintiff and granted by the Court. When mesne profit is determined for depriving the taxpayers of their properties, the compensation awarded would be deprivation of entire assets of which the assessee was the true owner. However, when the award of mesne profit is compensation of the true owners and deprivation of the yearly income of the property, the same may have the character of the revenue nature. In the case of Smt. Lila Ghosh (supra), the assessee was the owner of land which was in possession of the lessee. Though the lease had expired in 1970, the lessee did not give possession to the assessee. The assessee filed a suit for eviction of the lessee. The suit was decreed in favour of the assessee in August 1979. While the execution of the said decree and the quantification of the mesne profit was pending, the Government requisitioned the demised property on 24-12-1979. The requisition order was challenged and subsequently a settlement was arrived at. Under the terms of the settlement, the property in question was to be acquired by the State under the Land Acquisition Act, 1894 and the compensation for such acquisition was to be paid to the assessee. Apart from the compensation for acquisition of the said premises, the assessee received a sum of ` 2 lakhs from the State on account of mesne profits for the use and occupation of the said premises by the erstwhile tenant. The Assessing Officer had assessed the amount of ` 2 lakhs in the hands of the assessee under the head ‘income from other sources.’ The Tribunal held that the mesne profits of ` 2 lakhs arose as a result of transfer of capital asset and that amount was assessable under the head “capital gains”. The Tribunal further held that it was possible to determine the cost of acquisition of asset in question which, according to the Tribunal, consisted of the amount spent by the assessee towards stamp duty and other legal expenses incurred for obtaining the decree. On reference to the Hon’ble High Court, it was held that the Tribunal was justified in holding that the mesne profits of ` 2 lakhs received by the assessee in this case were in the nature of damages and, therefore, a capital receipt. The Hon’ble High Court, however, disagreed with the Tribunal that the amounts spent towards stamp duty and other legal expenses for obtaining the decree could be said to be the cost of acquisition. Their Lordships, accordingly, held that the capital gain derived by the assessee was not liable to tax there being no cost of acquisition. Reliance was placed on the decision of the Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 5 Taxman 1 (SC). Thus, it is seen that the decision of the jurisdictional High Court is distinguishable on facts. The land had been taken over by the State Government and apart from compensation, the amount of ` 2 lakhs had been granted by the Government as compensation for the period the property was in wrongful possession of the lessee. It was thus evident that the consideration received by the assessee of ` 2 lakhs was as part of compensation for acquisition of the land.”

It is to be stated  here that section 50D of the Act was inserted by the Finance Act, 2012 with effect from 01-04-2013 which provides that “ where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer.”

Clause 17 of the Memorandum explaining the provisions in the Finance Bill 2012 explained the purpose for which section 50D of the Act was inserted in the following words-

“Capital gains are calculated on transfer of a capital asset, as sale consideration minus cost of acquisition. In some recent rulings, it has been held that where the consideration in respect of transfer of an asset is not determinable under the existing provisions of the Income-tax Act, then, as the machinery provision fails, the gains arising from the transfer of such assets is not taxable.

It is, therefore, proposed that where in the case of a transfer, consideration for the transfer of a capital asset(s) is not attributable or determinable then for purpose of computing income chargeable to tax as gains, the fair market value of the asset shall be taken to be the full market value of consideration.

Accordingly, it is proposed to insert a new provision (section 50D) in the Income-tax Act to provide that the fair market value of the asset shall be deemed to be the full value of consideration if actual consideration is not attributable or determinable.

This amendment will take effect from the 1st day of April, 2013 and will accordingly apply to the assessment year 2013-14 and subsequent assessment years.”

This order passed by the Special Bench was affirmed by the Calcutta High Court in the case of Sushil Kumar Co. v. CIT [2017] 81 taxmann.com 345/[2016] 38 ITR 192 (Cal.) by holding that “the amount of mesne profit received by assessee with regard to unlawful possession of premises would be taxed as income from other sources.”

This is what the High Court observed at para.5 of its judgment-

“The terms of agreement dated 1st September, 1989 reveal it was a leave and license agreement. It appears that within a few days from the date of entering into the agreement, the suit was filed before the Small Causes Court at Bombay which ended with the passing of the compromise decree dated 25th October, 1989 on the terms and conditions as mutually agreed between the parties to the suit. In view of the law laid down in Kumar Sudhendu Narain Deb v. Mrs. Renuka Biswas [1992] 1 SCC 206, relied on behalf of the appellant, a decree passed in terms of settlement has a binding force as any other decree. The appellant in the income tax proceedings had relied on the said decree. However, as evident from paragraph 19 of the order of the Special Bench in assessee’s own case, though sought for repeatedly by the Assessing Officer, CIT(A) and the Special Bench of the Tribunal, the assessee failed to file a copy of the plaint. In such facts and circumstances, the Special Bench was justified in drawing adverse presumption since as a Tribunal specifically adjudicating revenue matters, it has the authority to examine the plaint which led to the passing of the compromise decree to investigate the real nature of the issue involved in the suit. The written notes of submission filed by the appellant is silent why the plaint was not filed. Hence, the judgments cited by the appellant are not applicable.”

2.24(i) The ITAT Delhi Bench in the case of Dy. CIT v. Sardar Exhibitors (P.) Ltd. [2005] 1 SOT 918 (Delhi – Trib.) held that “Mesne/profits’ decreed by a Court of law can be assessed as taxable income in hands of decree holder.”

The Hon’ble Judicial Member who authored this order succinctly analysed the concept of “mesne/profits” in the following words at para.11 of the Tribunal Order.

“The Code of Civil Procedure defines mesne/profits as that which a person in wrongful possession of property has actually received or might with ordinary diligence have received therefrom. The accent of the definition in section 2(12) of the Code concentrates more on the methodology of calculation of mesne/profits rather than on what the true nature of mesne/profits is. The rationale of awarding mesne/profits is that the trespasser or the person in wrongful possession not only defies the title of the true owner, but also prevents the true owner from enjoying the income or the usufruct of the property in question. When therefore the court decrees mesne/profits, that decree is in recognition of the position that the true owner is entitled to the income from the property and the person in wrongful possession is to compensate the true owner in that regard by paying either the actual income for the property or a reasonable estimate of that income. Having regard to these characteristics of mesne/profits, there can be no doubt that they are also a species of taxable income. Under the scheme of the Income-tax Act, anything which can properly be regarded as income and which is not expressly exempted from taxation under a specific provision of the statute must be regarded as taxable income. Therefore, mesne profits had to be assessed as taxable income in the hands of the present assessee.”

The Tribunal preferred to follow the decision rendered by the Madras High Court in the case of P. Mariappa Gounder (supra) wherein it was held that mesne profits accrue only when they are actually determined/quantified and not from the date on which the assessee’s claim is upheld by a competent Court. In this (P. Mariappa Gounder’s) case the suit filed by the assessee for specific performance which was finally decided in his favour by the Supreme Court on 22-4-1958. His claim for mesne profit against the third party was also upheld. However, the claim for mesne profits was remanded to the trial Court for determination, and the quantum was finally determined on 22-10-1962 during the year of account ended on 31-3-1963, and the amount was actually received by the assessee in the financial year ending on 31-3-1964.

The question that arose was the year in which the amount should be taxed. The High Court held (as stated above) that the amount was taxable in the assessment 1963-64 when the amount was quantified.

This decision of the Madras High Court was affirmed by the Supreme Court in the case of P. Mariappa Gounder v. CIT [1998] 232 ITR 2 (SC).

The Supreme Court in the case of P. Mariappa Gounder (supra) following its earlier decision in the case of CIT v. Hindustan Housing and Land Development Trust Ltd. [1986] 161 ITR 524/27 Taxman 450A (SC) held that when the Supreme Court decreed suit, only an inchoate right arose in favour of the assessee and only when the Trial Court determined amount of mesne profits that right to receiver same accrued in favour of the assessee.

2.25 Rights under purchase agreement

In Rustom Spinners Ltd. v. ITO [1990] 32 ITD 30 (Ahd. – Trib.) the assessee deposited ` 5 lakhs as earnest money as per the agreement to buy textile machinery and further acquired rights to use the trademarks of the vendor. For acquiring these rights, the assessee incurred some expenses. The assessee then assigned the rights, etc., to a third party at ` 9 lakhs. The Tribunal held that the amount of ` 9 lakhs minus expenses claimed was chargeable to tax as short-term capital gains.

2.26 Goodwill – Whether ‘property’?

Goodwill of a business, though intangible, is a capital asset. [Haji Abdul Kader Sahib v. CIT [1961] 42 ITR 296 (Ker.)].

In case of self-generated asset, being goodwill of a business or profession, the cost of acquisition shall be taken to be NIL in terms of section 55(2)(a)(iii) of the Act as substituted by the Finance Act with effect from 01-04-2021.

2.27 Transferable Development Right (TDR)

Transferable Development Right (TDR) given to owner by municipality in lieu of acquisition of immovable property is capital asset; if TDR was earlier sold to third party but same was cancelled, it could not be considered as purchase from said party and period of holding of TDR was to be calculated from date of acquisition of assessee’s property by municipality-[Adi D. Vachha v. ITO [2019] 110 taxmann.com 260/179 ITD 356 (Mum. – Trib.)]

In the case which arose before the ITAT Mumbai Bench in ITO v. Abdul Kayum Ahmed Mohd. Tamboli [2020] 117 taxmann.com 637 (Mum. – Trib.) the assessee was engaged as civil contractor and during the relevant assessment year 2009-10, the assessee transferred certain development rights of a property to ‘S’ builders and received part payment for the same. The case of the assessee case was that a part of sale consideration was spent on ground level activities such as collecting consent of slum dwellers, taking care of local elements etc. and balance amount was offered for tax. The Assessing Officer opined that the assessee parted with development rights and possession of land was also given. Thus, the Assessing Officer taking a view that transfer was complete within meaning of section 2(47) of the Act, brought the entire sale consideration to tax as business income in assessment year in question. The question arose whether, on facts, provisions of section 2(47)(v) of the Act would not apply since the same were applicable only in case of capital assets held by assessee. The Tribunal held in the affirmative in the sense that in terms of joint venture agreement, only part income accrued to assessee and balance consideration was a conditional receipt which would accrue only in subsequent years in the event of assessee performing certain contractual obligations and therefore the entire amount of sale consideration could not be brought to tax in the assessment year in question. The Tribunal thus held that “no fault could be found in the impugned order in estimating the income @10% of gross receipts in the relevant assessment year.”

2.28 Sub-tenancy right

Like tenancy right, a sub-tenancy right is also a capital asset within meaning of section 2(14) and gains/income derived on surrender/transfer of sub-tenancy right would be chargeable to tax under head ‘income from capital gains’-[Asstt. CIT v. Dr. Jayesh Keshrichand Shah [2019] 103 taxmann.com 352/175 ITD 751 (Mum. – Trib.)]

However, there is no liability to capital gains tax on transfer of “possessory rights” in a flat as explained by the ITAT Mumbai Bench in the case of Yogini Mohit Sahita v. ITO [2020] 82 ITR (Trib.) 15 (Mum.). The assessee’s mother-in-law occupied a flat on the second floor of a building on “licence basis”. She had two sons. After her demise, her son occupied the flat with his family. The building was purchased by HME. For vacating the premises, it filed a suit against the occupier of the building. An out-of-court settlement was entered into under which the assessee received ` 25 lakhs for not interfering with the possession of HME. The Assessing Officer held that the amount of ` 25 lakhs was consideration in respect of giving up the claim, vacating the premises and handing over possession of the premises, that it was capital gains, which had accrued to the assessee in lieu of relinquishment of rights in the premises. He brought to tax ` 25 lakhs as long-term capital gains. The Commissioner of Income-tax (Appeals) confirmed the order of the Assessing Officer. On appeal, the Tribunal held that the amounts received by the assessee as consideration for transfer of “possessory rights” was not chargeable to tax as capital gains and no transfer of “tenancy rights” was involved. For reaching this conclusion, the Tribunal followed P.N. Amersey-HUF v. ITO [2012] 20 taxmann.com 704/52 SOT 161 (Mum. – Trib.) (URO); Sardar Pruthisingh v. Kanchanlal Purshottamdas Desai  [2001] AIR 2001 Bom 255 ; CIT v. Star Chemicals (Bom) Pvt. Ltd. (I. T. A. Nos. 1110 and 1153 of 2009 dated August 14, 2009) ; Smt. Seetha S. Shetty v. Dy. CIT (I.T.A. No. 807/Mum/2013) ; Sonal A. Zaveri v. CIT (I.T. A. No. 5968/Mum/2013) ; Smt. Yashod Deora v. ITO (I.T. A. Nos. 835/Kolkata/2008 and 281/Kolkata/2013) and Associated Hotels of India Ltd. v. R.N. Kapoor [1959] AIR 1959 SC 1262.

2.29 Stock Option

The stock option is right or asset which is distinct from shares that arise out of the exercise of the options-Abbott v. Philbin (Inspector of Taxes) [1960] 2 All ER 763

The stock option being a right to purchase the shares underlying the options is a capital asset in the hands of the assessee under section 2(14) of the Act, which is also evident from Explanation 1(e) to section 2(42A) of the Act, which uses the expression ‘in case of a capital asset being a right to subscribe any financial asset’. The cashless exercise of option therefore was a transfer of capital asset by way of a relinquishment/ extinguishment of right in capital asset in terms of section 2(47) of the Act. Where at the time stock option was provided to the assessee, the assessee was an independent consultant of company and there was no relationship of employer and employee between the company and the assessee, cashless exercise of option was a transfer of capital asset by way of a relinquishment/extinguishment of right in capital asset giving raise to capital gains-[Chittharanjan A. Dasannacharya v. CIT [2020] 122 taxmann.com 162/[2021] 276 Taxman 433 (Kar.)]

The Karnataka High Court noted that “the stock option being a right to purchase the shares underlying the options is a capital asset in the hands of the assessee under section 2(14) of the Act, which is also evident from Explanation 1(e) to Section 2(42A) of the Act, which uses the expression ‘in case of a capital asset being a right to subscribe any financial asset’. The cashless exercise of option therefore was a transfer of capital asset by way of a relinquishment/extinguishment of right in capital asset in terms of Section 2(47) of the Act.”

The Supreme Court in the case of Dhun Dadabhoy Kapadia & Hari Brothers (P.) Ltd. v. CIT [1967] 63 ITR 651 (SC) held that right to subscribe to shares of a company was to be treated as a capital asset under section 2(14) of the Act.

Where on assessee’s leaving job of Google-USA and joining Indian subsidiary Google-India, Google-USA realized Stock held by assessee under ESOP and remitted same to assessee through Google-India, gain on such sale could not be treated as perquisite; it was capital gains. -[Dr. Muthian Sivathanu v. Asstt. CIT [2018] 100 taxmann.com 49/173 ITD 585 (Chennai – Trib.)]

Where assessee earned profit from transfer of ESOP options, in view of fact that said options provided valuable right to assessee to exercise and have allotment of shares, they constituted capital asset from date of grant itself and since consideration was paid to assessee after expiry of three years under option transfer agreement, profit in question was liable to tax as long-term capital gain-[N.R. Ravikrishnan v. ACIT  [2019] 102 taxmann.com 418/175 ITD 355 (Bang. – Trib.)]

The ITAT Delhi Bench in the case of Kamlesh Bahedia v. Asstt. CIT [2014] 50 taxmann.com 236/151 ITD 495 (Delhi – Trib.) held that where the assessee acquired rights to purchase shares under ESOP which was a capital asset and he transferred said right within 36 months of offer, period of holding of right in question being less than 36 months, gain arising from transfer of said right was to be assessed as short-term capital gain.

2.30 Loan given by assessee to its subsidiary company is capital asset

Assessee lent certain amount to its subsidiary company SNISL and as SNISL ran into financial trouble assessee sold debt and claimed difference in amount invested and consideration received as short-term capital loss. Assessing Officer disallowed same on ground that amount lent by assessee to its subsidiary company was not a capital asset under section 2(14) and also no transfer in terms of section 2(47) took place on assignment of a loss.

It was held that Loan given by assessee to its subsidiary company would be covered by meaning of ‘capital asset’ under section 2(14) as Revenue was not able to point out any of the exclusion clauses being applicable to an advancement of a loan. – [CIT  v. Siemens Nixdorf Information Systemse GmbH [2020] 114 taxmann.com 531 (Bom.)]

The fact that the term “capital asset” is wide enough to include machinery, plant, building, land and any rights in building or land is reinforced by the enactment of section 54G of the Act which extends exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area wherein sub-section 1 of section 54G starts with transfer of capital asset being machinery—–.

Thus, immovable properties (except stock-in-trade and rural agricultural land) are capital assets.

Section 2(14) excludes from the purview of capital asset ‘personal effects’, that is to say, movable property. Hence, immovable property can in no case be considered a ‘personal effect’. Immovable properties are capital assets and surplus on transfer of such property is liable to be taxed as capital gains except in the following cases:

(i)  Immovable property is held as stock-in-trade.

(ii)  The immovable property in question is agricultural land situated in rural area in India.

2.31 Right, title and interest in plot allotted by MIDC

Where assessee surrendered its right, title and interest in plot allotted by MIDC in favour of third party, in view of fact that assessee did not carry on any business activity during relevant year and thus plot transferred became a capital asset which did not bring into existence any business income as held by High Court, SLP filed against said order was to be dismissed – [Principal CIT v. Well Wisher Construction (P.) Ltd. [2019] 106 taxmann.com 260/264 Taxman 85 (SC)]

2.32 Allotment right in a flat

Where assessee made more than 90 per cent of payment for property, same would amount to a right which was transferable and will be termed as capital asset. The assessee had transferred the allotment right in respect of a flat allotted to him. The possession of the flat was never taken by the assessee. The flat did not come into existence and the full cost of the flat was also not paid by the assessee. A contract for sale of land which is capable of specific performance will be included in the definition of ‘capital asset’. In instant case, more than 90 per cent of the payments made for the said property will tantamount to a right which was transferable and will be termed as a capital asset. The total payment having been made for ` 89,50,000 whereas on transfer the assessee received ` 1,19,32,000 fetching about ` 30 lakhs profit which is taxable as ‘Capital gains’. [Satnam Overseas Exports v. Dy. CIT [2017] 88 taxmann.com 791 (Delhi – Trib.)]

2.33 Rubber Trees

Rubber trees are capital assets and the amounts received on the sale of such trees (cut and sold by the assessee) are liable to tax on the resulting capital gains. [Gokul Rubber & Tea Plantations Ltd. v. CIT [1988] 172 ITR 197 (Ker.)]. However, no capital gains will arise on sale of old and unyielding rubber trees when sale would procure only a far less price than when they were young and yielding as on 1-1-1954 or 1-1-1964 (then 01-04-1981 and now as on 01-04-2001). [CIT v. Trophical Plantations Ltd. [1992] 196 ITR 755 (Ker.)]. The Tribunal’s finding that old and unyielding trees cut and sold from rubber estate belonging to the assessee constitute capital assets so as to attract section 45, is a finding of fact. [Mar Thoma Rubber Co. Ltd. v. CIT [1992] 64 Taxman 160 (Ker.)].

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