Section 45 — Capital Gains

Section 45 of the Income-tax Act, 1961, deals with the taxation of capital gains. It specifies that any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income-tax under the head 'Capital Gains' and shall be deemed to be the income of the previous year in which the transfer took place. The section applies when there is a transfer of a capital asset, which is defined under Section 2(14) of the Act. The significance of Section 45 lies in its role in determining the tax liability arising from the sale or transfer of assets such as property, stocks, or bonds. The statutory test involves identifying a capital asset, determining the cost of acquisition, and computing the gain or loss from the transfer. The burden of proof typically lies with the taxpayer to substantiate the cost of acquisition and the expenses incurred in connection with the transfer. In practice, this section is crucial for individuals and businesses alike, as it affects investment decisions and tax planning strategies.

Common Litigation Flashpoints

1. Determination of the cost of acquisition
2. Classification of asset as capital or revenue
3. Timing of the transfer and recognition of gain
4. Applicability of exemptions under Section 54

Judgments on Section 45 — Capital Gains

• Reliance Capital Ltd. vs Dy. Commissioner of Income Tax — ITAT,
  If there are sufficient interest-free funds available, it can be presumed that investments were made from these funds rather than borrowed funds.
• Vodafone International Holdings B.V. vs Union of India & Anr. — SC,
  Section 9 of the Income Tax Act does not cover indirect transfers of capital assets situated in India.
• Union of India & Anr. vs M/s. Ganpati Dealcom Pvt. Ltd. — SC,
  The 2016 Amendment Act cannot be applied retrospectively as it creates new offences and substantive changes, which cannot be applied to past transactions.
• Aditya Birla Nuvo Limited vs The Deputy Director of Income-tax — HC,
  The beneficial ownership of shares, despite being registered in the name of a permitted transferee, determines the taxability of capital gains in India.
• Commissioner of Income Tax, Bangalore vs B. C. Srinivasa Setty — SC,
  Goodwill generated in a newly commenced business cannot be described as an 'asset' within the terms of Section 45 and therefore its transfer is not subject to income-tax under the head 'capital gains'