Post # 29: Capital Gains - Basis of Charge?

Q. What is the basis of charge of 'Capital Gains'?

Ans. Gain arising on disposal of a capital asset is chargeable to tax in the year in which disposal is made. Following core points must be noted:

- Asset must be capital asset
- There must be disposal of capital asset
- Gain is chargeable in the year of disposal

The gain is computed as follows:

Consideration Received  on Disposal

L: Cost of the Capital Asset

Gain Chargeable under Capital Gain

Capital gain is chargeable on 'Accrual Basis'. The term 'Consideration Recieved' is used above as a single phrase having meaning assigned to it by Section 77 (entitled 'Consderation Recieved'), wherein it is provided that consideration recieved by a person on disposal of an asset shall be the consideration recieved or the fair market value of thereof which ever is higher. Thus, if actual consideration received is less than fair market value then 'consideration recieved' is to be taken equal to fair market value. From this it is clear that 'consideration recieved' is not necessarily tantamount to 'actually recieved'.

Thus, capital gain is to be charged to tax in the year in which capital asset has been disposed whether the consideration has been recieved in full, in part or has not yet been actually recieved.

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[Note: Moduce C students ignore the following reference. It is only for Module F students]

Case Law:

Capital gain is attracted, the moment the assessee [i.e. taxpayer] has acquired the right to recieve the price. It is not necessary that the consideration should have been actually received. What the parties did subsequenlty will not hav any bearing on the liability of the asseessee to the tax of the year in which the right to recieve arises.

[T.V. Sundaram Iyengar & Sons Ltd vs. CIT, 37 ITR 26 (Mad)]

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