Landmark Cases on Capital Gains

Interest received under Section 28 of the Land Acquisition Act, 1894, from compensation for compulsory land acquisition is a revenue receipt and thus taxable under the Income Tax Act, 1961.

Capital gains arising from sham transactions, particularly those involving penny stocks designed to appear genuine, are not exempt under Section 10(38) but are taxable as unaccounted income brought into the books.

The deduction under Section 54 for investment in a new residential property is available even if the property is purchased in the name of the assessee's wife or jointly with the spouse.

In a Joint Development Agreement (JDA), capital gains arise for chargeability to tax when the complete control over the property is passed to the developer, with the date of such transfer of control being relevant for determining the assessment year. This includes considerations of possession under Section 53A of the Transfer of Property Act.

Where an assessee proves the genuineness of share transactions with supporting documents like contract notes, bank statements, and DMAT accounts, the Assessing Officer cannot treat the resulting capital gain as unexplained cash credit or make an addition under Section 68.

The determination of whether a transaction involving the sale and purchase of shares (or other assets) constitutes a trading transaction (business income) or an investment (capital gains) is a mixed question of law and fact. Courts must consider cumulative factors, including the assessee's habitual dealing and the intention at the time of the initial acquisition, rather than applying abstract tests.

The term 'transfer' under Section 2(47) includes the relinquishment of a right to property that creates an interest in the property. However, the extinguishment of rights in shares, when occurring without a formal conveyance, does not attract capital gains.

Additions for alleged bogus long term capital gain from penny stocks are not sustainable if based solely on third-party statements without establishing the assessee's direct nexus to price rigging, especially when share transactions are through banking channels and held for a reasonable period.

A receipt for loss of capital is a capital receipt, while a receipt as profit from a trading transaction constitutes taxable income. This case provides a foundational test for distinguishing between capital and revenue receipts.

Long-term capital gains claimed as exempt under Section 10(38) from the sale of penny stocks can be treated as bogus income if the revenue presents incriminating material demonstrating the transactions are a colourable device for accommodation entries.

Interest awarded under Section 28 of the Land Acquisition Act, 1894, includes interest on statutory solatium, treating solatium as an integral part of compensation. For income tax, interest on delayed compensation under the LAA is taxed as capital gains, not as 'interest' under Section 2(28A), and qualifies for Section 10(37) exemption if the acquired land is agricultural.

The amounts received by an assessee, when regarded as capital receipts, do not fall within the definition of "income" under Section 2(24) of the Income Tax Act and are thus not chargeable to tax, unless specifically included by a statutory provision.

The full value of consideration for computing capital gains under Section 48 refers to the amount stated in the sale deed and cannot be substituted by the market value or a valuation by the DVO under Section 55A, unless there is evidence that the assessee actually received a consideration in excess of the stated amount.

This case establishes principles for evaluating the genuineness of long-term capital gains claimed under Section 10(38), particularly when allegations of bogus transactions, price rigging, or penny stock schemes arise. It clarifies the department's burden of proof in demonstrating, based on a preponderance of probability, that an assessee used a colourable device to claim exempt income.

Interest on borrowed capital used to acquire an asset, paid year after year until the date of sale, must be capitalized and included in the cost of acquisition for computing capital gains.

The word 'purchase' in Section 54(1) and analogous sections like 54F of the Income-tax Act must be given its common, liberal meaning, including acquisition for a price, payment in kind, adjustment of debt, or other monetary consideration. A transfer of a co-owner's share for consideration qualifies as a 'purchase' for claiming capital gains exemption.

A share transaction, substantiated by documentary evidence such as payment by cheque, dematerialization, holding in a Demat account, and sale proceeds through banking channels, cannot be deemed bogus merely on suspicion or surmises without cogent contrary material from the revenue.

For claiming capital gains exemption under sections 54 and 54F, it is not mandatory for the assessee to complete the construction of a residential house or obtain an occupancy certificate within the specified period, provided the capital gains are invested in the purchase or construction.

A transfer of an immovable asset for capital gains purposes requires an effective conveyance through a registered sale deed to pass title. Prior to the amendment introducing Section 2(47)(v), transactions involving mere execution of documents or granting possession without registration were not considered complete transfers for tax.

To disallow long-term capital gains, the Assessing Officer must rely on cogent proof, not mere suspicion or presumption, regarding share price manipulation or the nature of the companies involved.

Receipts arising from the sale of Carbon Emission Reduction (CERs) or carbon credits are capital receipts, not revenue receipts, for assessment years preceding the introduction of Section 115BBG.

The "full value of the consideration" for computing capital gains under Section 48 of the Income Tax Act, 1961 (or Section 12B(2) of the 1922 Act), means the price actually bargained for and agreed to by the parties, not the market value of the asset transferred. In a sale transaction involving a price, the market value of the consideration is not relevant.

Deduction under Section 54F cannot be restricted or denied merely because the new residential property, for which the entire consideration is paid by the assessee, is purchased in the joint names of the assessee and their spouse. The assessee is considered the actual and constructive owner of the property.

The interest awarded on enhanced compensation under the Land Acquisition Act is to be treated as part of the compensation itself, and not as independent interest income taxable under the head 'Income from Other Sources'.

Assessees are entitled to capital gains exemption under Section 54 or 54F if sale proceeds are invested in a residential house. This benefit applies even if the construction or purchase transaction is not fully completed.

Capital gains from share transactions cannot be added as unexplained cash credit under section 68 if shares were purchased on the stock exchange floor, payment was through banking channels, shares were held in a demat account for over a year, contract notes were issued, and sales were made on the stock exchange.

The Supreme Court clarifies the distinction between income chargeable as capital gains and income taxable as business profits, guiding the assessment of whether a transaction constitutes a transfer of a capital asset or is in the nature of trade.

Dharmashibhai Sonani holds that if a statutory proviso is declaratory and curative, intended to remedy unintended consequences of a main provision, it should be given retrospective effect. This principle applies when determining the effective date of such provisos, including the third proviso to Section 50C(1).

The exemption for long-term capital gains under Section 10(38) is deniable where gains arise from bogus penny stock transactions, if the fraudulent nature is established by the revenue through a preponderance of probability, often involving evidence of price rigging and the role of entry operators. This applies even if documentary evidence like contract notes is presented.

Legal fictions and deeming provisions are created for definite purposes and must be limited strictly to that purpose, not extended beyond their legitimate field or the explicit mandate of the section. This principle requires strict interpretation of such provisions.

An assessee is entitled to exemption under Section 54 for long-term capital gains on a new residential house where a flat under construction is treated as 'construction' and not a purchase, allowing the benefit of the three-year completion period.

Additional amounts, solatium, and interest on excess compensation under the Land Acquisition Act form part of enhanced compensation under section 45(5) and are taxable in the year of receipt. If TDS is deducted, the Assessing Officer must determine the nature of the land acquired and the taxability of the compensation or enhanced compensation.

Multiple floors or houses can qualify as 'a residential house' for capital gains exemption under Sections 54 and 54F if they are constructed or capable of being used as a single unit. This applies to assessment years where the unamended law used the term 'a residential house'.

If the cost of acquisition for tenancy rights cannot be determined, the consideration received from the surrender of such tenancy rights is not subject to capital gains tax.

Payments made by an assessee to release property from an encumbrance or settle disputes, which are essential for a sale transaction to materialize, are allowable as a deduction under Section 48 of the Income-tax Act for computing capital gains. Such expenditure either reduces the full value of consideration or is deductible from it.

The Gujarat High Court formulates tests to distinguish between assets held as investments (capital assets) and those for business dealing (stock-in-trade). This helps determine whether income from the sale of such assets is taxable as capital gains or business income, considering factors like acquisition intention and transaction frequency/volume.

Interest awarded under Section 28 of the Land Acquisition Act is part of enhanced compensation and cannot be taxed as 'Income from Other Sources' under Section 56(2)(viii). This decision reaffirms the principles laid down in CIT v. Ghanshyam (HUF).

The date of purchase of a new residential property, for claiming exemption under Section 54, is the date the assessee obtains possession of the flat, especially for under-construction properties, rather than the date of agreement or registration.

Interest paid on a loan to acquire shares can be considered part of the cost of acquisition under Section 48 for computing capital gains, provided it has not been claimed as a deduction against other income. This prevents a double deduction of the same expenditure.

The exemption under Section 10(38) for long term capital gains can be denied when the gains arise from bogus transactions involving penny stocks or accommodation entries, indicating a lack of genuine investment.

Section 50C of the Income Tax Act, 1961, which is a deeming provision, applies only to the transfer of "land or building or both" and therefore does not apply to the transfer of leasehold rights.

Exemption under Section 54 for capital gains on a residential property is available even if the sale deed is not registered within the stipulated time, provided a substantial amount of consideration is paid, or the delay in completion/registration is beyond the assessee's control.

For claiming capital gains exemption under sections 54 and 54F, it is not mandatory for the assessee to obtain a registered sale deed; mere investment in the new property and taking possession suffice.

The Supreme Court holds that a purposive interpretation and harmonious construction must be applied to the provisions of the Income-tax Act. This approach is particularly important when considering claims for exemption from tax, to ensure the interpretation sub-serves the object and purpose of the law.

This AAR ruling provides guiding principles for distinguishing between shares held as stock-in-trade and those held as investments. It clarifies that the power to trade in shares in the memorandum of association is not decisive, and the nature of the transaction is determined by factors like the substantial nature of transactions, accounting methods, magnitude of trades, and holding period.

An assessee is not entitled to the full deduction under section 54F if the capital gains were not utilized for the construction of a new house or deposited in the specified bank accounts before filing the return of income. In such cases, the exemption is restricted proportionately to the amount invested.

Deduction under section 54F is permissible even if the new residential property is purchased in the name of the assessee's spouse or son, provided the capital gains have been reinvested within the stipulated time. The section requires reinvestment of capital gain, not necessarily purchase in the taxpayer's sole name.