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A capital asset is often owned for its contribution to the ability of the business to make a profit. Additionally, it is anticipated that the asset's advantages will last longer than a year. On a business's balance sheet, capital assets are represented by the property, plant, and equipment
Examples of PP&E include land, buildings, and machinery. These assets may be liquidated in worst-case scenarios, such as if a company is restructuring or declares bankruptcy. In other cases, a business disposes of capital assets if the business is growing and needs something better. For example, a business may sell one property and buy a larger one in a better location.
Capital assets may be disposed of by businesses through sales, exchanges, abandonment, or loss through foreclosure. Condemnation can occasionally be considered a disposition as well. The majority of the time, when a business sells an asset that it has owned for more than a year, it will experience a capital gain or loss. The IRS does, however, occasionally classify the gain as normal income.
Also possible are damage or obsolescence of capital assets. When an asset is impaired, its fair value drops, causing the book value on the balance sheet to change. Additionally, a loss will be recorded on the income statement. If the carrying amount is higher than the recoverable amount, a period-based impairment charge equal to the discrepancy is recorded. No impairment is recognised if the carrying amount is lower than the recoverable amount.
B) It should be transferred by the taxpayer during the previous year;
C) There should be profits or gain as a result of transfer.
Section 45(1) of the Income tax Act.1961 provides than any profit and gains arising from the transfer of a capital assets effected in previous year shall be chargeable to tax under the head of capital gain and shall be deemed to be the income of the previous year in which the transfer took place.
2. Three Condition for chargeability of capital gains:
(a) There exists a capital assets.
(b) There is effected transfer of such asset during the previous year.
(c) There shall arise profit and gains from such transfer.
Capital gains tax is leviable on transfer of a capital assets. The assets should be a capital assets as defined in section 2(14) of Income tax act. 1961 and transfer thereof should be in accordance with any of the modes of transfer as laid down in section 2(47) of Income tax act. 1961.
These primary conditions must be fulfilled or satisfied before levying capital gains as held by Hon’ble Madras High court in C A Natrajan V CIT (1973) 92 ITR 347 (Mad).
As held by Hon’ble Culcatta High Court in CIT v Chunilal Prabhudas & Co (1970) 76 ITR 566 (Cal) there have four primary tests in order that any amount is taxable as capital gains under section 45, namely
“Capital Asset” (Section 2(14)):
Section 2(14) provides a very vide definition of the expression capital asset accordingly, capital assets means.—
b. Any securities held by a foreign Institutional investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act,1992.
(a) Ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals whether or not containing any precious or semi-precious stone and whether or not worked or sewn into any wearing apprarel.
(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.
For the purpose of section 2(14)(iii) “population” means the population according to the last preceding census of which the relevant figures have been published before the 1st day of the previous year.