Income Tax Taxation

A Complete Overview of Section 45 of the Income Tax Act

Section 45 of the Income Tax Act, 1961 deals with taxability on capital gains arising from the transfer of capital assets in the previous year. According to section 45 of the IT Act, the profit gained from the transfer of a capital asset in the previous year is considered to be a capital gain that is chargeable to income-tax.  This income earned from the transfer of a capital asset is deemed to be the income of the year in which transfer took place.

Section 45 (1A)

Section 45(1A) of the Income Tax Act deals with taxability on money and other assets received during any previous year under insurance from an insurer because of some damage or destruction. Any profits or gains arising from the receipt of the insurance money or other assets is considered to be a capital gain in nature and is chargeable to income-tax. An insurer gives the insurance claim on account of damage or destruction of the capital asset because of natural calamities or other reasons. Some of the reasons which may lead to the destruction of a capital asset are as follows:

• Natural hazards such as floods, hurricanes, earthquakes, cyclone or other natural calamities.
• Communal riots or a civil disorder.
• Accidental fire or an explosion.
• Negative action was taken by an enemy to harm the business.

Any income gained out of insurance is deemed to be the income of the previous year in which the money was received. For Section 48 of the Income Tax Act, the value of money or fair market value of assets on the date of transfer of the receipt of insurance is deemed to be the full value of the consideration received as a result of the transfer of such capital assets.

Section 45(2)

Section 45(2) of the IT Act deals with the taxability on profits and gains that arises from the conversion of capital assets into stock in trade. It came into effect from 1^st April 1985. There was no provision of taxability on the conversion of stock into capital assets under the Income-tax Act, 1961. However, now according to the amendment made by the government in section 45(2) of the IT Act in Union Budget 2018, the conversion of stock in trade into capital assets would be chargeable to tax under the Income Tax Act.

New Amendment to section 45(2) of the Income Tax Act

According to the new amendment of Section 45(2) of the Income Tax Act, the conversion of stock in trade into capital asset income is chargeable to tax. Income is liable to tax under business income in the year when stock in trade is converted into capital assets. All these amendments will be effective from the Assessment year 2019-20.

Salient Features of Section 45(2)

Investments made by the assessee in capital gain returns are used for computation in the year where such converted asset is sold.

The complete value of the capital assets sold is determined as the fair market value on the date of conversion of assets.

The cost index is computed until the year of the conversion of assets.

Section45(3)

Section 45(3) of the IT Act deals with the taxability on profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals in which he becomes a partner or member by way of capital contribution. This is because the income of the previous year in which such transfers take place and for section 48 the amount recorded in the books of account of the firm, association or body as the value of capital asset shall be deemed to be the full value of the payment received as a result of the transfer of capital asset.

Section 45(4)

Section 45(4) of the Income Tax Act deals with the taxability on way of the distribution of capital assets on the conclusion of a firm or other associations of persons or body of individuals. This is because the income of the firm, association or body of the previous year is considered to be the full value of the deliberation received as an outcome of the transfer.

Also, Read – Section 194-H of the Income Tax Act, 1961

Section45(5)
Sub section 5 of section 45 of the Income tax Act ovverrides sub section 1 of section 45.As per this sub section when a capitl asset is compulsorily acquired under any law and the consideration of transfer is approved by Central  government or RBI, it shall be chargeable to Capital Gain in the previous year in which the compensation is first received by the assessee.
Section 45(5) is applicable when government acquires land from people compoulsorily like for the purpose of highway or for army.

Section45(5A)
Sub section 5a of section 45 of the Income Tax Act was introduced in the year 2017 and will be effective for  Assessment year 2018-19. This newly included sub section deals with the taxability on area sharing arrangement under real estate Development Agreements(DA) in the hands of land owner, in the year in which capital asset is received by it against the transfer of land under DA.