Under which of the following circumstances may ‘capital gains’ arise?
- 1.When there is an increase in the sales of a product
- 2.When there is a natural increase in the value of the property owned
- 3.When you purchase a painting and there is a growth in its value due to increase in its popularity
Select the correct answer using the codes given below:
Answer & explanation
Answer: (b) 2 and 3 only
The answer is (b): statements 2 and 3. Capital gains are the profit from holding a capital asset, which means property of almost any kind, and then transferring it at a higher value. Owned property (statement 2) and a painting (statement 3) are such assets, so their appreciation can give rise to capital gains. A rise in the sales of a product is business income, not a gain on a capital asset.
- ✗ 1. Higher sales of a product raise business turnover and profit. These are taxed as business income, because goods held for sale are stock-in-trade, which is excluded from the definition of capital asset. No capital asset is being transferred at a higher value.
- ✓ 2. Property held by its owner is a capital asset, since the definition covers any kind of property held by a person. When its value rises naturally and it is later transferred, the profit is a capital gain.
- ✓ 3. A painting bought as an investment is property held by the buyer, and paintings and works of art are expressly treated as capital assets. If its value rises because it becomes more popular, selling it gives a capital gain.
Remember · Capital gain means profit from transferring a capital asset (property, shares, paintings, jewellery). Business sales and stock-in-trade give business income, not capital gains.
Sources
- Income Tax Department, e-filing ITR-2 FAQs (Capital Gains, meaning of capital asset) ↗ “Any profit or gain arising from transfer of a capital asset during the year is charged to tax under the head Capital Gains. … Any kind of property held by an assessee, whether or not connected with business or profession of the assessee.”
Question: UPSC Civil Services (Preliminary) 2012, General Studies Paper I. Explanation: Minimalist IAS, checked 25 Oct 2026 (how we verify). ·
