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:

The correct answer is B. Capital gains arise when a capital asset, such as land, a house, shares or a painting, is sold for more than its cost. The gain is the rise in the asset's value over the holding period, and it is recognised at the point of transfer.

Statement 1 is wrong. A rise in sales of a product is business or trading income, earned through the normal operations of an enterprise. It is not an increase in the value of a capital asset, so it falls under revenue, not capital gains.

Statement 2 is right. A property you own can appreciate without any action on your part, because of location development, demand or inflation. When you sell it, the difference is a capital gain.

Statement 3 is right too. A painting is a capital asset. If its market value rises because its reputation grows, and you sell it, the increase is a capital gain. Popularity is simply the reason the value moved.

Core concept: capital gain is an appreciation in the value of a capital asset, realised on transfer, and taxed under the Income Tax Act, 1961 (Sections 45 to 55A). For Mains, it links to tax policy and to the difference between capital receipts and revenue receipts.

Trap: candidates often treat any rise in income or value as capital gain. Statement 1 is a trading result, not an asset appreciation. Also remember that the gain is taxed on realisation, not on the paper increase.