Madras High Court
Commissioner Of Income Tax vs M/S.Exim Rajathi India Pvt. Ltd on 7 September, 2021
T.C.A.No.78 of 2016
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 07.09.2021
CORAM
The Honourable Mr.Justice T.S.SIVAGNANAM
and
The Honourable Mr.Justice SATHI KUMAR SUKUMARA KURUP
T.C.A.No.78 of 2016
Commissioner of Income Tax,
Trichy. .. Appellant
-vs-
M/s.Exim Rajathi India Pvt. Ltd.,
No.11, First Line Beach Road,
Nagapattinam. .. Respondent
Appeal under Section 260A of the Income Tax Act, 1961 against the
order dated 07.04.2014 made in I.T.A.No.1584/Mds/2012 on the file of the
Income Tax Appellate Tribunal 'D' Bench, Chennai for the assessment year
2007-08.
For Appellant : Mr.M.Swaminathan,
Senior Standing Counsel
assisted by Ms.V.Pushpa,
Standing Counsel
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T.C.A.No.78 of 2016
For Respondent : Mr.B.Ramanakumar
*******
JUDGMENT
(Delivered by T.S.Sivagnanam, J.)
This appeal, by the Revenue, filed under Section 260A of the Income
Tax Act, 1961 (hereinafter referred to as “the Act”) is directed against the
order dated 07.04.2014 made in I.T.A.No.1584/Mds/2012 on the file of the
Income Tax Appellate Tribunal 'D' Bench, Chennai (for brevity “the
Tribunal”) for the assessment year 2007-08.
2.The appeal was admitted on 02.02.2016, on the following
substantial question of law:-
“Whether on the facts and in the circumstances of
the case, the Tribunal was right in holding that the
shares/debentures not listed in the recognized stock
exchange could be treated as a long term capital asset
as per Section 2(42A) read with its proviso?”
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3.We have heard Mr.M.Swaminathan, learned Senior Standing
Counsel assisted by Ms.V.Pushpa, learned Standing Counsel for the
appellant-Revenue and Mr.B.Ramanakumar, learned counsel appearing for
the respondent-assessee.
4.The assessee is an exporter of agricultural commodities and also
dealing in iron ore. The assessee filed their return of income for the
assessment year 2007-08 on 31.10.2007, declaring total income of
Rs.7,93,48,354/-. The return was duly processed under Section 143(1) of
the Act. Subsequently, the case was selected for scrutiny, the assessee was
called upon to furnish details and the case was discussed with the
Authorized Representative of the assessee.
5.On going through the books of accounts and other documents
produced by the assessee, the Assessing Officer pointed out various issues
and ultimately, the assessment was completed under Section 143(3) of the
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T.C.A.No.78 of 2016
Act by order dated 30.12.2009. The Commissioner of Income Tax-II,
Tiruchirappalli (for brevity “the CIT”) exercised his power under Section
263 of the Act on the ground that the Assessing Officer failed to find out
how many shares were acquired by the assessee from a hotel, which is a
company registered under the Indian Companies act and how many shares
were acquired by another company, which owned a hotel in Trichy.
Further, the Assessing Officer has not ascertained at what price and when
the shares were acquired. After noting certain facts, the CIT was of the
opinion that the order of assessment is erroneous and prejudicial to the
interest of Revenue and accordingly, proceeded with the matter under
Section 263 of the Act. After hearing the assessee, an order was passed by
the CIT dated 15.02.2011 by directing the Assessing Officer to workout the
short term capital gains keeping in mind the rate of interest. The said order
was given effect to by the Assessing Officer by order dated 30.12.2011.
Aggrieved by the same, the assessee preferred appeal to the Commissioner
of Income Tax (Appeals), Tiruchirappalli (for brevity “the CIT(A)”). The
assessee contended that the Revenue has made a mistake by treating the
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T.C.A.No.78 of 2016
shares held for more than twelve months as short term capital assets
whereas, the proviso to Section 2(42A) clearly defines an asset as a long
term capital asset and therefore, the gain should be taxed at the special rate
of 20%. The CIT(A) after taking into consideration the factual and legal
submissions made by the assessee, noted that the shares need not be one of a
company, which is listed in its stock exchange and even shares of private
limited companies are eligible to be treated as long term asset, if it is held
for more than twelve months. Accordingly, the appeal was partly allowed
by order dated 25.05.2012, directing the Assessing Officer to treat the sale
of shares as long term capital asset, allowing the indexation and tax the
resultant capital gain at the special rate of 20%. Aggrieved by the same, the
Revenue was on appeal before the Tribunal contending that the proviso to
Section 2(42A) of the Act would apply only to shares listed in a recognized
stock exchange which shall be treated as long term capital asset which are
held for more than twelve months. It was further contended that the CIT(A)
ought to have seen that the shares which were sold by the assessee were
unquoted and not listed in a registered stock exchange and were held for
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less than thirty six months and therefore, would not be covered by the
proviso to Section 2(42A) of the Act. The Tribunal after considering the
submissions on either side, the definition of “short-term capital asset” as
defined under Section 2(42A), the amendment brought out by Finance Act,
1994 with effect from 01.04.1995, the relevant extracts of the explanatory
notes on the provision of the Finance Act and the definition of the term
“securities” as defined in Section 2(h) of the Securities Contracts
(Regulation) Act, 1956 (hereinafter referred to as “the Securities Contracts
Act”), held that the intention of the Legislature while introducing the
amendment to the Act was very much clear not to include shares in the term
“security” and therefore, concluded that there is no distinction between
unlisted and listed shares for classifying them as short term capital asset
under the Act. Thus, the only issue involved in the instant case is whether
the shares held by the assessee in a company, which is not a listed company
when sold, can be brought under the definition of “short-term capital asset”
as defined under Section 2(42A) of the Act or whether it should be treated
as a “long term capital asset”.
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6.The explanatory notes on the provisions of the Finance Act, 1994
would make the situation lucid and clear, which read as follows:-
“There are many financial instruments, other
than company shares, through which the investors are
entering the capital market. The units of the Unit Trust
of India and Mutual Funds specified under section
10(23D) of the Income-tax Act are the instruments
through which the small investors are increasingly
getting the benefit of investment in the capital market.
In order to provide such units and all the securities
traded in the recognised stock exchanges a level
playing field with company shares, the Finance Act has
amended the provisions of Section 2(42A) so that the
maximum holding period for which such instruments
are to be considered as short-term will be 12 months in
place of 36 months. In other words, such assets are to
be considered long-term capital assets if they are held
for more than 12 months. The expression “securities”
will have the meaning assigned to it in clause (h) of
section 2 of the Securities Contracts (Regulation) Act,
1956.
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This amendment takes effect from 1st April, 1995
and will, accordingly, apply in relation to assessment
year 1995-96 and subsequent years.”
7.The above amendment came into effect from 01.04.1995. In the
case on hand, the assessee purchased the shares during November, 1993, as
stated, in a company which was not listed. The sale of shares took place in
1996 and the amendment would apply.
8.To be noted that between 1978-79 to 1987-88, there is no
differential period mentioned in Section 2(42A) and the period was thirty
six months both for shares and other securities. From the assessment year
1988-89, the period of holding was reduced to twelve months in respect of
shares alone and not extended to other security and the position remained
till the assessment year 1994-95, when the present amendment was
introduced with effect from 01.04.1995 bringing other securities also on par
with the shares.
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T.C.A.No.78 of 2016
9.The definition of “short-term capital asset” as defined under Section
2(42A) as it stood at the material time reads as follows:-
“Section 2(42A):
“Short-term capital asset” means a capital asset
held by an assessee for not more than (thirty-six)
months immediately preceding the date of transfer.
Provided that in the case of a share held in a
company (or any other security listed in a recognised
stock exchange in India or a unit of the Unit Trust of
India established under the Unit Trust of India Act,
1963 (52 of 1963) or a unit of a Mutual Fund specified
under clause (23D) of Section 10 (or a zero coupon
bond), the provisions of this clause shall have effect as
if for the words “thirty-six months”, the words “twelve
months” had been substituted.
Explanation (1). – ........”
10.In terms of the above definition, short term capital asset would
mean a capital asset held by an assessee for not more than 36 months
immediately preceding the transfer. The interplay of the provision in
Section 2(42A) would be relevant for the case on hand, which states that in
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T.C.A.No.78 of 2016
case of a share held in a company or any other security listed in a
recognized stock exchange in India or a unit of the Unit Trust of India or a
unit of a Mutual Fund or a zero coupon bond, the provisions of the clause
shall have effect as if for the words "thirty-six months", the words "twelve
months" had been substituted.
11.What is important to note is to use the word “or” in between each
of the categories of items mentioned in the proviso. The first of which
being shares held in company. The provision dose not make a distinction
between a public company, a private company, a listed company or an
unlisted company. The second category is "other securities" and a condition
has been imposed under the statute that for the benefit of the reduced period
of twelve months, the other securities should be listed in a recognized stock
exchange in India. This is precisely the reason for which the amendment
has been brought above and this is clear on a reading of the explanatory
notes, which states that in order to provide such units and all the securities
traded in the recognized stock exchanges a level playing field with company
shares, the Finance Act has amended the provisions of Section 2(42A) so
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that the maximum holding period for which such instruments are to
considered as short term will be twelve months in the place of thirty six
months.
12.The argument of Mr.M.Swaminathan, learned Senior Standing
Counsel is that the definition of "securities" as defined under Section 2(h) of
the Securities Contracts Act should be taken note of. This aspect has also
been dealt with by the Tribunal and it was held that although under the
Securities Contracts Act, the term “securities” includes shares, but in
Section 2(42A) of the Act, shares have been mentioned separately. As
pointed out earlier, the use of the word “or” in between each of the
categories of holding is very important and such distinction needs to be
borne in mind. It may be true that “securities” as defined under Section 2(h)
of the Securities Contracts Act includes shares, scripts, stocks, bonds etc.,
that by itself cannot have an impact to give a different interpretation to the
distinction of “short-term capital asset” as defined in Section 2(42A) of the
Act.
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13.In Mohan Virwani vs. Deputy Commissioner of Income Tax
[(2014) 51 taxmann.com 43 (Kar.)], the question which fell for
consideration was whether the shares held by the assessee is a short term
capital asset or a long term capital asset. The assessee in the said case,
acquired shares in November 1993 and sold the shares in June, 1996, the
period of holding was less than thirty six months. The assessee claimed
benefit under Section 2(14) of the Act claiming that the shares is a long term
capital asset. All the three authorities held that the period of holding for
thirty six months would apply in the case of shares for a company listed in
the stock exchange in India and the shares of the said assessee are of a
private limited companies, which are not listed shares in the stock exchange.
Therefore, all the shares of a private limited company would have to be
construed as thirty six months only and therefore, the shares cannot be
treated as short term capital gain and accordingly, taxed. Aggrieved by the
same, the assessee approached the High Court of Karnataka. While
answering the question, the Court took into consideration the definition of
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T.C.A.No.78 of 2016
“short-term capital asset” as defined under Section 2(42A), the circular
issued by the Central Board of Direct Taxes (CBDT) bearing Circular
No.684 dated 10.06.1994 and pointed out that the shares held in a company,
which may be a private limited company, a public limited company or a
listed company or any other security other than those shares listed in a
recognized stock exchange in India, if it is held for a period of twelve
months, then it ceased to be a short term capital asset and it becomes a long
term capital asset. Therefore, the Court pointed out that the authorities have
not kept this distinction in mind and they have misread the section and
accordingly, the appeal filed by the assessee was allowed. The above
decision would apply with full force to the case on hand warranting
answering of the substantial question of law in favour of the respondent-
assessee.
14.Identical issue came up for consideration before the Income Tax
Appellate Tribunal (ITAT), Delhi Bench in the case of Analjit Singh vs.
Deputy Commissioner of Income Tax, Circle-16(2), Delhi [2017 SCC
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OnLine ITAT 18870]. Two of the issues, which were framed for
consideration by the ITAT were (i) whether the CIT(A) erred on facts and in
law in observing that for unlisted shares to qualify as “long term capital
asset”, the period of holding was 36 months and not 12 months as per the
first proviso to Section 2(42A) (as applicable during the year under
consideration) read with Section 2(29A) of the Act; and (ii) Whether the
CIT(A) erred on facts and in law in holding that the shorter period of 12
months to qualify as “long term capital asset” was only applicable to
unlisted shares sold during the period 01.04.2014 to 10.07.2014, in terms of
second proviso to Section 2(42A), which was inserted by the Finance (No.2)
Act, 2014, with effect from 01.04.2015.
15.We find from paragraphs 85 to 87 of the order, which have
crystallized the arguments of the learned counsel appearing for the assessee
and the Revenue and we find those arguments to be substantially similarly
to the arguments, which were advanced before us. The ultimate conclusion
arrived at by the ITAT was that so far as the term used 'shares held in a
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company' is concerned, there is no category mentioned as listed or unlisted
shares, albeit the condition for being listed in recognized stock exchange in
India is for 'any other security'. The expression listed in a recognized stock
exchange in India is only used for category of 'any other security' and not
for the category of 'share held in a company'. Further after taking into
consideration that the condition for the period of holding was curtailed from
36 months to 12 months by the Finance Act, 1987, it was only for 'share
held in a company'. Further, when the amendment by the Finance Act 1994
was brought in the statute so far as the category 'shares held in a company'
was concerned, the same was not disturbed, albeit, new category was
included like 'any other security listed in recognized stock exchange in
India'. Further, the ITAT took note of the Memorandum explaining the
provision in the Finance Bill and observed that the Memorandum clearly
makes a distinction that there are many financial instruments other than the
company shares through which the investor are entering capital market and
in order to provide such units and all securities traded in the recognized
stock exchange, a level playing field with the company's share is proposed
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T.C.A.No.78 of 2016
to be amended and thus, the said Memorandum clearly makes a distinction
between the company shares and other than company shares.
16.In our considered view, the above decision of the ITAT has laid
down the correct legal principle which we have discussed in the preceding
paragraphs.
17.On a search made, we find that the Revenue has not challenged the
order of the ITAT before the Court, but it is the assessee, who has
challenged it before the High Court of Delhi and obviously not against the
above finding, which was rendered in favour of the assessee.
18.Further, we take note of the Explanatory Notes to the Provisions of
the Finance (No.2) Act, 2014 vide Circular No.01/2014, dated 21.01.2015.
In paragraph 5.2 of the Circular, it has been stated as follows:-
“5.2.The shorter period of holding of not more than
twelve months for consideration as short-term capital asset
was introduced for encouraging investment on stock market
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where prices of the securities are market determined.
However, all shares whether listed or unlisted have enjoyed
the benefit of short period of holding and even any
investment in shares of private limited companies enjoyed
long-term capital gains on its transfer after twelve months.
........”
19.The above Circular issued by the CBDT will clearly indicate that
all shares whether listed or unlisted have enjoyed the benefit of shorter
period of holding and even any investment in shares of private limited
companies enjoyed long-term capital gains on its transfer after twelve
months.
20.For all the above reasons, the appeal filed by the Revenue is
dismissed and the substantial question of law is answered against the
Revenue and in favour of the assessee. No costs.
(T.S.S., J.) (S.S.K., J.)
Index: Yes/ No 07.09.2021
Speaking Order : Yes/ No
abr
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T.C.A.No.78 of 2016
T.S.Sivagnanam, J.
and
Sathi Kumar Sukumara Kurup, J.
(abr)
To
The Income Tax Appellate Tribunal 'D' Bench, Chennai.
T.C.A.No.78 of 2016
07.09.2021
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