Mohan Virwani V. The Deputy Commissioner of Income Tax

ITA/799/2008

AI Insights

The case revolves around the classification of shares held in a private limited company for tax purposes under the Income Tax Act, 1961. The appellant, Mohan Virwani, contested the decision of the lower authorities, which treated the gains from the sale of shares as Short Term Capital Gains, subject to higher tax rates. The primary legal contention was whether shares of a private limited company held for more than 12 months but less than 36 months qualify as Long Term Capital Assets. The Tribunal and other authorities had previously ruled that such shares do not qualify, leading to the appeal in the High Court. The court examined the provisions of Section 2(42A) and relevant amendments, ultimately deciding in favor of the appellant.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 671552 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 16-09-2014
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K V ARAVIND
• Assessee Lawyers: A SHANKAR; M LAVA
• Keywords: Capital gains tax; Income tax appeal; Long Term Capital Asset; Short-term Capital-Asset
• Section: 234B; 2(14); 234A; 2(42A); 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 16th DAY OF SEPTEMBER, 2014 PRESENT THE HON' BLE MR. JUSTICE N.KUMAR AND THE HON' BLE MRS. JUSTICE RATHNAKALA Income Tax Appeal No 799 OF 2008 BETWEEN 1. Mohan Virwani, No.101/102, Embassy Chambers, 5, Vittal Mallya Road, Bangalore. ... APPELLANT (By Sri A. Shankar & M.Lava, Advocates) AND The Deputy Commissioner of Income Tax, C.R. Building, Queens Road, Bangalore. ... RESPONDENT (By Sri K.V. Aravind, Advocate) … This Income Tax Appeal is filed under Section 260-A of Income Tax Act, 1961 praying to formulate the substantial questions of law and to allow the appeal and set aside the Order dated 28-03-2008 passed Tribunal in ITA No. 1665/Bang/2004 and answer the questions of law in favour of the appellant. 2 This Income Tax Appeal coming on for Hearing this day, N. Kumar J., delivered the following: JUDGMENT The assessee has preferred this appeal against the order passed by the Tribunal which has held that the period of holding from 36 months would apply in the case of shares of a company listed in the Stock Exchange in India and is not applicable to a private limited companies which are not listed in the Stock Exchange and therefore, the period of holding of shares of private limited companies would have to be construed as 36 months only. 2. The assessee had acquired the shares in November 1993 and sold the said shares in June 1996. Thus the period for which the shares were held is less than 36 months. However, the assessee claimed benefit under Section 2(14) of the Income Tax Act (hereinafter referred to as ‘the Act’ for brevity) claiming that the shares is a Long Term Capital Asset. All the three authorities have held that the period of holding from 36 months would apply in the case of shares that of a 3 company listed in the Stock Exchange in India. The shares of the assessee are of private limited companies which are not listed in the Stock Exchange. Therefore, the period of holding of shares of a private limited company would have to be construed as 36 months only and therefore, the gain was treated as Short Term Capital Gain and was taxed. Aggrieved by the said order, the assessee is before this Court. 3. The substantial questions of law that arise for consideration are as under: “1. Whether the Tribunal was justified in holding that shares of a private limited company held for more than 12 months and less than 36 months cannot be considered as long term capital asset? 2. Whether the Tribunal was justified in holding that the shares of a private limited company are not covered within the ambit of proviso to Section 2(42A) of the Income Tax Act? 4 3. Whether the Tribunal was justified in confirming interest imposed under Section 234A and Section 234B of the Act on the fact and circumstances of the case?” 4. Section 2(42A) of the Act defines Short Term Capital Asset as under: “Short-term capital asset” means a capital asset held by an assessee for not more than thirty- six months immediately preceding the date of its 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 5 “twelve months” had been substituted. 5. A bare reading of the aforesaid section makes it clear that a capital asset held by an assessee for not more than 36 months immediately preceding the date of transfer is treated as Short Term Capital Asset. It is not in dispute that the shares held in a company is a capital asset. Therefore, the only question that arises for consideration is: Whether the shares held by the assessee is a Short Term Capital Asset or a Long Term Capital Asset? 6. The proviso to the aforesaid provision makes it clear that the asset as set out in the proviso, if it is held for a period of 12 months, would be a Long Term Capital Asset. The first type of capital asset which stands out as an exception to the main rule is a share held in a company. The law does not make any difference between a share held in a private limited company or a limited company or of a listed company. By an 6 amendment in the year 1994 which came into effect from 1.4.1995, the remaining words in the proviso are inserted. Apart from the share held in a company, any other security that is excluding shares listed in a recognized Stock Exchange in India, if it is held for a period of 12 months, is also held to be a Long Term Capital Asset. 7. In this context, it is useful to refer to the C.B.D.T. Circular bearing No.684, dated 10th June, 1994 at paras 16, 16.2 and 16.3: “16. Long-term capital assets enjoy certain tax concessions vis-à-vis., short term capital assets. The income-tax Act defines long-term capital assets as those assets which are not short-term. Short- term capital assets are those capital assets which are held for a period of up to 36 months. However, the Finance Act, 1987, through an amendment to the provisions of section 2(42A), reduced the maximum period of holding in respect of company shares from 36 months to 12 7 months for being treated as short-term capital assets. 16.2 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 recognized 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 the 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. 8 16.3 This amendment takes effect from 1st April, 1995, and will, accordingly, apply in relation to assessment year 1995- 96 and subsequent years.” 8. Therefore, 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 12 months, then it ceases to be a Short Term Capital Asset and it becomes a Long Terms Capital Asset. The authorities have not kept this distinction in mind. They have misread the Section resulting in the interpretation which they have placed. The said interpretation is contrary to the express words used in the statutory provision which runs counter to the intent behind the said provision. Therefore, the findings recorded by the authorities are unsustainable and accordingly, the impugned orders are set aside. The substantial questions of law are 9 answered in favour of the assessee and against the revenue. Accordingly, we pass the following: ORDER a) Appeal is allowed; b) The impugned orders are set aside; c) The assessee is entitled to the benefit of her capital asset being treated as Long Term Capital Asset and consequentially she is entitled to all the benefits. Sd/- Judge Sd/- Judge Nsu/- "