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Income Tax Appellate Tribunal, MUMBAI BENCH “H”, MUMBAI
O R D E R PER C.N.PRASAD (J.M.) : This appeal is filed by the revenue against the order of the Ld. CIT (Appeals)-44, Mumbai dated 18.03.2015 for the assessment year 2010-11 arising out of the assessment order passed u/s 143(3).
The first four grounds of appeal of the revenue is regarding computation of capital gains on two properties and allowability of deduction u/s 54/54F of 2 Shri Kiran G Gadhia Act. The Assessee computed the capital gains from sale of two properties i.e. Flat No. 1102, Sarvodaya CHSL and shop no.10B, JS Towers under the head long term capital gains based on the allotment letter issued by the builder to the Assessee allotting the said properties. However, the Assessing Officer computed the capital gains from these two properties under the head short term capital gains based on the purchase deed. In other words, the dispute is as to whether the period for computing the capital gains and for allowing deduction u/s 54/54F should be the date of allotment letter or the date of registration of the property in the name of the Assessee is to be adopted.
3. The facts are that the Assessee purchased a flat at Sarvodaya Co- operative Housing Society Ltd. (CHSL) through allotment letter dated 18.06.2006 issued by the builder which was later on got registered in the name of the Assessee on 23.10.2008. Similarly, Assessee also purchased shop 10B at JS Towers through allotment letter dated 29.12.2006 which was later got registered in the name of the Assessee on 12.02.2008. The Assessee has taken the holding period for computing the long term capital gains, the date of allotment letter issued by the builder and since the holding period was more than 3 years from the date of allotment letter, Assessee computed the long term capital gains from sale of these two properties and also claimed deduction u/s 54/54F on such properties when they were sold later and invested in residential house. The Assessee before the Assessing Officer contended that the basic requirement of section 54F is that the Assessee has to purchase residential house and accordingly Assessee has purchased the properties vide allotment letters dated 18.06.2006 and 29.12.2006 and got registered the property on 23.10.2008 and 12.02.2008 in terms of the said allotment letters.
3 Shri Kiran G Gadhia Therefore it was contented that the date of purchase of the properties should be taken as 18.06.2006 and 29.12.2006 and not the date of registration of the purchase agreements or purchase deeds.
In respect of the property at shop no.10B in JS Towers and the applicability of section 50, the deemed short term capital gain on sale of property being depreciable asset, the Assessee contended that section 50 prescribes only the mode of computation of deemed short term capital gain. It was contended that the Assessee has sold shop on which depreciation of Rs.2,73,511/- was claimed in assessment years 2007-08 to 2010-11 and therefore the depreciation claimed of Rs.2,73,511/- shall be treated as deemed income u/s 50 of the Act. It was contended that section 50 provides the mode of computation of deemed short term capital gain in respect of depreciable asset and Assessee is not entitled to the benefit of indexation u/s 48 and 49 for computation of capital gain. It was contended that Assessee has claimed deduction u/s 54F in respect of long term capital gain realized on sale of the said shop and the sale proceeds received have been fully utilized by Assessee and purchased a new residential property. It was contended that section 50 requires the Assessee to consider depreciation claimed on assets whether short term or long term as deemed income as a result the benefit of depreciation granted to the Assessee in earlier previous years would be subject to tax if amount realized on sale of such asset is more than WDV. Therefore, it was contended that section 50 nowhere states that in such case, the Assessee would not be entitled to any other benefit or exemption u/s 54, 54F, 54EC etc. allowable under Income Tax Act.
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5. However, the Assessing Officer not convinced with the submissions of the Assessee computed the short term capital gains on sale of the properties namely flat in Sarvodaya CHSL and shop at JS Towers holding that the date of purchase deed shall be taken to compute the holding period and not the date of allotment letter issued by the builder, since according to the Assessing Officer, the Assessee has obtained real ownership of the properties by virtue of the purchase deed, but not by the allotment letters issued by the builder. The Assessing Officer further in respect of the property situated in JS Towers held that since this property is depreciable asset, provisions of section 50 have been attracted and therefore only shot term capital gains is to be computed and thus he held that Assessee is not entitled for exemption u/s 54F claimed by the Assessee. On appeal, the Ld. CIT (Appeals) allowed the claims of the Assessee against which the revenue is in appeal before us.
6. The Ld. DR vehemently supported the orders of the Assessing Officer in holding that the sale proceeds of these two properties are to be assessed as short term capital gains and not as long term capital gain. Placing reliance on the decision of the Delhi High Court in the case of Gulshan Malik vs. CIT [43 taxmann.com 200], the Ld. DR vehemently supports that the Delhi High Court held that in terms of section 2(42A) of the Act, the period of 36 months in respect of booking rights of apartment with a builder has to be counted from the date of execution of agreement to sell and not based on the provisional allotment letter issued by the builder. Therefore, he submits that in view of this decision, the Assessee’s claim should be rejected.
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The Assessee strongly places reliance on the decision of the Ld. CIT (Appeals) and various following judgments of High Courts and submits that for the purpose of computing the period of 36 months the date of issue of allotment letter by the builder is to be considered and not necessarily the date of sale agreement or sale deed. 1. Vinod Kumar Jain v. CIT 46 [DTR 187 (P&H)] 2. CIT Vs. Panchand Gandhi [200 CTR 473 (Guj)] 3. CIT Vs. Anilaben Upendra Shah [184 CTR 129] 4. Hasmukh G Gala Vs. ITO [125 DTR 299 Mumbai Tribunal] The Ld. Counsel for the Assessee further submits that Delhi High Court in the case of Gulshan Malik, it was a conditional allotment in the sense that as per the allotment letter issued by the builder subject to entering into agreement and signing the agreement no right to provisional / final allotment accrues to the purchaser. He submits that in the case of the Assessee, it is an unconditional allotment and therefore Assessee holds the right of property from the date of unconditional allotment letter issued by the builder.
We have heard the rival submissions, perused the orders of the authorities below and the case laws relied on. The first issue to be decided in this case is as to whether the date of allotment by the builder or the date of purchase deed entered into by the Assessee with builder to be taken for computing the period of 36 months in terms of the provisions of section 2(42A) of the Act so as to hold that the asset was a long term or short term asset for the purpose of computing the capital gains. In this case, the Assessee by allotment letters dated 18.06.2006 and 29.12.2006 purchased the properties situated in Sarvodaya Co-operative Housing Society Ltd and shop at JS Towers
6 Shri Kiran G Gadhia respectively. By virtue of these allotment letters issued by the builder, Assessee entered into agreement for purchase of Flat no.1102 at Sarvodaya CHSL on 22.10.2008 and shop no.10 at JS Towers on 12.02.2008. Subsequently, the Assessee sold these two properties situated at Sarvodaya Cooperative Housing Society and JS Towers by entering into agreement of sale on 03.08.2009 and 02.02.2010 respectively. At the same time, the Assessee through allotment letter dated 10.09.2009 issued by Jai Ganesh Developers purchased a new flat and invested the sale proceeds in the said flat. The Assessee contended before the Assessing Officer that the date of allotment should be taken for computing the period of 36 months and if the date of allotment is taken, the period of holding is more than 36 months therefore the capital gains should be considered as long term capital gains. It was also contended that since the entire sale proceeds have been invested in the new flat, Assessee is entitled for exemption u/s 54F of the Act. The Assessing Officer denied the claim of the Assessee holding that the period of holding for the purpose of computing the capital gains should be considered from the date of purchase deed or the date of entering into agreement and not the date of provisional allotment issued by the builder. The Ld. CIT (Appeals) agreed with the submissions of the Assessee and allowed the claim.
Now the issue required to be addressed before us is as to whether the holding period of the properties for the purpose of computing capital gains should be considered from the date of allotment of properties by the builder or from the date of purchase agreement entered into by the Assessee. We find that an identical issue has been considered by the Coordinate Bench of this Tribunal in the case of Anita D Kanjani Vs. ACIT in dated 7 Shri Kiran G Gadhia 13.02.2017, wherein the Coordinate Bench after analyzing various decisions of High Courts held that the holding period is to be determined in terms of section 2(42A) of the Act and therefore holding period should be computed from the date of allotment letter issued by the builder. It was also held that the issue of transfer of ownership is not the issue to be decided for computing the holding period but holding period is to be determined in terms of section 2(42A) of the Act, in view of various judgements observing as under : “2. The solitary issue required to be addressed by us in this appeal is that whether the office unit (flat) sold by the assessee during the year on which long term capital gain was shown in the return was a ‘long term capital asset’ or ‘short term capital asset’ as per section 2(42A) of the Income-tax Act, 1961. The assessee claimed that it was a ‘long term capital asset’ and therefore gain arising there-from was long term capital gain whereas AO was of the view that the said property was ‘short term capital asset’ and thus it gave rise to short term capital gain.
The brief background as culled out from the orders of the lower authorities is that during the year assessee sold office unit located at Unit No.107, First Floor, Everest Grande, Village Malgaon, Mahakali Caves Road, Andheri (E), Mumbai. According to the assessee, the asset was held for more than 36 months, therefore, it was ‘long term capital asset’ and, therefore, resultant gain was shown in the return as long term capital gain. During the course of assessment proceedings it was noted by the AO that though allotment of the said office unit was done prior to 36 months from the date of sale but the agreement to sale was registered during the period of 36 months only, therefore, he computed the holding period from the date of registration of the agreement and accordingly it was held that the said asset was ‘short term capital asset’. The AO relied upon the judgement of Hon'ble Supreme Court in the case of M/s Suraj Lamps & Industries Pvt Ltd vs State of Haryana 304 ITR 1 (SC) wherein it was held that transfer of an immovable property is effective only from the date on which it is registered with the Sub Registrar, which is competent authority to register the documents for transfer of immovable properties. Accordingly, the AO computed the period of holding of the asset from the date of registration of the agreement with the office of Sub Registrar and found that the said property was ‘short term capital asset’. Consequently, the resultant gain was assessed as short term capital gain.
4. Being aggrieved, assessee filed appeal before Ld. CIT(A) and made detailed submissions to argue the point that the impugned property was held 8 Shri Kiran G Gadhia 36 months as per law, therefore, it should be held as ‘long term capital asset’. Ld. CIT(A) did not agree with the submissions of the assessee and confirmed the action of the AO. Still being aggrieved, assessee filed appeal before the Tribunal.
During the course of hearing, the Ld. Counsel of the assessee made detailed arguments. Twofold arguments were made by him before us. It was firstly argued that period of holding should be computed from the date of allotment of the property as per section 2(42A). In support of his claim, reliance was placed on the following judgments:- 1. Madhu Kaul v. CIT (2014) 363 ITR 54 (P&H HC) 2. CIT v. K Ramakrishnan (2014) 363 ITR 59 (Del HC) 3. CIT v. S R Jeyashankar (2015) 373 ITR120 9Mad HC) 4. CIT v. A Suresh Rao (2014) 223 Taxmann 228 (Kar HC) 5. Vinod Kumar Jain v. CIT (2012) 344 ITR 501 (P&H_HC) 6. CIT v. Jitendra Mohan (2007) 165 Taxman 524 (Del HC) 7. CIT v. Panchand Gandhi (2005) 279 ITR52 (Guj HC) 8. CIT v. Anilaben Upendra Shah (2003) 262 ITR 657 (Guj) 9. Lahar Singh Siroya v. ACIT (2016) 138 DTR 331 (Kar-HC) 10. Vijay Harnilapurkar v. DCIT
11. ACIT v. Vandana Rana Roy ITA No.6173/M12011 12. Meena Hernnani vs ITO ITA No.5998/M/2010 13. Sneha Bimal Parekh v. CIT ITA No.5489/M/2015 14. Surnatichand Tolamal Gouti v.DCIT ITA No.2009/M/2013 15. Circular: No. 471, dated 15-10-1986 162 ITR(St)41 16. Circular : No. 672, dated 16-12-1993 205 ITR(St) 47
It was alternatively argued by the Ld. Counsel that in case holding period is to be computed from the transfer of the property, in that case, ‘date of execution’ of the sale agreement should be taken as date of transfer of the property because the document registered on a subsequent date operates from the ‘date of execution’ and not from the ‘date of registration’ in view of clear provisions of section 47 of Registration Act, 1908. Reliance was placed in this regard on the two judgments of Hon’ble Supreme Court in the case of Principal Secretary, Government of Karnataka vs Ragini Narayan (Civil Appeal No.8895 of 2012) dated 20th September, 2016 and Gurubax Singh vs Kartar Singh 254 ITR 112 (SC). It was also submitted that if the holding period is to be computed from the date of execution of the agreement, then, the holding period shall exceed the period of 36 months and the impugned property shall be ‘long term capital asset’ in the hands of the assessee.
7. Per contra, the Ld. DR relied upon the orders of the lower authorities. It was submitted by him that it has been held by the AO relying upon the judgment of 9 Shri Kiran G Gadhia Hon’ble Supreme Court in the case of Suraj Lamps & Industries Pvt Ltd (supra) that holding period should be computed from the date of transfer of the property. He requested for upholding the order of the CIT(A). 8. We have gone through the facts and circumstances of the case, orders passed by the lower authorities, submissions made and judgements relied upon before us by both the sides. The chronology of relevant events in this regard is as under:-
1.
Date of allotment of office unit to the assessee - 11-04-2005 2. Date of signing of the agreement to sell - 28-12-2007 3. Date of registration of the aforesaid property with the Registrar - 24-04-2008 4. Date of sale of aforesaid property - 11-03-2011 The AO has computed the holding period from the date of registration, i.e. 24- 04-2008 and accordingly it was held that when the property was sold on 11- 03-2011 it was held for less than 36 months and, therefore, it was ‘short term capital asset’. On the other hand, assessee has claimed that the property was held by the assessee since when allotment letter was issued to the assessee of the said property, i.e. on 11-04-2005; when the property was duly identified and part payment was made. It was alternatively argued that in any case, if the date of transfer of property is to be taken as the beginning point of holding period, then the date of signing of the agreement i.e. 28-12-2007 should be taken into account and not the date of registration of the agreement in terms of section 47 of Registration Act, 1908 as has also been clarified by the Hon’ble Supreme Court in the above mentioned two judgements.
9. With a view to resolve this dispute, we have firstly analysed the provisions of section 2(42A) which defines ‘short term capital asset’ as under:- “Section 2(42A) in the Income- Tax Act, 1961 (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 its transfer": Perusal of aforesaid definition shows that the legislature has used the expression ‘held’. It is further noted by us that in various other allied or similar sections, the legislature has preferred to use the expression ‘acquired’ or ‘purchased’ e.g. in section 54 / 54F. Thus, it shows that the legislature was conscious while making use of this expression. The expressions like ‘owned’ has not been used for the purpose of determining the nature of asset as short term capital asset or long term capital asset. Thus, the intention of the legislature is clear that for the purpose of determining the nature of capital 10 Shri Kiran G Gadhia gain, the legislature was concerned with the period during which the asset was held by the assessee for all practical purposes on de facto basis. The legislature was apparently not concerned with absolute legal ownership of the asset for determining the holding period. Thus, we have to ascertain the point of time from which it can be said that assessee started holding the asset on de facto basis.
10. It is noted that the letter of allotment was issued to the assessee on 11-04- 2005, the letter of allotment makes a mention of the identity of the flat as office unit No.107, located at First Floor of Everest Grande. It also makes a mention that total consideration of the said property is a sum of Rs.29,64,000/- out of which a sum of Rs.5 lakhs was paid by the assessee on 04-04-2005 by cheque No.539104 as part payment against the said office unit. It is further noted by us that Hon'ble Karnataka High Court in the case of CIT vs A Suresh Rao 223 Taxmann 228 (Kar) dealt with similar issue wherein the significance of the expression ‘held’ used by the legislature has been analysed and explained at length. Hon'ble High Court analysed various provisions of the Act pertaining to computation of capital gain under various situations and also circulars issued by the CBDT on this issue. Relevant portion of the observation wherein the issue before us has been properly analysed is reproduced hereunder:- 12. “The definition as contained in Section 2 (42A) of the Act, though uses the words, "a capital asset held an assessee for not more than thirty-six months immediately preceding the date of its transfer", for the purpose of holding an asset, it is not necessary that, he should be the owner of the asset, with a registered deed of conveyance conferring title on him. In the light of the expanded definition as contained in Section 2(47), even when a sale, exchange, or relinquishment or extinguishment of any right, under a transaction the assessee is put in possession of an immovable property or he retained the same in part performance of the contract under Section 53-A of the Transfer of Property Act, it amounts to transfer. No registered deed of sale is required to constitute a transfer. Similarly, any transaction whether by way of becoming a member of or acquiring shares in a cooperative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever, which has the effect of transferring, or enabling the enjoyment of any immovable property, also constitutes transfer and the assessee is said to hold the said property for the purpose of the definition of 'short-term capital gain’. In fact, the Circular No.495 makes it clear that transactions of the nature referred to above are not required to be registered under the Registration Act, 1908. Such arrangements confer the privileges of ownership without transfer of title in the building and are common mode of 11 Shri Kiran G Gadhia acquiring flats particularly in multistoried constructions in big cities. The aforesaid new subclauses (v) and (vi) have been inserted in Section 2(47) to prevent avoidance of capital gains liability by recourse to transfer of rights in the manner referred to above. A person holding the Power of Attorney is authorized the powers of owner, including that of making construction though the legal ownership in such cases continues to be with the transferor. The intention of legislature is to treat even such transactions as transfers and the capital gain arising out of such transactions are brought to tax. Further, the Circular No.471 goes to the extent of clarifying that for the purpose of Income-tax Act, the allottee gets title to the property on the issuance of the allotment letter and the payment of installments is only a follow up action and taking the delivery of possession is only a formality. In case of construction agreements, the tentative cost of construction is already determined and the agreement provides for payment of cost of construction in installments subject to the condition that the allottee has to bear the increase, if any, in the cost of construction. Therefore, for the purpose of capital gains tax the cost of the new asset is the tentative cost of construction and the fact that the amount was allowed to be paid in installments does not affect the legal position. Therefore, in construing such taxation provisions, what should be the approach of the courts and the interpretation to be placed is clearly set out by the Apex Court in the case of Smt. Saroj Aggarwal vs CIT 156 ITR 497 wherein it is held as under: "Facts should be viewed in natural perspective, having regard to the compulsion of the circumstances of a case. Where it is possible to draw two inferences from the facts and where there is no evidence of any dishonest or improper motive on the part of the assessee, it would be just and equitable to draw such inference in such a manner that would lead to equity and justice. Too hyper-technical or legalistic approach should be avoided in looking at a provision which must be equitably interpreted and justly administered...............Courts should, whenever possible unless prevented by the express language by any section or compelling circumstances of any particular case, make a benevolent and justice oriented inference. Facts must be viewed in the social milieu of a country." Therefore, keeping the aforesaid principles in mind, when we look at Section 48, the language employed is unambiguous. The intention is very clear. When a capital asset is transferred, in order to 12 Shri Kiran G Gadhia determine the capital gain from such transfer, what is to be seen is, out of full value of the consideration received or accruing, the cost of acquisition of the asset, the cost of improvement and any expenditure wholly or exclusively incurred in connection with such transfer is to be deducted. What remains thereafter is the capital gain. It is not necessary that after payment of cost of acquisition, a title deed is to be executed in favour of the assessee. Even in the absence of a title deed, the assessee holds that property and therefore, it is the point of time at which he holds the property, which is to be taken into consideration in determining the period between the date of acquisition and date of transfer of such capital gain in order to decide whether it is a short-term capital gain or a long-term capital gain.” Thus, from the aforesaid judgment, it is clear that for the purpose of holding an asset, it is not necessary that the assessee should be the owner of the asset based upon a registration of conveyance conferring title on him.
11. Similarly, in the case of Madhu Kaul (supra), the Hon’ble Punjab & Haryana High Court analysed various circulars and provisions of the Act that on allotment of flat and making first installment the assessee was conferred with a right to hold a flat which was later identified and possession delivered on later date. The mere fact that possession was delivered later, would not detract from the fact that assessee (allottee) was conferred a right to hold the property on issuance of an allotment letter. The payment of balance amount and delivery of possession are consequential acts that relate back to and arise from the rights conferred by the allotment letter upon the assessee.
In the case of Vinod Kumar Jain vs CIT 344 ITR 501 it was held by Hon’ble Punjab & Haryana High Court that conjoined reading of section 2(14), 2(29A) and 2(42A) clarifies that holding period of the assessee starts from the date of issuance of allotment letter. Since allottee gets title of the property on the issuance of allotment letter and payment of first installment is only a consequential action upon which delivery of possession flows. Even if the sale deed or agreement to sell is executed or registered subsequently but the assessee always had a right in the property since the date of issuance of allotment letter. Therefore, it can be said that assessee held the property immediately from the date of allotment letter.
14. In the case of CIT vs K Ramakrishnan (supra), Hon’ble Delhi High Court analysed the provisions of the Act and held that date of allotment is relevant for the purpose of computing holding period and not the date of registration of conveyance deed. Similarly in the case of CIT vs S.R. Jeyashankar(supra), Hon’ble Madras High Court took a similar view following the aforesaid judgment and held that holding period shall be computed from the date of 13 Shri Kiran G Gadhia allotment. It is noted by us that similar view has been taken by other High Courts in the judgments which have been relied upon by the Ld. Counsel before us and mentioned in earlier part of our order.
15. In the assessment order, the Ld. AO has placed reliance upon the judgment of Hon’ble Supreme Court in the case of Suraj Lamps & Industries Pvt Ltd (supra) for the proposition that transfer of a property shall be effective only on registration of conveyance deed in view of section 54 of Transfer of Property Act. In our view, it is a settled proposition of law and there is no dispute on that. The absolute legal ownership of an immovable property shall take place in terms of various provisions of Transfer of Property Act which needs to be read with provisions of section 2(47) of Income-tax Act, 1961 for the purpose of computing tax liability arising on account of sale / purchase of immovable properties under Income-tax Act. But the issue here before us is different. As discussed earlier, the holding period is to be determined in terms of section 2(42A) of the Act which has been reproduced and discussed above. The issue of transfer of ownership is not the issue to be decided here for computing the holding period. Therefore, we find that application of the ratio of aforesaid judgment would not be appropriate here.
16. Thus, respectfully following the judgements of various High Courts wherein this very issue has been analysed in detail as discussed above at length, we find that holding period should be computed from the date of issue of allotment letter. If we do so, the holding period becomes more than 36 months and consequently, the property sold by the assessee would be long term capital asset in the hands of the assessee and the gain on sale of the same would be taxable in the hands of the assessee as Long Term Capital Gain. We direct accordingly.”
The Delhi High Court in the case of Gulshan Malik Vs. CIT (supra) though held that in terms of section 2(42A), the period of 36 months in respect of booking rights of an apartment with a builder has to be counted from the execution of agreement to sale i.e. buyers agreement but not the provisional allotment letter issued by the seller / developer, we would prefer to follow the decisions of various other High Courts which are in favour of the Assessee since as rightly pointed out by the Ld. A.R the allotment letter issued in this case is a conditional one and whereas in the Assessee’s case it is a non conditional
14 Shri Kiran G Gadhia allotment letter issued by the builder. Further in view of the decision of the Hon’ble Supreme Court in the case of CIT Vs. Vegetable Products Ltd. [82 ITR 192] wherein it was held that when two constructions are possible the view in favour of the Assessee is to be adopted. Therefore, respectfully following the decision of the Coordinate Bench and various decisions of the High Courts referred to there in, we hold that holding period of the properties should be computed from the date of issue of allotment letter and in this case, if the date of allotment letter is considered the holding period becomes more than 36 months and consequently the property sold by the Assessee would be the long term capital asset in the hands of the Assessee taxable under long term capital gain.
With regard to the contention of the Assessing Officer that since the Assessee has claimed depreciation on one of the properties and therefore by virtue of the provisions of Section 50 gain arising from the transfer of such asset should be considered as short term capital gain, we find that this issue has been decided by the Jurisdictional High Court in the case of CIT Vs. Ace Builders Pvt. Ltd. [281 ITR 210] wherein the Hon’ble High Court answered the following question in favour of the Assessee as under. " Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is entitled to deduction under section 54E in respect of the capital gain arising on the transfer of a capital asset on which depreciation has been allowed and which is deemed as short term capital gain under section 50 of the Income-tax Act, 1961" “23. The question required to be considered in the present case is, whether the deeming fiction created under Section 50 is restricted to section 50 only or is it applicable to section 54E of the Income Tax Act as well ? In other words, the question is, where the long term capital gain arises on transfer of a depreciable long term capital asset, whether the assessee can be denied exemption under 15 Shri Kiran G Gadhia 54E merely because, section 50 provides that the computation of such capital gains should be done as if arising from the transfer of short term capital asset ? 24. Section 54E of the Income Tax Act grants exemption from payment of capital gains tax, where the whole or part of the net consideration received from the transfer of a long term capital asset is invested or deposited in a specified asset within a period of six months after the date of such transfer. In the present case it is not in dispute that the assessee fulfills all the conditions set out in section 54E to avail exemption, but the exemption is sought to be denied in view of fiction created under section 50.
In our opinion, the assessee cannot be denied exemption under section 54E, because, firstly, there is nothing in section 50 to suggest that the fiction created in Section 50 is not only restricted to sections 48 and 49 but also applies to other provisions. On the contrary, Section 50 makes it explicitly clear that the deemed fiction created in sub-section (1) & (2) of section 50 is restricted only to the mode of computation of capital gains contained in Section 48 and 49. Secondly, it is well established in law that a fiction created by the legislature has to be confined to the purpose for which it is created. In this connection, we may refer to the decision of the Apex Court in the case of State Bank of India v. D. Hanumantha Rao . In that case, the Service Rules framed by the bank provided for granting extention of service to those appointed prior to 19/7/1969. The respondent therein who had joined the bank on 1/7/1972 claimed extention of service because he was deemed to be appointed in the bank with effect from 26/10/1965 for the purpose of seniority, pay and pension on account of his past service in the army as Short Service Commissioned Officer. In that context, the Apex Court has held that the legal fiction created for the limited purpose of seniority, pay and pension cannot be extended for other purposes. Applying the ratio of the said Judgment, we are of the opinion, that the fiction created under section 50 is confined to the computation of capital gains only and cannot be extended beyond that. Thirdly, section 54E does not make any distinction between depreciable asset and non depreciable asset and, therefore, the exemption available to the depreciable asset under section 54E cannot be denied by referring to the fiction created under section 50. Section 54E specifically provides that where capital gain arising on transfer of a long term capital asset is invested or deposited (whole or any part of the net consideration) in the specified assets, the assessee shall not be charged to capital gains. Therefore, the exemption under section 54E of the I.T.Act cannot be denied to the assessee on account of the fiction created in section 50.
It is true that section 50 is enacted with the object of denying multiple benefits to the owners of depreciable assets. However, that restriction is limited to the computation of capital gains and not to the exemption provisions. In other words, where the long term capital asset has availed depreciation, then the capital gain has to be computed in the manner prescribed under Section 50 and the capital 16 Shri Kiran G Gadhia gains tax will be charged as if such capital gain has arisen out of a short term capital asset but if such capital gain is invested in the manner prescribed in Section 54E, then the capital gain shall not be charged under Section 45 of the Income Tax Act. To put it simply, the benefit of section 54E will be available to the assessee irrespective of the fact that the computation of capital gains is done either under sections 48 & 49 or under section 50. The contention of the revenue that by amendment to section 50 the long term capital asset has been converted into to short term capital asset is also without any merit. As stated hereinabove, the legal fiction created by the statute is to deem the capital gain as short term capital gain and not to deem the asset as short term capital asset. Therefore, it cannot be said that section 50 converts long term capital asset into a short term capital asset.
For all the aforesaid reasons, we concur with the decision of the Gauhati High Court in the case of C.I.T. V/s. Assam Petroleum Industries (supra) and hold that the Tribunal was justified in allowing the benefit of exemption under section 54E of the I.T.Act to the assessee in respect of the capital gains arising on the transfer of a capital asset on which depreciation has been allowed.”
The SLP filed by the revenue on similar question has been dismissed by the Supreme Court in the case of CIT vs. Delite Tin Industries reported in 322 ITR (ST) 8 on the question as to whether the income earned by the Assessee on sale of factory shed is to be treated as long term capital gains eligible for deduction u/s 54EC or not. In this case, the Jurisdictional High Court held that the income earned by the Assessee on sale of factory shed should be treated as long term capital gains and is eligible for deduction u/s 54EC of the Act. Respectfully following the decision of the Jurisdictional High Court, we hold that the Assessee is entitled for deduction u/s 54/54F in respect of both the properties. Thus the grounds 1 to 4 raised by the revenue are rejected.
13. The next issue in the appeal of the Revenue in its ground nos.5 to 7 is regarding assessing the profit on sale of shares as short term capital gains and not as business income.
17 Shri Kiran G Gadhia
Briefly stated the facts are that the Assessing Officer while completing the assessment noticed that the Assessee reported short term capital gains on the transactions made in share and scripts. He noticed that there are high volume of purchase and sale of transactions. Assessing Officer noticed that out of 5,39,175 units 2,10,630 units were sold within 30 days and 92,600 units were sold within 3 months and 1,84,400 units were sold within a period of six months. Therefore, the Assessing Officer inferred that shares were not held as investment and required the Assessee to furnish explanation as to why income should not be treated as business income. The Assessee filed detailed replay dated 03.11.2012 and submitted that the Assessee is an investor in shares of listed companies and not a trader. A statement showing that about 50 scripts were almost all held for a period of more than 3-4 years was furnished. The Assessee also furnished that he has received substantial dividend income in the assessment years 2008-09 to 2012-13. The Assessee also submitted that its main income is from the business of real estate agency and the details of income was also furnished before the Assessing Officer. Therefore, it was submitted that the intention of the Assessee is not making any profit by trading them in the market and therefore income from sale of scripts cannot be treated under the head income from business but has to be considered under the head income from capital gains only. Not convinced with the reply submitted by the Assessee, the Assessing Officer treated the entire short term capital gains of Rs.50,51,020/- and long term capital gains of Rs.10,33,849/- reported by the Assessee was assessed as income from business. On appeal, the Ld. CIT (Appeals) held that transactions where shares are held for less than 30 days are 18 Shri Kiran G Gadhia 30 days but less than one year should be treated as short term capital gains and more than one year as long term capital gains.
The Ld. DR vehemently supported the orders of the Assessing Officer in treating the income from sale of shares as business income. The Ld. DR submits that the Assessee repeatedly entered into transactions, the volume of transactions is more and the holding period of the scripts is very less. Therefore, the intention appear to be earning profits from dealing in shares, thus, the Assessing Officer is justified in assessing the income from sale of shares under the head income from business.
The Ld. Counsel for the Assessee vehemently supported the orders of the Ld. CIT (Appeals). He further submits that the intention of the Assessee has never been making profit from sale of shares but it was always the intention being investment in shares, there is no justification in treating the purchase and sale of shares as business of the Assessee. He further submits that there was no repetitive transactions as observed by the Assessing Officer. He further submits that this is the only year where the Assessing Officer treated the long term as well as short term capital gains reported by the Assessee as income from business and in none of the earlier assessment years or in the subsequent assessment years, the Assessing Officer assessed the income from sale of shares as business income.
With regard to the speculation loss of Rs.13,872/- assessed by the Assessing Officer, the Ld. Counsel for the Assessee submits that it was not on account of speculation loss of any shares. Assessee was never into speculation
19 Shri Kiran G Gadhia Assessee on purchase and sale of shares. He submits that since Assessee could not reconcile the differences it was agreed to assess as speculation loss. He further submits that in view of smallness of the amount, the Assessee did not come in appeal on the direction of the Ld. CIT (Appeals) to assess the income from shares held for less than 30 days as business income. Therefore he prays that Ld. CIT (Appeals) order may be sustained.
We have heard the rival contentions, perused the orders of the authorities below. The Assessing Officer while completing the assessment treated the income from sale of shares as income from business as against the Assessee’s claim that such gain on sale of shares is to be computed under the head short term as well as long term capital gains. The fact that the treatment of the Assessing Officer in assessing the gain on shares as business income is only in this year and no such assessment treating the income on sale of shares was made in earlier years or in subsequent years is not controverted. The reason for the Assessing Officer in treating the gain on sale of shares appears to be that the Assessee made frequent transactions in purchase and selling. The holding period is low and therefore the Assessing Officer concluded that intention of purchase is not for an investment and the intention was to do business in dealing in shares. The Ld. CIT (Appeals) considering the averments of the Assessing Officer and the submissions of the Assessee concluded that gain on transactions where holding period was less than 30 days should be considered as short term capital gain observing as under :
The appellant is an estate agent and also a director in a company. The appellant engages in investing in shares as a investor in his free time. While no doubt the 20 Shri Kiran G Gadhia sequence of trade in shares is high however the fact of the being high in absolute term also cannot be the factors to treat the portfolio as business income. The CBDT circular No.4 of 2007 dated 15-06-2007 in fact also provides for a situation wherein taxpayer may hold both portfolios, trading in investment in shares at the same time. Para 10 of CBDT circular No .4. which reads as under : "CBDT also wishes to emphasis that it is possible for a tax payer to have two poftfolio i.e. an investment portfolio comprising of securities which are to be treated as capital assets and trading portfolio comprises of stock in trade which are to be treated as trading assets Where an assessee has two portfolio the assessee may have income under both heads i.e. capital gain as well as business income." The Hon'ble Supreme Court in the case of CIT vs Madan Gopal Radhyalal 73 ITR 62 has held that there cannot be a presumption that every acquisition by a dealer in a particular commodity is an acquisition for the purpose of his business. In each case the intention is to be seen from the facts of the case and also from the conduct of acquiring the commodity and its dealings in the same In the present facts the intention with reference to the accounting at the time of purchase becomes an important fact the Hon'ble Supreme Court have further held in the case of CIT Vs Associate Industrial Development Company Ltd. 82 ITR 586 that whether any part of the holding of shares is by way of investment or forms part of the stock in trade, is a matter which is within the knowledge of assessee, therefore he should be in a position to produce evidence to establish the distinction between the shares held as stock in trade and by way of investment The system of accounting has remained the same for his investment portfolio and his business portfolio. All these are important facts. It is also pertinent to note that there are few transactions where the appellant has sold the shares purchased within 30 days. There is no denying the fact that any person of prudence will liquidate his holdings if an appreciation is there in his holdings. I am of the opinion that such transactions, where shares are held for less than 30 days should be treated as Business Income. However, there is no reason to treat the capital gain component of shares held for a period of more than 30 days as being the part of the business of the assessee and the same should be treated as short term capital gain This ground of appeal is allowed.”
On a careful consideration of the above observations of the Ld. CIT (Appeals), we do not find any valid reason to disturb the reasoning of the Ld. CIT (Appeals) in holding that the gain on sale of shares held for less than 30
21 Shri Kiran G Gadhia 30 days as short term capital gains. In the circumstances, we uphold the order of the Ld. CIT (Appeals) and reject the grounds of revenue on this issue.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the open court on the 22nd day of March 2017.