Commissioner Of Income Tax,Trichy v. M/S.exim Rajathi India Pvt. Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM The Honourable Mr.Justice T.S.SIVAGNANAMandThe Honourable Mr.Justice SATHI KUMAR SUKUMARA KURUP T.C.A.No.78 of 2016 Commissioner of Income Tax,Trichy. .. Appellant/Appellant -vs- M/s.Exim Rajathi India Pvt. Ltd.,No.11, First Line Beach Road,Nagapattinam... Respondent/Respondent Appeal under Section 260A of the Income Tax Act, 1961againsttheorderdated07.04.2014madeinI.T.A.No.1584/Mds/2012 on the file of the Income Tax AppellateTribunal 'D' Bench, Chennai for the assessment year 2007-08,against the order of the Commissioner of Income Tax III(Appeals) Tiruchirapalli, dated.25.05.2012 in ITA No.294/2011-12pertaining to Assessment Year 2007-2008 against the order of theJoint Commissioner of Income Tax, Thanjavur Range, Thanjavur,dated 30.12.2011 in PAN No./GIR No. . For Appellant:Mr.M.Swaminathan,Senior Standing Counselassisted by Ms.V.Pushpa,Standing Counsel For Respondent :Mr.B.Ramanakumar JUDGMENT (Delivered by T.S.Sivagnanam, J.) This appeal, by the Revenue, filed under Section 260A of theIncome Tax Act, 1961 (hereinafter referred to as “the Act”) isdirected against the order dated 07.04.2014 made inI.T.A.No.1584/Mds/2012 on the file of the Income Tax AppellateTribunal 'D' Bench, Chennai (for brevity “the Tribunal”) for theassessment year 2007-08. 2.The appeal was admitted on 02.02.2016, on the followingsubstantial question of law:-“Whether on the facts and in thecircumstances of the case, the Tribunal wasright in holding that the shares/debentures notlisted in the recognized stock exchange could betreated as a long term capital asset as perSection 2(42A) read with its proviso?” 3.We have heard Mr.M.Swaminathan, learned Senior StandingCounsel assisted by Ms.V.Pushpa, learned Standing Counsel forthe appellant-Revenue and Mr.B.Ramanakumar, learned counselappearing for the respondent-assessee. 4.The assessee is an exporter of agricultural commoditiesand also dealing in iron ore. The assessee filed their returnof income for the assessment year 2007-08 on 31.10.2007,declaring total income of Rs.7,93,48,354/-. The return was dulyprocessed under Section 143(1) of the Act. Subsequently, thecase was selected for scrutiny, the assessee was called upon tofurnish details and the case was discussed with the AuthorizedRepresentative of the assessee. 3.We have heard Mr.M.Swaminathan, learned Senior StandingCounsel assisted by Ms.V.Pushpa, learned Standing Counsel forthe appellant-Revenue and Mr.B.Ramanakumar, learned counselappearing for the respondent-assessee. 4.The assessee is an exporter of agricultural commoditiesand also dealing in iron ore. The assessee filed their returnof income for the assessment year 2007-08 on 31.10.2007,declaring total income of Rs.7,93,48,354/-. The return was dulyprocessed under Section 143(1) of the Act. Subsequently, thecase was selected for scrutiny, the assessee was called upon tofurnish details and the case was discussed with the AuthorizedRepresentative of the assessee. 5.On going through the books of accounts and other documentsproduced by the assessee, the Assessing Officer pointed outvarious issues and ultimately, the assessment was completedunder Section 143(3) of the Act by order dated 30.12.2009. TheCommissioner of Income Tax-II, Tiruchirappalli (for brevity “theCIT”) exercised his power under Section 263 of the Act on theground that the Assessing Officer failed to find out how manyshares were acquired by the assessee from a hotel, which is acompany registered under the Indian Companies act and how manyshares were acquired by another company, which owned a hotel inTrichy. Further, the Assessing Officer has not ascertained atwhat price and when the shares were acquired. After notingcertain facts, the CIT was of the opinion that the order ofassessment is erroneous and prejudicial to the interest ofRevenue and accordingly, proceeded with the matter under Section263 of the Act. After hearing the assessee, an order was passedby the CIT dated 15.02.2011 by directing the Assessing Officerto workout the short term capital gains keeping in mind the rateof interest. The said order was given effect to by theAssessing Officer by order dated 30.12.2011. Aggrieved by thesame, the assessee preferred appeal to the Commissioner ofIncome Tax (Appeals), Tiruchirappalli (for brevity “the CIT(A)”). The assessee contended that the Revenue has made amistake by treating the shares held for more than twelve monthsas 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 legalsubmissions made by the assessee, noted that the shares need notbe one of a company, which is listed in its stock exchange andeven shares of private limited companies are eligible to betreated as long term asset, if it is held for more than twelvemonths. Accordingly, the appeal was partly allowed by orderdated 25.05.2012, directing the Assessing Officer to treat thesale of shares as long term capital asset, allowing theindexation and tax the resultant capital gain at the specialrate of 20%. Aggrieved by the same, the Revenue was on appealbefore the Tribunal contending that the proviso to Section 2(42A) of the Act would apply only to shares listed in arecognized stock exchange which shall be treated as long termcapital asset which are held for more than twelve months. Itwas further contended that the CIT(A) ought to have seen thatthe shares which were sold by the assessee were unquoted and notlisted in a registered stock exchange and were held for lessthan thirty six months and therefore, would not be covered bythe proviso to Section 2(42A) of the Act. The Tribunal afterconsidering the submissions on either side, the definition of“short-term capital asset” as defined under Section 2(42A), theamendment brought out by Finance Act, 1994 with effect from01.04.1995, the relevant extracts of the explanatory notes onthe provision of the Finance Act and the definition of the term“securities” as defined in Section 2(h) of the SecuritiesContracts (Regulation) Act, 1956 (hereinafter referred to as“the Securities Contracts Act”), held that the intention of theLegislature while introducing the amendment to the Act was verymuch clear not to include shares in the term “security” andtherefore, concluded that there is no distinction betweenunlisted and listed shares for classifying them as short termcapital asset under the Act. Thus, the only issue involved inthe instant case is whether the shares held by the assessee in acompany, which is not a listed company when sold, can be broughtunder the definition of “short-term capital asset” as definedunder Section 2(42A) of the Act or whether it should be treatedas a “long term capital asset”. 6.The explanatory notes on the provisions of the FinanceAct, 1994 would make the situation lucid and clear, which readas follows:- “There are many financial instruments, otherthan company shares, through which the investorsare entering the capital market. The units ofthe Unit Trust of India and Mutual Fundsspecified under section 10(23D) of the Income-tax Act are the instruments through which thesmall investors are increasingly getting the benefit of investment in the capital market. Inorder to provide such units and all thesecurities traded in the recognised stockexchanges a level playing field with companyshares, the Finance Act has amended theprovisions of Section 2(42A) so that the maximumholding period for which such instruments are tobe considered as short-term will be 12 months inplace of 36 months. In other words, such assetsare to be considered long-term capital assets ifthey are held for more than 12 months. Theexpression “securities” will have the meaningassigned to it in clause (h) of section 2 of theSecurities Contracts (Regulation) Act, 1956. This amendment takes effect from 1[st] April,1995 and will, accordingly, apply in relation toassessment year 1995-96 and subsequent years.” 7.The above amendment came into effect from 01.04.1995. Inthe case on hand, the assessee purchased the shares duringNovember, 1993, as stated, in a company which was not listed.The sale of shares took place in 1996 and the amendment wouldapply. This amendment takes effect from 1[st] April,1995 and will, accordingly, apply in relation toassessment year 1995-96 and subsequent years.” 7.The above amendment came into effect from 01.04.1995. Inthe case on hand, the assessee purchased the shares duringNovember, 1993, as stated, in a company which was not listed.The sale of shares took place in 1996 and the amendment wouldapply. 8.To be noted that between 1978-79 to 1987-88, there is nodifferential period mentioned in Section 2(42A) and the periodwas thirty six months both for shares and other securities.From the assessment year 1988-89, the period of holding wasreduced to twelve months in respect of shares alone and notextended to other security and the position remained till theassessment year 1994-95, when the present amendment wasintroduced with effect from 01.04.1995 bringing other securitiesalso on par with the shares. 9.The definition of “short-term capital asset” as definedunder Section 2(42A) as it stood at the material time reads asfollows:- “Section 2(42A): “Short-term capital asset” means a capitalasset held by an assessee for not more than(thirty-six) months immediately preceding thedate of transfer.Provided that in the case of a share held ina company (or any other security listed in arecognised stock exchange in India or a unit ofthe Unit Trust of India established under theUnit Trust of India Act, 1963 (52 of 1963) or aunit of a Mutual Fund specified under clause https://hcservices.ecourts.gov.in/hcservices/ (23D) of Section 10 (or a zero coupon bond), theprovisions of this clause shall have effect asif for the words “thirty-six months”, the words“twelve months” had been substituted.Explanation (1). – ........” 10.In terms of the above definition, short term capitalasset would mean a capital asset held by an assessee for notmore than 36 months immediately preceding the transfer. Theinterplay of the provision in Section 2(42A) would be relevantfor the case on hand, which states that in case of a share heldin a company or any other security listed in a recognized stockexchange in India or a unit of the Unit Trust of India or a unitof a Mutual Fund or a zero coupon bond, the provisions of theclause shall have effect as if for the words "thirty-sixmonths", the words "twelve months" had been substituted. 11.What is important to note is to use the word “or” inbetween each of the categories of items mentioned in theproviso. The first of which being shares held in company. Theprovision dose not make a distinction between a public company,a private company, a listed company or an unlisted company. Thesecond category is "other securities" and a condition has beenimposed under the statute that for the benefit of the reducedperiod of twelve months, the other securities should be listedin a recognized stock exchange in India. This is precisely thereason for which the amendment has been brought above and thisis clear on a reading of the explanatory notes, which statesthat in order to provide such units and all the securitiestraded in the recognized stock exchanges a level playing fieldwith company shares, the Finance Act has amended the provisionsof Section 2(42A) so that the maximum holding period for whichsuch instruments are to considered as short term will be twelvemonths in the place of thirty six months. 12.The argument of Mr.M.Swaminathan, learned Senior StandingCounsel is that the definition of "securities" as defined underSection 2(h) of the Securities Contracts Act should be takennote of. This aspect has also been dealt with by the Tribunaland it was held that although under the Securities ContractsAct, the term “securities” includes shares, but in Section 2(42A) of the Act, shares have been mentioned separately. Aspointed out earlier, the use of the word “or” in between each ofthe categories of holding is very important and such distinctionneeds to be borne in mind. It may be true that “securities” asdefined under Section 2(h) of the Securities Contracts Actincludes shares, scripts, stocks, bonds etc., that by itselfcannot have an impact to give a different interpretation to thedistinction of “short-term capital asset” as defined in Section 2(42A) of the Act. 13.In Mohan Virwani vs. Deputy Commissioner of Income Tax[(2014) 51 taxmann.com 43 (Kar.)], the question which fell forconsideration was whether the shares held by the assessee is ashort term capital asset or a long term capital asset. Theassessee in the said case, acquired shares in November 1993 andsold the shares in June, 1996, the period of holding was lessthan thirty six months. The assessee claimed benefit underSection 2(14) of the Act claiming that the shares is a long termcapital asset. All the three authorities held that the periodof holding for thirty six months would apply in the case ofshares for a company listed in the stock exchange in India andthe shares of the said assessee are of a private limitedcompanies, which are not listed shares in the stock exchange.Therefore, all the shares of a private limited company wouldhave to be construed as thirty six months only and therefore,the shares cannot be treated as short term capital gain andaccordingly, taxed. Aggrieved by the same, the assesseeapproached the High Court of Karnataka. While answering thequestion, the Court took into consideration the definition of“short-term capital asset” as defined under Section 2(42A), thecircular issued by the Central Board of Direct Taxes (CBDT)bearing Circular No.684 dated 10.06.1994 and pointed out thatthe shares held in a company, which may be a private limitedcompany, a public limited company or a listed company or anyother security other than those shares listed in a recognizedstock exchange in India, if it is held for a period of twelvemonths, then it ceased to be a short term capital asset and itbecomes a long term capital asset. Therefore, the Court pointedout that the authorities have not kept this distinction in mindand they have misread the section and accordingly, the appealfiled by the assessee was allowed. The above decision wouldapply with full force to the case on hand warranting answeringof the substantial question of law in favour of the respondent-assessee. 14.Identical issue came up for consideration before theIncome Tax Appellate Tribunal (ITAT), Delhi Bench in the case ofAnaljit Singh vs. Deputy Commissioner of Income Tax, Circle-16(2), Delhi [2017 SCC OnLine ITAT 18870]. Two of the issues,which were framed for consideration by the ITAT were (i) whetherthe CIT(A) erred on facts and in law in observing that forunlisted shares to qualify as “long term capital asset”, theperiod of holding was 36 months and not 12 months as per thefirst proviso to Section 2(42A) (as applicable during the yearunder consideration) read with Section 2(29A) of the Act; and(ii) Whether the CIT(A) erred on facts and in law in holdingthat the shorter period of 12 months to qualify as “long term capital asset” was only applicable to unlisted shares soldduring the period 01.04.2014 to 10.07.2014, in terms of secondproviso to Section 2(42A), which was inserted by the Finance(No.2) Act, 2014, with effect from 01.04.2015. capital asset” was only applicable to unlisted shares soldduring the period 01.04.2014 to 10.07.2014, in terms of secondproviso 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 havecrystallized the arguments of the learned counsel appearing forthe assessee and the Revenue and we find those arguments to besubstantially similarly to the arguments, which were advancedbefore us. The ultimate conclusion arrived at by the ITAT wasthat so far as the term used 'shares held in a company' isconcerned, there is no category mentioned as listed or unlistedshares, albeit the condition for being listed in recognizedstock exchange in India is for 'any other security'. Theexpression listed in a recognized stock exchange in India isonly used for category of 'any other security' and not for thecategory of 'share held in a company'. Further after takinginto consideration that the condition for the period of holdingwas curtailed from 36 months to 12 months by the Finance Act,1987, it was only for 'share held in a company'. Further, whenthe amendment by the Finance Act 1994 was brought in the statuteso far as the category 'shares held in a company' was concerned,the same was not disturbed, albeit, new category was includedlike 'any other security listed in recognized stock exchange inIndia'. Further, the ITAT took note of the Memorandumexplaining the provision in the Finance Bill and observed thatthe Memorandum clearly makes a distinction that there are manyfinancial instruments other than the company shares throughwhich the investor are entering capital market and in order toprovide such units and all securities traded in the recognizedstock exchange, a level playing field with the company's shareis proposed to be amended and thus, the said Memorandum clearlymakes a distinction between the company shares and other thancompany shares. 16.In our considered view, the above decision of the ITAThas laid down the correct legal principle which we havediscussed in the preceding paragraphs. 17.On a search made, we find that the Revenue has notchallenged the order of the ITAT before the Court, but it is theassessee, who has challenged it before the High Court of Delhiand obviously not against the above finding, which was renderedin favour of the assessee. 18.Further, we take note of the Explanatory Notes to theProvisions of the Finance (No.2) Act, 2014 vide CircularNo.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 notmore than twelve months for consideration asshort-term capital asset was introduced forencouraging investment on stock market whereprices of the securities are market determined.However, all shares whether listed or unlistedhave enjoyed the benefit of short period ofholding and even any investment in shares ofprivate limited companies enjoyed long-termcapital gains on its transfer after twelvemonths. ........” 19.The above Circular issued by the CBDT will clearlyindicate that all shares whether listed or unlisted have enjoyedthe benefit of shorter period of holding and even any investmentin shares of private limited companies enjoyed long-term capitalgains on its transfer after twelve months. 20.For all the above reasons, the appeal filed by theRevenue is dismissed and the substantial question of law isanswered against the Revenue and in favour of the assessee. Nocosts. abrTo1. The Income Tax Appellate Tribunal 'D' Bench, Chennai.2. The Joint Commissioner of Income Tax, Thanjavur Range, Thanjavur3. The Commissioner of Income Tax II (Appeals) Trichy+1CC to Mr.M.Swaminathan, Advocate, Sr.No.45635 SRA (CO)K.RK. (27.09.2021)