Ita/799/2008 Of Mohan Virwani v. The Deputy Commissioner Of Income Tax

IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THER 1[th]DAY OF SEPTEMBER, 2014 PRESENT THR HON' BLE MR. JUSTICK N.KUMAR AND THR HON' BLE MRS. JUSTICK RATHNAKALA| Income Tax Appeal No 799 OF 2008 BETWEEN| 1.Mohan Virwani, No.101/102,Embassy Chambers, o, Vittal Mallya Road,Bangalore.APPRLLANT (By Sri A. Shankar & M.Lava, Advocates) AND The Deputy Commissioner of Income Tax,C.R. Building,Queens Road,Bangalore.—. RBSPONDBENT (By Sri K.V. Aravind, Advocate) This Income Tax Appeal is filed under Section|260-A of Income Tax Act, 1961 praying to formulatethe substantial questions of law and to allow theappeal and set aside the Order dated 28-03-2008passed Tribunal in ITA No. 1669/Bang/2004 andanswer the questions of law in favour of theappellant. This Income Tax Appeal coming on for Hearing.this day, N. Kumar J., delivered the following: JUDGMENT The assessee has preferred this appeal against theorder passed by the Tribunal which has held that theperiod of holding from 36 months would apply in thecase of shares of a company listed in the StockExchange in India and is not applicable to a privatelimited companies which are not listed in the StockExchange and therefore, the period of holding of sharesof private limited companies would have to be construedas 36 months only. 2. The assessee had acquired the shares inNovember 1993 and sold the said shares in June 1996. —Thus the period for which the shares were held is lessthan 36 months. However, the assessee claimed benefitunder Section 2(14) of the Income Tax Act (hereinaiter ©referred to as ‘the Act’ for brevity) claiming that theshares is a Long Term Capital Asset. All the threeauthorities have held that the period of holding from 36months would apply in the case of shares that of a company listed in the Stock Exchange in India. Theshares of the assessee are of private hmited companieswhich are not listed in the Stock Exchange. Therefore,the period of holding of shares of a private limitedcompany would have to be construed as 36 months onlyand therefore, the gain was treated as Short TermCapital Gain and was taxed. Aggrieved by the saidorder, the assessee is before this Court. 3. The substantial questions of law that arise forconsideration are as under: “1. Whether the Tribunal was justified|in holding that shares of a private|limited company held for morethan 12 months and less than 36)months cannot be considered as|long term capital asset?in holding that shares of a private|limited company held for morethan 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|withinthe|ambitof|proviso to Section 2(42A) of theIncome Tax Act?in holding that the shares of a|private limited company are not)covered|withinthe|ambitof|proviso to Section 2(42A) of theIncome Tax Act? 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 TermCapital Asset as under: “Short-term capital asset” means|(Ocapitalassetheldby|anassessee 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 anyothersecuritylisted|in|(OrecognisedStockexchangeIn|India or a unit of the Unit Trust of|India established under the Untt'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 tf for the words|“thirty-six months”, the words| “tipelvemonths”hadbeen|substituted. 4. Section 2(42A) of the Act defines Short TermCapital Asset as under: “Short-term capital asset” means|(Ocapitalassetheldby|anassessee 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 anyothersecuritylisted|in|(OrecognisedStockexchangeIn|India or a unit of the Unit Trust of|India established under the Untt'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 tf for the words|“thirty-six months”, the words| “tipelvemonths”hadbeen|substituted. o. A bare reading of the aforesaid section makes itclear that a capital asset held by an assessee for notmore than 36 months immediately preceding the date oftransfer is treated as Short Term Capital Asset. It is notin dispute that the shares held in a company is a capitalasset. Therefore, the only question that arises forconsideration 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 itclear that the asset as set out in the proviso, if it is heldfor a period of 12 months, would be a Long Term CapitalAsset. The first type of capital asset which stands outas an exception to the main rule is a share held in acompany. The law does not make any ditferencebetween a share held in a private limited company or a limited company or of a listed company. By an amendment in the year 1994 which came into effectfrom 1.4.1995, the remaining words in the proviso areinserted. Apart from the share held in a company, anyother security that is excluding shares listed in arecognized Stock Exchange in India, if it is held for aperiod of 12 months, is also held to be a Long TermCapital Asset. 7. In this context, it is useful to refer to theC.B.D.T. Circular bearing No.684, dated 10[th]June,1994 at paras 16, 160.2 and 16.3: “16. Long-term capital assets enjoycertain tax concessions vis-qa-vVis., shorterm capital assets. The income-tax Actdefines long-term capital assets as thoseassets which are not short-term. Short-term capital assets are those capitalassets which are held for a period of up to36 months. However, the Finance Act,|1987, through an amendment to _ thprovisions of section 2(42A), reduced the|maximum period of holding in respect ofcompany shares from 36 months to 12 months for being treated as_ short-termcapital assets. 16.2 There are many financialinstruments, other than company shares,through which the investors are enteringthe capital market. The units of the UnitTrust of India and Mutual Funds specifiedunder section 10(23D) of the Income-TaxAct 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 thesecurities traded in the recognized stock|exchanges a level playing field withcompany shares, the Finance Act hasamended the provisions of section 2(42A)so that the maximum holding period for|whichsuchinstruments.aretobe|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 morethanI]?months.Theexpression“securities”willhave.the|meaningassigned to it in clause (h) of section 2 ofthe Securities Contracts (Regulation) Act,1956. 16.3 This amendment takes effectfrom 1[st]April, 1995, and will, accordingly,apply in relation to assessment year 1995-96 and subsequent years.” 16.3 This amendment takes effectfrom 1[st]April, 1995, and will, accordingly,apply in relation to assessment year 1995-96 and subsequent years.” 8. Therefore, shares held in a company which maybe a private limited company, a public limited companyor a listed company or any other security other thanthose shares listed in a recognized Stock Exchange inIndia, if it is held for a period of 12 months, then itceases to be a Short Term Capital Asset and it becomesa Long Terms Capital Asset. The authorities have notKept this distinction in mind. They have misread thesection resulting in the interpretation which they haveplaced. The said interpretation is contrary to theexpress words used in the statutory provision whichruns counter to the intent behind the said provision. |Therefore, the findings recorded by the authorities areunsustainable and accordingly, the impugned ordersare set aside. The substantial questions of law are 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. od/-/Judgeod/-.Judge Nsu/-_