2012 (4) TMI 438 - HC - Income Tax

Long term capital gains on Sale of two mutual fund - the expression not less than - AO treated the two gains as short term capital gains as the instruments had not been held for a period of more than 12 months immediately preceding the date of transfer Held that - To qualify as a short term capital asset, the capital asset should be held by the assessee for 12 or 36 months, but the moment the said time limit is crossed the assessee continues to be the holder/owner of the said asset, the same is to be treated as a long term capital asset - the date on which the asset is acquired is not to be excluded because the holding starts from the said date. There is nothing in the said Section to show and hold that the time period would not include fraction of a day. The expression not more than clearly in this case would refer and include the date on which the asset is first held or acquired. Thus, an asset acquired on the 1st of January would complete 12 months at the end of the said year, i.e., on 31st of December and if it is sold next year and if the proviso to Section 2(42A) applies, it would be treated as a long term capital gains. - in favour of assessee.

Summary

Issues:
1. Interpretation of Section 2(42A) of the Income Tax Act regarding the holding period of capital assets for determining short term or long term capital gains.

Detailed Analysis:
The case involves an appeal against the Income Tax Appellate Tribunal's order concerning the holding period of mutual fund instruments for the assessment year 2006-07. The main issue revolves around whether the appellant had held the shares/mutual fund instruments for more than 12 months preceding the date of transfer, impacting the classification of capital gains as short term or long term. The appellant treated the gains as exempt under specific sections of the Income Tax Act, but the Assessing Officer considered them as short term capital gains due to the holding period.

The High Court analyzed Section 2(42A) of the Act, which defines a short-term capital asset as one held for not more than thirty-six months, with an exception for certain securities where the period is reduced to twelve months. The Revenue contended that the holding period should exclude the date of transfer, based on the wording of the provision. However, the Court disagreed, interpreting that the date of transfer acts as a cut-off point for determining the holding period, without the need to add or exclude the transfer date itself.

Further, the Court delved into legal precedents and interpretations regarding the use of terms like "not less than" in legislative provisions. While acknowledging different meanings of words in legal contexts, the Court emphasized interpreting the context to determine the appropriate meaning. Referring to past judgments, the Court highlighted instances where the completion of the specified period was crucial, even down to the last minute, to meet the criteria stipulated in the law.

In the present case, the Court concluded that the holding period should be calculated without excluding any day, including the date of acquisition and transfer, to determine whether the asset qualifies as a long term capital asset. The expression "not more than" in Section 2(42A) was interpreted to encompass the entire period of holding, without excluding fractions of a day. Therefore, if an asset is held for 12 or 36 months and sold the next day after the period ends, it would be considered a long term capital asset.

Ultimately, the Court ruled in favor of the appellant-assessee, holding that the holding period should be computed inclusively, and the appeal was allowed with no order as to costs.