2021 (9) TMI 866 - HC - Income Tax

Long term capital asset as per Section 2(42A) - period of holding - Whether Tribunal was right in holding that the shares/debentures not listed in the recognized stock exchange could be treated as a long term capital asset as per Section 2(42A)? - HELD THAT - The expression listed in a recognized stock exchange in India is only used for category of 'any other security' and not for the category of 'share held in a company'. Further after taking into consideration that the condition for the period of holding was curtailed from 36 months to 12 months by the Finance Act, 1987, it was only for 'share held in a company' - when the amendment by the Finance Act 1994 was brought in the statute so far as the category 'shares held in a company' was concerned, the same was not disturbed, albeit, new category was included like 'any other security listed in recognized stock exchange in India'. ITAT took note of the Memorandum explaining the provision in the Finance Bill and observed that the Memorandum clearly makes a distinction that there are many financial instruments other than the company shares through which the investor are entering capital market and in order to provide such units and all securities traded in the recognized stock exchange, a level playing field with the company's share is proposed to be amended and thus, the said Memorandum clearly makes a distinction between the company shares and other than company shares.The above decision of the ITAT has laid down the correct legal principle which we have discussed in the preceding paragraphs. On a search made, we find that the Revenue has not challenged the order of the ITAT before the Court, but it is the assessee, who has challenged it before the High Court of Delhi and obviously not against the above finding, which was rendered in favour of the assessee. The above Circular issued by the CBDT will clearly indicate that all shares whether listed or unlisted have enjoyed the benefit of shorter period of holding and even any investment in shares of private limited companies enjoyed long-term capital gains on its transfer after twelve months. - Decided against revenue.

Summary

Issues Involved:
- Whether shares/debentures not listed in a recognized stock exchange can be treated as a long-term capital asset as per Section 2(42A) of the Income Tax Act, 1961.

Detailed Analysis of the Judgment:

1. Background and Proceedings:
The Revenue filed an appeal under Section 260A of the Income Tax Act, 1961, challenging the order of the Income Tax Appellate Tribunal (ITAT) for the assessment year 2007-08. The primary issue was whether shares not listed on a recognized stock exchange could be considered a long-term capital asset under Section 2(42A) of the Act.

2. Assessee's Return and Initial Assessment:
The assessee, an exporter of agricultural commodities and iron ore, filed their return of income for the assessment year 2007-08, which was processed under Section 143(1) of the Act. The case was selected for scrutiny, and the assessment was completed under Section 143(3).

3. Revision by CIT:
The Commissioner of Income Tax (CIT) exercised powers under Section 263, noting that the Assessing Officer (AO) failed to ascertain details regarding the shares acquired by the assessee. The CIT deemed the assessment order erroneous and prejudicial to the Revenue's interest, directing the AO to rework the short-term capital gains.

4. Appeal to CIT(A):
The assessee contended that shares held for more than twelve months should be treated as long-term capital assets, as per the proviso to Section 2(42A). The CIT(A) agreed, stating that even shares of private limited companies held for more than twelve months qualify as long-term assets. The appeal was partly allowed.

5. Appeal to ITAT:
The Revenue appealed to the ITAT, arguing that the proviso to Section 2(42A) applies only to shares listed on a recognized stock exchange. The ITAT held that there is no distinction between unlisted and listed shares for classifying them as short-term capital assets under the Act.

6. Legislative Intent and Amendments:
The court examined the explanatory notes on the Finance Act, 1994, which clarified that the holding period for certain financial instruments, including shares, was reduced to twelve months. The court noted that the legislative intent was to provide a level playing field for various securities, including shares.

7. Definition of Short-Term Capital Asset:
The court analyzed the definition of "short-term capital asset" under Section 2(42A), noting that it includes shares held for not more than thirty-six months. The proviso reduces this period to twelve months for shares and other specified securities.

8. Interpretation of the Proviso:
The court emphasized the use of the word "or" in the proviso, indicating that shares held in a company do not need to be listed to qualify for the reduced holding period. The court rejected the Revenue's argument that the definition of "securities" under the Securities Contracts (Regulation) Act should influence the interpretation of Section 2(42A).

9. Relevant Case Law:
The court referred to the case of Mohan Virwani vs. Deputy Commissioner of Income Tax, where it was held that shares in a private limited company held for more than twelve months qualify as long-term capital assets. The court also cited a decision by the ITAT, Delhi Bench, which supported this interpretation.

10. CBDT Circular:
The court noted the CBDT Circular No.01/2014, which clarified that all shares, whether listed or unlisted, benefit from the shorter holding period for long-term capital gains.

Conclusion:
The court concluded that the shares held by the assessee, even though not listed, qualify as long-term capital assets if held for more than twelve months. The appeal by the Revenue was dismissed, and the substantial question of law was answered in favor of the assessee.