2014 (12) TMI 841 - HC - Income Tax

Nature of shares held by assessee Scope of Section 2(42A) - Whether the shares held by the assessee is a Short Term Capital Asset or a Long Term Capital Asset Held that - A capital asset held by an assessee for not more than 36 months immediately preceding the date of transfer is treated as Short Term Capital Asset - the shares held in a company is a capital asset - shares held in a company which may be a private limited company, a public limited company or a listed company or any other security other than those shares listed in a recognized Stock Exchange in India, if it is held for a period of 12 months, then it ceases to be a Short Term Capital Asset and it becomes a Long Terms Capital Asset - the authorities have not kept this distinction in mind - They have misread the Section resulting in the interpretation which they have placed - the interpretation is contrary to the express words used in the statutory provision which runs counter to the intent behind the provision thus, the order of the Tribunal is set aside and the assessee is entitled to the benefit of her capital asset being treated as Long Term Capital Asset Decided in favour of assessee.

Issues:
1. Interpretation of holding period for shares of private limited companies for capital gains tax.
2. Applicability of proviso to Section 2(42A) of the Income Tax Act.
3. Imposition of interest under Section 234A and Section 234B of the Act.

Issue 1:
The main issue in this case is the interpretation of the holding period for shares of private limited companies for capital gains tax purposes. The Tribunal held that the period of holding for shares of a private limited company should be construed as 36 months only, resulting in the gain being treated as Short Term Capital Gain. The assessee challenged this interpretation, claiming that the shares should be considered Long Term Capital Assets.

Analysis:
The court analyzed Section 2(42A) of the Income Tax Act, which defines Short Term Capital Asset and provides a proviso for certain exceptions, including shares held in a company. The court noted that the law does not differentiate between shares held in private limited, public limited, or listed companies. The proviso states that if such shares are held for 12 months, they are considered Long Term Capital Assets. The court referred to a CBDT Circular to support this interpretation, emphasizing that shares held in a company for 12 months are treated as Long Term Capital Assets. The court found that the authorities had misinterpreted the section and ruled in favor of the assessee, allowing the appeal and granting the benefit of the capital asset being treated as a Long Term Capital Asset.

Issue 2:
The second issue involves the applicability of the proviso to Section 2(42A) of the Income Tax Act to shares of private limited companies.

Analysis:
The court reiterated that the proviso to Section 2(42A) includes shares held in any company, without distinction between private limited, public limited, or listed companies. The court emphasized that if such shares are held for 12 months, they qualify as Long Term Capital Assets. The court found that the authorities had failed to consider this distinction, leading to an incorrect interpretation of the law. As a result, the court ruled in favor of the assessee, setting aside the impugned orders and granting the benefit of Long Term Capital Asset treatment.

Issue 3:
The final issue pertains to the imposition of interest under Section 234A and Section 234B of the Income Tax Act.

Analysis:
The court did not provide detailed analysis of this issue in the judgment excerpt provided. However, it can be inferred that since the court ruled in favor of the assessee on the primary issues related to the capital gains tax treatment of the shares, the imposition of interest under Sections 234A and 234B was likely overturned along with the rest of the impugned orders.

In conclusion, the High Court of Karnataka, in the judgment delivered by N. Kumar and Mrs. Rathnakala, JJ., clarified the interpretation of the holding period for shares of private limited companies for capital gains tax purposes. The court emphasized that shares held in any company, including private limited companies, qualify as Long Term Capital Assets if held for 12 months. The court found the authorities' interpretation to be incorrect, setting aside the orders and ruling in favor of the assessee.

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