2024 (12) TMI 1161 - AT - Income Tax

Crypto currency - income earned on account of sale of Bitcoin - whether taxable as capital asset u/s 2(14) of the IT Act, 1961 in as much as the same is defined by FA, 2022 w.e.f 01.04.2022 u/s 2(47A)? - AO proposing to tax the net gains on sale of Bitcoins as Income from other sources and accordingly his claim for exemption u/s 54F of the Act was not considered as allowable. HELD THAT - Since crypto currency is specifically incorporated in the statute as an asset, it means that even before 01.04.2022 it was an asset and therefore gain on sale of crypto currency has to be taxed under the head capital gain and not under the head income from other sources before the law maker made the specific provision in the Act. Even otherwise, looking to the profile of the assessee we note that the only source of income of assessee is from salary and he has invested his savings in shares / crypto currency. He is not regularly dealing in purchase/ sale of shares/ crypto currency. His intention is to hold for long term capital gain which is more evident from the fact that he made investment in crypto currency during FY 2015-16 which was sold in FY 2020-21 and the gain on sale of crypto currency is invested for purchase of house. This proves that intention of the assessee in making investment in crypto currency is to hold it and to earn long term capital gain. Gain on sale of crypto currency (bitcoin) prior to AY 2022-23 is chargeable to tax as capital gain. Ground no. 1 raised by the assessee is allowed. Deduction u/s 54F - As we have in ground no. 1 held that the income on sale of crypto currency is chargeable to tax under the head long term capital gain since assessee has hold crypto currency for more than 36 months, therefore, AO is directed to allow claim of deduction u/s 54F of the Act to the assessee. Based on this observation ground no. 2 raised by the assessee is allowed.

Issues Involved:

1. Whether cryptocurrency (Bitcoin) qualifies as a capital asset under Section 2(14) of the Income Tax Act, 1961.
2. Whether the gains from the sale of cryptocurrency should be taxed as capital gains or as income from other sources.
3. Eligibility for deduction under Section 54F of the Income Tax Act on the gains from the sale of cryptocurrency.

Detailed Analysis:

Issue 1: Classification of Cryptocurrency as a Capital Asset

The primary contention revolves around whether Bitcoin qualifies as a "capital asset" under Section 2(14) of the Income Tax Act. The assessee argued that Bitcoin should be considered a capital asset, as Section 2(14) broadly defines a capital asset as "property of any kind held by an assessee." The assessee further contended that unless explicitly excluded, any property should be treated as a capital asset. The Assessing Officer (AO), however, did not accept this argument, stating that Bitcoin does not qualify as a property in the ordinary sense, as it lacks inherent value and utility, unlike traditional assets such as stocks, bonds, or real estate. The AO noted that Bitcoin is not a legal tender and does not represent an investment in a real asset class. Consequently, the AO concluded that Bitcoin does not fall within the definition of a capital asset under Section 2(14).

Issue 2: Taxation of Gains from Cryptocurrency

The AO determined that since Bitcoin does not qualify as a capital asset, the gains from its sale should not be taxed as capital gains. Instead, the AO taxed the net gains of Rs. 6,62,96,741/- as "income from other sources" under Section 56 of the Act. The AO's reasoning was based on the absence of specific provisions in the Act to tax transactions involving Virtual Digital Assets (VDAs) before the Finance Act 2022, which introduced Section 2(47A) to define VDAs. The assessee challenged this view, arguing that the gains should be taxed as capital gains, given that Bitcoin was held for more than three years, and the intention was to hold it as a long-term investment. The assessee also cited other assessment orders where similar gains were treated as capital gains.

Issue 3: Eligibility for Deduction under Section 54F

The denial of the deduction under Section 54F was a direct consequence of the AO's decision to tax the gains as income from other sources. The assessee claimed a deduction of Rs. 4,95,68,910/- under Section 54F, arguing that the gains from the sale of Bitcoin were long-term capital gains. The AO's rejection of this claim was based on the classification of the gains as income from other sources. However, the assessee contended that since the gains should be considered as capital gains, the deduction under Section 54F should be allowed.

Tribunal's Findings:

The Tribunal examined the definition of "capital asset" under Section 2(14) and acknowledged that the term "property" is not explicitly defined in the Act. It noted that the broad definition could include rights associated with investments like Bitcoin. The Tribunal found that the AO's interpretation was too restrictive and that the intention of the assessee was to hold Bitcoin as a long-term investment, which aligns with the characteristics of a capital asset. The Tribunal also considered the legislative intent behind the Finance Act 2022, which recognized VDAs as assets subject to specific taxation rules, indicating that Bitcoin could be considered a capital asset even before the amendment.

Consequently, the Tribunal ruled in favor of the assessee, holding that the gains from the sale of Bitcoin should be taxed as long-term capital gains. As a result, the deduction under Section 54F was also allowed, as the gains were now classified under the head of capital gains. The Tribunal emphasized that when two interpretations of a statutory provision are possible, the interpretation favoring the taxpayer should be adopted, as supported by precedent from the Supreme Court.

In conclusion, the appeal was allowed, and the gains from the sale of Bitcoin were treated as capital gains, with the corresponding deduction under Section 54F granted to the assessee.

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