Calcutta High Court
Commissioner Of Income-Tax vs Debmalya Sur on 26 April, 1993
Equivalent citations: [1994]207ITR996(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, the following questions of law have been referred by the Tribunal for the assessment year 1981-82 :
"(1) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that even if the period of ownership held by the appellant's mother is not taken into account, the assessee became the owner from October 27, 1965, and, therefore, in accordance with Section 2(42A), it does not become a short-term capital asset, is based on any material or perverse ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the National Defence Gold Bonds, 1980, and the primary gold are the same capital asset whereas the former is not at all a capital asset within the meaning of Section 2(14)(iv) of the Income-tax Act, 1961 ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the capital gain arising out of the sale of primary gold by the assessee was a long-term capital gain?"
2. The facts in brief are that the assessee received the National Defence Gold Bonds, 1980, as gift from his mother on October 8, 1979. The bonds were acquired by the mother in exchange for gold on October 27, 1965. On redemption, the assessee received 4,915 grams of primary gold on February 12, 1981. Out of such gold, he sold 3,100 grams at a consideration of Rs. 5,06,900 on March 24, 1981, resulting in a capital gain of Rs. 34,300, the cost of acquisition of the gold being taken as per value mentioned in the Government notification, dated September 22, 1980. In his return of income for the assessment year 1981-82, filed on July 8, 1981, the assessee disclosed such profit as short-term capital gains. In the course of assessment, the assessee came up with a plea that the gain should be considered as long-term capital gains computing the period of his holding from the date of acquisition of the gold bond by his mother, the donor, in terms of Clause (42A) of Section 2. The Income-tax Officer, however, rejected the claim and assessed the capital gains as short-term capital gains taking the date of maturity which is October 27, 1980, as the date of acquisition of gold by the assessee. Thus, the time between the date of acquisition and the date of sale, i.e., October 27, 1980, and March 24, 1981, was less than six months. The gain was, therefore, treated as a short-term capital gain. In appeal, the Appellate Assistant Commissioner also did not accept the assessee's contention that the period of holding should be reckoned from the period of acquisition of the bond by the mother, viz., October 27, 1965. The assessee took the matter in appeal before the Tribunal.
3. The Tribunal held that the gold bond was obtained by the mother of the assessee (donor) on October 27, 1965, and the gold was lying with the Reserve Bank of India till it was redeemed on February 12, 1981, for a period of about 15 years. The Tribunal also held that the profit on sale of such gold should be treated as a long-term capital gain. The Tribunal considered the provisions of Section 49 and Section 2(42A) of the Act. If both these sections are to be read together, then the real interpretation is that, in the period of holding by the assessee who became the owner of the gold under a gift, there shall be included the period for which the asset was held by the donor, the previous owner referred to in the said section as per Clause (b) of the Explanation to Clause (42A) of Section 2. Short-term capital asset means a capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer. Even if the period of ownership held by the assessee's mother is not taken into account, the assessee became the owner from October 27, 1965, in accordance with Section 2(42A). It does not become a short-term capital asset. It is a different point that the gold deposited in the National Defence Gold Bonds is not a capital asset but, after redemption, this aspect assumes importance. The assessee himself held 4,915 grams of gold as owner from October 27, 1965, and he got it redeemed on February 12, 1981. The gold bonds matured on October 27, 1980. The gift was made immediately on the date when the gold was deposited in the National Defence Bonds, 1965. If the period of the gold bond is taken as 15 years, then the assessee held the gold as owner for a period of 15 years. Calculating the period in this way and even taking the ownership of the assessee's mother into account as per Clause (b) of the Explanation to Clause (42A) of Section 2 of the Act read with Section 49, it would be more than 15 years. Therefore, it would be incorrect to say that the capital gain arising out of sale of gold is a short-term capital gain.
4. We have heard the rival contentions which consisted of the same pleas as urged before the Tribunal. Here the crucial point is whether the gold and the gold bonds acquired in exchange for gold and, vice versa can be treated as identical assets. Implicit in the assessee's contention is the proposition that the gold bonds and the gold received on redemption on maturity of the bonds do not lead to emergence of separate capital assets. Gold bonds are, according to this logic, equivalent to the quantity of gold which the bonds entitle the holder to receive in exchange for the matured bonds.
5. Such plea is not based on the right kind of logic. Gold is a distinct asset within the definition of capital asset as contained in Section 2(14) of the Act. Gold bond is another kind of capital asset which is excluded by legislative deliberation from the said definition of capital asset. "Capital asset" is defined in the said provision, in the first instance, in an exhaustive manner and then showing specific exclusions. This would be clear from the relevant excerpt of the said definition.
"'capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include-- . . .
(iv) 61/2 per cent. Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government."
6. This clearly shows that gold bonds, though capital assets, are excluded by legislative discretion from the said definition. Therefore, it is very clear that when a person exchanges gold for the gold bond, he acquires an altogether new species of capital asset which is left out of the scope of capital gains taxation. Again, when a person exchanges the bond for gold, he acquires a new species of capital asset which comes within the net of capital gains tax. What has been urged on behalf of the assessee is based on complete equation between gold and gold bonds. The entire line of submission pressed on behalf of the assessee wants us to assume that, even after conversion of the gold bonds into primary gold, there is no acquisition of a new capital asset and the bonds and the gold remain one and the same asset. The contention is fallacious. In that event, as a logical extension of the theory so advanced, the assessee should be totally free of any liability to pay tax on the gains arising on sale of the gold received on redemption of the bond because the bonds are exempt from capital gains.
7. In our opinion, when the gold is received on redemption of the bond, we have to take it that there is acquisition of gold as a fresh asset by conversion of another asset, viz., the gold bond. So, the Income-tax Officer's inference that the date of acquisition of the gold sold should be reckoned from the date of maturity of the bond is correct. In fact, the date of acquisition could have been taken as the actual date of redemption.
8. The pitfall in the Tribunal's approach is that the Tribunal lost sight of the distinct identities of the gold and gold bond as different assets. The Tribunal has observed that the conclusion that it had drawn is based on Section 49(1)(ii). The said provision deals with the mode of computation of cost with reference to certain modes of acquisition of assets. The relevant part of the provision reads :
"49(1). Where the capital asset became the property of the assessee-
(i) on any distribution of assets on the total or partial partition of a Hindu undivided family ;
(ii) under a gift or will ; . . .
the cost of acquisition of the asset shall be deemed to he the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be."
9. The fundamental misconception in the Tribunal's reading of the provision is that the Tribunal equates the receipt of the gift of the gold bond with the receipt of gold on conversion of the gifted bonds. The provision says that, where the capital asset became the property of the assessee under a gift, its cost should be the cost to the previous owner. It pre-supposes that the asset of which the cost is to be determined is the same asset which the assessee received by way of gift. If the asset gifted is converted into another asset, the former loses its identity and the conversion of the same as an asset becomes an independent asset. The conversion snaps its nexus with the gift and the converted new asset cannot retain its character as the gifted asset. In such a situation, Section 49(1)(ii) has no application. The provision which is directly on the point is not only Section 49, but Section 2(42A) read with Section 49. Section 2(42A) defines "short-term capital assets" to the following effect :
"Section 2(42A).--'Short-term capital asset' means a capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer . . .
Explanation.--(i) In determining the period for which any capital asset is held by the assessee-- . . .
(b) in the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in Sub-section (1) of Section 49, there shall be included the period for which the asset was held by the previous owner referred to in the said section."
10. The Tribunal, in the first instance, showed the inclination to take the entire period of the mother's investment in gold bond on October 27, 1965, as the origin of the holding of the gold which the assessee had sold on March 24, 1981, because, according to the Tribunal, the gold bond was acquired by the mother in October, 1965, as aforesaid and she eventually gifted the bond to her son, the assessee, on October 8, 1979. The subsequent conversion of the gold bond into gold being inconsequential, the holding by the son of the gifted asset continued till he finally sold the actual primary gold. In other words, according to the Tribunal, the gold exchanged for the bond remained gold even while the said gold bond was being held and even the redemption in between the investment in bond and the ultimate sale in the instant previous year did not affect the position. In sum, the Tribunal held that the gold which the mother invested in bonds was not changed into a new asset as a bond and the gold received on redemption is the same gold which the mother invested in October, 1965, in the gold bond.
11. Thus, according to the Tribunal, the period of holding by the assessee of the gold received on redemption of the gold bond and then sold should be reckoned from the date of investment of the gold in the gold bond in October, 1965, or from the date of receipt of the gift of the gold bond by the assessee.
12. In this connection, our attention has been drawn to a Circular No. 415, dated March 14, 1985 (see [1985] 152 ITR (St.) 205), which, in fact, takes the same view as has been canvassed by the Revenue. In the said circular, the Central Board of Direct Taxes has made it clear that no capital gains will arise when the bonds are exchanged for gold on redemption. However, subsequent sale, exchange or transfer of such gold would attract capital gains tax and the question as to whether the gains arising in such cases would be short or long-term would depend upon the passage of time between the date of redemption of the bonds and the subsequent sale of gold received on redemption. Paragraphs 1 and 2 of the said circular are extracted below (see [1985] 152 ITR (St.) 205) :
"'No capital gains will arise when the Bonds are exchanged for gold on redemption. However, any subsequent sale, exchange or transfer of such gold within the meaning of Section 2(47) of the Income-tax Act, would attract capital gains tax in respect of capital gains arising from such sale, exchange or transfer. For the purpose of computation of capital gains, the cost of acquisition of gold will be the market value of the Bonds on the date of redemption.' A question has arisen as to whether such capital gains should be treated as long-term or short-term capital gains. The question has been examined by the Board. The exchange of gold bonds at the time of redemption is an altogether fresh transaction when an assessee acquires a different asset. It has also been decided above that for the purposes of the computation of capital gains, the cost of acquisition of gold would be the market value of the bonds on the date of redemption. The material date in this case would, therefore, be the date of redemption of gold bonds which would be treated as the date of acquisition of the gold. As per Section 2(42A), 'short-term capital asset' means a capital asset held by an assessee for not more than 36 months immediately preceding the date of transfer. The question as to whether the gains arising in such cases would be short or long-term would, therefore, depend upon the time that has passed between the date of redemption of gold bonds and the subsequent sale of gold."
13. In our view, the Tribunal misconstrued the entire legal position which is quite transparent. Since the redemption by itself is a transaction of acquisition of a new capital asset, viz., primary gold, there could be no question of relating back the date of acquisition of such primary gold on redemption either to the date of investment in the gold bonds by the donor or the date of receipt of such bonds as gifts by the donee, the assessee herein. The quantity of gold received on redemption is a new asset unrelated to the mode of acquisition of the gold bond. Therefore, we answer all the three questions in the negative and in favour of the Revenue and against the assessee.
14. There will be no order as to costs.
Shyamal Kumar Sen, J.
15. I agree.