Income Tax Appellate Tribunal - Kolkata
Assistant Commissioner Of Income-Tax vs B.K.A.V. Birla on 24 August, 1990
Equivalent citations: [1990]35ITD136(KOL)
ORDER
Vimal Gandhi, Judicial Member
1. This appeal by the Revenue and the Cross Objection by the assessee: M/s. B.K.A. V. Birla (HUF) are directed against the order of the Commissioner of Income-tax (Appeals) dated 29-6-88. Both in the appeal as well as in the cross objection, the dispute relates to computation of capital gain arising out of sale of shares of M/s. Zenith Steel Pipes & Industries Ltd. (hereinafter referred to as'Zenith Steel'.)
2. The brief facts relating to the controversy are that the assessee acquired 11,533 shares of Zenith Steel in the year 1961. These shares were retained as "investment" till 1972 when the shares were converted into stock-in-trade. Between the years 1975 and 1979 the assessee was further allotted 14,430 bonus shares of Zenith Steel. The total shareholding of the above Company was again converted to investment on 9th September, 1982. All the shares were sold in August 1984. The assessee earned a profit of Rs. 6,18,141 on sale of shares and claimed the same to be long term capital gain.
3. From and out of the capital gain shown, the assessee claimed deduction under section SOT as also the benefit of Section 54E of the Act for having invested the sale consideration as provided in the section. The ITO, however, treated the gain as short term capital gain and, therefore, did not give the benefit either of Section 54E or Section 80T of the Act. The whole of capital gain was charged to tax.
4. The assessee challenged the assessment of capital gain in appeal before the CIT( A) and contended that the shares were reconverted into portfolio of investment in September 1982 but the ITO failed to appreciate that the assessee had held the shares since 1961. In view of definition of "short-term capital" under Section 2(42A) the shares held for a period of more than 36 months were long term capital assets. The assessee before the CIT(A) relied upon the decision of the Gujarat High Court in the case of CIT v. Chunilal Khushaldas [1974] 93 ITR 369 and of the Bombay High Court in the case of CWT v. C. Rai [1979] 119 ITR 553. In the alternative, it was claimed that if the shares in question were to be considered as short term capital assets having been acquired only in September 1982, then the market value of the shares on the date of conversion as "investment" should be deducted from the sale consideration for the purpose of computing the capital gain.
5. The CIT(A) accepting the main contention of the assessee and considering the definition of "short-term capital asset" as per Section 2(42A), held that the shares of Zenith Steel were held by the assessee for more than 36 months since the shares were acquired in 1961. According to the CIT(A), Section 2(42A) does not require that the assets should be held as "capital assets" for more than 36 months. Although the shares were held for part of 36 months as stock-in-trade that did not alter materially the position of holding of the assets. As per the decision of the Gujarat High Court referred to and mentioned by the CIT(A), the capital assets must exist as identifiable assets during the period of 36 months. As the shares were held by the assessee since the year 1961, they were "long-term capital assets" in the hands of the assessee when sold in August 1984. The CIT(A) accordingly directed the ITO to allow exemption under Section 54E and deduction under Section 80T of the Act on the capital gain as per the provisions of law. The CIT(A) did not consider or decide the assessee's alternative submission advanced before him.
6. The Revenue has challenged the order of the CIT(A) and the assessee in the cross objection has reiterated its alternative submission not considered by the CIT(A).
7. We have heard the rival submissions of the parties. The first question to be decided was and is whether the assessee held the shares in question as long-term capital assets at the time of sale in August 1984. To appreciate the rival stand of the parties, it is necessary to consider the definitions of "capital asset" as per provisions of Section 2(14) and of "short-term capital asset" as per provisions of Section 2(42A) of the Act. The terms are defined as under :
2(14) 'Capital asset'means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include -
(i) any stock-in trade, consumable stores or raw materials held for the purposes of his business or profession;
** ** ** 2(42A)'short-term capital asset'means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer. Explanation: (i) In determining the period for which any capital asset is held by the assessee-
(a) In the case of a share held in a company in liquidation, there shall be excluded the period subsequent to the date on which the company goes into liquidation;
(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;
(c) in the case of a capital asset being a share or shares in an Indian company, which becomes the property of the assessee in consideration of a transfer referred to in Clause (vii) of Section 47, there shall be included the period for which the share or shares in the amalgamating company were held by the assessee.
(ii) In respect of capital assets other than those mentioned in Clause (i), the period for which any capital asset is held by the assessee shall be determined subject to any rules which the Board may make in this behalf.
8. The departmental representative, Shri B. Biswas drew our attention to the above definitions and submitted that to qualify as 'long-term capital asset' the' capital asset' must be held by the assessee for a period more than 36 months. A stock-in-trade cannot be treated as 'capital asset' in view of Section 2(14) of the Act.
9. Shri R. N. Bajoria, the learned counsel for the assessee, did not dispute that so long the shares were held as stock-in-trade, they were not capital assets. His contention was that as per Section 2(42A) of the Act, it is necessary that the asset should be held as capital asset at the time of sale but it is not necessary that it should be held as "capital asset" for a period exceeding 36 months to qualify as long-term capital asset. Only thing necessary was that the assessee should hold the assets fora period exceeding 36 months. Thus, the period for which the assets were held as stock-in-trade was also to be taken into account for determining whether the assets sold were 'short-term' or 'long-term capital assets'.
10. On consideration of the rival submissions, we find force in the submissions advanced on behalf of the Revenue. The definition of term "short-term capital asset" as per Section 2(42A) makes clear that it is "capital asset" which should be held for a period less than 36 months and not "an asset". The definition uses the words "capital asset" and we see no reason for ignoring the word "capital" in it. The distinction and the dividing line between "long-term capital asset" and "short-term capital asset" is period of 36 months. The scale of time is to be applied to a "capital asset" and not to an ordinary "asset". The word "asset" is not defined and "short-term capital asset" is defined only for computing income under Chapter 'E' relating to capital gains. The capital gain arises on the transfer of a capital asset and, therefore, holding as an asset is not relevant for purposes of Chapter E. The clear scheme the Income-tax Act is to move backward in time from the date of the transfer of "capital asset" to determine whether gain or loss arising is long-term or short term. If capital asset is held for less than 36 months, it is short term. Otherwise it is long term. We therefore, see no justification for including the period for which the shares were part of stock-in-trade for determining whether these were held as long term capital assets. For all the above reasons, we hold that the assessee-HUF held shares in question for a period of less than 36 months and as short term capital assets. Modifying the order of the CIT(A), we direct the ITO to compute the capital gain as accruing on transfer of short-term capital assets.
11. Now, we take up the cross objection. In the cross objection the assessee claims, in the alternative, that market value of shares as on the date of conversion into investment should be deducted from the sale proceeds while determining the capital gain. This, according to Shri Bajoria has to be done if the shares are held to have been acquired on 9th September 1982 and are treated as 'short-term capital assets'.
12. We have considered the above submissions carefully; but unable to accept the same in view of the decisions of several High Courts. In the case of Ranchhodbhai Bhaijibhai Patel v. CIT [1971] 81ITR 446 (Guj.), the assessee for long held agricultural land which at the relevant time stood excluded from the definition of "capital asset". On 23-1-63 the assessee got permission to put the land to non-agricultural use. On that date the land became a capital asset. The land was sold in April and July 1963. From the sale proceeds the assessee claimed that it was entitled to deduct as "cost of acquisition of capital asset", the market value of the land as on 23-1 -63 when it became capital asset. Their Lordships of the Gujarat High Court held:
On the facts, at the time of sale the lands were not agricultural lands within the meaning of Section 2(14) of the Act. Therefore, profits from the sales were chargeable as capital gains.
The cost of acquisition of the lands was their cost when they were first acquired by the assessee and since the lands had been acquired prior to 1st January 1954, the assessee had the option under Section 55(2) to substitute the fair market value of the lands as on 1st January 1954.
The above decision of the Gujarat High Court has been followed by the Madras High Court in the case of M. Venkatesanb v. CIT [1983] 144 ITR 886, by the Karnataka High Court in the case of CIT v. M. Ramaiah Reddy [1986] 158 ITR 611/24 Taxman 764 and by the Kerala High Court in the case of CIT.v Smt.M.Subaida Beevi [1986] 160 ITR 557. It was again applied by the Gujarat High Court in the case of B.M. Vyas v. CIT [1986] 159 ITR 141.
13. In view of above authoritative pronouncement of various High Courts, there is no question of deducting the market vlaue of shares on the date these became capital asset from the sale consideration. Only "cost of acquisition" is to be deducted for determining the capital gains accruing to the assessee. For the above reasons, we do not find any force in the cross objection filed by the assessee. The same is dismissed.
14.In the result, the appeal is allowed whereas the cross objection is dismissed.