Issue :-An assessee has been carrying on business in real estate as flat promoter/developer by treating his self acquired/inherited asset as business asset and this has been accepted by the Income-tax department and income generated from his activities has been treated as business income. Now the assessee has converted his business asset into capital asset and wants to dispose of the same as he finds that the asset would fetch a good price in the market. The question which immediately arises and needs an answer is “what would be the period of holding of the asset-whether it would relate back to the date when (personal) capital asset was converted into business asset a few years back or the date of conversion now from business asset back to capital asset?”.
Relevant Sections
1. Section 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 ;
(ii) personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes-
(a) jewellery ;
(b) archaeological collections ;
(c) drawings ;
(d) paintings ;
(e) sculptures ; or
(f) any work of art.
Explanation.- For the purposes of this sub-clause, “jewellery” includes-
(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel ;
(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel ;
(iii) agricultural land in India, not being land situate-
(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year ; or
(b) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette ;
(iv) 6½ per cent. Gold Bonds, 1977, or 7 per cent. Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government ;
(v) Special Bearer Bonds, 1991, issued by the Central Government ;
(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999, notified by the Central Government ;
2. Section 2 (29A)-
“long-term capital asset” means a capital asset which is not a short-term capital asset ;
3. Section 2 (42A)-
(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 :
Provided that in the case of a share held in a company or any other security listed in a recognised stock exchange in India or a unit of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963), or a unit of a Mutual Fund specified under clause (23D) of section 10 65or a zero coupon bond, the provisions of this clause shall have effect as if for the words “thirty-six months”, the words “twelve months” had been substituted :
Explanation 1.- (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;
(d) in the case of a capital asset, being a share or any other security (hereafter in this clause referred to as the financial asset) subscribed to by the assessee on the basis of his right to subscribe to such financial asset or subscribed to by the person in whose favour the assessee has renounced his right to subscribe to such financial asset, the period shall be reckoned from the date of allotment of such financial asset ;
(e) in the case of a capital asset, being the right to subscribe to any financial asset, which is renounced in favour of any other person, the period shall be reckoned from the date of the offer of such right by the company or institution, as the case may be, making such offer ;
(f) in the case of a capital asset, being a financial asset, allotted without any payment and on the basis of holding of any other financial asset, the period shall be reckoned from the date of the allotment of such financial asset ;
(g) 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 demerger, there shall be included the period for which the share or shares held in the demerged company were held by the assessee ;
(h) in the case of a capital asset, being trading or clearing rights of a recognised stock exchange in India acquired by a person pursuant to demutualisation or corporatisation of the recognised stock exchange in India as referred to in clause (xiii) of section 47, there shall be included the period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatisation ;
(ha) in the case of a capital asset, being equity share or shares in a company allotted pursuant to demutualisation or corporatisation of a recognised stock exchange in India as referred to in clause (xiii) of section 47, there shall be included the period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatisation ;
(hb) in the case of a capital asset, being any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees), the period shall be reckoned from the date of allotment or transfer of such specified security or sweat equity shares ;
(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 :
Explanation 2.- For the purposes of this clause, the expression “security” shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) ;
Explanation 3.- For the purposes of this clause, the expressions “specified security” and “sweat equity shares” shall have the meaning respectively assigned to them in the Explanation to clause (d) of sub-section (1) of section 115WB ;
4. Section 45(2)-
Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.
Answer to the question
An answer to the issue (question) raised is directly provided by the ITAT Delhi Bench in the case of Splendor Constructions (P.) Ltd.v. Income-tax Officer, Ward 9(2), New Delhi- IT Appeal No. 325 (Delhi) of 2007- [Assessment year 2003-04]- October 24, 2008 and reported in (2009)-27-SOT-39(Del)
Catchwords from that decision-
Section 45, read with sections 2(29A) and 2(42A) of the Income-tax Act, 1961 – Capital gains – chargeable as – Assessment year 2003-04 – Whether for ascertaining as to whether a capital asset is a ‘short-term capital asset’ or a ‘long-term capital asset’, period for which said asset is held by assessee as capital asset alone has to be reckoned – Held, yes – Assessee company was engaged in business of developing and selling freehold immovable properties – In financial year 1998-99, assessee company acquired a property i.e. land for a certain consideration and same was subjected to development in financial years 2000-01 and 2001-02 incurring certain expenditure – Cost of acquisition of said property along with development expenditure incurred in respect thereof was shown by assessee company as its stock in trade in balance sheet upto 31-3-2002 – As on 1-4-2002 said property was converted by assessee company into investment and same was sold on 12-12-2002 - Authorities below, taxed profits arising from said sale as short-term capital gain – Whether since assessee sold property in question within 36 months from date it was converted into capital asset, i.e., investment, authorities below rightly brought to tax profit arising from sale of said property as short term capital gain – Held, yes
Reasoning adopted in this case-
The definition of capital asset as given in section 2(14) of the Act does not include stock-in-trade held by the assessee for the purpose of his business or profession. The property in question which was held by the assessee as stock-in-trade could not be regarded as a capital asset up to 31-03-2002 and it became a capital asset only on 01-04-2002 when the same was converted from stock-in-trade into investment. The assessing officer relied on the decision of the Bombay High Court in the case of Commissioner of Income-tax Vs. Santosh L. Chowgule [1998] 234 ITR 0787 wherein it was held that it is only “the life of the converted asset (being share in this case) have to be (re)considered in reckoning whether it is a short-term or long term capital asset. Reliance was also placed by the assessing officer on Commissioner of Income-tax Vs. Chunilal Khushaldas [1974] 093 ITR 0369(Guj) and Manecklal Premchand (Decd.) Vs. Commissioner of Income-tax [1990] 186 ITR 0554(Bom) wherein it was held that bonus shares are acquired by a shareholder when they are issued and they must be taken to be held by the shareholder from the date of their issue and not from the date when the original shares in respect of which they are issued were acquired by the assessee The Tribunal endorsed the views of the assessing officer. In the case before the Gujarat High Court in Commissioner of Income-tax Vs. Chunilal Khushaldas [1974] 093 ITR 0369 bonus shares which were issued on 5th September, 1961 were sold on 12th September, 1961 and it was held by the High Court that the bonus shares were short-term capital assets within the meaning of section 2(42A) as they were not held by the assessee for more than twelve months
Note of Caution
The Third Member Bench decision in the case of Kalyani Exports & Investments (P.) Ltd./Jannhavi Investments (P.) Ltd./Rajgad Trading (P.) Ltd. vs. Deputy Commissioner of Income-tax(2001)-78-ITD-95(Pune)(T.M.), which held that when shares were purchased prior to 01-04-1981 the assessee had to be allowed the option of substitution, should be confined to the facts of the case and is also distinguishable.. In that case the shares which were acquired in 1977 were converted into capital asset on 01-07-1988 at original purchase price of Rs.17 per share and the Tribunal held that the assessee should be permitted to substitute the market value as on 01-04-1981 in lieu of purchase cost as on 01-07-1988 as per provisions of 55(2)(b)(ii).The Tribunal in that case was dealing only with cost of acquisition and not period of holding.
Observations from the decision of the Gujarat High Court in the case of Commissioner of Income-tax Vs. Nirmal Textiles[1997] 224 ITR 0378-
Capital gains are not income which accrues from day-to-day for a spell of period but arise at a fixed point of time, namely, the date of transfer. This is unlike the income arising or accruing as profits and gains of a business to be computed in terms of section 28 of the Income-tax Act, 1961, where the profits and gains can only be said to accrue at the end of the previous year when the result of the working of business for the entire period is known. Section 48 of the Income-tax Act, 1961, which prescribes the mode of computation and deduction in respect of income chargeable under the head “Capital gains”, divides types of capital gains into two categories, namely, capital gains general and capital gains arising from transfer of a long-term capital asset. The period for the holding relates to the date of transfer and the transfer of such long-term asset on the date of transfer falls into the category of long-term capital gains. The question whether the capital asset which was transferred was a long-term capital asset or a short-term capital asset has direct relevance and nexus to the date of transfer, whether on that date it was a long-term capital asset or a short-term capital asset.
Conclusion :-From the above discussion it is quite clear that the date of conversion from business asset to capital asset is alone relevant for determining the period of holding of the capital asset. For example if the initial date of holding of the asset as business asset is (say) 01-04-2000 and date of conversion into a capital asset is (say) 31-03-2009 and the asset is sold on 20-08-2009 the asset will be treated as only a short-term capital asset and the period of reckoning (holding) would start from 31-03-2009 and the initial date of 01-04-2000 in this case is irrelevant
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