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High Court of Judicature at Bombay
M.S. SANKLECHA & G.S. KULKARNI, JJ.
Commissioner of Income-tax, Mumbai City-II - Appellant
Versus
Sham L. Chellaram - Respondent
IT Appeal No. 549 of 2000
Decided on: 18-02-2015
Income Tax Act - Short-term capital gain - Section 115E - 115C, 115E - The court discussed the interpretation of Section 115E of the Income Tax Act, which provides for a concessional rate of tax for non-resident Indians on investment income or income by way of long-term capital gains. The court considered whether short-term capital gains derived from foreign exchange assets would be covered by Section 115E and held that the benefit of concessional tax under Section 115E is available only for investment income or income by way of long-term capital gains, and not for short-term capital gains. The court also analyzed the conflicting decisions of the ITAT and the interpretation of 'investment income' and 'derived from' in the context of short-term capital gains, ultimately ruling in favor of the Revenue.
Fact of the Case:
The case involved an appeal by the revenue under Section 260A of the Income Tax Act, 1961, challenging the order of the Income Tax Appellate Tribunal (ITAT) regarding the tax treatment of short-term capital gains derived from the sale of bonus shares received in convertible foreign exchange.
Finding of the Court:
The court found that the benefit of concessional tax under Section 115E of the Act is available only for investment income or income by way of long-term capital gains, and not for short-term capital gains. It held that the income arising on the sale of assets leading to short-term capital gains is not income derived from foreign exchange assets and does not qualify as investment income within the meaning of Section 115E of the Act.
Issues: The main issue was whether short-term capital gains derived from foreign exchange assets would be covered by Section 115E of the Income Tax Act, and whether the benefit of concessional tax at 20% would apply to such gains.
Ratio Decidendi: The court's decision was based on the interpretation of Section 115E of the Income Tax Act, the definition of 'investment income' in Section 115C, and the distinction between income derived from an asset and income arising on the sale of assets leading to short-term capital gains.
Final Decision: The court allowed the appeal by the revenue, ruling that the benefit of concessional tax under Section 115E of the Act is not available for short-term capital gains, and that such gains do not qualify as investment income within the meaning of Section 115E.
M.S. Sanklecha, J.
1. This appeal by revenue under Section 260A of the Income Tax Act, 1961 (the 'Act') assails the order dated 12th July 1999 passed by the Income Tax Appellate Tribunal (the 'ITAT').
2. The Assessment Year involved is Assessment Year 1992-93.
3. The appeal was admitted on 10th September 2001 on the following substantial question of law:
"Whether on facts, the ITAT was right in holding that short-term capital gain was derived from foreign exchange asset. If so, whether on sale of bonus shares investment income within Section 115E of the Act accrued?"
4. It is an admitted position that for the purposes of this appeal, the Respondent-Assessee is a non-resident under the Act. During the previous year relevant to the Assessment Year 1992-93, Respondent-Assessee sold 10,000 shares of Tata Chemicals Ltd. received by him as bonus shares. The shares were sold after obtaining permission from the Reserve Bank of India. The original shares on which the aforesaid bonus shares had been received was purchased by Respondent-Assessee in the year 1997 in convertible foreign exchange.
5. In its return of income for the Assessment Year 1992-93, the Respondent-Assessee claimed the benefit of Chapter XII-A of the Act in respect of the short-term capital gains made on sale of 10,000 bonus shares of Tata Chemicals Ltd. This was claimed on the ground that any income earned out of investment would be covered by Section 115E of the Act chargeable to income tax at a concessional rate of 20%. However the Assessing Officer by his order dated 19th August 1993 did not accept the Respondent's contention and held that the benefit of concessional rate of income tax is not available to income earned by way of short-term capital gains. Thus bringing to tax the short-term capital gains on sale of bonus shares to tax at regular rates.
6. Being aggrieved, the Respondent-Assessee carried the matter in appeal to Commissioner of Income Tax (Appeals) ('CIT(A)'). By an order dated 21st September 1994, the CIT(A) allowed the Respondent-Assessee's appeal by following the decision of ITAT in Smt. Trishala Jain v. Deputy Commissioner of Income Tax reported in 34 ITD 523. The CIT(A) held that the concessional rate of income tax at 20% applied not only to long-term capital gains but also to investment income. Thus the sale of 10,000 bonus shares of Tata Chemicals Ltd. although short term capital gains was an investment income and thus covered by Section 115E of the Act attracting concessional rate of income tax.
7. Being aggrieved, the revenue carried the order of the CIT(A) in appeal to the ITAT. By the impugned order dated 12th July 1999, the ITAT upheld the order of the CIT(A) by following it's decision in the matter of Smt. Trishala Jain (supra).
8. Before considering the submissions of the respective Counsel, it may be convenient to reproduce the relevant provisions of Chapter XII-A of the Act.
"Definitions.
115C. In this Chapter, unless the context otherwise requires,-
(a) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder;
(b) "foreign exchange asset" means any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange;
(c) "investment income" means any income derived from a foreign exchange asset;
(d) "long-term capital gains" means income chargeable under the head "Capital gains" relating to a capital asset, being a foreign exchange asset which is not a short-term capital asset;'
(e)** ** **
(f) "specified asset" means any of the following assets, namely:-
(i) shares in an Indian company;
(ii) to (v)** ** **
115E. (1) Where the total income of an assessee, being a non-resident Indian, consists only of investment income or income by way of long-term capital gains or both, the tax payable by him on his to
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