Short-term capital assets are capital assets which are held by an assessee for less than thirty six months immediately preceding the date of its transfer. In case of shares, debentures, Units of Unit Trust of India and Mutual funds, the term would reduce to twelve months instead of thirty six months.
As per S. 2(42A) of the Income Tax Act, 1961, if an asset is received by way of inheritance, the period of holding of the previous owner will also be taken into account in determining whether it is a long- term or short-term capital asset.
Period of Holding plays an important role to determine whether it is a Short-term or Long-term capital asset. 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. 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.
Related Cases:
S. 2(42A), Expln. 1(b), (29A), 48, Expln. (iii), 49(1) of IT Act, 1961—Capital gain—u/s 2(42A), Expln. 1(b), 2(29A), 48 and 49(1) of the Act, 1961, read together, no capital gains are chargeable to tax on a gift, as transaction involving a gift of a capital asset is not regarded as a transfer for the purpose of S. 45 of the Act. However, where such capital asset becoming the property of the assessee under a gift is subsequently transferred as envisaged in S. 45, the capital gains arising from such transfer are chargeable to tax and the date and cost of acquisition of the assessee for the purpose of computing the long terms capital gains arising from the transfer of a capital asset which has become property of the assessee under the gift, the first year in which the capital asset held by the assessee has to be determined to work out the indexed cost of acquisition as envisaged in Explanation (iii) to S. 48 after taking into account the period for which the said capital asset was held by the previous owner. Hence, the indexed cost of acquisition of such capital asset has to be computed with reference to the year in which the previous owner first held asset—DCIT vs. Manjula J. Shah [2009] 318 ITR 417 (ITAT-Mumbai)
S. 2(29A), (42A), 45(1), 48 of IT Act, 1961—Capital gain—For the purpose of S. 48 of the Act, one must keep in mind an important principle that chargeability and computation have to go hand in hand. the right to subscribe for additional offer of shares/debentures comes into existence only when the company decides to come out with the rights offer. Computation is an integral part of chargeability under the Act—Navin Jindal vs. ACIT [2010] 320 ITR 708 (SC)
S. 2(42A), 47(iv), 48 & 49(1)(iii)(e) of IT Act, 1961—Capital gain—S. 45 specifies that capital gain tax is leviable on any profit and gains arising out of the transfer of capital asset. S. 47(iv) specifies that nothing contained in S. 45 would apply to the transfer as specified in S. 47(iv), therefore, in these circumstances, whether there is a consideration or non consideration, no transfer of a capital asset by a company to its subsidiary company if it falls within the provisions of S. 47(iv) shall be considered as transfer and the provisions of S. 45 would not apply. Therefore, transfer of trademarks being of capital gains asset, gains arising therefrom are chargeable to capital gain tax and cost of acquisition being indeterminable long-term capital gains is not liable to any tax—Trent Brands Ltd. vs. ITO [2010] 127 TTJ 65* (ITAT-Del F)(UO)
S. 2(42A), 2(42B), 17(2), 48, 54EA & 112 of IT Act, 1961—Capital gain—The capital gain arising out of the sale of shares acquired through ESOPs have to be assessed as long-term capital gains. Since the proceeds on sale of shares are assessable as long-term capital gain, the assessee is entitled for all consequential benefits including indexation and exemption u/s 54EA of the Act—ACIT vs. Dhurjati Gupta [2010] 127 TTJ 356 (ITAT-Hyd B)
Income Tax Act, 1961, S. 2(29A), 2(42A), 45, 48(2)—Capital gain—Short term loss or long term loss ” In this batch of civil appeals, the narrow issue which arises for determination is the nature of the loss suffered by the appellant(s) [assessee(s)] – Whether Rs. 2,43,750/- was a short-term capital loss, as contended on behalf of the assessee(s), or whether the said loss was a long-term loss, as contended on behalf of the Revenue?” While allowing the civil appeals, the Supreme Court held that:—”The loss suffered by the assessee amounting to Rs. 2,43,750/- was a short-term loss. Therefore, in our view, the computation of income under the head “Capital gains”, as projected in the chart submitted by the assessee and as computed by the assessee is correct. In other words, the computation of income under the head “Capital gain” submitted to this Court by the assessee is correct and the computation of income made by the Department is erroneous.” Navin Jindal vs. ACIT [2010] 228 CTR 478 (SC)
S. 2(14), 2(42A), 10(38) & 45 of IT Act, 1961—Capital gain—The word asset cannot be segregated from the word capital as capital asset itself has been defined in the Act. No doubt, the assessee has transferred the capital asset which is not in dispute but such capital asset came into existence only from 1st April, 2004 and before which it was merely a stock-in-trade and same cannot be treated as capital asset as per the definition of capital asset. The holding period prescribed in S. 2(42A) has to be reckoned within the asset i.e., shares became capital asset w.e.f. 1st April, 2004. Since the holding period was less than 12 months therefore, exemption of long-term capital gain under s. 10(38) cannot be allowed—Lohia Metals Pvt. Ltd. vs. CIT (2010) 131 TTJ 472 (ITAT-Chennai)
S. 2(42A), 2(47)(v), 2(47)(vi), 45 & 54EC of IT Act, 1961—Capital gain—u/s 2(47)(v) any transaction involving allowing of possession to be taken over or retained in part performance of a contract of the nature referred in S. 53A of the Transfer of Property Act would come within the abmit of S. 2(47)(v). In order to attract S. 53A, the following conditions need to be fulfilled as there should be a contract for consideration; it should be in writing; it should be signed by the transferor, it should be pertained to transfer of immovable property; the transferee should have taken possession of the property; lastly, the transferee should be ready and willing to perform his part of the contract. Assessee-co-owner of a property purchased in the year 1990 along with other co-owners entered into a development agreement on 31st Oct., 2000 with a developer. Under the said agreement, all co-owners get 32.5 per cent of total constructed area form the developer and balance 67.5 per cent was retained by developer. Assessee sold his share during financial year 2004-05 and claimed exemption u/s 54C against the capital gain claiming it to be long-term capital gain. Said development agreement resulted in confirming of the rights of ownership of the developers share of the land upto the developer on the date on which it entered and same would constitute a transfer in relation to developers share in that capital, i.e., 67.5 per cent of land, accordingly the assessees claim seeking exemption u/s 54EC is allowable—ITO vs. Vikash Behal (2010) 131 TTJ 229 (ITAT-Kol)
S. 2(42A) of IT Act, 1961—AY 2004-05—Capital gain—To calculate capital gain the period for holding of shares is to be reckoned from date of allotment only and not from date of right to purchase vested with assessee.
S. 2(42A), 54F & 54EC of IT Act, 1961—Capital gain—Capital gains arising in 2006 on sale of property bequeathed to assessee by her late husband in 1989 through a will duly amended by codicil conveying full ownership right to assessee are long-term capital gains, notwithstanding the fact that relinquishment by her sons and daughters was made in April, 2006—DCIT vs. Smt. Raj. Rajpal (2011) 141 TTJ (UO) 44 (ITAT-Delhi)
S. 2(29A) & 2(42A) of the IT Act, 1961—Capital Gain—Shares allotted to employees under ESOP will be deemed to have been held by assessee when he become the full legal owner thereof and not from the date on which the assessee employee accept the offer of ESOP as the employee become only beneficiary owner of shares at the time of acceptance of the offer and capital gain arising in respect of such shares has to be treated as short term or long term depending on the period of holding—Muthuswamy Ravi Kumar vs. ACIT (ITAT-Bang)
S. 2(14), 2(29A), 2(42A) & 2(42B) of the IT Act, 1961—Capital gain—S. 2(29A) and 2(42A) provides that if capital asset is held for more than 36 months immediately after preceding the date of transfer, it will be treated as long-term capital asset and the gain will be considered as long term capital gain but where from the date of conversion of business asset into investment or capital asset upto date of transfer or sale is less than 36 months as provided in S. 2(29A) and 2(42A), the same has to be treated as short term capital gain and the rate applicable in the case of short-term capital gain is leviable—Splendor Constructions Pvt. Ltd. vs. ITO (2009) 122 TTJ 34 (Del)
Income Tax Act, 1961, S. 2(42A), 14, 35(D), 56, 142(1), 143(1)(a), 143(2), Companies Act, S. 73(3)—Securities Contracts (Regulation) Act, 1956—The following substantial question of law was framed:—“Whether in the facts and circumstances of the case, the Tribunal was right in law in holding that interest earned by the assessee from short term deposits of the share application amount received is not taxable as income from other sources, but is income from profit and gains of business and was liable to be set off against the other liability of the assessee to pay interest on borrowed money?” While dismissing the appeal, the High Court of Judicature for Rajasthan at Jodhpur held that:—that the question as framed is answered in the manner, that the Tribunal was right in law in holding, that interest accrued on the share application money, lying with the Bank, under the mandate of S. 73 of the Companies Act, is not taxable as “Income from other source”, and was required to be set off or adjusted, against the public issue expenses, so as to reduce the amount of public issue expenses, for the purpose of enabling the assessee to claim amortization, under and in accordance with the provisions of S. 35D. CIT Jodhpur vs. Neha Protelins Limited [2007] 6 ITCD 181 (Raj)
S. 2(42A), r/w S. 49 of the IT Act, 1961—Capital gain—After dissolution of the firm in question on 15.4.2001, the entire assets were taken over by the assessee and thereafter on 18.4.2001 these were sold, i.e., just after three days of acquiring them. Hence, the said property or assets would be treated as a short term capital asset. The benefit of S. 2(42A), r/w S. 49(1)(iii)(b) is available only if the dissolution of the firm had taken place at any time before 1.4.1987. Since, the dissolution in question taken place on 15.4.2001, therefore, the benefit of above sections is not allowable to the assessee—P.P. Menon vs. CIT
Capital Gain—S. 2(42A)—IT ACT, 1961—Assistant Commissioner of Income-tax vs. Jaimal K. Shah. [2012] 137 ITD 376 (ITAT-MUMBAI)
Reference:
As Per Section 2(42A), of the Income Tax Act, 1961-
In this Act, unless the context otherwise requires,—
S. (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][or 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 demutualization or corporatization 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 demutualization or corporatization;
(ha) in the case of a capital asset, being equity share or shares in a company allotted pursuant to demutualization or corporatization 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 recognized stock exchange in India immediately prior to such demutualization or corporatization;
(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;
(hc) in the case of a capital asset, being a unit of a business trust, allotted pursuant to transfer of share or shares as referred to in clause (xvii) of section 47, there shall be included the period for which the share or shares were held by the assessee;
Sub-clauses (hd) and (he) by the Finance Act, 2015, w.e.f. 1-4-2016:
(hd) in the case of a capital asset, being a unit or units, which becomes the property of the assessee in consideration of a transfer referred to in clause (xviii) of section 47, there shall be included the period for which the unit or units in the consolidating scheme of the mutual fund were held by the assessee;
(he) in the case of a capital asset, being share or shares of a company, which is acquired by the non-resident assessee on redemption of Global Depository Receipts referred to in clause (b) of sub-section (1) of section 115AC held by such assessee, the period shall be reckoned from the date on which a request for such redemption was made;
(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 meanings respectively assigned to them in the Explanation to clause (d) of sub-section (1) of section 115WB.
The following Explanation 4 shall be inserted after Explanation 3 to clause (42A) of section 2 by the Finance (No. 2) Act, 2014, w.e.f. 1-4-2015:
Explanation 4.—For the purposes of this clause, the expression “equity oriented fund” shall have the meaning assigned to it in the Explanation to clause (38) of section 10.
Note:
In view of the fact that the tax rates for capital gains are different for assets held for short term and long term. Therefore its relevant to know the meaning of short term and long term capital assets under the Income Tax Act.
Budget 2014: Amendment to S. 2(42A), Of The IT Act, 1961-
The Proposal to amend the definition of “Short Term Capital Assets” in Finance (No. 2) Bill, 2014, has in a significant way impacted the debt mutual fund investors, domestic venture capital & private equity funds, and several private investors in various sectors ranging from real estate, infrastructure to media.
Currently, unlisted securities and units of non-equity oriented mutual funds are classified as short-term capital assets, if held for less than 12 months and long-term capital assets, if held for more than 12 months. The proposed amendment means that an investor who exits an investment in unlisted securities and non-equity oriented mutual funds before 36 months will have twofold negative impact (a) investor has to shell out a higher tax (as usually the tax rate of 30% applicable to short-term capital gains is higher than 10% or 20% tax rate of long term capital gains) and (b) investor will not be entitled to claim the indexation benefit (which is available only to long term capital assets).
More importantly the above proposed amendment will be retrospectively applicable to the purchase transaction made prior to the Budget Day and even to the sale transactions which are done during the period April 01, 2014 to July 10, 2014. When these transactions were initiated, the classification between short term and long term capital assets was amply clear and the investment decisions were made based on the income tax laws which were applicable before March 31, 2014.
The proposed retrospective amendment is contrary to the budget speech of Honorable Finance Minister which promised categorically that the new government would never create a past liability by means of retrospective change in tax laws and yet in the same Budget, the above proposed amendment of retrospective nature has been inserted.
On account of such proposed retrospective amendment, the retail & institutional investors, who have made/sold the investments prior to the date of Union Budget 2014 (keeping in mind the existing income tax laws); will not even get the necessary time to re-align their exit plans and will have to pay taxes retrospectively for the units redeemed or unlisted securities sold before this year’s budget was presented.
Further this also creates a distinction between listed and unlisted shares. Small entrepreneurs or start-ups are not in a position to list their shares initially. All equity investments in such ventures are through unlisted shares, now by creating this distinction it shall make it more difficult for such entrepreneurs and start-ups to raise funds, which again goes against the stated objective of the government to encourage start-ups and small business.
Proposed retrospective amendment to the definition of short term capital assets is not in the nature of a clarification and instead would tend to widen the tax base. Proposed retrospective amendment was not done after exhaustive and transparent consultation with all the stakeholders, who would be affected in the rarest of rare case.
To better reflect the principles of equity & morality in the formulation & implementation of commonly recognized taxation principles, the government should consider prospectively applying the proposed amendment in Section 2(42A) with effect from assessment year 2016-17.