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PERSONAL EFFECTS TAX EXEMPT!

Wearing apparel, furniture, utensils, vehicles, etc. held for personal use not liable to capital gains tax!

Readers will recall that the Cost Inflation Index (CII) for purposes of computing the Indexed Cost of Acquisition for computation of Long Term Capital Gains for FY 2011-12 was 785. As against the same the Central Government has recently notified the CII for FY 2012-13 at 852. This reflects an 8.5% rise in inflation over the preceding year.

As per Section 2(14) of the Income-tax Act ‘personal effects,’ excluding jewellery, are not treated as capital assets and hence any gain arising on their transfer cannot be made liable to capital gains tax. ‘Personal effects’ would include movable property such as wearing apparel, furniture, household articles, utensils, vehicles, etc. held for personal use. Jewellery which has been excluded from ‘personal effects’ would include ornaments made of gold, silver, platinum or any other precious metal, precious or semi-precious stones and any articles set in any such stones.

A motor car or any other conveyance held for the personal use of a taxpayer is also a personal effect and any profit or gain arising from the same cannot be charged to tax as capital gains. In this regard, one can rely on the decision of the Bombay High Court in the case of ‘CIT vs. Sitadevi N. Poddar’ 148 ITR 506(Bom.).

GAIN ON SALE OF SILVER UTENSILS NOT TAXABLE?

It has been held by a number of Courts and Tribunals that where silver utensils transferred by a taxpayer are ordinarily intended for personal or household use, such silver utensils would constitute personal effects and therefore, the profit or gain arising therefrom could not be charged to tax as capital gains.

In fact in one of its decisions, the Supreme Court of India in the case of ‘CIT vs. H.H. Maharani Ushadevi’ 231 ITR 793(SC) has held that a property intended for personal or household use, may be for ceremonial occasions also, is always a personal effect.

For example, clothes meant for use at wedding or formal occasions are not used daily. Yet they are stitched for personal use of the wearer and as such they would form a part of his personal effect. Merely because from the nature of the property it can be used on ceremonial occasions also, it does not follow that the property is not held by the taxpayer for personal use.

In an interesting judicial pronouncement rendered by the Gujarat High Court in the case of ‘Himatlal C. Valia vs. CIT’ 248 ITR 262(Guj.), it has been confirmed that silverwares comprising of dinner sets intended for personal use of the taxpayer, his family members and guests are to be treated as personal effects, irrespective of the size of the family and the fact that these items were not used frequently. Hence, capital gains cannot be charged on sale of such silverwares.

ART COLLECTIONS IN TAX NET!

Income tax Appellate Tribunals have held that any gains on sale of personal art collections are out of the capital gains tax net, since the same are in the nature of ‘personal effects.’ However, with a view to widen the tax base and expand the scope of taxing ‘capital assets’, the Finance Act, 2007 amended Section 2(14), so as to also exclude from the meaning of the term ‘personal effects,’ archaeological collections, drawings, paintings, sculptures, or any work of art. Any gains arising on the transfer of such ‘personal effects’ accordingly attract capital gains tax with effect from Assessment Year 2008-09.

BENEFIT OF INDEXATION ON SALE OF JEWELLERY

Even in case of sale of jewellery, which is treated as a capital asset, the tax impact in respect of long term capital gains can be minimized by availing of the benefit of the provisions relating to indexation of cost of acquisition. This point can be well illustrated by the following example:

Illustration: Mrs. P sells her Jewellery and Ornaments during Financial Year 2012-13 for a sale consideration of Rs.10,00,000. She had acquired these ornaments on her marriage during the Financial Year 1981-82, when the cost of acquisition was Rs.1,00,000. Although the effective gain to Mrs. P in this case is Rs.9,00,000 (Rs.10,00,000 – Rs.1,00,000), the taxable gain in her hands would work out as under:

  • Cost of Acquisition   :     Rs.1,20,000

  • Index of 1981-82     :     100

  • Index of 2012-13    :     852   

  • Indexed Cost of Acquisition     :     Rs.1,00,000 x 852/100

             = Rs.8,52,000

  • Sale Consideration     :     Rs.10,00,000

Difference between Rs.10,00,000 and Rs.8,52,000 will represent a taxable long term capital gain of Rs. 1,48,000. In this case, although Mrs. P’s effective gain on sale of jewellery is Rs.9,00,000, availing the benefit of indexation, she will be required to pay tax of only Rs.30,488 @20.6% on the taxable gains of Rs.1,48,000,. 

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