Mukesh Patel.in
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THE LONG & SHORT OF CAPITAL GAINS!

Understanding long term & short term capital gains is important since the same determines its tax treatment !

            The profit or gain arising on the transfer of a capital asset is known as ‘capital gains.’ It is important to ascertain the type of capital gain, as the computation of taxable gains is dependent on the same. Long term capital gains are entitled to concessional tax treatment in comparison to short term capital gains.

            There are two types of capital assets, which give rise to the two respective types of capital gains. Capital assets are classified in the following two categories on the basis of the period for which they have been held by the taxpayer prior to transfer.

            A ‘short term capital asset’ means a capital asset held by a taxpayer for a period of less than 36 months, immediately preceding the date of its transfer. However, in the case of shares of a company, quoted securities and units of the Unit Trust of India or an approved Mutual Fund, the period of 36 months is to be substituted by 12 months.

            A ‘long term capital asset’ means a capital asset which is not a short-term capital asset. In other words, it is an asset held by a taxpayer for a period of more than 36 months. Shares of a company, quoted securities and units of the Unit Trust of India or an approved Mutual Fund are also treated as long term capital assets, if held for more than 12 months.

           There may be cases where a taxpayer might not have actually ‘acquired’ or ‘purchased’ assets originally, as is commonly understood, but might have become owner of the asset by certain devolutionary means, and then held the asset for a certain period before transferring it. In such situations, the Income-tax Act provides that, in computing the period for which the asset was held by the taxpayer in order to determine whether the asset is a short term or a long term capital asset, the period for which the asset was held by the ‘previous owner’ should also be included.

These situations, whereby the taxpayer becomes the owner of the asset, are:

  • Distribution of assets on the total or partial partition of a Hindu Undivided Family.

  • Under a gift or Will.

  • By succession, inheritance or devolution.

  • Distribution of assets on the liquidation of a company.

This point can be well appreciated through the following illustration:

Illustration: A taxpayer receives a house property under his father’s Will on 25-4-2013. His father had acquired the property on, say, 25-3-2010, and the taxpayer decides to sell the property, on 5-5-2013 (just ten days after receiving it under the Will). The period for which he ‘held’ the asset will be worked out as follows:

Period for which the previous owner held the house (25-3-2010 to 25-4-2013) 37 months + period for which the taxpayer held the asset (25-4-2013 to 5-5-2013) 10 days = total period of holding 37 months 10 days.

Consequently, the house will be treated as a long term capital asset for capital gain purposes.

INTERESTING COURT VERDICTS

               In case of an immovable property such as a flat or bungalow, many a times a question may arise as to whether the period of holding for purpose of determining the nature of capital gains i.e. long term or short term, should be considered on the basis of the date of possession or final payment of purchase price. The Punjab & Haryana High Court in its judgment in the case of ‘CIT vs. Ved Prakash & Sons (HUF)’ 207 ITR 148(P & H) has observed that the legislature has used the words ‘held by a taxpayer’ and not ‘owned by the taxpayer,’ in the context of the relevant provisions of the Income-tax Act. Hence in a case where pursuant to an agreement for purchase of a flat, the taxpayer took possession of the flat, but was to pay the amount due in installments, the Court negatived the contention of the Department that when the flat was sold subsequently, the period of holding should be computed from the date of final payment to the date of sale which resulted in short term gains. The Court upheld the taxpayer’s plea of long term capital gains, on the basis of the period of holding from the date of possession to the date of sale of flat.

                 Another interesting case worth noting in this regard is where a taxpayer transfers his rights under an agreement for purchase of an immovable property, before a formal purchase deed comes to be executed. The Bombay High Court in ‘CIT vs. Vimal Lalchand Mutha’ 187 ITR 613 (Bom.) had occasion to consider a case, where a flat was agreed to be purchased in December, 1978, possession was taken in June, 1981 and even before the purchase deed could be executed the taxpayer sold her rights in respect of the said flat in April, 1983. The Department contended that the period of holding was less than 36 months based on the date of possession. However, the Court held that what was transferred in the present case were the ‘rights under the purchase agreement’ and since they were held for more than 36 months, the taxpayer was entitled to claim the benefit of long term capital gains.

 

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