Computation of capital-gains has to be made as per law existing as on the 1st day of April of the relevant assessment year
Gujarat High Court in the case of CIT Vs. Nirmal Textiles, has made an important ruling with regard to the taxation of capital gain.
The court observed that, as far as Capital gain is concerned, the taxable event occurs as on the date of transfer of capital asset.
Therefore, the question whether the asset transferred was of long-term or short-term holding will have to be determined as on the date of taxable event, that is, the date of transfer as per the law existing on that dat.
Computation of capital-gains will, however, be made as per law existing as on the 1st day of April of the relevant assessment year.
Any other interpretation would make the provisions like ss. 54 and 54A unworkable—
The court has held as under:
“As to what persons in respect of what property are liable to pay tax is to be determined with reference to law as on the date on the occurrence of event which creates or attracts the liability to tax, unless the statute by express or by necessary implication provides otherwise. In computing such liability what is to be excluded, or included or conditions or allowances of deductions or exemptions and like matters of law as it exists on 1st of April of the relevant assessment year govern the assessment. In the present case the taxable event which attracted liability to tax was the transfer of immovable property as a result of which the income in the nature of capital gain arose during the previous year. Whether capital asset is a short-term or long-term must exist as a fact in previous year to which law of computing income of that nature existing as on 1st April of assessment year shall be applied. The question whether the capital asset which was transferred was 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. It would be incongruous to say that taxable event when occurred on a particular date in respect of long-term asset would be deemed to be in respect of a short-term capital asset on 1st April of the relevant assessment year because of the definition which has come into existence as on the date of commencement of the assessment year. Computation of income or assessment of liability would depend upon the nature of income earned during the previous year. It is not the part of computation but it is relevant for determining the nature of capital asset transferred which would result in a different nature of capital gains in the two sets of capital assets resulting in different liabilities and applicability of various provisions in different manner. As is seen from the scheme of the IT Act, s. 45 defines capital gains which arise from transfer of capital assets effected in the previous year, i.e., the capital gains do not refer to an income which is accruing from day-to-day for a spell of period but arises at 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 s. 28 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. Sec. 48 which prescribes mode of computation and deduction in respect of income chargeable under the capital gains divides types of capital gains into two categories, namely, capital gains general and capital gains arising from transfer of long-term capital asset. Again reference is to capital gains arising from transfer of a long-term capital asset. The period for the holding of capital asset is also related to the date of transfer and its transfer of such long-term held asset on the date of transfer falls into the category of a long-term capital gains. This also indicates that determination of factum whether transfer of capital asset is of long-term capital asset or short-term is to be determined anterior to stage of reaching computation of income under that head. First it has to be determined whether capital gain which has arisen in previous year is of long-term or short-term. On such determination its quantification for making the charge effective takes place. This inherently postulates determination of nature of capital asset on the date of transfer. The conditions required to be fulfilled in pursuance of capital gains arising as a result of transfer of long-term capital assets in respect of ss. 54 and 54A were required to be fulfilled within a particular period from the date when such capital gains accrued or arose to the assessee. These provisions undoubtedly lead to one conclusion that nature of the capital asset as well as the nature of capital gain arising out of transfer of such capital asset has to be determined as on the date of transfer for the purpose of applicability of all these provisions and applicability of these provisions cannot be postponed to the date of commencement of assessment. Taking any other view would result in serious anomalous situation.”
The copy of the order is as under:
COMMISSIONER OF INCOME TAX vs. NIRMAL TEXTILES
HIGH COURT OF GUJARAT
Rajesh Balia & S.K. Keshote, JJ.
IT Ref. No. 252 of 1982
Nov 14, 1995
(1995) 63 CCH 0685 GujHC
(1996) 136 CTR 0148, (1997) 224 ITR 0378
Legislation Referred to
S 2(42A), 45, 48
Case pertains to
1975-76
Decision in favour of:
Assessee
Counsel appeared:
M.J. Thakore for R.P. Bhatt & Co., for the Applicant : N.R. Divetia, for the Respondents
RAJESH BALIA, J.
Respondent assessee has opted for Samvat Year as his accounting period ending on Diwali every year. The controversy relates to asst. yr. 1975-76, the previous year relevant to which ended on Diwali of 1974, i.e., the accounting period commencing on next day of Diwali 1973 and ending on Diwali 1974 is the previous year relevant to the assessment year in question for which income-tax payable by the assessee was to be assessed. He sold certain plots of land between 26th Dec., 1973 and 25th March, 1974. As on the date of such transfers, the assessee had held the said immovable property for the period of more than 24 months, but less than sixty months. The assessee claimed that as on the date of transfer of the capital assets concerned, the definition of short-term capital asset under s. 2(42A) of the IT Act, 1961, it was required that the assessee should have held the capital asset for not more than 24 months immediately preceding the date of transfer, it was a transfer of long-term capital assets by the assessee. He, therefore, claimed that income arising out of the said transaction is liable to be assessed to tax as long-term capital gains. He claimed deductions as are applicable in the case of capital gains arising out of transfer of long-term capital asset under s. 48 of the Act. The claim of the assessee was rejected by the ITO by taking into consideration that the definition of the short-term capital asset had been amended by the Finance Act, 1973 w.e.f. 1st April, 1974 extending the period of holding upto which the capital asset would remain a short-term capital asset to sixty months instead of 24 months.
2. The ITO rejected the claim of the assessee on the ground that under the IT Act, tax is to be assessed for the assessment year as per law prevailing on the first day of the commencement of the assessment year, though income in respect of which tax is to be assessed is such which has been earned during the previous year ending before commencement of such assessment year. As the asst. yr. 1975-76, undisputedly for which the capital gains chargeable to tax was to be assessed, commenced as on 1st April, 1975 and any income which accrued, earned or received by an assessee during the previous year relevant to that assessment year had to be computed in the manner prescribed in accordance with the provisions of the IT Act as they were in force on 1st April, 1975, including the various definition clauses under s. 2 of the Act. The assessee failed in appeal before the AAC. However, the contention found favour with the Tribunal. It held that as the provision in question, namely, s. 2(42A) applies to assets and not to income, the principle that it is the law in force in the previous year which has to be applied, does not govern ascertaining the nature of assets when transferred though will be governing the computation of income. In view of this conclusion the Tribunal found that the plots of land cannot be treated as short-term capital assets when transferred and the assessment must be for long-term capital gains.
3. In these circumstances, on application by the CIT under s. 256(1) of the Act the Tribunal had referred the following question of law arising out of its appellate order dt. 16th Oct., 1981 for the opinion of this Court :
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that notwithstanding the provisions of s. 2(42A) of the IT Act, 1961, which came into force from 1st April, 1974, i.e., from asst. yr. 1974-75 the capital gains earned by the assessee were liable to be taxed as long-term capital gains ?”
4. The controversy raised before us is within a very narrow compass. The question which calls for consideration is whether capital gains arising from a transfer made during the previous year relevant to the assessment year commencing after 1st April, 1974 can be considered to have been arisen as a result of transfer of short-term capital asset or transfer of long-term capital asset. In other words whether nature of capital asset has to be determined in terms of definition of short-term capital asset which was in force w.e.f. 1st April, 1974 or it will have to be determined in accordance with the provisions as standing on the date of transfer.
The contention before us by respective parties have been on the lines noticed by us while noticing the facts of the case.
5. Sec. 4 of the Act is the charging section which provides that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of the Act in respect of the total income of the previous year of the person. The provision is obvious, that the charge of income-tax does not come into existence before enactment of a Central Act brings it to life by requiring the charge of income-tax in respect of the income of the previous year. It is also clear that the tax chargeable under s. 4 is the tax for the assessment year for which charge has been brought to life and is not charge ipso facto coming into existence at the time of earning income during the previous year, i.e., tax is to be assessed for the assessment year in respect of the income of the previous year and not vice versa, namely, tax is not to be assessed for the previous year but is assessed for the assessment year in respect of income of the previous year. In that the charge under the income-tax is apparently distinct than the one which arises under the levy of tax like sales-tax where the charge would be operative as soon as the transaction of sale takes effect as at that point of time the liability is incurred on that transaction. This principle was enunciated by Lord Thankerton in Maharajah of Pithapuram vs. CIT (1945) 13 ITR 221 (PC) : TC 42R.169, when it was observed, while considering the like provision of the Indian IT Act, 1922 :
“The Indian IT Act, 1922, as amended from time to time, forms a code, which has no operative effect except so far as it is rendered applicable for the recovery of tax imposed for a particular fiscal year by a Finance Act. By virtue of the Indian Finance Act, 1939, s. 16(1)(c) of the Indian IT Act as amended by the Indian IT (Amendment) Act, 1939, applied for the asst. yr. 1939-40 although the subject of charge was the income of the year 1938-39.”
6. The principle was reiterated in CIT vs. Isthmian Steamship Lines (1951) 20 ITR 572 (SC) : TC 27R.640. The assessee-company had carried forward unabsorbed depreciation, claim for which had first arisen during the course of assessment for the asst. yr. 1938-39. At the time when depreciation became due to be allowed as deduction the assessee was entitled to carry forward the unabsorbed depreciation against the profit of the year for indefinite period until it was fully absorbed against the profits of future years. With effect from 1st April, 1940, the amendment took place, restricting the period upto which the unabsorbed depreciation could be carried forward and set off against profits of the subsequent years to a maximum of eight years. While dealing with the contention raised before it the apex Court held that :
“the 1st of April, 1940, when the amendments to s. 10(2)(vii) took effect, and the 1st of April, 1939, mentioned in the amended proviso, must be held to apply to the assessment year and not to the accounting year because in income-tax matters the law to be applied is the law in force in the assessment year unless otherwise stated or implied.”
7. Again, in Karimtharuvi Tea Estate Ltd. vs. State of Kerala (1966) 60 ITR 262 (SC) : TC 38R.479, the question arose in respect of levy of surcharge. The Surcharge Act under which levy was to be imposed came into force w.e.f. 1st Sept., 1957. The assessment year in consideration was the asst. yr. 1957-58 which commenced on 1st April, 1957. The assessee’s contention was that the Surcharge Act did not have retrospective operation so as to affect the income for the asst. yr. 1957-58. The Revenue had relied on the aforesaid principle. The Supreme Court, drawing distinction between law coming into force with effect from the date of commencement of assessment year and law coming into force after the commencement of the assessment year opined :
“now, it is well settled that the IT Act, as it stands amended on the first day of April, of any financial year must apply to the assessments of that year. Any amendments in the Act which come into force after the first day of April of a financial year, would not apply to the assessment for that year, even if the assessment is actually made after the amendments come into force.”
8. In Reliance Jute & Industries Ltd. vs. CIT (1979) 13 CTR (SC) 186 : (1979) 120 ITR 921 (SC) : TC 45R.214, the controversy arose in the circumstances where the appellant before the Supreme Court had claimed set off of unabsorbed loss of asst. yr. 1950-51 against its income for the asst. yr. 1960-61 on the ground that by virtue of s. 24(2)(iii) of the Indian IT Act, 1922, as it stood before its amendment w.e.f. 1st April, 1957, the appellant had a right to have unabsorbed loss carried forward from year to year until it was completely set off, and the subsequent amendment limiting the period for carrying forward the loss to eight years could not divest the appellant of that vested right which had accrued to it. The Court repelled the contention of the assessee based on the ground that the right acquired by the assessee to carry forward the unabsorbed depreciation at the time of acquisition of asset was not defeated by later amendments and observed, “the claim is based on a misconception of the fundamental basis underlying every income-tax assessment. It is a cardinal principle of the tax law that the law to be applied is that in force in the assessment year unless otherwise provided expressly or by necessary implication. There is no question of the assessee possessing any vested right under the law as it stood before the amendment. The assessment for one assessment year cannot, in the absence of a contrary provision, be affected by the law as in force in another assessment year. A right claimed by an assessee under the law in force in a particular assessment year is ordinarily available only in relation to a proceeding pertaining to that year.”
9. All these cases bring out clearly the nature of levy under the IT Act which is annual charge on the income earned during the previous year relevant to the assessment year and in a way it is prospective levy for the operation of which requisite action, namely, accrual of income is at a time antecedent to it.
10. The question then arises whether the nature of receipt as distinct from the computation of income for the purposes of crystallizing the actual amount of tax payable is to be determined as per the provisions of the Act existing on the commencement of the assessment year or on any other date.
11. We may refer to well established canons of interpreting the taxation statute. There are three stages in imposition of a tax. There is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment, that ex hypothesi has already been fixed. But the assessment particularizes the exact sum which a person liable has to pay. Lastly, come the methods of recovery if the person taxed does not voluntarily pay. The dictum of Lord Dunedin in Whitney vs. IRC (1926) Appeal Cases 37 has been quoted time and again by the Federal Court and the Supreme Court of India in various decisions and does not need elaboration. The other principle in the present context is, that the taxable event is that which on its occurrence creates or attracts the liability to tax. Such liability does not exist or accrue at any earlier or later point of time. This is what the apex Court stated in Goodyear India Ltd. vs. State of Haryana (1990) 76 STC 71 (SC).
12. These two principles do lead us to the conclusion that in so far as the first part of imposition of tax is concerned, namely what persons in respect of what property are liable to pay tax is to be determined with reference to law as on the date on the occurrence of event which creates or attracts the liability to tax, unless the statute by express or by necessary implication provides otherwise. In computing such liability what is to be excluded, or included or conditions or allowances of deductions or exemptions and like matters of law as it exists on 1st of April of the relevant assessment year govern the assessment.
13. Applying the aforesaid principles, if we view the facts of the present case the taxable event which attracted liability to tax was the transfer of immovable property as a result of which the income in the nature of capital gain arose during the previous year.
14. The next question which calls for consideration is whether the charge having attracted on the date of transfer, further question whether the transfer is of long-term capital assets or short-term capital assets is to be determined as per law in force on the 1st of April, 1975, or, as the case may be, 1974 when the assessment year commenced or in accordance with law on the date of the taxable event.
15. Under the IT Act actual income arising in the previous year has to be determined for the purposes of bringing it under levy. Sec. 2 of the Act envisages two types of capital assets. Under s. 45 the capital gain arises on the date of transfer of capital asset. Sec. 48 envisages that capital gain arising as a result of transfer of capital asset are of the two categories, viz., short-term capital gain or long-term capital gain depending on the type of asset transferred. In this respect the facts existing in the previous year are relevant. That is to say, whether capital asset is a short-term capital (asset) or long-term must exist as a fact in previous year to which law of computing income of that nature existing as on 1st April of assessment year shall be applied. The question whether the capital asset which was transferred was 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. It would be incongruous to say that taxable event when occurred on a particular date in respect of long-term asset would be deemed to be in respect of a short-term capital asset on 1st April of the relevant assessment year because of the definition which has come into existence as on the date of commencement of the assessment year. Computation of income or assessment of liability would depend upon the nature of income earned during the previous year. It is not the part of computation but it is relevant for determining the nature of capital asset transferred which would result in a different nature of capital gains in the two sets of capital assets resulting in different liabilities and applicability of various provisions in different manner. As is seen from the scheme of the IT Act, s. 45 defines capital gains which arise from transfer of capital assets affected in the previous year, i.e., the capital gains do not refer to an income which is accruing from day-to-day for a spell of period but arises at 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 s. 28 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. Sec. 48 which prescribes mode of computation and deduction in respect of income chargeable under the capital gains divides types of capital gains into two categories, namely, capital gains general and capital gains arising from transfer of long-term capital asset. Again reference is to capital gains arising from transfer of a long-term capital asset. The period for the holding of capital asset is also related to the date of transfer and its transfer of such long-term held asset on the date of transfer falls into the category of a long-term capital gains. This also indicates that determination of factum whether transfer of capital asset is of long-term capital asset or short-term is to be determined anterior to stage of reaching computation of income under that head. First it has to be determined whether capital gain which has arisen in previous year is of long-term or short-term. On such determination its quantification for making the charge effective takes place. This inherently postulates determination of nature of capital asset on the date of transfer.
16. Then in respect of long-term capital asset of different natures, or capital assets other than short-term capital assets, other provisions of the Act have been made for the benefit of assessee. Like s. 54 applies to the capital gains arising from the transfer of long-term capital asset. Sec. 54A also provides for certain reliefs to the assessee in case where the capital gains arise from the transfer of long-term capital asset. To avail relief the assessee has to invest or deposit the whole or any part of the net consideration in a specific asset within six months of such transfer. The conditions required to be fulfilled in pursuance of capital gains arising as a result of transfer of long-term capital assets in respect of these provisions were required to be fulfilled within a particular period from the date when such capital gains accrued or arose to the assessee. These provisions undoubtedly lead to one conclusion that nature of the capital asset as well as the nature of capital gain arising out of transfer of such capital asset has to be determined as on the date of transfer for the purpose of applicability of all these provisions and applicability of these provisions cannot be postponed to the date of commencement of assessment. Taking any other view would result in serious anomalous situation. To illustrate, s. 54E envisages that where the capital gain arises from transfer of long-term capital asset, and the assessee, in order to obtain the benefit of that section, has to invest within a period of six months from the date of transfer of the capital asset the net consideration in specified asset. For the purpose of operation of s. 54E it will have to be determined on the date of transfer as to whether the transfer is of a capital asset which is a short-term capital asset or long-term capital asset. If it is long-term capital asset, it is from the date of such transfer that the assessee has to invest the amount of net consideration within six months. The time of six months has to be counted from the date of transfer. If the determination of the nature of asset and the nature of capital gains arising out of such transfer is to be referred to the date of commencement of the assessment year to find out its liability prevailing on that date the provisions would be fully unworkable. Likewise s. 54 envisaged that where the assessee transfers a capital asset which is a residential house and which is long-term capital asset, resulting in accrual of income chargeable under the head `income from the capital gains’, then, if the assessee, within a specified period constructs or purchases another residential house, it has to be dealt with differently. This provision also directly requires determination of the nature of capital gains arising therefrom as on the date of transfer and in the very nature of things cannot have relation to the law existing as on the date of commencement of the assessment year, unless of course, by express provision or necessary intendment the provision is not to be given effect to in respect of such income arising during the previous year or to be treated differently. We do not find any such express or necessary implication in the provisions of the amending Act by which the amendment in s. 2(42A) for extending the period of holding requisite for treating any capital asset to be short-term capital asset or long-term capital asset was intended to affect the nature of capital gains that arose on the date of transfer resulting in different consequences.
17. The contention of the learned counsel for the Revenue that the definition of long-term capital gains or short-term capital gains have been provided only for the purposes of computing liability of tax arising out of capital gains which has accrued during the previous year and not part of substantive provision to chargeability, in our opinion, is not well founded. All receipts under the IT Act are not chargeable to tax. Receipts of consideration on transfer of capital asset is capital receipt. But for the provisions of charging capital gains, to tax the capital receipts would not have been at all subject to tax liability. Where the scheme of the Act itself envisaged two distinct nature of capital gains arising from long-term holding and short-term holding, for which the definition has been provided, liability to tax or the charge is directly related to the nature of capital gains earned by the assessee as on the date of transfer subjecting him not only to the charge of tax but to various other provisions as well, giving him certain rights and benefits for which he is under obligation to act in a particular manner within a particular time from the date of transfer dependent upon the nature of capital gains earned by him on the date of transfer makes the determination of nature of capital gains as on the date of transfer as integral part of determination of charge itself and does not make it merely a tax computation for crystallizing the liability. That being the position the principle aptly stated in Rawji Dhanji & Co. In re (1940) 8 ITR 1 (Bom), applies, “as you have to impose the tax for the year of assessment on the actual income of the previous year, it seems to me plain that you must take the facts as they existed during that previous year; otherwise you are not ascertaining the actual income of the previous year, you are only ascertaining what would have been the income of the previous year if the facts had been as they existed in a subsequent year”.
18. In enunciating the principle, the Bombay High Court has followed the Full Bench decision of the Madras High Court in CIT vs. Valliammai Achi (1938) 6 ITR 720 (Mad), which succinctly stated that the IT Act cannot be applied in any year until the Finance Act has been passed, but the Act cannot be treated as being a statute which is passed annually. It is a permanent enactment but it may not be enforced in any particular year until the Finance Act has been passed.
19. In our opinion, true ambit of the general principle referred to by us hereinabove is that ordinarily the law applicable on the first day of assessment year governs the assessment of that year, i.e., the liability having been declared ex hypothesi determined on the occurrence of taxable event which will be in accordance with the facts existing in the previous year, all the machinery provisions for crystallising that liability and recovering the sum to make the levy effective will be governed by the law as at the commencement of the assessment year for which the assessment has to be made.
20. Therefore, the Tribunal was justified in drawing distinction between determining the nature of asset, to find out what was the liability that ex hypothesi came into existence as a result of transfer of capital asset is distinct from determination of tax liability on that event on that basis. There being no dispute that as on date when taxable event occurred, namely, transfer of capital asset in question, the definition of short-term capital asset under s. 2(42A) required that the asset ought to have been held by the assessee for not more than 24 months as on the date of transfer and the definition of long-term capital gains meant that which is not short-term capital asset. The facts are also not disputed that as on the date of transfer the assessee had held the transferred asset for more than 24 months and on that date it was transfer of long-term capital asset in accordance with the definition existing on that date. Having earned capital gains, as a result of transfer of long-term capital asset, the computation of long-term capital gain had to be made in accordance with provisions of the Act. The assessee, if he desired to obtain benefits of provisions applicable to long-term capital assets, he was under obligation to act within the specified period from that date by treating such gains to be long-term capital gains. The nature of that liability and obligation in our opinion having been determined could not have been altered unless it was so ordained by statute by express provision or necessary implication which we do not find here.
21. Learned counsel for the Revenue, in support of his contention, referred to the decision of Karnataka High Court in Jayakumari & Dilharkumari vs. CIT (1986) 56 CTR (Kar) 289 : (1989) 165 ITR (Kar) : TC 20R.477, and the decision of Punjab & Haryana High Court in L.Rajeshwar Pershad vs. CIT (1986) 52 CTR (P&H) 305 : (1986) 159 ITR 920 (P&H) : TC 20R.479, wherein question had arisen in the context of amendment to s. 2(14)(ii) of the IT Act by which jewellery intended for personal use of the assessee was also included in the definition of capital assets w.e.f. 1st April, 1973. The question arose about liability of the assessee to be subjected to charge for capital gains arising out of such transfer of jewellery effected prior to 1st April, 1973. The Punjab & Haryana High Court and the Karnataka High Court had taken the view in favour of the contention put forward by the Revenue by applying the principle that whenever amendments are made w.e.f. 1st day of April of any financial year, the amendment would apply to the assessments to be made for that year. However, Rajasthan High Court in CIT vs. Laxman Singh (1985) 49 CTR (Raj) 50 : (1986) 159 ITR 983 (Raj) : TC 20R.475 took different view by holding that whatever substantive rights had accrued to the assessee prior to 1st April, 1973, could not be taken away.
22. Though the controversy is not directly before us, the conclusion to which we have reached above, in our opinion there is a clear distinction between application of law on the basis of which ex hypothesi charge is determined on the occurrence of taxable event and the assessment of the charge in accordance with the provisions of the law as in force on the commencement of assessment year. If that distinction is to be borne, we are in respectful agreement with the view expressed by the Rajasthan High Court.
23. As a result of the aforesaid discussion, we answer the question referred to us in affirmative, i.e., in favour of the assessee and against the Revenue. No order as to costs.
