2015 (2) TMI 778 - HC - Income Tax

Court denies concessional tax rate for short-term capital gains from bonus shares under Section 115E.

The Commissioner of Income Tax Versus Sham L. Chellaram

The High Court ruled in favor of the Revenue and against the Assessee, holding that short-term capital gains do not qualify as investment income under ... Short term capital gain derived from foreign exchange asset - whether on sale of bonus shares investment income within Section 115E of the Act accrued? - Assessee is a nonresident under the Act - ITAT extended the benefit of Section 115E of the Act to the Respondent-Assessee, as the issue stands covered by virtue of its decision in Trishala Jain (1990 (8) TMI 196 - ITAT DELHI-E) - Held that:- The words “derived from” was a subject matter of consideration in Cambay Electric Supply Industrial Company Ltd v/s. CIT [1978 (4) TMI 1 - SUPREME Court] wherein held that the expression “attributable” to wider then the expression “derived from”. Thus, the sale of old machinery was held not to be a profit and gains derived from the conduct of the business of generation of electricity. It was held in the above case that whenever Parliament wanted to give a restricted meaning, they use the word 'derived from'. This also support the Revenue's contention that any income earned by the sale of the investment cannot be said to be derived from a Foreign Exchange Assets. The words 'derived from' would normally indicate in case of shares, the dividend received on shares and not the sale of the shares. The amount received on sale of shares is not derived from it as it is received on the transfer of shares leading to extinguishment of all rights in the shares so sold. Thus the interpretation by the Revenue also find support from the fact that Section 115E of the Act specifically indicates income by way of long term capital gains to be entitled to the benefit of Section 115E of the Act as it is not considered to be an income derived from an investment. Chapter XIIA of the Act itself makes a distinction between income derived from an asset and an income arising on sale of assets, leading to long term capital gains. The later is a case of income being attributable to sale of assets. We hold that the income arising on sale of assets leading to short term capital gains is not income derived from foreign exchange asset so as to qualify as investment income within the meaning of Section 115E of the Act. - Decided in favour of the Revenue Issues Involved:1. Whether the ITAT was right in holding that short-term capital gain was derived from a foreign exchange asset.2. Whether on the sale of bonus shares, investment income within Section 115E of the Income Tax Act, 1961, accrued.Detailed Analysis:Issue 1: Whether the ITAT was right in holding that short-term capital gain was derived from a foreign exchange asset.The High Court examined the provisions of Chapter XIIA of the Income Tax Act, 1961, which deals with special provisions relating to the income of non-residents. The respondent-assessee, a non-resident, sold 10,000 bonus shares of Tata Chemicals Ltd., which were acquired as foreign exchange assets. The ITAT had held that the short-term capital gains from the sale of these shares qualified as investment income under Section 115E, thus eligible for a concessional tax rate of 20%.However, the High Court noted that Section 115E specifically grants concessional tax rates only to 'investment income' and 'income by way of long-term capital gains.' The Court emphasized that the statute must be strictly construed, and any exemption or concession must be explicitly provided for in the law. The Court found that the definition of 'investment income' under Section 115C does not include short-term capital gains. The Court also referred to the decision in Sunderdas Haridas, which held that short-term capital gains do not qualify for the concessional tax rate under Section 115E.The Court concluded that short-term capital gains do not fall within the definition of 'investment income' and thus do not qualify for the concessional tax rate under Section 115E.Issue 2: Whether on the sale of bonus shares, investment income within Section 115E of the Income Tax Act, 1961, accrued.The respondent-assessee argued that short-term capital gains should be considered as investment income under Section 115E. The ITAT had upheld this view, relying on its earlier decision in Smt. Trishala Jain, which interpreted 'investment income' to include income from the sale of assets. The respondent-assessee also cited the Supreme Court's decision in Sevantilal M. Sheth, which held that income arising from the sale of an asset is still income derived from the asset.The High Court, however, disagreed with this interpretation. It noted that the explicit mention of 'income by way of long-term capital gains' in Section 115E indicates that the legislature intended to exclude short-term capital gains from the definition of 'investment income.' The Court also referred to the Supreme Court's decision in Cambay Electric Supply, which distinguished between income 'derived from' an asset and income 'attributable to' an asset. The Court held that the sale of shares resulting in short-term capital gains does not constitute income 'derived from' the shares but rather income 'attributable to' the sale of the shares.The Court concluded that the income arising from the sale of bonus shares, resulting in short-term capital gains, does not qualify as investment income under Section 115E.Conclusion:The High Court answered the substantial questions of law in the negative, ruling in favor of the Revenue and against the Assessee. The Court held that short-term capital gains do not qualify as investment income under Section 115E of the Income Tax Act, 1961, and thus are not eligible for the concessional tax rate of 20%. The appeal was allowed, and the order of the ITAT was set aside.