Capital gains – Long-term or short-term capital asset – Period of holding – No distinction between unlisted and listed shares for classifying as short-term capital asset

Capital gains – Long-term or short-term capital asset – Period of holding – No distinction between unlisted and listed shares for classifying as short-term capital asset

For the A.Y. 2007-08, the Commissioner invoking his power u/s 263 held that the order passed by the A.O. u/s 143(3) was erroneous and prejudicial to the interests of the Revenue on the ground that the shares held by the assessee in a company, which was not a listed company when sold, should be treated as ‘short-term capital asset’ as defined u/s 2(42A) and not as ‘long-term capital asset’. Accordingly, the A.O. computed the short-term capital gains.

The Commissioner (Appeals) directed the A.O. to treat the shares as long-term capital asset, allow indexation and tax the resultant capital gains at the special rate of 20%. The Tribunal concluded that there was no distinction between unlisted and listed shares for classifying them as short-term capital asset under the Act and affirmed the decision of the Commissioner (Appeals).

On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:

‘i) In terms of the definition u/s 2(42A), short-term capital asset would mean a capital asset held by an assessee for not more than 36 months immediately preceding the transfer. The provision does not make a distinction between shares in a public company, a private company, a listed company or an unlisted company. The use of the word “or” in between each of the categories is very important and such distinction needs to be borne in mind. Although “securities” as defined u/s 2(h) of the Securities Contracts (Regulation) Act, 1956 includes shares, scrips, stocks, bonds, etc., that by itself cannot have an impact to give a different interpretation to the distinction of “short-term capital asset” as defined in section 2(42A).

ii) According to the Explanatory Notes to the provisions of the Finance (No. 2) Act, 2014, in Circular No. 1 of 2015 dated 21st January, 2015 [(2015) 371 ITR (St.) 22] issued by the Central Board of Direct Taxes, all shares whether listed or unlisted enjoy the benefit of shorter period of holding, and investment in shares of private limited companies enjoy long-term capital gains on transfer after 12 months.

iii) The Tribunal was right in holding that the shares and debentures not listed could be treated as a long-term capital asset u/s 2(42A) of the Act read with its proviso.’