SECTION 2(42A) l SHORT-TERM CAPITAL ASSET
21. Whether gains arising on exchange of gold bonds at the time of their redemption is short-term gain - Whether answer to this query would depend upon the time that has passed between their date of redemption and subsequent sale
1. The Government of India had issued in the year 1965, National Defence Gold Bonds, 1980. These Bonds were redeemable after 15 years, i.e., on or after 2-10-1980. It was clarified in the Press Communique bearing No. MMS/MMM/ANT/361/3, dated 22-9-1980 issued by the Department of Economic Affairs, Ministry of Finance, that :
"No capital gains will arise when the Bonds are exchanged for gold on redemption. However, any subsequent sale, exchange or transfer of such gold within the meaning of section 2(47 ) would attract capital gains tax in respect of capital gains arising from such sale, exchange or transfer. For the purpose of computation of capital gains, the cost of acquisition of gold would be the market value of the bonds on the date of redemption."
2. A question has arisen as to whether such capital gains should be treated as long-term or short-term capital gains. The question has been examined by the Board. The exchange of gold bonds at the time of redemption is an altogether fresh transaction when an assessee acquires a different asset. It has also been decided above that for the purposes of the computation of capital gains, cost of acquisition of gold would be the market value of the bonds on the date of redemption. The material date in this case would, therefore, be the date of redemption of gold bonds which would be treated as the date of acquisition of the gold. As per section 2(42A) ‘short-term capital asset’ means a capital asset held by an assessee for not more than 36 months immediately preceding the date of transfer. The question as to whether the gains arising in such cases would be short or long-term would, therefore, depend upon the time that has passed between the date of redemption of gold bonds and the subsequent sale of gold.
Circular : No. 415 [F. No. 207/7/85-IT(A-II)], dated 14-3-1985.
JUDICIAL ANALYSIS
EXPLAINED IN - In CIT v. Oriental Containers Ltd. [1993] 70 Taxman 374 (Bom.), it was observed that this circular merely states that no capital gain will arise when the Bonds are exchanged for gold on redemption. However, any subsequent sale, exchange or transfer of such gold would attract capital gains tax in respect of capital gains arising from such sale, exchange or transfer. This Circular has no application at all to the facts of the present case, namely, where assessee sold National Defence Gold Bonds, 1980 and claimed that excess realisation on such sale was neither taxable as income nor as capital gains.
EXPLAINED IN - In CIT v. Debmalya Sur [1994] 207 ITR 996 (Cal.), the above circular was explained with the following observations :
"In this connection, our attention has been drawn to a Circular No. 415, dated March 14,1985, which, in fact, takes the same view as has been canvassed by the Revenue. In the said circular, the Central Board of Direct Taxes has made it clear that no capital gains will arise when the bonds are exchanged for gold on redemption. However, subsequent sale, exchange or transfer of such gold would attract capital gains tax and the question as to whether the gains arising in such cases would be short or long-term would depend upon the passage of time between the date of redemption of the bonds and the subsequent sale of gold received on redemption...." (p. 1002)
REFERRED TO IN - In Smt. L.M. Parikh v. Sixth ITO [1990] 81 CTR (Bom. - Trib.) 97, this circular was referred to, with the following observations:
". . . . We are of the opinion that the Circular No. 415, dated 14th March, 1985, is very clear on the point that the date of redemption of the gold bonds would be treated as the date of acquisition of the gold and while computing the capital gains, the cost of acquisition of gold would be the market value of the bonds on the date of redemption. The circular lays down that capital gains will not arise when the bonds are exchanged for gold on redemption but would arise on subsequent sale of the gold and for this purpose the computation shall be on the premise that the cost of acquisition of gold is the market value of the bonds on the date of redemption. The plea of the assessee that the date of redemption means the actual date of redemption is misplaced. The press communique issued by the Finance Ministry on 22nd Sept., 1980, incorporating the guidelines states that for the purposes of computation of capital gains, the cost of acquisition of gold is the market value of the bonds on the date of redemption. On the date when the press communique was issued, only one date of redemption was conceivable and that was the date when the bonds were going to mature. Obviously, therefore, what is implied in the press communique is the date of maturity of the bonds, and could not be the actual date of redemption. It may also be stated that the bonds were also in the nature of debt or liability and their date of discharge would be the date when the same were due to be discharged which, in this case, was 27th Oct., 1980. When the gold bond is issued to a person, there is an agreement between him and the Government that the bond will be returned on a certain future date, called the maturity date, and during that time, he has the right to interest and he can also assign the bond. Under the terms of agreement, the holder has a right to get back the gold on the maturity date whereupon the interest would cease and it would not longer be assigned. Therefore, on the maturity date, the character of this document which was the bond, would change. It would not bear interest and it would lose assignability. On the maturity date, it is merely a document of title to the gold and its presentation to the Reserve Bank would entitle the holder of that document to the delivery of the gold. . . . ." (p. 100)