Are capital gains applicable on Sovereigns and silver coins which were customarily used for puja purposes and other ritual purposes?
Capital gain is the profit one earns on the sale of an asset like stocks, bonds or real estate. It results in capital gain when the selling price of an asset exceeds its purchase price. It is the difference between the selling price (higher) and cost price (lower) of the asset. Capital loss arises when the cost price is higher than the selling price. The sale of capital assets may lead to capital gains and these gains may attract tax under the Income Tax Act.
Section 45 of Income Tax Act, 1961 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year will be chargeable to income-tax under the head ‘Capital Gains’. Such capital gains will be deemed to be the income of the previous year in which the transfer took place.
Let us refer to the case of H. H. Maharaja Rana Hemant Singhji v. CIT (1976), where the issue under consideration was whether an item of movable property consisting of gold sovereigns, silver rupees and silver bars held for personal use, was a part of personal effects of an assessee and fell within the exception carved out by section 2(4A)(ii).
Facts of the Case:
- The assessee, a minor, was recognised by the Government as successor of the former Maharaja.
- Certain assets consisting of gold sovereigns, silver coins and silver bars were released by the Govt. and handed over to Rajmata being the adoptive mother and guardian of the assessee.
- During the financial year 1957-58, the aforesaid sovereigns, silver coins and silver bars were sold at the suggestion of the Government.
- The assessee contended that there was no voluntary sale chargeable to capital gains tax under section 12B of the 1922 Act and the aforesaid items did not constitute “capital assets” as contemplated by section 2(4A) of the 1922 Act.
- Assessee contented that the same fell within the purview of the exception carved out by clause (ii) thereof and as such were to be excluded in computing the gains because they were held for personal use by the assessee and the members of his family as was evident from the fact that they were used for the purpose of Maha Lakshmi puja and other religious festivals and rituals in the family.
- The ITO overruled the assessee’s contention and taking into account the market value of the assets worked out capital gains.
- The appeal before the AAC remained unsuccessful. On second appeal, the Tribunal dismissed the appeal holding that the expression “personal effects” meant such items of movable property as were necessary adjuncts to an individual’s own personality and the nature of sale being voluntary or otherwise was irrelevant for the purpose of section 12B of the 1922 Act.
- On reference, the High Court held that in order that an article should constitute a part of personal effects, it is necessary that the article must be associated with the person of the possessor and that the aforesaid items consisting of gold sovereigns, silver rupees and silver bars could not be deemed to fall within the exception carved out by clause (ii) of section 2(4A) of the 1922 Act merely because they were placed before Goddess Lakshmi while performing puja.
- Assessee then preferred further appeal to the Supreme Court (SC).
Observations of SC on the Provisions of Law
- According to section 2(4A)(ii), ‘Capital asset’ means property of any kind held by an assessee” whether or not connected with his business, profession or vocation, but does not include personal effects, that is to say, movable property (including wearing apparel, jewellery, and furniture) held for personal use by the assessee or any member of his family dependent on him.
- The expression “personal use” occurring in clause (ii) was very significant. A close scrutiny of the context where the expression occurred showed that only those effects could legitimately be said to be personal which pertained to the assessee.
- In other words, an intimate connection between the effects and the person of the assessee must be shown to exist to render them “personal effects”.
- The enumeration of articles like wearing apparel, Jewellery, and furniture mentioned by way of illustrations in the above quoted definition of “personal effects” also showed that the Legislature intended only those articles to be included in the definition which were intimately and commonly used by the assessee
Observations of SC on whether gold sovereigns, silver rupees and silver bars could be considered as held for personal use
- Bearing in mind the aforesaid meaning assigned to the expression in various dictionaries and cases the silver bars or bullion could by no stretch of imagination be deemed to be “effects” meant for personal use.
- Even the sovereigns and the silver coins which were alleged to have been customarily brought out of the iron safes and boxes on two special occasions namely, the Ashtmi Day of ‘Sharadh Pakh’ for Maha Lakshmi Puja and for worship on the occasion of Diwali festival could not also be designated as effects meant for personal use.
- They may have been used for puja of the deities as a matter of pride or ornamentation but it was difficult to understand how such user can be characterised as personal use.
- As rightly observed by the Income Tax authorities if sanctity of puja were considered so essential by the assessee, the aforesaid articles would not have been delivered by this guardian to the Banks for sale.
- SC also noted that no exemption on behalf of the assessee was claimed in respect of the aforesaid effects under the provision of the Wealth-tax Act
SC ruled that the aforesaid articles were capital assets and not personal effects and as such could not be excluded while computing the gains. In simple words, Sovereigns and silver coins which were customarily used for puja purposes and other ritual purposes could not be designated as effects meant for personal use.