My NRI client bought equity shares of an Indian company in convertible foreign exchange and sold them within a year. The assessing officer says section 115E mentions only long-term capital gains, so the short-term gain goes at ordinary rates. Is there any authority the other way?
Yes. The Tribunal held that a short-term capital gain derived from a foreign exchange asset is income derived from that asset and therefore falls within the definition of 'investment income' in section 115C(c), so the assessee is entitled to the concessional rate under section 115E. It rejected the Revenue's argument that the express mention of long-term capital gains in section 115E excludes short-term gains by necessary implication.
Decided by the ITAT (M.A. Bakshi, Judicial Member, Income Tax Appellate Tribunal, Delhi (the retrieved text names no other member)) on 1990-08-03, reported as [1990] 34 ITD 523 (Delhi); Assessment Year 1987-88; six connected appeals (appeal numbers not printed in the text retrieved). It bears on section 115C, section 115C(c), section 115E, section 115F, section 2(24), section 45, section 5(2) of the Income Tax Act 1961, in Capital Gains, Residence & Treaty Benefit, How Tax Law Is Read and Capital Gains Exemptions matters.
This is a rare piece of authority on a point that recurs constantly and on which the Revenue's position looks unanswerable until the definitions are read in the right order. The route is: section 2(24)(vi) makes capital gains chargeable under section 45 'income'; the Supreme Court in Sevantilal Maneklal Sheth held there is no logical distinction between income arising from an asset and income arising from the sale of that asset; therefore a short-term capital gain on a foreign exchange asset is income DERIVED FROM that asset, which is exactly what section 115C(c) defines as investment income; and section 115E charges investment income at the concessional rate. The Tribunal also disposed of the expressio unius argument — that naming long-term capital gains impliedly excludes short-term — by pointing out that short-term gains do not need separate mention because they are already inside 'investment income', and that the separate mention of long-term gains is explicable by the different computation rules and by the section 115F rollover, which is available only for long-term gains. Two limits must be stated. The decision is a 1990 Tribunal order construing section 115E in its ORIGINAL shape, when the section charged a single flat twenty per cent where the total income consisted only of investment income or long-term capital gains or both; the section was substituted with effect from 1 April 1998 into the two-rate form it now has. The definition in section 115C(c) that carries the reasoning is materially unchanged, so the argument survives the restructuring, but the consequence today is that the short-term gain is taxed at the twenty per cent investment-income rate in section 115E(i) and not at the capital-gains rate — and no later decision applying or doubting the reasoning was located.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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Six non-resident Indians settled abroad appealed against assessments for AY 1987-88. Each had purchased equity shares of M/s Oswal Agro Mills Ltd. in convertible foreign exchange and sold them to the Unit Trust of India, deriving both short-term and long-term capital gains, and each had also disclosed interest on debentures of the same company on a receipt basis. There was no dispute about the long-term capital gains: their computation and the levy of tax at 20 per cent under section 115E had been accepted by the Revenue. The dispute on the short-term capital gains was not about computation but about the rate and the manner of assessment. The assessees claimed the concessional 20 per cent rate under Chapter XII-A on the footing that the shares were foreign exchange assets and the gain on their sale was income derived from those assets and hence 'investment income' under section 115C(c). The Assessing Officer rejected that and taxed the short-term gains at the normal rates under the Finance Act 1987, relying among other things on a Reserve Bank of India circular, and the Commissioner of Income Tax (Appeals), Faridabad dismissed the appeals, confirming the orders of the Inspecting Assistant Commissioner of Income-tax (Assessment), Faridabad in all six cases.
The appeals were partly allowed. Since the language of the statute is unambiguous and short-term capital gains fall within the definition of 'investment income', the assessees are entitled to the concessional rate of tax at 20 per cent on short-term capital gains, being investment income within the meaning of section 115E read with section 115C. On the separate issue, interest on the debentures is assessable on an accrual and not a receipt basis, and the matter was remitted to the Assessing Officer with a direction to exclude the interest already disclosed on a receipt basis and to consider the effect of the sale of shares during the year on the accrual of interest (paragraphs 8, 9, 13 and 14).
The Tribunal identified the real issue as whether the short-term capital gain is derived FROM the foreign exchange asset, since if it is, it is investment income within section 115E; there was no dispute that the equity shares were foreign exchange assets, having been purchased in convertible foreign exchange, nor that income earned from them until sale was investment income (paragraph 7). Section 2(24)(vi) includes within 'income' any capital gains chargeable under section 45, and section 45 deems profits or gains arising from the transfer of a capital asset to be the income of the year of transfer, so short-term capital gains are undoubtedly income (paragraph 8). Applying the Supreme Court's ruling in Sevantilal Maneklal Sheth that there is no logical distinction between income arising from an asset and income arising from the sale of that asset, and that the gain in each case springs from the asset, the Tribunal held that the short-term capital gain is income derived from the foreign exchange asset and so falls within section 115C(c) (paragraph 8); the agricultural-income line of cases relied on by both sides was held irrelevant. The Revenue's argument that the express reference to long-term capital gains in section 115E excludes short-term gains by necessary implication was rejected: short-term gains fall within the definition of investment income so no such inference is warranted, the separate treatment of long-term gains is explicable because in their case the assessee has the option under section 115F of investing the whole or part of the net consideration in a specified asset to avoid tax, and the absence of a withholding obligation on short-term gains warrants no contrary inference (paragraph 9). Since the language of the statute is unambiguous the Finance Minister's speech was irrelevant, and in construing a fiscal statute where two reasonable views are possible the one favouring the subject must be adopted, following CIT v. Kulu Valley Transport Co. (P.) Ltd. (paragraph 9).
Thus the short term capital gains derived from foreign exchange assets would fall within the definition of investment income as defined in Section 115C(c) of the Income-tax Act, 1961.
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Handle my notice → Ask a CA on WhatsAppYes. The Tribunal held that a short-term capital gain derived from a foreign exchange asset is income derived from that asset and therefore falls within the definition of 'investment income' in section 115C(c), so the assessee is entitled to the concessional rate under section 115E. It rejected the Revenue's argument that the express mention of long-term capital gains in section 115E excludes short-term gains by necessary implication. This was decided by the ITAT (M.A. Bakshi, Judicial Member, Income Tax Appellate Tribunal, Delhi (the retrieved text names no other member)) and bears on section 115C, section 115C(c), section 115E, section 115F, section 2(24), section 45, section 5(2) of the Income Tax Act 1961. It is reported as [1990] 34 ITD 523 (Delhi); Assessment Year 1987-88; six connected appeals (appeal numbers not printed in the text retrieved). This is a rare piece of authority on a point that recurs constantly and on which the Revenue's position looks unanswerable until the definitions are read in the right order. The route is: section 2(24)(vi) makes capital gains chargeable under section 45 'income'; the Supreme Court in Sevantilal Maneklal Sheth held there is no logical distinction between income arising from an asset and income arising from the sale of that asset; therefore a short-term capital gain on a foreign exchange asset is income DERIVED FROM that asset, which is exactly what section 115C(c) defines as investment income; and section 115E charges investment income at the concessional rate. The Tribunal also disposed of the expressio unius argument — that naming long-term capital gains impliedly excludes short-term — by pointing out that short-term gains do not need separate mention because they are already inside 'investment income', and that the separate mention of long-term gains is explicable by the different computation rules and by the section 115F rollover, which is available only for long-term gains. Two limits must be stated. The decision is a 1990 Tribunal order construing section 115E in its ORIGINAL shape, when the section charged a single flat twenty per cent where the total income consisted only of investment income or long-term capital gains or both; the section was substituted with effect from 1 April 1998 into the two-rate form it now has. The definition in section 115C(c) that carries the reasoning is materially unchanged, so the argument survives the restructuring, but the consequence today is that the short-term gain is taxed at the twenty per cent investment-income rate in section 115E(i) and not at the capital-gains rate — and no later decision applying or doubting the reasoning was located. If it applies to you, the first step is this: Prove the section 115C(b) funding trail for the shares first; without it neither limb of section 115E is available and the argument does not arise.
Six non-resident Indians settled abroad appealed against assessments for AY 1987-88. Each had purchased equity shares of M/s Oswal Agro Mills Ltd. in convertible foreign exchange and sold them to the Unit Trust of India, deriving both short-term and long-term capital gains, and each had also disclosed interest on debentures of the same company on a receipt basis. There was no dispute about the long-term capital gains: their computation and the levy of tax at 20 per cent under section 115E had been accepted by the Revenue. The dispute on the short-term capital gains was not about computation but about the rate and the manner of assessment. The assessees claimed the concessional 20 per cent rate under Chapter XII-A on the footing that the shares were foreign exchange assets and the gain on their sale was income derived from those assets and hence 'investment income' under section 115C(c). The Assessing Officer rejected that and taxed the short-term gains at the normal rates under the Finance Act 1987, relying among other things on a Reserve Bank of India circular, and the Commissioner of Income Tax (Appeals), Faridabad dismissed the appeals, confirming the orders of the Inspecting Assistant Commissioner of Income-tax (Assessment), Faridabad in all six cases. The matter was decided on 1990-08-03 by the ITAT (M.A. Bakshi, Judicial Member, Income Tax Appellate Tribunal, Delhi (the retrieved text names no other member)). On those facts the ITAT held as follows. The appeals were partly allowed. Since the language of the statute is unambiguous and short-term capital gains fall within the definition of 'investment income', the assessees are entitled to the concessional rate of tax at 20 per cent on short-term capital gains, being investment income within the meaning of section 115E read with section 115C. On the separate issue, interest on the debentures is assessable on an accrual and not a receipt basis, and the matter was remitted to the Assessing Officer with a direction to exclude the interest already disclosed on a receipt basis and to consider the effect of the sale of shares during the year on the accrual of interest (paragraphs 8, 9, 13 and 14).
The Tribunal identified the real issue as whether the short-term capital gain is derived FROM the foreign exchange asset, since if it is, it is investment income within section 115E; there was no dispute that the equity shares were foreign exchange assets, having been purchased in convertible foreign exchange, nor that income earned from them until sale was investment income (paragraph 7). Section 2(24)(vi) includes within 'income' any capital gains chargeable under section 45, and section 45 deems profits or gains arising from the transfer of a capital asset to be the income of the year of transfer, so short-term capital gains are undoubtedly income (paragraph 8). Applying the Supreme Court's ruling in Sevantilal Maneklal Sheth that there is no logical distinction between income arising from an asset and income arising from the sale of that asset, and that the gain in each case springs from the asset, the Tribunal held that the short-term capital gain is income derived from the foreign exchange asset and so falls within section 115C(c) (paragraph 8); the agricultural-income line of cases relied on by both sides was held irrelevant. The Revenue's argument that the express reference to long-term capital gains in section 115E excludes short-term gains by necessary implication was rejected: short-term gains fall within the definition of investment income so no such inference is warranted, the separate treatment of long-term gains is explicable because in their case the assessee has the option under section 115F of investing the whole or part of the net consideration in a specified asset to avoid tax, and the absence of a withholding obligation on short-term gains warrants no contrary inference (paragraph 9). Since the language of the statute is unambiguous the Finance Minister's speech was irrelevant, and in construing a fiscal statute where two reasonable views are possible the one favouring the subject must be adopted, following CIT v. Kulu Valley Transport Co. (P.) Ltd. (paragraph 9). In the words reproduced by the source cited on this page: "Thus the short term capital gains derived from foreign exchange assets would fall within the definition of investment income as defined in Section 115C(c) of the Income-tax Act, 1961." The decision followed or applied Sevantilal Maneklal Sheth v. CIT [1968] 68 ITR 503 (SC) — applied, for the proposition that gain on the sale of an asset springs from the asset; CIT v. Kulu Valley Transport Co. (P.) Ltd. [1970] 77 ITR 518 (SC) — applied, on construing a fiscal statute in favour of the subject where two views are possible; CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573 (Mad.) — followed on the separate debenture-interest issue, against the assessees.
It was decided by the ITAT on 1990-08-03 and is reported as [1990] 34 ITD 523 (Delhi); Assessment Year 1987-88; six connected appeals (appeal numbers not printed in the text retrieved). Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 115C, section 115C(c), section 115E, section 115F, section 2(24), section 45, section 5(2), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were partly allowed. Since the language of the statute is unambiguous and short-term capital gains fall within the definition of 'investment income', the assessees are entitled to the concessional rate of tax at 20 per cent on short-term capital gains, being investment income within the meaning of section 115E read with section 115C. On the separate issue, interest on the debentures is assessable on an accrual and not a receipt basis, and the matter was remitted to the Assessing Officer with a direction to exclude the interest already disclosed on a receipt basis and to consider the effect of the sale of shares during the year on the accrual of interest (paragraphs 8, 9, 13 and 14). It arises in Capital Gains, Residence & Treaty Benefit, How Tax Law Is Read and Capital Gains Exemptions matters, on section 115C, section 115C(c), section 115E, section 115F, section 2(24), section 45, section 5(2) of the Income Tax Act 1961, and was decided by M.A. Bakshi, Judicial Member, Income Tax Appellate Tribunal, Delhi (the retrieved text names no other member). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Build the argument in the Tribunal's order: section 2(24)(vi) read with section 45 makes the gain income; Sevantilal Maneklal Sheth makes it income derived FROM the asset; section 115C(c) therefore catches it as investment income; section 115E(i) charges investment income at twenty per cent. Meet the expressio unius point head on. The answer the Tribunal accepted is that short-term gains needed no separate mention because they are already investment income, and that long-term gains are separately named because they are separately computed and because section 115F relief attaches only to them. Claim the twenty per cent investment-income rate in section 115E(i), not the long-term capital gains rate in section 115E(ii) — the reasoning puts the short-term gain into clause (a), not clause (b). Warn the client that the point is thinly supported. This is a single Tribunal order from 1990, no later decision applying it was located, and the section it construed has since been restructured. Do not use the agricultural-land line of cases in support. The Tribunal considered CIT v. B.S. Rajendrappa, CIT v. T.K. Sarala Devi, Ambalal Maganlal, Manubhai A. Sheth and D.L.F. United and held them irrelevant to this issue.
Validity check could not be completed. Validity could not be established either way this pass and the label should be read as an honest 'not checked to a conclusion'. The order construes section 115E in its ORIGINAL form — a single flat twenty per cent where the total income consisted only of investment income or long-term capital gains or both — and that section was substituted with effect from 1 April 1998 into its present two-rate shape, so the section actually construed no longer exists in that form. The definition of 'investment income' in section 115C(c) that carries the reasoning is materially unchanged apart from a dividend carve-out inserted in 1998, omitted in 2003, re-inserted in 2004 and finally omitted with effect from 1 April 2021, so the argument survives the restructuring; the consequence today would be tax at twenty per cent under section 115E(i) rather than at the capital-gains rate. NO LATER DECISION APPLYING, FOLLOWING, DOUBTING OR DISSENTING FROM THIS ORDER WAS LOCATED, and the negative is narrow: an indiankanoon search for the exact title 'Trishla Jain' returned 417 results of which the first ten were listed and contained no appeal from this order, and no High Court or Supreme Court consideration of the short-term-gain-as-investment-income point was found. The precise queries are in NOTES-B84.md. Practitioners should treat this as a single Tribunal authority and not as settled law. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The order was read in full from the plain document URL https://indiankanoon.org/doc/483298/ — a first fetch declined to transcribe it and returned a summary instead, and a second fetch with the Copyright Act section 52(1)(q) framing and an instruction to ignore interface elements returned the full text; the summary and the full text agreed on the outcome. The operative sentence was then re-fetched independently through https://indiankanoon.org/docfragment/483298/?formInput=%22short%20term%20capital%20gains%20derived%20from%20foreign%20exchange%20assets%20would%20fall%20within%22, which returned it in the same words. PARAGRAPH STRUCTURE, established by transcribing the whole document: numbered paragraphs 1 to 14 with no gaps, ending at paragraph 14 with the disposal sentence 'The appeals of the are partly allowed.' — the words are printed exactly like that in the source, with a word evidently dropped after 'the'. Paragraphs 1 to 9 deal with the section 115E issue and paragraphs 10 to 14 with a separate debenture-interest issue on which the Revenue succeeded (interest on debentures assessable on accrual and not on receipt, following the Madras High Court in CIT v. Standard Triumph Motor Co. Ltd.), with a remand in paragraph 14 to exclude the interest already offered on a receipt basis — which is why the disposal is 'partly allowed' and not simply 'allowed'. IMPORTANT: the long passage beginning 'In our opinion, there is no logical distinction between income arising from the asset transferred to the wife...' inside paragraph 8 is the SUPREME COURT speaking in Sevantilal Maneklal Sheth v. CIT [1968] 68 ITR 503, reproduced by the Tribunal; it is not the Tribunal's own words and must not be attributed to it. The section 115C definitions reproduced by the Tribunal in paragraph 7 are in their pre-1998 form and refer to the Foreign Exchange Regulation Act 1973, which was correct for AY 1987-88; clause (a) now refers to the Foreign Exchange Management Act 1999 with effect from 1 April 2013. The Tribunal's own paraphrase of section 115E in paragraph 7 is of the pre-1998 flat twenty per cent version. Only one member's name, M.A. Bakshi, Judicial Member, is printed in the text retrieved; no second member is named, and I have recorded the bench as the source prints it rather than inferring one. The appeal numbers of the six appeals are not printed in the text retrieved. The equivalent citation printed on the page is [1990] 34 ITD 523 (Delhi). One typographical oddity in the source: paragraph 6 prints 'Under Section SOT of the Act', evidently for section 80T. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were partly allowed. Since the language of the statute is unambiguous and short-term capital gains fall within the definition of 'investment income', the assessees are entitled to the concessional rate of tax at 20 per cent on short-term capital gains, being investment income within the meaning of section 115E read with section 115C. On the separate issue, interest on the debentures is assessable on an accrual and not a receipt basis, and the matter was remitted to the Assessing Officer with a direction to exclude the interest already disclosed on a receipt basis and to consider the effect of the sale of shares during the year on the accrual of interest (paragraphs 8, 9, 13 and 14).
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