Section 2(14)

Section 2(14) — the law in short

What the courts have decided on section 2(14), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Jindal Equipment Leasing Consultancy Services Ltd v CIT Supreme CourtCuts both ways
  My client held shares of the amalgamating company as stock-in-trade and received shares of the amalgamated company under the court-sanctioned scheme. Is there business income at that point, or only when those shares are sold?
  It depends. Section 28 does not require a sale, an exchange or a transfer - business profit can be realised in kind - so the substitution of shares on an amalgamation can be charged as business income where shares held as stock-in-trade are replaced by shares that are freely realisable and capable of definite valuation. It is not automatic: the Court laid down a fact-sensitive test of commercial realisability, put the burden of establishing it on the Revenue, and held that the charge is attracted only on allotment of the new shares and not on the appointed date or the date the scheme is sanctioned. The Delhi High Court's judgment was affirmed and the matter remitted to the Tribunal to decide, on the facts, whether the shares were stock-in-trade at all and whether what was received was freely realisable.
• Vodafone International Holdings BV v Union of India Supreme CourtHelps taxpayerValidity unconfirmed
  I am buying the shares of a foreign holding company from another non-resident, and that company's subsidiaries hold shares in an Indian company — must I withhold tax under section 195?
  No, on the law as it stood. The Supreme Court held on 20 January 2012 that what was sold was a single share in a Cayman Islands company, which is property situated outside India, in an outright sale between two non-residents on a principal to principal basis. Shares are a bundle of rights and a transfer lock, stock and barrel cannot be broken into components — control premium, non-compete, brand licence, call options — and taxed piecemeal, particularly where the parties fixed one lump sum of US$11.08 billion with no split. The Revenue established no connection with section 9(1)(i), so section 195 did not apply.
• CIT v D.P. Sandu Bros. Chembur (P) Ltd Supreme CourtHelps taxpayerSuperseded by amendment
  The landlord paid my company to give up its tenancy. Is that taxable, and if it cannot be computed as a capital gain can the officer tax it as a casual receipt instead?
  No — he cannot move it to another head. A tenancy right is a capital asset and its surrender is a transfer, so s.45 is the only head that can reach the consideration. For assessment year 1987-88 the Court held the receipt escaped tax altogether because the cost of acquiring the tenancy could not be ascertained and s.48 therefore could not be worked, and it refused to let the department bring the same receipt back under s.10(3) read with s.56. Section 55(2) was amended with effect from 1 April 1995 to supply a cost of acquisition for a tenancy right, so the computation gap this case turned on is closed for later years — the head-of-income holding is what survives.
• N. Bagavathy Ammal v CIT Supreme CourtHelps departmentValidity unconfirmed
  My client received agricultural land from a company in liquidation. Agricultural land is not a capital asset, so is there anything to tax under s.46(2)?
  Yes. The Supreme Court held that the word 'assets' in s.46(2) is not to be read as 'capital assets' as defined in s.2(14). A shareholder who receives assets of any kind on liquidation is chargeable on the market value of those assets on the date of distribution, and the exclusion of agricultural land from the definition of capital asset does not help him.
• Smt. Sarifabibi Mohmed Ibrahim v CIT, Gujarat Supreme CourtHelps departmentValidity unconfirmed
  My land is still entered as agricultural in the revenue records and I have paid land revenue on it right up to the sale. The Assessing Officer says it stopped being agricultural land years ago. Can he do that?
  Yes. Whether land is agricultural land is a question of fact to be decided on a cumulative consideration of all the circumstances, and the revenue entry is only one relevant fact, not a conclusive one. Where the land had not been cultivated for four years, was agreed to be sold to a housing society for building, and permission to sell it for a non-agricultural purpose had been applied for and obtained, the Supreme Court held it was not agricultural land on the date of sale even though it was still recorded as agricultural and land revenue was still being paid.
• CIT v B.C. Srinivasa Setty Supreme CourtHelps taxpayerSuperseded by amendment
  We sold the goodwill our own firm built up over the years. It cost us nothing to acquire. Is the price taxable as a capital gain?
  No, on the law as it stood. The Supreme Court held that the goodwill generated in a newly commenced business is not an asset within section 45, so its transfer is not chargeable under capital gains. Section 48 contemplates an asset in whose acquisition a cost can be envisaged, and no cost element can be identified in self-generated goodwill; nor can the date of its acquisition be fixed, which the computation provisions also require. Charge and computation form an integrated code, and where the computation provisions cannot apply at all, the case was never intended to fall within the charge.
• H H Maharaja Rana Hemant Singhji v CIT Supreme CourtHelps department
  We sold gold sovereigns and silver coins that the family used at puja. Were they personal effects, outside capital gains?
  No. The exclusion for personal effects requires an intimate connection between the article and the person of the assessee - articles meant for personal use. Sovereigns and silver coins customarily used for puja and other ritual purposes are not effects meant for personal use, so they were capital assets and the gain on them could not be excluded.
• CIT v Bai Shirinbai K Kooka Supreme CourtHelps taxpayer
  I held shares as an investment for years and then started dealing in them. When I sell, is my profit measured from what I originally paid or from the market value on the day I began trading?
  From the market value on the day the trading began. A seven-judge bench of the Supreme Court held, by six to one, that where an investor converts shares into stock-in-trade and then sells them in the course of business, the profits must be computed on ordinary commercial principles: the difference between what the article cost the business and what it fetched on sale. What the shares cost this business was their market value on 1 April 1945, the day the trading activity started. There is no notional sale involved; the sale that produced the profit was a real one, and the only question was how to measure it.
• Manjeet Singh Chawla v Dy CIT (TDS) High CourtHelps taxpayerValidity unconfirmed
  If the payment for the fall in option value is not salary, is it capital gains?
  On this decision, neither. The Karnataka High Court held that compensation for the diminution in value of stock options that were never exercised is a capital receipt not chargeable under any head, and quashed the order rejecting the employee's application for a nil withholding certificate.
• Vidarbha Veneere Industries Ltd v ITO High CourtHelps departmentValidity unconfirmed
  The Tribunal orders say s.50C does not touch leasehold rights. Is that still safe advice?
  No, not in Bombay. The High Court held that leasehold rights in land are a capital asset, because s.2(14) speaks of property held by an assessee and not of property owned by him, and that s.50C accordingly applies to the transfer or assignment of leasehold rights in land allotted by MIDC. The Court said it was not in agreement with the Mumbai Tribunal's decision in Atul G. Puranik, which cannot be considered good law, and that CIT v. Greenfield Hotels & Estates is of no assistance once that decision goes.
• Nishithkumar Mukeshkumar Mehta v Dy CIT High CourtHelps departmentUnder appeal
  Is compensation for the fall in value of stock options taxable as salary if I keep the options?
  Yes, on this decision. The Madras High Court held that where the employee paid nothing for the options and kept all of them after receiving the compensation, the whole receipt was a perquisite taxable under the head Salaries, and refused the nil-deduction certificate sought under s.197.
• CIT v Sri Vijay Singh Kadan High CourtHelps taxpayerSuperseded by amendment
  The Assessing Officer has measured the 8 km from the municipal limit to the edge of my village, not to my field, and has measured it as the crow flies. Which is right?
  For a year before assessment year 2014-15, neither. The Delhi High Court held that the distance under s.2(14)(iii)(b) had to be measured from the agricultural land itself to the outer limit of the municipality, by road and not by the straight line or aerial route, and dismissed the Revenue's appeal. The measuring-point holding — from the land, not from the village in which the land lies — still stands; the road-versus-aerial holding does not, because the Finance Act 2013 substituted item (b) with effect from assessment year 2014-15 so that the distance is now measured aerially.
• CIT v Nitish Rameshchandra Chordia High CourtHelps taxpayer
  My land is more than eight kilometres from the municipal limit by road but within eight kilometres as the crow flies. For years before 2014, was it a capital asset?
  No. The Bombay High Court, Nagpur Bench, held that for assessment years before the amendment took effect the distance under section 2(14)(iii)(b) is to be measured by the shortest road distance and not aerially. The amendment prescribing aerial measurement came into force on 1 April 2014 and, as the CBDT circular itself says, applies prospectively from assessment year 2014-15; the very need for the amendment shows there was confusion earlier, and the benefit of that must go to the assessee. Section 11 of the General Clauses Act therefore had no application to assessment year 2009-10. The Revenue's appeals were dismissed.
• Rajendra Kumar Dwivedi v CIT, Kanpur High CourtHelps departmentValidity unconfirmed
  I sold my agricultural land in small plots over several years, leaving roads and drains. The Assessing Officer has taxed part as business income and part as capital gains and invoked s.45(2). Can he split it like that?
  Yes, on facts like these. The Allahabad High Court upheld a finding that land held in an urban area as a capital asset, carved into 43 plots of 60 to 1,815 sq. mtrs. and sold over seven years with roads and drainage provided, had been converted into stock-in-trade, so that s.45(2) applied and the profits on sale were business income. Both substantial questions were decided in favour of the Revenue and the appeals were dismissed.
• CIT v Suresh Chand Goyal High CourtHelps taxpayerValidity unconfirmed
  I inherited agricultural land, got it converted, carved it into plots, laid roads and drains and sold the plots over three years. The Assessing Officer says it is an adventure in the nature of trade. Must the gain be business income?
  Not on these facts. The Madhya Pradesh High Court held that selling one's own land after plotting it out in order to secure a better price is not an adventure in the nature of trade or business, that an isolated transaction can be business only where there is regular activity of purchasing and selling, and that nothing showed the land had been acquired for the purpose of selling it in plots. The Revenue's appeals were dismissed, on that ground and also because the tax effect fell below the CBDT's monetary limit for filing an appeal.
• CIT v Siddharth J. Desai High CourtHelps taxpayer
  I sold farmland to a housing society after taking permission to sell it for residential use. Was it still agricultural land, so that no capital gains arise?
  Yes, on these facts. The Gujarat High Court held the land remained agricultural on the date of sale, so the surplus was not chargeable as capital gains. It set out thirteen factors that bear on the question and held that not all will appear in any case and the decision must be reached on a balanced consideration of the totality of circumstances. Here the land was in the revenue records and bore land revenue, had been cultivated for three of the years the assessee held it, lay outside municipal limits in an undeveloped area, and the assessee never obtained permission for non-agricultural use. Both questions were answered for the assessee.
• Pramod Kumar Jain v DCIT ITATHelps taxpayerValidity unconfirmed
  The company bought back my vested options before I exercised them. Salary or capital gains?
  Capital gains, on this order, and on a fact that does real work. The shares of the Singapore parent were not listed, so the assessee could never exercise his options. Section 17(2)(vi) charges the value of a specified security allotted or transferred to the employee and values it on the date the option is exercised; with no exercise and no allotment there was no specified security and no way to value one, so the salary charge failed. The vested option was itself a capital asset - a right to subscribe to shares - and its repurchase was a relinquishment, so the consideration fell under s.45. The Tribunal said in terms that this leaves the ordinary case alone: exercise the option and the perquisite charge applies as usual.
• ACIT v Manikandan (ITAT Chennai) — money credited to a continuing partner for his 'sacrificing ratio' is not his capital gain, for years before AY 2021-22 ITATHelps taxpayerSuperseded by amendment
  A new partner came into our LLP and paid in a large sum, part of which was credited to the existing partners' accounts in their sacrificing ratio. The AO has taxed my share of it as short-term capital gain for an old year. Is that right?
  Not for a year before assessment year 2021-22. The Tribunal held that where the existing partners do not retire and merely their profit-sharing ratios are realigned on the admission of a new partner, there is no relinquishment of any share in the firm's assets, no transfer within section 2(47), and therefore no capital gain in the continuing partner's hands. It added that the amendments made by the Finance Act 2021 — the substitution of section 45(4) and the insertion of section 9B — take effect only from assessment year 2021-22 and had no application to the year before it, which was AY 2017-18.
• Clayking Minerals LLP v ITO ITATCuts both waysValidity unconfirmed
  I bought agricultural land below the jantri rate. Can s.56(2)(x) apply when the land is not even a capital asset?
  Yes on this bench's reasoning, though it never decided whether this land was agricultural at all. Proceeding on an assumption for argument's sake that the land qualified as agricultural, the Tribunal held that s.56(2)(x) speaks of 'any immovable property' and does not exclude agricultural land; the exclusion of rural agricultural land from 'capital asset' in s.2(14) protects the seller's capital gain, not the buyer. On the second point it held that where the buyer disputes the stamp duty value the Assessing Officer has to refer the valuation to the Departmental Valuation Officer, and restored the matter to him for that reference. The addition was not deleted.
• Raunaq Prakash Jain v ITO ITATHelps taxpayerValidity unconfirmed
  I sold Bitcoin in FY 2020-21, before the VDA regime — capital gains or income from other sources?
  Capital gains, for that year. For AY 2021-22 Bitcoin was a capital asset under s.2(14), so the gain fell under the capital gains head and not s.56, and a holding period of more than three years made it long-term and eligible for s.54F relief on reinvestment in property. This decides only years before the virtual digital asset regime took effect on 1 April 2022; for years inside that regime s.115BBH governs and this answer does not carry across.
• Girdhari Lal v ITO ITATHelps departmentSuperseded by amendment
  The land is recorded as agricultural in the revenue records. Is that enough to keep it outside s.2(14)?
  No. The Tribunal upheld the addition. The land lay within eight kilometres of municipal limits, no crop had been grown on it in the years before sale, and the sale deed itself described it as residential land with structures on it, so it was a capital asset under s.2(14) and s.50C applied to the consideration.
• In re Morgan Stanley and Co. International Limited Advance RulingHelps taxpayerSuperseded by amendment
  We are a UK company registered as an FII, trading index and stock futures and options on Indian exchanges through brokers and custodians. Is that income taxable in India?
  No. The Authority ruled that the income derived by Morgan Stanley and Co. International Limited, a UK resident, from trading in exchange-traded derivative instruments in India would not be taxable in India under the India-UK agreement. It held first that income from derivative trading is business income and not capital gains, derivative contracts being excluded from the definition of capital asset. Business profits are taxable in India only through a permanent establishment, and the brokers, custodians and bankers the applicant used were independent agents acting for many clients in the ordinary course of their business, so no permanent establishment arose under article 5. The ruling binds only that applicant.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.