Period of holding is critical and initial step to determine tax liability on Capital Gain on shares, securities, immovable property, bonds or any other capital asset as the rate of tax, implication of carry forward and set off, and benefit of indexation depends upon the nature of asset. i.e. whether capital asset is Short Term Capital Asset or Long Term Capital Asset. In this article, the author has only focused upon the determination of period of holding as per the Income Tax Act, 1961.
Section 2(29A) and Section 2(42A) of the Income tax Act, 1961 define the term long-term capital asset and short-term capital asset respectively. Section 2(29A) is simple definition and provides “long-term capital asset” means a capital asset which is not a short-term capital asset. Therefore, any capital asset which is not short-term capital asset is long term capital asset.
However, Section 2(42A) is detailed provision which define the short-term capital asset.
The main provision provide as under
(42A) “short-term capital asset” means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer :
Provided that in the case of a security (other than a unit) listed in a recognized stock exchange in India or a unit of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963) or a unit of an equity oriented fund or a zero coupon bond, the provisions of this clause shall have effect as if for the words “thirty-six months”, the words “twelve months” had been substituted:
Provided further that in case of a share of a company (not being a share listed in a recognised stock exchange) or a unit of a Mutual Fund specified under clause (23D) of section 10, which is transferred during the period beginning on the 1st day of April, 2014 and ending on the 10th day of July, 2014, the provisions of this clause shall have effect as if for the words “thirty-six months”, the words “twelve months” had been substituted:
Provided also that in the case of a share of a company (not being a share listed in a recognised stock exchange in India), or an immovable property, being land or building or both, the provisions of this clause shall have effect as if for the words “thirty-six months”, the words “twenty-four months” had been substituted.
The main provision provides that the “short-term capital asset” means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer. This general provision with respect to all capital assets.
However, there are certain exception to the main provision which are stated in proviso. Therefore, as the cardinal principal of the Interpretation, a proviso does not travel beyond the provision to which it is a proviso. It carves out an exception to the main provision to which it has been enacted as a proviso and to no other. (See A.N. Sehgal and Ors. v. Raje Ram Sheoram and Ors. (AIR 1991 SC 1406), Tribhovandas Haribhai Tamboli v. Gujarat Revenue Tribunal and Ors. (AIR 1991 SC 1538) and Kerala State Housing Board and Ors. v. Ramapriya Hotels (P)Ltd. and Ors. (1994 (5) SCC 672). The ordinary and proper function of a proviso coming after a general enactment is to limit that general enactment in certain instances.
Therefore, the condition as mentioned in the main provision is subject to the provisions as stated in the proviso to the main provision. Main provision provides that short-term capital asset means a capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer. The proviso provides different holding period for certain assets to consider as short term capital assets.
The following chart exibit the complete analysis of the main provision and proviso to section 2(42A) of the Act. (Reading direction from top to bottom). This chart exhibit the particular capital asset to considered as short term if held for specified period.
Now let’s move to analyze the word “held” in s 2(42A) which is capable of divergent and different connotations and understanding. In this clause, it is used with reference to a capital asset and the term, “capital asset” is not confined or restricted to the ownership of a property or an asset. The legislature could have used different terms like “possessed” or “Owned” but they have used “held”. So, before going ahead, let’s us examined the dictionary meaning of the term “held”, “Owned” and “possessed”. (as all these terms are not defined in the Act).
| Term | Definition as per Black’s Law Dictionary |
| Hold | To possess by a lawful title |
| Own | To rightfully have or possess as property; to have legal title to |
| Possess | To have in one’s actual control; to have possession of. |
In CIT v Frick India Ltd 369 ITR 328, the Delhi High Court observed that the Expression “held by the assessee” means date from when assessee acquired right, got hold of and started enjoying the said asset. It went on to add that the words “held‟ or “to hold‟ have to be given wider meaning to effectuate the object and purpose of provision and therefore these words are not synonymous with right of the assessee over the asset as an owner. A similar view was also taken in the case of CIT v All India Tea and Trading Company Ltd 117 ITR 525 in the Calcutta High Court and in the case of CIT v/s Ved Prakash & Sons (HUF) 207 ITR 148 in the Punjab and Haryana High Court.
The Hon’ble Supreme Court in the cases of CIT v Podar Cement Pvt. Ltd. 226 ITR 625 and Mysore Minerals Ltd. v CIT 239 ITR 775, has held that ownership is not only complete when the Sale Deed has been executed but also complete when anyone is in the possession of the property in his own title so as to exclude others from exercising any right over the said property and as also anyone who is in occupation of the property would be the owner of the property though a formal deed of title may not have been executed.
Hon’ble Andhra Pradesh High Court in the case of Syamala Rao v/s CIT 234 ITR 140 observed that a perusal of the document made it clear that the agreement of sale was executed in 1962 and possession was delivered to the assessee on the same date and the sale consideration was also paid by the assessee to the vendor, though the document was registered on June 8, 1979. The registration of the document related back to the date on which the agreement of sale was executed in favour of the assessee by the vendor. Therefore, the assessee was deemed to be the owner of the property with effect from May 1, 1962. Therefore, the assessee had held the property for more than 36 months and the capital gains derived by the assessee on the sale of the plots could not be assessed as short-term capital gains.
In CIT v Rama Rani Kalia (2013) 358 ITR 499, the court held that the difference between the ‘short-term capital’ asset and ‘long-term capital asset’ depends on the period over which the property has been held by the assessee and not the nature of tittle over the property. The court held that conversion of the rights of the lessee in the property from having lease hold right into free hold is only by way of improvement of her rights over the property, which she enjoyed. It would not have any effect on the taxability of gain from such property, which is related to the period over which the property is held. If the period is less than 36 months, the gain arising from such transfer would be of short-term capital gain.
The term “held” has been interpreted by the Courts wherein unanimous view has been that the said term ‘held’ is different from the term ‘acquire’. The Hon’ble Punjab and Haryana High Court, in the case of CIT Vs. Ved Prakash & Sons (HUF) 207 ITR 148, stated that the term ‘held’ is deliberately used as against term ‘owned’. Hence, a person can hold the asset as owner, lessee, tenant, etc. Therefore, the right to the property is held by a person from the date when he enters into an agreement for purchase and not when he acquires possession.
Thus, from the analysis of the various legal pronouncements, it is settled position of law that the legal ownership of the asset is immaterial for computing the period of holding of the asset.
Based on above, let’s take the illustrative list of capital assets and corresponding period of holding upto which such capital would be considered as short term capital asset:
| Illustrative capital asset | period of holding upto which such capital would be considered as short term capital asset |
| Listed Shares | 12 Months |
| Unlisted Shares | 24 Months (12 Months in case transferred during specified period) |
| Listed Preference Shares | 12 Months |
| Unlisted Preference Shares | 24 Months |
| Listed Debentures | 12 Months |
| Unlisted Debentures | 36 Months |
| Units of Equity Oriented MF | 12 Months |
| Units of Debt Fund | 36 Months |
| Gold, Bullion, Jewellery or silver | 36 Months |
| Paintings | 36 Months |
| Land / Building (if depreciation not claimed) | 24 Months |
| Motor Car (if depreciation not claimed) | 36 Months |
Section 2(41A) also contain the four explanations. Explanation 1 is very lengthy and detailed. Said explanation discuss which period to be included or excluded while calculating period of holding or from which date the period of holding of particular capital assets shall be reckoned. The provisions of said explanations are reproduced as under;
Explanation 1.—(i) In determining the period for which any capital asset is held by the assessee—
(a) in the case of a share held in a company in liquidation, there shall be excluded the period subsequent to the date on which the company goes into liquidation ;
(b) in the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in sub-section (1) of section 49, there shall be included the period for which the asset was held by the previous owner referred to in the said section ;
(ba) in the case of a capital asset referred to in clause (via) of section 28, the period shall be reckoned from the date of its conversion or treatment;
(c) in the case of a capital asset being a share or shares in an Indian company, which becomes the property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, there shall be included the period for which the share or shares in the amalgamating company were held by the assessee ;
(d) in the case of a capital asset, being a share or any other security (hereafter in this clause referred to as the financial asset) subscribed to by the assessee on the basis of his right to subscribe to such financial asset or subscribed to by the person in whose favour the assessee has renounced his right to subscribe to such financial asset, the period shall be reckoned from the date of allotment of such financial asset ;
(e) in the case of a capital asset, being the right to subscribe to any financial asset, which is renounced in favour of any other person, the period shall be reckoned from the date of the offer of such right by the company or institution, as the case may be, making such offer ;
(f) in the case of a capital asset, being a financial asset, allotted without any payment and on the basis of holding of any other financial asset, the period shall be reckoned from the date of the allotment of such financial asset ;
(g) in the case of a capital asset, being a share or shares in an Indian company, which becomes the property of the assessee in consi-deration of a demerger, there shall be included the period for which the share or shares held in the demerged company were held by the assessee ;
(h) in the case of a capital asset, being trading or clearing rights of a recognised stock exchange in India acquired by a person pursuant to demutualisation or corporatisation of the recognised stock exchange in India as referred to in clause (xiii) of section 47, there shall be included the period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatisation;
(ha) in the case of a capital asset, being equity share or shares in a company allotted pursuant to demutualisation or corporatisation of a recognised stock exchange in India as referred to in clause (xiii) of section 47, there shall be included the period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatisation;
(hb) in the case of a capital asset, being any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees), the period shall be reckoned from the date of allotment or transfer of such specified security or sweat equity shares;
(hc) in the case of a capital asset, being a unit of a business trust, allotted pursuant to transfer of share or shares as referred to in clause (xvii) of section 47, there shall be included the period for which the share or shares were held by the assessee;
(hd) in the case of a capital asset, being a unit or units, which becomes the property of the assessee in consideration of a transfer referred to in clause (xviii) of section 47, there shall be included the period for which the unit or units in the consolidating scheme of the mutual fund were held by the assessee;
(he) in the case of a capital asset, being share or shares of a company, which is acquired by the non-resident assessee on redemption of Global Depository Receipts referred to in clause (b) of sub-section (1) of section 115AC held by such assessee, the period shall be reckoned from the date on which a request for such redemption was made;
(hf) in the case of a capital asset, being equity shares in a company, which becomes the property of the assessee in consideration of a transfer referred to in clause (xb) of section 47, there shall be included the period for which the preference shares were held by the assessee;
(hg) in the case of a capital asset, being a unit or units, which becomes the property of the assessee in consideration of a transfer referred to in clause (xix) of section 47, there shall be included the period for which the unit or units in the consolidating plan of a mutual fund scheme were held by the assessee;
5[(hh) in the case of a capital asset, being a unit or units in a segregated portfolio referred to in sub-section (2AG) of section 49, there shall be included the period for which the original unit or units in the main portfolio were held by the assessee;]
(ii) In respect of capital assets other than those mentioned in clause (i), the period for which any capital asset is held by the assessee shall be determined subject to any rules which the Board may make in this behalf.
Explanation 2.—For the purposes of this clause, the expression “security” shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).
Explanation 3.—For the purposes of this clause, the expressions “specified security” and “sweat equity shares” shall have the meanings respectively assigned to them in the Explanation to clause (d) of sub-section (1) of section 115WB.
Explanation 4.—For the purposes of this clause, the expression “equity oriented fund” shall have the meaning assigned to it in clause (a) of the Explanation to section 112A;
Explanation (a) to section 112A provides as under;
“equity oriented fund” means a fund set up under a scheme of a mutual fund specified under clause (23D) of section 10 and,—
(i) in a case where the fund invests in the units of another fund which is traded on a recognised stock exchange,—
(A) a minimum of ninety per cent of the total proceeds of such fund is invested in the units of such other fund; and
(B) such other fund also invests a minimum of ninety per cent of its total proceeds in the equity shares of domestic companies listed on a recognised stock exchange; and
(ii) in any other case, a minimum of sixty-five per cent of the total proceeds of such fund is invested in the equity shares of domestic companies listed on a recognised stock exchange:
Provided that the percentage of equity shareholding or unit held in respect of the fund, as the case may be, shall be computed with reference to the annual average of the monthly averages of the opening and closing figures;
About Author: The author, Manish Harchandani (founder of Harchandani & Associates) is practicing Chartered Accountant and mainly practice in Direct Tax, International Taxation, Transfer Pricing & FEMA related advisory, litigation & compliance matters. He can be reached at https://harchandani.in/contact
Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor Taxguru.in and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.
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If I buy a share on 10-Jan-21 for 100 and sell it on 10-Jan-22 for 120, will it be considered as LTCG or STCG?
How is the period calculated? When u buy a listed share on 10-Jan-21 (the amount is debited from your account), it comes into your demat account only on 11-Jan or 12-Jan. So what is considered as the date of acquisition of the share?
Similarly, when u sell a listed share on 10-Jan-21 (the shares is debited from your account), the consideration comes into your bank account only on 11-Jan or 12-Jan. So what is the date of transfer to be considered?