Case Law Details
Doraiswami Rajagopalan Vs DCIT (ITAT Bangalore)
The issue before the ITAT Bangalore was whether the long-term capital gain (LTCG) arising from the redemption of Market Linked Debentures (MLDs) should be taxed at the concessional rate of 10% under Section 112A of the Income Tax Act, 1961, or at 20% under Section 112, as applied by the Assessing Officer (AO).
Brief Facts:
- The assessee, an individual, earned an LTCG of ₹1,95,850 from the redemption of MLDs during the relevant financial year.
- The assessee paid tax at 10% on the LTCG, believing it to be covered under Section 112A.
- However, the Centralized Processing Center (CPC), in its intimation under Section 143(1), taxed the LTCG at 20% under Section 112, creating an additional tax demand.
- The assessee filed a rectification application under Section 154, which the CPC rejected.
- Aggrieved, the assessee filed an appeal before CIT(A)/NFAC, arguing that LTCG on listed debentures should be taxed at 10% under Section 112A.
- The CIT(A) dismissed the appeal, holding that Section 112A applies only to certain specified securities like equity shares and equity-oriented mutual funds, not debentures.
Assessee’s Arguments:
1. Debentures are Securities – The assessee argued that debentures qualify as “securities” under the Securities Contracts (Regulation) Act, 1956 and should be eligible for the concessional 10% tax rate.
2. Listed & Traded on Stock Exchange – The MLDs were listed and traded on a recognized stock exchange, and the transaction was settled through the stock exchange mechanism.
3. Reference to Section 112A – The assessee contended that LTCG on listed securities exceeding ₹1,00,000 is taxable at 10% under Section 112A, and since MLDs were listed securities, they should qualify.
ITAT Decision & Observations:
1. Scope of Section 112A –
- Section 112A applies only to the following securities:
- Equity shares of a company
- Units of an equity-oriented fund
- Units of a business trust
- Debentures, including Market Linked Debentures (MLDs), are not included in this list.
- Since MLDs are not covered under Section 112A, they cannot be taxed at the preferential 10% rate.
2.Interpretation of Securities –
- The ITAT acknowledged that debentures are classified as securities under the Securities Contracts (Regulation) Act, 1956.
- However, for income tax purposes, the legislature has made a clear distinction between different types of securities.
- Section 112A specifically limits the concessional rate to certain types of securities excluding debentures.
3. Application of Section 112 –
- Since MLDs are not covered under Section 112A, they are subject to Section 112, which governs taxation of LTCG on capital assets other than those covered by Section 112A.
- As per Section 112(1)(c)(ii), long-term capital gains from listed securities (other than shares, equity-oriented funds, and business trust units) are taxable at the rate of 20% with indexation or 10% without indexation, whichever is more beneficial to the assessee.
- The CPC & AO rightly applied 20% tax on LTCG from MLDs under Section 112.
Final ITAT Ruling:
- ITAT upheld the CIT(A)’s decision, confirming that MLDs do not qualify for the 10% tax rate under Section 112A.
- The correct rate of tax on LTCG from MLDs is 20% under Section 112.
- The assessee’s appeal was dismissed.
Key Takeaways:
1. Section 112A benefits apply only to equity shares, units of equity-oriented mutual funds, and business trusts.
2. Market Linked Debentures (MLDs) are excluded from Section 112A and are taxable under Section 112 at 20%.
3. The fact that MLDs are listed and traded on a recognized stock exchange does not change their tax treatment.
4. Section 112(1)(c)(ii) applies to listed securities (excluding equity shares, equity-oriented funds, and business trusts), taxing LTCG at 20% (with indexation benefit) or 10% (without indexation), whichever is beneficial to the assessee.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This is an appeal filed by the assessee against the order passed by the NFAC, Delhi dated 27/09/2024 vide DIN No. ITBA/NFAC/S/250/ 2024-25/1069187237(1) for the assessment year 2021-22.
2. The only issue raised by the assessee is that the learned CIT(A)/NFAC erred in confirming the action of the CPC levying the tax on capital gain @ 20% instead of 10%.
3. The necessary facts are that the assessee is an individual and in the year under consideration earned a long-term capital gain (LTCG) of Rs. 1,95,850/- on redemption of Market Linked Debenture. The assessee on the impugned LTCG paid tax @ 10%.
4. The CPC in the intimation under section 143(1) of the Act levied the tax on impugned LTCG @ 20% and raised demand of additional tax liability. The assessee against the intimation order filed rectification application u/s 154 of the Act which was rejected by the CPC.
5. The aggrieved assessee preferred an appeal before the learned CIT(A)/NFAC against the intimation under section 143(1) of the Act.
6. The assessee before the learned CIT(A)/NFAC contended that the long-term capital gain on the sale of listed debentures has been erroneously taxed at 20% by the AO instead of the applicable 10% rate as per section 112A of the Act. The assessee emphasizes that the debentures in question were listed and traded on a recognized stock exchange in India, and the transaction was duly settled through the stock exchange. Despite this, the AO assumed that the debentures were not routed through the exchange and charged an additional 10% tax, moving the total tax rate to 20% under section 112 of the Act.
7. The assessee provides proof of sale from the issuer, Centum Financial Services, and also attaches the BSE settlement confirmation to establish that the debentures were indeed traded on the stock exchange. Further, the assessee highlights that tax at 10% has already been paid, and the return of income has been submitted accordingly. The assessee claimed that as per the provisions of section 112A of the Act, long-term capital gains arising from the sale of listed securities, including debentures when they exceed Rs. 1,00,000 is taxable at concessional rate of 10% only.
8. The assessee argued that under the Securities Contracts (Regulation) Act, 1956, debentures qualify as “securities,” and therefore the benefit of the lower tax rate applicable for sale of listed securities shall be provided.
9. However, the learned CIT(A) dismissed the appeal of the assessee by holding that concessional rate of tax on capital gain under section 112A of the Act is available where LTCG is arising from the transfer of Shares & Unit of Equity Oriented Funds and not on the LTCG arising from transfer of debentures.
10. Being aggrieved by the order of the learned CIT(A)/NFAC, the assessee is in appeal before the Tribunal.
11. The assessee before me has filed the written submission having 16 pages, reiterating the submissions made before the lower authorities.
12. On the other hand, the learned DR before me vehemently supported the order of the authorities below.
13. I have heard the learned DR and gone through the written submissions filed by the assessee and also perused the materials available on record. The primary question before the me is whether the long-term capital gain (LTCG) arising from the redemption of Market Linked Debentures (MLDs) should be taxed at the concessional rate of 10% under section 112A of the Act, or at the rate of 20% as applied by the AO under section 112 of the Act.
13.1 It is noted that section 112A provides a preferential tax rate of 10% on LTCG arising from the transfer of specified assets, which include equity shares of a company, units of an equity-oriented fund, or units of a business trust, provided certain conditions are fulfilled. However, the provision does not extend this benefit to debentures, even if they are listed and traded on a recognized stock exchange in India. The legislature has intentionally limited the scope of section 112A of the Act to specific securities and has not included debentures within its ambit.
13.2 I have also examined the assessee’s argument that debentures qualify as “securities” under the Securities Contracts (Regulation) Act, 1956, and therefore, same should be eligible for the concessional tax rate. However, it was observed that while debentures may fall within the broader definition of securities, the Income Tax Act has clearly distinguished between different types of securities for taxation purposes. The benefits of section 112A are restricted to certain securities, and debentures are not covered under this provision. Hence, the argument of the assessee that the transaction was conducted on a recognized stock exchange does not alter the tax treatment specified under the Act.
13.3 The learned CIT(A) had correctly interpreted the law while dismissing the assessee’s appeal. I, therefore, uphold the view of the learned CIT(A). Since debentures are explicitly excluded from the concessional tax treatment under section 112A of the Act, the correct rate of tax applicable on the LTCG from the redemption of Market Linked Debentures is 20% under section 112 of the Act. In light of the above observations, I conclude that the AO/CPC had rightly applied the tax rate of 20% on the impugned LTCG. The appeal filed by the assessee, therefore, lacks merit and is accordingly hereby dismissed.
14. In the result, the appeal filed by the assessee is dismissed.
Order pronounced in court on 5th day of March, 2025
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