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Income Tax Laws – I

Notes Two observations of the Apex Court in the above decision are noteworthy. Firstly, it
observed that the definition of income in the 1922 Act did not originally include capital
gains. It is only by an artificial and extended definition of the word “income” that capital
gains have been brought under the purview of the Income-tax statute. In this context
reference can also be made to the decision of the Apex Court in the case of Navinchandra
Mafatlal v. CIT [1954] 26 ITR 758 given in the context of interpreting the word “income” in
entry No. 54 in List-I of the Seventh Schedule to the Government of India Act, 1935. The
Court held that the word should be given the widest connotation in view of the fact that it
occurred in a Legislative head conferring the legislative power and that in that context it
did not bear the same meaning as was ascribed to it in cases decided under the Income-tax
statute but included capital gains. The next observation of the Apex Court made in the case
of Sevantilal Maneklal Sheth (supra) that is note-worthy is that it is a sound rule of
interpretation that statute should be as construed as to prevent the mischief and to advance
the remedy according to the true intention of the makers of the statute. It is also to be
noticed that while interpreting a statute the expression used should be given due importance
and no part of the expression is rendered otiose. In this context the remarks of the Apex
Court in the case of Padmaraje R. Kadambande [1992] 195 ITR 877 also deserved to be kept
in mind.

The Court observed that, “a statute cannot always be construed with the dictionary in one
hand and the statute in the other. Regard must also be had to the scheme, context and – as
in this case – to the legislative history of the provision.” Keeping this observation of the
Apex Court in mind we are of the view that, notwithstanding the decision of the Delhi
Bench of Tribunal cited supra, the word “investment income” used in section 115E does
not include within its scope short-term capital gains. If this word is so construed as to
include short-term capital gains within its scope the expression “income by way of long
term capital gains or both” figuring in sections 115D and 115E would be rendered otiose.
Income derived from an asset can be only of two types i.e., either income as normally
construed or capital gains.
The Act has consistently made a distinction between the short-term capital gains and long-
term capital gains, both for applying the tax rates and set off of losses. If the benefit of the
concessional tax rate is extended even to short-term capital gains by including the short-
term capital gains within the scope of the expression “investment income” used in section
115E such an approach would overlook the distinction consistently made in the Act between
the short-term capital gains and long-term capital gains and also, as already observed,
render the expression “long-term capital gains or both redundant”. In other words, if
normal income and both the types of capital gains i.e., short-term and long-term are to be
given benefit of concessional tax rate, the legislature could have stopped with using the
expression ‘investment income’ in section 115E. It specifically restricted the concessional
tax rate to long-term capital gains presumably with a specific purpose and that purpose
appears to be the one mentioned by the learned D.R., i.e., to restrict the outflow of foreign
exchange relatable to “hot money”. In other words, the benefit of concessional tax rate is
extended only if a trader or investor is dedicated to the Indian market for a sufficiently
long time and derives either income like dividends, interest on securities or derives long-
term capital gains. The exclusion of short-term capital gains is to prevent short-term or
speculative inflows and out-flows of foreign exchange.
We may also refer to the provisions of section 204 the relevant portion of which reads as
follows:
For the purposes of this section:

(a) “non-resident Indian” and “foreign exchange asset” shall have the meanings assigned
to them in Chapter XII-A;”
Contd...

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