The Raunaq Prakash Jain v. Income Tax Officer case addresses a significant cryptocurrency transaction-related taxation issue in India, i.e., whether gains arising from cryptocurrency sales should be taxed as “capital gains” or “income from other sources”. This decision is particularly important because it clarifies the tax treatment of cryptocurrency gains before the introduction of the specific tax regime for virtual digital assets (“VDA”) with effect from April 1, 2022.
Case Background
In the said case, the taxpayer purchased bitcoin during Financial Year (“FY”) 2015-16 and sold it in FY 2020-21. In his income tax return, the taxpayer claimed that the bitcoin transferred by him qualified as a capital asset, as defined under Section 2(14) of the Income Tax Act, 1961 (“IT Act”). Accordingly, gains arising from the sale of such bitcoin should be regarded as long-term capital gains (“LTCG”), considering he had held the said bitcoin for more than 36 months. Further, the taxpayer claimed exemption under Section 54F of the IT Act, which exempts LTCG applied towards purchase or construction of a residential house, subject to various conditions.
However, the Assessing Officer (“AO”) rejected the taxpayer’s claim and held that bitcoin does not qualify as capital asset under Section 2(14) of the IT Act. Accordingly, the gains arising from its disposal should be taxed as income from other sources. Consequently, the AO also rejected the taxpayer’s claim for exemption under Section 54F of the IT Act. The aggrieved taxpayer unsuccessfully appealed before the Commissioner of Income-tax (Appeals) and subsequently, preferred an appeal before the Income Tax Appellate Tribunal, Jodhpur (“Tribunal”).
Tribunal Decision
The primary issue before the Tribunal was whether to classify cryptocurrency as a “capital asset” under the IT Act, and if the taxpayer was eligible to claim exemption under Section 54F of the IT Act.
The Tribunal noted that, under Section 2(14)(a) of the IT Act, capital asset has been defined to mean “property of any kind held by an assessee, whether or not connected with his business or profession”. The Tribunal noted that the ‘property’ has been defined under the IT Act to mean “any right in or in relation to an Indian company, including right of management or control or any other right whatsoever”. Accordingly, the Tribunal held that since all rights are property, the taxpayer’s right in the bitcoin, albeit a virtual asset, should qualify as capital asset within the definition under Section 2(14)(a) of the IT Act.
The Tribunal further clarified that in order to qualify as a capital asset, it not necessary for the taxpayer to actually own something as property. Even if a person has a right or claim on a property, the same can qualify as capital asset. Further, looking into the profile of the taxpayer, the Tribunal noted that the taxpayer’s only source of income was his salary, which he had invested in shares and cryptocurrency. Thus, considering that the taxpayer was not engaged in trade of crypto currencies and had held his investment therein for a long time, the Tribunal noted that the intention of the taxpayer was to earn LTCG.
Thus, relying on the above, the Tribunal agreed to the taxpayer’s claim that the gains should be taxed as capital gains. Accordingly, they allowed him the exemption under Section 54F of the IT Act.
Takeaway
Please note that with effect from April 1, 2022, a specific regime has been introduced for the taxation of gains arising from sale of VDA, which inter alia includes cryptocurrencies, non-fungible tokens etc. Under the said regime, gains arising from sale/disposal of VDAs are subject to tax at a rate of 30 percent, with no deductions allowed except for the cost of acquisition. However, having said the above, in absence of any specific provision for taxation of cryptocurrencies prior to April 1, 2022, this judgment provides the much-needed clarity to taxpayers.
For further information, please contact:
Kunal Savani, Partner, Cyril Amarchand Mangaldas
kunal.savani@cyrilshroff.com
