INCOME TAX QUESTIONS & ANSWERS SERIES PART - XXVI
Whether the profit on sale of a car in personal use for 6 years be taxable under provisions of the Income Tax Act, 1961
PROBLEM 1: Mr. X, a resident individual is maintaining a car for his personal use. He has sold the care after a period of 6 years at a profit of Rs. 60,000. Discuss whether gain will be taxable or not?.
LET'S FIRST CONSIDER APPLICABLE PROVISIONS OF THE INCOME TAX ACT, 1961
A capital asset is defined to include property of any kind held by an assessee, whether connected with their business or profession or not connected with their business or profession. It includes all kinds of property, movable or immovable, tangible or intangible, fixed or circulating. Thus, land and building, plant and machinery, motorcar, furniture, jewellery, route permits, goodwill, tenancy rights, patents, trademarks, shares, debentures, securities, units, mutual funds, zero-coupon bonds etc. are capital assets.
Section 2(14) of the IT Act,1961
Capital Asset is defined to include
a) Any kind of property held by an assessee, whether or not connected with business or profession of the assessee.
b) Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.
IT MEANS THAT: Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery are a few examples of capital assets. This includes having rights in or in relation to an Indian company. It also includes the rights of management or control or any other legal right.
The following do not come under the category of capital assets:
a. Any stock, consumables or raw material, held for the purpose of business or profession.
b. Personal goods such as clothes and furniture held for personal use.
c. Agricultural land in rural India.
d. 6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds (1980) issued by the central government.
e. Special bearer bonds (1991).
f. Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued under the Gold Monetisation Scheme, 2015.
We have to find out from the definition of Capital Asset under Section2(14) of the IT Act,1961 that whether a car used for personal purpose is a "Capital Asset" or not. In the definition some assets have been excluded as "Personal Effects", that is to say immovable property( including wearing apparel’s, and furniture, excluding jewellery) held for personal use by the assessee or any member of his family depending upon him.
There is no court ruling on the matter whether car is a "Personal effect" with reference to this definition.
LET'S CONSIDER SOME DEFINITIONS OF "PERSONAL EFFECTS"
- BLACK'S LAW DICTIONARY: "Personal Effects" means articles associated with person as property having more or less intimate relation to person of professor".
- RANDOM HOUSE DICTIONARY: "Personal Effects" means privately owned articles consisting chiefly of clothing, toilet items, etc., for intimate use by individual".
- THE CYCLOPAEDIC LAW DICTIONARY: interprets the word as such tangible property as is carried out about person.
- WORDS AND PHRASES: The terms designates articles associated with the person or such tangible property as is worn or carried out by the person.
It means that "Personal Effect" means personal property of an individual and includes, clothing, furniture, mobile phones or other things which we can carry by an individual.
H.H. Maharaja Rana Hemant Singhji Vs. CIT103 ITR 61- the Hon’ble Supreme Court decided that "the Legislature intended only those articles to be included in the definition which are intimately and commonly used by the assessee." Since the expression "Personal effects" is imprecise and it has not been exhaustively defined in the Act, it may be taken to include a conveyance. According to this opinion, there can be no tax on the Capital Gain resulting from the sale of a conveyance which has been taken to cover a scooter, a car and even an aeroplane.
LET'S CONSIDER SOME JUDGEMENTS IN OTHER COUNTRIES
AUSRALIA: "I feel no difficulty about the word "effects" being sufficient to cover a motor car, even apart from authorities – Re. Tormey, Torbay Vs. Tormey  VLR 300.
"if a horse-drawn carriage is a household effect, I see no reason why a Motor car should not be a household effect, or why a Motor car is any less a household effect than a horse-carriage- Ross Vs. Fortlage  60 Sol.Jo.527.
CANADA: Under present conditions of life, a Motor Car used in this fashion -as apparently the testator used his Motor car in his lifetime-should be included under the word "effect"[ Priadham(1953)1DLR782].
NEW ZEALAND: (A testator, by his will, bequeathed to his wife all his" household and personal furniture and effects"-the question was whether the testator’s Austin A40 Motor car passed under the bequest). "The phrase ‘ household and personal effects can comprehend a motor car and will, I think, ordinarily do so unless its user for business purposes has been so considerable as to exclude it from inclusion in that category". [Liverton Vs. Liverton (1954)NZLR612]
ANSWER: after going through above-mentioned decisions and judgements we can say that gain or profit on sale of a car used for personal purposes is not taxable under provisions of the Income Tax Act, 1961.
DISCLAIMER: The above write up is an attempt to share information and knowledge with our readers. The view expressed here are the personal views of the author and same should not be considered as professional advice. It is advisable to consult with your tax consultant before acting on any part of this article.
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