Virtual Digital Assets can be treated as Capital Assets and Exemption can be claimed u/s 54F - ITAT Jodhpur

Taxability of Virtual Digital Assets (VDAs) - Recent order of ITAT Jodhpur

• Appellant: Raunaq Prakash Jain
• Respondent: Income Tax Officer, Ward-1, Bhilwara
• Assessment Year: 2021-22
• Tribunal: Income Tax Appellate Tribunal (ITAT), Jodhpur Bench
• Date of order: 28/11/2024

The case pertains to the tax treatment of income arising from the sale of Bitcoin, a virtual digital asset (VDA), during the financial year 2020-21. The appellant contested the denial of long-term capital gains (LTCG) treatment and the corresponding exemption under Section 54F of the Income Tax Act, 1961 (the Act). The assessing officer (AO) had treated the gains as income from other sources under Section 56, rejecting both the LTCG classification and the exemption claimed.

Appellant's Contention

1. Bitcoin as a Capital Asset

• The appellant argued that Bitcoin qualifies as a "capital asset" under Section 2(14) of the Act, which broadly defines capital assets to include "property of any kind" unless explicitly excluded.
• Cryptocurrencies were not included in the exclusion list under Section 2(14) at the time of the transactions, and therefore, the gains from their sale should be taxed under the head "Capital Gains."

2. Intent and Nature of Investment

• The appellant had held Bitcoin for more than five years, purchasing it in FY 2015-16 for Rs. 5,05,155 and selling it in FY 2020-21 for Rs. 6,69,49,620. The long holding period demonstrated an investment intent rather than trading activity.
• Proceeds from the Bitcoin sale were reinvested in a residential property, qualifying for exemption under Section 54F.

3. Legal Precedents

• The appellant cited instances where similar gains had been taxed as LTCG, notably in the cases of his father Shri Prakash Chand Jain.
• Referred to the principle of favorable interpretation for taxpayers, as established by the Supreme Court in CIT vs. Vegetable Products Ltd.
• The assessee has further relied upon recent Judgement of Hon'ble Supreme Court in case of Chief Commissioner of CGST Vs. M/s Safari Retreats Pvt. Ltd where it was held that has held that if two interpretations of a statutory provision are possible, the court ordinarily would interpret the provision in favour of a taxpayer and against the revenue

4. Prospective Amendment in Finance Act, 2022

• The Finance Act, 2022 introduced Section 2(47A), defining Virtual Digital Assets (VDAs), and Section 115BBH, specifying the taxation regime for VDAs at 30%, effective April 1, 2022.
• Argued that these amendments are prospective and cannot alter the tax treatment of VDAs in prior periods.

Assessing Officer's (AO) Findings

1. Bitcoin Not a Capital Asset (FY 2020-21)

• The AO held that Bitcoin does not qualify as a "capital asset" under Section 2(14) for the assessment year in question.
• Bitcoin lacks inherent value or utility, unlike traditional capital assets such as stocks, bonds, or real estate.

2. Bitcoin Not a Legal Tender

• Cryptocurrencies are not recognized as legal tender and cannot be classified as property in the ordinary sense.

3. Taxation Under Income from Other Sources

• Gains from Bitcoin transactions were classified as income from other sources under Section 56, denying the LTCG benefit and the associated exemption under Section 54F.

4. Rationale Behind Finance Act, 2022

• The AO argued that the specific provisions for VDAs introduced in the Finance Act, 2022, including Sections 2(47A) and 115BBH, indicate that gains from cryptocurrencies should not be taxed as LTCG for prior periods.

CIT(A) Findings

1. Confirmation of AO's Stand

• The CIT(A) upheld the AO's treatment of Bitcoin gains as income from other sources.
• Cited the absence of explicit recognition of cryptocurrencies as capital assets in Section 2(14) during FY 2020-21.

2. Prospective Nature of VDA Provisions

• Acknowledged that VDAs were explicitly defined only from April 1, 2022, under Section 2(47A). Gains before this date must be taxed under Section 56 as residuary income.

3. Disregard for Past Precedents

· Dismissed the appellant's reliance on past cases, stating that differing AO interpretations do not establish a binding precedent.

 Key Issues Before the ITAT

• Whether Bitcoin qualifies as a capital asset under Section 2(14) for FY 2020-21.
• Whether gains from Bitcoin should be taxed as LTCG or as income from other sources.
• Whether the exemption under Section 54F applies to reinvestment of Bitcoin proceeds in residential property.

 ITAT Observations and Decision

1. Bitcoin as a Capital Asset

• Section 2(14) defines "capital asset" broadly as "property of any kind," and the term "property" includes rights.
• The ITAT found that Bitcoin represents a property right and qualifies as a capital asset, despite the lack of explicit recognition in FY 2020-21.

2. Prospective Nature of Finance Act, 2022

• The provisions defining VDAs and taxing them at 30% under Section 115BBH are prospective and apply only from FY 2022-23 onward.
• The absence of specific provisions for VDAs in FY 2020-21 does not preclude their classification as capital assets.

3. Taxation as LTCG

• Gains from the sale of Bitcoin, held for more than 36 months, were rightly offered as LTCG by the appellant.
• The ITAT rejected the AO's contention that cryptocurrencies lack inherent value, noting that the appellant's rights in Bitcoin qualify as a property interest.

4. Exemption Under Section 54F

• The ITAT allowed the appellant's claim for exemption under Section 54F, as the proceeds from the Bitcoin sale were reinvested in a residential property.

5. Doctrine of Favourable Interpretation

• Reiterated the principle that where two interpretations of a tax provision are possible, the one favouring the taxpayer must prevail (CIT vs. Vegetable Products Ltd.).

Implications of the Decision

Pre-2022 Tax Treatment of Cryptocurrencies

• VDAs held and sold before April 1, 2022, can be classified as capital assets, provided they demonstrate investment intent.
• Gains may be taxed as LTCG if the holding period exceeds 36 months.
• Taxpayers can claim exemptions under Section 54F by reinvesting VDA sale proceeds in residential properties.

This analysis encapsulates the author's understating and interpretation ofthe recent order pronounced by Hon'ble ITAT Jodhpur for cryptocurrency taxation in India and share now be constituted as opinion and advice.