Jigar M. Patel
International Tax Attorney
Any profit or gain arising from the ‘transfer’ of a ‘capital asset’ is treated as taxable income in the nature of capital gains. Section 2(14) of the Income-tax Act defines “capital asset as property of any kind held by a taxpayer, whether or not connected with his business or profession.”
Sale of ‘Personal Effects’ not Taxable
However, ‘personal effects’, being movable property, such as wearing apparel, furniture, household articles, etc. held for personal use by a taxpayer or any member of his family have been excluded from the meaning of ‘capital asset’. A motor car or any other conveyance for personal use has also been held to be a personal effect. It needs to be noted that the transfer of any personal effect would not give rise to any taxable capital gain.
Jewellery & Works of Art not Personal Effect
However, jewellery, paintings, sculptures and other works of art, although held for personal use, have not been excluded from the meaning of capital asset. Under Section 2(14), jewellery has been defined to include ornaments made of gold, silver, platinum or any other precious metal, precious or semi-precious stones and any articles set in any such stones.
Gain on Sale of Silver Utensils whether Taxable?
In a number of judicial decisions, Courts have held that where silver utensils transferred by a taxpayer are ordinarily intended for personal or household use, such silver utensils would constitute personal effects and therefore, the profit or gain arising therefrom could not be charged to tax as capital gains. It has been also held that merely because a property is used on ceremonial occasions, it does not follow that the property is not held for personal use.
In a very interesting case that arose before the Gujarat High Court, the Court confirmed that silverwares comprising of even a large number of dinner sets intended for personal use of the taxpayer, his family members and guests should be treated as personal effects, irrespective of the size of the family and the fact that these items were not used frequently. The Court held that there cannot be a rationing of personal effects of the taxpayer and there was nothing in the provisions of law to assign any restricted meaning to the term ‘personal effects’.
Minimizing Tax-impact on Sale of Jewellery
Even in case of sale of Jewellery, which is treated as a capital asset, the tax impact in respect of long-term capital gains (LTCG) can be minimized by availing the benefit of provisions relating to Indexation of Cost of Acquisition.
Illustration: Mrs. Parikh sells her Jewellery and Ornaments during the FY 2023-24 for a sale consideration of Rs. 60 lakhs. She had acquired these ornaments on her marriage during FY 2007-08, when the cost of acquisition was Rs. 12 lakhs. In FY 2007-08, the Cost Inflation Index (CII) was 129 and the CII for the current FY 2023-24 is 348. The indexed cost of acquisition in this case would work out to Rs. 32.37 lakhs.
Although the actual gain in the hands of Mrs. Parikh is Rs. 48 lakhs (60 lakhs – 12 lakhs), considering the benefit of indexation, the effective taxable gain would be only Rs. 27.63 lakhs (60 lakhs – 32.37 lakhs), resulting in a much lower tax liability. The appropriate tax rate in respect of the taxable LTCG in this case would be 20.8%.
