TMI Blog2013 (11) TMI 356X X X X Extracts X X X X X X X X Extracts X X X X ..... the stock exchange on the date of the advice of redemption. He failed to appreciate that Rule 40C had no application in the matter and erred in taking the average of the opening and closing price prevailing on the stock exchange. 2. The CIT(A) erred in assuming jurisdiction under section 251 and in enhancing the assessed income of the appellant." 2. On perusal of above grounds, it is observed that the issue involved in this appeal is as to what is the meaning of term 'prevailing price' in the Stock Exchange in respect of conversion of Global Depository Receipts (GDRs). 3. The relevant facts are that assessee is a Non-resident trust incorporated in Japan and registered with SEBI as a sub-account of M/s. The Master Trust Bank of Japan Ltd., which in turn is registered as a Foreign Institutional Investor with SEBI. 4. Assessee was holding GDRs of M/s. CIPLA Ltd., and same were converted into shares of M/s. CIPLA Ltd., on 10.7.2006. Thereafter, assessee sold 14,73,828 equity shares of M/s. CIPLA Ltd., and shown short term capital gain of Rs.3,53,48,763. Assessee claimed short term capital gain with respect to the closing price of M/s. CIPLA Ltd., of Bombay Stock Exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Distributors (Baroda Pvt Ltd., 155 ITR 120, wherein, Their Lordships observed that "to perpetuate an error is no heroism. To rectify it is the compulsion of judicial conscience". Further, ld CIT(A) referred dictionary meaning of the term 'prevailing price' and after considering the Black Law Dictionary, 9th edition (page 1308) and (page 1691), which defined the term 'market price' and 'fair market value', respectively. Ld CIT(A) has further stated that the term 'prevailing price' or 'fair market value' is also not defined in the Act except in Section 17(2)(vi)(d) of the Income tax Act that provides that 'fair market value' means the value determine in accordance with the method as may be prescribed. That the method has been prescribed in Rule 40C of the I.T. Rules and has been explained in Circular No.9 of 2007. Circular No.9 of 2007 dated 20.12.2007 defined the term 'fair market value' in case of shares given to the employees of a company as 'ESOP'. Rule 40C provides for determination of 'fair market value' of equity given by a company to its employees as sweat equity and it reads as under: 40C(1) For the purposes of clause (ba) of sub-section (1) of section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on a recognised stock exchange on a date shall he the price of the first settlement on such date on such stock exchange: Provided that where the stock exchange quotes both "buy" and "sell" prices, the opening price shall be the "sell" price of the first settlement; (d) "recognised stock exchange" shall have the same meaning assigned to it in clause of section 2 of the Securities Contracts (Regulation,) Act, 1956 (42 of 1956),' (e) "specified date" means,- (i) the date of vesting of the option; or (ii) any date earlier than the date of the vesting of the option, not being a date which is more than 180 days earlier than the date of the vesting; (f) [ *** ]' 8. There is no dispute that shares of M/s. CIPLA Ltd., is listed in BSE and NSE. Ld CIT(A) has stated that the 'fair market value' of the shares on 10.7.2006 of M/s. CIPLA Ltd., is to be determined as per sub-rule (2). He has stated the quotations of M/s. CIPLA Ltd., on 10.7.2006 at page 25 of the impugned order as under: Date Opening price High price Low price Close price WAP No. of shares No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and therefore, the methodology provided for valuation for the purpose of Section 56(2) (vii) cannot be applied for the purposes of capital gains. 5. In the above background, your attention is invited to Rule 40C of the Income-tax Rules and specifically sub-rule 2 which provides that 'fair market value" of a share listed on a recognized stock exchange shall be the average of the opening price and closing price of the share on the said dale i.e. 10-07-2006 in your case. 6. Now, your attention is invited to quotation of C'IPLA Ltd. on BSE' on 10-07-2006. The opening price, closing price, lowest price, highest price and average price of the CIPLA Ltd. on BSE are as under: Date Opening price High price Low price Close price WAP No. of shares No. of trades Total turnover (Rs) Spread (Rs.) H-L C-O 10-7-06 210.00 214.70 208.50 214.00 212.62 489349 5700 104042995 6.20 4.00 7. It is to be mentioned that Rule 40C has been made effective from 0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s tax ('FBT) and therefore we request your honour that Rule 40C should not be applied in our case. Further, in the notice, your honour has mentioned that since no other method is provided to determine 'fair market value' Rule 40C is applicable to the "fair market value" of the shares on the date of conversion and therefore by applying Rule 40C, the price of conversion is proposed to be adopted at Rs. 212. In this connection, we are to submit that the provisions prescribed under section II5WC(1)(ab) considered in Rule 40C and provisions in respect of 'capital gains' are to be considered separately. Section 115WC(1)(ab) containing provisions in respect of 'value of Fringe Benefits' provides for determination of the value of specified security or sweat equity shares allotted or transferred by the employer to his employees free of cost or at concessional rate in consideration for employment. As against this, in our case, we need to determine the 'cost of acquisition' to be considered for computation of the capital gains. Therefore, we request your honour that the prescribed valuation methodologies for section 115WC(1)(ab) provided vide Rule 40C should not be applied to ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id case, assessee gifted certain unquoted shares. The issue before the Hon'ble High Court was whether Rule 1D of the W.T. Rules can be applied to determine the value of unquoted shares for the purpose of Gift Tax. Ld CIT(A) has held that the Hon'ble High Court held that there was no fault to make reference to Rule 1D of the W.T. Rules, which was only a statutory guidelines available in the matter to determine the value of shares which were not freely saleable though W.T. Rules are not applicable and cannot be imported on their own for proceeding under the Gift Tax Act in the absence of any specific provision under the Gift Tax Act. That in the matter of exercise of discretion, for determination of valuation of assets as on a particular date guiding light can be seen. Ld CIT(A) stated that the Hon'ble Madras High Court in the case of CGT v. S. Venu Srinivasan [1978] 112 ITR 771 also upheld the action of the Tribunal in adopting the price for making adjustment to arrive at the market value of the shares on the date of gift by referring Rule 1D of W.T. Rules. Ld CIT(A) concluded that reference to and reliance on cognate provisions of Act, rules or other Acts is permissible in a case w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de to determine 'fair market value' of equity on the date of conversion. Hence, there is no basis for the assessee to adopt the closing price as the 'cost of acquisition'. Thus, ld CIT(A) following Rule 40C to determine the 'cost of acquisition' of equity on conversion from GDRs has adopted the average price of Rs.212 as the 'cost of acquisition' of shares of M/s. CIPLA Ltd., to compute short term capital gain as against Rs.212.62 adopted by the AO. Hence, this appeal by the assessee before the Tribunal. 12. On behalf of assessee, reliance was placed on Clause 7(3) of the scheme which provides the 'cost of acquisition' of shares on redemption of GDRs as the price of ordinary shares of the issuing company prevailing in the BSE or NSE on the date of the redemption, as the cost of acquisition of the underlying ordinary shares. Ld A.R. relying on the CBDT Circular No.3 /1957 dated 28.9.1957, issued in the context of valuation of assets for the purpose of wealth tax, stated that the closing price noted in the Stock Exchange on the valuation date has to be adopted. Since the closing price of the shares of M/s. CIPLA Ltd., on 10.7.2006 was Rs.214, the same should be adopted for computin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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