TMI Blog2014 (9) TMI 164X X X X Extracts X X X X X X X X Extracts X X X X ..... t insofar as record shows that GDSS earned sold profit of ₹ 1.40 crores in the financial year 2005-06 and ₹ 1.95 crores in the financial year 2006-07 relevant to the AY 2007-08 - there was no justification in the order of CIT(A) for allowing any discounting factor while working out price of shares so sold – the order of the CIT(A) in directing the AO to allow bogus loss of ₹ 2 crores is set aside and the matter is remitted back to the AO for fresh adjudication after finding out value of share of GDSS as per NAV in the year of sale. Share allotted to the assessee by BSE in lieu of its membership card was sold by the assessee during the year - long term capital gain arose thereon was computed by the AO by taking the WDV of membership card so allotted - The CIT(A) deleted the addition so made by observing that u/s 55(2)(ab) was introduced by Finance Act, 2001, according to which in case of sale of capital asset being equity share allotted to the shareholder of a recognized stock exchange in India under scheme of demutualization, shall be the cost of acquisition of its original membership of the exchange - CIT(A) found that the original cost of acquisition of membe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rore which resulted in the capital loss of ₹ 2 crores. The AO further observed that shares purchased by the assessee company from GDSS are not listed on any stock exchange as they are issued by private Itd company and they are unquoted equity shares. During the year, the assessee company claimed STCG of ₹ 31172981/- in the return of income wherein the loss of ₹ 2 crore was included pertaining to these shares. However, during the course of assessment proceedings, the assessee's representative Shri S.K. Rathi C.A vide letter dated 26.10.2010 submitted that under the details filed for capital gain assessee incurred loss on sale of unquoted shares which were held exceeding 12 months,' but in calculating capital gain, it was calculated in short term capital gains instead of long term capital gain due to mistake in interpretation of the proviso u/s.2(42A). The short term capital assets means a capital asset held by an assessee for not more than 36 months immediately preceding the date of transfer provided that in the case of a shares held in a company or any other securities listed in a recognized stock exchange in India. The clause shall have effect as if for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akup value of the shares is a recognised method under the Gift Tax Act as well as Schedule III of the Wealth Tax Act. However, under these provisions there is no room for discounting / deduction for nonpayment of dividend. Hence, the claim of the assessee company for such discount/deduction was rejected by the AO. Accordingly loss of ₹ 2.00 crore claimed by assessee was held to be bogus. 4. By the impugned order, loss disallowed by the AO was allowed by CIT(A) after having following observation :- 5.3(i) I have considered the facts of the case carefully. The appellant purchased 10,00,000 shares of GDSS having face value of ₹ 10/- each on 10/5/2005 at a premium of ₹ 20/ - each by making total payment of ₹ 3,O000,000/ - During the year, the appellant sold these shares at par i e @ 10/- each for a total consideration of ₹ 1 crore. This has resulted into loss of ₹ 2 crores The AO has considered this loss as a bogus loss on the ground that the loss has been created artificially set off against the short term capital gain earned during the year The AO also arrived at this conclusion considering the facts that the shares were unquoted shares and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such merger had taken place without appellant selling of shares of M/s GDSS, even the sale consideration of ₹ 1 crore received by the appellant would have been lost. In the facts and circumstances, the selling, of shares was incidental to merger scheme and not connected with the earning of short term capital gain. In any case, sale of shares of M/s. GDSS at a loss of Rs .2 crores was not connected with the earning of short term capital gain for the reason that the short term capital gain on sale of shares of BSE Ltd, took place subsequently Therefore, by considering these two aspects of firstly sale of shares of M/s GDSS in view of merger scheme and secondly the short term capital gain earned subsequent to sale of shares of M/s GDSS, it cannot be said that the loss of ₹ 2 crores was specifically, artificially earned to set off against short term capital gain. There was no immediate link between these two. 5.3(v) The AO in the remand report has reported that the scheme of BSE of buyback of shares was announced earlier to sale of shares of GDSS. There may have been some force in AO s argument but question for consideration is whether the appellant was not having any fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of AO and contended that assessee has sold the shares to close relative at a loss just to set up the capital gains earned on sale of shares allotted by BSE. 7. We have considered rival contentions, carefully gone through the orders of the authorities below and found from the record that assessee is engaged in the business of share broking, trading and dealing in shares and securities. The assessee has purchased 10,00,000 shares of face value of ₹ 10/- of GDSS on 10-5-2005 at a premium of ₹ 20/- per share. Thus, the purchase cost of ₹ 10 lacs shares worked out to be ₹ 3 crores. During the year under consideration, assessee has alleged to have sold these shares at a price of ₹ 10/- as against cost of acquisition at ₹ 30/- to relatives of Director thereby shown a capital loss of ₹ 2 crores. The assessee adjusted this loss against the capital gains earned by it on the sale of shares allotted by BSE in lieu of BSE Membership card. The justification given by the assessee for loss of shares to close relatives at loss was that GDSS has not declared any dividend in the last two years, therefore, discounting factor of 20%/25% was to be allowed wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of assessment proceedings, the assessee was required to justify the cost of acquisition claimed for calculating capital gain on sale of BSE shares. The assessee has claimed the cost at ₹ 49,21,875/- for BSE card. The assessee was asked to explain why the above cost be accepted, since the assessee has already claimed depreciation on the same in the earlier years. Taking the original cost of the BSE card as the amount of cost of acquisition amounts to claiming double deduction on the same asset. The assessee submitted that the above cost is taken in accordance with the provisions of section 55(2)(ab). 10. The AO held that assessee cannot take double deduction on the same asset under two different provisions of I.T. Act. Since, the assessee was allowed claim of written down value of BSE card as the cost and indexation is also allowed from 2005-06, the long term capital gains was worked out as under :- Calculation of Capital gain on sale of BSE Shares. Sales Value 9123 5200 47439600 Less : Cost of acquisition 9123x156.73=1429848 Indexed cost of acquisition CII:2005-06 CII: 2007-08 1429848x551 497 551 497 1585204 45854396 Long term capital gain Note 1 :Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration is as to whether the cost/indexation cost of acquisition of shares sold should be considered as the WDV of the shares after reducing depreciation already allowed or the cost/index cost should be considered on the actual/original cost paid without reducing therefrom the WDV already allowed to the appellant. This issue has been considered and decided by the undersigned in the case of M/s Sino Securities Pvt. Ltd. For Asst. Year 2009-10 as under :- (i) The appellant became member of BSE by acquiring BSE membership card on 20.9.2000 for ₹ 2,50,00,100/-. The Hon ble Supreme Court in the appellant s own case for AYrs.2002-03 to 2005-06 has held that the appellant is entitled for depreciation on BSE membership card treating the same as Intangible asset u/s.32(1)(ii) of the Act. (ii) The BSE on it corporatization into BSEL on 19.8.2005 allotted each holder of the BSE membership card 10,000 equity shares of face value of ₹ 1/-each of newly incorporated company. (iii) The Hon ble ITAT Mumbai in appellant s own case has held that the company is not entitled for depreciation on such membership card of erstwhile BSE after its corporatization on 19.8.2005 i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in effect means that after demutualization, the ownership, the management and the trading rights at the exchange are segregated from one another. A demutualised exchange is way different from a mutual exchange; the three functions of ownership, management and trading are intervened into a single Group in a mutual exchange. The brokers members of the exchange over here are both the owners and the traders on the exchange and they further manage the exchange as well. A demutualised exchange has all these three functions clearly segregated. 2.8 The exchange values all its assets including the value of seats and arrives at a total value. This is then divided into different shares and offered to the public. Later, the shares are listed on the stock exchange itself, and the funds got by selling the shares will be distributed among the members of the exchange as payment for their seats. If the company is not being listed, the shares may be offered to the members, not for transfer. On the other hand, Corporatization of Stock Exchanges is the process of converting the organizational structure of the stock exchange from a non-corporate structure to a corporate structure. Traditionally, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suant to demutualization or corporatization of the of the recognized stock exchange in India as referred to in clause (xiii) of section 47, there shall be included the period for which the person was a member of the recognized stock exchange in India immediately prior to such demutualization or corporatization; and the clause (ha) stipulates that in the case of a capital asset, being equity shares in a company allotted pursuant to demutualization or corporatization of a recognized stock exchange, in India as referred to in clause (xiii) of-section 47, there shall be included the period for which the person was a member of the recognized stock exchange in India immediately prior to such demutualization or corporatization. 2.12 The above provision of the Income Tax laid down the complete details and mode of computation of income from capital gain in case of shares of BSE are sold after demutualization or corporatization of stock exchange. It is also made clear as to what should be the treatment of the cost of acquisition. Now the position of law therefore, is very clear that the assessee will not get any benefit as far as the depreciation on the BSE card is concerned w.e.f. F.Y. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s if for the words thirty-sex months , the words twelve months had been substituted. The Finance Act, 2003 with effect from 1st April, 2004 inserted two new sub-clauses in Explanation 1; namely (h) in the case of a capital asset, being trading or clearing rights of a recognised stock exchange in India acquired by a person pursuant to demutualisation or corporatisation of the recognised stock exchange in India as referred to in clause (xiii) of section 47, there shall be included the period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatisation; (ha) in the case of a capital asset, being equity share or shares in a company allotted pursuant to demutualisation or corporatisation of a recognised stock exchange in India as referred to in clause (xiii) of section 47, there shall be included the period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatisation; . 2.13 The Finance Act, 2003 also bring in the statute new sections such as 47(xiiia) and 55(2)(ab), On the basis of the provisions of the Act as discussed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital gain for allowing indexation thereon. In the result, this ground of appeal as well as additional ground of appeal is allowed. 12. We have considered rival contentions and found that share allotted to the assessee by BSE in lieu of its membership card was sold by the assessee during the year under consideration. The long term capital gain arose thereon was computed by the AO by taking the WDV of membership card so allotted. The CIT(A) deleted the addition so made by observing that u/s.55(2)(ab) was introduced by Finance Act, 2001, according to which in case of sale of capital asset being equity share allotted to the shareholder of a recognized stock exchange in India under scheme of demutualization, shall be the cost of acquisition of its original membership of the exchange. The CIT(A) found that the original cost of acquisition of membership card at ₹ 91,23,000/-. Accordingly, the CIT(A) directed the AO to recomputed the capital gain on sale of shares of BSE by taking the cost of acquisition at ₹ 91,23,000/- and allowing indexation thereon as per provisions of law. Hence, we do not find any infirmity in the order of CIT(A) for directing the AO to recompute cap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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