2010 (10) TMI 687 - AT - Income Tax

LTCG or STCG - assessee in the present case is an individual who filed his return of income for the year under consideration on January 9 2006 declaring total income at Rs. 11, 85, 390 - The issue which is involved in the present case is relating to the determination of date of transfer and period of holding of shares by the assessee which were sold by him in the year under consideration giving rise to capital gain - Circular No. 768 issued on June 24 1998. In the said Circular the Board has discussed the said change as well as the salient features of the new system - The claim of the assessee regarding date of transfer and period of holding of the shares sold thus was made on the basis of purchase of shares claimed to be made through broker in the month of July 2003 which were stated to be transferred to the so called pool demat account maintained by the broker - It is therefore necessary to trace the corresponding purchases of shares from the said demat account maintained by the broker in order to verify whether such purchases of respective shares were actually made by the said broker on behalf of the assessee and the shares so purchased were credited to the said demat account and were lying there till the same were transferred to the demat account of the assessee after a period of more than one year - Only on such verification would it be possible to establish the link between sale of shares with the corresponding purchases as envisaged in the Central Board of Direct Taxes Circular No. 768 dated June 24 1998 and once such link is established the date of transfer of shares to the assessee and the period of holding of the said shares by him could be determined by applying Board Circular No. 704 - Appeal is allowed for statistical purpose

Summary

Issues Involved:
1. Classification of capital gain as long-term or short-term.
2. Applicability of Board Circulars No. 704 and No. 768.
3. Determination of the date of transfer and period of holding of shares.

Issue-Wise Detailed Analysis:

1. Classification of Capital Gain as Long-Term or Short-Term:
The primary issue in this case was whether the capital gain arising from the sale of shares of M/s. Artill Biotec Ltd. and M/s. Shakun Construction Ltd. should be treated as long-term capital gain (LTCG) or short-term capital gain (STCG). The assessee claimed the gain as LTCG, which is exempt under section 10(38), while the Assessing Officer (AO) treated it as STCG. The AO noted discrepancies in the demat account and the timing of payments, concluding that the shares were held for less than one year. The Commissioner of Income-tax (Appeals) (CIT(A)) accepted the assessee's claim based on the broker's note and Board Circular No. 704, treating the gain as LTCG.

2. Applicability of Board Circulars No. 704 and No. 768:
The assessee relied on Board Circular No. 704 dated April 28, 1995, which states that the holding period should be reckoned from the date of the broker's note. The AO rejected this, arguing that the circular was not applicable in the demat era, where shares are held electronically. The CIT(A) disagreed with the AO, interpreting the circular to support the assessee's claim. The Revenue argued that the CIT(A) did not consider Circular No. 768 dated June 24, 1998, which addresses the changes in the trading system due to dematerialization of shares.

3. Determination of the Date of Transfer and Period of Holding of Shares:
The Tribunal noted that the determination of the date of transfer and period of holding is crucial. According to Circular No. 768, the FIFO (First-In-First-Out) method should be applied to dematerialized shares to establish the link between the purchase and sale of shares. The CIT(A) did not verify this link, relying solely on Circular No. 704. The Tribunal emphasized the need to trace the corresponding purchases in the broker's demat account to verify the assessee's claim that the shares were purchased in July 2003 and held for more than one year before being sold.

Conclusion:
The Tribunal set aside the orders of the AO and CIT(A) and remanded the matter back to the AO for fresh adjudication. The AO was directed to verify the link between the purchase and sale of shares using the FIFO method as per Circular No. 768 and then apply Circular No. 704 to determine the date of transfer and period of holding. The AO was instructed to provide the assessee with sufficient opportunity to present evidence.

Order Pronounced:
The appeal of the Revenue was treated as allowed for statistical purposes, with the order pronounced on October 20, 2010.