2012 (10) TMI 746 - AT - Income Tax

Computation of cost of acquisition of membership card of stock exchange - capital gain arising on transfer of shares - cost of the memberships card to be taken at the cost paid OR proportionate cost - Held that - As from record it is found that the assessee has acquired membership card of Bombay Stock Exchange during the financial year 1999-00 by paying Rs. 2,51,00,000/-. At the time of conversion of Bombay Stock Exchange from AOP to a limited company, the assessee was allotted 10,000 shares for Re. 1/- each together with trading rights. Thus, the cost of acquisition of 10,000 shares worked out to be Rs. 2,51,10,000/-. Accordingly, the cost of 5000 shares would work out to be Rs. 1,25,55,000/- which is liable to be deducted as cost of acquisition of 5000 shares while working out the capital gains. Thus, the assessee has correctly worked out the cost as per the provisions of section 55(2)(ab). Accordingly no infirmity in the order of the CIT(A) in directing the AO to adopt the cost of acquisition of 5000 shares at Rs. 1,25,55,000/- - against Revenue.

Summary

Issues:
- Interpretation of section 55(2)(ab) of the Income Tax Act regarding the cost of acquisition of shares in the context of demutualisation and corporatisation of stock exchanges.
- Correct application of the provisions related to the cost of acquisition of shares and membership cards in the computation of capital gains arising from the transfer of shares.

Analysis:
1. Interpretation of section 55(2)(ab): The case involved a dispute over the interpretation of section 55(2)(ab) of the Income Tax Act concerning the cost of acquisition of shares in the context of the demutualisation and corporatisation of stock exchanges. The provision states that the cost of acquisition of equity shares allotted to a shareholder of a recognized stock exchange under a demutualisation or corporatisation scheme approved by SEBI shall be the cost of acquisition of the original membership of the exchange. The proviso to this section specifies that the cost of trading rights acquired by a shareholder under such a scheme shall be deemed to be nil. The Tribunal clarified that these provisions were introduced to address the conversion of stock exchanges from associations of persons (AOPs) to companies, separating ownership rights and trading rights previously embedded in membership cards. The legislative intent was to determine the cost of acquisition based on the original membership value in the case of equity shares and to consider trading rights as having a nil cost of acquisition.

2. Application of provisions in capital gains computation: The dispute also revolved around the correct application of the provisions related to the cost of acquisition of shares and membership cards in the computation of capital gains arising from the transfer of shares. In this case, the assessee had acquired a membership card of a stock exchange by paying a specific amount. Upon conversion of the stock exchange into a limited company, the assessee was allotted shares along with trading rights. The Tribunal noted that the cost of acquisition of these shares should be based on the original membership value as per section 55(2)(ab). The Assessing Officer had incorrectly considered the cost of acquisition as nil, leading to a higher capital gain assessment. The Tribunal upheld the CIT(A)'s decision to direct the Assessing Officer to compute the capital gain by adopting the correct cost of acquisition, as determined by the assessee in accordance with the provisions of the Act.

In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the decision that the cost of acquisition of shares should be determined based on the original membership value in the context of demutualisation and corporatisation of stock exchanges, as prescribed under section 55(2)(ab) of the Income Tax Act. The judgment emphasized the importance of correctly applying the statutory provisions to ensure accurate computation of capital gains in such cases.