2016 (2) TMI 666 - AT - Income Tax

Depreciation u/s 32 on membership of BSE - value of consideration received by the assessee company on sale/transfer - received 10000 equity shares of BSE Limited and trading rights of BSE Limited in the process of the demutualization and corporatization of BSE, in lieu of membership of BSE - Held that - Pursuant to demutualization or corporatization of BSE, the assessee company has got 10000 equity shares of BSE Limited and trading right of BSE Limited . Thus, the cost of acquisition of 10000 equity shares of BSE Limited shall be taken as written down value of the membership of the BSE as at the beginning of previous year i.e. 01.04.2005 while the cost of acquisition of trading rights of BSE acquired in demutualization or corporatization process shall be deemed to be nil , as per the mandate of Section 55(2)(ab) of the Act. The assessee company shall be entitled for working out cost of acquisition of 4562 shares of BSE Limited sold during the previous year on proportionate basis based on the number of shares sold calculated on the total written down value of the 10000 shares of BSE Limited so allotted on 10-10-2005. The assessee company shall not be entitled for claiming benefit of cost inflation indexation from the period 10-07-2000 i.e. date of acquisition of membership of BSE till 10-10-2005 i.e. when the 10000 equity shares are allotted by BSE Limited along with trading rights in BSE Limited, in lieu of membership of BSE. The assessee company on demutualization or corporatization of BSE Limited is holding 10000 equity shares of BSE Limited and trading right both as assets w.e.f 10-10-2005 . The assessee company shall be entitled to claim benefit of cost inflation index on the sale of 4562 equity shares so sold in the previous year relevant to assessment year 2008-09, from the assessment year 2006-07 till the current assessment year i.e. 2008-09. We order accordingly - Decided against assessee

Summary

Issues Involved:
1. Determination of the cost of acquisition of BSE shares received in demutualization.
2. Calculation of indexed cost of acquisition for long-term capital gains.

Issue-Wise Detailed Analysis:

1. Determination of the Cost of Acquisition of BSE Shares Received in Demutualization:
The primary issue was whether the cost of acquisition of BSE shares should be the original cost of the BSE membership card or its written down value (WDV) after claiming depreciation. The assessee company argued that the cost of acquisition should be the original cost of Rs. 2,41,00,000 as per Section 55(2)(ab) of the Income Tax Act, 1961. The AO and CIT(A) disagreed, noting that the assessee had claimed depreciation on the BSE membership card in earlier years, and thus, taking the original cost would amount to a double deduction. They held that the WDV should be the cost of acquisition, as per Section 50 of the Act, which applies to depreciable assets. The Tribunal upheld this view, emphasizing that the special provisions of Section 50, which start with a non-obstante clause, override the general provisions and mandate the use of WDV for depreciable assets.

2. Calculation of Indexed Cost of Acquisition for Long-Term Capital Gains:
The second issue was whether the indexed cost of acquisition should be calculated from the year the BSE membership card was purchased (FY 2000-01) or from the year of demutualization (FY 2005-06). The assessee contended that the period of holding should include the time from the original acquisition of the BSE membership card, allowing for indexation from FY 2000-01. The Revenue argued, and the Tribunal agreed, that since the BSE membership card was a depreciable asset, the cost of acquisition should be the WDV as at the beginning of the previous year when demutualization occurred (FY 2005-06). Consequently, indexation should be applied from FY 2005-06, not from FY 2000-01. The Tribunal noted that Section 50, which deals with depreciable assets, precludes the application of cost inflation index benefits for the period before demutualization.

Conclusion:
The Tribunal dismissed the appeal, holding that the cost of acquisition of BSE shares should be the WDV of the BSE membership card as at the beginning of the previous year in which demutualization occurred, and indexation should be applied from the year of demutualization (FY 2005-06). The decision harmonizes the application of Sections 50, 55(2)(ab), and 2(42A) of the Income Tax Act, ensuring no double deduction and proper computation of capital gains.