2019 (8) TMI 1770 - AT - Income Tax

Calculation of the long term capital gain - Cost of shares allotted to members of Bombay Stock Exchange (BSE) pursuant to its corporatisation/de-mutualisation - Cost of acquisition of shares of BSE Ltd. sold by the assessee in a situation wherein assessee had claimed depreciation on the cost of membership card. Is the cost of acquisition to be computed as per Section 50 of the Act or Section 55(2)(ab) - what should be the period of holding of shares of BSE Ltd.; will it be computed from date of acquisition of membership card or from date of allotment of shares in BSE Ltd? - Whether indexation benefit on sale of such share would be available from the date of corporatisation/de-mutualisation of BSE or from the date of acquisition of original membership of BSE ? - HELD THAT - Section 55(2)(ab) of the Act and held that cost of trading rights will be NIL as per Section 55(2)(ab) of the Act, whereas for cost of shares, it applied Section 50 of the Act. We find that such a partial application of Section 55(2)(ab) of the Act is not correct application of Section 55(2)(ab) of the Act and, as such, the same is not a good precedent. As regards the reliance placed by the learned DR on the decision of M/s Pavak Securities Pvt. Ltd. vs. ITO 2013 (9) TMI 608 - ITAT MUMBAI the same is distinguishable on facts as in that case, assessee had not argued and claimed that it was eligible to claim entire cost of acquisition of membership card while computing Long Term Capital Gains - assessee itself chose to claim only the WDV as the cost of acquisition of membership card. Such an action on the part of the assessee in that case cannot be said to be a valid binding precedent and thus, the same cannot help the cause of Revenue in the present case. As hold that the cost of acquisition of shares of BSE Ltd. shall be the original cost of acquisition of membership card in terms of Section 55(2)(ab) of the Act even though assessee has claimed depreciation on the cost of membership card in the earlier years. As regards the period of holding of shares of BSE Ltd., we find that as per clause (ha) inserted in Explanation 1 to Section 2(42A) of the Act by the Finance Act, 2003, period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatisation shall also be included in period of holding of shares. In terms of the clear and unambiguous language of the section, I hold that the period of holding of shares of BSE Ltd. shall be reckoned from the date of original membership of BSE and not from date of allotment of shares in BSE Ltd. We agree with the view taken by the learned Judicial Member that the cost of shares will be original cost of the membership card in terms of Section 55(2)(ab) of the Act. The decision arrived at by learned Judicial Member is the appropriate view, and we concur with the view adopted by the learned Judicial Member on this issue. Decided in favour of the assessee.

Summary

Issues Involved:
1. Determination of the cost of shares allotted to members of Bombay Stock Exchange (BSE) pursuant to its corporatisation/demutualisation.
2. Availability of indexation benefit on the sale of such shares.

Issue-Wise Detailed Analysis:

1. Determination of Cost of Shares:
The primary issue was whether the cost of shares allotted to members of BSE pursuant to its corporatisation/demutualisation should be calculated as per Section 50 or Section 55(2)(ab) of the Income-tax Act, 1961, if depreciation was claimed on BSE membership.

The assessee, a company incorporated under the Companies Act, 1956, paid ?94.50 Lakhs to become a member of BSE and claimed depreciation on this membership, which was initially disallowed but later allowed by the Supreme Court, treating it as an intangible asset. Upon corporatisation and demutualisation of BSE, the assessee was allotted shares and trading rights in BSE Ltd. The assessee computed the cost of shares based on the original cost of membership and claimed indexation from the date of acquisition of the membership right.

The Assessing Officer held that the cost of the shares should be the Written Down Value (WDV) of the membership right due to the depreciation claimed, as per Section 50, to prevent double deduction. However, the Judicial Member of the Tribunal argued that Section 55(2)(ab) specifically provides that the cost of acquisition of shares should be the original cost of the membership card, not the WDV, and this should be applicable even if depreciation was claimed. The Accountant Member disagreed, maintaining that Section 50 should apply to prevent double deduction.

The Third Member resolved this by stating that Section 55(2)(ab) is clear and unambiguous, specifying that the cost of shares should be the original cost of the membership card. The provisions of Section 50, which apply to depreciable assets, do not apply to shares as they do not form part of the block of assets for depreciation purposes. The Third Member emphasized that the specific provision of Section 55(2)(ab) should prevail over the general provision of Section 50, and the legislative intent was considered while bringing in Section 55(2)(ab), even if it results in a double deduction.

2. Availability of Indexation Benefit:
The second issue was whether the indexation benefit on the sale of such shares would be available from the date of corporatisation/demutualisation of BSE or from the date of acquisition of the original membership of BSE.

As per clause (ha) inserted in Explanation 1 to Section 2(42A) by the Finance Act, 2003, the period of holding of shares should include the period for which the person was a member of the recognised stock exchange prior to such demutualisation or corporatisation. Therefore, the period of holding should be reckoned from the date of the original membership of BSE, not from the date of allotment of shares in BSE Ltd.

Conclusion:
The Third Member concurred with the Judicial Member's view that the cost of shares should be the original cost of the membership card as per Section 55(2)(ab), and the period of holding for indexation purposes should be from the date of the original membership of BSE. The decision was directed to be listed before the Division Bench for passing an order in accordance with the majority view.