2014 (2) TMI 686 - AT - Income Tax

Disallowance of transaction charges u/s 40(a)(ia) of the Act Held that - The decision in Techno Shares & Stocks Ltd. v. CIT 2010 (9) TMI 6 - SUPREME COURT OF INDIA and T.R.F. Ltd. v. CIT 2010 (2) TMI 211 - SUPREME COURT followed the transaction charges paid by the assessee to stock exchange constitute fees for technical services u/s. 194J of the Act - the assessee was liable to deduct tax at source while crediting the transaction charges to the account of stock exchange there was no infirmity in the findings of CIT(A) for disallowing expenditure relating to transaction charges Decided against Assessee. Calculation of Indexation benefit Cost of Acquisition of shares Held that - As per the express provisions for determining the holding period of capital asset being equity shares allotted in pursuance to demutualisation or corporatisation of a recognised stock exchange in hand, the period for which the assessee was a member of the recognised stock exchange prior to such demutualisation or corporatisation shall also be included - the holding period of the asset is to be calculated from the acquisition of date of BSE card and not from the date of conversion of BSE card into equity shares - As per the section 55(2)(ab) of the Act, the cost of acquisition in relation to equity shares allotted to a shareholder under a scheme of demutualisation or corporatisation shall be the cost of acquisition of his original membership of the exchange - The cost of acquisition of BSE card shall be the cost of acquisition of BSE shares and the shares are deemed to be acquired on the date of acquisition of BSE card and not from the date of their conversion thus, the date of holding/acquisition of an asset being equity shares allotted pursuant to demutualisation or corporatisation of a recognised stock exchange will be the date of acquisition of original BSE card thus, the enhancement of income made by the CIT(A) on this account is set aside Decided in favour of Assessee.

Summary

Issues:
1. Disallowance of transaction charges under section 40(a)(ia).
2. Calculation of indexation benefit for capital gains on shares.

Analysis:

Issue 1: Disallowance of transaction charges under section 40(a)(ia):
The assessee contested the disallowance of transaction charges under section 40(a)(ia) amounting to Rs.8,37,889. The CIT(A) disallowed the charges based on the judgment in the case of "CIT vs. Kotak Securities Ltd." The assessee argued that section 40 of the Income Tax Act only applies to certain allowable expenditures under sections 30 to 38, not section 28. However, the Tribunal clarified that section 28 deals with income, not deductions, and any expenditure not allowable under sections 30 to 38 cannot be claimed as a deduction under section 28. Referring to the Kotak Securities Ltd. case, the Tribunal upheld the disallowance of transaction charges as fees for technical services.

Issue 2: Calculation of indexation benefit for capital gains on shares:
The appeal also addressed the calculation of indexation benefit for capital gains on shares. The assessee acquired a 'BSE card' which later converted into 'Shares of BSE' and were sold. The AO calculated capital gains from the original acquisition date, but the CIT(A) calculated it from the date of acquiring the shares. The Tribunal analyzed relevant provisions such as section 2(42A)(ha) and section 55(2)(ab) to determine that the cost of acquisition of the 'BSE card' should be considered for indexation benefit, not the conversion date. It was concluded that the indexation should start from the acquisition of the original asset, and the enhancement of income by the CIT(A) was ordered to be deleted.

In conclusion, the Tribunal partially allowed the appeal, dismissing the disallowance of transaction charges and ruling in favor of the assessee regarding the calculation of indexation benefit for capital gains on shares.