2019 (12) TMI 1232 - AT - Income Tax

Cost of acquisition of shares released against cancellation of Global Depository Receipts (GDRs) - HELD THAT - What ideally should have been taken as the cost of acquisition/FMV of shares of Bajaj Hindustan Ltd., for computing the Short term capital gain/loss is the aforesaid price. However, considering the fact that the revenue authorities have agreed with the assessee with regard to the applicable date for cost of acquisition as 12.04.2006, we do not want to indulge much into that aspect of the issue. Therefore, considering all relevant factors, we are of the view that share opening price of ₹ 523.95 as considered by the assessee is closest to the closing price of the very same shares as on 10.04.2006, wherein, the shares were last traded prior to 12.04.2006. Therefore, in our view, the assessee was justified in adopting the cost of acquisition of shares at ₹ 523.95. The allegation of the revenue authorities that the assessee has chosen the price of share which is more suitable to him, in our view, is not a correct finding of fact as the assessee has not taken the highest price of the share quoted during the date at ₹ 525. After considering pros and cons of the issue, we hold that adoption of share opening price of ₹ 523.95 as cost of acquisition is the most appropriate and rational in the given facts and circumstances of the case. Accordingly, we direct the Assessing Officer to accept the short term capital loss computed by the assessee. Consequently, the addition made in this regard is deleted. Setting off Long term capital loss against Long term capital gain - whether long term capital loss arising on sale of shares can be set off against long term capital gain arising on sale of shares claimed to be exempt u/s. 10(38) ? - HELD THAT - Following the consistent view expressed by different Benches of the Tribunal on identical issue, we hold that long term capital loss arising out of sale of shares cannot be set off against long term capital gain from shares subjected to STT and claimed exempt u/s. 10(38) of the Act. Accordingly, we direct the Assessing Officer to allow carry forward of long term capital loss as claimed by the assessee.

Issues Involved:

1. Determination of the cost of acquisition of shares of Bajaj Hindustan Limited released against the cancellation of Global Depository Receipts (GDRs).
2. Setting off Long Term Capital Loss against Long Term Capital Gain.

Detailed Analysis:

1. Determination of the Cost of Acquisition of Shares:

The primary issue concerns the cost of acquisition of shares of Bajaj Hindustan Limited released against the cancellation of GDRs. The assessee, an approved sub-account of The Master Trust Bank of Japan Limited, filed its return of income for the Assessment Year 2007-08, declaring a total income of ?345,45,121,702 and claimed a Short Term Capital Loss of ?12,49,42,867. The Assessing Officer (AO) found that the GDRs issued against the underlying shares of Bajaj Hindustan Limited were redeemed on 11.04.2006, a public holiday when the Indian share markets were closed. Thus, the assessee took the opening price of shares on the next working day, 12.04.2006, at ?523.95 as the cost of acquisition. However, the AO determined the cost of acquisition at ?504.10, the weighted average price of shares on 12.04.2006, resulting in an addition of ?1,19,10,000 to the income of the assessee. The Commissioner of Income Tax (Appeals) upheld this addition.

The assessee argued that as per paragraph 7(3) of the GDR Scheme, the cost of acquisition should be the price prevailing on the date of redemption, which was a public holiday, hence the next working day’s opening price was considered. The AO and CIT (Appeals) unjustifiably adopted the weighted average price, which was not mandated by the GDR Scheme or any statutory provision.

The Tribunal noted that paragraph 7(3) of the GDR Scheme refers to the price prevailing on the stock exchange on the date of advice of redemption, not the weighted average price. The Tribunal held that in the absence of a specific mandate for adopting the weighted average price, the opening price of ?523.95, being closest to the closing price on the last trading day before the redemption date, was appropriate. The Tribunal directed the AO to accept the short term capital loss computed by the assessee, deleting the addition made by the AO.

2. Setting off Long Term Capital Loss against Long Term Capital Gain:

The second issue pertains to the setting off of Long Term Capital Loss against Long Term Capital Gain. The assessee had a Long Term Capital Gain of ?519,21,44,332, exempt under section 10(38) of the Income Tax Act, and claimed a carry forward of Long Term Capital Loss of ?31,00,52,918. The AO set off the Long Term Capital Loss against the exempt Long Term Capital Gain, resulting in the disallowance of carry forward of loss. The CIT (Appeals) upheld this decision.

The assessee contended that section 10(38) refers to income and does not include loss. Hence, Long Term Capital Loss cannot be set off against exempt Long Term Capital Gain. The Tribunal referred to various decisions, including Raptakos Brett & Co. Ltd. vs. DCIT, where it was held that the exemption under section 10(38) applies only to income and not to loss. The Tribunal observed that the income from the sale of shares is not exempt at the source but only on fulfilling certain conditions. Therefore, the entire source is not exempt, and the Long Term Capital Loss should not be set off against exempt Long Term Capital Gain.

The Tribunal followed the consistent view expressed by different Benches and held that Long Term Capital Loss arising from the sale of shares cannot be set off against Long Term Capital Gain exempt under section 10(38). The AO was directed to allow the carry forward of Long Term Capital Loss as claimed by the assessee.

Conclusion:

The appeal was allowed, directing the AO to accept the short term capital loss computed by the assessee and to allow the carry forward of Long Term Capital Loss without setting it off against exempt Long Term Capital Gain.

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