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TMI Blog2013 (11) TMI 356X X X X Extracts X X X X X X X X Extracts X X X X ..... closing price prevailing in the stock exchange on the date of the advice of redemption. He failed to appreciate that Rule 40C had no application in the matter and erred in taking the average of the opening and closing price prevailing on the stock exchange. 2. The CIT(A) erred in assuming jurisdiction under section 251 and in enhancing the assessed income of the appellant." 2. On perusal of above grounds, it is observed that the issue involved in this appeal is as to what is the meaning of term 'prevailing price' in the Stock Exchange in respect of conversion of Global Depository Receipts (GDRs). 3. The relevant facts are that assessee is a Non-resident trust incorporated in Japan and registered with SEBI as a sub-account of M/s. The Master Trust Bank of Japan Ltd., which in turn is registered as a Foreign Institutional Investor with SEBI. 4. Assessee was holding GDRs of M/s. CIPLA Ltd., and same were converted into shares of M/s. CIPLA Ltd., on 10.7.2006. Thereafter, assessee sold 14,73,828 equity shares of M/s. CIPLA Ltd., and shown short term capital gain of Rs.3,53,48,763. Assessee claimed short term capital gain with respect to the closing price of M/s. CIPLA Ltd., of Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pex court in the case of Distributors (Baroda Pvt Ltd., 155 ITR 120, wherein, Their Lordships observed that "to perpetuate an error is no heroism. To rectify it is the compulsion of judicial conscience". Further, ld CIT(A) referred dictionary meaning of the term 'prevailing price' and after considering the Black Law Dictionary, 9th edition (page 1308) and (page 1691), which defined the term 'market price' and 'fair market value', respectively. Ld CIT(A) has further stated that the term 'prevailing price' or 'fair market value' is also not defined in the Act except in Section 17(2)(vi)(d) of the Income tax Act that provides that 'fair market value' means the value determine in accordance with the method as may be prescribed. That the method has been prescribed in Rule 40C of the I.T. Rules and has been explained in Circular No.9 of 2007. Circular No.9 of 2007 dated 20.12.2007 defined the term 'fair market value' in case of shares given to the employees of a company as 'ESOP'. Rule 40C provides for determination of 'fair market value' of equity given by a company to its employees as sweat equity and it reads as under: "40C(1) For the purposes of clause (ba) of sub-section (1) of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment on such date on such stock exchange: Provided that where the stock exchange quotes both "buy" and "sell" prices, the opening price shall be the "sell" price of the first settlement; (d) "recognised stock exchange" shall have the same meaning assigned to it in clause of section 2 of the Securities Contracts (Regulation,) Act, 1956 (42 of 1956),' (e) "specified date" means,- (i) the date of vesting of the option; or (ii) any date earlier than the date of the vesting of the option, not being a date which is more than 180 days earlier than the date of the vesting; (f) [ *** ]' 8. There is no dispute that shares of M/s. CIPLA Ltd., is listed in BSE and NSE. Ld CIT(A) has stated that the 'fair market value' of the shares on 10.7.2006 of M/s. CIPLA Ltd., is to be determined as per sub-rule (2). He has stated the quotations of M/s. CIPLA Ltd., on 10.7.2006 at page 25 of the impugned order as under: Date Opening price High price Low price Close price WAP No. of shares No. of trades Total turnover (Rs) Spread (Rs.) 11-L C-O 10-7-06 210.00 214.70 208.50 214.00 212.62 489349 5700 104042995 6.20 4.00 9. Ld CIT(A) has stated that average of opening price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the opening price and closing price of the share on the said dale i.e. 10-07-2006 in your case. 6. Now, your attention is invited to quotation of C'IPLA Ltd. on BSE' on 10-07-2006. The opening price, closing price, lowest price, highest price and average price of the CIPLA Ltd. on BSE are as under: Date Opening price High price Low price Close price WAP No. of shares No. of trades Total turnover (Rs) Spread (Rs.) H-L C-O 10-7-06 210.00 214.70 208.50 214.00 212.62 489349 5700 104042995 6.20 4.00 7. It is to be mentioned that Rule 40C has been made effective from 01-04-2008 and the applicable for the Assessment Year 2308-09 onwards. The average price as per above data is Rs. 212 on 10-07-2006. 8. Considering your submission and Rule 40C and since, no other method is provided to determine 'fair market value', I am of the opinion that Rule 40C is applicable to determine the 'fair market value' of the shares on the date of conversion in your case also. Therefore, as per BSE data applied with Rule 40C, the price of conversion is adopted at Rs. 212 instead weighted averaged mean price Rs. 212.62 as adopted & A. O. Adopting the conversion price at Rs. 212 will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions in respect of 'value of Fringe Benefits' provides for determination of the value of specified security or sweat equity shares allotted or transferred by the employer to his employees free of cost or at concessional rate in consideration for employment. As against this, in our case, we need to determine the 'cost of acquisition' to be considered for computation of the capital gains. Therefore, we request your honour that the prescribed valuation methodologies for section 115WC(1)(ab) provided vide Rule 40C should not be applied to our case. Further, reiterate that Section 45 to section 48 of the Income-tax Act, 1961 which contains capital gains provisions are complete code by itself and therefore, the interpretations are not to he imported from other provision. In view of our above submissions, we are to submit that Rule 40C which provides for determination of the fair market value' for valuation of the shares and securities covered by section 115WC(1)(ab) should not be applied to our case. We are to further submit that the Foreign Currency Convertible Bonds and Ordinary shares (through Depository Receipt Mechanism) Scheme, 1993 refers to the price prevailing on the Bomb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscretion, for determination of valuation of assets as on a particular date guiding light can be seen. Ld CIT(A) stated that the Hon'ble Madras High Court in the case of CGT v. S. Venu Srinivasan [1978] 112 ITR 771 also upheld the action of the Tribunal in adopting the price for making adjustment to arrive at the market value of the shares on the date of gift by referring Rule 1D of W.T. Rules. Ld CIT(A) concluded that reference to and reliance on cognate provisions of Act, rules or other Acts is permissible in a case where the specific Act or specific provision or the specific rule is either absent or is ambiguous. Thus, reference to Rule 40C r.w. Circular 9 of 2007 can be relied upon to determine the 'cost of acquisition' of equity on conversion of GDR as the provisions related to valuation of ESOP or sweat equity is pari-materia to the determination of 'cost of acquisition' of equity on conversion from GDR and Income tax Rules are cognate to Income tax Act. Ld CIT(A) has further stated that Income tax Rules are cognate to the Income tax Act. The term 'cost of acquisition' in Section 48(ii) of the Income tax Act is pari-materia to the 'fair market value' of shares or specified se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinary shares of the issuing company prevailing in the BSE or NSE on the date of the redemption, as the cost of acquisition of the underlying ordinary shares. Ld A.R. relying on the CBDT Circular No.3 /1957 dated 28.9.1957, issued in the context of valuation of assets for the purpose of wealth tax, stated that the closing price noted in the Stock Exchange on the valuation date has to be adopted. Since the closing price of the shares of M/s. CIPLA Ltd., on 10.7.2006 was Rs.214, the same should be adopted for computing short term capital gain. Ld A.R. submitted that Rule 40C applies for specific purpose of fringe benefit tax and same cannot be made applicable for the purpose of computing capital gain. He further submitted that in financial year 2005-06, the closing price of the shares on the date of redemption of GDRs was considered and same should be followed in assessment year under consideration. However, ld D.R. strongly supported the order of ld CIT(A) and submitted that Rule 40C specifically provides how to determine the 'fair market value' of shares and same method should be adopted for determining the price of the shares for purpose of computing short term capital gain on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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