2012 (10) TMI 746 - AT - Income Tax

Share Acquisition Cost: Key Factor in Capital Gains Calculation

The Tribunal dismissed the Revenue's appeal, affirming that the cost of acquisition of shares should be determined based on the original membership value ... Cost of acquisition under clause (ab) of section 55(2) in the context of demutualisation/corporatisation - distinction between equity shares allotted on demutualisation and trading/clearing rights - proviso to section 55(2)(ab) deeming cost of trading or clearing rights to be nil - allocation of original membership cost to shares allotted on corporatisation/demutualisationCost of acquisition under clause (ab) of section 55(2) in the context of demutualisation/corporatisation - proviso to section 55(2)(ab) deeming cost of trading or clearing rights to be nil - allocation of original membership cost to shares allotted on corporatisation/demutualisation - Whether the cost of acquisition of equity shares allotted to a member on demutualisation/corporatisation of a recognised stock exchange is to be taken as the cost of the original membership (proportionately), or nil under the proviso to section 55(2)(ab). - HELD THAT: - The Tribunal held that clause (ab) of section 55(2) was introduced to treat the cost of equity shares allotted under a SEBI approved corporatisation/demutualisation scheme as the cost of the original membership. The proviso, inserted later, relates specifically to trading or clearing rights and deems the cost of such trading/clearing rights to be nil; it does not operate to make the cost of equity shares nil. The legislative history and the explanatory clarification in Board's circular No.7/2003 support this construction. The Assessing Officer erred in treating the cost of the equity shares allotted by BSE Ltd. as nil by reference to the proviso. On the facts, the assessee purchased the membership in FY 1999 2000 and was allotted 10,000 shares and trading rights on conversion; the original membership cost is therefore allocable to the shares. Accordingly the proportional cost of 5,000 shares claimed by the assessee (computed from the original membership cost) is to be adopted in computing capital gains. The Tribunal found no infirmity in the CIT(A)'s direction to the AO to adopt the assessee's cost computation in accordance with section 55(2)(ab). [Paras 4, 5]The cost of acquisition of the equity shares allotted on corporatisation/demutualisation is the proportionate cost of the original membership and not nil; the CIT(A)'s direction to adopt the assessee's cost for computing capital gains is upheld.Final Conclusion: The Revenue's appeal is dismissed; the Assessing Officer is directed to compute long term capital gain by adopting the proportionate cost of acquisition of the shares equal to the original membership cost as per clause (ab) of section 55(2). Issues:- Interpretation of section 55(2)(ab) of the Income Tax Act regarding the cost of acquisition of shares in the context of demutualisation and corporatisation of stock exchanges.- Correct application of the provisions related to the cost of acquisition of shares and membership cards in the computation of capital gains arising from the transfer of shares.Analysis:1. Interpretation of section 55(2)(ab): The case involved a dispute over the interpretation of section 55(2)(ab) of the Income Tax Act concerning the cost of acquisition of shares in the context of the demutualisation and corporatisation of stock exchanges. The provision states that the cost of acquisition of equity shares allotted to a shareholder of a recognized stock exchange under a demutualisation or corporatisation scheme approved by SEBI shall be the cost of acquisition of the original membership of the exchange. The proviso to this section specifies that the cost of trading rights acquired by a shareholder under such a scheme shall be deemed to be nil. The Tribunal clarified that these provisions were introduced to address the conversion of stock exchanges from associations of persons (AOPs) to companies, separating ownership rights and trading rights previously embedded in membership cards. The legislative intent was to determine the cost of acquisition based on the original membership value in the case of equity shares and to consider trading rights as having a nil cost of acquisition.2. Application of provisions in capital gains computation: The dispute also revolved around the correct application of the provisions related to the cost of acquisition of shares and membership cards in the computation of capital gains arising from the transfer of shares. In this case, the assessee had acquired a membership card of a stock exchange by paying a specific amount. Upon conversion of the stock exchange into a limited company, the assessee was allotted shares along with trading rights. The Tribunal noted that the cost of acquisition of these shares should be based on the original membership value as per section 55(2)(ab). The Assessing Officer had incorrectly considered the cost of acquisition as nil, leading to a higher capital gain assessment. The Tribunal upheld the CIT(A)'s decision to direct the Assessing Officer to compute the capital gain by adopting the correct cost of acquisition, as determined by the assessee in accordance with the provisions of the Act.In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the decision that the cost of acquisition of shares should be determined based on the original membership value in the context of demutualisation and corporatisation of stock exchanges, as prescribed under section 55(2)(ab) of the Income Tax Act. The judgment emphasized the importance of correctly applying the statutory provisions to ensure accurate computation of capital gains in such cases.