Tribunal rules creditor payments not part of share cost for capital gain, rejects fair market value for indexation.

The Tribunal dismissed the assessee's appeal, affirming that the amount paid to creditors cannot be considered as the cost of shares for determining capital gain. Additionally, the Tribunal upheld the decision that the fair market value as of 01-04-1981 cannot be adopted for indexation purposes. The Tribunal found no merit in the assessee's arguments and agreed with the Assessing Officer and Commissioner of Income Tax (Appeals), ultimately dismissing the appeal.

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Issues Involved:
1. Whether the amount of Rs. 1.58 crores paid to creditors can be considered as the cost of shares for determining capital gain.
2. Whether the fair market value as on 01-04-1981 of the membership should be adopted and indexation allowed.

Detailed Analysis:

Issue 1: Cost of Shares for Determining Capital Gain
The assessee received Rs. 1,42,32,400 on the sale of 2737 shares of Bombay Stock Exchange (BSE) but did not offer this as capital gain. The assessee argued that Rs. 1.58 crores paid to creditors of a broking concern should be considered as the cost of shares and eligible for indexation. The Assessing Officer (AO) rejected this claim, stating that the creditors paid off cannot be treated as the cost of sale of the shares since the value of the creditors is not connected to the value of the shares. The AO also noted the absence of documentary evidence to substantiate the claim.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision, noting that the payment to creditors was made long before the purchase of shares from BSE and had no relation to the cost of shares. The CIT(A) found that the payment to creditors was to become an operative member of BSE, not for acquiring shares.

Upon appeal, the Tribunal agreed with the AO and CIT(A), stating that the assessee’s claim lacked cogency and corroborative material. The Tribunal found no infirmity in the well-reasoned orders of the authorities below and dismissed the assessee’s appeal.

Issue 2: Fair Market Value and Indexation
The AO determined the cost of shares based on section 55(2)(ab) of the Income Tax Act, which specifies the cost of acquisition of shares allotted under a scheme for demutualization or corporatization. The AO rejected the assessee’s claim to adopt the fair market value as on 01-04-1981, stating that the legislative intent was to deny the adoption of fair market value and that the cost should be the original cost of acquiring the membership of the stock exchange, estimated at Rs. 20,000.

The CIT(A) upheld this view, stating that the payment to creditors had no bearing on the cost of shares and that the cost of shares should be taken as per section 55(2)(ab).

The Tribunal, upon appeal, found no merit in the assessee’s argument and upheld the decisions of the AO and CIT(A), dismissing the appeal.

Conclusion:
The Tribunal dismissed the assessee's appeal on both counts, affirming that the Rs. 1.58 crores paid to creditors could not be considered as the cost of shares and that the fair market value as on 01-04-1981 could not be adopted for indexation. The Tribunal found the orders of the AO and CIT(A) to be well-reasoned and devoid of any infirmity.

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