TaxTMI 
TaxTMI 
2010 (10) TMI 687
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....sessment proceedings, it was noticed by the Assessing Officer that there was a sum of Rs. 1,57,07,424 credited to the capital account of the assessee as long-term capital gain which was claimed as exempt from tax. The said long-term capital gain was claimed to have been earned by the assessee from the purchase and sale of two scrips namely M/s. Artill Biotec Ltd. and M/s. Shakun Construction Ltd. On examination of the relevant documents filed by the assessee in support of the said claim, it was noticed by the Assessing Officer that the said two scrips were claimed to be purchased during the month of July, 2003 through M/s. Archana Investments but none of these shares were appearing in the demat account of the assessee for the period April 1, 2003 to March 31, 2004. On further verification, he noticed that the shares of M/s. Artill Biotec Ltd. had been transferred to the demat account of the assessee maintained with Cosmos Co-operative Bank during the period November 11, 2004 and November 20, 2004 and sale thereof was effected between November 19, 2004 to December 29, 2004. Similarly, the shares of M/s. Shakun Construction Ltd. were found to be transferred to the demat account of th....
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....d on February 8, 2005 was towards the interest charged by the broker for the delayed payment and not the payment towards the purchase. Moreover, for the determination of the date of transfer of shares listed in a recognised stock exchange in India and also the holding period to be reckoned under section 2 (42A), the Board (vide Circular No. 704 dated April 28, 1995 : [1995] 213 ITR (St.) 7) have clarified that in respect of purchase of shares the holding period shall be reckoned from the date of the broker's note for purchase on behalf of the purchaser and not by actual transfer of shares in the demat account. As such the assessee is entitled to the claim of long-term capital gain." The above submissions made on behalf of the assessee in support of his claim for long-term capital gain were not found acceptable by the Assessing Officer. According to him, the Board Circular No. 704 dated April 20, 1995 sought to be relied upon by the assessee was not applicable in the assessee's case as the same contemplated brokers note to be followed with it delivery of shares accompanied by transfer deeds duly signed by the registered holders. He noted in this context that the shares cla....
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....e Assessing Officer that delivery had not been effected in pursuant to broker's contract note. It was submitted that a letter dated November 5, 2004 issued by the broker M/s. Archana Investments was filed before the Assessing Officer confirming that the shares purchased by the assessee were lying in their pool account and the same were not transferred to the account of the assessee since the full payment against the said shares was not made by him. It was submitted that there is a common practice prevailing in the share trading business to keep the shares in their pool account by the broker till the full payment is made by the purchaser. It was contended that the relevant shares thus were purchased by the assessee in the month of July, 2003 itself as per the broker's note and the profit arising from sale of the said shares in the month of November/December, 2004 was a long-term capital gain exempt from tax. The learned Commissioner of Income-tax (Appeals) found merit in the submissions made on behalf of the assessee before him for the following reasons given in paragraph 4.5 of his impugned order:- "I have carefully considered the submissions made by the learned....
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....oard Circular No. 704 dated April 20, 1995. He invited our attention to the copy of the said Circular placed at page 15 of the assessee's paper book and pointed out that the same was issued taking into consideration the then established procedure of transacting securities through stock exchange where brokers first used to enter into contracts for purchase/sale of securities and thereafter follow it up with delivery of shares, accompanied by transfer deeds duly signed by the registered holders. He contended that the said procedure has now undergone a material change due to introduction of demat accounts where there is no physical delivery of shares and the said Board Circular therefore has no application to decide the date of acquisition of shares in the demat era. He submitted that this change has been taken note of by the Board in its Circular No. 768 issued on June 24, 1998 and the issue relating to the date of acquisition of shares by the assessee in the present case is required to be decided by applying the said circular. He contended that although the learned Commissioner of Income-tax (Appeals) has referred to the said Circular No. 768 dated June 24, 1998, he has relied only ....
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.... to be more than one year by the assessee on the basis of contract notes issued by the concerned broker showing the period of acquisition of shares as July, 2003. In support of this claim reliance was placed by the assessee on the Board Circular No. 704 dated April 20, 1995. As rightly pointed out by the learned Departmental representative at the time of hearing before us by referring to the relevant portion of the said circular, the same was issued keeping in view the procedure of transacting securities through stock exchange as was prevalent at the relevant time where brokers used to first enter into contracts for purchase and sale of shares and thereafter follow it up with delivery of shares accompanied by transfer deeds duly signed by the registered holders. Even in all the judicial pronouncements cited by learned counsel for the assessee, the shares/securities were transacted through stock exchange as per this procedure which was prevailing at the relevant time. The said procedure has, however, undergone a material change with introduction of shares/securities in a dematerialised form and the Central Board of Direct Taxes has duly taken note of the said change in its Circular ....
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....tem is that it is optional and would operate in conjunction with the existing system of holding securities in physical form. Where an investor opts to hold a security with a depository, i.e., not in physical possession of a certificate, the depository shall be intimated of the details of allotment of securities and, accordingly, the depository shall enter in its records the name of the allottee as the beneficial owner of that security. Under this system, physical share certificates are surrendered to the issuing agency and the account maintained with the depository is the only evidence of the ownership of the securities. This conversion of physical certificates into the electronic holdings at the request of an investor is caEed dematerialisation. Whenever purchase/sale, i.e., any transfer of such securities held in dematerialised form is effected, delivery is given or taken by making adjustments in the accounts maintained with the depository by the two parties. The significant feature of the dematerialised securities is that they are fungible, i.e., all the holdings of a particular security will be identical and interchangeable and they will have no unique characteristic such as di....
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....sting holdings, the item that first entered into the account is deemed to be the first to be sold out. However, once a sale is linked with an earlier purchase, for determination of their 'date of transfer' and 'period of holdings', the Board's Circular No. 704 would be applicable. That is to say that the relevant contract notes as explained in Circular No. 704 will have to be referred to, for ascertaining the cost of the security sold and the date of transfer." (emphasis supplied) The Board thus has considered the effect of the change in procedure of transacting shares/securities through stock exchange and its impact on the Circular No. 704 issued earlier. Although the Board has stated that the primary position as regards "date of transfer" and "period of holding" would not change even when the securities are held in the dematerialised form, they have identified the problem which is likely to arise in the absence of a distinct trail linking every share to a certificate and its unique distinctive number linking it with its subsequent sale. The Board has clarified in this regard relying on the provisions of 45(2A) that linking of sale of shares with an earlier purchase can ....