TaxTMI 
TaxTMI 
2013 (11) TMI 356
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....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 Bombay Stock Exchange (BSE) as on 10.7.2006, which was Rs.214 per share as cost of acquisition of the equity. However, AO adopted weighted average price of shares of M/s. CIPLA ltd., in BSE on 10.7.2006 which was Rs.212.62. Thus, AO made an addition of Rs.94,32,500. Being aggrieved, assessee filed appeal before ld CIT(A). 5. On behalf of assessee, it was contended that the closing price prevailing on BSE as on 10.7.2006 be considered as cost o....
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....ir 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 section 115WC, the 'fair market value' of any specified security or sweat equity share, being an equity share in a company, on the date on which the option vests with the employee, shall be determined in accordance with the provisions of sub-rule (2) or sub-rule (3). (2) In a case where, on the date of the vesting of the option, the share in the company is liste....
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....re on a recognised stock exchange on a date shall he the price of the first settlement 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 th....
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....October, 2009. You have further submitted that since, in your case, the Assessment Year 2008-09, this circular cannot be applied. 4. You have also submitted that provisions of Section 56(2) (vii) and capital gains are different and the said circular is for the transfer of a property without consideration or inadequate consideration and therefore, the methodology provided for valuation for the purpose of Section 56(2) (vii) cannot be applied for the purposes of capital gains. 5. In the above background, your attention is invited to Rule 40C of the Income-tax Rules and specifically sub-rule 2 which provides that 'fair market value" of a share listed on a recognized stock exchange shall be the average of 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 trad....
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....n 115WC(1)(ba). Section 115WC(1)(ba) deals with valuation of fringe benefits provided by the employer to its employees and which are chargeable to fringe benefits tax. The said Rule 40C thus has limited application and could only be applied to determine the fringe benefits tax arising on allotment or transfer of securities or sweat equity shares by the employer free of cost or at concessional rate to its employees. We are to submit that the given case is not in relation to fringe benefits tax ('FBT) and therefore we request your honour that Rule 40C should not be applied in our case. Further, in the notice, your honour has mentioned that since no other method is provided to determine 'fair market value' Rule 40C is applicable to the "fair market value" of the shares on the date of conversion and therefore by applying Rule 40C, the price of conversion is proposed to be adopted at Rs. 212. In this connection, we are to submit that the provisions prescribed under section II5WC(1)(ab) considered in Rule 40C and provisions in respect of 'capital gains' are to be considered separately. Section 115WC(1)(ab....
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....quirements. Should your honour need any further information, we shall be glad to provide the same." 11. Ld CIT(A) after considering the submissions of the assessee has stated that the prevailing price of 'fair market value' can be understood in common parlance with the help of dictionary since they are not defined in the Act. He has further stated that the context in which the term is to be used i.e. determination of cost of acquisition of shares for the purpose of capital gains, is to be kept in mind. Ld CIT(A) considered the decision of Hon'ble Gujarat High Court in the case of CIT v. Prthivi Nath Sharma [1999] 239 ITR 809. In the said case, assessee gifted certain unquoted shares. The issue before the Hon'ble High Court was whether Rule 1D of the W.T. Rules can be applied to determine the value of unquoted shares for the purpose of Gift Tax. Ld CIT(A) has held that the Hon'ble High Court held that there was no fault to make reference to Rule 1D of the W.T. Rules, which was only a statutory guidelines available in the matter to determine the value of shares which were not freely saleable though W.T. Rules are not applicable and cannot be imported on their own for proceed....
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....ly as it provides that if there are two interpretations, the interpretation favourable to the assessee should be adopted but there must exist to equally reasonable two interpretations of statute so that the interpretation favourable to the assessee may be adopted. Ld CIT(A) has stated that assessee has not given any cogent reasons supported with some reasonable authority to claim that the closing price on the date of conversion should be taken as 'cost of acquisition' of equity acquired on conversion from GDR. Whereas Rule 40C and Circular 9 of 2007 are reasonable authority and valid aids to construction and can be adopted as the reasonable guide to determine 'fair market value' of equity on the date of conversion. Hence, there is no basis for the assessee to adopt the closing price as the 'cost of acquisition'. Thus, ld CIT(A) following Rule 40C to determine the 'cost of acquisition' of equity on conversion from GDRs has adopted the average price of Rs.212 as the 'cost of acquisition' of shares of M/s. CIPLA Ltd., to compute short term capital gain as against Rs.212.62 adopted by the AO. Hence, this appeal by the assessee before the Tribunal. 12. On behalf of assessee, reliance....