TaxTMI 
TaxTMI 
2026 (6) TMI 334
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....rming the action of the learned AO in making an addition of Rs. 11,89,68,147 [Rs. 10,76,48,000 pertaining to addition of short-term capital gains and Rs. 1,13,20,147 pertaining to disallowance under Section 14A]; Ground of Appeal No. 2-4: Incorrect computation of Short-Term Capital Gains-Rs. 10,76,48,000 2. erred in upholding the addition of Rs. 10,76,48,000/- made by the learned AO computed basis First-In-First-Out ('FIFO') method, without appreciating the facts of the case and therefore, the impugned addition ought to have been deleted; 3. failed to appreciate that shares held in physical form are distinguishable and not fungible since the share certificates distinctly identify the shares and their cost of acquisition and therefore, the impugned addition made by computing the cost of acquisition as per FIFO method instead of the actual cost of acquisition of shares is bad in law and ought to have been deleted; 4. erred in upholding the application of the FIFO method without appreciating that the provisions of section 45(2A) of the Act are applicable only in respect of securities held in dematerialised form and therefore, the impugned addition i....
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....ever, in the computation of income, it had reduced the above amount from the Business Income but under the head 'Income from Capital Gains‟ offered as taxable Short Term Capital Gains (STGS) at Rs. 43,54,240/-. 4. The AO further observed that the assessee sold 46,66,760 shares of its investment in Brightsolar Renewable Energy Private Ltd.('BREPL‟) during the relevant year for a sale consideration of Rs. 34/- for each share. It had purchased these shares on various dates at different rates as per following table :- Date of Purchase No. of Shares Price Paid Per Unit (Rs.) Value of transaction (Rs.) 14.03.2014 10,000 10 1,00,000 26.11.2014 61,50,000 10 6,15,00,000 27.06.2015 33,64,000 42 14,12,88,000 The sale of the share of BREPL were made as per following table- Date of Sale No. of Shares Consideration (Rs.) Received Per Unit Total Consideration (Rs.) Sale 29.01.2016 46,66,760 34 15,86,69,840 4.1 The assessee while calculating the profit as declared in the books, took the cost of acquisition of the shares as average cost per share by dividing the total purchase consideration by the total num....
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....l holding of the investment." 4.4 Therefore, even if the assessee had to rely on consistent accounting policy followed by it, it should have offered Rs. 5,92,54,720/-to tax under the Capital Gains. The purpose of following Last-in-First-Out was clearly a device to evade taxes. 5. Aggrieved, the assessee filed appeal before the first appellate authority contesting the action of the AO contending that the shares of BREPL were held in physical form and not in dematerialised form and therefore, the application of Section 45(2A) of the Act, which mandates FIFO method in the case of securities held in demat accounts, had no relevance to the present case. It also emphasized that when shares were held in physical form, each lot of acquisition could be distinctly identified through share certificate, distinctive numbers, and transfer deeds, and hence, the cost of each acquisition was ascertainable without resorting to the deeming fiction of FIFO. It was further submitted that the assessee had exercised its right to specifically identify which shares were sold to Trina Solar, namely 33,64,000 shares acquired at Rs. 42/-per share and 13,02,760 shares acquired at Rs. 10/- per share, and ....
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....im of Rs. 43,54,240/- based on selective identification could not be accepted. 6. The ld.AR made a detailed submission claiming the assessee had a wholly owned subsidiary named BREPL in which it held 95,24,000 shares. During the year under consideration, it sold 49% of the shares of BREPL ie 46,66,670 equity shares at Rs. 34 per share for a total consideration Rs. 15,86,69,840/- to Trina Solar (Singapore) Third Pte Limited under a Share Purchase Agreement dated 17 December 2015.The said shares had been acquired in three lots. The assessee had, while arriving at the figure of gain on sale of shares of Rs. 5,92,54,720/-as per to books of accounts, calculated the cost using average cost method as mandated by Accounting standard-13 ('AS-13').Subsequently, while preparing the computation of income for tax purposes, it computed the income from capital gains at Rs. 43,54,240/-. This amount was arrived at by use of 'Specific Identification Method'. 6.1 The shares sold were allotted to it in physical form, were held in physical form and even were sold in physical form. Therefore, the assessee adopted the cost of specific shares which were transferred to the buyer while computing capit....
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....ned. As a result, it is submitted that the provisions of section 45(2A) of the Act cannot be extended to shares held in physical format. 6.4 It is submitted that practically all the assets which are assessed to capital gains, tax is offered on the basis of specific identification method for example, Land, Building, Vehicle, Motor Car, painting, Gold, etc. Hence, section 45 by default applies on the basis of specific identification method and the only exception is section 45(2A) Therefore, the working of specific identification method was correct. However, even if we say that no method is prescribed in the Act, then whatever method is beneficial to the assessee must be adopted. Reliance in this regard is placed on Bright Star Investment (P.) Ltd ((2009) 120 TTJ 498 dated 02 July 2008 (Mumbai Tribunal). 6.5 It is claimed that the shares held by it in physical form bear a distinctive number, which clearly prove that each share held by it can be separately identified. A detailed working in this regard along with the copies of the share certificates showing the distinctive number for each share was enclosed. The said working summarizes the fact that the assessee could identify the....
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.... is the most appropriate method in a scenario where no method for computation of cost is prescribed by the Act. As a result, it is submitted that no tax evasion has taken place in the case of the Appellant. 7. The ld.CIT(DR) in his arguments before the Bench claimed that there was single defense taken by the assessee that since these shares were in physical form and having distinguish folio no. and those specific particular folio no. shares were sold. Therefore, Capital Gain had to be worked out after taking cost price of those particular shares only ignoring AS-13 and FIFO method. By doing so it has deliberately and purposefully reduced its tax liability. By arbitrarily claiming that selling last lot of shares purchased were sold first (LIFO method), the assessee had reduced its tax liability on the Capital gains as below:- 1. Applying FIFO method Rs. 11,20,02,240/- 2. Applying average cost method as per AS-13 Rs. 5,92,54,720/- 3. Applying LIFO method Rs. 43,54,240/- 7.1 He further pleaded that from above, it was clear that the purpose of following Last-in-First-Out was clearly a device to evade taxes. Here, concept of substance over form has to be....
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....for the most neutral and objective approach to be adopted. In such circumstances, the principle embodied in Section 45(2A), namely application of the FIFO method, is equally relevant and should be extended to physical holdings as well to prevent arbitrary tax planning. 7.3 He claimed that for the purchaser, particular folio number did not affect the value of shares determined because all the shares had same underlying value. However, in the case of seller i.e. the assessee, when the shares were acquired in different lots on different period spread over 2 years, then valuation had to be done for all shares at the same rate on the basis of its underlying value and same method should be applied treating all shares as one as distinguished folio number did not change the characteristics of shares and its underlined value. In this regard, para 15 of AS-2 is also referred during hearing as under: "However, when there are large numbers of items of inventory which are ordinarily interchangeable, specific identification of costs is inappropriate since, in such circumstances, an enterprise could obtain predetermined effects on the net profit or loss for the period by selecting a p....
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.... FIFO method is not applicable to physical form and the assessee is not prevented from applying a different method. 8.1 Apart from the method of valuation, the lower authorities have also considered the entire transaction in the nature of tax evasion since there is absolutely no difference in the scrips. We find merits in the conclusion drawn that it was a deliberate attempt on part of the assessee to evade tax which was evident more so from the fact that the computation of gains on sale of investments as shown in books of accounts, which came out to be Rs. 5,92,54,720/- had been correctly shown as per the accounting policies of the assessee. The contentions of the assessee are self-contradictory and defies any logic apart from the palpable case of tax evasion. The assessee has neither followed the FIFO method nor the Accounting Standard -13.Therefore,there is apparent case of inconsistent action on part of the assessee. The purpose of following Last-in-First-Out or the so called method of "specific lot identification" to determine which shares had been sold was clearly a device to evade taxes. The AO has rightly noted that this resulted in a stark divergence between the profit ....
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.... the principles laid down in McDowell. Courts have adopted a balanced approach, distinguishing genuine tax planning from artificial contrivances designed solely to avoid taxes. While the decision in McDowell & Co. Ltd. v. CTO (1985) provided a groundwork for judicial interpretation regarding colourable devices, many other decisions furthered the rigidity of McDowell. In Union of India v. Azadi Bachao Andolan (2003), the Apex Court reaffirmed that arrangements devoid of genuine economic substance could be disregarded. 8.3 In the instant case, so far as the contentions that the provisions of section 45(2A) apply only to dematerialized shares, has been correctly countered by the lower authorities including the ld.CIT(DR). The ld.CIT(A) has rightly observed that when such a large bulk transfer of over forty-six lakh shares is made to a single buyer, the commercial reality is that the shares are fungible and indistinguishable, and the attempt to link the transfer to specific certificates appears more an afterthought designed to minimise taxable gains than a genuine limitation. Moreover, the CBDT circular does not prescribe any particular method for computation of capital gains in res....
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....tion 10(38) of the Income Tax Act, 1961 and the purported findings of the Tribunal reversing the order of the Commissioner of Income Tax (Appeals) are arbitrary, unreasonable and perverse? (ii) Whether on a true and proper interpretation of Circular No.704 dated April 28, 1995 and No.768 dated June 24, 1998, Circular No.704 was applicable in respect of shares in dematerialised form and the date of acquisition of the dematerialised shares was to be taken as the date of purchase when the broker issued his contract note and not the date of entry in the demat account?" We have heard Mr. J.P. Khaitan, learned standing senior counsel, assisted by Ms. Swapna Das, learned advocate for the appellant/assessee and Mr. Tilak Mitra, learned counsel appearing for the respondent/revenue. The short issue involved in the instant case is whether the Circular issued by the Board in Circular No.768 dated 24th June, 1998 would be applicable only in the case of dematerialised share scripts and not in the case of share scripts held in physical form. The learned Tribunal after extracting the said Circular No.768 holds that the said Circular is not applicable to dematerialised sh....
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....ransfer." On a reading of the above Circular it is seen that there is nothing to indicate that the Circular excludes the cases of securities sold in physical form. In fact, the circular deals with securities held in physical form as well as those in dematerialised form. Furthermore, the circular has also clarified the position as to the applicability of the earlier circular No. 704 dated 28.4.1995. Thus we are of the view that the conclusion arrived at by the learned Tribunal holding that Board Circular No. 704 dated 28.4.1995 is not applicable to dematerialised share scripts and the date of acquisition of shares would be the date only when dematerialised shares are entered in the D-mat account with depository is incorrect conclusion arrived at by the learned Tribunal. For the above reason the appeal filed by the assessee is allowed and the substantial questions of law are answered in favour of the assessee." 8.6 In the light of the above discussion and considering the entirety of facts and the circumstances of the case in hand, we therefore, uphold the action of the lower authorities in adopting FIFO and recomputing the Capital gains at Rs. 11,20,02,240/-. The....