Mr.Lalit Kumar Raichur, Bangalore V. Income Tax Officer, Bangalore

ITA 2100/BANG/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8508 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-03-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 30-11-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: V. SRINIVASAN
• Keywords: Salary income; Cost of acquisition; Avoidance of tax; Set aside; Capital Gains
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC - A BENCH : BANGALORE BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NO. 2100/BANG/2016 ASSESSMENT YEAR : 2009-10 SHRI LALIT KUMAR RAICHUR, B-306, SOBHA JADE, BEHIND JAKKUR FLYING SCHOOL, BANGALORE 560 064. PAN: AFEPR 0487F VS. THE INCOME TAX OFFICER, WARD-6(2), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI V. SRINIVASAN, ADVOCATE RESPONDENT BY : SHRI AR.V. SREENIVASAN, JCIT (DR) DATE OF HEARING : 20.02.2017 DATE OF PRONOUNCEMENT : 15.03.2017 O R D E R PER VIJAY PAL RAO, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER DATED: 22.07.2016 OF CIT(A) FOR THE ASSESSMENT YEAR 2009-1 0. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS. ITA NO. 2100/BANG/2016 PAGE 2 OF 7 2. THE ONLY ISSUE ARISES IN THIS CASE IS RE-COMPUTATIO N OF CAPITAL GAIN ON SALE OF 9,000 SHARES BY CONSIDERING THE BONUS SHARES. T HE ASSESSEE IS AN INDIVIDUAL AND DRAWING INCOME FROM SALARY, CAPITAL GAINS AND OTHER SOURCES. THE ASSESSEE CLAIMED SHORT TERM CAPITAL L OSS OF RS. 21,72,866/- ON ACCOUNT OF SALE OF 9,000 SHARES OF M/S. SESA GOA LTD. THE AO HAS RESTRICTED THE SHORT TERM CAPITAL LOSS AT RS. 7,50, 886/- BY CONSIDERING THE 1:1 BONUS SHARES ISSUED BY THE COMPANY. CONSEQUENT LY THE AO HAS DENIED THE CARRY FORWARD OF SHORT TERM CAPITAL GAIN CLAIMED BY THE ASSESSEE. THE ASSESSEE CHALLENGED THE ACTION OF TH E AO BEFORE THE ITA NO. 2100/BANG/2016 PAGE 3 OF 7 CIT(A) BUT COULD NOT SUCCEED AS THE CIT(A) HAS CONF IRMED THE ACTION OF AO. 3. BEFORE THE TRIBUNAL, THE LD. AR OF THE ASSESSEE HAS REFERRED TO SECTION 55(2)(AA) AS WELL AS SECTION 94(8) OF THE ACT AND S UBMITTED THAT THE BONUS STRIPPING IS APPLICABLE ONLY IN RESPECT OF MUTUAL F UNDS U/S. 94(8) AND NOT IN RESPECT OF THE SHARES. THUS, THE LD. AR HAS CON TENTED IT THAT THE COST OF ACQUISITION OF THE SHARES HAS TO BE CONSIDERED PRIO R TO THE BONUS AND THEREFORE THE CLAIM OF THE ASSESSEE REGARDING SHORT TERM CAPITAL GAIN CANNOT BE DISALLOWED. IN SUPPORT OF HIS CONTENTION HE HAS RELIED UPON THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL DA TED 20.09.2013 IN THE CASE OF DCIT VS SHRI B.G. MAHESH IN ITA NO. 450/BAN G/2012 AND CO NO. 99/BANG/2012 AND SUBMITTED THAT WHEN THE COST O F BONUS SHARES AS PER SECTION 55(2)(AA) ARE TO BE TAKEN AT NIL THEN T HE BONUS STRIPPING REFERS TO SECTION 94(8) IS NOT APPLICABLE. ON THE OTHER HAND, THE LD. DR HAS RELIED UPON THE ORDER OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE ASSESSEE PURCHASED SHARES PRIOR TO THE RECORD DATE AND SOLD THE SAME AFTER THE RECORD DATE. THEREFORE, THE COST OF THE SHARES HAS TO BE ADJUSTED BY THE NUMBER OF BONUS SHARES ALLOWED TO THE ASSESSEE. ITA NO. 2100/BANG/2016 PAGE 4 OF 7 4. HAVING CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD IT IS NOTED THAT THE ASSESSEE SOLD 9,000 SHA RES ON 01.09.2008 FOR THE CONSIDERATION OF RS. 14,22,000/-. THEREAFTER O N 06.09.2008 BONUS SHARES AT THE RATIO 1:1 WAS RECEIVED BY THE ASSESSE E. WHILE COMPUTING THE CAPITAL GAIN THE ASSESSEE TOOK THE COST PRICE A S IT WAS PRIOR TO THE ISSUE OF BONUS SHARES. THE AO HAS WORKED OUT THE C OST OF SHARES BY CONSIDERING THE BONUS SHARES AND THEREFORE RECOMPUT ED THE SHORT TERM CAPITAL GAIN. THERE IS NO DISPUTE REGARDING THE SA LE PRICE. HOWEVER THE AO HAS TAKEN INTO CONSIDERATION THE BONUS SHARES WH ICH IS NOT PERMISSIBLE AS PER THE PROVISIONS OF THE ACT. THER E IS NO DISPUTE THAT THE ASSESSEE SOLD THE SHARES AFTER THE RECORD DATE AND THEREFORE THE ASSESSEE WAS ENTITLED FOR ISSUE OF BONUS SHARES AND RECEIVED THE EQUAL NUMBER OF BONUS SHARES AFTER SALE OF 9,000 SHARES. HOWEVER, THE BONUS STRIPPING IS NOT PERMISSIBLE IN CASE OF SHARES AS PER SECTION 94 (8) WHICH IS APPLICABLE ONLY IN THE CASE OF MUTUAL FUND UNITS. THE COORDIN ATE BENCH OF THE TRIBUNAL IN THE CASE OF SHRI B.G. MAHESH VS DCIT (S UPRA) WHILE DEALING WITH AN IDENTICAL ISSUE HAS HELD IN PARA 6.4.1 TO 6 .4.4. 6.4.1 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERU SED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD INCLUDI NG THE WRITTEN SUBMISSIONS MADE AND THE JUDICIAL DECISIONS CITED. THE BASIC FACTS OF THE CASE ARE NOT IN DISPUTE. THAT THE SHARES OF TH E SAID COMPANIES WERE BOUGHT CUM-BONUS WITH A VIEW TO ACQUIRING THE BONUS SHARES HAS BEEN CLEARLY BROUGHT OUT BY THE ASSESSING OFFIC ER AND THE SAME IS NOT IN DISPUTE. ALSO, THE FACT THAT THE ASSESSEE S OLD THE ORIGINAL SHARES IMMEDIATELY AFTER THE ALLOTMENT OF BONUS SHA RES OF THESE COMPANIES IS ALSO AN INDISPUTABLE FACT ON RECORD. IN VIEW OF THESE SALE TRANSACTIONS, THE ASSESSEE HAS INCURRED LOSS I N THE CURRENT YEAR ITA NO. 2100/BANG/2016 PAGE 5 OF 7 EVEN WHILE HIS WEALTH IS INTACT, AS HE RETAINS THE BONUS SHARES ALLOTTED TO HIM. THEREFORE, IN REAL TERMS, THE ASSESSEE HAS NOT INCURRED ANY LOSS AS THE LOSS CLAIMED BY HIM IS A NOTIONAL LOSS. AS OBSERVED BY THE LEARNED CIT(APPEALS), THIS GIVES A TWO-FOLD BENEFIT TO THE ASSESSEE, IN THAT HE GETS A DEDUCTION OF THE NOTIONAL LOSS FROM LTCG EARNED FROM SALE OF OTHER SHARES THEREBY REDUCING HIS TAX LIABI LITY AND ALSO THE CAPITAL GAINS ON EVENTUAL SALE OF THE BONUS SHARES (AFTER HOLDING IT FOR A PERIOD OF ONE YEAR, THEREBY MAKING IT LONG TERM A SSET) IS NOT TAXABLE AS PER THE PROVISIONS OF SECTION 10(38) OF THE ACT. 6.4.2 AS OBSERVED BY THE ASSESSING OFFICER, THE SEQ UENCE OF THE TRANSACTIONS POINT TO A CLEAR INTENTION ON THE PART OF THE ASSESSEE TO GAIN THE BONUS SHARES AND TO MAKE NOTIONAL LOSS BY SALE OF THE ORIGINAL SHARES. THIS INTENTION OF THE ASSESSEE HA S ALSO BEEN ACKNOWLEDGED BY THE LEARNED CIT(APPEALS) IN HER ORD ER. HOWEVER, IN OUR VIEW, THE CONCLUSION DRAWN BY THE ASSESSING OFF ICER THAT THIS INTENTION OF THE ASSESSEE RENDERS IT A TRADING ACTI VITY AND THEREFORE THE TRANSACTION IS DISTINGUISHED FORM SECTION 55(2)(AA) OF THE ACT, IS MISPLACED. WHILE SELLING THE SHARES, THE ASSESSEE HAS ADOPTED THE FIRST-IN-FIRST-OUT (FIFO) METHOD WHICH IS AS PROVID ED IN SECTION 45(2A) OF THE ACT. FURTHER, IN TERMS OF SECTION 55(2)(AA) (IIIA) OF THE ACT, INTRODUCED BY FINANCE ACT, 1995 AND W.E.F. 1.4.1996 , THE COST OF BONUS SHARES ARE TO BE TAKEN AS NIL. HENCE, IT IS CLEAR THAT THESE TRANSACTIONS ARE IN ACCORDANCE WITH THE PROVISIONS OF SECTION 55(2)(AA) OF THE ACT. 6.4.3 THE LEARNED CIT(APPEALS) OBSERVED THAT THESE TRANSACTIONS WHICH GENERATE A NOTIONAL LOSS IS COMMONLY CALLED BONUS STRIPPING. BONUS STRIPPING REFERS TO A TRANSACTION WHERE A PER SON PURCHASES SHARES OF A COMPANY CUM-BONUS AFTER THE PUBLIC ANNO UNCEMENT OF THE BONUS ISSUE BY THE COMPANY AND AFTER HE GETS ENTITL ED TO RECEIVE THE BONUS SHARES ON THE RECORD DATE, HE SELLS THE ORIGI NAL SHARES AND CONTINUES TO HOLD THE BONUS SHARES. USUALLY, AFTER THE RECORD DATE, THE SHARE PRICE DECLINES ALMOST PROPORTIONATELY TO THE EXTENT OF DILUTION CAUSED BY THE BONUS ISSUE. THE RECORD DATE IS THE CUT-OFF DATE AS ON WHICH THE BENEFICIAL HOLDERS OF THE SHARES ON RECOR D WILL BE CONSIDERED ELIGIBLE FOR RECEIVING / BEING ALLOTTED BONUS SHARE S. ANYONE BUYING SHARES AFTER THIS DATE WILL NOT BE ELIGIBLE FOR BON US SHARE ALLOTMENT. UPON THE SALE FOR THE ORIGINAL SHARES, BECAUSE OF T HE REDUCTION IN THE MARKET PRICE OF THE SHARES PURSUANT TO ALLOTMENT OF BONUS SHARES, THE PERSON SUFFERS A STCL ON SUCH TRANSACTION AND CLAIM S SET-OFF OF THE SAME AGAINST OTHER INCOME CHARGEABLE TO TAX UNDER T HE HEAD CAPITAL GAINS. IF THE BONUS SHARES ARE LISTED AND THE TAX PAYER SELLS THEM AFTER 12 MONTHS, ANY PROFIT THAT ARISES THEREFROM W ILL BE EXEMPT FROM LTCG. BRIEFLY, BONUS STRIPPING INVOLVES BUYING SHA RES CUM-BONUS AND SELLING THEM EX-BONUS AND CLAIMING A STCL ON SA LE OF THE ORIGINAL SHARES. THERE ARE NO SPECIFIC CONDITIONS SPECIFIED IN THE IT ACT, 1961 FOR OBTAINING THE BENEFIT OF BONUS STRIPPING OF SHA RES EXCEPT THAT HE MUST HOLD THE BONUS SHARES FOR A PERIOD OF ATLEAST 12 MONTHS SO THAT THE GAIN ARISING ON ITS SALE WILL BE LTCG AND WOULD BE EXEMPT TO TAX IF ITA NO. 2100/BANG/2016 PAGE 6 OF 7 THEY ARE LISTED SHARES. ANY TAX PAYER WHO DERIVES STCG OR LTCG CAN OFF SET THE SAID INCOME BY STCL INCURRED FROM B ONUS STRIPPING AND THEREBY REDUCE HIS TAX LIABILITY. AT THE SAME TIME, THE LTCG THAT ARISES ON SALE OF LISTED BONUS SHARES (WHERE COST O F ACQUISITION IS NIL) WILL BE EXEMPT FROM TAX. 6.4.4 SECTION 94(8) OF THE ACT WAS INTRODUCED W.E.F . 1.4.2005 (VIZ. ASSESSMENT YEAR 2005-06) TO CURB THE PRACTICE OF CR EATION OF LOSSES THROUGH BONUS STRIPPING AS HAS BEEN CARRIED OUT BY THE ASSESSEE IN THE CASE ON HAND. THIS SECTION HAS BEEN INTRODUCED UNDER CHAPTER X OF THE ACT SPECIAL PROVISIONS RELATING TO AVOIDA NCE OF TAX. SECTION 94 OF THE ACT IN CHAPTER X OF THE ACT BEARS THE HEA DING AVOIDANCE OF TAX BY CERTAIN TRANSACTIONS IN SECURITIES. THE PROVISIONS OF SECTION 94(8) OF THE ACT READ AS UNDER : 94 (8) WHERE (A) ANY PERSON BUYS OR ACQUIRES ANY UNITS WITHIN A PERIOD OF THREE MONTHS PRIOR TO THE RECORD DATE; (B) SUCH PERSON IS ALLOTTED ADDITIONAL UNITS WITHO UT ANY PAYMENT ON THE BASIS OF HOLDING OF SUCH UNITS ON SUCH DATE; (C) SUCH PERSON SELLS OR TRANSFERS ALL OR ANY OF T HE UNITS REFERRED TO IN CLAUSE (A) WITHIN A PERIOD OF NINE MONTHS AFTER SUC H DATE, WHILE CONTINUING TO HOLD ALL OR ANY OF THE ADDITIONAL UNI TS REFERRED TO IN CLAUSE (B), THEN, THE LOSS, IF ANY, ARISING TO HIM ON ACCOUNT O F SUCH PURCHASE AND SALE OF ALL OR ANY OF SUCH UNITS SHALL BE IGNORED F OR THE PURPOSES OF COMPUTING HIS INCOME CHARGEABLE TO TAX AND NOTWITHS TANDING ANYTHING CONTAINED IN ANY OTHER PROVISION OF THIS ACT, THE A MOUNT OF LOSS SO IGNORED SHALL BE DEEMED TO BE THE COST OF PURCHASE OR ACQUISITION OF SUCH ADDITIONAL UNITS REFERRED TO IN CLAUSE (B) AS ARE HELD BY HIM ON THE DATE OF SUCH SALE OR TRANSFER.] EXPLANATION.FOR THE PURPOSES OF THIS SECTION, (A) 'INTEREST' INCLUDES A DIVIDEND ; (AA) 'RECORD DATE' MEANS SUCH DATE AS MAY BE FIXED BY (I) A COMPANY FOR THE PURPOSES OF ENTITLEMENT OF THE HOLDER OF THE SECURITIES TO RECEIVE DIVIDEND; OR (II) A MUTUAL FUND OR THE ADMINISTRATOR OF THE SPE CIFIED UNDERTAKING OR THE SPECIFIED COMPANY AS REFERRED TO IN THE EXPLANA TION TO CLAUSE (35) OF SECTION 10 THE PURPOSES OF ENTITLEMENT OF THE HO LDER OF THE UNITS TO RECEIVE INCOME, OR ADDITIONAL UNIT WITHOUT ANY CONS IDERATION, AS THE CASE MAY BE;] ITA NO. 2100/BANG/2016 PAGE 7 OF 7 (B) 'SECURITIES' INCLUDES STOCKS AND SHARES ; (C) SECURITIES SHALL BE DEEMED TO BE SIMILAR IF TH EY ENTITLE THEIR HOLDERS TO THE SAME RIGHTS AGAINST THE SAME PERSONS AS TO C APITAL AND INTEREST AND THE SAME REMEDIES FOR THE ENFORCEMENT OF THOSE RIGHTS, NOTWITHSTANDING ANY DIFFERENCE IN THE TOTAL NOMINAL AMOUNTS OF THE RESPECTIVE SECURITIES OR IN THE FORM IN WHICH THEY ARE HELD OR IN THE MANNER IN WHICH THEY CAN BE TRANSFERRED; (D) 'UNIT' SHALL HAVE THE MEANING ASSIGN ED TO IT IN CLAUSE (B) OF THE EXPLANATION TO SECTION 115AB. 5. FOLLOWING THE EARLIER ORDER OF THIS TRIBUNAL I HOLD THAT THE CLAIM OF SHORT TERM CAPITAL LOSS ON ACCOUNT OF SALE OF SHARES CANN OT BE DENIED BY BONUS STRIPPING IN THIS CASE. CONSEQUENTLY, THE ORDERS O F THE AUTHORITIES BELOW ARE SET ASIDE QUA THIS ISSUE. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWE D. PRONOUNCED IN THE OPEN COURT ON THIS 15 TH DAY OF MARCH, 2017 SD/- (VIJAY PAL RAO) JUDICIAL MEMBER BANGALORE, DATED, THE 15 TH MARCH, 2017. / MS/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.