MUKUL H DALAL, MUMBAI V. ITO 2(2)(3), MUMBAI

ITA 2384/MUM/2012

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 4467 (ITAT-MUMBAI)
• Duration Of Justice: 10 year(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-04-2022
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 10-04-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Capital asset; Cost of acquisition; Fair market value

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “B” Bench, Mumbai Before Shri Shamim Yahya (AM) & Shri Pavan Kumar Gadale (JM) I.T.A. No.2384/Mum/2012 (Assessment Year 2008-09) Mukul H Dalal Sorab Minar 5, M L Dahanukar Marg Mumbai-400 026 PAN : ABFPD4063Q Vs. ITO-2(2)(3) Mumbai (Appellant) (Respondent) Assessee by Shri Gautam Thacker Department by Shri C.T.Mathews Date of Hearing 07.02.2022 Date of Pronouncement 18.04.2022 O R D E R Per Shamim Yahya (AM) :- This appeal by the assessee is directed against the order of the Ld. Commissioner of Income Tax (Appeals)-05, dated 25.01.2012 and pertains to the assessment year (A.Y.) 2008-09. 2. Grounds of appeal read as under:- 1. The learned Commissioner of Income-tax (Appeals) erred in law and in facts in not allowing an amount of Rs 1.58 crores , being dues paid to certain creditors of the broking concern as cost of shares while determining capital Gain on sale of said shares received in exchange of membership of the said broking concern. 2. The learned Commissioner of Income-tax (Appeals) erred in law and in facts in not adopting fair market value as on 01-04-1981 of Membership and not allowing an Indexation thereof, 3. Each of the above grounds of appeal are independent and without prejudice to each other, 4. The appellant craves liberty to add, to alter and /or amend any of the grounds of appeal at or before the time of hearing. ITA No.2384/Mum/2012 2 3. The assessee in this case received a sum of Rs. 1,42,32,400/- on sale of 2737 shares of Bombay Stock Exchange. However, capital gain was not offered. On Assessing Officer’s query it was informed that broking concern of Shri Harkisondas Dalai ie. H.L. incurred huge loses. Since 1983, Shri Mukul Dalal was Managing Director of Carbon Corporation Ltd till 1991 and as such was not actively engaged in the broking concern. However, when he succeeded in business, he paid dues of certain creditors of the brokering concern where upon Bombay Stock Exchange changed the status of Membership to activity Membership. As per the information available with the assessee, this amount aggregated to Rs. 1.58 crore and same will be eligible to be considered as cost for sale of shares and. will be eligible for indexation too. 4. The AO had noted following submissions:- “As can be seen from the above; the assessee has made a claim for increasing the cost of acquisition of the shares sold by it by adding to such cost the aggregate amount of Rs. 1.58 crores, being dues paid off, of certain creditors of the broking concern whereupon the, Stock Exchange changed the status of membership to active membership. The assessee contends that this amount would be eligible to be considered as cost of sale of .shares and will be eligible for indexation too. However citing the present unavailability of documentary evidence and for health reasons, the assessee has not substantiated his contention. However, the authorized representative stated that as the required evidence is not likely to be traced before the 31 st of December, 2010, there would be no likelihood of submitting the same in the assessment proceedings.” 5. However, AO had rejected it by holding as under:- “a) The creditors paid off cannot be treated as cost of sale of the shares, because the value of the creditors is not connected to the value of the shares. The attachment of the membership card would be in force irrespective of the quantum of creditors, 'because the attachment is in terms of rules and regulations of the Exchange, Even if 99% of the creditors are paid off, the attachment is not liable to be lifted solely because of the outstanding 1% of the creditors. Thus the claim made by the assessee fails on account of absence of proximate nexus and is accordingly rejected. ITA No.2384/Mum/2012 3 b) The next issue is the claim of cost, of the shares on the basis of letter issued by the BSE, of which the assessee hay enclosed a copy with his submission dt.23-12-2010. In this regard, it is seen that the provisions of section 55(2)(ab) are applicable in determining the cost of the shares as they have been received by him on the basis of his membership to the Stock Exchange. Section 55(ab) reads – “in relation to a capital asset, being equity share or shares allotted to a share holder of a recognized stock exchange in India under a scheme for (demutualization or) corporatization approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992(15 of 1992), shall be the cost of acquisition of his original membership of the exchange.) Further, section 55(b)(i) provides that where the capital asset became the property of the assessee before 1- April, 1981, its cost would be the cost of acquisition of the asset to the assessee or the fair market value of the asset on 01-04-81 at the option of the assessee. Since, section 55(2)(ab) applies in this case and as the provisions of section 55(2)(b)(i) relate to any other capital asset", the cost of the shares sold by the assessee have to be taken in accordance with' section 55(2)(ab) as the cost at which the membership of the exchange was originally acquired by the assessee and there is no ground to adopt fair market value under section 55(2)(b)(i). c) The claim for adopting fair market value as on 01-04-1981 .in respect of shares sold is also not allowable for the reason that when the shares were allotted, the capital gain arising from the transfer of membership right was entitled for not being regarded as a transfer by virtue of section 47(xiii)(a). Accordingly, the cost of- the shares was also specifically provided by section 55(ab), by which it is apparent that the, legislative intent was to deny adoption of fair market value. Since the assessee has not beer, able to furnish the cost paid by him for acquiring the membership of the stock exchange. Therefore, the same is estimated at Rs. 20,000.” 6. Upon assessee’s appeal, the details noted by ld.CIT(A) are as under:- “i) Consequent upon corporatization and demutualization of Bombay Stock Exchange, each trading member was allotted 10000 Shares. Accordingly the appellant made an application dt. 05.01.2005 to Bombay Stock Exchange for allotment of the shares. ii) Bombay Stock Exchange Limited made an invitation to offer abovementioned Shares to its members including the appellant which were allotted being offer for Sale. iii) Bombay Stock Exchange Limited held an Extraordinary General Meeting on 12 th April, 2007 for the purposes of allotment of Shares to Deutsche Boerse AG and Singapore Exchange Limited, etc. ITA No.2384/Mum/2012 4 iv) Consequent upon the said offer, the appellant offered 3000 Shares for Sale. v) From the offer of 3000 Shares, 2737 Shares were accepted in offer and balance 263 Shares (3000 less 2737=263) were credited to the Demat account of the appellant. vi) The appellant received a total consideration on 2737 Shares @ Rs.5200 per Share. Thus total Sale consideration was Rs. 1,42,32,400 as stated in the Assessment Order. vii) From the documents filed by the appellant during the appellate proceedings, it is seen that Bombay Stock Exchange Ltd. offered invitation to shareholders being trading member to offer for sale their existing equity shares. The invitation to offer open on Wednesday. Feb. 28, 2007 and the invitation to offer dose on Friday, Mar. 09, 2007. As per the offer para 3 - terms and conditions of the invitation, "only equity shares held by the selling shareholders which are free from any charge, lien, encumbrance or any transfer, restriction, of any kind whatsoever (other than transfer restriction imposed on the equity shares pursuing to SEBI letter dtd. Feb. 23, 2006), at the time of tendering the letter of transmittal would be eligible to be offered for sale in the offer process." 7. The ld.CIT(A) rejected the assesses submission as under:- “It is the argument of the appellant that he paid Rs.1.58 cr. to the creditors in order to be active member of the BSE. On said payment, membership of the Stock Exchange became active and share could be received in favour of the appellant. On these facts, it is contended that payment of Rs.1.58 cr. would be eligible to be considered as cost of shares and would be eligible indexation too. On the specific query, regarding date of payment to the creditors, it is submitted by the AR of the appellant vide letter dated 16.01.2012 that payment was made to respective parties as under :- Details of Payment by to Respective Parties Sr No. Party Details Paid Amount Date I S.S. Miranda 100,000.00 1986 To 1987 2 Swastik safe Deposite + Friend 50,000.00 1986 To 1992 3 Advance Paints Pvt Ltd 292,670.10 1990 4 Harshad Sheth 25,000.00 1983 5 Rrukh Enterprise 25,000.00 1 983 ITA No.2384/Mum/2012 5 6 Sumara Foundation 33,000.00 1983 7 Vakil&Co 80,000.00 1983 8 Ramaniklal Mohanlal 1,246,000.00 1991 To 1992 9 Ramaniklal Mohanlal(Interest Paid) 1,403,011.00 I991 To 1992 10 Herdilia Chemicals 92,500.00 1983 11 Musco(PF/(Graduaty) 2,200,000.00 1983 To 1987 12 Babulal Bagri 957,000.00 1983 13 Hind Marketing 500,000.00 1986 14 Dun can Agro Ind. Ltd 975,000.00 1985 To 1989 15 Ceat Finance Co. Ltd 60,000.00 1985 TO 1986 16 Eastern Aviation & Ind. Ltd 17,464.00 1987 17 Chitrakoot Inv. Ltd 320,969.00 1 993 To 1 994 18 Swan Mills Ltd 62,552,00 1983 To 1984 19 Dempo Steamship Ltd 40,000.00 1983 To 1984 20 General Insurance Corp 52,500.00 1985Tol986 21 Unit Trust Of India 800,000.00 1985 To 1990 22 Mathur Group 1,000,000.00 1992 To 1993 23 Arbitration Group 4,345.00 1984 24 ICDS Karnataka 479,450.00 1983 25 Bills Discounting 300,000.00 1983 26 Asrani 50,000.00 1983 27 Mukund M Shah 1,500,000.00 1983 To 1984 28 Bank of Baroda 200,000.00 2005 29 Paid to various parties my HL Fund 3,000,000.00 1982 To 1983 15,866,461.10 ITA No.2384/Mum/2012 6 The purpose of payment to the creditors was to become operative member on BSE. At that time, ' no one even thought of corporatization and demutualization of BSE and allotment of any share. Therefore, payment to creditors has nothing to do with cost of shares and allotment of shares. For allotment of shares, the appellant filed application dated 05.08,2005 and it was allotted 10000 shares which are shown as on 30.03.2006. From the above facts, it is seen that payment to the creditors admittedly made in the year 1982 to 1994 except the payment of Rs.2 lacs which is claimed to be paid to Bank of Baroda in the year 2005. In any case, all the payments were made much before than BSE offer for sale of equity shares to BSE which was in the month of Feb/Mar. 2007. Thus, in any case, the payment to the creditors was made much before the purchase of the shares from BSE consequent upon its corporatization and demutualization. For the purchase of 10000 equity share, the appellant has paid an amount of Rs.10,000 which is evident from bill No./clearing No. 434 of BSE and for the same payment was made vide cheque No. 857459 dtd. 05.08.2005 drawn on Bank of Baroda. Hence, the payment made to the creditors has nothing to do with the cost of shares which was purchased from BSE on its offer. In the working of capital gain, the AO has taken cost of sold 2737 shares as on 01.04.81 in the view of sec.55(2)(ab) of the I.T. Act. The appellant has not challenged this working. In fact, the appellant has not challenged sale consideration of 2737 shares and cost of the same. His only contention is that payment made to the creditors should be taken as cost of the shares which is not correct in view of the above discussion. Therefore, it is held that AO is justified in rejecting their claim and justified in working of LTCG for Rs.1,42,02,239/- on sale of 2737 shares. 8. Against the above order, assessee is in appeal before us. 9. We have heard the ld. DR and perused the records. The ld. Counsel of the assessee summarized the submission as under:- The question for consideration pertains to the computation of capital gains arising from the sale of shares of the BSE Ltd. sold by the Appellant in the relevant previous year to AY 2008-09. The shares of the BSE were allotted to the Appellant when the BSE corporatized on 30 th March 2006. Prior to that the Appellant held a membership of the BSE. The flow depicting the acquisition of the BSE Ltd. shares is as under: ITA No.2384/Mum/2012 7 1. This membership of the BSE was initially acquired by the Appellant's father Shri Harkisondas Dalai in 1933 and was used for the running of a proprietary share trading business. 2. The appellant's brother Shri Manharkant Dalai joined the concern as a partner of the stock broking concern in 1939. 3. Shri Shri Harkisondas Dalai passed away in 1957 and the Appellant joint as a partner. The business continued to be run by the Appellant's brother. 4. The Appellant started actively participating in the broking concern from 1991, until which time he was managing director of a company by the name of carbon corporation limited. 5. After the death of his brother, i.e. Shri Manharkant Dalai, the Appellant ran the concern as the sole proprietor. 6. In 2006 the Bombay Stock Exchange undertook corporatization and demutualization and as a result each member was allotted shares in lieu of their memberships in view of the same on 30 th March 2006 the applicant was allotted 10 thousand shares in the Bombay Stock Exchange limited. 7. An open offer was made wherein the members offered these shares for sale. The Appellant offered 3,000 of his 10,000 shares which had been allotted for sale. Of the 3,000 shares offered 2,737 shares were accepted in the offer for sale and these shares was sold for a price of Rs.5200 per share i.e. for a total consideration of Rs. 1,42,32,400. 10. On this submission learned Counsel reiterated the claim of assessee incurring 1.58 crores in clearing debts as cost for acquiring shares. 11. Per contra learned Departmental Representative relied upon the orders of the authority below. 12. Upon careful consideration we find that assessee’s claim of incurring 1.58 crore in connection with the acquisition of shares has no cogency whatsoever. No details were given to the Assessing Officer of the so called credit payment. Before learned CIT(A) also an attempt was made to give a sketchy details of payments which has rightly been rejected by learned CIT(A). Moreover the theory of payment to creditor for obtaining shares of membership of the stock exchange is only an ipse ITA No.2384/Mum/2012 8 dixit of the assessee, devoid of cogent corroborative material. Hence, we do not find any infirmity in the well reasoned order of the authorities below. 13. In the result, assessee’s appeal stands dismissed. Pronounced in the open court on 18.04.2022. Sd/- Sd/- (PAVAN KUMAR GADALE) (SHAMIM YAHYA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated : 18/04/2022 Thirumalesh, Sr.PS Copy of the Order forwarded to : The Appellant 1. The Respondent 2. The CIT(A) 3. CIT 4. DR, ITAT, Mumbai 5. Guard File. BY ORDER, //True Copy// (Assistant Registrar) ITAT, Mumbai