DCIT 4(1), MUMBAI V. G. DAS CAPITAL MARKETS P.LTD, MUMBAI

ITA 3187/MUM/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 83639 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: G
• Assessment Year: 2008-2009
• Appeal Filed On: 25-04-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ADAGIRI
• Assessee Lawyers: VIPUL JOSHI MR S M BANDI
• Keywords: Capital asset; Gift; Business income; Depreciation; Cost of acquisition
• Section: 15

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL G , BENCH MUMBAI , BEFORE SHRI R.C.SHARMA , A M & DR.S.T.M.PAVALA N , J M ITA NO. 3187 / MUM/20 1 3 ( ASSESSMENT YEAR : 200 8 - 0 9 ) DCIT 4 ( 1 ), MUMBAI - 20 VS. M/S G.DAS CAPITAL MARKETS PVT. LTD. , 6, 2 ND FLOOR, 20 RAJA BAHADUR MANSION, AMBALAL DOSHI MARG, FORT, MUMBAI - 400 023 PAN/GIR NO. : A AACG 5715 F ( APPELLANT ) .. ( RESPONDENT ) /REVENUE BY : MR. B. YADAGIRI /ASSESSEE BY : MR . VIPUL JOSHI, MR. S.M BANDI & MR. NISHIT GANDHI DATE O F HEARING : 30 TH JU LY , 201 4 DATE OF PRONOUNCEMENT : 28 TH AUGUST , 2014 O R D E R PER R.C.SHARMA (A.M) : THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF CIT(A), DATED 28 - 12 - 2010 FOR THE AY 2008 - 09, W HEREIN FOLLOWING GROUNDS HAVE BEEN TAKEN BY THE ASSESSEE. : 1. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DIRECTING A. O. TO CONSIDER LOSS OF RS 2 CRORES ON SALE OF SHARES OF M/S GDSS AS GENUINE' 2. ON THE FAC TS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DIRECTING A.O. TO CONSIDER COST OF ACQUISITION OF 9123 SHARES SOLD AT RS 91,23,000/ - AS AGAINST RS 14,29,848/ - AND RECOMPUTED THE CAPITAL GAIN' 3. 'ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE IMPUGNED ORDER OF THE LD.CIT(A) IS CONTRARY TO LAW AND CONSEQUENTLY MERITS TO BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED.' ITA NO. 3187 /1 3 2 2 . RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. FACTS IN BRIEF ARE THAT THE AS SESSEE IS ENGAGED IN THE BUSINESS OF SHARE BROKING, TRADING AND DEALING IN SHARES AND SECURITIES. DURING THE SCRUTINY ASSESSMENT, THE AO OBSERVED THAT THE ASSESSEE COMPANY HAD PURCHASED 1000000 EQUITY S HARES OF THE FACE VALUE OF RS.1 0 / - EACH OF M/S. G. DAS SHARES & STOCK BROKERS PVT LTD (GDSS) ON 10.05.2005 AT A PREMIUM AT RS.20/ - PER SHARE. M/S. G. DAS SHARES & STOCK BROKERS PVT LTD ISSUED THE SHARES AT A PREMIUM OF RS.20/ - ON 10.05.2005 AS THE COMPANY WAS HAVING PROFITABILITY FOR EARLIER YEARS AND HAD CHA NCE OF EARNING FROM DIVIDEND ON INVESTMENT. THEREFORE, COST OF ACQUISITION OF THESE SHARES IN THE HANDS OF THE ASSESSEE COMPANY WAS R S .3 CRORES. DURING THE YEAR RELEVANT TO A.Y.2008 - 09 UNDER CONSIDERATION , THE ASSESSEE COMPANY SOLD THESE EQUITY SHARES OF G DSS FOR A SUM OF RS.1 CRORE WHICH RESULTED IN THE CAPITAL LOSS OF RS.2 CRORES. THE AO FURTHER OBSERVED THAT SHARES PURCHASED BY THE ASSESSEE COMPANY FROM GDSS ARE NOT LISTED ON ANY STOCK EXCHANGE AS THEY ARE ISSUED BY PRIVATE ITD COMPANY AND THEY ARE UNQUO TED EQUITY SHARES. DURING THE YEAR, THE ASSESSEE COMPANY CLAIMED STCG OF RS.31172981/ - IN THE RETURN OF INCOME WHEREIN THE LOSS OF RS .2 CRORE WAS INCLUDED PERTAINING TO THESE SHARES. HOWEVER, DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE'S REPR ESENTATIVE SHRI S.K. RATHI C.A VIDE LETTER DATED 26.10.2010 SUBMITTED THAT UNDER THE DETAILS FILED FOR CAPITAL GAIN ASSESSEE INCURRED LOSS ON SALE OF UNQUOTED SHARES WHICH WERE HELD EXCEEDING 12 MONTHS,' BUT IN CALCULATING CAPITAL GAIN, IT WAS CALCULATED I N SHORT TERM CAPITAL GAINS INSTEAD OF LONG TERM CAPITAL GAIN DUE TO MISTAKE IN INTERPRETATION OF THE PROVISO U/S.2(42A). THE ITA NO. 3187 /1 3 3 SHORT TERM CAPITAL ASSETS MEANS A CAPITAL ASSET HELD BY AN ASSESSEE FOR NOT MORE THAN 36 MONTHS IMMEDIATELY PRECEDING THE DATE OF T RANSFER PROVIDED THAT IN THE CASE OF A SHARES HELD IN A COMPANY OR ANY OTHER SECURITIES LISTED IN A RECOGNIZED STOCK EXCHANGE IN INDIA. THE CLAUSE SHALL HAVE EFFECT AS IF FOR THE WORD 'THIRTY SIX MONTHS' THE WORD 'TWELVE MONTHS' HAD BEEN SUBSTITUTED. HOWEV ER, IT IS UNDERSTOOD THAT EVEN UNQUOTED SHARES HELD EXCEEDING 12 MONTHS IS TO BE CONSIDERED AS LONG TERM BASIS AND ACCORDINGLY ASSESSEE'S REPRESENTATIVE CONCEDED THAT UNDER THE COMPUTATION THE LOSS ON SALE OF UNQUOTED SHARES AMOUNTING TO RS.2 CRORES BE TRE ATED AS LONG TERM CAPITAL LOSS AND BE ALLOWED TO BE ADJUSTED AGAINST LONG TERM CAPITAL GAIN. THE AO ALSO OBSERVED THAT THE ASSESSEE HAS TRIED TO JUSTIFY THE LOSS IN TERMS OF THE BREAKUP VALUE OF THE S H ARES OF GDSS. THE ASSESSEE COMPANY HAS WORKED OUT THE B REAKUP VALUE OF SHARES AND DISCOUNTED THE SAME BY 20% FOR VALUATION AS AT 31ST MARCH, 2006 & 25% FOR VALUATION AS AT 31ST MARCH, 2007 ON THE GROUND THAT NO DIVIDEND HAS BEEN DECLARED OR PAID BY THE SAID COMPANY FOR LAST 6 YEARS. FOR ADOPTING THE BREAKUP VA LUE METHOD THE ASSESSEE HAS RELIED ON THE PUBLICATION NAMELY 'STUDY ON SHARE VALUATION' ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA'. THE ASSESSEE COMPANY HAD WORKED OUT THE MARKET VALUE OF SHARES SOLD AND THE LOSS ARISING ON SALES AS UNDER: SR. NO PARTICULARS AS AT 31.03.2006 AS AT 31.03.2007 1. NAV PER SHARE ON NET ASSET BASIS 22.32 27.17 2. DEDUCTION @ 20% / 25% 4.46 6.79 3. NET ASSETS BOOK VALUE PER SHARE 17.86 20.38 4. COST OF ACQUISITION 3, 00 , 00 , 000 3, 00 , 00 , 000 5. INDEXED COST OF ACQUISITION 3, 32 , 59 , 557 3 , 32 , 59 , 557 6. MARKET VALUE 1, 78 , 58 , 450 20 3 80 , 654 7. LON G TERM CAPITAL LOSS 1, 54 , 01 , 107 1 , 2 8 , 78 , 903 ITA NO. 3187 /1 3 4 3 . THE AO OBSERVED THAT THE QUESTION OF ANY DEDUCTION/DISCOUNT FOR NON DECLARATION OF DIVIDEND BY THE COMPANY WHOSE SHARE ARE SOLD DOES NOT ARISE AT ALL. THE PUBLICATION OF ICAI RELIED UPON BY THE ASSESSEE ALSO DOES NOT CONTAIN ANY SUCH PROVISION FOR DISCOUNTING / DEDUCTION. THE VALUATION OF UNQUOTED EQUITY SHARES ON THE BASI S OF BREAKUP VALUE OF THE SHARES IS A RECOGNISED METHOD UNDER THE GIFT TAX ACT AS WELL AS SCHEDULE III OF THE WEALTH TAX ACT. HOWEVER, UNDER THESE PROVISIONS THERE IS NO ROOM FOR DISCOUNTING / DEDUCTION FOR NONPAYMENT OF DIVIDEND. HENCE, THE CLAIM OF THE A SSESSEE COMPANY FOR SUCH DISCOUNT/DEDUCTION WAS REJECTED BY THE AO. ACCORDINGLY LOSS OF RS. 2.00 CRORE CLAIMED BY ASSESSEE WAS HELD TO BE BOGUS. 4. BY THE IMPUGNED ORDER, LOSS DISALLOWED BY THE AO WAS ALLOWED BY CIT(A) AFTER HAVING FOLLOWING OBSERVATION : - 5.3(I) I HAVE CONSIDERED THE FACTS OF THE CASE CAREFULLY. THE APPELLANT PURCHASED 10,00,000 SHARES OF GDSS HAVING FACE VALUE OF RS.10/ - EACH ON 10/5/2005 AT A PREMIUM OF RS 20/ - EACH BY MAKING TOTAL PAYMENT OF RS 3,O000,000/ - DURING THE YEAR, THE APPEL LANT SOLD THESE SHARES AT PAR I E @ 10/ - EACH FOR A TOTAL CONSIDERATION OF RS.1 CRORE. THIS HAS RESULTED INTO LOSS OF RS 2 CRORES THE A O HAS CONSIDERED THIS LOSS AS A BOGUS LOSS ON THE GROUND THAT THE LOSS HAS BEEN CREATED ARTIFICIALLY SET OFF AGAINST THE SHORT TERM CAPITAL GAIN EARNED DURING THE YEAR THE AO ALSO ARRIVED AT THIS CONCLUSION CONSIDERING THE FACTS THAT THE SHARES WERE UNQUOTED SHARES AND ALSO THAT THE SHARES WERE TRANSFERRED TO FAMILY MEMBERS HOWEVER, CAREFUL CONSIDERATION OF THE FACTS AND CIR CUMSTANCES DOES NOT SUPPORT THE AO'S FINDINGS THAT THE LOSS WAS BOGUS/ARTIFICIAL CREATED LOSS. 5.3(II) ON 10/5/2005, THE APPELLANT PURCHASED SHARES OF M/S GDSS AT 'A PREMIUM OF RS. 20/ - EACH AT THAT POINT OF TIME, THE PREMIUM WAS PAID CONSIDERING THE PAS T PROFIT TRACK RECORDS OF GDSS. IN THE FACTS AND CIRCUMSTANCES, THE PAYMENT OF PREMIUM ON PURCHASE OF THOSE SHARES COULD NOT HAVE BEEN DOUBTED. 5.3(III) THE APPELLANT HAS SOLD THESE SHARES AT PAR I.E @ 10/ - EACH WHEREAS THE ACQUISITION COST OF EACH SHARE WAS AT RS 30/ - EACH..THE QUESTION FOR CONSIDERATION IS AS TO WHETHER THE SALE PRICE OF RS 10/ - EACH WAS JUSTIFIED AND REASONABLE THE SHARES OF M/S. GDSS ITA NO. 3187 /1 3 5 WERE UNQUOTED SHARES. IN THE CASE OF UNQUOTED SHARES, THE GIFT TAX ACT AS WELL AS SCHEDULE - III OF WEALTH TAX ACT HAS PROVIDED THE METHOD FOR VALUING THE UNQUOTED EQUITY SHARES. THE APPELLANT HAS WORKED OUT THE VALUE OF UNQUOTED EQUITY SHARES BY GIVING DISCOUNT @20/ - EACH YEAR FOR NON DECLARATION OF DIVIDEND. THE AO HAS ACCEPTED THAT THE VALUATION OF UN QUOTED SHARES ON THE BASIS OF BREAK UP VALUE OF SHARES IS RECOGNIZED METHOD UNDER GIFT TAX ACT AND SCHEDULE - II OF WEALTH TAX ACT BUT UNDER THESE PROVISIONS, THERE IS NO ROOM FOR .. DISCOUNTING . FOR NON PAYMENT OF DIVIDEND . I AM NOT IN AGREEMENT WITH THE OBS ERVATIONS OF THE AO WHETHER QUOTED OR UNQUOTED THE MARKET VALUE OF SHARES ALWAYS DEPENDS ON THE PA S T PROFIT TRACK RECORD OF THE COMPANY AND THE PERCENTAGE OF DIVIDEND DECLARED BY THAT COMPANY. SINCE, IN THE CASE UNDER CONSIDERATION, M/S GDSS HAD NOT DECLAR ED DIVIDEND,. THEREFORE, THE APPELLANT CORRECTLY WORKED OUT THE VALUE OF THOSE UNQUOTED SHARES BY DISCOUNTING ON ACCOUNT OF NON DECLARATION OF DIVIDEND. THUS, THE APPELLANT HAS SATISFACTORILY PROVED THE SALE VALUE OF SHARES SOLD AT RS 10/ - EACH AS AGAINST ACQUISITION COST OF RS 30/ - EACH. 5.3(IV) THE AO HAS HELD THE SALE TRANSA C TIONS AS BOGUS HOLDING THAT THE SALE WAS ARTIFICIALLY CREATED TO SET OFF AGAINST SHORT TERM CAPITAL GAIN. THE AO'S OBSERVATION APPEARS TO BE NOT CORRECT . THE APPELLANT HAS SATISFA CTORILY PROVED THAT ON ACCOUNT OF MERGER DULY APPROVED BY BOMBAY HIGH COURT, ITS SHARE HOLDING IN M/S. GDSS WOULD HAVE STAND CANCELLED AND NO BENEFIT OR ADVANTAGE WOULD HAVE ACCRUED TO THE APPELLANT. IN CASE, SUCH MERGER HAD TAKEN PLACE WITHOUT APPELLANT S ELLING OF SHARES OF M/S GDSS, EVEN THE SALE CONSIDERATION OF RS.1 CRORE RECEIVED BY THE APPELLANT WOULD HAVE BEEN LOST. IN THE FACTS AND CIRCUMSTANCES, THE SELLING , OF SHARES WAS INCIDENTAL TO MERGER SCHEME AND NOT CONNECTED WITH THE EARNING OF SHORT TERM CAPITAL GAIN. IN ANY CASE, SALE OF SHARES OF M/S. GDSS AT A LOSS OF RS .2 CRORES WAS NOT CONNECTED WITH THE EARNING OF SHORT TERM CAPITAL GAIN FOR THE REASON THAT THE SHORT TERM CAPITAL GAIN ON SALE OF SHARES OF BSE LTD, TOOK PLACE SUBSEQUENTLY THEREFORE, BY CONSIDERING THESE TWO ASPECTS OF FIRSTLY SALE OF SHARES OF M/S GDSS IN VIEW OF MERGER SCHEME AND SECONDLY THE SHORT TERM CAPITAL GAIN EARNED SUBSEQUENT TO SALE OF SHARES OF M/S GDSS, IT CANNOT BE SAID THAT THE LOSS OF RS.2 CRORES WAS SPECIFICALLY, ARTIF ICIALLY EARNED TO SET OFF AGAINST SHORT TERM CAPITAL GAIN. TH ERE WAS NO IMMEDIATE LINK BETWEEN THESE TWO. 5.3(V) THE AO IN THE REMAND REPORT HAS REPORTED THAT THE SCHEME OF BSE OF BUYBACK OF SHARES WAS ANNOUNCED EARLIER TO SALE OF SHARES OF GDSS. THERE MA Y HAVE BEEN SOME FORCE IN AOS ARGUMENT BUT QUESTION FOR CONSIDERATION IS WHETHER THE APPELLANT WAS NOT HAVING ANY FUNDAMENTAL LIBERTY/RIGHT TO SELL ITS SHARES AT ANY POINT OF TIME. THE APPELLANT WAS HAVING LIBERTY TO TAKE A DECISION AS TO WHEN ITS SHARES SHOULD BE SOLD. EVEN IF THE APPELLANT HAD SOLD THE SHARES WITH A VIEW TO ADJUST AGAINST CAPITAL GAINS, SUCH DECISION AND TRANSACTION WAS WITHIN THE FOUR CORNERS OF LAW AND THERE WAS N O ILLEGALITY IN THE SAME. IN THE CASE UNDER CONSIDERATION, THE SHARES WER E UNQUOTED. HAD THE SHARES WERE QUOTED ONE, WHETHER IN THE SAME SET OF FACTS, THE AO COULD HAVE RAISED ANY OBJECTION. THE COURTS, AS RELIED UPON BY APPELLANT, HAVE HELD THAT THE RATIO OF DECISION IN MCDOWELLS CASE DOES NOT APPLY TO EVERY CASE. ITA NO. 3187 /1 3 6 5.3(IV) THE AO HAS ALSO DOUBTED THE SALE TRANSACTION CONSIDERING THE FACTS THAT THE SHARES WERE SOLD TO FAMILY MEMBERS ONLY. HOWEVER, ON THIS GROUND, THE TRANSACTION CANNOT BE HELD AS BOGUS OR ARTIFICIALLY CREATED UNLESS THERE IS SOME EVIDENCE FOR THE SAME. IN THE CA SE UNDER CONSIDERATION, THE FACTS SHOW THAT THE LOSS WAS ALREADY EARNED BEFORE EARNING OF CAPITAL GAIN AND FURTHER THE SALE OF SHARES WAS IN PURSUANCE TO MERGER SCHEME AND ALSO WITH A VIEW TO SAVE THE SHARES BEING CANCELLED IN VIEW OF MERGER SCHEME. FURTHE R, THERE IS NO BAR FOR SELLING SHARES TO FAMILY MEMBERS. FURTHER, THERE WERE NO OTHER BUYERS OF THESE SHARES AND IN THAT CASE, THE APPELLANT WOULD NOT HAVE RECEIVED EVEN SALE CONSIDERATION OF RS.1 CORE. 5.3(VII) CONSIDERING THE ENTIRETY OF THE FACTS AND C IRCUMSTANCES, IT IS HELD THAT THE LOSS AROSE OF RS.2 CRORES ON THE SALE OF SHARES OF M/S GDSS WAS NOT A BOGUS LOSS AS HELD BY THE AO. THE AO IS DIRECTED TO CONSIDER SUCH LOSS OF RS.2 CORES ON SALE OF SHARES AS GENUINE. SINCE, THE SHARES OF M/S GDSS WERE HE LD FOR MORE THAN 12 MONTHS, THE AO IS DIRECTED TO CONSIDER SUCH LOSS AS LONG TERM CAPITAL LOSS. IN THE RESULT, THIS GROUND OF APPEAL IS ALLOWED. 5. IT WAS ARGUED BY THE LEARNED AR THAT ASSESSEE HAS ACQUIRED SHARES OF GDSS AT A PREMIUM OF RS. 20/ - PER SHAR E WHICH HAS NOT BEEN DOUBTED BY THE AO AND SINCE SELLING PRICE WAS RS. 10/ - , THERE WAS A CLEAR LOSS OF RS.2 CRORES ON THE SALES OF GDSS SHARES. HE FURTHER RELIED ON THE FINDING RECORDED BY THE CIT(A) TO THE EFFECT THAT LOSS ON SALE OF SHARES OF GDSS WAS NOT BOGUS LOSS AND DIRECTING THE AO TO TREAT THE SAME AS LONG TERM CAPITAL LOSS SINCE SHARES WERE HELD MORE THAN 12 MONTHS. 6. ON THE OTHER HAND, LEARNED DR RELIED ON THE ORDER OF AO AND CONTENDED THAT ASSESSEE HAS SOLD THE SHARES TO CLOSE RELATIVE AT A LOSS JUST TO SET UP THE CAPITAL GAINS EARNED ON SALE OF SHARES ALLOTTED BY BSE. 7. WE HAVE CONSIDERED RIVAL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOUND FROM THE RECORD THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF SHARE BR OKING, TRADING AND DEALING IN SHARES AND SECURITIES. THE ASSESSEE HAS PURCHASED 10,00,000 SHARES OF FACE VALUE OF RS.10/ - OF GDSS ON 10 - 5 - 2005 AT A PREMIUM OF RS. 20/ - PER ITA NO. 3187 /1 3 7 SHARE. THUS, THE PURCHASE COST OF RS. 10 LACS SHARES WORKED OUT TO BE RS. 3 CRORES. DUR ING THE YEAR UNDER CONSIDERATION, ASSESSEE HAS ALLEGED TO HAVE SOLD THESE SHARES AT A PRICE OF RS. 10/ - AS AGAINST COST OF ACQUISITION AT RS. 30/ - TO RELATIVES OF DIRECTOR THEREBY SHOWN A CAPITAL LOSS OF RS. 2 CRORES. THE ASSESSEE ADJUSTED THIS LOSS AGAINST THE CAPITAL GAIN S EARNED BY IT ON THE SALE OF SHARES ALLOTTED BY BSE IN LIEU OF BSE MEMBERSHIP CARD. THE JUSTIFICATION GIVEN BY THE ASSESSEE FOR LOSS OF SHARES TO CLOSE RELATIVES AT LOSS WAS THAT GDSS HAS NOT DECLARED ANY DIVIDEND IN THE LAST TWO YEARS, TH EREFORE, DISCOUNTING FACTOR OF 20%/25% WAS TO BE ALLOWED WHILE DETERMINING NET ASSET BOOK VALUE PER SHARE. HOWEVER, FROM THE RECORD, WE FOUND THAT GDSS HAS MADE PROFIT OF RS. 1,40,05,113/ - DURING THE FINANCIAL YEAR 2005 - 06 AND RS .1,95,53,946/ - IN FINANCIAL YEAR 2006 - 07. THE AO ALSO FOUND THAT THE MARKET VALUE OF STOCK - IN - TRADE OF GDSS AS ON 31 - 3 - 2007 WAS RS. 7,00,65,890/ - AS AGAINST BOOK VALUE OF RS. 6,83,60,170/ - . SINCE THE GDSS IS A PRIVATE LIMITED COMPANY, ITS SHARES WERE NOT LISTED IN THE STOCK EXCHANGE , F OR THE PURPOSE OF DETERMINING THE PRICE PER SHARE, THE NET ASSET VALUE OF SHARE AS AT 31 - 3 - 2007 IS REQUIRED TO BE SEEN. WITHOUT GIVING ANY JUSTIFICATION, THE CIT(A) HAS DIRECTED THE AO TO ALLOW LOSS OF RS. 2 CRORE AGAINST CAPITAL GAIN S EARNED ON SALE OF BS E SHARES. THE CIT(A) HAS ALSO MENTIONED MERGER OF GDSS IN THE ASSESSEE COMPANY AS ONE OF THE REASON FOR SALE OF SHARES AT A LOSS. HOWEVER, THIS ASPECT WAS NOT STATED BEFORE THE AO NOR THERE WAS ANY ARGUMENT ON THIS POINT. FURTHER, SINCE THE SALES WAS TO TH E CLOSE RELATIVE, THE ACTUAL PRICE OF THE SHARE AS ON THE DATE OF SALE IS REQUIRED TO BE SEEN FOR DETERMINING THE TRUE PROFIT OR LOSS O N SALE OF ITA NO. 3187 /1 3 8 SHARES. SINCE THE GDSS IS A PRIVATE LIMITED COMPANY, THE VALUE OF SHARE IS TO BE DETERMINED AS PER THE NAV, WH ICH HAS NOT BEEN DONE BY THE CIT(A). THE FINDING OF THE CIT(A) WAS TO THE EFFECT THAT SINCE DIVIDEND WAS NOT DECLARED BY GDSS, THE DISCOUNT IS TO BE ALLOWED WHILE VALUING THE PRICE OF SHARES AT THE TIME OF SALE , IS NOT CORRECT INSOFAR AS RECORD SHOWS THAT GDSS EARNED SOLD PROFIT OF RS. 1.40 CRORES IN THE FINANCIAL YEAR 2005 - 06 AND RS. 1.95 CRORES IN THE FINANCIAL YEAR 2006 - 07 RELEVANT TO THE ASSESSMENT YEAR 2007 - 08. THUS, THERE WAS NOT JUSTIFICATION IN THE ORDER OF CIT(A) FOR ALLOWING ANY DISCOUNTING FACTOR W HILE WORKING OUT PRICE OF SHARES SO SOLD. 8. IN VIEW OF THE ABOVE DISCUSSION, WE SET ASIDE THE ORDER OF CIT(A) DIRECTING THE AO TO ALLOW BOGUS LOSS OF RS. 2 CRORES AND MATTER IS RESTORED BACK TO THE FILE OF AO FOR DECIDING AFRESH AFTER FINDING OUT VALUE O F SHARE OF GDSS AS PER NAV IN THE YEAR OF SALE . WE DIRECT ACCORDINGLY. 9 . THE AO ALSO FOUND THAT THE ASSESSEE COMPANY HAS SOLD 9123 SHARES OF BSE LTD ON WHICH IT HAS EARNED. LONG F IRM CAPITAL GAIN. THESE SHARES WERE ALLOTTED TO THE ASSESSEE COMPANY UNDER THE SCHEME OF CAPITALIZATION AND DE M UTUALISATION OF BOMBAY STOCK EXCHANGE, IN LIEU OF BSE MEMBERSHIP CARD. DURING THE COURSE OF ASSESSMENT PROCEEDINGS , THE ASSESSEE WAS REQUIRED TO JUSTIFY THE COST OF ACQUISITION CLAIMED FOR CALCULATING CAPITAL GAIN ON SAL E OF BSE SHARES. THE ASSESSEE HAS CLAIMED THE COST AT RS.49,21,875 / - FOR BSE CARD. THE ASSESSEE WAS ASKED TO EXPLAIN WHY THE ABOVE COST BE ACCEPTED, SINCE THE ASSESSEE HAS ALREADY CLAIMED DEPRECIATION ON THE SAME IN THE EARLIER YEARS. TAKING THE ORIGINAL ITA NO. 3187 /1 3 9 C OST OF THE BSE CARD AS THE AMOUNT OF COST OF ACQUISITION AMOUNTS TO CLAIMING DOUBLE DEDUCTION ON THE SAME ASSET. THE ASSESSEE SUBMITTED THAT THE ABOVE COST IS TAKEN IN ACCORDANCE WITH THE PROVISIONS OF SECTION 55(2)(AB ). 10. THE AO HELD THAT ASSESSEE CANN OT TAKE DOUBLE DEDUCTION ON THE SAME ASSET UNDER TWO DIFFERENT PROVISIONS OF I.T. ACT. SINCE, T HE ASSESSEE WAS ALLOWED CLAIM OF WRITTEN DOWN VALUE OF BSE CARD AS THE COST AND INDEXATION IS ALSO ALLOWED FROM 2005 - 06 , T HE LONG TERM CAPITAL GAINS WAS WORKED O UT AS UNDER : - CALCULATION OF CAPITAL GAIN ON SALE OF BSE SHARES . SALES VALUE 9123 5200 47439600 LESS : COST OF ACQUISITION 9123X156.73=1429848 INDEXED COST OF ACQUISITION CII:2005 - 06 CII: 2007 - 08 1429848X551 497 551 497 1585204 45854396 LONG TERM CAPITAL GAIN NOTE 1 :CALCULATION OF COST OF ACQUISITION PARTICULARS WDV AS ON 1.04.2005 1567312 NO.OF SHARES ALLOTTED ON 07.10.2005 10000 WDV ALLOCATED TO 1 SHARE 156.73 WEDV OF 9123 SHARES SOL D 1429848 IN VIEW OF THE ABOVE, THE LONG TERM CAPITAL GAIN OF RS. 45854396/ - IS ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. 11 . BY THE IMPUGNED ORDER THE CIT(A) DELETED THE ADDITION ON ACCOUNT OF LONG TERM CAPITAL GAIN MADE IN RESPECT OF SALE OF BSE CARD AFTER HAVING THE FOLLOWING OBSERVATIONS : - 6.3(I) I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE. THE APPELLANT WAS HAVING BSE CARD. THE APPELLANT CLAIMED TO HAVE ACQUIRED THE SAME DURING F.Y.1998 - 99. IN SUBSEQUENT YEARS, IE. UPTO 2001 - 02 ITA NO. 3187 /1 3 10 APPE LLANT WAS ALLOWED DEPRECIATION ON SUCH BSE CARD. IN FACTS AND CIRCUMSTANCES,, THE WEDV OF SUCH BSE CARD WENT ON DECREASING EVERY YEAR TO THE EXTENT OF DEPRECIATION ALLOWED. FOR ASST. YEAR 2002 - 03 , 2003 - 04 , THE APPELLANT WAS NOT ALLOWED DEPRECIATION IN VIEW OF BOMBAY HIGH COURTS DECISION. HOWEVER, FOR ASST.YEAR 2004 - 05 & 2005 - 06 , THE CLAIM OF DEPRECIATION ON BSE CARD WAS ALLOWED. IN THE FACTS AND CIRCUMSTANCES, THE COST OF BSE CARD TO THE APPELLANT WAS THE COST AS REDUCED BY DEPRECIATION ALLOWED. IN BETWEE N, THE BSE WAS CORPORATIZED AND THE APPELLANT WAS ALLOTTED 10,000 SHARES OF BSE IN PLACE OF BSE CARD HELD. DURING THE YEAR, THE APPELLANT SOLD 9123 SHARES OF BSE OUT OF 10,000/ - SHARES HELD. IN THE RETURN OF INCOME, THE APPELLANT OFFERED LONG TERM CAPITAL GAIN OF RS. 4,16,31,819/ - ON SALE OF SHARES OF BSE. IN THE SAID WORKING, THE APPELLANT CONSIDERED THE COST OF ACQUISITION OF 9123 SHARES OF BSE AT RS. 37,10,633/ - . THIS COST WAS CONSIDERED BY THE APPELLANT BY REDUCING THE DEPRECIATION AT RS. 62,89,367/ - FROM THE COST OF RS. 1 CRORE. HOWEVER, IN THE ASSESSMENT ORDER, THE AO HAS CONSIDERED THE WDV ON SHARES SOLD AT RS. 14,29,848/ - AS COST OF SHARES AND RS. 15,85,204/ - BY GIVING INDEXATION BENEFIT. DURING APPELLATE PROCEEDINGS, THE APPELLANT HAS RAISED AN ADDITIONAL GROUND CLAIMING THAT THE COST OF ACQUISITION OF SHARES SOLD SHOULD BE CONSIDERED AT RS. 91,23,000/ - (PROPORTIONATE TO 9123 SHARES SOLD) OUT OF 10,000 SHARES ALLOTTED IN PLACE OF BSE CARD PURCHASED AT RS. 1 CRORE. THIS ADDITIONAL GROUND OF APPEAL IS PERTAINI NG TO GROUND OF APPEAL ALREADY TAKEN IN THE APPEAL MEMO AND THEREFORE ADMISSIBLE AS ADDITIONAL GROUND. 6.3(II) THE QUESTION FOR CONSIDERATION IS AS TO WHETHER THE COST/INDEXATION COST OF ACQUISITION OF SHARES SOLD SHOULD BE CONSIDERED AS THE WDV OF THE SH ARES AFTER REDUCING DEPRECIATION A LREADY ALLOWED OR THE COST/I NDEX COST SHOULD BE CONSIDERED ON THE ACTUAL/ORIGINAL COST PAID WITHOUT REDUCING THEREFROM THE WDV ALREADY ALLOWED TO THE APPELLANT. THIS ISSUE HAS BEEN CONSIDERED AND DECIDED BY THE UNDERSIGNED IN THE CASE OF M/S SINO SECURITIES PVT. LTD. FOR ASST. YEAR 2009 - 10 AS UNDER : - (I ) THE APPELLANT BECAME MEMBER OF BSE BY ACQUIRING BSE MEMBERSHIP CARD ON 20.9.2000 FOR RS. 2,50,00,100/ - . THE HON BLE SUPREME COURT IN THE APPELLANTS OWN CASE FOR AYRS.2002 - 03 TO 2005 - 06 HAS HELD THAT THE APPELLANT IS ENTITLED FOR DEPRECIATION ON BSE MEMBERSHIP CARD TREATING THE SAME AS INTANGIBLE ASSET U/S. 32(1)(II) OF THE ACT. (II) THE BSE ON IT CORPORATIZATION INTO BSEL ON 19.8.2005 ALLOTTED EACH HOLDER OF THE BSE MEMB ERSHIP CARD 10,000 EQUITY SHARES OF FACE VALUE OF RS. 1/ - EACH OF NEWLY INCORPORATED COMPANY. (III) THE HONBLE ITAT MUMBAI IN APPELLANTS OWN CASE HAS HELD THAT THE COMPANY IS NOT ENTITLED FOR DEPRECIATION ON SUCH MEMBERSHIP CARD OF ERSTWHILE BSE AFTER ITS CORPORATIZATION ON 19.8.2005 I.E. FROM A.Y.2006 - 07 ONWARDS. 2.5 IT IS ALSO AN ACCEPTED POSITION OF LAW SECTION 14 ENUMERATED 5 HEADS UNDER WHICH THE INCOME OF AN ASSESSEE FAILS TO BE CHARGED. THE SEVERAL HEADS INTO WHICH INCOME IS DIVIDED UNDER THE ACT P RESCRIBED ITA NO. 3187 /1 3 11 DIFFERENT RULES OF COMPUTATION AND THESE RULES ARE TO BE APPLIED IN ORD E R TO ARRIVE AT THE INCOME U N DER THE PARTICULAR HEAD. THERE IS NO DOUBT THAT DEPRECIATION U/S. 32(1)(II) ON BSE MEMBERSHIP CARD WAS ALLOWED UNDER THE HEAD BUSINESS INCOME. HOW EVER, ON CORPORATIZATION OF STOCK EXCHANGES THE SCHEME OF THE ACT HAS GONE A CHANGE AND THE CAPITAL GAIN ON SALE OF SHARES OF BSE LTD IS TO BE WORKED OUT AS PROVIDED UN DER THE HEAD INCOME FROM CAPITAL GAINS. 2.6 DEMUTUALIZATION REFERS TO THE CONVERSIO N OF AN EXISTING NON - PROFIT ORGANIZATION INTO A PROFITS - ORIENTED COMPANY. IN OTHER WORDS, AN ASSOCIATION THAT IS MUTUALLY OWNED BY MEMBERS CONVERTS ITSELF INTO AN ORGANIZATION THAT IS OWNED BY SHAREHOLDERS. THE COMPANY CAN TAKE DIFFERENT SHAPES AND FORMS , THAT IS, IT COULD BE EITHER A LISTED OR UNLISTED COMPANY WHICH MAY BE CLOSELY HELD OR PUBLIC LY HELD. THIS PROCESS INVOLVES THE SEGREGATION OF MEMBERS RIGHT INTO DISTINCT SEGMENTS, VIZ, OWNERSHIP RIGHTS AND TRADING RIGHTS. IT CHANGES THE RELATIONSHIP BET WEEN MEMBERS AND THE STOCK EXCHANGE. MEMBERS WHILE RETAINING THEIR TRADING RIGHTS ACQUIRE OWNERSHIP RIGHTS IN THE STOCK EXCHANGE, WHICH HAVE A MARKET VALUE, AND THEY ALSO ACQUIRE THE BENEFITS OF LIMITED LIABILITY. THE SHAREHOLDERS IN A CORPORATIZED STOCK E XCHANGE MAY BE A DIVERSE GROUP, AS MEMBERS MAY DECIDE TO RETAIN THEIR SHARES OR TO SELL THEM. DEMUTUALIZATION HOWEVER, DOES NOT INSULATE THEM FROM COMPETITION. A STOCK EXCHANGE WHOSE MANAGEMENT DOES NOT EFFECTIVELY WORK TO MAINTAIN ITS POSITION IN THE MARK ET MAY SOON BECOME A TAKEOVER TARGET. THIS TERM IS NOT RESTRICTED ONLY TO CORPORATIZATION OF STOCK EXCHANGES. ANY ORGANIZATION THAT IS A NON - PROFIT BODY (WHICH IS NOT THE SAME AS LOSS - MAKING) AND IS NOT DISTRIBUTING ITS PROFITS TO OWNER - MEMBERS BUT RETAINS THE SAME TO DEVELOP INFRASTRUCTURE OF THE ORGANIZATION, CAN DEMUTUALISE. 2.7 THUS, DEMUTUALIZATION REFERS TO THE TRANSITION PROCESS OF AN EXCHANGE FROM A MUTUALLY - OWNED ASSOCIATION TO A COMPANY OWNED BY SHAREHOLDERS. IN OTHER WORDS, TRANSFORMING THE LEGAL STRUCTURE OF AN EXCHANGE FROM A MUTUAL FORM TO A BUSINESS CORPORATION FORM IS REFERRED TO AS DEMUTUALIZATION. THE ABOVE, IN EFFECT MEANS THAT AFTER DEMUTUALIZATION, THE OWNERSHIP, THE MANAGEMENT AND THE TRADING RIGHTS A T THE EXCHANGE ARE SEGREGATED FROM ONE ANOTHER. A DEMUTUALISED EXCHANGE IS WAY DIFFERENT FROM A MUTUAL EXCHANGE; THE THREE FUNCTIONS OF OWNERSHIP, MANAGEMENT AND TRADING ARE INTERVENED INTO A SINGLE GROUP IN A MUTUAL EXCHANGE. THE BROKERS MEMBERS OF THE EXCHANGE OVER HERE ARE BOTH THE OWNERS AND THE TRADERS ON THE EXCHANGE AND THEY FURTHER MANAGE THE EXCHANGE AS WELL. A DEMUTUALISED EXCHANGE HAS ALL THESE THREE FUNCTIONS CLEARLY SEGREGATED. 2.8 THE EXCHANGE VALUES ALL ITS ASSETS INCLUDING THE VALUE OF SEATS AND ARRIVES AT A TOTAL VALUE . THIS IS THEN DIVIDED INTO DIFFERENT SHARES AND OFFERED TO THE PUBLIC. LATER, THE SHARES ARE LISTED ON THE STOCK EXCHANGE ITSELF, AND THE FUNDS GOT BY SELLING THE SHARES WILL BE DISTRIBUTED AMONG THE MEMBERS OF THE EXCHANGE AS PAYMENT FOR THEIR SEATS. IF THE COMPANY IS NOT BEING LISTED, THE SHARES MAY BE OFFERED TO THE MEMBERS, NOT FOR TRANSFER. ON THE OTHER HAND, CORPORATIZATION OF STOCK EXCHANGES IS THE PROCESS OF CONVERTING THE ORGANIZATIONAL STRUCTURE OF THE STOCK EXCHANGE FROM A NON - CORPORATE STRUCTUR E TO A CORPORATE STRUCTURE. TRADITI O NALLY, SOME OF THE STOCK EXCHANGES IN INDIA ITA NO. 3187 /1 3 12 WERE ESTABLISHED AS ASSOCIATION OF PERSONS, LIKE BSE, ASE AND MPSE. CORPORATIZATION OF THESE EXCHANGES IF THE PROCESS OF CONVERTING THEM INTO INCORPORATED COMPANIES. 2.9 T O GIVE EFFECT TO THE SCHEME OF DEMUTUALIZATION AND CORPORATIZATION OF THE STOCK EXCHANGES, THE LEGISLATURE AMENDED THE PROVISION OF THE ACT TO GIVE EFFECT TO THE LEGISLATIVE INTENT. SECTION 55(2)(AB) WAS IN SERTED BY THE FINANCE ACT, 2001 W.E.F.01.04.2002 LAYS DOWN THE RULES AND METHOD FOR COMPUTATION OF INCOME FROM CAPITAL GAINS AS THE HEAD SUGGESTS AND HAS NO RELEVANCE REGARDING DEPRECIATION CLAIM OF THE APPELLANT U/S. 32(1)(II) OF THE ACT. SECTION 55(2)(AB) IS REPRODUCED HEREIN BELOW : SECTION 55. MEA NING OF ADJUSTED, COST OF IMPROVEMENT AND COST OF ACQUISITION - (2) FOR THE PURPOSE OF SECTIONS 48 AND 49, COST OF ACQUISITION, - (AB) IN RELATION TO A CAPITAL ASSET, BEING EQUITY SHARE OR SHARES ALLOTTED TO A SHAREHOLDER OF A RECOGNIZED STOCK EXCHA NGE 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 COST OF ACQUISITION OF HIS O RIGINAL MEMBERSHIP OF THE EXCHANGE; PROVIDED THAT THE COST OF A CAPITAL ASSET, BEING TRADING OR CLEARING RIGHTS OF THE RECOGNIZED STOCK EXCHANGE ACQUIRED BY A SHAREHOLDER WHO HAS BEEN ALLOTTED EQUITY SHARE OR SHARES UNDER SUCH SCHEME OF DEMUTUALIZATION OR CORPORATIZATION, SHALL BE DEEMED TO BE NIL; 2.10 SECTION 32(1) WAS SUBSTITUTED BY THE FINANCE (NO.2) ACT, 1998 W.E.F. 01.04.1999 I.E. PRIOR TO INSERTION OF SEC.55 (2)(AB), WHICH WAS INSERTED SUBSEQUENTLY BY THE FINANCE ACT, 2001 W.E.F. 01.04.2002. HOWEV ER, SECTION 55(2)(AB) CLEARLY MANDATES THAT THE COST OF ACQUISITION OF ORIGINAL MEMBERSHIP SHALL BE TAKEN AS THE COST OF EQUITY SHARES ALLOTTED ON ITS CORPORATIZATION. THEREFORE, THERE IS NO RELEVANCE OF THE FACTUM OF CLAIM OF DEPRECIATION IN THE PREVIOUS YEARS BY THE APPELLANT ON THE BSE CARD. THE EARLIER CLAIM WAS THUS GOT TOTALLY DIVORCED OFF FROM THE COST OF ACQUISITION. 2.11 SIMILARLY, SUB - CLAUSE 2(H) &(HA) WERE INSERTED TO SEC.2 (42A) BY THE F INANCE ACT, 2003 W.E.F. 01.04.2004, CLAUSE (H) STIPULATE S THAT IN THE CASE OF A CAPITAL ASSET, BEING TRADING OR CLEARING RIGHTS OF A RECOGNIZED STOCK EXCHANGE IN INDIA ACQUIRED BY A PERSON PURSUANT TO DEMUTUALIZATION OR CORPORATIZATION OF THE OF THE RECOGNIZED STOCK EXCHANGE IN INDIA AS REFERRED TO IN CLAUSE (X III) OF SECTION 47, THERE SHALL BE INCLUDED THE PERIOD FOR WHICH THE PERSON WAS A MEMBER OF THE RECOGNIZED STOCK EXCHANGE IN INDIA IMMEDIATELY PRIOR TO SUCH DEMUTUALIZATION OR CORPORATIZATION; AND THE CLAUSE (HA) STIPULATES THAT IN THE CASE OF A CAPITAL AS SET, BEING EQUITY SHARES IN A COMPANY ALLOTTED PURSUANT TO DEMUTUALIZATION OR CORPORATIZATION OF A RECOGNIZED STOCK EXCHANGE, IN INDIA AS REFERRED TO IN CLAUSE (XIII) OF - SECTION 47, THERE SHALL BE INCLUDED THE PERIOD FOR WHICH THE PERSON WAS A MEMBER OF T HE RECOGNIZED STOCK EXCHANGE IN INDIA IMMEDIATELY PRIOR TO SUCH DEMUTUALIZATION OR CORPORATIZATION. 2.12 THE ABOVE PROVISION OF THE INCOME TAX LAID DOWN THE COMPLETE ITA NO. 3187 /1 3 13 DETAILS AND MODE OF COMPUTATION OF INCOME FROM CAPITAL GAIN IN CASE OF SHARES OF BSE AR E SOLD AFTER DEMUTUALIZATION OR CORPORATIZATION OF STOCK EXCHANGE. IT IS ALSO MADE CLEAR AS TO WHAT SHOULD BE THE TREATMENT OF THE COST OF ACQUISITION. NOW THE POSITION OF LAW THEREFORE, IS VERY CLEAR THAT THE ASSESSEE WILL NOT GET ANY BENEFIT AS FAR AS TH E DEPRECIATION ON THE BSE CARD IS CONCERNED W.E.F. F.Y. 2005 - 06 RELEVANT TO AY2006 - 07. IT IS ALSO MADE VERY CLEAR UNDER THE PROVISIONS OF SEC.55(2)(AB) OF THE ACT WHICH CLEARLY READS THAT THE COST OF ACQUISITION SHALL BE THE COST OF ACQUISITION OF ORIGINA L BSE CARD. THE SECOND PROVISO TO SECTION 48 PROVIDES FOR ADOPTION OF INDEXED COST OF ACQUISITION IN PLACE OF THE COST FOR WHICH THE PROPERTY WAS ACQUIRED. THIS INDEXED COST OF ACQUISITION TAKES THE PLACE OF ADDITIONAL DEDUCTION THAT WAS BEING ALLOWED IN THE EARLIER YEARS FROM THE CAPITAL GAINS COMPUTED UNDER OLD SECTION 48. THE TERM INDEXED COST OF ACQUISITION HAS BEEN DEFINED IN CL.(III) OF THE EXPLANATION AS THE AMOUNT WHICH BEARS TO THE COST OF ACQUISITION THE SAME PROPORTION AS COST INFLATION INDE X FOR THE FIRST YEAR IN WHICH THE ASSET WAS HELD BY THE ASSESSEE OR THE YEAR BEGINNING WITH 1 ST APRIL, 1981, WHICHEVER IS LATER. IT IS ALSO ABUNDANTLY CLEAR U/S. 48 THAT THE INDEX COST OF ACQUISITION IS QUA THE CAPITAL ASSET. THEREFORE, IN VIEW OF THE SPEC IFIC PROVISIONS OF LAW THE APPELLANT HAD TO ALLOW THE COST OF INDEXATION FROM THE DATE O WHICH THE APPELLANT ACQUIRED CAPITAL ASSET I.E. FROM FY 2005 - 06 ONLY AND NOT EARLIER THAN THAT. THE ENTIRE CASE OF THE APPELLANT MUST BE VISUALIZED FROM THE SCHEME OF DEMUTUALIZATION/CORPORATIZATION OF THE SCHEME OF THE BSE AS APPROVED BY THE SEBI. THE RIGHT OF A MEMBER TO TRADE ON WITH THE STOCK EXCHANGE WAS CONVERTED FROM THE INTANGIBLE ASSET TO A MORE TANGIBLE ASSET I.E. FORM OF SHARES AND THE ACQUISITION OF THE CAPI TAL ASSET THUS TOOK PLACE IN FY2005 - 06 AND NOT EARLIER THAN THAT. THE LAW IS ALSO ABUNDANTLY CLEAR THAT TILL THE PERIOD OF 2005 - 06, THE DEPRECIATION ON THE BSE CARD IS PERMISSIBLE TO THE APPELLANT AND NOT THEREAFTER. NOW THE QUESTION ARISES AS TO WHETHER O R NOT THE PRIOR PERIOD OF HOLDING BEFORE DEMUTUALIZATION TO BE INCLUDED IN WHILE COMPUTING THE CAPITAL GAIN SECTION 2(42A) OF THE ACT DEFINED A SHORT - TERM CAPITAL ASSET TO MEAN A CAPITAL ASSET HELD BY AN ASSESSEE FOR NOT MORE THAN THIRTY - SEX MONTHS IMMED IATELY PRECEDING THE DATE OF ITS TRANSFER. PROVIDED THAT IN THE CASE OF A SHARE HELD IN A COMPANY, OR ANY OTHER SECURITY LISTED IN A RECOGNIZED STOCK EXCHANGE IN INDIA OR A UNIT OF THE UNIT TRUST OF INDIA ESTABLISHED UNDER THE UNIT TRUST OF INDIA ACT, 1963 (52 OF 1963) OR A UNIT OF A MUTUAL FUND SPECIFIED UNDER CLAUSE (23D) OF SECTION 10 OR A ZERO COUPON BOND THE PROVISIONS OF THIS CLAUSE SHALL HAVE EFFECT AS IF FOR THE WORDS THIRTY - SEX MONTHS, THE WORDS T W ELVE MONTHS HAD BEEN SUBSTITUTED. THE FINANCE AC T, 2003 WITH EFFECT FROM 1 ST APRIL, 2004 INSERTED TWO NEW SUB - CLAUSES IN EXPLANATION 1; NAMELY '(H) IN THE CASE OF A CAPITAL ASSET, BEING TRADING OR CLEARING RIGHTS OF A RECOGNISED STOCK EXCHANGE IN INDIA ACQUIRED BY A PERSON PURSUANT TO DEMUTUALISATION OR CORPORATISATION OF THE RECOGNISED STOCK EXCHANGE IN INDIA AS REFERRED TO IN CLAUSE (XIII) OF SECTION 47, THERE SHALL BE INCLUDED THE PERIOD FOR WHICH THE PERSON WAS A MEMBER OF THE RECOGNISED STOCK EXCHANGE IN INDIA IMMEDIATELY PRIOR TO SUCH DEMUTUALISATI ON OR CORPORATISATION; (HA) IN THE CASE OF A CAPITAL ASSET, BEING EQUITY SHARE OR SHARES IN A COMPANY ALLOTTED PURSUANT TO DEMUTUALISATION OR CORPORATISATION OF A ITA NO. 3187 /1 3 14 RECOGNISED STOCK EXCHANGE IN INDIA AS REFERRED TO IN CLAUSE (XIII) OF SECTION 47, THERE SHAL L BE INCLUDED THE PERIOD FOR WHICH THE PERSON WAS A MEMBER OF THE RECOGNISED STOCK EXCHANGE IN INDIA IMMEDIATELY PRIOR TO SUCH DEMUTUALISATION OR CORPORATISATION;'. 2.13 THE FINANCE ACT, 2003 ALSO BRING IN THE STATUTE NEW SECTIONS SUCH AS 47(XIIIA) AND 55 (2)(AB), ON THE BASIS OF THE PROVIS IONS OF THE ACT AS DISCUSSED IN THE FOREG O ING PARAGRAPHS, I AM OF THE CONSIDERED VIEW THAT THERE IS A, NO MERIT IN. THE ARGUMENT OF THE ASSESSING OFFICER THAT THE SALE OF THE BSE SHARES BE TREATED AS SHORT TER M CAPITAL G AIN , THE LAW IS VERY CLEAR THAT SINCE THE HOLDING IS MORE THAN A Y EAR THE SALE OF SHARES BE TREAT ED AS L ONG TER M CAPITAL GAIN AND THE ASSESSING OFFICER IS DIRECTED TO TREAT THE RECEIPTS ON SALE OF SHARES AS LONG TERM CAPITAL GAIN . THERE IS A CONSIDERABLE FORCE IN THE ARGUMENTS OF THE LD. AR OF THE APPELLANT THAT T HAT THE COST OF INDEXATION SHOULD BE GIVE N FROM THE DATE IT ACQUIRED ,THE, MEMBERSHIP CARD AND NOT FROM THE DATE OF THE SCHEME OF DEMUTUALIZATION/CORPORATIZATION WHICH HAS COME INTO BEING IN FY 2 005 - 06. THE SCHEME OF THE ACT IS VERY CLEAR AND THE SAME HAS BEEN SPECIFICALLY CLARIFIED BY THE EXPLANATION 1 TO THE SECTION 2(42A) OF THE A CT. IN VIEW OF THE FOREGOING DISCUSSION EVEN THOUGH THE NEW ASSET CAME INTO BEING THROUGH A GOVERNMENTAL SCHEME, THE COST OF INDEXATION HAS TO BE ALLOWED WITH EFFECT FROM DATE OF ORIGINAL HOLDING AND THE PRIOR PERIOD HAS TO BE TAKEN INTO CONSIDERATION WHILE COMPUTING THE CAPITAL GAIN. THE OBJECT OF GIVING RELIEF TO AN ASSESSEE BY ALLOWING INDEXATION IS WITH A VIEW TO OF FSET THE EFFECT OF INFLATION. AS PER THE CBDT CIRCULAR NO. 636 DTD. 31 ST AUG, 1992 (1992) 198 ITR (ST) 1, A FAIR METHOD OF ALLOWING RELIEF BY WAY OF INDEXATION IS TO L INK IT TO THE PERIOD OF HOLDING THE ASSET. THE SAID CIRCULAR FURTHER PROVIDES THAT THE COS T OF ACQUISITION AND THE COST OF IMPROVEMENT HAVE TO BE INFLATED TO ARRIVE AT THE INDEXED COST OF ACQUISITION AND THE INDEXED COST OF IMPROVEMENT AND THEN DEDUCT THE SAME FROM THE SALE CONSIDERATION TO ARRIVE AT THE LONG - TERM CAPITAL GAINS. IF INDEXATION I S LINKED TO THE PERIOD OF HOLDING AND THE LAW SPECIFICALLY ALLOWED THE INCLUSION OF THE PRIOR PERIOD OF HOLDING DESPITE THE ASSETS UNDERGOING A CHANGE, THE SAME IS THUS REQUIRED TO BE INCLUDED. IN VIEW OF THE FORGOING THE APPELLANTS APPEAL IS ALLOWED. 6 .3(III) IN VIEW OF MY ABOVE DECISION IN TERMS OF PROVISIONS OF SECTION 55(2)(AB) R.W.S.2(42A)(HA) OF SECTION 2(42A) OF THE ACT, THE COST OF ACQUISITION OF 9123 SHARES SOLD IS REQUIRED TO BE CONSIDERED AT RS. 91,23,000/ - BEING THE ORIGINAL COST IN PROPORTIO N TO COST PAID FOR BSE CARD. THE AO IS DIRECTED TO RE - COMPUTE THE CAPITAL GAIN BY CONSIDERING THE COST OF ACQUISITION AT RS. 91,23,000 AND RE - COMPUTE THE CAPITAL GAIN FOR ALLOWING INDEXATION THEREON. IN THE RESULT, THIS GROUND OF APPEAL AS WELL AS ADDITIONA L GROUND OF APPEAL IS ALLOWED. . _ , 12 . WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT SHARE ALLOTTED TO THE ASSESSEE BY BSE IN LIEU OF ITS MEMBERSHIP CARD WAS SOLD BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. THE LONG TERM CAPITAL GAIN A ROSE THEREON WAS COMPUTED BY THE AO BY TAKING THE WDV OF MEMBERSHIP ITA NO. 3187 /1 3 15 CARD SO ALLOTTED. THE CIT(A) DELETED THE ADDITION SO MADE BY OBSERVING THAT U/S. 55(2)(AB) WAS INTRODUCED BY FINANCE ACT, 200 1 , ACCORDING TO WHICH IN CASE OF SALE OF CAPITAL ASSET BEING EQU ITY SHARE ALLOTTED TO THE SHAREHOLDER OF A RECOGNIZED STOCK EXCHANGE IN INDIA UNDER SCHEME OF DEMUTUALIZATION, SHALL BE THE COST OF ACQUISITION OF ITS ORIGINAL MEMBERSHIP OF THE EXCHANGE. THE CIT(A) FOUND THAT THE ORIGINAL COST OF ACQUISITION OF MEMBERSHIP CARD AT RS. 91,23,000/ - . ACCORDINGLY, THE CIT(A) DIRECTED THE AO TO RECOMPUTED THE CAPITAL GAIN ON SALE OF SHARES OF BSE BY TAKING THE COST OF ACQUISITION AT RS. 91,23,000/ - AND ALLOWING INDEXATION THEREON AS PER PROVISIONS OF LAW. HENCE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A) FOR DIRECTING THE AO TO RECOMPUTE CAPITAL GAIN BY TAKING COST OF ACQUISITION AT RS. 91,23,000/ - . 13 . IN THE RESULT, APPEAL FILED BY THE REVENUE IS ALLOWED IN PART FOR STATISTICAL PURPOSES , IN TERMS INDICATED HEREINABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 28/08/ 201 4 . 28/08/ 2014 SD/ - SD/ - ( ) ( DR.S .T.M.PAVALAN ) ( ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED 28/08 / 2014 /PKM , PS COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A), MUMBAI. 4. / CIT 5. / DR, ITAT, MUMBAI ITA NO. 3187 /1 3 16 / BY ORDER, (ASSTT. REGISTRAR) / ITAT, MUMBAI 6. G UARD FILE. //TRUE COPY//