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Facts
The assessee, a promoter of Polycab India Limited, sold shares through an Offer for Sale (OFS) and claimed capital gains. The Assessing Officer treated the cost of acquisition of bonus shares as Nil, leading to a higher capital gains tax. The assessee challenged this, arguing for the fair market value as on January 31, 2018, as the cost of acquisition.
Held
The Tribunal held that the cost of acquisition of bonus shares should be considered as the fair market value as on January 31, 2018, not Nil. They reasoned that Section 55(2)(ac) specifically governs the computation for STT-paid equity shares under Section 112A and overrides general provisions like Section 55(2)(aa), preventing the taxation of pre-2018 appreciation.
Key Issues
Whether the cost of acquisition of bonus shares for OFS transactions should be treated as Nil or the fair market value as on January 31, 2018, considering the grandfathering provisions and specific section 55(2)(ac) of the Income Tax Act.
Sections Cited
139(1), 143(3), 10(38), 244A, 112A, 55(2)(ac), 55(2)(aa), 2(228)
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Income Tax Appellate Tribunal, “C” BENCH MUMBAI
Before: SHRI SANDEEP GOSAIN & SHRI GIRISH AGRAWAL
Assessment Year: 2020-21 Inder Jaisinghani Deputy Commissioner of 1401, Tower -B, Beau Monde, Income Tax, Appasaheb Marathe Marg, Vs. Central Circle -5(2), Prabhadevi, Mumbai Mumbai - 400031 (PAN: AAAPJ9287G) (Appellant) (Respondent) Present for: Assessee : Shri Rajan Vora and Shri Pranay Gandhi, CAs Revenue : Shri R A Dhyani, CIT DR Date of Hearing : 23.09.2025 Date of Pronouncement : 31.10.2025 O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the assessee is against the order of Ld. CIT(A)-53, Mumbai, vide order No. ITBA/APL/S/250/2024- 25/1070982081(1), dated 06.12.2024 passed against the assessment order by Deputy Commissioner of Income-tax, Central Circle-5(2), Mumbai, u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 23.03.2022, for Assessment Year 2020-21.
Grounds taken by the assessee are reproduced as under: General 1. erred in denying the Appellant's additional claim, in respect of non- chargeability of capital gains Income amounting to Rs. 107,45,07,080 to tax in respect of shares held in Polycab Ltd, offered under "offer for sale at the time of Initial Public Offering (IPO); Inder Jaisinghani AY 2020-21 Provisions of Explanation to section 55(2)(ac) of the Act as applicable at the time when the impugned OFS transactions was entered into should be applied: 2. failed to appreciate the fact that as per the provisions existing at the time of the transaction, the computation mechanism in relation to determination of cost of shares offered under OFS as per section 55(2)(ac) of the Act fails, by virtue of which the capital gains cannot be computed and hence there can be no levy of capital gains tax; failed to appreciate the fact that the date of transfer of shares under OFS is the date on which the shares are allotted to the purchasers and transferred to the account of purchasers and not the date of listing of the said shares and therefore the shares were already transferred by the assessee before the shares were listed on stock exchange and Securities Transaction Tax (STT) was paid by assessee and therefore the capital gains are not chargeable to tax; Without prejudice, cost of acquisition of the shares may be computed using the fair market value as on 31 January 2018: 3. without prejudice to the above, while computing capital gains arising on shares offered under OFS, the cost of shares of Polycab India Ltd should be considered to be Fair Market Value ('FMV) of shares as on 31 January 2018in light of provision of Explanation a(i) Section 55(2)(ac); Without prejudice, provisions of section 55(2)(aa)(ilia) of the Act cannot be imported into the provisions of section 55(2)(ac) of the Act: 4. without prejudice to the above, failed to appreciate that the provisions of section 55(2)(aa)(iiia) of the Act providing for cost of acquisition of bonus shares to be Nil cannot be imported into the provisions of section 55(2)(ac) of the Act and it has to be considered as per grand-fathering provisions i.e. fair market value as on 31 January 2018 should be adopted; Amendment to Explanation to section 55(2)(ac) of the Act by the Finance (No. 2) Act. 2024 should be applied prospectively: 5. erred in holding that the amendment made to the Explanation to section 55(2)(ac) of the Act by the Finance (No. 2) Act, 2024 with retrospective effect from 1 April 2018 is applicable to present case of transfer of shares under OFS in AY 2020-21 without appreciating that the amendment being substantive in nature ought to be applied prospectively ie. it should be applied to OFS transactions after 22 July 2024, 6. erred in applying the amended provision of Section 55(2)(ac) of the Act, without appreciating that the amended provisions cannot be applied retrospectively, since it creates a new class of "assessee as well as burdens the taxpayers with additional tax liability on concluded transactions; Short grant of interest under section 244A of the Act: 7. erred in disposing the Appellant's grounds of appeal holding the same to be consequential in nature instead of adjudicating the same on merits;
3. Assessee is one of the promoters of Polycab India Limited. For the year under consideration, assessee filed his return of income u/s.139(1) of the Act on 21.12.2020 reporting total income at Rs. 117,71,03,930/-. During the year, Polycab India Limited decided to list its shares in National Stock Exchange ('NSE') and Bombay Stock Exchange ('BSE'). The offer comprised of fresh issue of shares and offer for sale ('OFS') by existing shareholders/ promoters. As on 01.04.2019, assessee held 2,35,40,579 shares comprising of both bonus and non-bonus shares. Assessee also participated in the OFS and wherein, sold 20,89,603 for a total consideration of Rs. 112,34,33,261/-, earning capital gains of Rs. 107,45,07,080/-. Shares sold during OFS (20,89,603 shares) were out of bonus shares issued during FY 2006-07. Subsequently, assessee filed an additional legal claim before the ld. Assessing Officer on 30.07.2021 in relation to taxability of capital gains arising on sale of shares under OFS. After considering the additional claim filed by the assessee and the submissions filed on various dates during the proceedings, ld. Assessing Officer passed the assessment order dated 23.03.2022, accepting the returned income. However, ld. Assessing Officer rejected the additional claim filed by the assessee on legal ground as well as on merits.
4. The issue raised before us on the above stated facts is identical to the one already dealt with the Coordinate Bench in the case of brother of the assessee, viz. Ramesh Jaisinghani in order dated 10.10.2025, wherein the undersigned Accountant Member is the co-author. Since the facts are identical, the decision of the Coordinate Bench in the case of Ramesh Jaisinghani Inder Jaisinghani AY 2020-21 (supra) squarely applies in the present case. Relevant extracts of the order are given below: "52. It is settled canon of fiscal jurisprudence that a charge of far must be supported by a clear and workable machinery provision. It is a well settled law after the judgment of the Hon'ble Supreme Court in B.C. Srinivasa Shetty (supra) held that where the computation provisions fail the charging section itself becomes inoperative. The factual matrix brings the case squarely within this ratio because the charge cannot survive when the legislature itself cannot devise a means to quantify it.
53. Even the view purposively, the 2018 introduction of Section 112A and section 55(2)(ac) was meant to grandfather gains accrued up to 31 January 2018, not to tax them. This provides an additional anchor for the assessee's case. The legislative intent was clear to protect appreciation accruing up to 31/01/2018. The assessee's shareholding being of a very long period had already appreciated substantially before that date. To tax such appreciation substantially before that date. To tax such appreciation on the ground that shares were listed few days after the transfer would defeat both the spirit and later on that covenant. This legislative intent is also clear from the Finance Minister's Speech (supra) that long term capital gains exceeding to Rs.1,00,000/- shall be taxed at 10% without indexation but that all gains up to 31/01/2018 shall be grandfathered. Thus the intention was manifestly benevolent to mitigate hardship from the withdrawal of exemption under section 10(38). To construe the provision in a manner that either denies the grandfathering or renders computation impossible would be antithetical to that legislative purpose. Thus, the addition made by the id. AD and upheld by the Id. CIT(A) is accordingly, set aside because the computation mechanism u/s 55(2)(ac) rw.s. 1124 was incapable of application to the assessee's OFS transaction and the substantive legislative amendment of 2024 cannot operate retrospectively to tax a transaction already concluded in 2019.
Although we have already concluded that the capital gains purported to arise from the sale of shares under the Offer for Sale mechanism are not exigible to tax under the law as it stood during the relevant period owing to the failure of the computation provisions and the impermissibility of any retrospective operation it was nonetheless clarified, during the course of the hearing, that relief would, in any event, be available to the assessee on the alternative plea advanced. It was urged that the fair market value of the shares as on 31 January 2018 ought to be regarded as the cost of acquisition within the meaning of section 2(228) of the Act, and that the resultant capital gains, if at all susceptible of computation, be determined accordingly. In this perspective, our earlier conclusion on the non-exigibility of capital gains stands rendered academic, since the relief ultimately rests upon the very manner of computation envisaged under this alternative approach 55. Turning now to this alternative plea, the learned counsel for the assessee contended that even assuming, arguendo, that the provisions of section 112A were otherwise applicable, the fair market value of the shares as on 31 January 2018 should, in any event, be adopted as the cost of acquisition, by invoking the statutory definition of "fair market value under section 2(228) of the Act. Such a construction, it was urged, would give full and faithful Inder Jaisinghani AY 2020-21 expression to the grandfathering principle enshrined in the Finance Act, 2018 a legislative measure consciously designed to preserve the accretion in value of listed equity shares up to the cut-off date, and to tax only the incremental gains arising thereafter. This interpretation, in our considered view, harmonises the letter of the statute with its evident spirit, ensuring that the computational machinery operates in a rational and equitable manner, and that taxation, if at all attracted, is confined strictly to the post-2018 accretions in value......
Summarizing the argument, the assessee urged that: The amendment brought by the Finance (No. 2) Act, 2024 creates a new class of taxable persons and cannot apply retrospectively to concluded transactions; Transactions already completed and assessments finalized cannot be reopened on the strength of a later amendment: Vested rights cannot be impaired retrospectively; Substantive law cannot be retrospectively amended to impose a new charge; and Where computation is impossible, no tax can be levied. In the alternative, if at all computation is to be made, the cost of acquisition should be taken as the FMV as on 31 January 2018 under section 2(228) of the Act.
We agree with the contention raised by the Id. Counsel on the alternative plea. Section 2(228) defines fair market value as the price the asset would ordinarily fetch if sold in the open market on the relevant date. Even in the absence of a quoted price, a reasonable estimation based on comparable valuation or book value could be adopted. Such adoption would be consonant with both legislative purpose and practical justice. It would preserve the grandfathering covenant while ensuring that genuine post-2018 appreciation remains taxable. The "maxim generalia specialibus non derogant" which means general provisions must yield to the special applies squarely. Section 55(2)(aa) is a general rule applicable to all bonus shares; section 55(2)(ac) is a specific computation mechanism for equity shares subjected to STT and eligible under section 112A. Once Parliament created this special regime, its self-contained method of computation necessarily governs all such shares, including bonus shares. If, therefore, the cost of bonus shares were to be compulsorily taken as nil, even under the section 112A regime, the consequence would be to tax pre-2018 appreciation contrary to the grandfathering objective. Such an interpretation would render the special provision nugatory. The harmonious construction that best advances the statute's purpose is to treat section 55(2)(ac) as an overriding computational code for all section 112A assets.
It has been brought on record that FMV of the Polycab shares as on 31/01/2018, when the company's financials and public offers valuations were known, the price per share was around Rs.500/-per share. The computation based on such fair market value on 20,71,963 shares sold during OFS as per the computation given by the Id. Counsel above, the capital gain chargeable u/s. 112A would work out to Rs.2,94,53,256/-. We also find merit Inder Jaisinghani AY 2020-21 with regard to cost of acquisition of the bonus shares cost which department has treated the cost of acquisition at "Nil". Here also the bonus shares being equity shares on which STT has been paid falls squarely within the scope of Section 55(2)(ac) which specifically governs computation of capital gains or long term equity shares on which STT has been paid and overrides the general provision contained under Section 55(2) (aa) which earlier governed cost of acquisition of bonus shares, applies only to cases where the shares are not covered by the STT regime. Once the transaction is of shares subjected to STT, as in the case of the assessee, the special provision of section 55(2)(ac) must prevall over the general provision of section 55(2)(aa). Ergo, the maxim "generalia specialibus non derogant" general provisions must yield to the special applies squarely, Section 55(2)(aa) is a general rule applicable to all bonus shares; section 55(2)(ac) is a specific computation mechanism for equity shares subjected to STT and eligible under section 112A Once Parliament created this special regime, its self-contained method of computation governs all such shares, including bonus shares. If, therefore, the cost of bonus shares were to be compulsorily taken as nil, even under the section 112A regime, the consequence would be to tax pre-2018 appreciation contrary to the grandfathering objective. Such an interpretation would render the special provision nugatory. The harmonious construction that best advances the statute's purpose is to treat section 55(2)(ac) as an overriding computational code for all section 112A assets. Accordingly, we hold that bonus shares cannot be treated as having a nil cost of acquisition. In the statutory framework of section 112A, read harmoniously with section 55(2)(ac), such an interpretation would be antithetical to both the text and the evident legislative intent. The cost of acquisition must, therefore, be reckoned at the fair market value as on 31 January 2018, determined in terms of section 2(228) of the Act. This valuation, anchored to an objective and statutorily recognised benchmark, furnishes the most rational, equitable and consistent measure of acquisition cost.
To adopt a nil cost even in the context of section 112A assets would be to subvert the very grandfathering covenant that Parliament consciously enacted to protect pre-1 February 2018 appreciation from the sweep of taxation. The law, after all, does not countenance a construction that nullifies its own beneficent purpose. We thus hold that section 55(2)(ac), being the later and special provision, must prevail over section 55(2)(aa); and that the computational regime of section 1124 cannot be rendered nugatory by importing a rule devised for an earlier and distinct context.
Consequently, in the present case, the fair market value as on 31 January 2018, taken at ₹500 per share as per the valuation report submitted by the assessee, shall constitute the cost of acquisition for the purpose of computing long-term capital gains. Applying this measure, the resultant gain under section 112A works out to ₹2,94,53,256, as against the figure assessed by the Assessing Officer upon treating the cost as nil. The addition so made, and sustained by the learned CIT(A), is accordingly unsustainable in law and on facts, and stands deleted."
In view of the above, the revised capital gains basis the alternate claim shall be Rs. 2,97,05,580/- is computed as under:
2 Full value of consideration per share (B) Rs. 537.63 3 Capital gains per share (before claim- (C) = (A)-(B) Rs. 37.63 ing selling expenses) 4 No. of shares sold (D) 20,89,603 shares 5 Capital gains (before claiming selling (E) = (C) * (D) Rs. 7,86,31,761 expenses) 6 Selling Expenses (F) Rs. 4,89,26,181 7 Capital gains chargeable to tax under (G) = (E) - (F) Rs. 2,97,05,580 section 112AoftheAct 5.1. Accordingly, the above tabulated working, the resultant gain under section 112A works out to ₹2,97,05,580, as against the figure assessed by the Assessing Officer upon treating the cost as nil. The addition so made, and sustained by the learned CIT(A), is accordingly unsustainable both, in law and on facts, and stands deleted.