RAMESH JAISINGHANI,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX CENTRAL CIRCLE -5(2), MUMBAI

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)(iia) 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)(as) of the Act by the Finance (No. 21 Act. 2024 should be applied prospectively. erred in holding that the amendment made to the Explanation to section 50(2)(ec) 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 Le it should be applied to OFS transactions after 22 July 2024: erred in applying the amended provision of Section 56(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 Each of the above ground is independent and without prejudice to one another.

It is an admitted fact that as on 1 April 2019, the assessee held 2,33,39,964 equity shares of Polycab India Limited, comprising both original subscribed shares and bonus shares issued by the company in earlier years. Under the OFS, the assessee sold 20,71,963 shares for a total consideration of ₹111,39,47,912. While filing the return of Ramesh Jaisinghani income, the assessee, proceeding on a conservative basis, declared long-term capital gains on the sale of these shares at ₹1,06,54,34,756, net of selling expenses. It was specifically noted that the shares sold under the OFS were part of the bonus shares issued in financial year 2006–07.

Subsequently, the assessee filed an additional claim before the ld. Assessing Officer by letter dated 30 July 2021 (pages 77 to 89 of the factual paper-book), contending that the gains arising from the sale of shares under the OFS were not exigible to tax at all, as the computation mechanism for determining capital gains failed under the law. The assessee relied upon the decision of the Hon‟ble Supreme Court in CIT v. B.C. Srinivasa Shetty (1981) 128 ITR 294 (SC) and subsequent decisions to submit that where the computation machinery provided under the Act fails, the charging provision itself cannot be applied. The principal argument was that under Explanation to section 55(2)(ac), the determination of fair market value (FMV) as cost of acquisition is contingent upon the share being listed on a recognised stock exchange on the date of transfer. In the case of an OFS during IPO, the shares are first transferred by the selling shareholders to an escrow account prior to listing, and thereafter transferred to the allottees before the listing date. The shares become listed only after such transfer. Consequently, on the date of transfer, the shares are unlisted and hence no FMV could be determined in the manner prescribed. The cost of acquisition being indeterminable, the computation mechanism collapses, Ramesh Jaisinghani and accordingly, the resultant capital gains cannot be brought to tax.

The assessee further emphasised that the transaction is governed exclusively by section 55(2)(ac), which deals specifically with equity shares covered under section 112A. Hence, the computation cannot be made under any other provision of section 55. Since no other clause provides a substitute or alternative method to determine FMV in such a situation, and the specific computational mechanism fails, the charge under section 45 equally fails. The assessee also filed an alternate claim on 31 March 2022 placed at pages 90 to 94 of the factual paper-book, urging that, in the event the capital gains were considered taxable, the cost of acquisition of the shares should be taken as their FMV as on 31 January 2018, in accordance with the grandfathering provision introduced by the Finance Act, 2018 and the definition of “fair market value” in section 2(22B). It was submitted that while a revised return was not filed, the claim was raised through written submissions and supported by documents already on record.

During the course of the scrutiny assessment proceedings initiated under section 143(2), the Assessing Officer called for various details, including the computation of capital gains offered by the assessee. In response, the assessee filed detailed replies and supporting documents on 10 July 2021; 4 February 2022; and 26 March 2022, elaborating the grounds of his claim and the computation issues arising under the Act. After considering the submissions, the Assessing Officer passed the assessment Ramesh Jaisinghani order dated 23 March 2022, determining the total income at ₹128,54,70,680/-, the same as the returned income thereby rejecting the additional claim made by the assessee. The rejection was twofold: first, on the technical ground that an additional claim could not be entertained without a revised return, relying upon the decision of the Hon‟ble Supreme Court in Goetze (India) Ltd. v. CIT (2006) 284 ITR 323 (SC); and second, on merits, holding that the assessee‟s contention was unfounded and that the computation mechanism under section 55(2)(ac) was workable.

The reasons given by the ld. AO for the sake of ready reference is reproduced hereunder:- “10. The reasoning given is absurd as Polycab Limited was an unlisted entity and the shares held in the company by the assessee were therefore unlisted equity shares. The cost of acquisition of the same was Nil as the same were bonus shares. The cost of acquisition for the same would be Nil at the time of the transfer as has been rightly done by the assessee in his return of income. The process of IPO or listing follows a process where the seller places shares on offer in escrow, that's not a transfer in any sense. Its merely an offer for sale and its as if the same have been put on the market now for sale for the bidders to bid for. So that is not a transfer as is being claimed incorrectly by the assessee. Secondly, in the IPO process, when the allotment is finalised, the next day the funds are received by the company and the third day, the listing and trading is done. The share allotment from the escrow and the listing is just a procedural step subsequent to that trading starts. Moreover, no transfer is complete or valid unless the consideration is received by the transferor. The date on which the consideration has been received by the transferor is 16.04.2019 which is after/on the date of listing. Therefore, the claim of the assessee is an attempt to misread the provisions of the law and is rejected.

In the light of the above, and after having gone through the submissions filed by the assessee, verification on test-check basis, information available on record & the facts of the case, the total income of the assessee is computed as under :- Amount (in Rs.) TOTAL INCOME (as per Return 128,54,70,680/-, of Income) ASSESSED TOTAL INCOME 128,54,70,680/-,

Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A). In appellate proceedings, the assessee filed elaborate written submissions, relying upon judicial precedents to contend that an additional claim can be validly raised before the appellate authority, since the appellate powers are co-extensive with those of the Assessing Officer and are not circumscribed by procedural restrictions applicable to the assessing stage. However, on merits the ld. CIT(A) analysed the statutory scheme and the assessee‟s Ramesh Jaisinghani submissions in elaborate detail. He noted that section 112A, introduced by the Finance Act, 2018, withdrew the exemption under section 10(38) and brought to tax long-term capital gains on listed equity shares where STT had been paid, while introducing section 55(2)(ac) to define the cost of acquisition and to protect gains accrued up to 31 January 2018 through the so-called “grandfathering” mechanism. Under the Explanation to section 55(2)(ac), the cost of acquisition was to be the higher of (i) the actual cost and (ii) the FMV as on 31 January 2018.

The ld. CIT(A) took note of the assessee‟s contention that this machinery failed in application because the shares were unlisted on the date of transfer to the escrow account, while the listing occurred only thereafter. Hence, there was no quoted price to determine FMV and therefore the charge under section 45 failed for want of a workable computation provision. The ld.CIT(A), however, disagreed. He observed that the OFS and IPO were one continuous and integrated commercial event. The transfer of shares to the escrow account, though preceding the formal listing by a few days, formed part of the same indivisible transaction culminating in listing and public sale. Therefore, he held that for purposes of computation under section 55(2)(ac), the shares should be deemed to be listed on the date of transfer.

He also reasoned that the expression “lacuna” in the Memorandum was used loosely to indicate ambiguity rather than absence of law and that the amendment merely codified what was implicit. Consequently, the ld. CIT(A) held that the Assessing Officer had correctly applied section 55(2)(ac) to the assessee‟s transaction.

The ld. CIT(A) further noted that section 55(2)(aa) already provides that the cost of acquisition of bonus shares is nil, and therefore the computation of capital gain on sale of such bonus shares did not suffer from any failure of machinery. The reliance placed by the assessee on CIT v. B.C. Srinivasa Shetty (128 ITR 294, SC) was, in his view, misplaced, because in that case the cost was indeterminable, whereas here the statute itself fixed it as nil. In support of his conclusion, he referred to CBDT Notification No. 60/2018 dated 1 October 2018 and the legislative history leading to the introduction of Ramesh Jaisinghani section 112A, observing that the intent was always to tax gains arising on sale of listed shares after withdrawal of the exemption under section 10(38), including those sold through OFS in IPO processes.

He therefore, concluded that the assessee‟s contention regarding failure of machinery provisions was untenable and dismissed the grounds of appeal

Developing his argument further, the ld. counsel for the assessee invited attention to the legislative backdrop governing the taxation of capital gains on listed shares. He explained that prior to 31 March 2018, section 10(38) of the Act provided a complete exemption for long-term capital gains arising from the transfer of equity shares on which Securities Transaction Tax (STT) had been paid at the time of acquisition and sale. This exemption was withdrawn by the Finance Act, 2018, which simultaneously introduced section 112A to bring such gains within the tax net at a concessional rate of ten per cent. Importantly, the Finance Minister, in his Budget Speech for 2018, announced that all gains accrued up to 31 January 2018 would be grandfathered, meaning that appreciation up to that date would not be taxed, and only subsequent gains would be chargeable. To operationalise this, Parliament Ramesh Jaisinghani enacted section 55(2)(ac) prescribing how the cost of acquisition was to be computed by taking the higher of the actual cost or the lower of the fair market value (FMV) as on 31 January 2018 and the sale consideration. The ld. counsel emphasised that this mechanism rested upon the availability of a quoted price as on 31 January 2018 and applied only to shares listed on a recognised stock exchange.

In the case of the present assessee, it was stressed that the shares were not listed on any recognised exchange on the date of transfer, for the simple reason that they were part of the very IPO through which the company was seeking listing. The sale to investors through OFS took place prior to the listing and hence outside the literal ambit of the computation mechanism. Consequently, as on the relevant date, there was no determinable FMV as contemplated under section 55(2)(ac), and the computation of capital gains under section 48 became impossible. In such circumstances, following the ratio of B.C. Srinivasa Shetty (1981) 128 ITR 294 (SC), the ld. counsel submitted that when the machinery provisions fail, the charging section must fail along with it, and hence, the gains arising on such transfer cannot be brought to tax.

The ld. counsel then referred to the subsequent Finance (No. 2) Act, 2024, which inserted clause (a)(iii)(AA) to the Explanation to section 55(2)(ac) with retrospective effect from 1 April 2018. This amendment, for the first time, provided a notional formula for determining FMV in cases where equity shares were unlisted on 31 January 2018 but became listed subsequently pursuant to an IPO and were sold under an Ramesh Jaisinghani Offer for Sale prior to such listing. The Explanatory Memorandum accompanying the amendment, he pointed out, candidly acknowledged that “a lacuna has arisen in computation of cost of acquisition under clause (ac) of sub- section (2) of section 55 in the case of equity shares transferred under OFS as part of IPO process.” This legislative confession, according to the assessee, is the clearest proof that the law prior to this amendment did not contain any such computational provision and that the insertion of the clause (a)(iii)(AA) was curative and enabling, not clarificatory.

He further contended that this amendment, which for the first time created a legal fiction for computing cost in such cases, was substantive in nature and could not be given retrospective effect. He relied heavily upon the dictum of the Hon‟ble Supreme Court in CIT v. Vatika Township Pvt. Ltd. (2014) 367 ITR 466 (SC), which laid down that a provision which imposes a new obligation or creates a new charge must operate prospectively unless the legislative intent for retrospective operation is clearly expressed. The presumption of prospectivity, he submitted, is particularly strong in fiscal legislation, where taxpayers plan their affairs based on the law as it exists. The 2024 amendment, by introducing for the first time a formula for computing FMV of shares sold before listing, clearly enlarges the scope of taxability and thus cannot retrospectively affect completed transactions.

The ld. counsel also referred to the decisions of the Hon‟ble Delhi High Court in CIT v. Ansal Landmark Township (P) Ltd. (2015) 377 ITR 635 (Del) and CIT v. New Skies Satellite Ramesh Jaisinghani BV (2016) 382 ITR 114 (Del), wherein it was held that amendments which expand the scope of income or create new deeming fictions cannot be applied retrospectively in the absence of express legislative intent. Drawing analogy from these rulings, he urged that the amendment of 2024 introduced a new computation device which previously did not exist, and hence could apply only prospectively.

Adverting to the facts of the case, the ld. counsel submitted that the assessee‟s sale of shares under the OFS was not an independent, voluntary sale but a part of a statutorily regulated IPO process governed by the SEBI (Issue of Capital and Disclosure Requirements) Regulations. The shares were compulsorily transferred to an escrow account prior to the IPO opening and were subsequently transferred to investors before the listing approval. The assessee had no control over the timing or sequencing of events. The impossibility of determining FMV on the date of transfer was thus a direct consequence of the statutory framework, not of any omission on the part of the assessee. The Legislature, by amending the law in 2024 to include precisely such cases, itself recognised this structural anomaly. It would therefore be wholly inequitable to tax the assessee retrospectively for a situation which the Legislature itself later sought to cure.

Without prejudice to the primary plea that no charge arises due to computational impossibility, counsel advanced an alternate proposition: even if gains are held exigible under section 112A, the cost of acquisition must, to give effect to the 2018 grandfathering, be taken as the FMV as on 31 January Ramesh Jaisinghani 2018 by adopting the general definition in section 2(22B) (open-market value) or, purposively, by extending the indexation limb of then-existing Explanation (a)(iii) to the instant facts so as to avoid absurdity. A working was furnished taking ₹500 per share as 31-01-2018 FMV, yielding an aggregate long-term capital gain of ₹2,94,53,256 after selling expenses (₹4,85,13,156), as against the AO‟s treatment effectively taxing the near-entire proceeds by assuming nil cost.

Addressing bonus shares, counsel urged that where the asset falls within section 112A (i.e., STT paid and the asset is the specified equity), the special provision of section 55(2)(ac) governs the cost base for grandfathering, and, being a later, specific code for section 112A assets, it prevails over the general rule in section 55(2)(aa) that prescribes nil cost for bonus shares. Reliance was placed on decisions recognising that a special, subsequent computation code displaces a general, anterior one for the same subject matter; to insist on nil cost for bonus shares under 55(2)(aa) while invoking 112A/55(2)(ac) for levy would defeat the very grandfathering objective and tax pre-2018 appreciation, which the Legislature promised to protect.

On procedural objections, the Revenue‟s reliance on Goetze (India) Ltd. reported in 284 ITR 323(SC) was met with the settled position that Goetze limits the Assessing Officer‟s power to entertain new claims without a revised return; it does not limit appellate powers. Citing CIT vs. Prithvi Brokers & Shareholders reported in 349 ITR 336 and NTPC vs. CIT Ramesh Jaisinghani reported in (1998) 229 ITR 383, ld. counsel submitted that new legal grounds based on facts already on record can be urged before appellate fora; hence both the non-taxability claim (machinery failure) and the alternate FMV working are fully entertainable at this stage.

Finally, invoking purposive interpretation, counsel relied on K.P. Varghese and J.H. Gotla to submit that where a literal reading generates absurd or manifestly unjust outcomes as here, where identically situated taxpayers are treated differently solely due to the listing-sale sequence, the Court must construe the statute to advance the remedy and suppress the mischief: either treat the transaction as outside charge for want of machinery, or, at the very least, adopt a workable FMV so that the grandfathering covenant is honoured.

Per contra, the ld. Departmental Representative supported the orders below, arguing that the 2024 insertion is a curative/clarificatory device enacted to remove doubt and secure the Legislature‟s original intention namely, that all post-31.01.2018 long-term gains on equity intended to fall within section 112A must be computed, including OFS during IPO. Placing reliance on Allied Motors and Alom Extrusions, it was submitted that remedial amendments designed to perfect machinery have been consistently applied retrospectively. The DR stressed the Memorandum‟s declaration of retrospective effect from 01.04.2018.

As to bonus shares, the DR urged that section 55(2)(aa) expressly prescribes nil cost, which continues to apply unless specifically overridden in clear terms; 55(2)(ac) addresses grandfathering for 112A assets but does not abrogate the nil- cost rule for bonus shares. The assessee, having returned gains on a conservative basis and accepted nil cost at the return stage, is, according to the DR, estopped from resiling to argue computational impossibility; consistency in tax positions and self-assessment were also pressed into service. In the alternative, should the Bench accept any part of the assessee‟s theory, the DR prayed for a remand to the AO for recomputation strictly under the amended clause (iii)(AA).

In rejoinder, ld. counsel reiterated that labels in a memorandum cannot convert a substantive expansion into a mere clarification; the Memorandum‟s use of “lacuna” is telling. The retrospective tag cannot be enforced so as to disturb vested/settled rights or completed assessments (Vatika Township, Avani Exports, New Skies, Max India).

After considering the factual and legal canvas as discussed above, the controversy crystallises into the following determinative questions: (i) Whether, on the unamended section 55(2)(ac) as it stood at the time of the assessee‟s transaction, the computation mechanism for determining FMV was inapplicable to a pre- listing OFS transfer, thereby causing machinery failure and rendering the charge under section 45 inoperative; (ii) Whether the Finance (No. 2) Act, 2024 insertion of Explanation (a)(iii)(AA) is clarificatory (and therefore retrospectively applicable) or substantive (and therefore only prospective), particularly in light of the Memorandum acknowledging a lacuna; (iii) Consequent upon (i)/(ii), whether the capital gains assessed by the AO and sustained by the CIT(A) are legally tenable; and Ramesh Jaisinghani (iv) In the alternative, assuming taxability, what cost of acquisition must be adopted nil under section 55(2)(aa) as urged by the Revenue, or FMV as on 31.01.2018 (by resort to section 2(22B) / purposive reading of 55(2)(ac)) as urged by the assessee together with the effect, if any, of the grandfathering scheme on bonus shares.

The essential factual substratum is undisputed. The assessee‟s shares were transferred to the merchant banker‟s escrow account on 22 and 25 March 2019, in compliance with SEBI regulations. On those dates, Polycab India Ltd. was not listed on any recognised stock exchange; the listing ensued only on 16 April 2019. The question is thus one of timing whether the transfer should be regarded as having taken place when the assessee was divested of beneficial ownership, or when the company‟s shares were first admitted to trading. The statute provides no deeming fiction to treat subsequent listing as contemporaneous with transfer.

In order to appreciate the rival contentions, it is necessary to trace the legislative evolution of the provisions governing capital gains on equity shares and to ascertain the intent underlying section 55(2)(ac). It is trite that the computation provisions form an inseparable component of the charging provision under section 45, and any failure in the machinery prescribed for computation ipso facto results in failure of the charge itself. Up to 31 March 2018, long-term capital gains arising on transfer of listed equity shares, where STT had been paid at the time of both acquisition and sale, were wholly exempt under section 10(38) of the Act. The Legislature, Ramesh Jaisinghani recognising the need to rationalise exemptions and expand the tax base, enacted the Finance Act, 2018, withdrawing this exemption and substituting it with a concessional regime under section 112A, which subjected such gains to tax at the rate of ten per cent, provided that STT was paid and subject to the benefit of grandfathering for appreciation up to 31 January 2018.

Section 55(2)(ac), as introduced by the Finance Act, 2018, provided a mechanism to determine cost for assets covered under section 112A namely, listed equity shares on which STT had been paid. It contemplated that the cost of acquisition shall be the higher of the actual cost and the FMV as on 31 January 2018. The Explanation defined FMV by reference to the price quoted on a recognised stock exchange, either on that date or on the date of transfer, whichever was lower. This presupposed that the shares were listed on one or both dates. For the sake of ready reference, relevant extract of Hon‟ble Finance Minister‟s Budget 2018 Speech is reproduced hereunder:- “155. Madam Speaker, currently long term capital gains arising from transfer of listed equity shares, units of equity oriented fund and unit of a business trust are exempt from tax………………………………………………………………………….. here is therefore a strong case for bringing long term capital gains from listed equities in the tax net. However, recognising the fact that vibrant equity market is essential for economic growth. I propose only a modest change in the present regime. propose to tax such long term capital gains exceeding 1 lakh at the rate of 10% without allowing the benefit of any indexation. However, all gains up to 31st January, 2018 will be grandfathered. For example, if an equity share is purchased six months before 31st January, 2018 at 100/- and the highest Ramesh Jaisinghani price quoted on 31st January, 2018 in respect of this share is 120/-, there will be no tax on the gain of 20/- if this share is sold after one year from the date of purchase. However, any gain in excess of 20 earned after 31st January. 2018 will be taxed at 10% if this share is sold after 31st July, 2018…………………………………………………………………….. (Emphasis Supplied) 36. The intention of the Section 55(2)(ac) can be gauged by the Finance Minister‟s speech while introducing this amendment unambiguously reflected the legislative policy that all appreciation till 31 January 2018 would be excluded from taxation. He illustrated this by stating that if an equity share purchased at ₹100 prior to that date had an FMV of ₹120 as on 31 January 2018 and was later sold at ₹150, the gain of ₹20 accruing till 31 January 2018 would not be taxed, and only the incremental ₹30 would be chargeable. To give effect to this legislative promise, the computation mechanism under section 55(2)(ac) was inserted, prescribing that the cost of acquisition shall be the higher of the actual cost and the lower of (i) the FMV as on 31 January 2018 and (ii) the sale consideration. The very definition of FMV in the Explanation thereto made it clear that the FMV was to be determined with reference to the quoted price on a recognised stock exchange as on 31 January 2018.

The relevant proviso of Section 55 of the Act as were applicable on the date when OFS transaction was undertaken is as under:- (2) For the purposes of sections 48 and 49, "cost of acquisition"ー Ramesh Jaisinghani ………………………………………………………………………… (aa) in a case where, by virtue of holding a capital asset, being a share or any other security. within the meaning of clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter in this clause referred to as the financial asset), (A) becomes entitled to subscribe to any additional financial asset, or (B) is allotted any additional financial asset without any payment, then, subject to the provisions of sub-clauses (1) and (ii) of clause (b).- …………………………………………………………………………… (iiia) in relation to the financial asset allotted to the assessee without any payment and on the basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee and ………………………………………………………………. (ac) subject to the provisions of sub-clauses (1) and (ii) of clause (b), in relation to a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust referred to in section 112A, acquired before the 1st day of February, 2018, shall be higher of- (i) the cost of acquisition of such asset, and (ii) lower of- (A) the fair market value of such asset and (B) the full value of consideration received or accruing as a result of the transfer of the capital asset Explanation For the purposes of this clause- (a) "fair market value" means- Ramesh Jaisinghani (i) in a case where the capital asset is listed on any recognised stock exchange as on the 31st day of January, 2018, the highest price of the capital asset quoted on such exchange on the said date: …………………………………………………. (iii) in a case where the capital asset is an equity share in a company which is- (A) not listed on a recognised stock exchange as on the 31st day of January, 2018 but listed on such exchange on the date of transfer …………………………………………….. an amount which bears to the cost of acquisition the same proportion as Cost inflation Index for the financial year 2017-18 bears to the Cost inflation Index for the first year In which the asset was held by the assessee or for the year beginning on the first day of April, 2001, whichever is later; (b) in relation to any other capital asset- (i) where the capital asset became the property of the assessee before the 1st day of April. 2001, means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of April, 2001 at the option of the assessee (ii) where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, and the capital asset became the property of the previous owner before the 1st day of April 2001, means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of April, 2001, at the option of the assessee. Further provisions of section 2(22B) of the Act are reproduced hereunder for ready reference: (22B) "fair market value in relation to a capital asset, means- (i) the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date and Ramesh Jaisinghani (ii) where the price referred to in sub-clause (i) is not ascertainable, such price as may be determined in accordance with the rules made under this Act;”

Thus, for the purpose of computation of capital gains, the existence of a quoted market price on 31 January 2018 or at least on the date of transfer was a necessary condition. The provision did not contemplate, and indeed could not accommodate, a situation where the shares were unlisted on the date of transfer and listed only subsequently. The mechanism was designed for already listed securities, not for those which acquired that status later. The Legislature, at that point, did not visualise a scenario where promoters would transfer shares through OFS prior to listing. This omission later surfaced as a significant anomaly, leading to inconsistent treatment and in many cases, the inability to compute capital gains at all.

In the assessee‟s case, however, the shares were unlisted both on 31 January 2018 and on the date of transfer. The prescribed formula was, therefore, incapable of application. No other method for determining FMV was then available under the statute. The computational edifice thus collapsed, leading to a classic machinery failure in the sense contemplated by B.C. Srinivasa Shetty and later reaffirmed in Sunil Siddharthbhai v. CIT (156 ITR 509).

This position continued until the Finance (No. 2) Act, 2024 sought to remedy this gap by inserting clause (AA) in Explanation (a)(iii) to section 55(2)(ac), specifically covering the case of equity shares unlisted as on 31 January 2018 but Ramesh Jaisinghani listed thereafter by IPO or OFS. For the sake of ready reference the said clause reads as under:- (AA) not listed on a recognised stock exchange as on the 31st day of January 2018, or which became the property of the assessee in consideration of share which is not listed on such exchange as on the 31st day of January, 2018 by way of transaction not regarded as transfer under section 47, as the case may be, but listed on such exchange subsequent to the date of transfer (where such transfer is in respect of sale of unlisted equity shares under an offer for sale to the public included in an initial public offer)."

The Explanatory memorandum to Finance Bill (No 2) of 2024 states that the amendment proposed is to resolve the controversy as to whether the cost could be Nil The said amendment has been made with retrospective effect from 1 April 2018 and shall accordingly apply from AY 2018-19 onwards Relevant extracts of the Explanatory Memorandum to the Finance (No. 2) Bill, 2024 are reproduced hereunder for ready reference "6. Due to this relaxation, a lacuna has arisen in computation of cost of acquisition under clause (ac) of sub-section (2) of section 55 of the Act in the case of equity shares transferred under Offer-For-Sale (OFS) as part of Initial Public Offering (IPO) process where STT is paid at the time of transfer Since the condition of STT payment at the time of acquisition is relaxed through the aforementioned Notification it becomes an asset referred to under section 112A Hence, for determination of cost of acquisition under clause (ac) of sub-section (2) of section 55 of the Act the computation of FMV as on 31 January 2018 as per the Explanation is required. However the equity shares at the time of OFS are unlisted on the date of transfer, since the listing happens a few days after the transfer, and therefore some taxpayers are taking the plea that the computation of Ramesh Jaisinghani FMV is not covered on a literal reading of the Explanation to clause (ac) of sub-section (2) of section 55. 7 It has come to light in survey operations that, taxpayers in some cases are not paying capital gaina bax on transfer of shares acquired through Offer for Sale (OFS) route citing the absence of an express provision for determination of the FMV of such equity shares since they were still unlisted on the date of transfer even though STT has been paid on transfer and thus. Cost of Acquisition is indeterminable, and Capital Gains is not chargeable, & It is therefore proposed to amend sub-clause (iii) of clause (a) of the Explanation to clause (ac) of sub-section (2) of section 55 of the Act, to specifically provide that in a case where the capital asset is an equity share in a company which is not listed on a recognised stock exchange as on the 31st day of January, 2018 or which became the property of the assessee in consideration of share which is not listed on such exchange as on the 31st day of January, 2018 by way of transaction not regarded as transfer under section 47, but listed on such exchange subsequent to the date of transfer, where such transfer is in respect of sale of unlisted equity shares under an offer for sale to the public included in an initial public offer "fair market value would mean an amount which bears to the cost of acquisition the same proportion as Cost Inflation index for the financial year 2017-18 bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the first day of April, 2001 whichever is later.

Thus, this clause prescribed a new method of computing FMV based on the cost-inflation index between the year of acquisition and the year of listing, and declared that it would take effect retrospectively from 1 April 2018. The Explanatory Memorandum candidly stated that a “lacuna has arisen” and Ramesh Jaisinghani the amendment was intended “to remove doubt and ensure uniformity.”

The use of expression “a lacuna has arisen” in the Explanatory Memorandum assumes great significance. A lacuna, in legislative parlance, denotes a void or an omission in the existing law. Where the Legislature itself admits the existence of such a void and then proceeds to fill it, the amendment introduced for that purpose can by no means be regarded as declaratory or clarificatory. It is, on the contrary, a substantive change, bringing into the fold a class of transactions that were hitherto uncomputable. The 2024 amendment thus created, for the first time, a legal fiction enabling determination of cost in respect of shares sold under OFS prior to listing.

In our view „lacuna‟ connotes an absence of provision, not a confusion in interpretation. By supplying an entirely new computational rule for a category of assets hitherto unaddressed, Parliament enacted a substantive change. The amendment, therefore, in our view cannot be applied to transactions that had already occurred when the law contained no such mechanism. To do so would be to reconstruct history and to tax what was not taxable when it happened.

To demonstrate this, the review of past amendments to section 55(2) to see the legislative pattern following chart is drawn to see the taxability of capital gains arising on transfer of STT paid long term equity shares.

Thus, the amendment not only introduced a new formula but effectively created a new category of taxable events transfers of unlisted shares preceding listing. This category did not exist under the pre-amendment regime. The insertion thus enlarged the tax base, which is the hallmark of a substantive, not clarificatory, amendment. It would therefore be incongruous to treat the amendment in question as retrospective, when the legislative context, the contemporaneous enactments, and the very language of the Memorandum all indicate that it was a remedial measure introduced to address an unanticipated gap. The distinction between a clarificatory and a curative amendment is not merely semantic; a clarificatory provision explains an existing ambiguity, whereas a curative one creates new law to remedy a defect. The 2024 insertion clearly falls in the latter category. Against this legislative background, it becomes apparent that as on the date of the assessee‟s transaction April 2019 the statute did not provide any computational mechanism for determining FMV where shares were transferred before listing. The assessee‟s contention that the computation provisions Ramesh Jaisinghani failed, and consequently the charge under section 45 could not apply, is thus appears to be well-founded.

The ld. CIT(A)‟s reliance on the legislative declaration of retrospectivity, though understandable, overlooks the distinction between form and substance. Merely declaring that an amendment shall take effect from an earlier date does not make it retrospective in the true sense if it imposes a new liability. The courts have repeatedly held that such declarations cannot override the constitutional presumption against retroactive taxation.

Before us ld. Counsel has placed exhaustive reliance on line of authorities culminating in Martin Lottery Agencies Ltd. (SC), Avani Exports (Guj HC affirmed by SC), New Skies Satellite BV (Del HC), Max India Ltd. (SC), and the more recent Senapati Santaji Ghorpade Sugar Factory Ltd. (Bom HC). The thread that runs through these decisions is that fiscal enactments are presumed to be prospective, and a retrospective operation may be given only when it confers a benefit on the assessee or the statute unequivocally so provides. It was urged that the 2024 amendment, by creating a fresh computational clause (a)(iii)(AA) and enlarging the scope of charge, is patently substantive, and therefore cannot be pressed into service for taxing a transaction which had attained finality two years prior to its introduction.

The ld. counsel drew particular strength from the dictum of the Supreme Court in Martin Lotteries (Civil Appeal No. 3239 of 2009), wherein it was held that if two interpretations Ramesh Jaisinghani are possible, the one which avoids retrospectivity must prevail, and that an Explanation inserting a new taxable concept “cannot be regarded as merely clarificatory.” The same principle was reaffirmed by the Gujarat High Court in Avani Exports (348 ITR 391), which struck down retrospective withdrawal of a benefit under section 80HHC on the ground that no amendment can operate to the detriment of those whose assessments have already been concluded. Their Lordships categorically observed that “in the type of substantive amendment, retrospective operation can be given only if it is for the benefit of the assessee but not in a case where it affects even a fewer section of the assessees.” The Department‟s appeal was dismissed by the Supreme Court, thereby giving the principle constitutional finality.

The same reasoning animated the judgment of the Delhi High Court in New Skies Satellite BV (382 ITR 114), which lucidly explained that even when the Legislature styles an amendment as “clarificatory,” if its true effect is to transform the law and expand the charge, it is in reality substantive and cannot retrospectively impose tax liabilities. In harmony with that doctrine, the Bombay High Court in Senapati Santaji Ghorpade Sugar Factory Ltd. (WP No. 5862/2021, 2 April 2024) held that a completed act under the existing law cannot be invalidated by a later amendment, and that vested statutory rights, once accrued, cannot be divested unless the statute expressly or by necessary implication so enacts. These authorities, it was submitted, squarely apply to the assessee‟s case, for the OFS transfer and its assessment were Ramesh Jaisinghani both completed years before the Finance (No. 2) Act 2024, and the amendment neither states nor implies that it shall unsettle past transactions.

We are in tandum with the aforesaid submission of the ld. Counsel is in consonance with the principles laid down by the Hon‟ble Supreme Court and also other Hon‟ble High Courts including jurisdictional High Court. In the case of the assessee when the sale of shares under OFS happened in April 2019, which was unlisted on both the date of transfer and on 31/01/2018, can it be held subject to capital gains u/s.45 r.w.s. 55(2)(ac) and 112A of the Act, particularly when at the material time, no statutory mechanism existed to determine the fair market value. This came only by the subsequent amendment brought by the Finance (2) Act, 2024. In the present case, section 55(2)(ac) in its original form defined the “cost of acquisition” of an equity share, for the purpose of section 112A, as the higher of its actual cost or the lower of (i) the fair-market value as on 31 January 2018 and (ii) the sale consideration. The accompanying Explanation delineated how such FMV was to be determined. However, it is manifest that this formula presupposed the existence of a quoted price on a recognized stock exchange either as on 31 January 2018 or on the date of transfer. It made no provision for shares which were unlisted on both those dates, as was the case with the assessee‟s OFS shares. To reiterate here in this case assessee transferred 20,71,963 shares into an escrow account on 22 and 25 March 2019; the IPO opened on 5 April 2019; allotment and listing followed on 15 and 16 April 2019. Thus, Ramesh Jaisinghani the transfer was completed before the shares became listed. On that date, there was neither a market quotation nor a prescribed alternative method for computing FMV. The computation mechanism was therefore incapable of operation.

It is settled canon of fiscal jurisprudence that a charge of tax 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.

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 Ramesh Jaisinghani 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 ld. AO and upheld by the ld. CIT(A) is accordingly, set aside because the computation mechanism u/s.55(2)(ac) r.w.s. 112A 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(22B) 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.

It was argued that the provisions of section 55(2)(ac), as they stood prior to amendment, did not provide for determination of FMV in respect of unlisted shares sold through OFS prior to their listing. Hence, to avoid rendering the section nugatory, reference could be made to the general definition under section 2(22B), which provides that “fair market value” in relation to a capital asset means the price that such asset would ordinarily fetch if sold in the open market. By such construction, the FMV of the Polycab shares as on 31 January 2018, when the company‟s financials and public offer valuations were known, could reasonably be taken Ramesh Jaisinghani at ₹500 per share. This interpretation, according to the assessee, is harmonious with the spirit of section 112A and the grandfathering principle, and prevents manifest injustice.

Elaborating on this alternate submission, the assessee placed before us a detailed working of the recomputed capital gains assuming such FMV as the cost of acquisition. The computation, based on 20,71,963 shares sold during the OFS, was tabulated as under:

It was explained that 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 prevail over the general provision of section 55(2)(aa). Consequently, the cost of acquisition of bonus shares cannot be treated as nil; it must be valued in accordance with the FMV prescribed under section 55(2)(ac) read with section 2(22B) i.e., the FMV as on 31 January 2018.

The ld. counsel relied upon the decision of the Madras High Court in T.R. Balasubramanian [174 Taxmann.com 328], wherein it was held that when a specific computation mechanism applies to a particular category of assets, it must prevail over the general rule, and that bonus shares cannot automatically be assigned a nil cost if the governing section Ramesh Jaisinghani provides an alternative method of valuation. Following that reasoning, the cost of acquisition of bonus shares in the assessee‟s case, being equity shares forming part of the listed company‟s capital and subjected to STT, should be governed by section 55(2)(ac) and not by section 55(2)(aa).

It was thus submitted that in the present case, the impugned transaction of sale of shares under OFS, being one taxable (if at all) under section 112A, must draw its cost base from the same section, and that the FMV as on 31 January 2018, adopted in terms of section 2(22B), would constitute the most rational and statutorily consistent measure of acquisition cost. The contention that cost of acquisition of bonus shares should be treated as nil, it was urged, is unsustainable both on textual and purposive construction.

In view of these submissions, it was prayed that even without prejudice to the principal plea of non-taxability, the computation mechanism should be applied by adopting the FMV as on 31 January 2018 as the cost of acquisition for all shares, including bonus shares. This approach, it was submitted, accords with the legislative intent of grandfathering gains accrued prior to 1 February 2018 and avoids arbitrary discrimination between similarly placed shareholders.

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; Ramesh Jaisinghani • 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(22B) of the Act.

We agree with the contention raised by the ld. Counsel on the alternative plea. Section 2(22B) 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 Ramesh Jaisinghani 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 ld. Counsel above, the capital gain chargeable u/s.112A would work out to Rs.2,94,53,256/- We also find merit 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 prevail over the general provision of section 55(2)(aa). Ergo, the maxim “generalia specialibus non derogant” general Ramesh Jaisinghani 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. 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(22B) 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 Ramesh Jaisinghani 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 112A 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.

The computation of capital gains made by the Assessing Officer is hereby set aside.

In the result, appeal of the assessee is allowed. Order pronounced on 10th October, 2025.