DCIT, NEW DELHI vs. M/S. OPG SECURITIES PVT. LTD., NEW DELHI

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “D”: NEW DELHI BEFORE SMT BEENA A PILLAI, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No. 3776/Del/2015 (Assessment Year: 2008-09) DCIT, Vs. OPG Securities Pvt. Ltd, Circle-19(1), Room No. 221, G-190, Preet Vihar, New Delhi New Delhi PAN: AAACO1081C (Appellant) (Respondent)

Revenue by : Smt Naina Soin Kapil, Sr. DR Assessee by: Shri R.K. Kapoor, CA Date of Hearing 22/01/2019 Date of pronouncement 28/02/2019

O R D E R PER PRASHANT MAHARISHI, A. M. 1. This is an appeal filed by the revenue against the order of the ld CIT (A)-7, New Delhi dated 02.03.2015 for the Assessment Year 2008-09. The revenue has raised the following grounds of appeal:- “1. On the facts and in the circumstances of the case, the ld CIT(A) has erred in law holding that deposit made to BSE shall form part of the cost acquisition of the original membership of the exchange for the purpose of section 55(ab) of the Income Tax Act, 1961.” 2. The assessee is a private limited company, member of the Bombay stock exchange and National stock exchange, engaged in the business of trading in shares and securities. Thus it filed its return of income on 30/9/2008 declaring total income of INR 2

49854650/– and the assessment under section 143 (3) of the act was passed on 26/11/2010 at an income of Rs 256369200/–. 3. The only dispute in this appeal is that whether the assessee is eligible for grant of indexed cost of acquisition of Bombay stock exchange membership cards when it has sold shares of BSE in buyback scheme. 4. During the year assessee has claimed the capital gain on buyback of shares with Bombay stock exchange. The assessee offered buyback of 8211 shares of Bombay stock exchange Ltd at INR 5200/- per share where the total sale consideration received is INR 42697200/–. As the above sum is chargeable to tax under the head capital gain assessee computed the capital gain by reducing the cost of the original shares 10,000 acquired on 10/10/2005 at INR 10,000/-. It further deducted the cost of Bombay stock exchange membership card which was purchased by the assessee on 29/1/2004 at a cost of INR 6750000/–. Assessee claimed both these cost and total cost of shares was found to be Rs. 6760000/- which was indexed to INR 8044024/–. As out of total 10,000 shares, only 8211 shares were sold, assessee computed proportionate indexed cost of those shares and reduced there from the proportionate indexed cost offering long-term capital gain of INR 36092252/–. The learned assessing officer on examination of the computation noted that assessee has shown a deposit of INR 6,500,000 under the head Bombay stock exchange membership card in the schedule of loans and advances. He further stated that the value of 10,000 shares of the Bombay stock exchange was shown at only INR 10,000 under the schedule of investment in unquoted equity shares and therefore the assessee is not eligible for

deduction of the cost of the Bombay stock exchange membership card claimed of INR 6 500000/– as cost of acquisition of those shares. On being asked the assessee explained that according to the provisions of section 55 (2) (ab) which were specifically introduced to deal with such cases, clearly provides that the cost of acquisition of original membership of the stock exchange shall be the cost of acquisition of shares for the purposes of the capital gain. The ld AO rejected the conenetion of the assessee, consequently the long-term capital gain earned by the assessee was computed at INR 42098575/– and held that the assessee has shot disclose the long-term capital gain by INR 6 514555/–. Consequently the assessment order under section 143 (3) was passed on 26/11/2010 determining the total income of the assessee at Rs. 256369204/–. The assessee aggrieved with the order of the learned assessing officer has preferred an appeal before the learned Commissioner of income tax (appeals) – 7, New Delhi who passed an order dated 2/3/2015 allowing the claim of the assessee. Therefore the revenue is aggrieved with the order of the learned Commissioner of income tax appeals has preferred an appeal before us. 5. The only ground of appeal in the appeal of the learned AO is that the learned Commissioner of income tax (appeals) has erred in law holding that the deposit made to BSE shall form part of the cost of acquisition of the original membership of the exchange for the purpose of working of the capital gain as per section 55 (AP) of the income tax act. 6. Adverting to the facts of the case the learned departmental representative vehemently supported the order of the learned assessing officer and stated that the assessee has shown the cost

of the membership card with the Bombay stock exchange in the investment as deposits and therefore it is not the cost of acquisition of those shares. He stated that even despite this the assessee is eligible to carry on the business at the Bombay stock exchange and therefore there is no extinction of the right. He therefore stated that the cost of the membership with the Bombay stock exchange deposit of INR 6,500,000 claimed by the assessee as cost of acquisition is incorrect. He stated that the learned Commissioner of income tax (appeals) has wrongly allowed the assessee the same as cost of acquisition. 7. The learned authorised representative vehemently submitted that that the provisions of section 55(2) (ab) specifically provides for the deduction of the cost of acquisition of the above deposit. He further stated that the assessee has not claimed depreciation on the card and therefore there is no issue of double deduction. He therefore supported the order of the learned CIT – A. 8. We have carefully considered the rival contention and perused the orders of the lower authorities. The only issue involved is whether the cost of deposit placed by the assessee with the Bombay stock exchange is allowable as deduction as cost of acquisition when the sales of the Bombay stock exchange have been transferred by the assessee at the time of buyback of such share. Provisions of section 55 (2) (ab) of the act provides that the cost of acquisition [(ab) in relation to a capital asset, being equity share or shares allotted to a shareholder of a recognised stock exchange in India under a scheme for 18[demutualisation or] corporatisation approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), shall be the cost of acquisition of his original membership of the exchange:] 18[Provided that the cost of a capital asset, being trading or clearing rights of the recognised stock exchange acquired by a shareholder who has been allotted equity share or shares under such scheme of Page | 4

demutualisation or corporatisation, shall be deemed to be nil;]

share value cannot be clubbed for the purpose of calculation of long term capital gain. The letter under reference also indicates clearly that membership rights were bifurcated into ownership rights and trading right and since trading rights has not been transferred therefore assessee’s submissions are not acceptable. Further not only the fact that under the head investment the assessee had shown value of BSE shares at Rs.10,000/- but also the letter dated 13.12.2000 of BSE submitted by assessee is being allowed for trading rights without any deposits etc. In these circumstances, the submissions of the assessee regarding consideration of indexed cost of acquisition of membership card in accordance with the provisions of section 55(2)(ab) of the Act cannot be accepted. REMAND REPORT “………..During the remand proceedings, the assessee submitted that the assessee could not produce certificate that the amounts paid to BSE was non refundable deposit, without appreciating that the assessee had especially replied on the said issued and had applied for the said letter/confirmation and required some time to obtain the same. The assessee has further contended that the aforesaid letter was not received until the passing of the assessment order by the AO, therefore, the assessee was unable to produce the aforesaid evidence before the AO. The assessee now produced the letter dated 13.12.2010 issued by the General Manager, Membership compliance, Bombay Stock Exchange Ltd. as additional evidence. It is pertinent to mention here that the addition of rs. 65,14,555/- was made by the AO not only in absence of the certificate of BSE Ltd., but the point of controversy was with regard to the cost of acquisition of shares. As per the demutualization scheme dated 20.05.2005 to BSE, it was converted form an AOP to BSE Ltd. On conversion, the existing members were offered 10,000/- equity shares of BSE Ltd. Besides the shares of BSE Ltd., the trading members retained the right of trading After the demutualization any new trading member can be admitted subject to deposit of prescribed fees for trading. In this case the assessee continues to hold the trading rights without depositing any additional fees and the only asset transferred by the assessee is shares of BSE Ltd. Since the assessee continues to hold the trading rights therefore it cannot be without any deposit of requisite fees etc. It was held that the assessee continues to hold the trading rights, therefore, the clubbing of deposit fees of erstwhile membership rights i.e. trading rights as of today, with share value is only with an intention to reduce the long term capital liability. Has the assessee transferred its trading rights also, provisions of section 55(2)(ab) as claimed by assessee would have been applicable. Under the trading right of BSE, Page | 6

the assessee has made a turnover of Rs.32,500/- crores approximately duhng the year. It is certain that the assessee would not have been allowed by the BSE to made such a huge transaction without any deposits. Since the trading rights have not been transferred therefore the claim of clubbing of its value is ab-initio incorrect. As per the provisions of section 48 of the I. T. Act, 1961, the benefit of indexation can be allowed in respect to the capital assets only. Further, as per the para 3 of copy of BSE Ltd. letter dated 13.12.2010, filed by the assessee before your goodself, “after the Corporatization and Demutualization of the Exchange on 19.08.2005. the Membership right was bifurcated into two components i.e. a) ownership right and b) Trading right. Against the Ownership right Bombay Stock Exchange Ltd. has issued also allotted 10.000/- fully paid up equity shares of the face value of Rs. 1/- each to the members." The above letter clearly shows that the deposit fees for trading rights and share value cannot be clubbed for the purpose of calculation of long term capital gain. The letter under reference also indicates clearly that membership rights were bifurcated into ownership rights and trading right and since trading rights has not been transferred therefore assessee's submissions are not acceptable. Further not only the fact that under the head investment the assessee had shown value of BSE shares at Rs. 10,000/- but also the letter dated 13.12.2000 of BSE submitted by assessee is being allowed for trading rights without any deposits etc. In these circumstances, the submissions of the assessee regarding consideration of indexed cost of acquisition of membership card in accordance with the provisions of section 55(2)(ab) of the Act cannot be accepted. The additional evidence submitted by assessee in fact goes against him to the extent that the BSE letter dated 13.12.2010 has further clarified that under demutualization the membership rights was bifurcated into two components i.e. a) Ownership rights & b) Trading rights. In view of the facts narrated above, the submissions of the assessee deserve to be rejected." 7.4. The appellant replied as under:- “In reply to the aforesaid, it is respectfully submitted as under: It is, at the outset, respectfully submitted that in the forwarding letter dated 13th September, 2011 of the Addl. CIT, the comments of the AO in his remand report dated 27th July, 2011 have merely been reiterated. Accordingly, in the present reply, we are submitting our reply to the comments of the AO in his remand report dated 27th July, 2011, which also covers the comments stated in the forwarding letter of the Addl. CIT. Page | 7

The ground wise reply to the remand report is submitted as under: Re: Grounds of Appeal No. 3 to 3.4 and 4: In these grounds of appeal, the appellant has challenged the action of the AO in making an addition of Rs.65,14,555/- on account of alleged erroneous computation of long-term capital gain on transfer of 8,211 shares in Bombay Stock Exchange ('BSE’). The factual background of the aforesaid grounds of appeal is briefly recapitulated hereunder: Facts: The appellant became a corporate member of the BSE on 29th January, 2004 on payment of aggregate sum of Rs.67.50 lakhs. At that point of time, BSE was an Association of Persons ('AOP'), having the concept of membership card for their members. Subsequently, BSE, pursuant to the BSE (Corporatisation and Demutualisation) Scheme, 2005 ('the Scheme') of SEBI, was converted into a company. In terms of the aforesaid Scheme, the membership rights of BSE were bifurcated into two components: c) Ownership rights d) Trading rights The Scheme provided for allotment of 10,000 fully paid up equity shares of face value of Rs. 1/- each of BSE Limited to each of the members. In terms of Clause 8 of the Scheme a member already registered as a stock broker with the BSE became trading member after demutualization of the stock exchange. In terms of the aforesaid Scheme, the appellant, registered as stock broker with BSE, received 10,000 fully paid up equity shares of face value of Rs. 1/- each and trading rights in the BSE limited on 10.10.2005 viz., during the financial year 2005-06. The shares received under the said scheme were shown as "Investments in Unquoted Equity shares - fully paid up" in the balance sheet of the relevant assessment year. The appellant had, during the previous year relevant to the assessment year 2008-09, the year under consideration, transferred 8,211 shares of BSE Ltd. out of aforesaid 10,000 shares, which were acquired/ received on 10.10.2005 on demutualization/corporatisation of BSE. The said shares were repurchased/ bought back by BSE limited. On the aforesaid transfer, the appellant computed 'long-term capital gains' as under: Sale consideration Rs. 4,26,97,200/- Indexed cost of acquisition Page | 8

Indexed cost 10000 shares Rs.81,44,024 Proportionate cost of 8,211 shares Rs. 66.04.948/- Long-term capital gain Rs.3.55.84.020/- The aforesaid indexed cost of acquisition, it may be mentioned here, was computed on the basis of indexed cost of acquisition of membership card in accordance with the provisions of section 55(2)(ab) of the Act. Further, the appellant while computing the capital gains calculated the period of holding the shares transferred after including the period for which the appellant was member of the recognised stock exchange in India immediately prior to such demutualization or corporatisation, in accordance with Explanation 1 to section 2(42A) of the Act. Case of AO In the impugned assessment order, the AO, without judiciously appreciating the facts of the case and the position in law, computed the 'long term capital gains' at Rs.4,20,98,575/-. The AO held that the cost of acquisition of original membership (i.e. BSE membership card) was cost of trading rights and further that since trading rights were not transferred during the relevant assessment year, the provisions of section 55(2)(ab) of the Act were not attracted, Accordingly, the AO recomputed the 'capital gains' by treating indexed cost of acquisition of shares of 8,211 shares as the cost of acquisition, ignoring the cost of membership card of BSE. The aforesaid action of the AO has been challenged before your Honour. Reply to the comments in the remand report The appellant had, vide letter dated 18th May, 2011, filed application for admission of additional evidence under Rule 46A of the Income-tax Rules, 1962 ('the Rules'). In the said application, the appellant had requested for admission of the letter dated 13? December, 2010 issued by BSE clarifying that amount paid by the appellant for purchase of membership right was not in the nature of refundable deposit, as additional evidence. In the remand report, the AO, it is respectfully submitted, has not objected to the admissibility of the aforesaid additional evidences under Rule 46A of the Rules. In these circumstances, it is respectfully submitted that additional evidences submitted by the appellant may kindly be admitted and taken into consideration while adjudicating the present appeal. Now coming to the submissions made by the AO in the remand report, it is respectfully submitted that the AO has primarily reiterated the

findings given in the assessment order. The AO has submitted as under: (a) Since the assessee continues to hold the trading rights, provisions of section 55(2)(ab) of the Act are not applicable. (b) The letter issued by BSE supports the case of the Revenue since even as per the said letter the membership rights, prior to corporatisation of BSE, were, post-corporatisation, bifurcated into two separate rights, viz., trading rights and ownership rights. In the said letter, it has also been informed that the trading rights have not been transferred by the appellant and only shares in BSE have been transferred. It is respectfully submitted that the aforesaid findings have elaborately been dealt with in the written submissions, which are net repeated here for the sake of brevity. It may, however, be mentioned that the AO has failed to appreciate the applicability of section 55(2)(ab) of the Act. On the perusal of the same, it will kindly be appreciated that as per the clear and unambiguous language of section 55(2)(ab) of the Act, for computing capital gains on transfer of equity shares allotted under the scheme of corporatisation/demutualisation, cost of acquisition of original membership of the stock exchange shall be considered its cost of acquisition. To put the matter beyond any doubt, proviso was also added to the said section to categorically provide that cost of trading/ clearing rights shall be deemed to be Nil. Accordingly, the appellant had, while computing the cost of acquisition of shares so transferred, considered the proportionate indexed cost of membership of BSE as per the mandate of section 55(2)(ab) of the Act. The AO, it is submitted, failed to appreciate that in terms of proviso to section 55(2)(ab) of the Act the cost of trading or clearing rights of the stock exchange acquired by a shareholder who was allotted equity share under such scheme of demutualisation or corporatisation, shall be deemed to be nil. Therefore, the observation of the AO that the cost of membership of Rs. 67.50 lacs taken prior to demutualisation and corporatisation of stock exchange represents cost of trading rights is, it is further submitted, grossly erroneous and clearly violative/ contrary to the clear mandate of the said proviso to section 55(2)(ab) of the Act. In the aforesaid circumstances, the contention of the AO that the provisions of section 55(2)(ab) of the Act applies only on transfer of the trading rights is not correct inasmuch as the provision of the said section, in fact, applies on transfer of equity shares/ shares allotted by the Stock Exchange and not transfer of trading rights.

The letter dated IB* December, 2010 received from BSE also supports the contention of the appellant that only shares of BSE have been transferred by the appellant and not the trading rights. The appellant fails to appreciate as to how the said letter supports the case of the Revenue. In view of the aforesaid, it is respectfully submitted that the AO grossly erred since making addition of Rs.55,14,555 by recomputing capital gains on transfer of 8211 shares in BSE, by totally misconstruing the mandate of section 55(2)(ab) of the Act. We trust that your Honour will find the aforesaid in order and our request for admission of additional evidence shall be acceded to. ” 7.5. The BSE vide letter dated 13.12.2010 had stated that the amount in question was not a refundable deposit. The letter further stated that the membership right was bifurcated into 1. Ownership rights 2.Trading rights. 7.6. As per section 55(2)(ab):- "Sec. 55: Meaning of 'adjusted", “cost of improvement" and 'Cost of acquisition". (ab) in relation to a capital asset, being equity share or shares allotted to a shareholder of a recognised stock exchange in India under a scheme for [demutualisation or] corporatisation approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), shall be the cost of acquisition of his original membership of the exchange:] [Provided that the cost of a capital asset, being trading or clearing rights of the recognised stock exchange acquired by a shareholder who has been allotted equity share or shares under such scheme of demutualisation or corporatization, shall be deemed to be nil;]’ 7.7. The decision of the AO in para 6.4 and 6.5 of the assessment order to exclude the cost of the membership card of the BSE while computing capital gain on sale of shares of BSE in based on the assumption that section 55(2)(ab) of the Act is attracted only when the shares and the trading rights are simultaneously sold. 7.8 A plain reading of section 55(2)(ab) of the Act, clearly reflects that in the case of dematerialization/corporatization of a stock exchange, as in the instant case, the cost of acquisition of membership card was to be considered as cost of shares for calculating capital gains. Further, the proviso provides that the cost of trading rights will be considered as nil. There is no requirement whatsoever for the shares and the trading rights to be sold simultaneously. The main argument of the AO, thus, fails. Page | 11

7.9. The AO's argument in para 6.5 of the order that since the membership card is shown under the head loans and advances in the balance sheet it will not qualify for indexation on cost of acquisition is completely contrary to the provisions of section 55(2)(ab) of the Act. Cost of acquisition of shares includes the cost of membership card as per section 55(2)(ab) of the Act and the disclosure in the balance sheet will not affect the same. Accordingly, the computation of capital gains by the appellant is found correct. 7.10. The appellant in my view had computed long term capital gains as per provisions of the section. The addition of Rs. 65,74,555/- is thus deleted. The ground of appeal is ruled in favour of the appellant.” 10. Admittedly, the assessee has not claimed depreciation on the cost of deposit placed with the Bombay stock exchange for the membership card. In view of this it is apparent that it is not the case of the revenue that assessee has claimed depreciation on the membership card cost as well as claimed the deduction under section 55 (2) (ab) of the income tax act. The learned departmental representative also could not point out any infirmity in the order of the learned CIT – A. In view of this the solitary ground of appeal of the revenue is dismissed. 11. Accordingly appeal of the revenue is dismissed. Order pronounced in the open court on 28/02/2019. -Sd/- -Sd/- (BEENA A PILLAI) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 28/02/2019 Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi Page | 12