NAWAL KISHORE KEJRIWAL vs. COMMISSIONER OF INCOME TAX, KOLKATA-IX

O - 88 IN THE HIGH COURT AT CALCUTTA Special Jurisdiction (Income Tax) ORIGINAL SIDE ITA/161/2010 NAWAL KISHORE KEJRIWAL -Versus- COMMISSIONER OF INCOME TAX, KOLKATA -IX Appearance: Mr. J.P. Khaitan, Sr. Adv. Ms. Swapna Das, Adv. ...for the appellant. Mr. Tilak Mitra, Adv. . . .for the respondent. BEFORE: The Hon’ble JUSTICE T.S. SIVAGNANAM -And- The Hon’ble JUSTICE HIRANMAY BHATTACHARYYA Date : 17th February, 2023

The Court : This appeal by the assessee under Section 260A of the Income Tax Act (the ‘Act’ in brevity) is directed against the order dated 23rd April, 2010 passed by the Income Tax Appellate Tribunal, A - Bench, Kolkata (the ‘Tribunal’) in ITA No.1391/Kol/2009 for the assessment year 2005-06. This appeal was admitted on 13th September, 2010 on the following substantial questions of law:

2 “(i) Whether, in view of Circular No.704 dated April 28, 1995 issued by the Central Board of Direct Taxes, the capital gains of Rs.56,81,483/- from the sale on February 22, 23 and 28, 2005 of share purchased by the appellant on February 10, 2004 were long term capital gains exempt under section 10(38) of the Income Tax Act, 1961 and the purported findings of the Tribunal reversing the order of the Commissioner of Income Tax (Appeals) are arbitrary, unreasonable and perverse? (ii) Whether on a true and proper interpretation of Circular No.704 dated April 28, 1995 and No.768 dated June 24, 1998, Circular No.704 was applicable in respect of shares in dematerialised form and the date of acquisition of the dematerialised shares was to be taken as the date of purchase when the broker issued his contract note and not the date of entry in the demat account?” We have heard Mr. J.P. Khaitan, learned standing senior counsel, assisted by Ms. Swapna Das, learned advocate for the appellant/assessee and Mr. Tilak Mitra, learned counsel appearing for the respondent/revenue. The short issue involved in the instant case is whether the Circular issued by the Board in Circular No.768 dated 24th June, 1998 would be applicable only in the case of dematerialise share

3 scripts and not in the case of share scripts held in physical form. The learned Tribunal after extracting the said Circular No.768 holds that the said Circular is not applicable to dematerialised share scripts and the date of acquisition of share scripts would be the date only when the dematerialised share scripts are entered into assessee’s D-mat account with depository. The first Circular was issued by the Board is Circular No.704 dated 28th April, 1995. By the said Circular clarification was issued for determination of the date of transfer and holding period for the purpose of capital gains when the assessee transacts in securities. The relevant portion of the Circular reads as follows : “When the securities are transacted through stock exchanges, it is established procedure that the brokers first enter into contracts for purchase/sale of securities and thereafter, follow it up with delivery of shares accompanied by transfer deeds duly signed by the registered holders. The seller is entitled to receive the consideration agreed to as on the date of contract. The Board are of the opinion that it is the date of broker’s note that should be treated as the date of transfer in cases of sale transitions of securities provided such transactions are followed up by delivery of shares and also the transfer deeds. Similarly, in respect of the purchasers of the securities, the holding period shall be reckoned from the date of the brokers'’ note for purchase on behalf f the investors. In case the transactions take place directly between the parties and not through stock exchanges, the date of contract of sale as declared by the parties shall

4 be treated as the date of transfer provided it is followed up by actual delivery of shares and the transfer deeds”. In terms of the above circular the relevant date is the date of broker’s note that should be treated as date of transfer in cases of sale transactions of securities provided such transactions are followed up by delivery of shares and also the transfer deed. Similarly, in respect of purchase of securities the holding period shall be reckoned from the date of the broker’s note for purchase on behalf of the investors. In case the transactions take place directly between the parties and not through stock exchanges the date of contract of sale as declared by the parties shall be treated as the date of transfer provided it is followed up by actual delivery of shares and transfer deeds. The CBDT by circular No. 768 dated 24.6.1998 issued another circular for determination of date of transfer and the period of holding of securities held in demoralised form under Section 45(2A) of the Act. The relevant portion of the Circular reads as follows : 4. The primary issue under the Income-tax Act in the case of securities whether held in physical form or in the dematerialized form remains the determination of cost of acquisition and the period of holding. The Board had earlier issued Circular No.704, dated 28th April, 1995, which explains the manner in which the “date of transfer”

5 and “period of holding” may be determined. This primary position as regards the “date of transfer” and “period of holding” does not change even when the securities are held in the dematerialized form. The only problem when securities are held in dematerialized form is that the distinct trail linking every share to a certificate and its unique distinctive number linking it with its subsequent sale is not available. 5. Section 45(2A) stipulates that in the case of securities held in dematerialized form, for determining “date of transfer” and “period of holding”, the FIFO method would be applicable. The FIFO method is generally used to determine the value of any item moving out of a stock account and those remaining in stock at any point of time. When applied to an account holding dematerialized stock, it implies that, out of the existing holdings, the item that first entered into the account is deemed to be the first to be sold out. However, once a sale is linked with an earlier purchase, for determination of their “date of transfer” and “period of holdings”. Board’s Circular No.704 would be applicable. That is to say that the relevant contract notes as explained in Circular No.704 will have to be referred to, for ascertaining the cost of the security sold and the date of transfer.”

6 On a reading of the above circular it is seen that there is nothing to indicate that the circular excludes the cases of securities sold in physical form. In fact the circular deals with securities held in physical form as well as those in demoralised form. Furthermore, the circular has also clarified the position as to the applicability of the earlier circular No. 704 dated 28.4.1995. Thus we are of the view that the conclusion arrived at by the learned Tribunal holding that Board Circular No. 704 dated 28.4.1995 is not applicable to dematerialised share scripts and the date of acquisition of shares would be the date only when dematerialised shares are entered in the D-mat account with depository is incorrect conclusion arrived at by the learned Tribunal. For the above reason the appeal filed by the assessee is allowed and the substantial questions of law are answered in favour of the assessee. (T.S. SIVAGNANAM, J.)

(HIRANMAY BHATTACHARYYA, J.) S Das/s.chandra/Pkd/GH.