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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
आदेश / O R D E R
PER RAMIT KOCHAR, ACCOUNTANT MEMBER :
This appeal, filed by the assessee company, being ITA No. 2640/Mum/2012, is directed against the order dated 31.01.2012 passed by the learned Commissioner of Income Tax (Appeals)- 8, Mumbai (Hereinafter called “the CIT(A)”), for the assessment year 2008-09.
The Grounds of appeal raised by the assessee company in the memo of appeal filed with the Tribunal read as under:-
“I. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax(Appeals) -8 (hereinafter referred to as “the
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CIT(A)”) has erred in adopting the written down value(hereinafter referred to as “WDV” ) as on 31-03-2005, of the Bombay Stock Exchange (hereinafter referred to as “BSE”) membership card/trading rights as the cost of acquisition of BSE shares contrary to the provisions of Section 55(2)(ab) of the act. 2. On the facts and in the circumstances of the case and in law, the CIT(A) further has erred in calculating the indexed cost of acquisition with reference to year of exchange of BSE Membership Card for BSE Ltd.’s shares i.e. FY 2005-06 instead of the year in which the BSE Membership card was purchased i.e. FY 2000-01.” .
The Brief facts of the case are that the assessee company is engaged in the business of share broking. During the course of assessment proceedings u/s 143(3) of the Income Tax Act,1961(hereinafter called “the Act”) read with Section 143(2) of the Act, the learned assessing officer (Hereinafter called “the AO”) observed that the assessee company has sold 4562 shares of BSE Limited , on which it has earned long term capital gains . The said shares were allotted to the assessee company under the scheme of capitalization and demutualization of Bombay Stock Exchange , in lieu of BSE membership card. The AO asked the assessee company to justify the cost of acquisition claimed for calculating capital gain on sale of BSE shares. The assessee company had claimed the cost of Rs.2,41,00,000/- for BSE card. The assessee company was asked why the said cost be accepted as the assessee company has claimed depreciation on the BSE card in the earlier years and taking the original cost of BSE card as the cost of acquisition amounts to claiming double deduction on the same asset. The assesse company submitted that the above cost is to be taken as cost of acquisition in accordance with Section 55(2)(ab) of the Act which contentions was rejected by the AO as it was held by the AO that the assessee company cannot claim double deduction on the same asset, under the two different provisions of the Act. The AO allowed the written down value of the BSE card as the cost, and indexation on account of cost inflation was also allowed from the financial
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year 2005-06 when demutualization and corporatization of BSE took place and accordingly long term capital gains arising from sale of 4562 shares of BSE was computed at Rs.1,45,80,661/- chargeable to tax under the Act vide assessment orders dated 16.11.2010 passed u/s 143(3) of the Act .
Aggrieved by the assessment orders dated 16.11.2010 passed u/s 143(3) of the Act by the AO, the assessee company filed first appeal with the CIT(A). The assessee company submitted that Long Term Capital Gain is to be computed as per Section 55(2)(ab) of the Act which unconditionally mandate to take the cost of acquisition of the original membership of the exchange as the cost of the shares allotted pursuant to a scheme for demutualization or corporatization of BSE. The assessee company submitted that the assessee company acquired BSE membership card/trading rights on 20-07-2000 for Rs.2,41,00,000/- which shall be allowed as cost of acquisition of the 10000 shares of BSE Limited allotted to the assessee company by BSE Ltd..
The CIT(A) observed that the prior to demutualization and corporatization of BSE , the assessee company held membership right in BSE(AOP) which constituted the two rights being trading rights and membership rights which were not two different assets but a single asset . Upon demutualization and corporatization of BSE, the membership right in BSE(AOP) stood extinguished; in return the assessee company acquired 10000 shares in BSE Ltd as well trading right in BSE Ltd.. Therefore the two resulting assets , being trading right and membership have emerged from the earlier right in BSE(AOP). The CIT(A) referred to provisions of Section 47(xiiia) of the Act and Section 55(2)(ab) of the Act and held that provisions of Section 50 of the Act is applicable as the assessee company has claimed depreciation on the BSE membership right in the earlier years from which shares have emerged and such depreciation shall be reduced from the cost of acquisition of the shares of BSE Ltd. The Hon’ble Supreme Court has in the case of Techno Shares and
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Stocks Limited in (2010) 327 ITR 323(SC) has held that membership rights in BSE(AOP) is eligible for depreciation as intangibles. While calculating the long term capital gains on sale of such shares as shares of BSE Ltd are long term capital asset within the meaning of Section 2(42A) explanation1 (ha) of the Act and if the contentions of the assessee company is accepted , Section 50 of the Act will become otiose. The CIT(A) also held that the assessee company will be entitled to take the benefit of indexation u/s 48 of the Act with effect from the assessment year in which status of BSE changed from AOP to company i.e. assessment year 2006-07. Thus, the CIT(A) dismissed the appeal of the assessee company vide orders dated 31/1/2012.
Aggrieved by the orders dated 31/1/2012 of the CIT(A), the assessee company filed appeal before the Tribunal. None appeared on behalf of the assessee company despite several opportunities being given to the assessee company and the last opportunity being provided to the assessee company on the hearing held on 19/11/2014 but still none appeared. The Ld. DR on the other hand relied upon the orders of the authorities below.
We have considered the material on record including case laws and after hearing the Ld. DR , we are proceeding to decide the appeal as despite several opportunities , the assessee company did not appear before the Tribunal when appeal was called for hearing. We have observed that the assessee company is a member of Bombay Stock Exchange and is engaged in the business of share broking. It is stated that the assessee company acquired the membership of Bombay Stock Exchange(BSE) on 20-07-2000 for Rs.2,41,00,000/- and it claimed depreciation u/s 32 of the Act on the membership of BSE by treating it as part of block of asset being intangible asset u/s 32(1)(ii) of the Act which was allowed by the Revenue.
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The BSE was Association of Person (AOP), controlled and managed by trading members who held membership cards prior to demutualization and corporatization of BSE in the year 2005. Securities and Exchange Board of India(SEBI), a Government regulatory body directed that all the exchanges in the country should be demutualised and they should be managed by a company where share-holding is held by public at large and not merely by stock brokers and traders who hold trading rights. BSE, therefore, implemented demutualization process whereby first it converted itself into a company and subsequently at least shareholding to the extent of 51% was to be held by members of public and public institutions. As the first step, the BSE-AOP was converted into a company and trading members were allotted shares and separate trading right , i.e. the trading rights and membership in the company was separated. At this stage i.e. on 10th October 2005 , the assessee company received 10000 shares of BSE Ltd. and trading rights in BSE Ltd. on formation of BSE Limited . As a second step , the BSE facilitated sale of shares of individual members to public institutions. It was in the process of second step, that the 4562 shares of BSE Ltd. out of 10000 shares of BSE Ltd. held by the assessee company were transferred/sold by the assessee company for a consideration of Rs.2,37,22,400/- leading to present dispute. The assessee company has contended that the original cost of acquisition of BSE membership on 20-07-2000 of Rs.2,41,00,000/- shall be taken as cost of acquisition of 10000 shares of BSE Ltd on proportionate basis by virtue of Section 55(2)(ab) of the Act and period of holding shall be reckoned from the date of acquisition of original membership of BSE on 20- 07-2000 by virtue of Section 2(42A) explanation 1 (ha) and Section 47(xiiia) of the Act for availing the benefit of cost inflation index u/s 48 of the Act , to compute long term capital gains on sale of 4562 shares of BSE Ltd.. It is contended by the assessee company that in view of the specific provisions of Section 55(2)(ab) of the Act for computing long term capital gains on sale of 4562 shares of BSE Ltd. and also for the purposes of cost inflation index , the
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period of holding shall be reckoned from the date of acquisition of the original BSE membership by the assessee company on 20-07-2000, in view of the provisions of Section 2(42A) Explanation 1 (ha ) of the Act and Section 47(xiiia) of the Act . While the Revenue on the other hand is contending that the membership of the BSE as acquired by the assessee company in the year 2000 was an intangible asset forming part of block of asset u/s 32(1)(ii) of the Act, on which depreciation u/s 32 of the Act has been claimed by the assessee company and allowed by the Revenue in the preceding year and in accordance with the provisions of Section 50 of the Act, the written down value of the block of asset on the date of demutualization and corporatization of BSE i.e. 10-10-2005 when the assessee company got 10000 shares in BSE Limited and trading rights in BSE Ltd., shall be allowed as cost of acquisition of shares in view of provisions of Section 55(2)(ab) of the Act and period of holding for the indexation purposes shall also be reckoned from the date of demutualization or corporatization of BSE on 10-10-2005 and not from the date of acquisition of original membership of BSE by the assessee company on 20-07-2000, as the said original membership of BSE being intangible asset formed part of block of assets on which the assessee company has claimed depreciation u/s 32 of the Act and in view of provisions of Section 50 of the Act , written down value of the block of assets as at the beginning of previous year , inter-alia, corresponding to the proportionate shares sold shall be reduced from the full value of consideration received by the assessee company on sale/transfer of 4562 equity shares of BSE Limited.
At this stage it will be relevant to refer to the provisions of the relevant Section’s of the Act as under:
“2. In this Act, unless the context otherwise requires,— …….. ……..
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(42A) ["short-term capital asset" means a capital asset held by an assessee for not more than [thirty-six] months immediately preceding the date of its transfer:] ……… ……… [Explanation 1].—(i) In determining the period for which any capital asset is held by the assessee— ………. ………. (ha) in the case of a capital asset, being equity share or shares in a company allotted pursuant to demutualisation or corporatisation of a recognised stock exchange in India as referred to in clause(xiii) of section 47, there shall be included the period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatisation;] ”
“Transactions not regarded as transfer . 47. Nothing contained in section 45 shall apply to the following transfers :— …….. …….. ……. [(xiiia) any transfer of a capital asset being a membership right held by a member of a recognised stock exchange in India for acquisition of shares and trading or clearing rights acquired by such member in that recognised stock exchange in accordance with a scheme for demutualisation or corporatisation which is 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);]”
“[Special provision for computation of capital gains in case of depreciable assets. 50. Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications :— (1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of
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such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely :— (i) expenditure incurred wholly and exclusively in connection with such transfer or transfers; (ii) the written down value of the block of assets at the beginning of the previous year; and (iii) the actual cost of any asset falling within the block of assets acquired during the previous year, such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets; (2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets.]”
“Meaning of "adjusted", "cost of improvement" and "cost of acquisition". 55. (1) For the purposes of [sections 48 and 49],—
……….. ……….. (2) [For the purposes of sections 48 and 49, "cost of acquisition",— …………… …………….
[(ab) in relation to a capital asset, being equity share or shares allotted to a shareholder of a 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
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the recognised stock exchange acquired by a shareholder who has been allotted equity share or shares under such scheme of demutualisation or corporatisation, shall be deemed to be nil;]”
The Perusal of Section 2(42A) of the Act , Explanation 1 (ha) will reveal that in determining the period of holding for which any capital asset is held by the tax-payer, the capital asset being equity shares or shares in a company allotted in pursuance to the demutualization or corporatization of the recognized stock exchange in India as referred to in Section 47(xiii) of the Act, there shall be included the period for which the person was a member of the recognized stock exchange in India immediately prior to such demutualization or corporatization .
The perusal of Section 47(xiiia) of the Act will reveal that for bringing to charge capital gains u/s 45 of the Act, any transfer of capital asset being a membership right held by a member of a recognized stock exchange in India for acquisition of shares and trading or clearing rights acquired by such member in that recognized stock exchange in accordance with scheme of demutualization or corporatization which is approved by the SEBI shall not be regarded as transfer.
Perusal of Section 50 of the Act will reveal that it is a special provision for computation of capital gains in case of depreciable assets under the Act under ‘Chapter IV E –Computation of Total Income –Capital gains’ and starts with a non-obstante clause that notwithstanding anything to contrary contained in clause (42A) of Section 2 of the Act, where the capital asset is an asset forming part of a block of assets in respect of which depreciation is provided under the Act or under the Indian Income Tax, 1922 (11 of 1922), the provisions of Section 48 and 49 shall be applied subject to modifications for computation of capital gains as specified u/s 50 of the Act. Section 50(1) of the Act stipulates , inter-alia, that with respect of block of assets as defined
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under Section 2(11) of the Act, where the full value of the consideration received or accruing as a result of transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling with in the block of asset during the previous year , exceeds the aggregate of the (i) expenditure incurred wholly and exclusively in connection with such transfer (ii) the written down value of the block of asset at the beginning of the previous year; and (iii) the actual cost of any asset acquired during the previous year, such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets .While Section 50(2) of the Act provides that when block of asset ceases to exist as such, for the reasons that all the assets in that block are transferred during the previous year , the cost of acquisition of the block of asset shall be written down value of the block of asset at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets.
Whereas Section 55(2)(ab) of the Act stipulates that for the purposes of section 48 and 49 of the Act , in relation to a capital asset being equity share or shares allotted to a shareholder of a recognized stock exchange in India under a scheme of demutualization and corporatization approved by SEBI , shall be cost of acquisition of his original membership of the exchange. While for capital asset being trading or clearing rights of the recognized stock exchange acquired by a shareholder who has been allotted equity share or shares under such scheme of demutualization or corporatization , shall be deemed to be nil.
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The Hon’ble Supreme Court has in the case of Techno Shares and Stocks Limited (supra) has held that membership right of BSE (AOP- assessment year 1999-00 to 2002-03 dealt with by Hon’ble Supreme Court was prior to demutualization or corporatization of BSE ) is a ‘business or commercial right of similar nature’ and is a ‘license’ or ‘akin to license’ as defined u/s 32(1)(ii) of the Act and is entitled for depreciation as being intangible asset , if acquired on or after 01.04.1998 as provided under the amended Act .
The assessee company in the instant case has acquired membership of BSE for Rs.2,41,00,000/- on 10-07-2000 which is after 1.4.1998 and is an intangible asset as ‘business or commercial right of similar nature’ and is ‘license’ or ‘akin to license’ as stipulated u/s 32(1)(ii) of the Act and shall form part of block of intangible assets as defined u/s 2(11)(b) of the Act and shall be entitled for depreciation u/s 32 of the Act. The assessee company has prior to demutualization or corporatization of BSE, had in-fact claimed depreciation on the membership of BSE in the return of income filed with the Revenue which was allowed by the Revenue. The Section 50 of the Act is a special provision for computing capital gains in case of depreciable assets and in the instant case , the membership of BSE is depreciable asset being intangible asset u/s 32(1)(ii) of the Act on which the assessee company has in-fact claimed depreciation in the preceding year which was allowed by the Revenue. There is a need for harmonious construction of these relevant sections to arrive at the true mandate of the Act in this respect and the conflicts, if any needed to be accordingly resolved. Section 50 of the Act, inter-alia, stipulates that cost of acquisition for the purposes of computing capital gains shall be taken to be written down value of asset as at the beginning of the previous year. The Section 50 of the Act starts with a non-obstante clause and stipulate that notwithstanding anything contained in Section 2(42A) of the Act, the provisions of Section 48 and 49 of the Act shall be applied subject to the modifications as stipulated which , inter-alia, provides that cost of
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acquisitions shall be deemed to be written down value of the block of asset as at the beginning of the previous year and actual cost of any asset falling with the block of asset acquired during the previous year , for the purposes of computing capital gains which shall be deemed to be arising from the transfer of short-term capital assets . Thus, Section 50 of the Act clearly stipulate that the original cost of acquisition of the depreciable assets shall not be taken as cost of acquisition for the purposes of computing capital gains under the Act but the written down value as at the beginning of the previous year shall be deemed to be cost of acquisition of the depreciable asset . Further, benefit of indexation of cost of acquisition shall also not be available as provided u/s 48 of the Act because Section 50 of the Act being special provisions for computation of capital gain in case of depreciable asset has clearly stipulated that the provisions of Section 48 and 49 shall be applicable subject to the stipulated modifications u/s 50 of the Act and written down value of the block of asset at the beginning of the previous year shall , inter- alia be reduced from full value of consideration to arrive at capital gains which shall be deemed to be the capital gains arising from transfer of short- term capital assets meaning thereby that no benefit of cost inflation index as stipulated u/s 48 of the Act shall be allowed to taxpayer in case of depreciable asset , which proposition is further supported by a non-obstante clause in Section 50 which states that ‘notwithstanding anything contained in clause (42A) of Section 2….’ And Section 2(42A) of the Act defines short term capital asset and the period of holding relevant for determining the short term capital asset and Explanation 1 (ha) provides that in determining the period of holding for which any capital asset is held by the tax-payer, the capital asset being equity shares or shares in a company allotted in pursuance to the demutualization or corporatization of the recognized stock exchange in India as referred to in Section 47(xiii) of the Act, there shall be included the period for which the person was a member of the recognized stock exchange in India immediately prior to such demutualization or corporatization while Section 50
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clearly stipulate that the capital gains arising there-from shall be treated as arising from transfer of short term capital assets while Section 48 , inter-alia, provides that benefit of cost inflation index shall only be granted in case of long term capital gains arising from the transfer of a long-term capital assets . On the other hand Section 55(2)(ab) of the Act has explained, inter-alia, the meaning of cost of acquisitions and stipulated that cost of acquisition for purposes of Section 48 and 49 of the Act in relation to the capital asset , being equity share or shares allotted to a shareholder of a recognized stock exchange in India under a scheme of demutualization and corporatization approved by SEBI , shall be cost of acquisition of original membership of the exchange. While for capital asset being trading or clearing rights of the recognized stock exchange acquired by a shareholder who has been allotted equity share or shares under such scheme of demutualization or corporatization , shall be deemed to be nil, by virtue of provisions of Section55(2)(ab) of the Act. While by virtue of Special provisions as contained in Section 50 of the Act , Section 48 and 49 of the Act shall be applicable subject to such modification as stipulated by Section 50 of the Act, which inter-alia provides , that cost of acquisition shall be taken to be written down value as at the beginning of the previous year and it is well settled proposition that special provisions shall prevail on the general provisions because if a special provision is made on a certain matter, that matter is excluded from the general provision. Section 55(2)(ab) of the Act while referring to cost of acquisition of original membership of the exchange has to subjugate itself and cost of acquisition referred therein Section 55(2)(ab) of the Act for the purposes of Section 48 and 49 of the Act being cost of acquisition of original membership will mean thereby cost of acquisitions for the purposes of Section 48 and 49 as modified by Section 50 of the Act which shall be taken to be written down value as at the beginning of the previous year and as increased by actual cost of any additions during the previous year and not the original cost of membership paid by the assessee company in the year 2000 and
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secondly benefit of indexation shall also not be available to the assessee company till it got equity shares and trading rights on demutualization or corporatization on 10-10-2005 as the assessee company was claiming the depreciation u/s 32 of the Act on membership of BSE till it received 10000 equity shares of BSE Limited and trading rights of BSE Limited in the process of the demutualization and corporatization of BSE, in lieu of membership of BSE. Pursuant to demutualization or corporatization of BSE, the assessee company has got 10000 equity shares of BSE Limited and trading right of BSE Limited . Thus, the cost of acquisition of 10000 equity shares of BSE Limited shall be taken as written down value of the membership of the BSE as at the beginning of previous year i.e. 01.04.2005 while the cost of acquisition of trading rights of BSE acquired in demutualization or corporatization process shall be deemed to be nil , as per the mandate of Section 55(2)(ab) of the Act. The assessee company shall be entitled for working out cost of acquisition of 4562 shares of BSE Limited sold during the previous year on proportionate basis based on the number of shares sold calculated on the total written down value of the 10000 shares of BSE Limited so allotted on 10-10-2005. The assessee company shall not be entitled for claiming benefit of cost inflation indexation from the period 10-07-2000 i.e. date of acquisition of membership of BSE till 10-10-2005 i.e. when the 10000 equity shares are allotted by BSE Limited along with trading rights in BSE Limited, in lieu of membership of BSE. The assessee company on demutualization or corporatization of BSE Limited is holding 10000 equity shares of BSE Limited and trading right both as assets w.e.f 10-10-2005 . The assessee company shall be entitled to claim benefit of cost inflation index on the sale of 4562 equity shares so sold in the previous year relevant to assessment year 2008-09, from the assessment year 2006-07 till the current assessment year i.e. 2008-09. We order accordingly
In the result, the appeal filed by the assessee company is dismissed.
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Order pronounced in the open court on 10th February , 2016. आदेश क� घोषणा खुले �यायालय म� �दनांकः 10.02.2016 को क� गई ।
Sd/- Sd/- (SAKTIJIT DEY) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER मुंबई Mumbai; �दनांक Dated 10-02-2016 [ व.�न.स./ R.K. R.K. R.K., Ex. Sr. PS R.K. आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. आयकर आयु�त(अपील) / The CIT(A)- concerned, Mumbai 4. आयकर आयु�त / CIT- Concerned, Mumbai �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai H Bench 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, मुंबई / ITAT, Mumbai