Vildirect: IncomeTax-caselaws-2010-VIL-871--DT

2010-VIL-871--DT

Equivalent Citation: [2011] 9 ITR 360

Income Tax Appellate Tribunal, MUMBAI

I. T. A. No. 3803/Mum/2008,

Date: 20.10.2010

ITO

DEEPCHAN G. SHAH

Jitendra Yadev for the Appellant
Dharmesh Shah for the Respondent

BENCH

P. M. Jagtap, Vijay Pal Rao, JJ.

JUDGMENT

P. M. Jagtap, Accountant Member:-

This appeal is preferred by the Revenue against the order of the learned Commissioner of Income-tax (Appeals)-18, Mumbai, dated March 17, 2008 whereby he directed the Assessing Officer to treat the capital gain arising on sale of shares of M/s. Artill Biotec Ltd. and M/s. Shakun Construction Ltd. as long-term capital gain, which is exempt under section 10(38) as claimed by the assessee as against treatment given by the Assessing Officer to the same as short-term capital gain.

The assessee in the present case is an individual who filed his return of income for the year under consideration on January 9, 2006 declaring total income at Rs. 11,85,390. In the said return, the assessee had shown business income, capital gain and income from other sources. During the course of assessment proceedings, it was noticed by the Assessing Officer that there was a sum of Rs. 1,57,07,424 credited to the capital account of the assessee as long-term capital gain which was claimed as exempt from tax. The said long-term capital gain was claimed to have been earned by the assessee from the purchase and sale of two scrips namely M/s. Artill Biotec Ltd. and M/s. Shakun Construction Ltd. On examination of the relevant documents filed by the assessee in support of the said claim, it was noticed by the Assessing Officer that the said two scrips were claimed to be purchased during the month of July, 2003 through M/s. Archana Investments but none of these shares were appearing in the demat account of the assessee for the period April 1, 2003 to March 31, 2004. On further verification, he noticed that the shares of M/s. Artill Biotec Ltd. had been transferred to the demat account of the assessee maintained with Cosmos Co-operative Bank during the period November 11, 2004 and November 20, 2004 and sale thereof was effected between November 19, 2004 to December 29, 2004. Similarly, the shares of M/s. Shakun Construction Ltd. were found to be transferred to the demat account of the assessee during the period November 9, 2004 to November 25, 2004 and sale thereof was made during the period November 10, 2004 to December 15, 2004. The Assessing Officer also found that payment against purchase of M/s. Artill Biotec Ltd. shares was made by the assessee only on January 22, 2005 and payment against purchase of shares of M/s. Shakun Construction Ltd. was made on December 16, 2004 and February 8, 2005 after sale of respective shares. The Assessing Officer therefore asked the assessee to justify his claim of long-term capital gain in the light of all these facts. In reply, a letter dated November 15, 2007 was filed by the assessee making the following submissions:-

"The shares of M/s. Artill Bio Innovation Ltd. were purchased on July 16, 2003, July 21, 2003 and July 24, 2003, and were transferred to the demat account of the Cosmos Co-operative Bank Ltd. between November 16, 2004 to January 11, 2005. The payment for the same was made between August 5, 2003 to August 9, 2003 in cash of total Rs. 2,00,000 and the balance amount of Rs. 2,09,860 was paid on August 8, 2003 vide cheque No. 00812495 drawn on State Bank of India, Shivaji Park branch. The amount of Rs. 28,160 paid on January 22, 2005 was towards the interest charged by the broker for the delayed payment and not the payment towards the purchase. Moreover, for the determination of the date of transfer of shares listed in a recognised stock exchange in India and also the holding period to be reckoned under section 2(42A), the Board (vide Circular No. 704 dated April 28, 1995 ([1995] 213 ITR (St.) 7) have clarified that in respect of purchase of shares the holding period shall be reckoned from the date of the broker's note for purchase on behalf of the purchaser and not by actual transfer of shares in the demat account. As such the assessee is entitled to the claim of long-term capital gain."

"The shares of M/s. Shukun Construction Ltd. were purchased on July 30, 2003 and were transferred to the demat account with Cosmos Co-operative Bank Ltd. between November 9, 2004 to November 23, 2004. The payment for the same was made between dated August 5, 2003 to August 8, 2003 in cash of total Rs. 70,000 and the balance amount of Rs. 3,88,409.16 was paid on December 16, 2004 vide cheque No. 00812480, drawn on State Bank of India, Shivaji Park branch. The amount of Rs. 60,203 paid on February 8, 2005 was towards the interest charged by the broker for the delayed payment and not the payment towards the purchase. Moreover, for the determination of the date of transfer of shares listed in a recognised stock exchange in India and also the holding period to be reckoned under section 2 (42A), the Board (vide Circular No. 704 dated April 28, 1995 : [1995] 213 ITR (St.) 7) have clarified that in respect of purchase of shares the holding period shall be reckoned from the date of the broker's note for purchase on behalf of the purchaser and not by actual transfer of shares in the demat account. As such the assessee is entitled to the claim of long-term capital gain."

The above submissions made on behalf of the assessee in support of his claim for long-term capital gain were not found acceptable by the Assessing Officer. According to him, the Board Circular No. 704 dated April 20, 1995 sought to be relied upon by the assessee was not applicable in the assessee's case as the same contemplated brokers note to be followed with it delivery of shares accompanied by transfer deeds duly signed by the registered holders. He noted in this context that the shares claimed to be purchased by the assessee in the month of July, 2003 as per the broker's note were transferred to the demat account of the assessee only after a period of one year. He also held that the said circular had been issued by the Board when the share transactions were being carried out on the basis of physical delivery of share certificates. The Assessing Officer also noted that the shares claimed to be purchased by the assessee through his broker M/s. Archana Investments in the month of July, 2003 were actually transferred to the demat account of the assessee in the month of November and December, 2004 and that too in different lots. According to him, when all the shares were purchased by the assessee in the month of July, 2003 and the same were lying in the demat account of the broker, the same should have been transferred to the demat account of the assessee in one lot and there was no reason to make the said transfer in different lots on different dates. He therefore held that all the purchase and sale of both the scrips had actually been carried out by the assessee within a span of two months and the profit arising from the said transfer was assessable to tax as short-term capital gain in accordance with the provisions of section 111A. He therefore brought to tax the amount of Rs. 1,57,07,424 in the hands of the assessee as short-term capital gain in the assessment completed under section 143(3) vide an order dated December 7, 2007.

Against the order passed by the Assessing Officer under section 143(3), an appeal was preferred by the assessee before the learned Commissioner of Income-tax (Appeals) challenging the action of the Assessing Officer in treating the amount of Rs. 1,57,07,424 as short-term capital gain chargeable to tax in his hands. During the course of appellate proceedings before the learned Commissioner of Income-tax (Appeals), it was contended on behalf of the assessee that the Board Circular No. 704 dated April 28, 1995 was wrongly interpreted by the Assessing Officer. It was contended that as clarified in the said circular, the date of contract would be the date of transfer provided it is followed by actual delivery of shares. It was submitted that in the case of the assessee, the dates of contract were falling in the month of July, 2003 whereas delivery had followed later on. It was submitted that it was not a case of the Assessing Officer that delivery had not been effected in pursuant to broker's contract note. It was submitted that a letter dated November 5, 2004 issued by the broker M/s. Archana Investments was filed before the Assessing Officer confirming that the shares purchased by the assessee were lying in their pool account and the same were not transferred to the account of the assessee since the full payment against the said shares was not made by him. It was submitted that there is a common practice prevailing in the share trading business to keep the shares in their pool account by the broker till the full payment is made by the purchaser. It was contended that the relevant shares thus were purchased by the assessee in the month of July, 2003 itself as per the broker's note and the profit arising from sale of the said shares in the month of November/December, 2004 was a long-term capital gain exempt from tax.

The learned Commissioner of Income-tax (Appeals) found merit in the submissions made on behalf of the assessee before him for the following reasons given in paragraph 4.5 of his impugned order:-

"I have carefully considered the submissions made by the learned authorised representative as also the arguments of the Assessing Officer as given in the body of the assessment order, I observe that the Assessing Officer has ignored the fact that the ownership, rights, title and interest vested with the investor/purchaser immediately with the broker note for purchase. The liability to make the payment and demating of the shares are independent events which do not affect the fact of the ownership having been passed on the day of broker's note issued.

The Assessing Officer has drawn the conclusion on the basis of debit and credit entries in the demand statement. This statement merely reflects the inward flow and the outward flow in the shares in the said account. The date of inward flow of the shares nowhere determines the actual date of purchase since the shares in question have remained in pool account for considerable time and this time cannot be excluded for the consideration of determination of the holding period of shares in question. The Assessing Officer has also ignored the mandate on Circular No. 768 dated June 24, 1998 as per which the date of transfer and the period of holding does not change even when the securities are held in the demat form. I also agree with the plea of the authorised representative that the Assessing Officer has incorrectly interpreted Circular No. 704 dated April 28, 1995 wherein it has been provided that the date of contract could be the date of transfer provided it is followed by the actual delivery of shares and transfer deeds. The Assessing Officer has nowhere given the finding that the delivery has not been effected or the delivery has been effected in pursuant to the above referred contract."

For the reasons given above and relying mainly on Circular No. 704, dated April 20, 1995 read with Circular No. 768 dated June 24, 1998, he directed the Assessing Officer to treat the capital gain of Rs. 1,57,07,424 arising to the assessee from sale of shares as long-term capital gain exempt from tax as per section 10(38). Aggrieved by the order of the learned Commissioner of Income-tax (Appeals) the Revenue has preferred this appeal before the Tribunal.

The learned Departmental representative submitted that the broker's note has been treated as date of acquisition of shares by the learned Commissioner of Income-tax (Appeals) as claimed by the assessee relying on Board Circular No. 704 dated April 20, 1995. He invited our attention to the copy of the said Circular placed at page 15 of the assessee's paper book and pointed out that the same was issued taking into consideration the then established procedure of transacting securities through stock exchange where brokers first used to 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. He contended that the said procedure has now undergone a material change due to introduction of demat accounts where there is no physical delivery of shares and the said Board Circular therefore has no application to decide the date of acquisition of shares in the demat era. He submitted that this change has been taken note of by the Board in its Circular No. 768 issued on June 24, 1998 and the issue relating to the date of acquisition of shares by the assessee in the present case is required to be decided by applying the said circular. He contended that although the learned Commissioner of Income-tax (Appeals) has referred to the said Circular No. 768 dated June 24, 1998, he has relied only on one observation of the said Circular. He then took us through the copy of the said Circular placed at pages 17 to 20 of the assessee's paper book and pointed out that there are various other aspects which ought to have been considered by the learned Commissioner of Income-tax (Appeals) while deciding the issue involved in the present case. He contended that the learned Commissioner of Income-tax (Appeals), however, has decided the issue accepting the claim of the asses-see relying only on the part of the said Circular without appreciating the same as a whole.

Learned counsel for the assessee, on the other hand, strongly relied on the impugned order of the learned Commissioner of Income-tax (Appeals) as well as on the submissions made on behalf of the assessee during the course of appellate proceedings before the learned Commissioner of Income-tax (Appeals). He submitted that the relevant shares were purchased by the assessee through his broker in the month of July, 2003 itself and this period of acquisition was duly supported by the contract notes issued by the concerned broker. He submitted that merely because the said shares were lying in the demat account of the broker for want of settlement of full payment by the assessee, it cannot be said that the shares were not purchased by the assessee in the month of July, 2003. He contended that it is well settled that actual delivery of shares does not mean delivery given to the assessee only and delivery taken by the broker being an agent on behalf of the assessee is also passive delivery to the assessee. He relied on the decision of a co-ordinate Bench of this Tribunal in the case of Suresh K. Jajoo and Vimla S. Jajoo v. Asst. CIT [2010] 39 SOT 514 (Mumbai) wherein it was held that where it would suit to an assessee to claim the date of broker's notes as the date of sale, he can do so and the relevant Board Circular can help him to support such plea being beneficial to such assessee.

We have considered the rival submissions and also perused the relevant material on record. The issue which is involved in the present case is relating to the determination of date of transfer and period of holding of shares by the assessee which were sold by him in the year under consideration giving rise to capital gain. In this regard, it is observed that the period of holding of the said shares was claimed to be more than one year by the assessee on the basis of contract notes issued by the concerned broker showing the period of acquisition of shares as July, 2003. In support of this claim reliance was placed by the assessee on the Board Circular No. 704 dated April 20, 1995. As rightly pointed out by the learned Departmental representative at the time of hearing before us by referring to the relevant portion of the said circular, the same was issued keeping in view the procedure of transacting securities through stock exchange as was prevalent at the relevant time where brokers used to first enter into contracts for purchase and sale of shares and thereafter follow it up with delivery of shares accompanied by transfer deeds duly signed by the registered holders. Even in all the judicial pronouncements cited by learned counsel for the assessee, the shares/securities were transacted through stock exchange as per this procedure which was prevailing at the relevant time. The said procedure has, however, undergone a material change with introduction of shares/securities in a dematerialised form and the Central Board of Direct Taxes has duly taken note of the said change in its Circular No. 768 issued on June 24, 1998. In the said Circular, the Board has discussed the said change as well as the salient features of the new system in paragraphs 1, 2 and 3 which read as under ([1998] 232 ITR (St.) 5):-

"1. At present trading in securities is done through the physical movement of the scrips. Transactions are settled through the endorsement and delivery of the certificates which are also the proof of ownership of the security mentioned therein. This system is fraught with many difficulties caused due to bad deliveries and loss of share certificates. In order to remove these difficulties faced by the investors, a system of holding securities in the electronic mode at the option of an investor has now been introduced in India. The object of this system is to eliminate problems which are normally associated with settlement through physical certificates, like tearing/mutilation of share certificates due to careless handling, loss of certificates by postal authorities or registrars or investors, problems of bad delivery, forgery of certificates, etc. The new system is devised to ensure faster and hassle free settlement of trade with shorter settlement cycles.

2. Under the new system, the movement of the scrips physically from one person to another is totally done away with by introducing certain intermediaries, chief among them being a depository and a participant. In order to implement the system of holding and transferring securities through the electronic media, firstly the Depositories Act, 1996, has been enacted. The object of this Act is to regulate the working of the depositories in securities and matters incidental thereto. A depository is an organisation where the securities of a shareholder are held in the electronic form on the request of the shareholder, through the medium of a depository participant. The depository is comparable to a bank where an investor who desires to utilise its services can open an account with it through a depository participant. However, a depository is not merely a custodian but is in fact the registered owner of the security and it is the depository whose name is entered as such in the register of the issuer. The person actually entitled to the security becomes the beneficial owner, whose name is recorded as such in the books of the depository.

3. The salient feature of this new system is that it is optional and would operate in conjunction with the existing system of holding securities in physical form. Where an investor opts to hold a security with a depository, i.e., not in physical possession of a certificate, the depository shall be intimated of the details of allotment of securities and, accordingly, the depository shall enter in its records the name of the allottee as the beneficial owner of that security. Under this system, physical share certificates are surrendered to the issuing agency and the account maintained with the depository is the only evidence of the ownership of the securities. This conversion of physical certificates into the electronic holdings at the request of an investor is caEed dematerialisation. Whenever purchase/sale, i.e., any transfer of such securities held in dematerialised form is effected, delivery is given or taken by making adjustments in the accounts maintained with the depository by the two parties. The significant feature of the dematerialised securities is that they are fungible, i.e., all the holdings of a particular security will be identical and interchangeable and they will have no unique characteristic such as distinctive number, certificate number, folio number, etc. As the holdings of any securities in dematerialised form is represented only by the account with the depository and all transfers are effected through book entries in the accounts maintained by the depository, under this system it is not possible to link the purchase of a security with its sale by means of its distinctive number, etc. It is for this reason that subsection (2A) has been inserted in section 45 to provide for the computation of capital gains in respect of securities held in dematerialised form. This sub-section provides that for the purposes of calculating the date of transfer and period of holding in respect of shares held in dematerialised form, the FIFO method would apply. The clarifications have been sought on the manner of application of the FIFO system for the determination of the date of transfer and the period of holding."

The Board has also considered the effect of the above change on the issues involved in income-tax proceedings relating to determination of cost of acquisition and the period of holding in paragraphs 4 and 5 of the said circular which are extracted below (page 7 of 232 ITR (St.)):-

"4. The primary issue under the Income-tax Act in the case of securities whether held in physical form or in the dematerialised form remains the determination of cost of acquisition and the period of holding. The Board had earlier issued Circular No. 704, dated April 28, 1995, which explains the manner in which the 'date of transfer' 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 dematerialised form. The only problem when securities are held in dematerialised 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 dematerialised form, for determining 'date of transfer' and 'period of holding', the FIFO method would be applicable. 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 dematerialised 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', the 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." (emphasis supplied)

The Board thus has considered the effect of the change in procedure of transacting shares/securities through stock exchange and its impact on the Circular No. 704 issued earlier. Although the Board has stated that the primary position as regards "date of transfer" and "period of holding" would not change even when the securities are held in the dematerialised form, they have identified the problem which is likely to arise in the absence of a distinct trail linking every share to a certificate and its unique distinctive number linking it with its subsequent sale. The Board has clarified in this regard relying on the provisions of 45(2A) that linking of sale of shares with an earlier purchase can be made by following the FIFO method and once such linking is established, Circular No. 704 would be applicable for determination of their "date of transfer" and "period of holding". It appears from the impugned order of the learned Commissioner of Income-tax (Appeals), the relevant portion of which is already reproduced in the forgoing portion of this order, that he has decided the issue relating to the date of transfer and period of holding in the present case by applying Board Circular No. 704 without ascertaining the link of sale of shares with the corresponding purchase of shares made earlier. In this regard, the claim of the assessee was that although the shares in dematerialised form sold by him in the month of November and December, 2004 were transferred to his demat account only in the month of November and December, 2004, the same were actually purchased in the month of July, 2003 and the shares so purchased in July, 2003 were duly transferred to the demat account of his broker. The claim of the assessee regarding "date of transfer" and "period of holding" of the shares sold thus was made on the basis of purchase of shares claimed to be made through broker in the month of July, 2003 which were stated to be transferred to the so called pool demat account maintained by the broker. It is therefore necessary to trace the corresponding purchases of shares from the said demat account maintained by the broker in order to verify whether such purchases of respective shares were actually made by the said broker on behalf of the assessee and the shares so purchased were credited to the said demat account and were lying there till the same were transferred to the demat account of the assessee after a period of more than one year. Only on such verification, would it be possible to establish the link between sale of shares with the corresponding purchases as envisaged in the Central Board of Direct Taxes Circular No. 768 dated June 24, 1998 and once such link is established the date of transfer of shares to the assessee and the period of holding of the said shares by him could be determined by applying Board Circular No. 704. Since this exercise has not been done either by the Assessing Officer or even by the learned Commissioner of Income-tax (Appeals), we set aside their orders on this issue and restore the matter to the file of the Assessing Officer for deciding the same afresh in the light of Board Circular No. 768 read with Circular No. 704 after carrying out the necessary verification. Needless to mention that the Assessing Officer shall afford sufficient opportunity to the assessee of being heard.

In the result, appeal of the Revenue is treated as allowed for statistical purpose.

The order pronounced on 20th October, 2010.

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