ITAT applies Sec. 50 to determine cost of shares allotted in pursuance of demutualization of BSE

Cost of shares allotted pursuant to corporatization of BSE would be calculated as per Section 50 and not as per Section 55(2(ab) if depreciation was claimed on BSE membership. Further, indexation benefit on sale of such share would be available from the date of corporatization of BSE and not from the date of acquisition of original membership of BSE.

Facts

a) Assessee, engaged in the business of share broking, earned long-term capital gain on sale of shares of BSE Limited.

b) The said shares were allotted to the assessee under the scheme of corporatization of Bombay Stock Exchange (BSE), in lieu of BSE membership card.

c) Assessee contended that the original cost of acquisition of BSE membership shall be taken as cost of acquisition of shares of BSE Ltd by virtue of Section 55(2)(ab) of the Income-tax Act (‘Act’). Further, the period of holding shall be reckoned from the date of acquisition of original membership of BSE by virtue of Explanation 1(ha) to Section 2(42A).

d) On the other hand, revenue contended that as the assessee was claiming depreciation on membership card of BSE, WDV of the membership card on the date of BSE shall be taken as the cost of acquisition of shares in view of the provisions of Section 50 of the Act. Further, period of holding for the indexation purposes shall also be reckoned from the date of corporatization of BSE and not from the date of acquisition of original membership of BSE by the assessee.

e) The stand taken by AO was affirmed by CIT(A). Aggrieved assessee filed the instant appeal before the tribunal.

The tribunal held in favour of revenue as under-

1) Section 55(2)(ab) stipulates that cost of acquisition of shares allotted pursuant to scheme of corporatization of a recognized stock exchange shall be deemed to be the cost of acquisition of original membership of the exchange.

2) Explanation 1(ha) to Section 2(42A) provides that in determining the period of holding of shares allotted in pursuance of the corporatization of the recognized stock exchange, there shall be included the period for which the person was a member of the recognized stock exchange immediately prior to such corporatization.

3) Section 50 stipulates that notwithstanding anything contained in Section 2(42A) of the Act, while computing capital gain in case of depreciable asset, the cost of acquisition of asset 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. Further, the capital gain shall be deemed to arise from the transfer of short-term capital assets.

4) Section 50 is a special provision for computation of capital gain in case of depreciable asset. It is well-settled proposition that special provisions shall prevail on the general provisions.

5) As in the instant case depreciation was claimed on original membership of stock exchange, cost of acquisition of membership shall be computed as per section 50 and not as per section 55(2(ab).

6) Therefore, cost of acquisition of shares shall be taken as WDV of the membership card on the date of corporatization of BSE and not the original cost of membership paid by the assessee.

7) Further, it was held by the ITAT that as Section 50 overrules Section 2(42A), the benefit of indexation shall be available from the date of corporatization of BSE and not from the date of acquisition of original membership of BSE by the assessee. - [2016] 66 taxmann.com 258 (Mumbai - Trib.)

Scope of sec. 50 limited to compute capital gain; tax rate to be fixed as per holding period of depreciable assets

The Tribunal held as under:

1)  It had been argued by the learned AR that the provisions of section 50, deeming the capital gain as short-term capital gain was only for the purposes of sections 48 and 49 which relates to computation of capital gain;

2)  The view canvassed by the learned AR was supported by the judgment of the Mumbai bench of Tribunal in case of  Manali Investments v.Asstt. CIT [2011] 45 SOT 128/10 taxmann.com 293 in which it had been held that the provisions of section 50 were to be extended only to the stage of computation of capital gain and, therefore, capital gain resulting from transfer of depreciable asset which was held for more than three years would retain the character of long-term capital gain for the purpose of all other provisions of the Act;

3)  For the purpose of computation of capital gain, the flat had to be treated as short-term capital assets, but for the purpose of applicability of tax rate it had to be treated as long-term capital assets if held for more than three years;

4) Thus, the AO was to be directed to compute the capital gain from the sale of flat and apply the appropriate tax rate after necessary verification in the light of observations made in this order - Smita Conductors Ltd. v. Dy. CIT [2014] 41 taxmann.com 514 (Mumbai - Trib.)