Ita/161/2010 Of Nawal Kishore Kejriwal v. Commissioner Of Income Tax, Kolkata-Ix

O - 88 IN THE HIGH COURT AT CALCUTTASpecial 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 : 17[th] February, 2023 The Court : This appeal by the assessee under Section260A of the Income Tax Act (the ‘Act’ in brevity) is directedagainst the order dated 23[rd] April, 2010 passed by the Income TaxAppellate Tribunal, A - Bench, Kolkata (the ‘Tribunal’) in ITANo.1391/Kol/2009 for the assessment year 2005-06. This appeal was admitted on 13[th] September, 2010 on the following substantial questions of law: “(i) Whether, in view of Circular No.704 dated April 28,1995 issued by the Central Board of Direct Taxes, thecapital gains of Rs.56,81,483/- from the sale on February22, 23 and 28, 2005 of share purchased by the appellanton February 10, 2004 were long term capital gains exemptunder section 10(38) of the Income Tax Act, 1961 and thepurported findings of the Tribunal reversing the order ofthe Commissioner of Income Tax (Appeals) are arbitrary,unreasonable and perverse? (ii)Whether on a true and proper interpretation ofCircular No.704 dated April 28, 1995 and No.768 datedJune 24, 1998, Circular No.704 was applicable in respectof shares in dematerialised form and the date ofacquisition of the dematerialised shares was to be takenas the date of purchase when the broker issued hiscontract note and not the date of entry in the demataccount?” We have heard Mr. J.P. Khaitan, learned standing seniorcounsel, assisted by Ms. Swapna Das, learned advocate for theappellant/assessee and Mr. Tilak Mitra, learned counsel appearingfor the respondent/revenue. The short issue involved in the instant case is whether theCircular issued by the Board in Circular No.768 dated 24[th] June,1998 would be applicable only in the case of dematerialise share scripts and not in the case of share scripts held in physicalform. The learned Tribunal after extracting the said CircularNo.768 holds that the said Circular is not applicable todematerialised share scripts and the date of acquisition of sharescripts would be the date only when the dematerialised sharescripts are entered into assessee’s D-mat account with depository.The first Circular was issued by the Board is Circular No.704dated 28[th] April, 1995. By the said Circular clarification wasissued for determination of the date of transfer and holdingperiod for the purpose of capital gains when the assesseetransacts in securities. The relevant portion of the Circularreads as follows : “When the securities are transacted through stock exchanges,it is established procedure that the brokers first enter intocontracts for purchase/sale of securities and thereafter,follow it up with delivery of shares accompanied by transferdeeds duly signed by the registered holders. The seller isentitled to receive the consideration agreed to as on thedate of contract. The Board are of the opinion that it is thedate of broker’s note that should be treated as the date oftransfer in cases of sale transitions of securities providedsuch transactions are followed up by delivery of shares andalso the transfer deeds. Similarly, in respect of thepurchasers of the securities, the holding period shall bereckoned from the date of the brokers'’ note for purchase onbehalf f the investors. In case the transactions take placedirectly 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 upby actual delivery of shares and the transfer deeds”. be treated as the date of transfer provided it is followed upby actual delivery of shares and the transfer deeds”. In terms of the above circular the relevant date is the dateof broker’s note that should be treated as date of transfer incases of sale transactions of securities provided suchtransactions are followed up by delivery of shares and also thetransfer deed. Similarly, in respect of purchase of securities theholding period shall be reckoned from the date of the broker’snote for purchase on behalf of the investors. In case thetransactions take place directly between the parties and notthrough stock exchanges the date of contract of sale as declaredby the parties shall be treated as the date of transfer providedit is followed up by actual delivery of shares and transfer deeds.The CBDT by circular No. 768 dated 24.6.1998 issued anothercircular for determination of date of transfer and the period ofholding of securities held in demoralised form under Section45(2A) of the Act. The relevant portion of the Circular reads asfollows : 4.The primary issue under the Income-tax Act in the case ofsecurities whether held in physical form or in thedematerialized form remains the determination of cost ofacquisition and the period of holding. The Board hadearlier issued Circular No.704, dated 28[th] April, 1995,which explains the manner in which the “date of transfer” and “period of holding” may be determined. This primaryposition as regards the “date of transfer” and “period ofholding” does not change even when the securities are heldin the dematerialized form. The only problem whensecurities are held in dematerialized form is that thedistinct trail linking every share to a certificate andits unique distinctive number linking it with itssubsequent sale is not available.5. Section 45(2A) stipulates that in the case of securitiesheld in dematerialized form, for determining “date oftransfer” and “period of holding”, the FIFO method wouldbe applicable. The FIFO method is generally used todetermine the value of any item moving out of a stockaccount 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 itemthat first entered into the account is deemed to be thefirst to be sold out. However, once a sale is linked withan earlier purchase, for determination of their “date oftransfer” and “period of holdings”. Board’s CircularNo.704 would be applicable. That is to say that therelevant contract notes as explained in Circular No.704will have to be referred to, for ascertaining the cost ofthe security sold and the date of transfer.” On a reading of the above circular it is seen that there isnothing to indicate that the circular excludes the cases ofsecurities sold in physical form. In fact the circular deals withsecurities held in physical form as well as those in demoralisedform. Furthermore, the circular has also clarified the position asto the applicability of the earlier circular No. 704 dated28.4.1995. Thus we are of the view that the conclusion arrived atby the learned Tribunal holding that Board Circular No. 704 dated28.4.1995 is not applicable to dematerialised share scripts andthe date of acquisition of shares would be the date only whendematerialised shares are entered in the D-mat account withdepository is incorrect conclusion arrived at by the learnedTribunal. For the above reason the appeal filed by the assessee isallowed and the substantial questions of law are answered infavour of the assessee. (HIRANMAY BHATTACHARYYA, J.) S Das/s.chandra/Pkd/GH.