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2025 Supreme(Online)(ITAT) 21859
INCOME TAX APPELLATE TRIBUNAL (MUMBAI BENCH)
Amit Shukla, Judicial Member, Girish Agrawal, Accountant Member
Ramesh Jaisinghani – Appellant
Versus
Deputy Commissioner of Income Tax, Central Circle-5(2), Mumbai – Respondent
ITA No.980/Mum/2025
For the Appellants/Petitioners: Rajan Vora, Pranay Gandhi, Lekh Mehta
For the Respondents: Sanyogita Nagpal
When the computation machinery prescribed for determining the cost of acquisition of an asset fails, the governing charging section for capital gains becomes inoperative. Amendments introducing new computation devices to bridge such lacunae are substantive and operate prospectively, failing to trigger retrospective tax liability on concluded transactions.
Headnote:(A) Income Tax Act, 1961 - Sections 45, 48, 55(2)(aa), 55(2)(ac), 112A - Capital Gains - Cost of acquisition - Determination for unlisted shares sold under Offer for Sale (OFS) in Initial Public Offering (IPO) - Failure of computation machinery - Whether capital gains are exigible to tax when statutory mechanism for determining fair market value on date of transfer is absent - Held, that in absence of quoted price on recognized stock exchange on date of transfer, and with no specific formula existing under unamended provisions, machinery for computing cost of acquisition fails, rendering charging provision inoperative. (Paras 3, 38, 39, 52)
(B) Interpretation of Statutes - Retrospective application of law - Amendment brought by Finance (No. 2) Act, 2024 to Section 55(2)(ac) - Whether amendment is clarificatory or substantive - A legislation creating a new computation device for a category of transactions previously outside the tax net is substantive and cannot be applied retrospectively to completed assessments. (Paras 43, 44, 46)
(C) Principles of Interpretation - Harmonious construction - Applicability of Section 55(2)(ac) over Section 55(2)(aa) - Special provision prescribing computation code for specific assets under STT regime overrides general rule in Section 55(2)(aa) providing nil cost of acquisition for bonus shares; latter would render grandfathering objective nugatory. (Paras 65, 66, 67)
Facts of the case:
The taxpayer sold bonus shares through an Offer for Sale (OFS) during the IPO process. The shares were transferred to an escrow account while unlisted and were subsequently listed. The tax authorities treated the cost of acquisition as nil, leading to a substantial tax demand. The taxpayer contended that because the shares were unlisted at the time of transfer, the computation mechanism under the Act was unworkable, invoking the principle of machinery failure.
Findings of Court:
The court found that prior to the 2024 amendment, the statute provided no mechanism for determining the fair market value of shares that were unlisted on the date of transfer but listed subsequently. Furthermore, the court held that the special computational code under Section 55(2)(ac) regarding STT-paid equity shares must take precedence over the general provision for nil cost of bonus shares, and the 2024 amendment could not be applied retrospectively to concluded transactions.
Issues: Whether the computation mechanism for long-term capital gains failed for pre-listing OFS transfers and whether the subsequent amendment to the Act, intended to remedy this, operates retrospectively to tax completed transactions.
Ratio Decidendi: Where the legislative machinery for computing capital gains is found to be non-existent or unworkable for a specific class of transaction, the charging section fails. A subsequent amendment that introduces a new computation formula is substantive in nature and cannot be applied to transactions finalized prior to its enactment.
Result: Appeal of the assessee allowed.
| Table of Content |
|---|
| 1. sequence of events in an ipo-ofs transaction determines taxability. (Para 4 , 5 , 8 , 33) |
| 2. failure of computational machinery results in failure of the taxing charge. (Para 6 , 19 , 39 , 46 , 52) |
| 3. statutory amendments addressing a 'lacuna' are substantive, not declaratory. (Para 12 , 13 , 40 , 41 , 43 , 44) |
| 4. grandfathering provisions intend to exclude pre-2018 gains from tax. (Para 34 , 35 , 36 , 53) |
| 5. specific computation provisions (s.55(2)(ac)) override general rules (s.55(2)(aa)). (Para 59 , 60 , 61 , 65 , 66) |
| 6. assessing officer's capital gains computation set aside in favor of fmv. (Para 68 , 69 , 70) |
आदेश / O R D E R
PER AMIT SHUKLA (J.M):
The aforesaid appeal has been filed by the assessee against order dated 06/12/2024 passed by ld. CIT(A)-53, Mumbai in relation to the assessment framed u/s.143(3) of the Act for the A.Y.2020-21.
2. Assessee has raised following grounds of appeal:-
Based on the facts and circumstances of the case. Mr. Ramesh Jaisinghani (hereinafter referred to as the Appellant) craves leave to prefer an appeal against the order passed by the learned Commissioner in against the of Income-Tax (Appeals)-53, Mumbai learned CIT(A) in relation to the appeal against the order passed under section 143(3) of the Act dated 23 March Tax (Central Circle)-5(2), Mumbai (learned AO) on the following grounds, each of which are without prejudice to one another.
On the facts and in the circumstances of the case and in law, the learned CIT(A) on the facts and in circumstances of the case and in law has
Capital gains not chargeable to tax of Rs. 101,70,80,733.
General
1. erred in denying the Appellant's additional claim, in respect of non-chargeability of capital gains Income amounting to Rs. 101,70,80,733 to tax in respect of shares held in Polycab Ltd, offered under "offer for sale at the time of initial Public Offering (IPO);
Provisions of Explanation to section 55(2)(ac) of the Act as applicable at the time when the Impugned OFS transactions was entered into should be applied.
2. failed to appreciate the fact that as per the provisions existing at the time of the transaction, the computation mechanism in relation to determination of cost of shares offered under OFS as per section 55(2)(ac) of the Act fails, by virtue of which the capital gains cannot be computed and hence there can be no levy of capital gains tax
failed to appreciate the fact that the date of transfer of shares under OFS is the date on which the shares are allotted to the purchasers and transferred to the account of purchasers and not the date of listing of the said shares and therefore the shares were already transferred by the assessee before the shares were listed on stock exchange and Securities Transaction Tax (STT) was paid by assessee and therefore the capital gains are not chargeable to tax
Without prejudice, cost of acquisition of the shares may be computed using the fair market value as on 31 January 2018
3. without prejudice to the above, while computing capital gains arising on shares offered under OFS, the cost of shares of Polycab India Ltd should be considered to be Fair Market Value ('FMV) of shares as on 31 January 2018in light of provision of Explanation a(i) Section 55(2)(ac)
Without prejudice, provisions of section 55(2)(aa)(iia) of the Act cannot be imported into the provisions of section 55(2)(ac) of the Act:
4. without prejudice to the above, failed to appreciate that the provisions of section 55(2)(aa)(iiia) of the Act providing for cost of acquisition of bonus shares to be Nil cannot be imported into the provisions of section 55(2)(ac) of the Act and it has to be considered as per grand-fathering provisions i.e. fair market value as on 31 January 2018 should be adopted.
Amendment to Explanation to section 55(2)(as) of the Act by the Finance (No. 21 Act. 2024 should be applied prospectively.
erred in holding that the amendment made to the Explanation to section 50(2)(ec) of the Act by the Finance (No. 2) A
