Tax Insights
from India Tax & Regulatory Services
www.pwc.in
Tribunal upholds adoption of
“opening price” on next working day as cost of shares received on redemption of GDRs on a stock exchange holiday
January 31, 2020
In brief
The Mumbai bench of the Income-tax Appellate Tribunal1 (Tribunal) held that the opening price of the shares underlying GDRs on next working day should be adopted as the cost of acquisition thereof, where the GDRs are redeemed on a day when the stock exchanges were closed. It rejected the Revenue’s claim to adopt a weighted average price as the cost of such shares. Further, the Tribunal allowed the taxpayer’s claim to carry forward LTCL on shares where STT was paid.
In detail
Facts Ruling I
• The appellant was a sub- account of a foreign institutional investor registered with the Securities and Exchange Board of India.
• The appellant held global depository receipts (GDRs) against underlying Indian shares. The GDRs were redeemed and the underlying shares were
“released,” which were then sold.
• As the underlying shares were “released” on a public holiday, when the Indian stock exchanges were closed, the appellant took
1 ITA No. 8140/ Mum/ 2010
the opening share price as on the next working day as the cost of acquisition of shares.
• The Tax Officer (TO) agreed with the appellant that the cost of acquisition of shares should have been
determined considering their price on the next working day, as the stock markets were closed on the date of “release.” However, the TO did not agree with the cost adopted by the appellant.
• According to the TO, because of the fluctuating prices of shares, a weighted av erage price of shares should have been considered as the cost of acquisition. Since such weighted average price of
the shares was lower than the opening price, this resulted in reduction of short-term capital losses, and accordingly, an addition to the income of the appellant.
Ruling II
• The appellant had earned long-term capital gains (LTCG) and long-term capital losses (LTCL) on the sale of equity shares where Security Transaction Tax (STT) was paid. It claimed LTCG on sale of equity shares as exempt under section 10(38) of the Income-tax Act, 1961 (the Act) and carried forward LTCL on sale of shares where STT was paid. The TO set-off the LTCL against
Tax Insights
2 pwc
the exempt LTCG, resulting in a lower carried forward LTCL.
Issue before the Tribunal
• What should be the cost of acquisition of shares
“released” against the redemption of GDRs?
• Whether the LTCL arising on sale of shares on which STT was paid can be carried forward under section 74 of the Act?
Appellant’s contention Ruling I
• As per para 7(3) of the Issue of Foreign Currency Convertible Bonds And Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993 (GDR scheme) issued by the Gov ernment of India, the cost of acquisition of underlying shares of GDRs shall be the cost as on the date on which the GDRs are redeemed and as per the price prevailing on the Bombay Stock Exchange or the National Stock Exchange.
• On the date of redemption of GDRs, the stock exchanges were closed and the price of the shares on that day could not be ascertained.
Accordingly, the appellant took the opening price of the shares on the next working day , which was closest to the price of shares as on the date of redemption.
• Para 7(3) of the GDR Scheme does not provide for
considering the weighted av erage price as the cost of acquisition of shares.
Ruling II
• Section 10(38) of the Act specifically refers to “income”
by way of LTCG and does not include losses. Exemption giv en under section 10(38) of
2 Raptakos Brett & Co. Limited v. DCIT [2015] 58 taxmann.com 115 (Mumbai)
the Act is conditional and subject to payment of STT.
Therefore, LTCG are not exempt at source itself and the appellant should be allowed to carry forward such losses on sale of equity shares.
Revenue’s contention Ruling I
The opening price of the shares may not be the same as the closing price of shares on
previous day. That being the case, the weighted average price is one of the best options for
determining the cost of acquisition of the shares, considering the fluctuating price of shares during the day.
Ruling II
The term “income,” as used in section 10(38) of the Act, refers to entire receipts arising from transfer of long-term capital assets and includes “loss.”
Tribunal’s ruling Ruling I
• As per para 7(3) of the GDR scheme, the cost of acquisition of shares underlying GDRs shall be the cost as on the date on which the Overseas
Depositary bank advices the custodian bank for
redemption.
• In the absence of any specific mandate either in the tax law or in the scheme for adoption of weighted average price for cost of acquisition, the same cannot be adopted as the cost.
• Ideally, to determine the cost of acquisition of shares, the closing price of the previous working day should have been considered in the given situation. However, the Tribunal did not indulge in this aspect, considering the TO has agreed with the appellant
on the applicable date for determining the cost of acquisition.
• The adoption of opening price as the cost of acquisition is most appropriate and rational in the given facts and
circumstances of the case.
Ruling II
• The expression “income” used in section 10(38) of the Act also includes “loss.” However, reading section 10(38) of the Act, it becomes clear that the income derived from sale of shares is exempt in a case where STT has been paid. It cannot be said that capital gains on sale of shares are generally exempt.
• Thus, the income derived from sale of shares is not exempt at the source itself. The Tribunal relied on the decision of Mumbai bench of the Tribunal in the case of Raptakos Brett &
Co. Limited.2 The Tribunal also noted that the Bombay High Court dismissed the appeal preferred by the revenue authorities in this case, and accordingly, this issue attained finality.
• The Tribunal held that LTCL arising from the sale of shares cannot be set-off against LTCG from shares (subjected to STT) exempt under section 10(38) of the Act. Accordingly, such losses can be carried forward under section 74 of the Act.
The takeaways
The Tribunal’s ruling provides guidance for determining the cost of acquisition of shares released on redemption of Depository Receipts on a public holiday. It also follows judicial precedents to allow carry forward of losses on the sale of equity shares where STT was paid.
Tax Insights
For priv ate circulation only
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional adv ice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwCPL, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. Without prior permission of PwCPL, this publication may not be quoted in whole or in part or otherwise referred to in any documents.
© 2020 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India hav ing Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers I nternational Limited (PwCIL), each member firm of which is a separate legal entity.
About PwC
At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with over 276,000 people who are committed to delivering quality in assurance, advisory and tax services.
Find out more and tell us what matters to you by visiting us at www.pwc.com.
In India, PwC has offices in these cities: Ahmedabad, Bengaluru, Bhopal, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai, Pune and Raipur. For more information about PwC India’s service offerings, visit www.pwc.in
PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.
© 2020 PwC. All rights reserved
Follow us on:
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor
Our Offices
Ahmedabad Bengaluru Chennai
1701, 17th Floor, Shapath V, Opp. Karnavati Club, S G Highway,
Ahmedabad – 380051 Gujarat
+91-79 3091 7000
6th Floor
Millenia Tower ‘D’
1 & 2, Murphy Road, Ulsoor, Bengaluru – 560 008 Karnataka
+91-80 4079 7000
8th Floor
Prestige Palladium Bayan 129-140 Greams Road Chennai – 600 006 Tamil Nadu +91 44 4228 5000
Hyderabad Kolkata Mumbai
Plot no. 77/A, 8-2-624/A/1, 4th Floor, Road No. 10, Banjara Hills, Hy derabad – 500034,
Telangana
+91-40 44246000
56 & 57, Block DN.
Ground Floor, A- Wing Sector - V, Salt Lake Kolkata - 700 091 West Bengal
+91-033 2357 9101/
4400 1111
PwC House Plot No. 18A,
Guru Nanak Road(Station Road), Bandra (West), Mumbai – 400 050 Maharashtra
+91-22 6689 1000
Gurgaon Pune For more information
Building No. 10, Tower - C 17th & 18th Floor,
DLF Cy ber City, Gurgaon – 122002 Hary ana
+91-124 330 6000
7 th Floor, Tower A - Wing 1, Business Bay, Airport Road, Y erwada, Pune – 411 006 Maharashtra
+91-20 4100 4444
Contact us at
