I held shares in physical form for years and dematerialised them just before selling. The AO says my holding period runs from the demat date. Is he right?
No. The date of purchase is taken from the broker's note or contract note, and the period of holding runs from that date, not from the date of dematerialisation. The Assessing Officer had converted a long-term gain into a short-term one by treating the demat date as the date of acquisition and the market price on that date as cost; the Tribunal rejected both moves.
Decided by the ITAT (Income Tax Appellate Tribunal, Mumbai Bench 'J'; D. Manmohan (Vice President) and R. K. Panda (Accountant Member)) on 2012-01-25, reported as [2012] 23 taxmann.com 21 (Mumbai) / [2012] 53 SOT 220 (Mumbai)(URO); IT Appeal No. 5068 (Mum.) of 2009. It bears on section 2(42A), section 10(38), section 68, section 69, section 153A of the Income Tax Act 1961, in Capital Gains and Evidence & Burden of Proof matters.
This is one of the commonest assessment-stage arguments on listed shares, because the only date the department can see in the demat statement is the date of credit. It matters twice over now: once for the long-term threshold, and again for grandfathering under s.112A, which turns on the asset having been acquired before 1 February 2018 — if the demat date displaced the purchase date, shares bought in physical form long ago and dematerialised after that date would lose the fair market value substitution altogether. The department's usual counter is CBDT Circular No. 768 and its first-in-first-out rule, but that circular decides which lot leaves the account, not when the lot was acquired.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
Read aloud by your device. Press again to stop.
The assessee filed a return for assessment year 2006-07 in response to a notice under s.153A, declaring a long-term capital gain of Rs 4,94,51,910 on the sale of shares in six companies and claiming exemption under s.10(38). He produced contract notes and purchase bills from a broker, Mahasagar Securities Pvt. Ltd., a bank statement and the account payee cheque evidencing payment, ledger accounts in both sets of books, sale contract notes from a registered broker, the demat statement and a confirmation letter from Sunchan Securities. The Assessing Officer found the shares had been dematerialised on the date of sale or two or three days before it; the stock exchanges said Mahasagar was not registered with them and the trades shown on its notes had not taken place; and Mahasagar's director, examined on summons under s.131, denied knowing the assessee or issuing the notes, though on cross-examination he confirmed he had received the assessee's cheque. The Assessing Officer added the whole sale proceeds of Rs 5,09,25,802 as unexplained cash credit under s.68, and held in the alternative that if there had been a purchase, the date of purchase could only be the date of dematerialisation, making Rs 4,41,10,775 an unexplained investment and Rs 80,03,027 a short-term capital gain. The Commissioner (Appeals) deleted the s.68 addition, the revenue did not appeal against that, and he upheld only the alternative - the unexplained investment and the short-term capital gain. It was that alternative the assessee appealed against (paras 3 to 5.4).
The appeal was allowed in full. The Tribunal held that the director's denial could not be the deciding factor when he had contradicted himself on oath and every other document the assessee produced stood unrebutted, and that since dematerialisation from a physical holding takes considerable time, shares dematerialised before the sale must have been purchased well before it (paras 9.5 and 9.6). On the holding period it held that for securities the date of purchase is to be taken from the broker's note or contract note and the period of holding reckoned from that date, not from the date of dematerialisation; the holding period so measured exceeded twelve months, so the shares were a long-term capital asset. The order of the Commissioner (Appeals) was set aside and the Assessing Officer was directed to accept the long-term capital gain as declared (paras 9.7 and 10). Nothing was restored to the Assessing Officer for fresh consideration.
The Tribunal reached the holding-period question only after clearing the evidentiary ground. It held that a witness who denies a transaction before the Assessing Officer and then confirms receiving the cheque under cross-examination is double speaking, and applied the Calcutta High Court's observation in CIT v. Eastern Commercial Enterprises [1994] 210 ITR 103 that no court can decide on which occasion such a man was truthful; a coordinate Bench had taken the same view of the same witness in Asstt. CIT v. Mrs. Uttara S. Shorewala [2011] 48 SOT 6 (URO) / 12 taxmann.com 460 (Mum.), an order in which the Accountant Member here had sat (para 9.5). With the denial discounted and the assessee's documents unrebutted, and dematerialisation being a lengthy process, the shares must have been acquired well before the sale (para 9.6). On the date of acquisition the Tribunal read the two Board circulars together: Circular No. 704 of 28 April 1995 makes the date of the broker's note the date of transfer for a sale followed by delivery and transfer deeds, and reckons a purchaser's holding period from the date of the broker's note; Circular No. 768 of 24 June 1998 states that the position in Circular No. 704 on the date of transfer and the period of holding does not change when securities are held in dematerialised form. From those two the date of purchase is the date of the contract note (para 9.7).
Therefore in view of the above two circulars of CBDT it is clear that in case of securities the "date of purchase" has to be taken from the broker's note/contract note and the period of holding is also to be reckoned from the "date of purchase" and not from the "date of dematerialization".
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppNo. The date of purchase is taken from the broker's note or contract note, and the period of holding runs from that date, not from the date of dematerialisation. The Assessing Officer had converted a long-term gain into a short-term one by treating the demat date as the date of acquisition and the market price on that date as cost; the Tribunal rejected both moves. This was decided by the ITAT (Income Tax Appellate Tribunal, Mumbai Bench 'J'; D. Manmohan (Vice President) and R. K. Panda (Accountant Member)) and bears on section 2(42A), section 10(38), section 68, section 69, section 153A of the Income Tax Act 1961. It is reported as [2012] 23 taxmann.com 21 (Mumbai) / [2012] 53 SOT 220 (Mumbai)(URO); IT Appeal No. 5068 (Mum.) of 2009. This is one of the commonest assessment-stage arguments on listed shares, because the only date the department can see in the demat statement is the date of credit. It matters twice over now: once for the long-term threshold, and again for grandfathering under s.112A, which turns on the asset having been acquired before 1 February 2018 — if the demat date displaced the purchase date, shares bought in physical form long ago and dematerialised after that date would lose the fair market value substitution altogether. The department's usual counter is CBDT Circular No. 768 and its first-in-first-out rule, but that circular decides which lot leaves the account, not when the lot was acquired. If it applies to you, the first step is this: Produce the contract note or broker's note for the original purchase, and the share certificate and transfer records if the holding was physical, rather than relying on the demat statement.
The assessee filed a return for assessment year 2006-07 in response to a notice under s.153A, declaring a long-term capital gain of Rs 4,94,51,910 on the sale of shares in six companies and claiming exemption under s.10(38). He produced contract notes and purchase bills from a broker, Mahasagar Securities Pvt. Ltd., a bank statement and the account payee cheque evidencing payment, ledger accounts in both sets of books, sale contract notes from a registered broker, the demat statement and a confirmation letter from Sunchan Securities. The Assessing Officer found the shares had been dematerialised on the date of sale or two or three days before it; the stock exchanges said Mahasagar was not registered with them and the trades shown on its notes had not taken place; and Mahasagar's director, examined on summons under s.131, denied knowing the assessee or issuing the notes, though on cross-examination he confirmed he had received the assessee's cheque. The Assessing Officer added the whole sale proceeds of Rs 5,09,25,802 as unexplained cash credit under s.68, and held in the alternative that if there had been a purchase, the date of purchase could only be the date of dematerialisation, making Rs 4,41,10,775 an unexplained investment and Rs 80,03,027 a short-term capital gain. The Commissioner (Appeals) deleted the s.68 addition, the revenue did not appeal against that, and he upheld only the alternative - the unexplained investment and the short-term capital gain. It was that alternative the assessee appealed against (paras 3 to 5.4). The matter was decided on 2012-01-25 by the ITAT (Income Tax Appellate Tribunal, Mumbai Bench 'J'; D. Manmohan (Vice President) and R. K. Panda (Accountant Member)). On those facts the ITAT held as follows. The appeal was allowed in full. The Tribunal held that the director's denial could not be the deciding factor when he had contradicted himself on oath and every other document the assessee produced stood unrebutted, and that since dematerialisation from a physical holding takes considerable time, shares dematerialised before the sale must have been purchased well before it (paras 9.5 and 9.6). On the holding period it held that for securities the date of purchase is to be taken from the broker's note or contract note and the period of holding reckoned from that date, not from the date of dematerialisation; the holding period so measured exceeded twelve months, so the shares were a long-term capital asset. The order of the Commissioner (Appeals) was set aside and the Assessing Officer was directed to accept the long-term capital gain as declared (paras 9.7 and 10). Nothing was restored to the Assessing Officer for fresh consideration.
The Tribunal reached the holding-period question only after clearing the evidentiary ground. It held that a witness who denies a transaction before the Assessing Officer and then confirms receiving the cheque under cross-examination is double speaking, and applied the Calcutta High Court's observation in CIT v. Eastern Commercial Enterprises [1994] 210 ITR 103 that no court can decide on which occasion such a man was truthful; a coordinate Bench had taken the same view of the same witness in Asstt. CIT v. Mrs. Uttara S. Shorewala [2011] 48 SOT 6 (URO) / 12 taxmann.com 460 (Mum.), an order in which the Accountant Member here had sat (para 9.5). With the denial discounted and the assessee's documents unrebutted, and dematerialisation being a lengthy process, the shares must have been acquired well before the sale (para 9.6). On the date of acquisition the Tribunal read the two Board circulars together: Circular No. 704 of 28 April 1995 makes the date of the broker's note the date of transfer for a sale followed by delivery and transfer deeds, and reckons a purchaser's holding period from the date of the broker's note; Circular No. 768 of 24 June 1998 states that the position in Circular No. 704 on the date of transfer and the period of holding does not change when securities are held in dematerialised form. From those two the date of purchase is the date of the contract note (para 9.7). In the words reproduced by the source cited on this page: "Therefore in view of the above two circulars of CBDT it is clear that in case of securities the "date of purchase" has to be taken from the broker's note/contract note and the period of holding is also to be reckoned from the "date of purchase" and not from the "date of dematerialization"."
It was decided by the ITAT on 2012-01-25 and is reported as [2012] 23 taxmann.com 21 (Mumbai) / [2012] 53 SOT 220 (Mumbai)(URO); IT Appeal No. 5068 (Mum.) of 2009. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 2(42A), section 10(38), section 68, section 69, section 153A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was allowed in full. The Tribunal held that the director's denial could not be the deciding factor when he had contradicted himself on oath and every other document the assessee produced stood unrebutted, and that since dematerialisation from a physical holding takes considerable time, shares dematerialised before the sale must have been purchased well before it (paras 9.5 and 9.6). On the holding period it held that for securities the date of purchase is to be taken from the broker's note or contract note and the period of holding reckoned from that date, not from the date of dematerialisation; the holding period so measured exceeded twelve months, so the shares were a long-term capital asset. The order of the Commissioner (Appeals) was set aside and the Assessing Officer was directed to accept the long-term capital gain as declared (paras 9.7 and 10). Nothing was restored to the Assessing Officer for fresh consideration. It arises in Capital Gains and Evidence & Burden of Proof matters, on section 2(42A), section 10(38), section 68, section 69, section 153A of the Income Tax Act 1961, and was decided by Income Tax Appellate Tribunal, Mumbai Bench 'J'; D. Manmohan (Vice President) and R. K. Panda (Accountant Member). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Show the demat request form and the dematerialisation date separately, so the record distinguishes conversion of form from acquisition. Meet the FIFO point head on: under s.45(2A) and Circular No. 768 the first-in-first-out method identifies which dematerialised lot is treated as sold, applied account by account, and it does not fix the date of acquisition of that lot. Where s.112A grandfathering is in issue, evidence acquisition before 1 February 2018 from the purchase records and take the 31 January 2018 quoted price separately.
Still good law. A later coordinate Bench has applied it. In Smt. Smita P. Patil v. Assistant Commissioner of Income-tax [2015] 55 taxmann.com 346 (Pune - Trib.) / [2014] 159 TTJ 182, IT Appeal Nos. 1407 to 1421 (Pune) of 2012, decided 29 July 2013 in favour of the assessee, the Pune Bench treated this order as deciding an identical issue - the same broker, the same director's denial, one of the same scrips - set out its operative paragraphs and decided the same way. That is Tribunal-level treatment, not appellate approval: no High Court or Supreme Court decision on this order was located, and the document carries no citator banner and no case review block. Two later orders also turn up on a full-text search of the party name and have not been read: Assistant Commissioner of Income-tax, Circle-7, Ahmedabad [2017] 78 taxmann.com 133 (Ahmedabad - Trib.), in favour of the assessee, and Radhika Roy v. Deputy Commissioner of Income-tax [2019] 106 taxmann.com 210 (Delhi - Trib.), in favour of the revenue - the second may distinguish it, and should be read before this order is relied on against a similar charge. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The order has now been read in full. It is a search assessment, and the point it is usually cited for - that the holding period runs from the contract note and not from the date of dematerialisation - is the second of two steps, the first being the Tribunal's refusal to act on the broker's denial. The relief on the record was that the Commissioner (Appeals)'s order was set aside and the Assessing Officer directed to accept the long-term capital gain as returned; nothing was restored. A companion appeal of the assessee's wife, Smt. Hamida J. Rattonsey, arose out of the same investigation and is referred to in the recorded statements, but is a separate order and is not authority for anything decided here. The decision predates s.112A; it is applied to grandfathering by reasoning, not because the Tribunal said anything about it. The Tribunal's own record of the two circulars is at para 9.7 and is narrower than it is sometimes reported to be - Circular No. 768 is treated as saying only that the position stated in Circular No. 704 is unaffected by holding in demat form, and neither circular is read as fixing cost. The Tribunal did not lay down what happens where the purchase documents themselves are absent: here the contract notes, the cheque, the ledgers and the demat statement were all on the record and unrebutted, and the case was won on the unreliability of the denial rather than on any presumption in the assessee's favour. It says nothing about an off-market transfer with no contract note at all, nothing about the price movement the Assessing Officer relied on - shares up eighteen to eighty-six times in a year - which it did not address, and nothing about how the same reasoning fares against a report of the investigation wing naming the scrip, which is how these disputes are now framed. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was allowed in full. The Tribunal held that the director's denial could not be the deciding factor when he had contradicted himself on oath and every other document the assessee produced stood unrebutted, and that since dematerialisation from a physical holding takes considerable time, shares dematerialised before the sale must have been purchased well before it (paras 9.5 and 9.6). On the holding period it held that for securities the date of purchase is to be taken from the broker's note or contract note and the period of holding reckoned from that date, not from the date of dematerialisation; the holding period so measured exceeded twelve months, so the shares were a long-term capital asset. The order of the Commissioner (Appeals) was set aside and the Assessing Officer was directed to accept the long-term capital gain as declared (paras 9.7 and 10). Nothing was restored to the Assessing Officer for fresh consideration.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
You have a document that says so. Does that settle it?
If the department doubts my shareholders, can it add the money to my income?
You gave particulars, paid by cheque and got a confirmation. Has the burden shifted?
The seized documents say nothing about the years being assessed. Can s.153C still be used for them?