22. Instructions regarding determination of the ‘date of transfer’ and holding period for purposes of capital gains qua transactions in securities
Circular No. 704 was issued by the Central Board of Direct Taxes on 28 April 1995. Its subject is 22. Instructions regarding determination of the ‘date of transfer’ and holding period for purposes of capital gains qua transactions in securities.
This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.
Fixes the date of transfer and the reckoning of the holding period for securities, for the twelve-month short-term test in section 2(42A) applicable to shares, listed securities, Unit Trust of India units and units of a mutual fund specified under section 10(23D). Where securities are dealt with through a stock exchange, the date of the broker's note is the date of transfer for a sale, and the holding period of a purchaser is reckoned from the date of the broker's purchase note, provided the transaction is followed by delivery of shares and transfer deeds. Where parties deal directly, the date of the contract of sale declared by them is the date of transfer, again subject to actual delivery and transfer deeds. Where securities were bought in several lots and the purchase and sale cannot be correlated by distinctive numbers, the first-in-first-out method applies, so the earliest acquired are treated as sold first and indexation follows the holding period so worked out.
Clarifications had been sought on which date is the date of transfer, from what date the holding period runs, and how the holding period is computed where securities bought in several lots and delivered in one lot are later sold in parts without any correlation of dates.
22. Instructions regarding determination of the ‘date of transfer’ and holding period for purposes of capital gains qua transactions in securities
1. Under the provisions of clause (42A) of section 2 of the Income-tax Act, 1961, the shares held in a company or any other security listed in a recognised stock exchange in India or units of the Unit Trust of India or units of a mutual fund specified under section 10(23D) shall be regarded as short-term capital assets if they are held by an assessee for not more than 12 months immediately preceding the date of its transfer. Clarifications have been sought as to which date should be regarded as the date of transfer and also about the date from which the holding period of the securities should be reckoned. Clarifications have also been sought as to how the holding periods will be computed for the purposes of capital gains when the securities, purchased in several lots at different points of time and which are taken delivery of in one lot, are subsequently sold in parts and no correlation of the dates of purchase and sale is available.
2. When the securities are transacted through stock exchanges, it is the established procedure that the brokers first enter into contracts for purchase/sale of securities and thereafter, follow it up with delivery of shares, accompanied by transfer deeds duly signed by the registered holders. The seller is entitled to receive the consideration agreed to as on the date of contract. The Board are of the opinion that it is the date of broker’s note that should be treated as the date of transfer in cases of sale transactions of securities provided such transactions are followed up by delivery of shares and also the transfer deeds. Similarly, in respect of the purchasers of the securities, the holding period shall be reckoned from the date of the broker’s note for purchase on behalf of the investors. In case the transactions take place directly 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 up by actual delivery of shares and the transfer deeds.
3. As regards the second issue, where securities are acquired in several lots at different points of time, the First-in-first-out (FIFO) method shall be adopted to reckon the period of the holding of the security, in cases where the dates of purchase and sale could not be correlated through specific numbers of the scrips. In other words, the assets acquired last will be taken to be remaining with the assessee while assets acquired first will be treated as sold. Indexation, wherever applicable, for long-term assets will be regulated on the basis of the holding period determined in this manner.
Circular: No. 704, dated 28-4-1995.
In a capital gains assessment where the short-term or long-term character of a share sale turns on a few days, or where the department recomputes gains lot by lot.
An investor buys 100 shares in April under one broker's note and another 100 in the following March, both delivered in one lot, and sells 100 in June of the next year without any means of identifying which scrips went. On first-in-first-out the April lot is treated as sold; since it was held for more than twelve months from the date of the April broker's note, the gain is long-term and indexation runs from that date.
Source: the Income Tax Department’s own published text — its page for this instrument.
