Demutualisation Gains On BSE Shares Must Be Treated As Long-Term Capital Gains: ITAT Mumbai

Background

The Income Tax Appellate Tribunal Mumbai Bench has held that profits arising from the sale of shares received on demutualisation of the Bombay Stock Exchange cannot be assessed as short-term capital gains merely because depreciation was earlier claimed on the membership card. The dispute arose after Bang Equity Broking Pvt. Ltd. sold shares of BSE Ltd that were allotted when the exchange was corporatised. The Assessing Officer treated the gains as short-term capital gains under Section 50, reasoning that the original membership card was a depreciable asset and further denied any meaningful cost of acquisition. The NFAC upheld this view.

Outcome

Before the Tribunal, the assessee pointed out that the Income Tax Act contains a special framework for demutualisation cases. Section 55(2)(ab) mandates that the cost of acquisition of such shares must be the original cost of the membership card, while the holding period must include the period of membership itself. Accepting the argument, the Bench relied on the Third Member ruling in Techno Shares & Stocks Ltd., which had conclusively settled that depreciation on the card does not convert subsequent gains into short-term capital gains. The Tribunal emphasised that demutualisation is a statutory transformation of rights, not a fresh acquisition.

Accordingly, it held that the gains were long-term in nature and directed adoption of the original membership cost for computation.