Income Tax Appellate Tribunal - Mumbai
Megasolis Renewables Pvt Ltd ,Mumbai vs The Acit -7(2)(2), Mumbai on 5 May, 2026
IN THE INCOME-TAX APPELLATE TRIBUNAL"D" BENCH, MUMBAI BEFORE SHRI NARENDER KUMAR CHOUDHRY, JUDICIAL MEMBER & SHRI PRABHASH SHANKAR, ACCOUNTANT MEMBER ITA No.7904/MUM/2025 (A.Y. 2016-17) Megasolis Renewable v/s. Assistant Commissioner of Private Limited बनाम Income Tax - 7(2)(2) (Formerly known as Mahindra Aaykar Bhavan, Maharishi Renewables Pvt. Ltd.) , Ground Karve Road, Mumbai -
Floor, Cowrks, Winchester, 400020, Maharashtra South Avenue Road, Downtown Powai , Mumbai 400 076, Maharashtra
स्थायी लेखा सं ./जीआइआर सं ./ PAN/GIR No: AAGCM7010H Appellant/अपीलार्थी .. Respondent/प्रतिवादी Assessee by : Shri Anish Thacker & Shri Nikhil Tiwari, ARs Revenue by : Shri Umashankar Prasad, (CIT-DR) Date of Hearing 12.03.2026 Date of Pronouncement 05.05.2026 आदे श / O R D E R PER PRABHASH SHANKAR [A.M.] :-
The present appeal arising from the appellate order dated 30.09.2025 is preferred by the assessee against the order passed by the Learned Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre, Delhi [hereinafter referred to as "CIT(A)"] pertaining to assessment order passed u/s. 143(3) of the Income-tax Act, 1961 Page |2 ITA No. 7904/Mum/2025 A.Y. 2016-17 Megasolis Renewable Pvt. Ltd.
[hereinafter referred to as "Act"] dated 28.12.2018 for the Assessment Year [A.Y.] 2016-17.
2. The grounds of appeal are as under:
On the facts and the circumstances of the case and in law, learned CIT(A):
Ground of Appeal No. 1: General
1. Erred in confirming the action of the learned AO in making an addition of Rs. 11,89,68,147 [Rs. 10,76,48,000 pertaining to addition of short-term capital gains and Rs. 1,13,20,147 pertaining to disallowance under Section 14A];
Ground of Appeal No. 2-4: Incorrect computation of Short-Term Capital Gains-Rs. 10,76,48,000
2. erred in upholding the addition of Rs. 10,76,48,000/- made by the learned AO computed basis First-In-First-Out ('FIFO') method, without appreciating the facts of the case and therefore, the impugned addition ought to have been deleted;
3. failed to appreciate that shares held in physical form are distinguishable and not fungible since the share certificates distinctly identify the shares and their cost of acquisition and therefore, the impugned addition made by computing the cost of acquisition as per FIFO method instead of the actual cost of acquisition of shares is bad in law and ought to have been deleted;
4.erred in upholding the application of the FIFO method without appreciating that the provisions of section 45(2A) of the Act are applicable only in respect of securities held in dematerialised form and therefore, the impugned addition is bad in law and ought to have been deleted:
Ground of Appeal No. 5-9: Disallowance under Section 14A - Rs. 1,13,20,147
5. erred in upholding the disallowance of Rs. 1,13,20,147 under section 14A of the Act read with Rule BD of Income Tax Rules, 1962 („the Rules‟) without appreciating the facts of the case and therefore the impugned addition ought to be deleted;
6. failed to appreciate that the investments made by Appellant have been made out of own funds and therefore, disallowance under section 14A read with rule 8D(2)(ii) of the Act ought to have been deleted;
7. erred in upholding the disallowance under section 14A read with rule 8D(2)(iii) of the Rules without appreciating that the same is excessive and therefore, the disallowance ought to have been deleted.
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8. without prejudice to the above, failed to appreciate that disallowance under section 14A of the Act cannot exceed exempt income and therefore, disallowance, if any, ought to have been restricted to Rs. 9,48,238.
9. without prejudice to the above, ought to have directed the learned assessing officer to computed disallowance under section 14A read with rule 8D of the Rules by only considering investments which have actually yielded exempt income during the year, Ground of Appeal No. 10: Computation of interest under section 234B of the Act-Rs. 1,02,99,511
10. ought to have directed the learned AO to restrict the computation of interest under section 234B of the Act at Rs. 5,21,269 as computed in the return of income as against Rs. 1,02,99,511 as computed in the impugned assessment order after allowing complete credit for the pre-paid taxes. Ground of Appeal No. 11: Computation of interest under section 234D of the Act-Rs. 81,988
11. ought to have directed the learned AD to delete the levy of interest under section 234D of the Act amounting to Rs. 81,988.
3. Ground no.1 is general in nature requiring no adjudication while ground nos. 2 to 4 pertain to the alleged incorrect computation of Capital Gains of Rs. 10,76,48,000/-. Brief facts of the case are that the assessee is engaged in the business of generation and distribution of electrical power. According to the assessment order, it was noticed that it had credited Rs 5,92,54,720/- as Profit on sale of equity shares under the head „Other Income". However, in the computation of income, it had reduced the above amount from the Business Income but under the head „Income from Capital Gains‟ offered as taxable Short Term Capital Gains (STGS) at Rs.43,54,240/-.
4. The AO further observed that the assessee sold 46,66,760 shares of its investment in Brightsolar Renewable Energy Private Page |4 ITA No. 7904/Mum/2025 A.Y. 2016-17 Megasolis Renewable Pvt. Ltd.
Ltd.(„BREPL‟) during the relevant year for a sale consideration of Rs.34/- for each share. It had purchased these shares on various dates at different rates as per following table :-
Date of No. of Shares Price Paid Per Unit Value of transaction Purchase (Rs.) (Rs.) 14.03.2014 10,000 10 1,00,000 26.11.2014 61,50,000 10 6,15,00,000 27.06.2015 33,64,000 42 14,12,88,000 The sale of the share of BREPL were made as per following table-
Date of Sale No. of Shares Consideration (Rs.) Total Consideration Received Per Unit (Rs.) Sale 29.01.2016 46,66,760 34 15,86,69,840 4.1 The assessee while calculating the profit as declared in the books, took the cost of acquisition of the shares as average cost per share by dividing the total purchase consideration by the total number of shares. In calculating the gain on sale of shares, it reduced this average purchase price from the sale price to arrive at the gains. In the computation of income offered in the return, the assessee offered Capital Gains as under-
No. of units Sale Price Total Value of Purchase Total Cost Gains(Loss)
Sold Per Share Sale Price Per
Consideration Unit
33,64,000 34 11,43,76,000 42 14,12,88,000 (2,69,12,000)
13,02,760 34 4,42,93,840 10 1,30,27,600 3,12,66,240
Total 43,54,240/-
4.2 It was observed by the AO that the assessee had not followed well established and accepted principle of First-in First-Out (FIFO) in Page |5 ITA No. 7904/Mum/2025 A.Y. 2016-17 Megasolis Renewable Pvt. Ltd.
calculating the gain accruing out of the sale of these shares. The AO held that each equity share of a company was the same as other. Each equity share represented and carried with it equal rights and liabilities. There was nothing that could differentiate one equity share from other and it was not material whether the transaction had been carried out through electronic exchange in a dematerialized form or otherwise. What was important was the nature of capital assets being sold. If they were exactly same, as discussed above, then one had to adopt the principle of FIFO while calculating the capital gains. Therefore the Capital gains was re-worked by him following FIFO principle asunder:
No. of Sale Total Value of Purchase Total Cost Gains(Loss) units Sold Price Per Sale Price Per Share Consideration Unit 10,000 34 3,40,000 10 1,00,000 2,40,000 46,56,760 34 15,83,29,840 10 4,65,67,600 11,17,62,240 Total 15,86,69,840 4,66,67,600 11,20,02,240 The LTCG was recomputed at Rs.11,20,02,240/-. Credit was given for STCG already declared of Rs.43,54,240/-. Thus, addition of Rs.
10,76,48,000/- was made under the head „Capital Gains‟.
4.3 The AO further observed that it was a deliberate attempt on part of the assessee to evade tax which was evident more so, from the fact that the computation of gains on sale of investments as shown in books of accounts, which came out to be Rs.5,92,54,720/- had been Page |6 ITA No. 7904/Mum/2025 A.Y. 2016-17 Megasolis Renewable Pvt. Ltd.
correctly shown as per the accounting policies of the assessee. However, in the computation it had taken an indefensible position. As per the submission of assessee itself, it had declared profits from this sale in the books of accounts as per para 22 of the Accounting Standard-13 which reads as under-
"22 When disposing of a part of the holding of an individual investment, the carrying amount to be allocated to that part is to be determined on the basis of the average carrying amount of the total holding of the investment."
4.4 Therefore, even if the assessee had to rely on consistent accounting policy followed by it, it should have offered Rs. 5,92,54,720/- to tax under the Capital Gains. The purpose of following Last-in-First- Out was clearly a device to evade taxes.
5. Aggrieved, the assessee filed appeal before the first appellate authority contesting the action of the AO contending that the shares of BREPL were held in physical form and not in dematerialised form and therefore, the application of Section 45(2A) of the Act, which mandates FIFO method in the case of securities held in demat accounts, had no relevance to the present case. It also emphasized that when shares were held in physical form, each lot of acquisition could be distinctly identified through share certificate, distinctive numbers, and transfer deeds, and hence, the cost of each acquisition was ascertainable without Page |7 ITA No. 7904/Mum/2025 A.Y. 2016-17 Megasolis Renewable Pvt. Ltd.
resorting to the deeming fiction of FIFO. It was further submitted that the assessee had exercised its right to specifically identify which shares were sold to Trina Solar, namely 33,64,000 shares acquired at Rs. 42/- per share and 13,02,760 shares acquired at Rs. 10/- per share, and on that basis computed short-term capital gains of Rs. 43,54,240/-. It was further argued that there was no prohibition in law against adopting such identification and in fact, judicial precedents as well as CBDT Circular No. 768 dated 24.06.1998 confirm that the FIFO is confined exclusively to demat holdings where specific identification is impossible. The assessee also explained that the profit of Rs. 5,92,54,720/- shown in the audited financial statements was arrived at by applying the average cost method solely because Accounting Standard-13 required such method for accounting purposes. However, the accounting standards are framed for disclosure in books of accounts and cannot override the provisions of the Income-tax Act, which mandates computation of capital gains under Sections 45 and 48 of the Act strictly on the basis of cost of acquisition of the asset transferred.
5.1 The ld.CIT(A),however did not accept the contentions by observing that though it was correct that Section 45(2A) of the Act, as clarified by CBDT Circular No.768 dated 24.06.1998, referred expressly to securities held in dematerialized form, where fungibility and the Page |8 ITA No. 7904/Mum/2025 A.Y. 2016-17 Megasolis Renewable Pvt. Ltd.
absence of distinctive numbers make specific identification impossible which is not the case here as the assessee held the shares in physical form, and had sought to rely on share certificates and transfer deeds to claim the specific lots were sold.
5.2 Besides, ld.CIT(A) also observed that when such a large bulk transfer of over forty six lakh shares was made to a single buyer, the commercial reality was that the shares were fungible and indistinguishable and the attempt to link the transfer to specific certificates appeared more an afterthought designed to minimize taxable gains than a genuine limitation. It was also significant that the CBDT Circular did not prescribe any particular method for computation of capital gains in respect of shares held in physical form which left it open for the most neutral and objective approach to be adopted. In such circumstances, the principle embodied in Section 45(2A), i.e. application of the FIFO method, was equally relevant and should be extended to physical holdings as well to prevent arbitrary tax planning. Accordingly, ld.CIT(A) upheld the action of the AO in adopting FIFO and recomputing the capital gains at Rs. 11,20,02,240/-. The addition made was sustained, as the claim of Rs. 43,54,240/- based on selective identification could not be accepted.
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6. The ld.AR made a detailed submission claiming the assessee had a wholly owned subsidiary named BREPL in which it held 95,24,000 shares. During the year under consideration, it sold 49% of the shares of BREPL ie 46,66,670 equity shares at Rs. 34 per share for a total consideration Rs. 15,86,69,840/- to Trina Solar (Singapore) Third Pte Limited under a Share Purchase Agreement dated 17 December 2015.The said shares had been acquired in three lots. The assessee had, while arriving at the figure of gain on sale of shares of Rs 5,92,54,720/- as per to books of accounts, calculated the cost using average cost method as mandated by Accounting standard-13 („AS-13‟).Subsequently, while preparing the computation of income for tax purposes, it computed the income from capital gains at Rs 43,54,240/-. This amount was arrived at by use of „Specific Identification Method‟.
6.1 The shares sold were allotted to it in physical form, were held in physical form and even were sold in physical form. Therefore, the assessee adopted the cost of specific shares which were transferred to the buyer while computing capital gains earned on sale of shares. Thus, on an identified lot basis, the Lot of 33,64,000 shares purchased at cost of Rs. 42 per share and a Lot of 13,02,760 shares purchased at cost of Rs.10 per share were transferred resulting in Short Term Capital Gain of Rs 43,54,240/-.
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6.2 It is further submitted that the concept of dematerialization of shares came from the Depositories Act, 1996. Prior to that all the shares were held in physical format by the shareholders vide possession of share certificates, wherein each share would have a unique distinctive number and would be a separate identifiable unit. During the physical holding of shares, capital gain was consistently computed using „Specific Identification Method‟. Subsequently, a legal framework for dematerialization of securities was brought in by The Depositories Act, 1996.After the dematerialization of shares was brought in, a practical difficulty arose as all the shares which earlier could be identifiable by way of distinctive numbers became fungible and lost their individual identity Also, as per Depositories Act, 1996, shares will be removed from demat A/c as per FIFO method and hence difficulty arose about the computation of capital gain, particularly in arriving at the cost of acquisition and period of holding for such shares It is due to this reason that section 45(2A) was inserted in the Act by the Depositories Act, 1996 w.ref. 20 September 1995. It is contended that section 45(2A) of the Act applies only to dematerialized securities The purpose, intent of this amendment is explained in CBDT Circular No 768 dated 24 June 1998.As a result of this fungible nature of securities, it becomes difficult to link the purchase of a security with its sale, due to which the provision P a g e | 11 ITA No. 7904/Mum/2025 A.Y. 2016-17 Megasolis Renewable Pvt. Ltd.
of section 45(2A) has been introduced. As a result, the Circular addresses the situation of dematerialized shares specifically and consequently, shares which are held in physical form shall not be governed by the provisions of section 45(2A) of the Act.
6.3 Reliance in this regard is placed on the decision of the Hon‟ble Hyderabad Tribunal in the case of Savyasachi Constructions P Ltd in ITA No. 504/Hyd/2014 wherein it has been stated by the Hon‟ble Tribunal that for the shares held in physical format, FIFO or LIFO method is not a criteria if the shares which are sold can be identified and cost of the same can be ascertained. As a result, it is submitted that the provisions of section 45(2A) of the Act cannot be extended to shares held in physical format.
6.4 It is submitted that practically all the assets which are assessed to capital gains, tax is offered on the basis of specific identification method for example, Land, Building, Vehicle, Motor Car, painting, Gold, etc. Hence, section 45 by default applies on the basis of specific identification method and the only exception is section 45(2A) Therefore, the working of specific identification method was correct. However, even if we say that no method is prescribed in the Act, then whatever method is beneficial to the assessee must be adopted. Reliance P a g e | 12 ITA No. 7904/Mum/2025 A.Y. 2016-17 Megasolis Renewable Pvt. Ltd.
in this regard is placed on Bright Star Investment (P.) Ltd ((2009) 120 TTJ 498 dated 02 July 2008 (Mumbai Tribunal).
6.5 It is claimed that the shares held by it in physical form bear a distinctive number, which clearly prove that each share held by it can be separately identified. A detailed working in this regard along with the copies of the share certificates showing the distinctive number for each share was enclosed. The said working summarizes the fact that the assessee could identify the distinctive number of the shares which it has sold and it continued to hold the balance shares in physical format during the year. In the given case, Share Certificate Nos. 6 and 7 cover 33,64,000 shares and 13,02.760 shares respectively, both transferred to Trina Solar (Singapore) Pte Limited.
6.6 It is argued that the ld. DR during the course of the hearing argued that the fluctuations in the price of the share of BREPL were unjustified and requested for the valuation report to be furnished. At the outset, it is stated that the DR cannot raise any fresh issues, which have never been raised by the AO during the course of the assessment proceedings. Such an approach would tantamount to revision/ reopening of the assessment proceedings and that is not permissible at this stage.
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6.7 It is argued that the assessee wishes to place reliance on the Accounting Standard-2, though the same is applicable for inventory, wherein it has been stated that the first valuation method that is appropriate when items of inventory are identifiable is specific identification method It is only when large number of items of inventory which are interchangeable ordinarily, when specific identification method becomes inappropriate and then methods like FIFO, Weighted average, etc will have to be applied to compute the cost. When the units are specifically identifiable and the cost of the units can be ascertainable, specific identification method is the most appropriate method. 6.8 The Ld. DR also alleged that the assessee was engaged in tax evasion and that the transaction should be seen by lifting of the corporate veil as it cherry picked the stocks which had the highest cost and used Last In First Out Method („LIFO‟) for the purpose of calculation of capital gains. In this regard, it is submitted that the assessee had used the Specific Identification Method and not LIFO method. Further, when it sells the stocks which were purchased at a relatively lower price, it would be required to pay the capital gains on the same. As a result, there was no tax evasion done by it. Further, the assessee has been a company which has its own business operations and hence the question of lifting the corporate veil did not arise. There was P a g e | 14 ITA No. 7904/Mum/2025 A.Y. 2016-17 Megasolis Renewable Pvt. Ltd.
no violation of any provision of the Act done which resulted in any tax evasion. The assessee has merely adopted a method of Specific Identification which is the most appropriate method in a scenario where no method for computation of cost is prescribed by the Act. As a result, it is submitted that no tax evasion has taken place in the case of the Appellant.
7. The ld.CIT(DR) in his arguments before the Bench claimed that there was single defense taken by the assessee that since these shares were in physical form and having distinguish folio no. and those specific particular folio no. shares were sold. Therefore, Capital Gain had to be worked out after taking cost price of those particular shares only ignoring AS-13 and FIFO method. By doing so it has deliberately and purposefully reduced its tax liability. By arbitrarily claiming that selling last lot of shares purchased were sold first (LIFO method), the assessee had reduced its tax liability on the Capital gains as below:-
1. Applying FIFO method Rs. 11,20,02,240/-
2. Applying average cost method as per AS-13 Rs. 5,92,54,720/-
3. Applying LIFO method Rs. 43,54,240/-
7.1 He further pleaded that from above, it was clear that the purpose of following Last-in-First-Out was clearly a device to evade taxes. Here, concept of substance over form has to be applied.
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Transaction of shares had to be examined in this context only. All shares were interchangeable and represent and carried equal right and liabilities. The assessee had to follow the establish prescribed method for valuation of equity shares held as investment as per AS-13 or prescribed FIFO method. Shares held in Demat account, FIFO had to be applied as per provision of section 45 (2A) of the Act. The Act is silent on method to be applied in case of shares held in physical form. Inference can be drawn that shares although held in physical form do not change the character of equity shares of that company and FIFO may be applied as per provision of section 45 (2A) of the Act in absence of any specific method prescribed for valuation of shares held in physical form. Therefore, in respect of shares held in physical form also, FIFO method should be applied.
7.2 The ld.CIT(DR) vehemently argued that doctrine of lifting of corporate veil is squarely applicable in this case. The assessee had purposefully shown that the last lot of shares purchased were firstly sold to evade tax, because it was trying to misuse the fact that shares were held in physical form having distinguished folio no. and therefore, he could use it for evasion of tax. Further, it was worth mentioning that out of total equity shares, 46,66,760 shares had been sold. It was single transaction made to singly party. The share purchase agreement clearly P a g e | 16 ITA No. 7904/Mum/2025 A.Y. 2016-17 Megasolis Renewable Pvt. Ltd.
demonstrated that it was business transfer agreement and the underlying value of the asset determines the valuation of shares. The last lot of shares purchase on Rs.42/- per share which was transferred as per share purchase agreement at rate of Rs. 34/- per share. No valuation report has been submitted during assessment proceedings why there is a sudden decrease in price of shares within 5 months period. The ld.CIT(A) had rightly observed that when such a large bulk transfer of over forty-six lakhs‟ shares is made to a single buyer, the commercial reality is that the shares are fungible and indistinguishable, and the attempt to link the transfer to specific certificates appears more an afterthought designed to minimize taxable gains than a genuine limitation. It is also significant that the CBDT circular did not prescribe any particular method for computation of capital gains in respect of shares held in physical form, which leaves it open for the most neutral and objective approach to be adopted. In such circumstances, the principle embodied in Section 45(2A), namely application of the FIFO method, is equally relevant and should be extended to physical holdings as well to prevent arbitrary tax planning.
7.3 He claimed that for the purchaser, particular folio number did not affect the value of shares determined because all the shares had same underlying value. However, in the case of seller i.e. the assessee, P a g e | 17 ITA No. 7904/Mum/2025 A.Y. 2016-17 Megasolis Renewable Pvt. Ltd.
when the shares were acquired in different lots on different period spread over 2 years, then valuation had to be done for all shares at the same rate on the basis of its underlying value and same method should be applied treating all shares as one as distinguished folio number did not change the characteristics of shares and its underlined value. In this regard, para 15 of AS-2 is also referred during hearing as under:
"However, when there are large numbers of items of inventory which are ordinarily interchangeable, specific identification of costs is inappropriate since, in such circumstances, an enterprise could obtain predetermined effects on the net profit or loss for the period by selecting a particular method of ascertaining the items that remain in inventories."
7.4 It is further pleaded that all shares were interchangeable and carried the same value when the shares were sold. Para 15 of AS-2 was squarely applicable because when there were large numbers of items of inventory which were ordinarily interchangeable, specific identification of costs was inappropriate since, in such circumstances, an enterprise could obtain predetermined effects on the net profit or loss for the period by selecting a particular method of ascertaining the items that remain in inventories. Once any inventory, in this case, equity shares has been purchased in different lots in different time periods, then the purchase price divided by no of equity shares i.e. average price has to be work out.
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7.5 The ld.CIT(DR) also distinguished the case laws relied by the assessee claiming that the case of Savyasachi Constructions Pvt. Ltd. (ITA No. 504/HYD/2014 dated 23 September 2015 Hyderabad Tribunal) was related to penalty u/s 271(1), therefore, distinguished clearly and not applicable in this particular case. But in this case also, the appellant had applied average purchased cost for arriving purchase price which was subsequently sold which was affirmed by hon‟ble ITAT. Therefore, this decision was against the appellant. With regard to the case of Bright Star Investment (P) [(2009) 120 TTJ 498] dated 02 July, it is stated that it not applicable in present facts of the case. In this case, the issue before Hon‟ble ITAT was applicability of section 45(2) of the ACT in case of stock in trade converted into investment.
8. We have carefully considered all relevant aspects of the case. We find that the entire issue revolves around the valuation of the shares held in physical form and the resultant amount of capital gains. It is indeed evident that the assessee has itself worked out the capital gains in the books of account at Rs 5.92 cr. claiming it to be in consonance with the Accounting Standards-13 for the purposes of books of accounts. However, the capital gains has been disclosed at Rs 43.54 lakh only based on the plea that the assessee has considered shares purchased at P a g e | 19 ITA No. 7904/Mum/2025 A.Y. 2016-17 Megasolis Renewable Pvt. Ltd.
later dates for the said sales which in turn were purchased at a much higher price. The main contention in this regard is that the provisions of section 45(2A) of the Act providing for consideration of FIFO method is not applicable to physical form and the assessee is not prevented from applying a different method.
8.1 Apart from the method of valuation, the lower authorities have also considered the entire transaction in the nature of tax evasion since there is absolutely no difference in the scrips. We find merits in the conclusion drawn that it was a deliberate attempt on part of the assessee to evade tax which was evident more so from the fact that the computation of gains on sale of investments as shown in books of accounts, which came out to be Rs. 5,92,54,720/- had been correctly shown as per the accounting policies of the assessee.The contentions of the assessee are self-contradictory and defies any logic apart from the palpable case of tax evasion. The assessee has neither followed the FIFO method nor the Accounting Standard -13.Therefore,there is apparent case of inconsistent action on part of the assessee. The purpose of following Last-in-First-Out or the so called method of "specific lot identification" to determine which shares had been sold was clearly a device to evade taxes. The AO has rightly noted that this resulted in a stark divergence between the profit reflected in the books of account and P a g e | 20 ITA No. 7904/Mum/2025 A.Y. 2016-17 Megasolis Renewable Pvt. Ltd.
the capital gain declared in the return of income. Each equity share represented and carried with it equal rights and liabilities. There was nothing that could differentiate one equity share from other and it was not material whether the transaction has been carried out through electronic exchange in a dematerialized form or otherwise. By arbitrarily claiming that selling last lot of shares purchased were sold first.
8.2 From the above stated facts, it is quite evident that the whole exercise smacks of a premeditated planning to reduce the tax liability. The term "colourable devices" originates from the legal maxim "substance over form," an accounting principle rooted in common law. The Maxim lays down that the legality of something should be deciphered on the basis of its intent and purpose rather than the form of transactions involved. On the face of it, colourable devices may seem to comply with statutory law, but they have been devised with the intention to evade the bounds of the law. Colourable Devices gained prominence in tax jurisprudence through the landmark decisions rendered by the UK House of Lords in W.T. Ramsay Ltd. v. Inland Revenue Commissioners (1981) and Inland Revenue Commissioners v. Burmah Oil Co. Ltd. (1982). The decisions by the House of Lords pertained to companies that had made significant capital gains, but indulged in establishing mechanisms to portray artificial capital losses, all for the purpose of P a g e | 21 ITA No. 7904/Mum/2025 A.Y. 2016-17 Megasolis Renewable Pvt. Ltd.
avoiding capital gains tax. Over time, this doctrine has evolved into a critical tool for curbing tax avoidance worldwide, earning the title "Ramsay Principle". In simple terms, the Ramsay Principle propounds that if a transaction has pre-arranged artificial steps which have been conceived specifically to avoid paying tax, the effect of the transaction as a whole should be subject to tax. Colourable Devices in Indian Jurisprudence the case of McDowell & Co. Ltd. v. CTO (1985) laid down the groundwork for addressing colourable devices in India. The Supreme Court, in a historic judgment, ruled against tax avoidance schemes camouflaged under the guise of lawful tax planning. Justice Chinnappa Reddy asserted that such schemes constitute fraud on the statutory laws, setting the tone for subsequent judicial activism against abuse of the tax system. Subsequent judgments have refined and contextualized the principles laid down in McDowell. Courts have adopted a balanced approach, distinguishing genuine tax planning from artificial contrivances designed solely to avoid taxes. While the decision in McDowell & Co. Ltd. v. CTO (1985) provided a groundwork for judicial interpretation regarding colourable devices, many other decisions furthered the rigidity of McDowell. In Union of India v. Azadi Bachao Andolan (2003), the Apex Court reaffirmed that P a g e | 22 ITA No. 7904/Mum/2025 A.Y. 2016-17 Megasolis Renewable Pvt. Ltd.
arrangements devoid of genuine economic substance could be disregarded.
8.3 In the instant case, so far as the contentions that the provisions of section 45(2A) apply only to dematerialized shares, has been correctly countered by the lower authorities including the ld.CIT(DR). The ld.CIT(A) has rightly observed that when such a large bulk transfer of over forty-six lakh shares is made to a single buyer, the commercial reality is that the shares are fungible and indistinguishable, and the attempt to link the transfer to specific certificates appears more an afterthought designed to minimise taxable gains than a genuine limitation. Moreover, the CBDT circular does not prescribe any particular method for computation of capital gains in respect of shares held in physical form, which leaves it open for the most neutral and objective approach to be adopted. In such circumstances, the principle embodied in Section 45(2A), namely application of the FIFO method, is equally relevant and should be extended to physical holdings as well to prevent arbitrary tax planning. All shares were interchangeable and represent and carries equal right and liabilities.
8.4 We are of the considered opinion that the assessee has to follow the established prescribed method for valuation of equity shares held as investment as per AS-13 or prescribed FIFO method. Shares held P a g e | 23 ITA No. 7904/Mum/2025 A.Y. 2016-17 Megasolis Renewable Pvt. Ltd.
in Demat account, FIFO had to be applied as per provision of section 45 (2A) of the Act. The Act is silent on method to be applied in case of shares held in physical form. Inference can be drawn that shares although held in physical form do not change the character of equity shares of that company and FIFO may be applied as per provision of section 45 (2A) of the Act in absence of any specific method prescribed for valuation of shares held in physical form. Therefore, in respect of shares held in physical form also, FIFO method should be applied.
8.5 The assessee has placed reliance on certain case laws which have been examined and held to be distinguishable on facts qua the instant case by the lold.CIT(DR).We do agree with his observations in this regard. We wish to mention here that the even the contentions of the assessee that the provisions of section 45(2A) of the Act and the Circular of the Board pertain to demat shares only, has been examined by the hon‟ble Calcutta High Court in the case of Nawal Kishore Kejriwal vs Commissioner Of Income Tax on 17 February, 2023 in ITA /161/2010 wherein it has been held that the said Circular r.w. provisions of section 45(2A) applied to the physical shares as well. Therefore, applicability of FIFI method is impliedly approved in this decision. Relevant parts of the said decision are extracted as below:
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"This appeal was admitted on 13th September, 2010 on the following substantial questions of law:
"(i) Whether, in view of Circular No.704 dated April 28, 1995 issued by the Central Board of Direct Taxes, the capital gains of Rs.56,81,483/- from the sale on February 22, 23 and 28, 2005 of share purchased by the appellant on February 10, 2004 were long term capital gains exempt under section 10(38) of the Income Tax Act, 1961 and the purported findings of the Tribunal reversing the order of the Commissioner of Income Tax (Appeals) are arbitrary, unreasonable and perverse?
(ii) Whether on a true and proper interpretation of Circular No.704 dated April 28, 1995 and No.768 dated June 24, 1998, Circular No.704 was applicable in respect of shares in dematerialised form and the date of acquisition of the dematerialised shares was to be taken as the date of purchase when the broker issued his contract note and not the date of entry in the demat account?"
We have heard Mr. J.P. Khaitan, learned standing senior counsel, assisted by Ms. Swapna Das, learned advocate for the appellant/assessee and Mr. Tilak Mitra, learned counsel appearing for the respondent/revenue. The short issue involved in the instant case is whether the Circular issued by the Board in Circular No.768 dated 24th June, 1998 would be applicable only in the case of dematerialised share scripts and not in the case of share scripts held in physical form. The learned Tribunal after extracting the said Circular No.768 holds that the said Circular is not applicable to dematerialised share scripts and the date of acquisition of share scripts would be the date only when the dematerialised share scripts are entered into assessee's D-mat account with depository. The first Circular was issued by the Board is Circular No.704 dated 28th April, 1995. By the said Circular clarification was issued for determination of the date of transfer and holding period for the purpose of capital gains when the assessee transacts in securities.
xxxxxxxxxxxxxxxxx The CBDT by circular No. 768 dated 24.6.1998 issued another circular for determination of date of transfer and the period of holding of securities held in dematerialised form under Section 45(2A) of the Act.The relevant portion of the Circular reads as follows :
4. The primary issue under the Income-tax Act in the case of securities whether held in physical form or in the dematerialized form remains the determination of cost of acquisition and the period of holding. The Board had earlier issued Circular No.704, dated 28th April, 1995, which explains the manner in which the "date of transfer"and "period of holding" may be determined. This primary position as regards the "date of transfer" and "period of holding" does not change even when the securities are held in the dematerialized form. The only problem P a g e | 25 ITA No. 7904/Mum/2025 A.Y. 2016-17 Megasolis Renewable Pvt. Ltd.
when securities are held in dematerialized form is that the distinct trail linking every share to a certificate and its unique distinctive number linking it with its subsequent sale is not available.
5. Section 45(2A) stipulates that in the case of securities held in dematerialized form, for determining "date of transfer" and "period of holding", the FIFO method would be applicable. The FIFO method is generally used to determine the value of any item moving out of a stock account and those remaining in stock at any point of time. When applied to an account holding dematerialized stock, it implies that, out of the existing holdings, the item that first entered into the account is deemed to be the first to be sold out. However, once a sale is linked with an earlier purchase, for determination of their "date of transfer" and "period of holdings". Board's Circular No.704 would be applicable. That is to say that the relevant contract notes as explained in Circular No.704 will have to be referred to, for ascertaining the cost of the security sold and the date of transfer." On a reading of the above Circular it is seen that there is nothing to indicate that the Circular excludes the cases of securities sold in physical form. In fact, the circular deals with securities held in physical form as well as those in dematerialised form. Furthermore, the circular has also clarified the position as to the applicability of the earlier circular No. 704 dated 28.4.1995. Thus we are of the view that the conclusion arrived at by the learned Tribunal holding that Board Circular No. 704 dated 28.4.1995 is not applicable to dematerialised share scripts and the date of acquisition of shares would be the date only when dematerialised shares are entered in the D-mat account with depository is incorrect conclusion arrived at by the learned Tribunal.
For the above reason the appeal filed by the assessee is allowed and the substantial questions of law are answered in favour of the assessee." 8.6 In the light of the above discussion and considering the entirety of facts and the circumstances of the case in hand, we therefore, uphold the action of the lower authorities in adopting FIFO and recomputing the Capital gains at Rs. 11,20,02,240/-. The addition made by the AO has been rightly sustained by the ld.CIT(A) and assessee‟s claim of Rs. 43,54,240/- based on average or selective identification was rightly rejected. Accordingly, the ground nos.2 to 4 are dismissed.
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9. Ground nos. 5 to 9 pertain to the disallowance of expenditure u/s 14A of the Act. During the course of assessment, the assessee had suo moto disallowed an amount of Rs. 1,99,397/- under section 14A read with Rule 8D. The AO rejected the working and computed the disallowance under section 14A read with Rule 8D as applicable to the year under consideration of Rs 1,13,20,147/-.The CIT(A) upheld the disallowance.
10. In this regard, it is contended that the assessee had issued equity share capital of Rs. 1,02,56,00,000/- during the year. Further, it repaid the borrowings and then invested an amount of Rs. 12,30,00,000/- in mutual fund named UTI Money Market Fund Institutional Plan. It received a dividend of Rs 9,48,238/- from the said mutual fund only. It was stated that there was no other source from which the Appellant has earned exempt income.
10.1 It is further argued that as the investment in mutual fund which had yielded exempt income had been made out of its own funds and not borrowed funds, no disallowance of interest of Rs. 79,21,880/- was is warranted under Rule 8D. Reliance in this regard is placed South Indian Bank Ltd [(2021) 438 ITR 1 dated 09 September 2021 (Supreme Court)], HDFC Bank Ltd [(2014) 366 ITR 505 dated 23 July 2014 (Bombay HC)].
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10.2 It is further pleaded that only those investments which have yielded exempt income during the year i.e. the investment in UTI Money Market Fund Institutional Plan should be considered for the purpose of computation of disallowance. Reliance in this regard is placed on Cargo Motors (P) Ltd [2023] 453 ITR 554 dated 07 October 2022 (Del) and Vireet Investment (P.) Ltd [2017] 58 ITR(T) 313 dated 16 June 2017 (Del-Trib)(SB).
10.3 It is stated that considering the above propositions, the assessee had arrived at the correct working of disallowance under section 14A. As per the said working, the disallowance under section 14A would be Rs 3,07,500/-.
10.4 Without prejudice to the above, disallowance if any should be restricted to exempt income. It is stated that the total disallowance made under section 14A rw Rule 8D may be restricted to the dividend income of Rs. 9,48,238/-. Reliance in this regard is placed on HSBC Invest Direct (India) Ltd. (ITA No. 1672/Bom/2016 dated 4 February, 2019) (Bom),M/s Nirved Traders Pvt. Ltd. (ITA No. 149 of 2017 dated 23 April 2019) (Bom) and Sapphire Fintech Pvt Ltd (ITA No.594/Mum/2023 (Mum).It is requested to direct the AO to compute disallowance under section 14A read with rule 8D by only considering investments which have actually yielded exempt income. Without prejudice to the above, P a g e | 28 ITA No. 7904/Mum/2025 A.Y. 2016-17 Megasolis Renewable Pvt. Ltd.
the AO may be directed o restrict the disallowance to the extent of exempt income earned, i.e. Rs. 9,48,238/-.
11. We have carefully considered the above facts and find sufficient merits in the contentions of the assessee. It is a settled position of law now that for the purposes of section 14A of the Act only investments which have actually yielded exempt income are required to be considered. Besides, the disallowance cannot be more than the exempt income. Accordingly, we direct the AO to recompute the disallowance in the light of these observations.
12. Ground no.10 and 11 pertain to charging of interest u/s 234B and 234D of the Act. The ground being consequential in nature, the AO would recalculate them in the light of the our decision rendered with the main issue dealt with in the preceding paras.
13. In the result, the appeal is partly allowed.
Order pronounced in the open court on 05/05/2026.
Sd/- Sd/-
NARENDER KUMAR CHOUDHRY PRABHASH SHANKAR
(न्याययक सदस्य /JUDICIAL MEMBER) (लेखाकार सदस्य /ACCOUNTANT MEMBER)
Place: मुंबई/Mumbai
ददनाुंक /Date 05.05.2026
Lubhna Shaikh / Steno
P a g e | 29
ITA No. 7904/Mum/2025
A.Y. 2016-17
Megasolis Renewable Pvt. Ltd.
आदे श की प्रयियलयि अग्रेयिि/Copy of the Order forwarded to :
1. अपीलार्थी / The Appellant
2. प्रत्यर्थी / The Respondent.
3. आयकर आयुक्त / CIT
4. विभागीय प्रविविवि, आयकर अपीलीय अविकरण DR, ITAT, Mumbai
5. गार्ड फाईल / Guard file.
सत्यावपि प्रवि //True Copy// आदे शानुसार/ BY ORDER, उि/सहायक िंजीकार (Dy./Asstt. Registrar) आयकर अिीलीय अयधकरण / ITAT, Bench, Mumbai.