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Showing contexts for: dematerialization in Megasolis Renewables Pvt Ltd ,Mumbai vs The Acit -7(2)(2), Mumbai on 5 May, 2026Matching Fragments
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:
P a g e | 10 A.Y. 2016-17 Megasolis Renewable Pvt. Ltd.
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 A.Y. 2016-17 Megasolis Renewable Pvt. Ltd.
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 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.