Megasolis Renewable Private Limited Vs ACIT (ITAT Mumbai)
FIFO Wins Over “Cherry-Picked Shares” – Mumbai ITAT Calls Selective Share Identification a “COLOURABLE DEVICE” for TAX AVOIDANCE
In a strongly worded ruling, the Mumbai ITAT upheld a massive addition of ₹10.76 CRORE by rejecting the assessee’s attempt to compute capital gains through selective identification of physical share certificates instead of applying the FIFO (First-In-First-Out) method. The Tribunal held that the assessee’s method was a clear “COLOURABLE DEVICE” designed to artificially suppress taxable capital gains.
The assessee had sold over 46.66 LAKH SHARES of its subsidiary company for ₹34 per share. While the shares were acquired in different lots at prices ranging from ₹10 to ₹42 per share, the assessee selectively claimed that only the later-acquired high-cost shares were sold, thereby reducing the taxable capital gains to merely ₹43.54 LAKH. On the other hand, the AO recomputed gains at ₹11.20 CRORE by applying the FIFO METHOD, resulting in an addition of ₹10.76 CRORE.
The assessee argued that since the shares were held in PHYSICAL FORM carrying distinctive share certificate numbers, the provisions of Section 45(2A) — which mandate FIFO for dematerialised shares — were not applicable. It claimed that “SPECIFIC IDENTIFICATION METHOD” was permissible for physical shares and relied on CBDT Circular No. 768 and certain Tribunal rulings.
However, the ITAT was unimpressed. The Bench observed that all equity shares carried identical rights and liabilities and were commercially “FUNGIBLE & INDISTINGUISHABLE.” The Tribunal held that the assessee had neither consistently followed FIFO nor Accounting Standard-13, and had adopted different methods in books and tax computation solely to minimize tax liability.
The Tribunal went a step further and invoked the doctrine of “SUBSTANCE OVER FORM”, extensively discussing the concept of COLOURABLE DEVICES and the celebrated Supreme Court ruling in McDowell & Co. Ltd. It held that the so-called “specific lot identification” was nothing but a pre-arranged mechanism to reduce taxes and amounted to impermissible tax avoidance.
Importantly, the ITAT also relied on the Calcutta High Court ruling in Nawal Kishore Kejriwal to hold that the principles underlying Section 45(2A) and CBDT Circular No. 768 are equally relevant even for PHYSICAL SHARES, thereby impliedly approving application of FIFO even where shares are not held in demat form.
While the Tribunal confirmed the addition relating to capital gains, it granted partial relief on the Section 14A disallowance by directing the AO to restrict disallowance only to investments that actually yielded exempt income and reiterated that disallowance cannot exceed exempt income earned during the year.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
