2005 (7) TMI 541 - AT - Income Tax

Summary

Issues Involved:
1. Determination of the cost of acquisition of Detachable Warrants (DWs) acquired along with Non-Convertible Debentures (NCDs).
2. Applicability of amendments to Section 55(2)(a) and (aa) of the Income Tax Act.
3. Taxability of capital gains on the sale of DWs.

Detailed Analysis:

1. Determination of the Cost of Acquisition of Detachable Warrants (DWs):

The primary issue revolves around whether the DWs had a cost of acquisition and, if so, how it should be determined. The assessee argued that the DWs were acquired without any cost, as evidenced by the Letter of Offer from Mukund Ltd. (ML), which stated that the NCDs were issued at par value of Rs. 325 each, and no amount was attributed to the DWs. The assessee purchased renunciation rights of NCDs along with DWs for Rs. 60,385 and later sold the DWs for Rs. 5,75,100, claiming the receipt as exempt from capital gains tax on the grounds that the DWs had no cost.

The Assessing Officer (AO) disagreed, arguing that the payment of Rs. 60,385 was for acquiring both the NCDs and DWs, and thus, this amount should be considered the cost of acquisition for the DWs. The AO relied on the book "Taxation of Shares and Securities Transaction" by Sri Gautham Nayak, which suggested that when debentures and DWs are purchased together, the payment made should be attributed to both.

2. Applicability of Amendments to Section 55(2)(a) and (aa):

The CIT(A) held that the amendments to Section 55(2)(a) and (aa) of the Income Tax Act, introduced by the Finance Act, 1995, were not retrospective and thus could not be applied to the assessment year 1994-95. The CIT(A) reasoned that if the AO's view were correct, there would have been no need for these statutory changes. The CIT(A) concluded that the cost of acquisition of DWs was nil and deleted the addition made by the AO.

However, the Tribunal noted that these amendments were intended for original shareholders who were allotted financial instruments as a right and did not apply to the assessee, who purchased the NCDs and DWs from the market. Therefore, the cost of acquisition should be based on the actual price paid by the assessee.

3. Taxability of Capital Gains on the Sale of DWs:

The Tribunal examined the arguments and concluded that the cost of acquisition of DWs was indeed ascertainable. The assessee was not the original subscriber to the NCDs and DWs, which made a significant difference. The Tribunal highlighted that the assessee paid a composite price of Rs. 60,385 for both NCDs and DWs, and this amount should be considered the cost of acquisition for the DWs. The Tribunal rejected the contention that the DWs had no cost and affirmed that the AO was correct in attributing the sum of Rs. 60,385 as the cost of acquisition for the DWs.

The Tribunal also reviewed relevant case laws cited by both parties. In "Kamal Trading Co. v. Dy. CIT" and "Asstt. CIT v. Ganesh Enterprises," it was held that DWs have a cost of acquisition, which can be determined based on the price paid for acquiring the NCDs and DWs. The Tribunal found these precedents supportive of the view that the DWs had a cost.

Conclusion:

The Tribunal reversed the order of the CIT(A) and restored the AO's decision to tax the capital gains on the sale of DWs by treating Rs. 60,385 as the cost of acquisition. The appeal of the revenue was allowed, confirming that the cost of acquisition for DWs was ascertainable and that capital gains were chargeable on their sale.