1982 (7) TMI 66 - HC - Income Tax

Summary

Issues Involved:
1. Classification of surplus as short-term capital gains.
2. Determination of the date of acquisition of equity shares.
3. Calculation of the cost of acquisition of equity shares.

Summary:

1. Classification of Surplus as Short-Term Capital Gains:
The Tribunal held that the surplus arising from the sale of equity shares was liable to be assessed as short-term capital gains. The assessee argued that the transaction did not fall within the scope of s. 55(2) of the I.T. Act, 1961, and thus could not be taxed as capital gains. However, the court rejected this contention, stating that s. 45 of the I.T. Act, 1961, imposes a charge on any profits or gains arising from the transfer of a capital asset, and the cost of acquisition must be understood in the commercial sense.

2. Determination of the Date of Acquisition of Equity Shares:
The Tribunal determined that the date of acquisition of the equity shares was 1st October, 1963, when the debentures were converted into shares, not 20th December, 1962, when the debentures were originally acquired. Since the shares were sold on 30th March, 1964, the holding period was less than 12 months, classifying the shares as short-term capital assets u/s 2(42A) of the I.T. Act, 1961.

3. Calculation of the Cost of Acquisition of Equity Shares:
The Tribunal initially held that the cost of acquisition of the equity shares was the cost incurred for the debenture bonds. However, the court found this approach incorrect. It stated that the cost of acquisition should be the market price of the debentures on the date they were exchanged for shares, not the original purchase price of the debentures. The Tribunal was directed to recompute the cost of the equity shares based on this principle.

Conclusion:
The court concluded that the Tribunal was justified in classifying the surplus as short-term capital gains but erred in determining the cost of acquisition of the shares. The Tribunal must recompute the cost of the equity shares in accordance with the principles indicated by the court. There was no order as to costs.