2008 (1) TMI 314 - HC - Income Tax

Cost of acquisition could only be the cost on the date of actual acquisition not on the date of conversion from stock-in-trade to capital asset hence option of adopting Fair Market Value as cost of acquisition is available to assessee - whether the coupons received alongwith non convertible debentures were liable for capital gains no proof that coupons were security as per Securities Contracts Regulation Act section 55(2) will not apply coupons not liable to capital gain

Summary

Issues:
1. Whether the assessee was entitled to opt for the fair market value of certain shares held as stock-in-trade as on 1.4.1981 for capital gain computation.
2. Whether the coupons received with non-convertible debentures were liable for capital gains.

Issue 1: Fair Market Value of Shares
The primary issue in this case revolved around whether the assessee could choose the fair market value of shares held as stock-in-trade on 1.4.1981 for computing capital gains. The dispute arose when the Assessing Officer denied this option, stating that since the shares were not capital assets on 1.4.1981, the assessee was not entitled to consider the fair market price on that date. The Appellate Tribunal ruled in favor of the assessee, citing a Division Bench Judgment that emphasized the importance of the cost of acquisition at the time of actual acquisition. The revenue contended that changes introduced in 1993 regarding the computation of capital gains did not align with the earlier judgment. However, the court held that the cost of acquisition must be based on the date of actual acquisition, which did not occur on 6.11.1987 when the shares transitioned from stock-in-trade to a capital asset.

Issue 2: Capital Gains on Coupons with Debentures
The second issue centered on whether the coupons received with non-convertible debentures from Bharat Forge Limited were subject to capital gains tax. The ITAT ruled against taxing the coupons, stating that there was no identifiable cost of acquisition for them. The revenue argued that the cost of acquisition should be determined as per Section-55(2)(aa)(ii), but the court found no evidence to classify the coupons as securities under the relevant act. While the coupons could be considered financial assets under a subsequent provision, it was deemed inapplicable to the case at hand. Consequently, the court dismissed the appeal, concluding that the substantial questions of law framed did not apply to the situation.

In summary, the judgment addressed the issues of determining the fair market value of shares held as stock-in-trade for capital gains computation and the taxability of coupons received with non-convertible debentures. The court upheld the assessee's right to choose the fair market value based on the date of actual acquisition and ruled against taxing the coupons as capital gains due to the lack of identifiable cost of acquisition.