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2019 (4) TMI 106 - HC - Income TaxRevision u/s 264 - Taxation on Foreign Currency Convertible Bonds - NBVL issued FCBB - conversion of FCBB in shares partly - determination of cost of acquisition of the shares - assessee has considered the cost of acquisition of the shares to be the closing price of the shares of NBVL on the National Stock Exchange on the date of allotment of the shares to the assessee i.e. on 18th August, 2011, but the AO faulted it.- transfer referred to in clause (x) or (xa) of section 47 and section 47(x) under a transfer by way of conversion of bonds or debentures and (xa) by way of conversion of bonds HELD THAT - We find that section 115AC(1) clearly refers to income by way of interest on bonds of an Indian company issued in accordance with such Scheme as the Central Government may, by notification in the Official Gazette, specify in this behalf. Section 49(2A), to which we have already made detailed reference above, deals with a capital asset being a share or debenture of a company becoming the property of the assessee in consideration of a transfer referred to in clause (x) or (xa) of section 47 and section 47(x) under a transfer by way of conversion of bonds or debentures and (xa) by way of conversion of bonds referred to in clause (a) of subsection (1) of section 115AC into shares or debentures of any company. The assessee may maintain that there is nothing in the Act which enables the authorities to deal with a situation and it is only clause 7 dealing with transfer and redemption and particularly sub-clause (4) thereof, as spelt out in the Scheme, which will apply. We are of the clear opinion that it is the conversion of foreign currency convertible bonds that the cost of acquisition in the hands of non-resident Indian investors would be the conversion price determined on the basis of the price of the shares as in this case, the National Stock Exchange, on the date of conversion of foreign currency convertible bonds into shares. This is the cost of acquisition in the hands of a non-resident investor. That would be the conversion price determined on the basis of the price of the shares at the National Stock Exchange and, therefore, conversions of FCCBs would be done accordingly. A bare perusal of the unamended provision denotes that insofar as on introduction of clause (xa) of section 47 effective from 1st April, 2008 by the 2008 Finance Act, this subsection (2A) of section 49 was also amended. Simultaneously, with the introduction of clause (xa) in section 47, this amendment has been effected. Therefore, though section 47 opens with the words nothing contained in section 45 shall apply to the following provisions , section 49 provides for determination of cost with reference to certain modes of acquisition. Earlier, where the capital asset being a share or debenture in a company, became a property of an assessee in consideration of a transfer referred to in section 47, the determination of the cost of that acquisition was provided for. By the substituted sub-section (2A) of section 49, the cost of acquisition of the asset of the assesee shall be deemed to be that part of the cost of debenture, debenture-stock bond or deposit certificate in relation to which such asset is acquired by the assessee. The introduction of the word bond and the word or before the words deposit certificate with effect from 1st April, 2008 is thus crucial. All this came once Chapter XII titled as Determination of Tax in Certain Special Cases had, by virtue of amendment with effect from 1st April, 2002 enabled imposition of tax on income from bond or global depository receipt purchased in foreign currency or capital gains arising from their transfer. Now, even in that part, while clauses (a) of sub-section (1), which deals with the total income by an assesse, being a non-resident, including what is provided by in clause (a) of sub-section (1) of section 115AC of the Income Tax Act, 1961 the legislature had in mind the scheme. In these circumstances, it is evident that any scheme prior thereto and particularly the one involved before us, namely, the FCCB Scheme notified by Central Government in 1993 and applicable with effect from 1st April, 1992 and enabling the computation of cost of acquisition, in terms thereof, was held to be unaffected. It was, therefore, possible to compute the cost in terms of the clauses of that scheme and which was admittedly an earlier scheme. To our mind, therefore, assessee is right in his contention that the revisional authority fell in clear error in taking assistance of the amendments made by the Finance Act, 2008. To our mind, he is right in urging that the cost of acquisition of the shares was to be determined with reference to the date of acquisition of the FCCBs, then, the period for which the shares should be regarded as having been held by the petitioner assessee should also be reckoned to the date of acquisition. He is right in urging that the second respondent failed to consider the scheme and therefore, once these clauses are included in the FCCB Scheme itself, then, they would govern the FCCB related transactions to the extent the corresponding provisions are not made in the Act. The authority was not right in holding that the cost of acquisition of the shares as per clause 7(4) of the FCCB Scheme is not tenable. Thus, the Government of India notified Scheme effected from 1992 held the field and was the applicable one. The FCEB Scheme has equal status but is admittedly a later one. As a result of the above discussion, we are of the firm opinion that this writ petition deserves to succeed. Rule is, therefore, made absolute
Issues Involved:
1. Quashing of the order dated 29th March 2018. 2. Determination of the cost of acquisition and period of holding for shares obtained through conversion of FCCBs. 3. Interpretation of the FCCB Scheme and its applicability vis-à-vis the Income-tax Act provisions. Detailed Analysis: 1. Quashing of the Order Dated 29th March 2018: The petitioner seeks to quash and set aside the order passed on 29th March 2018 by the respondent. This order was challenged on the grounds that it incorrectly applied the provisions of the Income-tax Act, specifically regarding the cost of acquisition and period of holding of shares obtained through the conversion of FCCBs. 2. Determination of the Cost of Acquisition and Period of Holding: The petitioner entered into an agreement on June 24, 2008, with Lehman Brothers to purchase 352 Zero-Coupon Foreign Currency Convertible Bonds (FCCBs) in Nava Bharat Ventures Limited (NBVL). The FCCBs were issued under the FCCB Scheme of 1993. During the financial year 2011-12, the petitioner converted 323 FCCBs into 1,29,23,073 equity shares of NBVL. The petitioner reported short-term capital gain on the sale of 83,89,938 equity shares of NBVL, considering the closing price on the date of conversion as the cost of acquisition. The Assessing Officer (AO) disagreed with this computation, referencing amended provisions of the Income-tax Act and Circular No.1 of 2009. The AO considered the cost of acquisition based on the price prevailing on the date of issue of the FCCBs (September 2006), which led to a significantly higher capital gain calculation. The petitioner filed a Revision Petition under section 264 of the Income-tax Act, contending that the AO's approach was incorrect and that the cost of acquisition should be based on the conversion price as per clause 7(4) of the FCCB Scheme. The Revisional Authority, however, upheld the AO's view, stating that the amended section 49(2A) should be applied, which considers the cost of acquisition of the shares to be the cost of the FCCBs on the date of their purchase. 3. Interpretation of the FCCB Scheme and Its Applicability: The petitioner argued that the FCCB Scheme of 1993, which predates the amendments to the Income-tax Act, should govern the cost of acquisition for shares obtained through the conversion of FCCBs. The relevant clauses of the FCCB Scheme specify that the cost of acquisition should be the conversion price determined on the basis of the share price on the date of conversion. The court noted that the FCCB Scheme is a distinct and earlier scheme that should govern FCCB transactions unless explicitly overridden by the Income-tax Act. The court found that the Revisional Authority erred in applying the amendments made by the Finance Act, 2008, which were intended for the Foreign Currency Exchangeable Bond Scheme (FCEB) and not the FCCB Scheme. Conclusion: The court concluded that the cost of acquisition should be determined based on the FCCB Scheme's provisions, specifically clause 7(4), and not the amended section 49(2A) of the Income-tax Act. The court quashed the order dated 29th March 2018 and directed the respondents to withdraw and cancel the order concerning the cost of acquisition and period of holding for the transfer of shares. The court ruled in favor of the petitioner, affirming that the FCCB Scheme should govern the transactions in question.
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