2008 (4) TMI 37 - AAR - Income Tax

The applicant is a foreign company acquired a 26 per cent stake in an Indian company - In course of time, bonus shares were allotted to the applicant and it also subscribed to right issues - The entirety of shares was sold to an Indian individual - Held that fair market value prevailing on 1st April, 1981 ought to be taken as the cost of acquisition in the case of bonus shares held by the applicant on 1-4-1981 - For TDS and refund, applicant asked to follow the normal procedure.

Summary

Issues:
1. Computation of capital gains on bonus shares acquired before April 1, 1981.
2. Requirement to file a return under section 139(1) for claiming refund of excess taxes deducted by the buyer.

Analysis:
1. The case involved a foreign company holding shares in an Indian company and seeking an advance ruling on the computation of capital gains from the sale of bonus shares acquired before April 1, 1981. The applicant questioned whether the fair market value as of April 1, 1981, could be considered as the cost of acquisition for computing capital gains. The Authority for Advance Rulings (AAR) analyzed the relevant provisions of the Income Tax Act, particularly sections 48 and 55(2), to determine the cost of acquisition. The AAR concluded that for assets falling under clause (b) of section 55(2), including bonus shares acquired before April 1, 1981, the fair market value as on that date should be considered as the cost of acquisition. This interpretation was supported by a decision of the Income-tax Appellate Tribunal, Mumbai, and the AAR ruled in favor of considering the fair market value on April 1, 1981, as the cost of acquisition for the bonus shares.

2. The AAR also addressed the issue of filing a return under section 139(1) for claiming a refund of excess taxes deducted by the buyer while remitting sale proceeds of shares. It clarified that the order passed by the Income Tax Officer (ITO) under Section 195(2) was a tentative fixation of tax liability, subject to final assessment. With the clarification provided on the computation of capital gains, the applicant was advised to follow the normal procedure by filing a return and claiming a refund under Section 139 of the Act. The AAR confirmed that there was no controversy on this aspect, and the applicant could proceed with claiming the refund as per the regular process.

In conclusion, the AAR ruled in favor of considering the fair market value prevailing on April 1, 1981, as the cost of acquisition for bonus shares acquired before that date. Additionally, the AAR clarified the procedure for the applicant to claim a refund of excess taxes deducted by the buyer, emphasizing the need to file a return under section 139(1) for the same. The ruling provided clarity on the computation of capital gains and the subsequent process for claiming refunds, ensuring compliance with the Income Tax Act.