2020 (10) TMI 521 - HC - Income Tax

Capital gain computation - conversion of bonds into shares - foreign currency convertible bonds - Assessing Authority concluded that cost of acquisition of share has to be assessed at ₹ 200/- per share and not at ₹ 873.83 and ₹ 858.08 per share as claimed by the assessee and completed the assessment - HELD THAT - The Central Government has issued the scheme viz., issue of foreign currency convertible bonds and ordinary shares (through Depository Receipt Mechanism) Scheme, 1993. The aforesaid scheme has been made applicable for the Assessment Year 2002-03 onwards vide notification dated 10.09.2002. Cost of acquisition has to be determined as per provisions of Clause 7(4) of the Scheme for computation of capital gains. It is also pertinent to mention here that Clause (xa) of Section 47, which refers to transfer by way of conversion of bonds has been inserted with effect from 01.04.2008 which is applicable to the Assessment Year 2009-10 onwards. Bonds issued to the petitioner were issued under the FCCB scheme and the conversion price determined on the basis of price of shares at Bombay Stock Exchange or National Stock Exchange on the date of conversion of FCBBs into shares. It is also pertinent to mention here that there is no conflict between the provisions of the scheme and the Acts / Rules. We respectfully agree with the view taken in KINGFISHER CAPITAL CLO LTD. 2019 (4) TMI 106 - BOMBAY HIGH COURT and therefore, answer the substantial question of law against the revenue and in favour of the assessee.

Summary

Issues Involved:
1. Whether the Tribunal was right in holding that the computation of capital gains by the assessee is correct.
2. Whether the cost of acquisition of equity shares on conversion of foreign currency convertible bonds should be assessed at ?200 per share or the higher amount claimed by the assessee.
3. Whether the period of holding shares should be from the date of conversion into shares to the date of sale of shares, thereby classifying it as short-term capital gain.

Issue-wise Detailed Analysis:

1. Computation of Capital Gains:
The Tribunal held that the computation of capital gains by the assessee was correct. The assessee had acquired foreign currency convertible bonds and converted them into shares, subsequently selling them and disclosing short-term capital gains. The Tribunal referenced Section 115AC of the Income Tax Act, which allows for the conversion of bonds into equity shares as per a scheme approved by the Central Government and the Reserve Bank of India. The Tribunal concluded that the assessee was rightly allotted shares at ?200 per share as per the bond agreement, and the cost of acquisition should reflect this rate.

2. Cost of Acquisition:
The Assessing Authority had determined the cost of acquisition at ?200 per share, contrary to the assessee's claim of ?873.83 and ?858.08 per share. The Tribunal, however, found that the cost of acquisition should be determined as per Clause 7(4) of the Scheme for the issue of foreign currency convertible bonds and ordinary shares (through Depository Receipt Mechanism) Scheme, 1993. This clause specifies that the cost of acquisition in the hands of non-resident investors would be the conversion price determined based on the price of shares at the Bombay Stock Exchange or the National Stock Exchange on the date of conversion of the bonds into shares.

3. Period of Holding and Classification of Gains:
The Tribunal held that the period of holding shares should be from the date of conversion into shares to the date of sale of shares, thereby classifying the gains as short-term capital gains since the holding period was less than 12 months. The Tribunal referenced Clause (xa) of Section 47 of the Act, which was applicable from 01.04.2008 and specified that the transfer by way of conversion of bonds into shares should not be considered a transfer for tax purposes. The Tribunal concluded that the cost of acquisition should be assessed as per the provisions of the scheme and not the Act, thereby supporting the assessee's computation.

Conflict Between Scheme/Rules and Provisions of the Act:
The revenue argued that in case of any conflict between the scheme/rules and the provisions of the Act, the provisions of the Act would prevail. However, the Tribunal found no conflict between the provisions of the scheme and the Act or Rules. The Tribunal referenced the Bombay High Court's decision in 'KINGFISHER CAPITAL CLO LTD. Vs. COMMISSIONER OF INCOME-TAX (INTERNATIONAL TAXATION), MUMBAI,' which dealt with similar issues and supported the assessee's position.

Conclusion:
The High Court agreed with the Tribunal's findings, affirming that the cost of acquisition should be determined as per Clause 7(4) of the Scheme and that the period of holding should be from the date of conversion to the date of sale, classifying the gains as short-term capital gains. The substantial question of law was answered against the revenue and in favor of the assessee, resulting in the dismissal of the appeal.