1993 (11) TMI 86 - AT - Income Tax

Summary

Issues Involved:
1. Computation of capital gains in foreign currency.
2. Determination of cost of acquisition for original and bonus shares.
3. Taxability of proceeds from the sale of bonus shares.

Issue-wise Detailed Analysis:

1. Computation of Capital Gains in Foreign Currency:
The primary issue in the department's appeal was whether the capital gains should be computed in US Dollars and then converted into Indian Rupees as per rule 115 of the Income-tax Rules, 1962. The assessee, a non-resident company, argued that the sale price of shares should be converted into US Dollars at the prevailing rate on the date of transfer and similarly, the cost of acquisition should be converted into US Dollars at the rate as on 1-4-1974. The Assessing Officer disagreed, noting the transaction occurred in Indian Rupees and there was no physical remittance to the USA, thus ruling out the application of rule 115. The CIT (Appeals) sided with the assessee based on certain Tribunal decisions. However, the Tribunal reversed the CIT (Appeals) decision, citing the Bombay High Court ruling in Asbestos Cement Ltd. v. CIT [1993] 203 ITR 358, which held that transactions of transfer of shares in India could not convert the cost of acquisition and sale price into foreign currency for computing capital gains. The department's ground of appeal was allowed.

2. Determination of Cost of Acquisition for Original and Bonus Shares:
The second and third grounds of the department's appeal pertained to the computation of capital gains on the sale of shares, including original and bonus shares. The original shares were purchased before 1-4-1974, and the bonus shares were acquired in 1982. The assessee computed the cost of acquisition of original shares at Rs. 15.85 per share, which was the fair market value on 1-4-1974, and spread this cost over the total number of shares to determine the cost of bonus shares. The Assessing Officer, however, spread the cost of acquisition of original shares over both original and bonus shares, as per the Supreme Court rulings in CIT v. Dalmia Investment Co. Ltd. and CIT v. Gold Mohore Investment Co. Ltd. The CIT (Appeals) accepted the assessee's method, relying on the Supreme Court decision in Shekhawati General Traders Ltd. v. ITO, which stated that the cost of original shares could not be reduced by spreading it over bonus shares. The Tribunal upheld the CIT (Appeals) decision for the original shares but clarified that the cost of bonus shares should be determined by spreading the cost of original shares over both original and bonus shares collectively, partially allowing the department's appeal.

3. Taxability of Proceeds from Sale of Bonus Shares:
The assessee's cross-objection argued that if the department's claim of reducing the cost of original shares was accepted, the proceeds from the sale of bonus shares should not be taxable as capital gains, citing the Supreme Court decision in B.C. Srinivasa Shetty. However, the Tribunal noted the Special Bench decision in Rohiniben Trust v. ITO, which held that surplus from the sale of bonus shares was taxable as long-term capital gains. The Tribunal rejected the cross-objection, following the Special Bench decision and maintaining the taxability of the proceeds from the sale of bonus shares.

Conclusion:
The Tribunal allowed the department's appeal regarding the computation of capital gains in foreign currency and partially allowed the appeal concerning the determination of the cost of acquisition for bonus shares. The assessee's cross-objection was dismissed, upholding the taxability of proceeds from the sale of bonus shares.