9911796707
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Issues Involved:
1. Computation of capital gains on the sale of shares and bonus shares. 2. Taxability of receipts from the sale of coupons. 3. Disallowance of interest on borrowings. Summary: 1. Computation of Capital Gains on Sale of Shares and Bonus Shares: The primary issue was whether the assessee could adopt the fair market value of shares as on 1-4-1981 for computing capital gains. The assessee acquired shares in 1977, which were initially stock-in-trade and converted into capital assets on 1-7-1988. The Assessing Officer (AO) argued that since the shares were stock-in-trade on 1-4-1981, the fair market value as on that date could not be adopted. The AO computed the capital gains by taking the cost of acquisition as Rs.17 per share, the value at the time of conversion, and spread this cost over the original and bonus shares. The CIT (Appeals) upheld the AO's decision, citing the Supreme Court's ruling in CIT v. Bai Shirinbai K. Kooka, which would have taxed the appreciation in stock value as business income if converted at market price. The Tribunal's Judicial Member (JM) disagreed, stating that the asset becomes the property of the assessee only once, and the fair market value as on 1-4-1981 could be adopted under section 55(2)(b)(i). The JM cited the Gujarat High Court in Ranchhodbhai Bhaijibhai Patel and the Bombay High Court in Keshavji Karsondas, asserting that the asset need not be a capital asset at acquisition time. The JM's view was upheld by the Third Member (TM), who emphasized that there could be only one acquisition date and that the statutory cost remains unaffected by subsequent events like bonus issues, following the Supreme Court's ruling in Shekhawati General Traders Ltd. 2. Taxability of Receipts from Sale of Coupons: The assessee sold coupons received with non-convertible debentures, which entitled it to acquire equity shares. The AO taxed the proceeds as capital gains, taking the cost of acquisition as nil. The CIT (Appeals) agreed, applying section 55(2)(aa)(b)(ii). The JM, however, held that since the coupons had no identifiable cost of acquisition, as per CIT v. B. C Srinivasa Setty, no capital gains arose. This view was upheld by the TM, who noted that the cost of acquisition of such incentives could not be estimated. 3. Disallowance of Interest on Borrowings: The AO disallowed interest on borrowings from BFL and KSL, arguing that the funds were diverted to a sister concern (KCPL) interest-free. The CIT (Appeals) concurred, considering the agreement with KCPL a sham. The JM disagreed, stating that the agreement was genuine and acted upon. The JM emphasized that the assessee's business decisions should not be second-guessed by tax authorities. The TM upheld the JM's view, noting that the interest was for business purposes and allowable under section 36. Conclusion: The Tribunal allowed the assessee to adopt the fair market value as on 1-4-1981 for computing capital gains, held that no capital gains arose from the sale of coupons, and allowed the interest on borrowings as a business expense.
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