2015 (10) TMI 402 - HC - Income Tax

Reckoning the period for long term capital gains - calculated from the date of purchase of convertible debentures or actual date of allotment of shares on conversion from debentures - Held that - A plain reading of Section 47(x) would indicate that the conversion of convertible debentures into shares would not constitute transfer for the purposes of computation of income under the head capital gains . Similarly, Section 49(2A) of the Act clarifies that for computing the capital gains on sale of shares received on conversion of convertible debentures, the cost of acquisition of shares shall be the cost of convertible debentures and thus it shall be deemed to be the cost of such shares received on conversion. In such a situation, as a necessary corollary, it would be but logical to reckon the date of acquisition of the convertible debentures as the date of acquisition of such shares received on conversion of convertible debentures. Now examining the factual matrix herein, the assessee was allotted 27160 convertible debentures of TELCO Limited on 20.12.2001 which were converted into equal number of shares on 31.3.2002. The assessee sold the said shares between 23.12.2002 to 10.3.2003 in different lots. This shall result in long term capital gains as the shares shall be deemed to have been held for a period exceeding 12 months by the assessee. The equity shares held earlier and the preference shares acquired in exchange thereof were not the same. It was held that in such circumstances, irredeemable preference shares issued to the assessee being different from the equity shares issued in lieu thereof shall be deemed to have been held by the assessee from the date of their issue and not from the date of issue of the equity shares. Thus, the pronouncements cited by the revenue do not come to its rescue as those cases related to conversion of financial asset into another form of asset where there was no right accruing on the date of acquisition, whereas in the case of convertible debentures, a right is appended to the debenture for the debenture holder to receive shares on conversion after the stipulated period. Thus, in such circumstances, cases relied upon by the revenue shall be on different footing vis-a-vis case of secured convertible debentures. - Decided against the revenue and in favour of the assessee

Issues:
1. Interpretation of the date of acquisition of shares received on conversion of convertible debentures for the purpose of calculating long term capital gains.
2. Application of relevant provisions of the Income Tax Act, 1961 regarding the period of holding for capital gains on the sale of shares received on conversion of debentures.
3. Comparison of judicial precedents related to the conversion of financial assets into shares to determine the cost of acquisition for capital gains calculation.

Issue 1: Interpretation of the date of acquisition of shares received on conversion of convertible debentures

The primary issue in this case revolved around determining the date of acquisition of shares received on conversion of convertible debentures for calculating long term capital gains. The revenue contended that the date of acquisition should be considered from the date of conversion of debentures into shares, while the assessee argued that it should be reckoned from the original allotment of debentures. The Tribunal upheld the assessee's position, emphasizing that the date of acquisition should be the date of allotment of convertible debentures, as clarified by relevant provisions of the Income Tax Act.

Issue 2: Application of relevant provisions of the Income Tax Act

The analysis delved into the application of Section 2(42A), Section 47(x), and Section 49(2A) of the Income Tax Act to determine the period of holding for capital gains on the sale of shares received on conversion of debentures. Section 47(x) clarified that the conversion of debentures into shares does not constitute a transfer for capital gains computation. Section 49(2A) further specified that the cost of acquisition of shares received on conversion shall be deemed to be the cost of debentures, supporting the assessee's argument regarding the date of acquisition.

Issue 3: Comparison of judicial precedents

The judgment compared judicial precedents such as Mrs. A. Ghosh's case and Commissioner of Income Tax vs. Santosh L. Chowgule and others to distinguish cases involving the conversion of financial assets into shares. It highlighted that the cases cited by the revenue did not align with the situation of secured convertible debentures, where a clear right was attached to the debentures for conversion into shares. The Tribunal's decision favored the assessee, emphasizing the unique nature of secured convertible debentures in determining the date of acquisition for capital gains calculation.

In conclusion, the judgment resolved the issues by interpreting the relevant provisions of the Income Tax Act and judicial precedents to establish that the date of acquisition of shares received on conversion of convertible debentures should be considered from the original allotment of debentures. The decision favored the assessee, dismissing the revenue's appeal and upholding the Tribunal's order.

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