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TMI Blog2018 (11) TMI 859X X X X Extracts X X X X X X X X Extracts X X X X ..... till taxed again, as the cost of acquisition would still be adopted as the issue price of the CCPS and not the consideration adopted while levying capital gain upon such conversion. By so starch of imagination, such interpretation process is permissible. We are of the view that conversion of CCPS into equity shares cannot be treated as ‘transfer’ within the meaning of Sec. 2(47) of the Act and hence, we delete the addition and allow this issue of assessee’s appeal. Addition on account of notional interest @ 7% on capital balance in the partnership firm as income of the assessee - Before us, assessee contended that the deed was not modified pertaining to the below changes and thus, the same has not been registered with the Registrar of Firms - Held that:- the supplementary deed entered by the assessee was duly executed on a stamp paper and as such, holds legal validity. Now, before us, ld. Counsel stated that even under section 40(b) of the Act, which provides the allowance for remuneration and interest expense of partners for a partnership firm does not provide for a requirement to have the partnership firm registered in order to allow the expenses in the hands of the firm. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the AO noted from the schedule of non-current investment forming part of balance sheet of the assessee as on 31.03.2012 that during the previous year 2011-12 relevant to AY 2012-13, the assessee company held 51,634 number of CCPS series A of Trent Ltd. as investment and converted the same into equity shares. According to AO, the conversion of CCPS into equity shares is transfer within the meaning of the definition provided in section 2(47)(i) of the Act. According to AO, the amount of ₹ 2,85,01,968/- being difference of market value of 51,634 number of equity shares of Trent Ltd. as on 10.09.2011 and the cost of the acquisition of equal number of CCPS A series of Trent Ltd., which were completed into equity shares are taxable capital gain on account of transfer of shares by way of exchange. The assessee contested the action of the AO but AO finally added the same as taxable long term capital gain amounting to ₹ 2,55,46,266/-. Aggrieved, assessee preferred the appeal before CIT(A). 4. The CIT(A) considered the assessment order and also the submissions of the assessee and noted that this issue is covered by the decision of Hon ble Bombay High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of stock from which it is derived. At such, the circular being beneficial to the assessee, has to be adopted by the Income Tax Department without any option. Accordingly, no capita gain tax liability arose upon the conversion. In case, and otherwise also the circular is perfectly in consonance with the legislative intention as well as the legislative scheme of taxing capital gain. This is evident from section 55(2)(b)(v)(e). Simply put, it is provided that where the capital asset being share of company, became property of the asset on conversation of any kind of shares of the company into another kind the cost of acquisition for the purpose of computing capital gain would be the cost of acquisition calculated with reference to the cost of acquisition of shares from which such asset is derived. In other words, when the equity shares, so received by the assessee upon such conversion are sold later on, while computing capital gain tax liability, its cost of acquisition would be the cost of subscribing the CCPS and not intermediate value. Thus, it is clear that the legislature itself has chosen to ignore the intermediate even of conversion for taxation purposes. If there arises any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matic. There was neither any option with the assessee nor any further step that was required to be taken by the assessee for conversion, being compulsory and automatic. The Assessing Officer while framing the assessment considered the conversion of CCPS into equity shares as transfer within the meaning of Sec. 2(47) of the Act and brought to tax under Long Term Capital Gains an amount of ₹ 2,55,46,266/-. The CIT(A) also confirmed the action of the Assessing Officer exactly on the same reasoning. Now, we have to consider whether any transfer of a capital asset has taken place or not. The provisions of Sec. 45(1) of the Act bring into tax the profits or gains arising from transfer of a capital asset under the head Capital Gains in case there is a capital asset, there is transfer of such capital asset and there is gain arising out of such transfer of such capital asset. The Assessing Officer relying on the definition of exchange as per the Black s Law Dictionary, deluxe fourth edition held that conversion of preference shares into equity shares will be treated as transfer within the meaning of Sec. 2(47) of the Act, whereas the assessee argued from the beginning that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noted that the Tribunal placing reliance on the CBDT Circular (supra) held as under :- ........according to the circular, when the shares which are converted and are sold, capital gains are to be calculated on the basis of cost of original shares. Thus, the factum of conversion does not make any material difference in calculating the capital gains....... the circular of the Government to which we have made reference above, clearly lays down that there is no transfer when one type of share is converted into another type of share.... 11. We have gone through the provisions of Sec. 48 of the Act which specifies the mode of computation of capital gain, which makes it clear that the provision regarding computation of capital gain contemplates ascertainment of the full value of consideration received or accruing as a result of transfer of capital asset. The word received means actually received and the word accruing means the debt created in favour of the assessee as a result of the transfer. According to us, in any case, both the terms are used as actual and not estimated amounts. The provision does not contain words to the effect fair market value . The ld. Counsel for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quent to the resolution dated 30-9-1971, the equity share capital held by the assessee was exchanged for the three new types of equity shares and the irredeemable preference shares in question. It was not a case of change of nomenclature of the shares. It was an exchange of one kind of shares for another kind of shares, having different rights and liabilities. 13. The ld. Counsel for the assessee in view of the above argued that the decision of the Hon'ble Bombay High Court in the case of Santosh L. Chowgule (supra) and the decision of the Hon'ble Andhra Pradesh High Court in the case of Addl. CIT vs. Trustees of H.E.H. The Nizam s Second Supplementary Family Trust, 102 ITR 248 (AP) are not applicable. The ld. Counsel further drew our attention to the decision of the Hon'ble Supreme Court in the case of CIT vs Gillanders Arbuthnot Co., 66 ITR 622 (SC), wherein it is specifically held as under :- It is manifest that the consideration for the transfer of capital asset is what the transferor receives in lieu of the asset he parts with, namely, money or money s worth and, therefore, the very asset transferred or parted with cannot be the consideration for the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d u/s 48 r.w.s 45(4) of the Act has been discussed and held as under :- Now, in the present case, it is argued on behalf of the department before the Tribunal, for the first time, that in this case, on vesting of the properties of the erstwhile Firm in the Limited Company, there was a transfer of capital assets and, therefore, it was chargeable to income-tax under the head Capital gains as, on such vesting, there was extinguishment of all right, title and interest in the capital assets qua the Firm. We do not find any merit in this argument. In the present case, we are concerned with a Partnership Firm being treated as a company under the statutory provisions of Part IX of the Companies Act. In such cases, the Company succeeds the Firm. Generally, in the case of a transfer of a capital asset, two important ingredients are : existence of a party and a counterparty and, secondly, incoming consideration qua the transferor. In our view, when a Firm is treated as a Company, the said two conditions are not attracted. There is no conveyance of the property executable in favour of the Limited Company. It is no doubt true that all properties of the Firm vests in the Limited Company o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the consideration does not mean the market value of the asset transferred, but it shall mean the price bargained for by the parties to the transaction. It has been further held that consideration for the transfer of a capital asset is what the transferor receives in lieu of the assets he parts with viz. money or money's worth and, therefore, the very asset transferred or parted with cannot be the consideration for the transfer and, therefore, the expression full value of the consideration cannot be construed as having a reference to the market value of the asset transferred and that the said expression only means the full value of the things received by the transferor in exchange of the capital asset transferred by him. In the circumstances, even if we were to proceed on the basis that vesting in the company under Part IX constituted transfer under Section 45(1), still the assessee ought to succeed because the Firm can be assessed only if the full value of the consideration is received by the Firm or if it accrues to the Firm. In the present case, the Company had allotted shares to the Partners of the erstwhile Firm, but that was in proportion to the capital of the Partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as chosen to ignore the intermediate event of conversion for taxation purposes. If there arises any capital gain event upon such conversion, then, the cost of acquisition would be the consideration adopted while computing such capital gain and the exercise in regard to such conversion will be tax-neutral. The decisions relied on by the Assessing Officer and the CIT(A) for taxing the CCPS to equity shares as being transfer of capital asset are distinguished by the ld. Counsel for the assessee particularly in the case of CIT vs Motors General Stores Pvt. Ltd., 66 ITR 692 (SC) by stating that this judgment by the Hon'ble Supreme Court was delivered in the context of an assessment year prior to introduction of Sec. 55(2)(b)(v)(e) of the Act and also prior to the above CBDT Circular dated 12.05.1964. The ld. Counsel also explained in the case of Santosh L. Chowgule (supra), the Hon'ble Bombay High Court has discussed the issue without considering the provisions of Sec. 55(2)(b)(v)(e) of the Act, which section has a direct bearing on the case of the assessee. According to him, neither this section was considered nor adjudicated. 16. We have considered the issue in hand and n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Not only this interpretation would be in furtherance to the legislative intention but would also make the competition provision of capital gain work smoothly, in synchronization with other provisions, without any conflict with other provisions. On the other hand, if the view is adopted that capital gain tax liability arose upon conversion, the same would be not only against the legislative intention but also would make the composition of capital gain unworkable and would bring conflict with other provisions of the Act. In fact, the contrary interpretation would lead to double taxation in as much as, having taxed the capital gain upon such conversion, at the time of computing capital gain upon sale of such converted shares, the assessee would be still taxed again, as the cost of acquisition would still be adopted as the issue price of the CCPS and not the consideration adopted while levying capital gain upon such conversion. By so starch of imagination, such interpretation process is permissible. 18. In view of the above factual discussion and legal propositions, we are of the view that conversion of CCPS into equity shares cannot be treated as transfer within the meaning of Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balance of current capital account as on 1.4.2011 and added an amount of ₹6,91,418/- to the returned income of the assessee. The CIT(A) also confirmed the action of the AO. Aggrieved now, assessee is now in second appeal before the Tribunal. 21. Before us, assessee contended that the deed was not modified pertaining to the below changes and thus, the same has not been registered with the Registrar of Firms. But, the supplementary deed entered by the assessee was duly executed on a stamp paper and as such, holds legal validity. Now, before us, ld. Counsel stated that even under section 40(b) of the Act, which provides the allowance for remuneration and interest expense of partners for a partnership firm does not provide for a requirement to have the partnership firm registered in order to allow the expenses in the hands of the firm. Even otherwise, the income has not accrued to the assessee we find that these facts need verification and hence, the same are restored back to the file of the AO. This issue of the assessee s appeal is allowed for statistical purposes. 22. The next issue in this appeal is assessment under MAT computation under section 115JB of the Act in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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