High Courts
Summary and Review of Case Laws Decided by High Courts
Thursday, 18 April 2019 12:12

Period for long term capital gains | Kingfisher Capital CLO Ltd. vs. CIT

Written by
Rate this item
(0 votes)
Period for long term capital gains | Kingfisher Capital CLO Ltd. vs. CIT Taxpundit.org

1 By this writ petition under Article 226 of the Constitution of India, instituted on 6th July, 2018 the petitioner seeks to quash and set aside an order passed on 29th March, 2018. This order is passed by the respondent No.1. The second relief is that of a writ of mandamus or any other appropriate writ, order or direction under Articles 226 and 227 of the Constitution of India be issued directing the respondents to forthwith withdraw and/or cancel this order insofar as the cost of acquisition and period of holding in regards to the transfer of shares. That aspect of the matter has been held against the petitioner

2 Since the writ petition was directed to be listed for admission with an intent to dispose it off finally, we proceed to issue Rule. The respondents waive service. By consent, Rule is made returnable forthwith.

3 The facts necessary to appreciate the challenge to the impugned order, briefly stated, are as under :

4 The petitioner entered into an agreement dated June 24, 2008 with Lehman Brothers Commercial Corporation Asia Limited (hereinafter referred to as “Lehman Brothers”), a nonresident company incorporated in Hong Kong, to purchase, inter alia, 352 Zero-Coupon Foreign Currency Convertible Bonds in Nava Bharat Ventures Limited (for short “NBVL”) an Indian company listed on the National Stock Exchange of India Limited (for short “NSE”).

5 NBVL issued the FCCBs on September 29, 2006, under the issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993 (for short “FCCB Scheme”) to Lehman Brothers.

6 The FCCB Scheme was notified by the Central Government in 1993 and applicable with effect from April 1, 1992. It governed the issue of (i) Foreign Currency Convertible Bonds and (ii) Global Depositary Receipts (for short “GDRs”)with equity shares of the Indian company as the underlying securities.

The relevant clauses of the FCCB Scheme that require consideration in the matter are reproduced below :

“7(4) For the purpose of conversion of Foreign Currency Convertible Bonds, the cost of acquisition in the hands of the non-resident investors would be the conversion price determined on the basis of the price of the shares at the Bombay Stock Exchange, or the National Stock Exchange, on the date of conversion of Foreign Currency Convertible Bonds into shares.”

8(3) Conversion of Foreign Currency Convertible Bonds into shares shall not give rise to any capital gain liable to incometax in India.

8(4) Transfers of For ign Currency Convertible Bonds made outside India by a non-resident investor to another nonresident investor shall not give rise to any capital gains liable to tax in India.

7 Dur ng the Financial Year 2011-12, the petitioner - assessee had entered into transactions pertaining to Foreign Currency Convertible Bonds (for short “FCCBs”) issued by Nava Bharat Ventures Limited (for short “NBVL”) an Indian company and the equity shares underlying these FCCBs. It had reported short-term capital gain of Rs.7,36,52,016 on the sale of 83,89,938 equity shares of NBVL which were acquired on conversion of the FCCBs held in NBVL. This short-term capital gain was shown as taxable under section 111A of the Act at 15% plus applicable surcharge and education cess.

8 During the Assessment proceedings, the Assessing Officer (for short “AO”) observed that the assessee had purchased 352 zero-coupon FCCBs of NBVL and on 18th August, 2011, 323 FCCBs were converted into 1,29,23,073 equity shares of NBVL out of which 83,89,938 equity shares were sold by the petitioner in the period January, 2012 to March, 2012 and the short-term capital gain arising on the same was duly shown in the Income tax return filed by the petitioner-assessee on 5th April, 2013. The remaining equity shares (45,33,125) were sold by the petitioner in November, 2012. The balance 29 FCCBs were redeemed by NBVL on 29th September, 2011 at a premium of 25.96% over the face value. While framing the assessment, the AO made reference to the petitioners contentions, but did not accept the same in view of the amended provisions of the Income-tax Act vide Circular No.1 of 2009 dated 27th March, 2009, Finance Act 2008 - Explanatory Notes to the provisions of the Finance Act 2008.

9 The assessment order was served on the assessee on 13th May, 2015, and being aggrieved thereby, the assesseepetitioner filed a Revision Petition under section 264 of the Income-tax Act on 12th May, 2016. The contention in that Revision Petition was that the entire sale proceeds of 83,89,958 equity shares of NBVL an Indian company, amounting to Rs.174,73,12,155/-had been treated as unexplained cash credit in the hands of the assessee by the AO in the final assessment order. After referring to the details of the transaction it is urged that the AO had added the entire sale proceeds received on sale of shares of NBVL which were received on conversion of FCCBs into shares on the presumption that the petitioner had subscribed to these FCCBs in September 2006 whereas it was incorporated in the Cayman Islands only on 2nd August, 2007. It was urged that this was a wrong presumption. On this premise only the AO added the sale proceeds of the shares received on conversion as an unexplained cash credit in the hands of the assessee. Based on these submissions made by the assessee, relief to the tune of Rs.174.73 crores was granted to the tax payer by the respondent No.1 on this account.

10 The second issue was that the cost of acquisition of the equity shares of NBVL taken by the AO in the assessment order is incorrect. In the return of income filed by the assessee, it had computed the short-term capital gain by considering the closing price of the equity shares of NBVL on the National Stock Exchange on the date of conversion of the FCCBs into NBVL equity shares. That is taken as a cost of acquisition of the shares (Rs.198.85). The assessee relied on clause 7(4) of the FCCB Scheme reproduced above. However the AO held that the provision of section 49(2A) of the IT Act should be considered for the purpose of computing the cost of acquisition of the shares of NBVL received from the conversion of the FCCBs. On this basis, the AO had considered the cost of acquisition of the equity shares at the price prevailing (Rs.113.9) on the date of issue of the FCCBs (September 2006) and computed the capital gains at Rs.78.9 crores as against Rs.7.9 crores computed by the assessee. It is claimed by the first respondent that during the course of the proceedings, these aspects were examined in detail and the Revisional Authority, after considering the amended provisions of section 49(2A), section 47(xa) and section 115AC (1)(a) of the Income-tax Act, calculated the capital gains as set out in paragraph 11.11 of the order of the Revisional Authority. In paragraph 6.7 of the affidavit-in-reply, at running pages 168 and 169, the working made by the Revisional Authority is set out. That reads as under :

“Calculation of Capital gain by the Respondent No.1

6.7 It is clear that 323 FCCBs were acquired by the assessee on 24.06.2008 from LBCCA for a consideration of Japanese Yen 3230 million. The exchange rate as prevalent on 24.06.2008 was JPY 100 = Rs. 39.73 as per RBI website. Therefore, 323 FCCBs were purchased by KCLO on 24.06.2008 for Rs.128,32 79,000. These 323 FCCBs were converted into 1,29,23,073 equity shares of Rs.2 face value each of NBVL. Therefore, as per Section 49(2A), the cost of acquisition of the shares of NBVL will be equal to the total consideration paid by KCLO to LBCCA for purchase of 323 FCCBs on 24.06.2008 divided by No. of shares allotted to it on conversion i.e. 1,29,23,073 (Rs.993/share). The closing price of the shares of NBVL as on 07.09.2006 as taken by A.O. to be the cost of acquisition of shares for calculating the STCG is not as per Section 49(2A). As per Section 49(2A), capital gains on the sale of shares of NBVL should be calculated as given below :

11 In the affidavit-in-reply, therefore, the conclusions of the authorities as referred above have been supported and it is claimed that the order under section 264 of the Income-tax Act could not be prejudicial to the interest of the assessee, hence the order of the AO was not revised on this count and the contention of the assessee was rejected.

12 Thereafter, we find that in the affidavit-in-reply to this petition, the petition has been dealt with para-wise. The order of the Revisional Authority is thus challenged on several grounds in this petition. The petitioner has also referred to the legal provisions and set out the same in somewhat details. We reproduce them.

13 Prior to the introduction of the FCCB Scheme, section 115AC was introduced by the Finance Act, 1992 with effect from April 1, 1993, to govern the taxability of income arising from FCCBs and GDRs. Section 115AC along with the footnote at the time of introduction of FCCB Scheme is reproduced below :

“Tax on income from bonds or Global Depository Receipts purchased in foreign currency or capital gains arising from their transfer.

115AC (1) Where the total income of an assessee, being a non resident, includes -

(a) income by way of interest or dividends on bonds or shares of an Indian company issued in accordance with such scheme as the Central Government may, by notification in the Official Gazette*, specify in this behalf and purchased by him in foreign currency; or

*The footnote to section 115AC(1)(a) is reproduced below “Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme has been notified – Notification No.SO 1032(E), dated 24-12-1993”

14 The explanatory memorandum dealing with section 115AC at the time of introduction reads as under :

“The Government has approved, in principle, the scheme permitting issue abroad of foreign currency convertible bonds/equity by established Indian companies. These bonds have to be denominated in foreign currencies with a view to bringing in foreign exchange. It is, therefore, necessary that the tax regime for the non-resident investors of these bonds / equities is competitive vis-vis the tax regimes of other such instruments of investments available in the international market. Accordingly, it is proposed to insert a new section 115AC in the Income-tax Act to provide for special rates of tax applicable to income from such bonds or shares purchased in foreign currency or long-term capital gains arising from their transfer

The income by way of interest or dividends in respect of the bonds issued by or shares in an Indian company purchased in foreign currency in accordance with the scheme notified by the Central Government in this behalf and income by way of longterm capital gains arising from transfer of such bonds or shares is proposed to be charged to tax at the rate of ten percent. However, this rate of tax will apply on gross income of the nature specified above without allowing deduction under section 28 to 44CC, 48 and 57 and Chapter VI-A. The provisions for protection from fluctuation of rupee value against foreign currency will not apply to the aforesaid shares. Further, when the said bonds or shares are transferred outside India, by a non-resident to another non-resident, it will not be regarded as a transfer for the purpose of capital gains tax.”

The notes to clause dealing with section 115AC at the time of introduction reads as under :

“Sub-section (1) of the new section seeks to provide that in the case of a non-resident, the income tax payable shall be the aggregate of (i) ten percent of the income by way of interest or dividends in respect of bonds issued by or, as the case may be, shares in respect of bonds issued by or, as the case may be, shares in an Indian company purchased in foreign currency in accordance with such scheme as the central government may, by notification in the Official Gazette, specify in this behalf, if any (ii) ten percent in case of long-term capital gains arising from the transfer of the aforesaid bonds or shares, if any, and (iii) the amount of income-tax on the total income as reduced by the income from the said bonds or shares.

Sub-section (2) of the new section seeks to provide that in the case of the aforesaid non-resident, no deduction shall be allowed under section 29 to 44C or clause (i) or clause (iii) of section 57 or under Chapter VI-A where the gross total income consists only of income from bonds or shares. However, where the gross total income includes income from shares or bonds, the reduction under Chapter VI-A shall be allowed as if the gross total income does not include the income from units.”

15 Section 115AC deals with taxability of only certain types of income that could arise in respect FCCBs and GDRs.

a) Interest payments made to non-resident holders of FCCBs would be liable to tax in India at 10 percent.

b) Long-term capital gain realized from the transfer of FCBBs or shares to a resident would be liable to tax in India at 10 percent.

16 In light of the amendment to section 115AC of the Act, clause (x) of Section 47 was amended simultaneously to include “bonds” to address the taxability arising from the conversion into equity shares of the issuing company. Section 47 of the Act, specifies the cases in which transfer of a capital asset is not assessable to tax under the head “Capital Gains” Clause (x) of section 47 reads as under :

“(x) any transfer by way of conversion or debentures, debenture-stock or deposit certificates in any form, of a company into shares or debentures of that company.”

17 Section 49 of the Act specifies the cost with reference to certain modes of acquisition. Section 49(2A) of the Act was not amended to inc ude “bonds”. Section 49(2A) of the Act at the time of introduction to section 115AC and 47(x) of the Act read as under :

“(2A) Where the capital asset, being a share or debenture in a company, became the property of the assessee in consideration of a transfer referred to in clause (x) of section 47, the cost of acquisition of the asset to the assessee shall be deemed to be that part of the cost of debenture, debenture-stock or deposit certificates in relation to which such asset is acquired by the assessee.”

78 Section 47 is a provision which keeps out certain transactions from the purview of section 45 and section 45 deals with capital gains. One such transaction is the transfer by way of conversion of bonds or debentures or debenture-stock or deposit certificates in any form of a company into shares or debentures of that company and the other is transfer by way of conversion of bonds referred to in clause (a) of sub-section (1) of section 115AC into shares or debentures of that company. This is, therefore, not a transfer as is evident from the reading of section 47. However, the cost with reference to certain modes of acquisition is a matter dealt with by section 49 and where the capital asset becomes the property of the assessee on any distribution of assets on the total or partial partition of a Hindu undivided family or under a gift or will, by succession, inheritance or devolution, then, that is an aspect dealt with by sub-section (1). Where the capital asset being a share or shares in an amalgamated company which is an Indian company and that becomes property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the share or shares in the amalgamating company and by (2A) where the the capital asset being a share or debenture of a company became the property of the assessee in consideration of a transfer referred to in clause (x) or (xa) of section 47, then the cost of acquisition of the asset to the assesee shall be deemed to be that part of the cost of bond or deposit certificate in relation to which such asset is acquired by the assessee.

79 Prior to the substitution, sub-section (2A) as inserted by Finance Act No.2 of 1991 with retrospective effect from 1st April, 1962, read as under:-

“(2A) Where the capital asset, being a share or debenture in a company, became the property of the assessee in consideration of a transfer referred to in clause (x) of section 47, the cost of acquisition of the asset to the assessee shall be deemed to be that part of the cost of debenture, debenture-stock or deposit certificates in relation to which such asset is acquired by the assessee.”

80 A bare perusal of the unamended provision denotes that insofar as on introduction of clause (xa) of section 47 effective from 1st April, 2008 by the 2008 Finance Act, this subsection (2A) of section 49 was also amended. Simultaneously, with the introduction of clause (xa) in section 47, this amendment has been effected. Therefore, though section 47 opens with the words “nothing contained in section 45 shall apply to the following provisions” section 49 provides for determination of cost with reference to certain modes of acquisition. Earlier, where the capital asset being a share or debenture in a company, became a property of an assessee in consideration of a transfer referred to in section 47, the determination of the cost of that acquisition was provided for. By the substituted sub-section (2A) of section 49, the cost of acquisition of the asset of the assesee shall be deemed to be that part of the cost of debenture, debenture-stock bond or deposit certificate in relation to which such asset is acquired by the assessee. The introduction of the word ‘bond’ and the word ‘or’ before the words “deposit certificate” with effect from 1st April, 2008 is thus crucial.

81 All this came once Chapter XII titled as “Determination of Tax in Certain Special Cases” had, by virtue of amendment with effect from 1st April, 2002 enabled imposition of tax on income from bond or global depository receipt purchased in foreign currency or capital gains arising from their transfer. Now, even in that part, while clauses (a) of sub-section (1), which deals with the total income by an assesse, being a non-resident, including what is provided by in clause (a) of sub-section (1) of section 115AC of the Income Tax Act, 1961 the legislature had in mind the scheme. In these circumstances, it is evident that any scheme prior thereto and particularly the one involved before us, namely, the FCCB Scheme notified by Central Government in 1993 and applicable with effect from 1st April, 1992 and enabling the computation of cost of acquisition, in terms thereof, was held to be unaffected. It was, therefore, possible to compute the cost in terms of the clauses of that scheme and which was admittedly an earlier scheme.

82 To our mind, therefore, Mr.Kaka is right in his contention that the revisional authority fell in clear error in taking assistance of the amendments made by the Finance Act, 2008. To our mind, Mr. Kaka is right in urging that the cost of acquisition of the shares was to be determined with reference to the date of acquisition of the FCCBs, then, the period for which the shares should be regarded as having been held by the petitionerassessee should also be reckoned to the date of acquisition. He is right in urging that the second respondent failed to consider the scheme and therefore, once these clauses are included in the FCCB Scheme itself, then, they would govern the FCCB related transactions to the extent the corresponding provisions are not made in the Act. The authority was not right in holding that the cost of acquisition of the shares as per clause 7(4) of the FCCB Scheme is not tenable. Thus, the Government of India notified Scheme effected from 1992 held the field and was the applicable one. The FCEB Scheme has equal status but is admittedly a later one.

83 The reliance placed by Mr.Kaka on the compilation tendered by him is thus accurate. In the compilation, there is an order passed by the High Court of Punjab and Haryana at Chandigarh in Income Tax Appeal No. 153 of 2008 (Commissioner of Income Tax-I, Ludhiana vs. Shri Naveen Bhatia) decided on 19th August, 2015. There, the substantial question as raised was as under:-

“Whether on the facts and in law the Hon’ble Income Tax Appellate Tribunal was justified in reckoning the period for long term capital gains from the date of purchase of convertible debentures instead of actual date of allotment of shares on conversion from debentures?”

84 In para 2 of the judgment, the facts have been noted as also the submissions and thereafter, the discussion has been made in paras 7 and 8, which read as under:-

“7. Section 2(42A) of the Act defines a short term capital asset and in case of shares where the assessee holds the said shares for 12 months or less than 12 months, it shall be short term capital asset. Clause (f) of Explanation I(i) to Section 2(42A) of the Act states that in case of capital asset being a financial asset, allotted without any payment and on the basis of holding of any other financial asset, the period shall be reckoned from the date of the allotment of such financial asset. Section 47(x) and 49(2A) were inserted by the Finance (No.2) Act, 1961 with retrospective effect from 1.4.1962. Section 47(x) provides that any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificates in any form, of a company into shares or debentures of that company shall not mean transfer within the meaning of Section 45 of the Act. Further, sub-section 2A of Section 49 provides that the cost of acquisition of the asset to the assessee shall be deemed to be that part of the cost of debenture, debenture-stock, bond or deposit certificate in relation to which such asset is acquired by the assessee. In other words, the original cost at the time of allotment would be taken to be cost of acquisition.

8. 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 lot. 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.”

85 We do not think that this view of the High Court of Punjab and Haryana at Chandigarh is in any way inaccurate. Similarly, Mr.Kaka laid emphasis on certain observations in the case of Commissioner of Income Tax vs. Manjula J. Shah (supra) and to our mind, though the principle laid down in this judgment may be of some assistance to the petitioners, still, merely because the judgment in the case of Commissioner of Income Tax vs. Naveen Bhatia, reported in 287 ITR 587 of the High Court of Punjab and Haryana at Chandigarh is not accepted by the Department and a Special Leave Petition is pending, its persuasive value is not lost. More so, when it is dealing with an identical issue.

86 We are aware of the fact that Mr.Ahuja has also tendered a compilation and he has given certain list of dates, but, once we find that the reliance on these dates and events and particularly the date of conversion would not in any manner dilute the clauses of the FCCB Scheme of 1993, then, these dates and events as compiled by the Revenue are of no assistance.

87 In the compilation tendered on behalf of the Revenue, several other materials are also introduced, including the Budget Speech of the Finance Minister. It also contains the new Industrial Policy, 1991 and relevant part of Taxmann’s Foreign Exchange Management Manual. These may also make reference to the FCCB, but what we find is that an attempt is made to read the provisions of the Income Tax Act and in roduced with effect from 1st April, 2008 in relation to Foreign Currency Exchangeable Bond Scheme, 2008 and apply it to the FCCB Scheme of 1993. That is not correct.

88 Then, Mr.Ahuja invited our attention to the judgments of the Hon’ble Supreme Court in Gainda Ram and Ors. vs. Municipal Corporation of Delhi and Ors, reported in (2010) 10 SCC 715. He relied upon this judgment to urge that a provision of law cannot be disregarded or brushed aside by making references to a scheme or understanding of it particularly of the executive. The principle that was pressed into service is that the schemes that are framed and referred in this judgment were later on not totally endorsed by the Hon’ble Supreme Court. In any event, neither the policy nor the scheme can be called law and ignored in preference to the clear statutory provisions. Hence, the scheme framed under the direction of the court cannot be said to be framed under the power to frame Byelaws which flows from the statute. The scheme, therefore, does not have the status of law or even subordinate legislation.

89 Mr.Ahuja also then invited our attention to the judgment of the Hon’ble Supreme Court in the case of Ispat Industries Ltd. vs. Commissioner of Customs, Mumbai, reported in (2006) 12 SCC 583 to urge that rules framed under a statute stand on a different footing. Therefore, they can be considered as binding. We do not think that there is any quarrel about this principle, but its application will depend on the facts and circumstances of an individual case. Hence, we are not dealing with other judgments cited by him, including Smt.Taralata Shyam and Ors. vs. Commissioner of Income Tax, reported in (1977) 108 ITR 345. The other judgments on similar point also need not be referred in further details.

90 As a result of the above discussion, we are of the firm opinion that this writ petition deserves to succeed. Rule is, therefore, made absolute in terms of prayer clauses (a) and (b). In the facts and circumstances of the case, there will be no order as to costs.

Cases Referred to 

1. Commissioner of Income-tax vs Naveen Bhatia 287 ITR 587

2. Commissioner of Income-tax vs. Manjula J. Shah rendered by this Court and reported in 355 ITR 474.

3. Ispat Industries Ltd. vs. Commissioner of Customs, Mumbai, reported in (2006) 12 SCC 583

4. Smt.Taralata Shyam and Ors. vs. Commissioner of Income Tax, reported in (1977) 108 ITR 345

YOU CAN ALSO SEARCH FOR YOUR DESIRED TOPICS:

If You Appreciate What We Do Here On TaxPundit, You Should Consider:

We are thankful for your never ending support.

Recommended Articles

 

Additional Info

Read 119 times Last modified on Monday, 13 May 2019 13:07
Deepak Kumar

A Post Graduate and Chartered Accountant Deepak Sinha is a member of Taxpundit's core team. An analytical, result oriented professional with more than 10 years of combined experience in industry and consultancy.

This email address is being protected from spambots. You need JavaScript enabled to view it.

Media

Video Tutorials for Searching Case Laws Taxpundit.org

Leave a comment

Thank you for reading! We welcome and appreciate your comments, but at the same time, make sure you are adding something valuable to this article. If you have any serious queries, suggestions or anything related to this article, feel free to share them, we really appreciate that.

If you want to give us any feedback or report any errors, you can email your concerns on taxpundit@taxpundit.org and we'll revert back soon.

Recommended Articles

 

Have you done Analysis of any Case? Tell Us About It.

ABOUT TAXPUNDIT

Taxpundit.org provides Income Tax Case Laws, Circulars, Notification, Orders, Press Releases etc. to Members without any subscription.

Subscription is for extra tools, features and functionalities.

Newsletter

Subscribe to our newsletter and stay updated on the latest developments and special offers!

Create your own website as per ICAI guidelines. Plan starts at Rs. 15000/- with Free Premium Membership. Read more
Toggle Bar