Income Tax Appellate Tribunal - Ahmedabad
Smt Roda vs Ito on 30 October, 2001
Equivalent citations: (2004)90TTJ(AHD)1048
ORDER
BAL Kothari, AM.:
The assessee has raised various grounds in this appeal directed against the order dated 2-1-1996, passed by the learned Addl. Commissioner (Appeals) for asst, yr. 1991-92, However, all those grounds can be briefly summarised as that capital gains on sale of 350 shares of Tisco Ltd. be treated as long-term capital gains and exemption claimed under section 54E should be allowed. The assessee has also challenged levy of interest under section 234B of the Act.
2. The learned counsel submitted that 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, will not be regarded as transfer for purpose of section 45 of the Act. This provision was inserted by the Finance (No. 2) Act, 1991 with retrospective effect from l-4-1962. The acquisition of shares by the assessee as a result of conversion of fully convertible/partly convertible debentures is, therefore, not regarded as, transfer for purpose of levy of capital gains. The learned counsel then drew our attention to section 49(2A) of the Act which provides that 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. This amendment was also made by the same amending Act with retrospective effect from 1-4-1962. The learned counsel contended that since the cost of debentures is treated as cost of shares received on conversion of such fully convertible/partly convertible debentures, the date of acquisition of shares should also relate back to the date of acquiring such convertible debentures for purpose of deciding as to whether the assessee has derived long-term capital gains or short-term capital gains. He therefore urged that the capital gains on sale of 350 ordinary shares of Tisco Ltd. out of 1290 shares sold in the year under consideration should be treated as long-term capital gains and consequently exemption under section 54E should be allowed.
3. The learned Departmental Representative simply relied on the reasons mentioned in the orders of the Addl. Commissioner (Appeals) and the assessing officer.
4. We have carefully considered the submissions made by the learned representatives of the parties and have perused the orders of the learned departmental authorities. We have also carefully gone through the relevant provisions of the Act.
5. The relevant facts as given in the statement of facts annexed with the assessee's appeal submitted before the Addl. Commissioner (Appeals) are reproduced below :
"Appellant during financial year 1990-91 ending 31-3-1991, has sold 1,290 ordinary shares of the Tata Iron & Steel Co. Ltd, among other scrips sold and capital gain duly computed in the statement of income as under :
On sale of 1290 ordinary shares of the Tata Iron & Steel Co. Ltd.
Sale proceeds 160 x 155.25 24840 1130 x 159.00 179670 1290 2,04,510 Less : Cost of purchase 940 x 10 9,400 350 x 60 21,000 30,400 1,74,110 The above capital gain was treated as long-term capital gain and had appended Note No. 6 to the statement of income which reads as under :
The assessee desires to place the following facts fully and truly in connection with her claim for exemption of long-term capital gains on sale of shares of Tata Iron & Steel Co. Ltd. (TISCO).
The relevant facts are as follows :
The assessee sold 1,290 ordinary shares bf Tata Iron & Steel Co. Ltd. on 3-8-1990, which includes 360 out of 400 shares received on 1-2-1990, on conversion of 25 convertible debentures of Rs. 600 each and 15 partly convertible debentures of Rs. 1,200 (conversion portion Rs. 600). The investment in the said debentures viz. 25 convertible debentures of Rs. 600 each and 15 partly convertible debentures of-Rs. 1,200 was made on 31-7-1989 as per allotment letter of the company.
The assessee respectfully invited attention to the provisions contained in section 47(x) read with section 49(2A) of the Indian Income Tax Act, 1961 (hereinafter referred to as the "Act").
According to the above retrospective amendments, which are made applicable with effect from 1-4-1962, it is clear that the conversion of debentures into shares of a company is not regarded as "transfer". Secondly, by virtue of section 49(2A) of the Act, cost of acquisition of right shares shall be the cost of debentures, though by fiction enacted in the above cited section, the cost of acquisition relates back to the date of acquisition of debentures. In other words, the cost of debentures shall be the cost of acquisition of right shares in case where right shares are sold.
Again under section 55(2)(b)(v) when share or a stock of the company becomes the property of the assessee inter alia, on conversion of any shares of the company into stock, the cost of acquisition would be calculated with reference to the cost of acquisition of the shares or stock from which such asset is derived. Therefore, it is clear that, by virtue of fiction enacted in the aforesaid sections, the cost of debentures is deemed to be the cost of acquisition of the right shares and, therefore, for the purpose of acquisition of capital gains, the cost of acquisition to be effected from full value of consideration would be the cost of acquisition of debentures.
The assessee respectfully claims that the surplus of Rs. 3,41,445 realised on sale of aforesaid shares amounting to Rs. 3,88,195 is duly exempt from capital gains in view of the investment made in specified assets under section 54E of the Act. The claim of the assessee that the amount realised is not exigible to capital gains is founded on the following reasons :
Firstly, the conversion of debentures into shares of a company is not regarded as a "transfer". Secondly, by virtue of section 49(2A), cost of acquisition of right shares shall be the cost of acquisition of debentures by virtue of fiction enacted in the said sections. Thirdly, the, date of acquisition must also relate back to the cost of acquisition in view of fiction inasmuch as the fiction has to be carried out to its logical end."
6. The main issue for consideration is as to whether the capital gains derived on sale of shares received on conversion of fully/partly convertible debentures is long-term capital gains or short-term capital gains. The assessing officer has observed that since the share certificates were issued in exchange of letter of authority on 1-2-1990, and the contract for sale of shares was made on 3-8-1990, the capital gains derived by the assessee on sale of such shares is assessable as short-term capital gains. Since the said gain was treated as short-term capital gains, the assessing officer also did not grant exemption under section 54E as claimed by the assessee. The Addl. Commissioner (Appeals) confirmed the view so taken by the assessing officer.
7. The provisions of section 47(x) are reproduced below :
47 Nothing contained in section 46 shall apply to the following transfers : ............
(x) any transfer by way of conversion of (bonds or) debentures, debentures-stock or deposit certificates in any form, of a company into shares or debentures of that company:
Section 49(2A) of the Act is also reproduced below :
49(2A) Where the capital assets, 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 certificate in relation to which such asset is acquired by the assessee,
8. A plain reading of the aforesaid provisions clearly indicates that the conversion of convertible debentures into shares is not regarded as-transfer for purpose of computation of income from capital gains. Section 49(2A) clarifies that for computing the capital gains on sale of shares received on conversion of fully/partly convertible debentures, the cost of acquisition of the debentures will be deemed to be the cost of such shares received on such conversion, Once the cost of fully/partly convertible debentures is deemed to be the cost of shares .received on conversion, it is necessary that the date of acquisition of debentures should be reckoned as the date of acquisition of such shares received on conversion of fully/partly convertible debenture, In the present case, the debentures were allotted to the assessee vide allotment letter dated 31-7-1989. The payment for acquiring fully/partly convertible debentures of TISCO Ltd. is stated to have been made on 6-6-1989. The shares received on conversion of such convertible debentures have been sold in the year under consideration. The cost of acquisition of debentures is deemed to be the cost of shares by virtue of deeming provisions contained in section 49(2A). Such fiction will therefore have to be taken to its logical end. We are, therefore of the considered opinion that the holding period of 12 months as referred to in proviso to section 2(42A) should be reckoned from the date of acquisition of such fully/partly convertible debentures. We accordingly direct the assessing officer to decide the question as to whether the gain derived by the assessee on sale of shares received on conversion of fully/partly convertible debentures in accordance with the aforesaid findings and also decide the question relating to grant of deduction under section 54E in accordance with the provisions of law. The matter is, therefore, restored back to the assessing officer for deciding the same in accordance with the aforesaid findings and in accordance with the provisions of law. The order passed by the Addl. Commissioner (Appeals) and the assessing officer relating to levy of interest under section 234B is also set aside and restored back to the assessing officer for considering the question of levy of interest afresh after providing an opportunity to the assessee.
9. In the result, the appeal is treated as allowed for statistical purposes.