Income Tax Appellate Tribunal - Mumbai
Titan Investment & Finance Co. Ltd. vs Income Tax Officer on 8 October, 1999
Equivalent citations: [2000]75ITD441(MUM)
ORDER
M.V.R. Prasad, A.M.
1. This appeal is directed against the order of the CIT(A), dt. 20th February, 1991, for the asst. yr. 1984-85.
2. The ground taken is that the CIT(A) erred in holding that the assessee had made short-term capital gains of Rs. 1,37,000.
3. The assessee subscribed for 10,300 convertible debentures of Maheshwari Mills Ltd. on 26th April, 1983, at the aggregate cost (inclusive of cost of right purchased of Rs. 5,17,575) of Rs. 18,05,075. Pursuant to the terms of the issue of the said debentures, the assessee was allotted 10,300 fully paid-up equity shares of the face value of Rs. 12.50 each. The assessee has sold on different dates during the year of account relevant for the asst. yr. 1984-85 the said debentures with residual rights, i.e. rights after the allotment of the shares on 30th June, 1983, for Rs. 9,25,309 in the aggregate. The assessee has sold the equity shares received against the convertible debentures for Rs. 10,17,125.
4. In the return of income, the result of the sale of the debentures was disclosed as a loss of Rs. 6,99,258 and the result of the sale of the shares was disclosed at a loss of Rs. 2,575, and in both the cases the loss was shown as a short-term capital loss. The loss on the sale of debentures was computed as follows :
(a) Cost of subscription (inclusive of cost of 18,05,075
rights purchased)
(b) Less : Cost of convertible portion
(10 per cent of the cost of subscription) 1,80,508
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(c) Cost of residue debentures (a-b) 16,24,567
(d) Less : Sale proceeds of residual debentures 9,25,309
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(e) Loss on sale of residual debentures (c-d) 6,99,258
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5. The short-term capital loss on the sale of equity shares was computed as follows :
(a) Sale proceeds of 10,300 equity shares received on conversion of debentures 10,17,125
(b) Less : Cost which is equal to reduction in market value of debentures on conversion :
(i) Estimated market value of debentures with conversion rights (186 x 10,300) 19,15,800
(ii) Less : Market value of debentures after conversion (87 x 10,300) 8,96,100 10,19,700
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(c) Loss on sale of equity shares (a-b) 2,575
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6. It may be observed that the short-term capital loss on the sale of debentures has been worked out on the basis of the difference of the sale proceeds of the debentures and their cost of acquisition after reducting the cost allocable to the convertible portion of the debentures. While working out the short-term capital loss on the sale of equity shares, it took as the cost of acquisition of shares not the cost of the debentures allocable to the convertible portion, which is Rs. 1,80,508 but the depreciation in the value of the debentures consequent to their conversion into equity shares. For adopting the depreciation in the value of the debentures as the cost of acquisition of the shares, acquired on conversion, the assessee relied upon the ratio of the decision of the apex Court in the case of Miss Dhun Dababhoy Kapadia vs. CIT (1967) 63 ITR 651 (SC) and the decision of the Hon'ble Bombay High Court in the case of CIT vs. K. A. Patch (1971) 81 ITR 413 (Bom). The AO rejected the claims of the assessee but did not give any particular reason for the rejection of the claims. On the other hand, he determined the loss at Rs. 342 only on the ground that the balance sheet and the P&L a/c of the assessee filed along with the return disclosed this figure as the loss incurred by the assessee in this composite transaction. The CIT(A) discussed the issue at length and, according to him, the assessee had actually made a short-term capital gain of Rs. 1,37,000. So he not only disallowed the loss claimed of Rs. 7,01,833 (6,99,258 + 2,575) by the assessee but actually held that the assessee had made a short-term capital gain of Rs. 1,37,000. He observed as follows, at pp. 3 and 4 of his order :
"I have considered the rival submissions. In my view, appellant's reliance on Dhun Kapadia vs. CIT (1967) 63 ITR 651 (SC) and K. A. Patch (1971) 81 ITR 413 (Bom) decisions is misplaced. 'Actual' cost to the appellant (Rs. 175.25 including premium of Rs. 50.25) is to be the basis or market cost at the time of conversion (Rs. 186 which on conversion was Rs. 87, appellant has worked equity cost at Rs. 99 as per Dhun Kapadia decision. The market value of equity was Rs. 81 on 19th October, 1983, i.e., four months after the conversion. Appellant's cost for both equity and debentures after conversion cannot be more than original and total cost of debentures cum equity (regarding convertible) including premium totalling to Rs. 125 per convertible share. Dhun Kapadia decision did not consider these overall situations and absurdity that 'cost' of total is more than what is actual cost including the premium. Other ways more damaging to appellant will be to take cost at Rs. 12.50 per equity shares (i.e., 10 per cent) which is as per Controller of Capital Issue at issue of convertible debentures, or Rs. 86 which was equity price a little later in October/November, 1983. There is no justification for claiming Rs. 99 and claiming for debentures original full cost, thus claiming a total loss of Rs. 7 lakhs against actual profit of Rs. 1,37,000 on the same composite transaction through debentures after conversion, sold in different lots through October/November, 1983, but during same asst. yr. 1984-85.
Applying principles of averaging or pro rata (i.e., equity @ 10 per cent and debentures @ 90 per cent as held by a number of cases - CIT vs. Dalmia Investment Co. Ltd. (1964) 52 ITR 567 (SC) and others and distinguishing Dhun Kapadia decision from appellant's case (total sale in one assessment year composite transaction) which did not review Dalmia Investment Co. Ltd. (supra) and confined only to cost of bonus shares and not to balance equity/debentures after conversion/issue of bonus shares. I hold the difference of Rs. 1,37,000 (difference between sale to cost price total) should be short-term capital gains or profits of share business of appellant's investment company. Thus, total addition to appellant's income will be 7,01,833 + 1,37,000 (i.e., loss claimed plus profit or short-term capital gains).
Appeal dismissed."
7. Before us, the learned counsel for the assessee reiterated the contentions made out before the Revenue authorities and pleaded that the CIT(A) was totally unjustified in ignoring the ratio of the decision of the apex Court in Miss Dhun D. Kapadia (supra). It is also claimed that the CIT(A) erred in relying on the decision of the apex Court in the case of CIT vs. Dalmia Investment Co. Ltd. (1964) 52 ITR 567 (SC) which dealt with only bonus shares. He has also enclosed in the paper book a number of cases wherein it has been held that a decision of the apex Court cannot be ignored simply because a particular plea was not raised before it and accordingly was not considered.
8. The learned Departmental Representative, on the other hand, invited our attention to the provisions of s. 49(2A) of the IT Act which has been introduced by the Finance (No. 2) Act, 1991, with retrospective effect from 1st April, 1962, which reads as follows :
"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 cl. (x) of s. 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."
9. Clause (x) of s. 47 refers to "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". In terms of the above statutory amendment, it is claimed that the cost of the equity shares has to be taken only at Rs. 1,80,508, which is the convertible portion of the debentures. He has also relied upon certain decisions like that of the Hon'ble Bombay High Court in the case of W.H. Brady & Co. Ltd. vs. CIT (1979) 119 ITR 359 (Bom) for the proposition that the price of the original debentures should be spread over the equity shares obtained on conversion and the residual debentures.
10. The learned counsel for the assessee, on the other hand, in his rejoinder, pleaded that the provisions of s. 47(x) applied to a case of only full conversion and not part conversion. He has also referred to the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Gautam Sarabhai Trust ((1988) 173 ITR 216 (Guj) and argued that when a composite consideration is involved, it cannot be regarded as a transfer within the meaning of s. 2(47) of the IT Act.
11. We are of the view that the assessee cannot be granted the benefit of the decision of the apex Court in the case of Miss Dhun Dadabhoy Kapadia vs. CIT or other decisions cited by the learned counsel for the assessee because of the specific provisions of s. 49(2A) which we have extracted hereinabove. This provision is applicable in transactions of the type under consideration in terms of s. 47(x). The relevant terms of the letter of offer of debentures dt. 10th February, 1983, issued by the company, Maheshwari Mills Ltd., had the following clauses :
"3. Principal terms of the debentures The Debentures now being issued are subject to the memorandum and articles of association of the company, the terms of this letter of offer and the application form :
(i) Value : The debentures have a face value of Rs. 125 each comprising a convertible part of Rs. 12.50 and non-convertible part of Rs. 112.50 issued in two parts, Part 'A' of Rs. 12.50 and Part 'B' of Rs. 112.50.
(ii) Conversion terms :
(a) The convertible part of each debenture of Rs. 12.50 i.e., Part 'A' will be converted into one equity share of the nominal value of Rs. 12.50 at par.
(b) The conversion will be effected on 30th June, 1983.
(c) On conversion, the amount of Rs. 12.50 due to the debenture-holder will be applied towards the price of one fully-paid equity share of the company of the face value of Rs. 12.50 each at par. Thus, there will be constructive receipt of Rs. 12.50 by the debenture-holder of the convertible part and the constructive payment of the same amount by the debenture-holder to the company towards the price of one fully-paid equity share."
12. It is not disputed before us that as per the above terms of the debentures and in terms of s. 49(2A) of the Act, the cost of acquisition of the equity shares obtained on conversion has to be taken at a figure of Rs. 1,80,508. On a fair reading of the provisions of s. 49(2A), we are of the view that the cost of acquisition of the equity shares sold by the assessee has to be taken for the purpose of working out the short-term capital gains thereon at Rs. 1,80,508. In effect, the short-term capital loss on the sale of the debentures has to be taken as returned by the assessee at Rs. 6,99,258. The short-term capital gains on the sale of the shares has to be taken at Rs. 8,36,617 (10,17,125 - 1,80,508). After setting off of the short-term capital loss against the short-term capital gains, there is a net short-term capital gain of Rs. 1,37,359. The CIT(A) has determined the net short-term capital gain at Rs. 1,37,000 as against the figure of Rs. 1,37,359 arrived at by us. In the circumstances, we have to upheld the order of the CIT(A).
13. The appeal is dismissed.