Income Tax Appellate Tribunal - Mumbai
Deputy Commissioner Of Income-Tax vs Corning Glass Works Usa (Corning Inc) on 17 November, 1993
Equivalent citations: [1994]49ITD368(MUM)
ORDER
V.K. Sinha, Accountant Member
1. The appeal by the department and the cross objection by the assessee are being consolidated, for the sake of convenience, since one of the issues is common.
2. The department's appeal will be taken up first. Ground No. 1 is reproduced below:
On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) erred in directing the Assessing Officer to compute the capital gain in US Dollars and then convert into Indian Rupees as per Rule 115 of the Income-tax Rules, 1962. The learned CIT (Appeals) has failed to appreciate that the proviso to Section 48 of the Income-tax Act which is in accordance with his direction has been inserted only from 1-4-1990 and hence is not applicable for the assessment year under consideration.
3. The assessee is a non-resident company. It was providing technical know-how to the Indian company, M/s. Borosil Glass Works Ltd. The sources of income were, therefore, receipt of technical know-how fees from the Indian Company and also dividend from the same company. In addition to the above, the assessee disclosed income from capital gains on sale of shares of the Indian Company and the dispute relates to the computation of capital gains.
4. The assessee sold 8,86,594 shares of the face value of Rs. 10 each of the Indian Company at a price of Rs. 51 per share. The rate for transfer was fixed by the Reserve Bank of India. According to the assessee, for the purpose of working out the capital gains, the sale-price of Rs. 51 per share should be converted into US Dollars at the prevailing rate of exchange on the date of transfer of shares. Similarly, the cost of acquisition of shares should also be converted into US Dollars after applying the conversion rate as on 1-4-1974 with respect to the original shares, which were purchased before 1-4-1974. After working out the capital gains in foreign currency in the above manner, the assessee has sought to apply the provisions of Rule 115 of the Income-tax Rules, 1962 which deals with the rate of exchange which has to be applied for conversion of income expressed in foreign currency into Indian Rupees.
5. The Assessing Officer did not accept the above method of conversion of Rupees into foreign exchange and reconversion of foreign exchange into Indian Rupees under Rule 115 of the Income-tax Rules. In this regard, he noted that the payment was made in India; the rate of sale was fixed in India; and the transaction took place in Indian Rupees. There was no physical remittance of the sale consideration to USA. He, therefore, held that Rule 115 of the Income-tax Rules had no application and he worked out the capital gains on the basis of the Rupee value of the cost as well as the sale-price. The CIT (Appeals), however, accepted the assessee's contention based on certain decisions of the Tribunal.
6. We have heard the rival submissions. The learned counsel for the assessee has very fairly brought to our notice that the Bombay High Court has held recently in the case of Asbestos Cement Ltd. v. CIT [1993] 203 ITR 358 that where transaction of transfer of shares took place in India, then the non-resident company could not convert the cost of acquisition of shares and their sale-price into foreign currency for the purposes of computing the capital gains. In view of the above, respectfully following the aforesaid decision of the jurisdictional High Court, we reverse the decision of the CIT (Appeals) and allow the department's ground of appeal.
7. Ground Nos. 2 and 3 reproduced below:
2. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) erred in directing the Assessing Officer not to reduce the cost of original shares on determining the cost of bonus shares on the sale of original and bonus shares. He has thereby erred in directing the Assessing Officer to attribute the average price as the cost of the bonus shares.
3. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) erred in directing the Assessing Officer to compute the cost of bonus shares by averaging the substituted FMV as on 1 -4-1974 which is the cost of original shares by the total number of shares (original + bonus) for arriving at the cost of bonus shares.
8. The above dispute also relates to computation of capital gains on sale of the abovementioned 8,86,594 shares. These shares consisted of 5,91,063 original shares acquired by the assessee before 1-4-1974 and bonus shares numbering 2,95,531 acquired in the year 1982. These dates are significant. The original as well as the bonus shares were transferred during the year under consideration. The sale price @ Rs. 51 per share is no more in dispute. However, the difference has arisen in the computation of cost of acquisition.
9. The assessee worked out the cost of acquisition of 5,91,063 shares @ Rs. 15.85 per share, which was the fair market value on 1-4-1974. This amounted to Rs. 93,68,348. Thereafter, the assessee worked out the average cost of 2,95,531 bonus shares by spreading the above fair market value on 1-4-1974 of Rs. 93,68,348 over the total number of shares of 8,86,594 and multiplying the same by 2,95,531. This gave a value of Rs. 31,22,779. This computation is reproduced below:
Fair market value as on 1-4-1974 of 5,91,063 shares @ Rs. 15.85 per share. Rs. 93,68,348 Average cost of 2,95,531 bonus shares -
93,68,348 x 2,95,531 Rs. 31,22,779
8,86,594
Rs. 1,24,91,127
10. On the other hand, the Assessing Officer took a view that the cost of acquisition of the original shares has to be spread over the original shares as well as the bonus shares, as held by the Supreme Court in the case of CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567 and CIT v. Gold Mohore Investment Co. Ltd. [1969] 74 ITR 62 (SC). It was held in these cases that if the bonus shares ranked paripassu with the old shares, they should be valued by spreading original cost over the old and new shares. It is not in dispute here that the bonus shares ranked paripassu with the original shares. With these observations, the Assessing Officer adopted the cost of the original shares as the fair market value on 1-4-1974, i.e., Rs. 15.85 per share and arrived at the cost of 5,91,063 original shares as well as 2,95,531 bonus shares together at Rs. 93,68,348 (5,93,063 original shares x Rs. 15.85).
11. The CIT (Appeals), however, accepted the contention of the assessee. He relied on the decision of the Supreme Court in the case of Shekhawati General Traders Ltd. v. ITO [ 1971 ] 82 ITR 788 for coming to the conclusion that the cost of original shares cannot be reduced by a process of spread over of the cost over the original shares and the bonus shares. The department has objected to this finding in ground No. 2 of the appeal.
12. The CIT (Appeals) further held that the bonus shares must be deemed to have been obtained at some cost and not free and relied on the decisions of the Supreme Court in the cases of Dalmia Investment Co. Ltd. (supra) and Gold Mohore Investment Co. Ltd. (supra) besides the decisions of the Calcutta High Court in the case of CIT v. Kishore Trading Co. Ltd. [1982] 138 ITR 527 (Cal.) and Smt. Protima Roy v. CIT[1982) 138 ITR 536 (Cal.). Regarding the precise computation of the cost of bonus shares, he held that it was to be arrived at by averaging the substituted fair market value as on 1-4-1974 by the total number of shares and relied on the decision of the Bombay Bench of the Tribunal in F. Hoffman-La Roche & Co. Ltd. v. IAC [1988] 27 ITD 17. Thus, the CIT (Appeals) accepted fully the computation given by the assessee along with the return of income. The revenue objects to this part of the decision of the CIT (Appeals) in ground No. 3 of the appeal.
13. The learned Departmental Representative relied on the reasoning given in the assessment order and submitted that full effect had been given to the provisions of Section 55(2)(b)(i) of the Income-tax Act, 1961, according to which, the assessee had an option to substitute the fair market value of the asset as on 1 -4-1974 in place of the cost of acquisition for the purpose of the capital gains. According to him, full effect had been given in this manner to the decision of the Supreme Court in the case of Shekhawati General Traders Ltd. (supra) and, there was no further justification to add the cost of bonus share once more to the total arrived at.
14. The learned counsel for the assessee, on the other hand, submitted before us that the Supreme Court was considering only the valuation of original shares in the case of Shekhawati General Traders Ltd. (supra) and it had been held that for the purpose of ascertainment of the fair market value of the shares in question on 1-1-1954, any issue of bonus shares subsequent to that date was wholly extraneous and irrelevant and could not be taken into consideration. In the circumstances, according to him, the cost of original shares had been arrived at by the assessee strictly in accordance with the above decision. Further, the decision did not touch upon the computation of the cost of bonus shares. This question had been considered by the earlier decisions of the Supreme Court in the cases of Dalmia Investment Co. Ltd. (supra) and Gold Mohore Investment Co. Ltd. (supra), though in those cases, the question of substitution of the fair market value as on a particular date for the cost was not involved. The Bombay Bench of the Tribunal had considered the impact of such substitution in the case of F. Hoffman-La Roche & Co. Ltd. (supra) and had come to a conclusion that the fair market value of the original shares on the prescribed date as against the original cost should be spread over to arrive at the cost of acquisition of the bonus shares. This decision had been followed subsequently by the Ahmedabad Bench of the Tribunal in the case of ITO v. N. Kishore Settlement & N.K. Settlement [IT Appeal Nos. 678 and 679 (Ahd.) of 1987, dated 2-4-1990] a copy of which was placed before us. Reliance was also placed on a decision in Smt. KrishnabaiA. Khatau v. Fourth ITO [1989] 35 TTJ (Bom.) 531 but a copy of the same was not placed before us.
15. We have considered the rival submissions carefully. In order to appreciate the issue before us, it will be appropriate to consider the computation of cost of acquisition separately for the original shares numbering 5,91,063 and the bonus shares numbering 2,95,531. As far as the original shares are concerned, we have noted that they were purchased before 1-4-1974, i.e., the prescribed date in Section 55(2)(b)(i) of the Income-tax Act, 1961, the relevant extract from which is reproduced below:
55(2) For the purposes of Sections 48 and 49, 'cost of acquisition',-
(b) in relation to any other capital asset,-
(i) where the capital asset became the property of the assessee before the 1st day of April, 1974 means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1-4-1974, at the option of the assessee.
16. The prescribed date has been changed from time to time. It was 1-4-1974 for the year under consideration, in place of 1-1-1954 considered in the decision of the Supreme Court in Shekhawati General Traders Ltd.'s case (supra). In that case, the assessee exercised its option under Section 55(2) of the Income-tax Act, 1961 to take the fair market value prevailing on 1-1-1954 in place of the cost price of certain shares issued to the assessee prior to 1-1-1954. There was no controversy between the revenue and the assessee upto this point. However, thereafter, according to the revenue, a position was advanced that while determining the fair market value on 1-1 -1954, the issuance of bonus or right shares after that date on the basis of the holding of the assessee prior to 1-1-1954 should have been taken into account. In other words, the cost had to be worked out by averaging the cost of the original shares and the cost of the original shares and the bonus shares taken together. According to the revenue, after the issue of bonus shares, the cost of the original holding had to be spread over the shares inclusive of the bonus or the right shares acquired on the original holding, relying on the decision of the Supreme Court in Dalmia Investment Co. Ltd. (supra). This contention was negatived by the Supreme Court by observing that in that case, no question arose of the calculation of the capital gains in accordance with the statutory provisions in pari materia with Section 48 and Section 55(2) of the Income-tax Act, 1961. In the present case, they were confined to the express provisions of Section 55(2) of the Act relating to the manner in which the cost of acquisition of capital asset has to be determined for the purposes of Section 48 of the Act. It was finally held that any issue of bonus shares subsequent to 1-1-1954 was wholly irrelevant and extraneous and could not be taken into consideration for ascertainment of the fair market value of the shares in question on 1-1-1954. This decision of the Supreme Court fully justifies the computation of cost for the original shares given by the assessee and upheld by the CIT (Appeals). We, therefore, do not find any infirmity in the order of the CIT (Appeals) on the point holding that the cost of original shares, opting for the fair market value on 1 -4-1974 cannot be reduced on account of subsequent issue of bonus shares. Thus, ground No. 2 of the department's appeal is also rejected.
17. Ground No. 3 of the appeal requires a clarification. Inasmuch as in case the cost of acquisition of the original shares numbering 5,91,063 has been rightly taken at Rs. 93,68,348, as we have held above and if the cost of acquisition of the original shares as well as 2,95,531 bonus shares is also taken at Rs. 93,68,348, as held in the assessment order, then it must follow that the cost of acquisition of 2,95,531 bonus shares in the assessment order has been taken at 'nil' With this clarification, we will now proceed to understand the impact of the issue of bonus shares, as explained by the Supreme Court in the case of Dalmia Investment Co. Ltd. (supra). It was held in that case that where bonus shares are issued in respect of ordinary shares held in a company by an assessee who is a dealer in shares, their real cost to the assessee cannot be taken to be nil or their face value. The court further held that they have to be valued by spreading the cost of the old shares over the old shares and the new issue of the bonus shares taken together if they rank paripassu. In the present case, it is not in dispute that they rank paripassu and, therefore, we heed not consider a circumstance contrary to it. We may also mention that it is not in dispute before us that the cost to an investor in shares is not different from that of a dealer in shares and, in any case, it has been held by the Bombay High Court in DM. Dahanukar v. CIT[ 1973] 88 ITR 454 that a case of an investor in shares is not different in this regard.
18. It was observed by the Supreme Court in the above case that there were four possible methods for determining the cost of bonus shares. The first method is to take the cost as the equivalent of the face value of the bonus shares. The second method was to take the cost at nil. The third method was to take the cost of the original shares and to spread it over the original shares and the bonus shares taken collectively. The fourth method was to find out the fall in the price of the original shares on the Stock Exchange and to attribute this to the bonus shares. The Supreme Court held that it could not be said that the bonus shares were a gift and were acquired for nothing (pages 578 and 579 of the report). There was an immediate detriment to the shareholder in respect of his original holding by the issue of bonus shares pro rata which ranked pari pass with the existing shares, the market price was exactly halved and divided between the old and the bonus shares. It was further observed that the result may be stated by saying that what the shareholder held as a whole rupee coin is held by him, after the issue of bonus shares, in two 50np. coins. The total value remains the same but the evidence of that value is not in one certificate but in two. It follows that the bonus shares cannot be said to have cost nothing to the shareholder because on the issue of bonus shares, there is an instant loss to him in the value of his original holding. The method of calculation which places the value of the bonus shares at nil cannot be correct. After some further discussion, it was held that the bonus shares can be valued by spreading the cost of the old shares over the old shares and the new shares taken together if the shares ranked pari passu. In the subsequent judgment in the case of Gold Mohore Investment Co. Ltd. (supra), the same principle was reiterated.
19. Thus, it will be seen that although the above judgment is the prevailing authority on valuation of bonus shares in normal cases where the question of option of adopting the fair market value under Section 55(2)(b)(i) of the Income-tax Act, 1961 is not involved, the impact of such an option remains to be examined. It is clear that the value of bonus shares cannot be taken at nil as has been done in the assessment order. However, there are still two methods possible for the computation of the cost. The first method would be to spread the cost of the original shares over the original shares and the bonus shares taken together and, the second would be to spread the fair market value of the original shares over the original shares and the bonus shares taken together. The assessee has adopted the second method.
20. This very question was considered by the Tribunal in the case of F. Hoffman-La-Roche & Co. Ltd. 's case (supra) and we will now proceed to analyse the same. It may be mentioned that this decision was followed by the Ahmedabad Bench of the Tribunal in the case of N. Kishore Settlement & N.K. Settlement (supra) and, therefore, we do not deem it necessary to consider this decision separately. In the case of F. Hoffman-La-Roche & Co. Ltd. (supra), the assessee acquired some shares in the year 1959 and, thereafter, the assessee received bonus shares in the yearl979. Subsequently, some bonus shares were sold in the assessment year 1980-81. The question arose whether the assessee was entitled to work out the average cost of acquisition of bonus shares by adopting the market value of the original shares as on 1-4-1954 which was the prescribed date for the assessment year 1980-81 as against the original cost under Section 55(2) of the Income-tax Act, 1961. The Tribunal, in para 4 of its order, noted that the meaning of the term 'cost of acquisition for the bonus shares' was to be found in the case of Daltnia Investment Co. Ltd. (supra) where the four possible methods for determination of the cost of bonus shares were examined. The four methods were mentioned and they have already been described by us above. Thereafter, it was noted that it was held by the Supreme Court that if the bonus shares ranked pari passu with the old shares, they should be valued by spreading the original cost over the old and new shares. It was further observed by the Tribunal that the cost of acquisition is defined in Section 55(2) of the Act for the purpose of computing the capital gains in relation to a capital asset. Admittedly, the bonus shares did not become the property of the assessee before 1-1-1964 and, therefore, the market value of the bonus shares as on 1-1-1964 cannot be opted by the assessee. However, the average cost of acquisition should be worked out in the light of the above decision of the Supreme Court. For this purpose, the Tribunal held that the cost of acquisition of the original shares as substituted by the market value as on 1-1-1964 under Section 55(2) of the Act should be taken into consideration. When a particular meaning has been assigned to a word under the Income-tax Act, the same should be carried to its logical conclusion and necessary implication. The market value as on 1-1-1964 has been deemed as the cost of acquisition of the original shares. Therefore, that substituted cost of acquisition should be adopted for all purposes including for the purpose of finding out the average cost of acquisition of the bonus shares.
21. On a careful perusal of the above decision, we find that it is contrary to the analysis in the judgment of the Supreme Court about the impact of the issue of the bonus shares, in the case of Dalmia Investment Co. Ltd. (supra) (at pages 578 and 579 of the report). On the issue of bonus shares, there was an immediate detriment to the shareholder in respect of his original holdings and there is a beautiful illustration given in the judgment saying that what the shareholder held as a whole rupee coin is held by him, after the issue of bonus shares, in two fifty paise coins. Thus, it is at the stage of issue of bonus shares itself that there is a detriment to the shareholder in respect of his original holding and the bonus shares acquire a cost. The question of invoking the provisions of Section 55(2)(b)(i) of the Income-tax Act, 1961 does not arise at that stage at all since Section 55(2) starts with the words "for the purposes of Sections 48 and 49" and, these sections deal with the "mode of computation and deductions of income chargeable under the head "Capital gains" and "cost with reference to certain modes of acquisition" with which we are not concerned here. Income chargeable under the head "Capital gains" can arise only when there is a transfer of a capital asset, as laid down in Section 45(1) of the Income-tax Act, 1961. There is no transfer of a capital asset at the time of issue of bonus shares and the transfer arises much later, at the time of sale. In the circumstances, we are of the opinion that the only conclusion in conformity with the observations of the Supreme Court will be that the cost of the original shares should be spread over the original shares and the bonus shares collectively and not the fair market value of the original shares. We direct accordingly. In the circumstances, ground No. 3 of the department's appeal is partly allowed.
22. The cross objection filed by the assessee will now be taken up. The ground is reproduced below:
If the Department's claim of reducing the cost of original shares on determining the cost of bonus shares is accepted, your appellant submit the following cross objections. The said proceeds in respect of bonus shares sold are not eligible to tax as capital gains as no cost can be envisaged for bonus shares and the date of the real emergence of bonus shares is not predictable and, therefore, the computational machinery of capital gain under Section 48 of the Act fails. The respondent derives support from the decision of the Supreme Court in the case of B.C. Srinivasa Shetty (128 ITR 294).
23. We have heard the rival submissions. The learned counsel for the assessee has, very fairly, invited our attention to the decision of the Special Bench of the Tribunal in the case of Rohiniben Trust v. ITO [1985] 13 ITD 830 (Bom.). In that case, the assessees sold certain equity shares giving rise to a surplus. The ITO included the surplus as long-term capital gains in the assessee's total income. On appeal, the assessee contended on the basis of the decision of the Supreme Court in CIT v. B.C. Srinivasa Setty [1981] 123 ITR 294 that the shares sold being bonus shares, no capital gains arose on the transfer of an asset for which no cost of acquisition could be ascribed. The CIT (Appeals) rejected the claim and his decision was upheld by the Tribunal. However, the learned counsel for the assessee sought to distinguish the facts of the present case inasmuch as the cost of acquisition of bonus shares had been calculated on the basis of fair market value on 1-4-1974 in the return of income. That may be the position in the return of income, but we have held above that the cost of acquisition of the bonus shares has to be ascertained with respect to the cost of original shares being spread over the original shares and the bonus shares collectively. Thus, the facts are not distinguishable and, respectfully following the aforesaid decision of the Special Bench of the Tribunal, we reject the cross objections filed by the assessee.
24. In the result, the appeal is partly allowed and the cross objections stand dismissed.