Advance Ruling on entitlement of a non-resident company inter alia to benefits of section 55(2)(b)(i) of IT Act in respect of bonus shares allotted to it by an Indian company
SUMMARY OF ADVANCE RULING
In the case of a capital asset falling within the ambit of clause (b) of section 55(2), acquired before 1-4-1981, the cost of acquisition can be taken as fair market value of that asset as on 1-4-1981.
ADVANCE RULING DETAILS
Decided by:. The Authority for Advance Rulings (Income Tax) New Delhi
In The case of: Four Star Oil & Gas Co., In re
Appeal No. : AAR NO. 792 OF 2008
Decided on: MARCH 31, 2008
13. To appreciate the above rival contentions, it would be worthwhile to refer to relevant provisions of the Act i.e. section 48 and section 55(2) respectively. Section 48 provides for the computation of capital gains. The key factors to be taken into account while computing the capital gains are (1) the full value of consideration for transfer (ii) the cost of acquisition of the capital asset and the cost of improvement; and (iii) the expenditure incurred in connection with the transfer. Items (ii) and (iii) have to be deducted from item (i). Section 55(2) defines the expression “cost of acquisition” . The relevant parts of the said sub-section i.e. section 55(2) are extracted hereunder:
“55. (1) xxx xxx xxx
(2) For the purposes of section 48 and 49, “cost of acquisition” : -
(aa) In a case where, by virtue of holding a capital asset, being a share or any other security, within the meaning of clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter in this clause referred to as the financial asset), the assessee –
(A) becomes entitled to subscribe to any additional financial asset ; or
(B) is allotted any additional financial asset without any payment, then, subject to the provisions of sub-clause (i) and (ii) of clause (b)@ (iiia) In relation to the financial asset allotted to the assessee without any payment and on the basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee; and (ab) In relation to a capital asset, being equity share or shares allotted to a share- holder of a recognized stock exchange in India under a scheme for demutualisation or corporatisation approved by a Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), shall be the cost of acquisition of his original membership of the exchange.
Provided that the cost of a capital asset, being trading or clearing rights of the recognized stock exchange acquired by a shareholder who has been allotted equity share or shares under such scheme of demutualisation or corporatisation, shall be deemed to be nil.
(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, 1981, means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of April, 1981, at the option of the assessee@ ;
(ii) where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, and the capital asset became the property of the previous owner before the 1st day of April, 1981, means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of April, 1981, at the option of the assessee.”
14. From the above, it emerges that there are four categories of capital assets enumerated in clauses (a),(aa), (ab) and (b) of sub-section (2) of section 55. Clause (b) is a residuary provision governing “any other capital asset”. We are concerned here with the capital asset falling within the scope of sub-clause (aa) and category (B) thereof. The bonus shares allotted without payment of consideration is an additional financial asset that falls within part (B) of clause (aa) and, therefore in the normal course, the cost of acquisition shall be taken to be `nil’ in view of stipulations in sub-clause (iiia). But, we are of the view that in relation to clause (aa) asset that principle of computation stands excluded by the phrase “subject to the provisions of sub-clause (i) and (ii) of clause (b)”. The said expression “subject to….” is significant and it points to the applicable provision for the purpose of ascertaining the cost of acquisition of an asset falling under clause (aa). In other words, the rules of computation of cost laid down in various sub-clauses of clause (aa) have been expressly made subject to the provisions of sub-clause (i) & (ii) of clause (b). Thus, in the case of a capital asset answering the description given in sub-clauses (i) and (ii) of clause (b), the rules of computation laid down by those sub-clauses of clause (b) would prevail over the rules in the preceding sub-clause (aa). The expression “subject to the provisions” of sub-clause (i) and (ii) of clause (b)” was advisedly introduced to extend the benefit of deduction of deemed cost of acquisition in respect of a capital asset of the nature specified in clause (aa), if it was acquired before 1st April, 1981. Otherwise, there is no purpose in ordaining that the operation of clause (aa) is subject to the provisions of sub-clause (i) and (ii) of clause (b). The `capital asset’ referred to in clause (b) takes within its fold the financial assets in the form of shares or other securities as specified in clause (aa). It is clear from clause (b) of Section 55(2) that in the case of a capital asset falling within the ambit of that clause, acquired before 1st April, 1981, the cost of acquisition can be taken as fair market value of the that asset as on 1st April, 1981. This provision prevails over sub-clause (iiia) of clause (aa). The applicant is therefore entitled to the benefit conferred by clause (b)(i) of S.55(2). We are of the opinion that the ruling of this Authority in Kern-Liebers International GmbH, In RE reported in 301 I.T.R. 178 squarely applies to the present case.