Citation : ACIT Vs. ABC Bearing Ltd. ITA No. 6430/Mum/2007, July 16, 2010
Court : ITAT Mumbai
· ABC Bearing Limited (“ABC”) claimed a capital loss on account of conversion of units of Unit Trust of India (“UTI”) US – 64 into UTI 6.75% Tax Free Bonds.
· Assessing Officer (“AO”) was of the view that conversion of units into bonds did not amount to transfer, hence there was no question of any capital gain or loss arising out of such conversion, and accordingly, the capital loss was disallowed.
· The First Appellate Authority allowed the loss, holding that „conversion? would be considered as „transfer? in terms of section 2(47) of the Income-tax Act (“ITA”).
Issues before the Mumbai Tribunal :-Whether the conversion of units into bonds amounted to a transfer under section 2(47) of the ITA and the loss on account of conversion would be allowable?
Contentions of Revenue
· The conversion of UTI US-64 units into tax free bonds would not be covered by the term transfer because it is not a case of sale or exchange or relinquishment or even extinguishment of any rights.
· Further, since transfer by way of conversion of bonds or debenture is not considered as a transfer under section 47(x), conversion of units could not to be treated as a „transfer„.
Contentions of ABC
· Section 2(47) defines the term „transfer? and the conversion of units into bonds would be covered under exchange or relinquishment or extinguishment.
· Section 47(x) starts with the phrase “nothing contained in section 45 shall apply to following transfer”, and hence the transaction has to meet the criteria of a „transfer? first, before section 47(x) per se applies.
· ABC surrendered the existing holding of the units against which a new bond was issued by the UTI. This should be treated either as an exchange as one instrument was exchanged for another or as a sale as UTI had brought the old units and issued the new bonds.
Ruling of the Tribunal
· The scheme of UTI provided that every investor holding US – 64 units of UTI had two options
– Take money back from UTI by surrendering the units; or
– Receive 6.75% Tax Free Bonds guaranteed by the Government of India
As ABC chose the second option, it is a case of conversion wherein ABC chooses to replace one type of security, i.e. US-64 units with another type of security, i.e. Tax Free Bonds.
· For any capital receipt to be brought under the provisions of section 45, there has to be disposal of an asset by way of any modes referred to in the definition of „transfer?. Any gain or loss on account of any receipt would not be chargeable u/s 45 if the transfer of asset is not involved.
· ABC had surrendered the old units of US -64 in line with the scheme announced by the UTI and received the new tax free bonds and hence it would not amount to sale.
· The Tribunal observed that “Exchange” involves mutual transfer of ownership of one thing for the ownership of another. Since the units of US – 64 of UTI ceased to be in existence after ABC opted for conversion of units into Tax Free Bonds, the Tribunal held that no exchange can be said to have taken place which can be construed as transfer.
· In case of „relinquishment? the owner withdraws himself from the property and abandon his rights, but the property continues to be in existence. Tribunal held that ABC has not abandoned its rights as it got new tax free bonds on the strength of its rights in the old US-64 units. The units ceased to exist after the conversion and hence, the transaction cannot be construed as relinquishment.
· The Tribunal held that conversion of the units would not fall under the term „extinguishment? as the old units of US-64 had ceased to be existing, but a new asset in the form of UTI Tax Free Bonds had come into existence. Thus, it is a simple case of conversion of one asset into another.
· In view of the above, conversion of units of US-64 into Tax free bonds of UTI would not amount of transfer and hence the loss would not be allowed. The Tribunal has distinguished the Supreme Court ruling in case of Anarkali Sarabhai vs. CIT [224 ITR 422] on the grounds that the facts in the instant scenario are different.
· An important proposition reiterated by this ruling is that conversion of UTI units into Tax free bonds would not be treated as transfer for the purpose of section 45 of the ITA. This principle laid down by the Tribunal is important as similar logic could apply to „conversion? of other forms of instruments, e.g. conversion of preference shares to equity shares for which there is no specific exemption under the law.
· It is also important to analyze the impact of such conversion in light of the provisions of section 56(2)(viia) of the ITA.