Case Law Details
Director Of Income-Tax International Taxation Vs Intel Capital (Cayman) Corporation (Karnataka High Court)
HC: Capital gain on conversion of FCCBs into shares would be determined by adopting conversion price prevailing at BSE or NSE on date of conversion
Conclusion: AO was not justified in computing capital gains by adopting the cost of acquisition at Rs. 873.83 and 858.08 per share as bonds issued to assessee were issued under the Foreign Currency Exchangeable Bond Scheme, 2008 (FCCB scheme) and the conversion price Rs. 200/- determined by assessee on the basis of price of shares at Bombay Stock Exchange or National Stock Exchange on the date of conversion of FCBBs into shares.
Held: Assessee had acquired foreign currency convertible bonds and after conversion of the same into shares, sold the same during the relevant previous year and disclosed short term capital gains from the transaction and paid tax thereon at the prescribed rate. The cost of acquisition of equity shares on conversion of foreign currency convertible bonds was shown to be at 873.83 and 858.08 per share whereas in fact assessee converted the bonds into shares at `200/- per share. AO concluded that cost of acquisition of share had to be assessed at 200 per share and not at 873.83 and 858.08 per share as claimed by assessee and completed the assessment. In the instant case, bonds issued to assessee were issued under the Foreign Currency Exchangeable Bond Scheme, 2008 (FCCB scheme) and the conversion price determined on the basis of price of shares at Bombay Stock Exchange or National Stock Exchange on the date of conversion of FCBBs into shares. It was also pertinent to mention that there was no conflict between the provisions of the scheme and the Acts / Rules. Therefore, the issue was decided in favour of assessee.
FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT
This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment year 2008-09. The appeal was admitted by a bench of this Court vide order dated 27.11.2015 on the following substantial question of law:
Whether on the facts and circumstances of the case, the Tribunal was right in holding that the computation of capital gains by assessee is right and capital gains computed by assessing authority by adopting rate of acquisition at Rs.200 is erroneous and further holding that period of holding shares should be from the date of conversion into shares to the date of sale of shares and it is short term capital gain as it is less than 12 months only.
2. Facts leading to filing of the appeal briefly stated are that assessee is a non-resident company. The company filed its return of income for Assessment Year 2008-09 by declaring a total income of Rs. 49,95,03,232/-. In the assessment proceedings under Section 143(3) read with Section 144C of the Act, the Assessing Authority, vide order dated 18.02.2011 inter alia held that assessee had acquired foreign currency convertible bonds and after conversion of the same into shares, sold the same during the relevant previous year and disclosed short term capital gains from the transaction and paid tax thereon at the prescribed rate. It was further held that the cost of acquisition of equity shares on conversion of foreign currency convertible bonds was shown to be at Rs. 873.83 and Rs. 858.08 per share whereas in fact the assessee converted the bonds into shares at Rs. 200/- per share. The Assessing Authority therefore concluded that cost of acquisition of share has to be assessed at Rs. 200/- per share and not at `873.83 and `858.08 per share as claimed by the assessee and completed the assessment.
3. Being aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), who by an order dated 14.07.2011 dismissed the appeal. The assessee thereupon approached the Income Tax Appellate Tribunal. The Tribunal, by an order dated 28.03.2013 inter alia held that under Section 115AC of the Act, the Central Government has formed the scheme permitting some companies like NIIT to issue foreign currency convertible bonds which can at any point of time be converted into equity shares. It was further held that subscription agreement which is approved by Reserve Bank of India, that is the regulatory body and as per the terms and conditions for the issuance of foreign currency convertible bonds between the NIIT and the assessee, the bonds are to be initially converted into shares at `200/- per share subject to adjustments under Clause 6(c) of the agreement. Therefore, the assessee was rightly allotted 21,28,000 shares at the rate of `200/- as per bond agreement at the prevalent convertible foreign currency rate. It was further held that Clause (xa) of Section 47 of the Act refers to transfer by way of conversion of bonds referred to in Clause (a) of sub-Section 115AC of the Act. Therefore, the aforesaid provision is not applicable to the case in hand. Accordingly, the order passed by the Commissioner of Income Tax (Appeals) and the Assessing Officer was set aside and the appeal preferred by the assessee was allowed. In the aforesaid factual background, this appeal has been filed.
4. Learned counsel for the revenue submitted that in view of Section 49(2A) of the Act, for the purposes of Section 45 of the Act, the cost of acquisition has to be taken as the cost of debentures. It is further submitted that in case of any conflict between scheme / Rules and the provisions of the Act, the provisions of the Act would prevail. It is also submitted that the Bombay High Court in ‘KINGFISHER CAPITAL CLO LTD. Vs. COMMISSIONER OF INCOME-TAX (INTERNATIONAL TAXATION), MUMBAI (2019) 413 ITR 1 (Bombay), was dealing with the scheme which was introduced in the year 1993 and was made applicable for the Assessment Year 2002-03 and has invited our attention to para 80 to 82 of the aforesaid decision.
5. On the other hand, learned counsel for the assessee has invited the attention of this court to the scheme for facilitating issue of foreign currency, convertible bonds and ordinary shares through global depository mechanism by Indian companies and has invited our attention to Clause 2(f) of the Scheme and has pointed out that the words and expressions not defined in the scheme but defined in the Act, the Companies Act, 1956 or the Securities and Exchange Board of India Act, 1992 or the Rules and Regulations framed under these acts shall have the same meaning respectively assigned to them as the case may be in Income Tax Act, or the Companies Act or the Securities and Exchange Board of India Act. It is also pointed out that Clause 7 of the scheme deals with transfer and detention and sub-Clause (4) of Clause 7 cannot be read in isolation and has to be read along with sub-Clause (3). It is also argued that clause 4 of the scheme deals with cost of acquisition of shares in respect of conversion of foreign currency convertible bonds. It is also pointed out that 2008 scheme deals with foreign currency exchangeable bond and therefore, does not apply to the fact situation of the case. It is also urged that the issue involved in this appeal is covered by a decision in KINGFISHER CAPITAL CLO LTD. supra and there is no conflict between the provisions of the scheme and either the Act or the Rules and therefore, the cost of acquisition of shares has rightly been assessed as per the provisions of the scheme by the Tribunal.
6. We have considered the submissions made by learned counsel for the parties and have perused the record. The singular issue, which arises for consideration in this appeal is whether the Tribunal was right in computing the capital gains by adopting the rate of acquisition at Rs.200/-. The Central Government has issued the scheme viz., issue of foreign currency convertible bonds and ordinary shares (through Depository Receipt Mechanism) Scheme, 1993. The aforesaid scheme has been made applicable for the Assessment Year 2002-03 onwards vide notification dated 10.09.2002. Clause 2(f) of the Scheme provides that the words and expressions not defined in the scheme, but defined in the Income Tax Act, 1961 or the Companies Act, 1956, or the Securities and Exchange Board of India Act, 1992 or the Rules and Regulations arising from the conversion into equity shares of the issuing company. Section 47 of the Act, specifies the cases in which transfer of a capital asset is not assessable to tax under the head “Capital Gains”. Clause (x) of section 47 reads as under:
For the purposes of conversions of Foreign Currency Convertible Bonds, the cost of acquisition in the hands of the nonresident investors would b the conversion price determined on the basis of the price of the shares at the Bombay Stock Exchange, or the National Stock Exchange, on the date of conversion of the Foreign Currency Convertible Bonds into shares.
7. Thus, the cost of acquisition has to be determined as per provisions of Clause 7(4) of the Scheme for computation of capital gains. It is also pertinent to mention here that Clause (xa) of Section 47, which refers to transfer by way of conversion of bonds has been inserted with effect from 01.04.2008 which is applicable to the Assessment Year 2009-10 onwards.
8. Even otherwise, this issue has been dealt with by division bench of Bombay High Court in KINGFISHER CAPITAL CLO LTD. supra. The relevant extract of the judgment is reproduced for the facility of reference:
15. Section 115AC deals with taxability of only certain types of income that could arise in respect FCCBs and GDRs.
a) Interest payments made to non- resident holders of FCCBs would be liable to tax in India at 10 percent.
b) Long-term capital gain realized from the transfer of FCBBs or shares to a resident would be liable to tax in India at 10 percent.
16. In light of the amendment to section 115AC of the Act, clause (x) of Section 47 was amended simultaneously to include “bonds” to address the taxability arising from the conversion into equity shares of the issuing company. Section 47 of the Act, specifies the cases in which transfer of a capital asset is not assessable to tax under the head “Capital Gains”. Clause (x) of section 47 reads as under:
“(x) any transfer by way of conversion or debentures, debenture-stock or deposit certificates in any form, of a company into shares or debentures of that company.”
17. Section 49 of the Act specifies the cost with reference to certain modes of acquisition. Section 49(2A) of the Act was not amended to include “bonds”. Section 49(2A) of the Act at the time of introduction
to section 115AC and 47(x) of the Act read as under:
“(2A) 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.”
18. In 2008, the Central Government notified a new and separate scheme as Foreign Currency Exchangeable Bond Scheme, 2008 (for short “FCEB Scheme”). The footnote to section 115AC was amended. The relevant part of section 115AC including the amended Footnote is reproduced as below:
“Tax on income from bonds or Global Depository Receipts purchased in foreign currency or capital gains rising from their transfer.
115AC (1) Where the total income of an assessee, being a nonresident, includes –
(a) income by way of interest on bonds of an Indian company issued in accordance with such scheme as the Central Government may, by notification in the Official Gazette* specify in this behalf or on bonds of a public sector company sold by the Government and purchased by him in foreign currency; or:”
*The footnote to section 115AC(1)(a) reads as under:
66. See Issue of Foreign Currency Exchangeable Bonds Scheme, 1 2008/Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993/Depository Receipts Scheme, 2014″.
19. Section 47(xa) was introduced by the Finance Act, 2008, with effect from April 1, 2008. Clause (xa) of section 47 reads as under:
“(xa) Any transfer by way of conversion of bonds referred to in clause (a) of sub-section (1) of section 15AC into shares or debentures of any company.”
20. Section 49(2A) as amended by the Finance Act, 2008 with effect from April 1,14 2008. Clause (2A) of section 49 reads as under:
“(2A) Where the capital asset, being a share or debenture of a company, became the property of the assessee in consideration of a transfer referred to in clause (x) or clause (xa) 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, bond or deposit certificate in relation to which such asset is acquired by the assessee”
21. The notes to clauses dealing with Section 47(xa) and 49(2A) at the time of introduction read as under:
“47 (xa) It is proposed to insert a new clause (xa) to provide that any transfer by way of conversion of bonds referred to in clause (a) of sub-section (1) of section 115AC into shares or debentures of any company shall not be considered as transfer.
49(2A) Sub-section (2A) of the said section 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.
It is proposed to substitute the said sub-section to provide that where the capital asset, being a share or debenture of a company, became the property of the assessee in consideration of a transfer referred to in clause(x) or clause (xa) 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, bond or deposit certificates in relation to which such asset is acquired by the assessee.
This amendment will take effect from 1st April, 2008 and will accordingly apply in relation the assessment year 2008- 09 and subsequent assessment years.”
22. The explanatory memorandum dealing with 49(2A) at the time of introduction reads as under:
“In 1992, the Government allowed established Indian companies to issue Foreign Currency Convertible Bonds (FCCBs), with special tax regime for non- resident investors, so as to encourage the flow of foreign exchange to India. The Government has now allowed established Indian companies to issue Foreign Currency Exchangeable Bond (FCEB). These are bonds expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency. The FCEBs differ from FCCBs in as much as the latter can only be converted into shares of the issuing company, whereas FCEBs can also be converted into or exchanged for the shares of a group company. With a view to providing a level playing field to FCEBs, it is proposed to provide that the conversion of FCEBs into shares or debentures of any company shall not be treated as a ‘transfer’ within the meaning of Income-tax Act. Further it is also proposed to substitute sub- section (2A) of section 49 to provide that the cost of acquisition of the shares received upon conversion of the bond shall be the price at which the corresponding bond was acquired.”
23. The bonds issued to the Petitioner are under the FCCB Scheme of 1993. Under the FCCB Scheme, the cost of acquisition of equity shares upon conversion of FCCBs are to be determined in accordance with the provisions of clause 7(4) and 8(3). It is submitted that:
a. The provisions of the aforesaid clauses of the FCCB Scheme continue to operate; and
b. Section 49(2A) of the Act was amended by the Finance Act, 2008 and was to be read with the FCEB Scheme.
24. Prior to its substitution by the Finance Act, 2008, w.e.f. 1-4-2008, sub-section (2A) of section 49, as inserted by the Finance Act (No. 2) Act, 1991, w.e.f. 1-4- 1962 did not contain any reference to “bonds”. Under this circumstance, the cost of acquisition of equity shares upon the conversion of FCCBs was not governed by the provisions of section 49(2A) instead it was always to be determined in accordance with the special provisions of clause 7(4) read with clause 8(3) of the FCCB Scheme.
9. In the instant case also, bonds issued to the petitioner were issued under the FCCB scheme and the conversion price determined on the basis of price of shares at Bombay Stock Exchange or National Stock Exchange on the date of conversion of FCBBs into shares. It is also pertinent to mention here that there is no conflict between the provisions of the scheme and the Acts / Rules. We respectfully agree with the view taken by the High Court of Bombay and therefore, Answer the substantial question of law against the revenue and in favour of the assessee.
In the result, the appeal fails and is hereby dismissed.
