By K. B. Bhujle
Advocate
25. DIT (International Taxation) vs. Intel Capital (Cayman) Corporation [2020]
429 ITR 45 (Kar.) Date
of order: 6th October, 2020 A.Y.: 2008-09
Capital
gains – Computation of capital gains – Cost of acquisition – Section 115AC –
Conversion of foreign currency convertible bonds into equity shares –
Subsequent sale of such shares – Cost of acquisition of shares to be calculated
in terms of Issue of Foreign Currency Convertible Bonds and Ordinary Shares
(through Depository Receipt Mechanism) Scheme, 1993
The
assessee was a non-resident company. It filed its return of income for the A.Y.
2008-09. The A.O. held that the assessee had acquired foreign currency
convertible bonds and after conversion thereof into shares, sold the shares
during the previous year relevant to the A.Y. 2009-10 and disclosed short-term
capital gains from the transaction and paid tax thereon at the prescribed rate.
He 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 A.O. therefore concluded that the cost of acquisition of
shares had to be assessed at Rs. 200 per share and not at Rs.873.83 and Rs.
858.08 per share as claimed by the assessee and completed the assessment.
This was
upheld by the Commissioner (Appeals). The Tribunal held that u/s 115AC the
Central Government had formed the Issue of Foreign Currency Convertible Bonds
and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993
permitting some companies to issue foreign currency convertible bonds which
could at any point of time be converted into equity shares. It further held
that the subscription agreement was approved by the Reserve Bank of India, the
regulatory body, and under the terms and conditions for the issuance of foreign
currency convertible bonds between the NIIT and the assessee, the bonds were to
be initially converted into shares at Rs. 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 Rs. 200 in accordance with the bond
agreement at the prevalent convertible foreign currency rate. Accordingly, the
orders passed by the Commissioner (Appeals) and the A.O. were set aside and the
appeal preferred by the assessee was allowed.
On appeal
by the Revenue, the Karnataka High Court upheld the decision of the Tribunal
and held as under:
‘i) The Central Government made the Issue of
Foreign Currency Convertible Bonds and Ordinary Shares (through Depository
Receipt Mechanism) Scheme, 1993 applicable for the assessment year 2002-03
onwards by Notification dated 10th September, 2002 ([1994] 208 ITR [St.] 82). 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 framed under these Acts, shall have the meanings respectively
assigned to them, as the case may be, in those Acts. Clause 7 of the Scheme
deals with transfer and detention. Thus, the cost of acquisition has to be
determined in accordance with the provisions of clause 7(4) of the Scheme for
computation of capital gains. Clause (xa) of section 47 of the Income-tax Act,
1961, which refers to transfer by way of conversion of bonds, was inserted with
effect from 1st April, 2008 and is applicable to the A.Y. 2009-10
onwards. There is no conflict between the provisions of the Scheme and the
Income-tax Act or the Income-tax Rules.
ii) The bonds were issued under the 1993 Scheme
and the conversion price was determined on the basis of the price of shares at
the Bombay Stock Exchange or the National Stock Exchange on the date of
conversion of the foreign currency convertible bonds into shares. The
computation of capital gains by the assessee was right.’
