Case Note & Summary
The writ petition under Article 226 was filed before the Bombay High Court challenging an order dated 29 March 2018 passed by the Commissioner of Income Tax (International Taxation) under section 264 of the Income-tax Act, 1961. The petitioner, Kingfisher Capital CLO Ltd., a Cayman Islands entity, had purchased 352 zero-coupon Foreign Currency Convertible Bonds (FCCBs) of Nava Bharat Ventures Limited (NBVL) from Lehman Brothers Commercial Corporation Asia Limited in June 2008. During financial year 2011-12, it converted 323 FCCBs into 1,29,23,073 equity shares of NBVL and sold 83,89,938 shares, reporting a short-term capital gain of Rs. 7.36 crores. The petitioner computed the cost of acquisition based on the closing price of NBVL shares on the National Stock Exchange on the date of conversion, invoking clause 7(4) of the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993. The Assessing Officer, however, applied section 49(2A) of the Income-tax Act and determined the cost of acquisition as the price attributable to the FCCBs, resulting in a capital gain of Rs. 91.15 crores. The AO also initially treated the entire sale proceeds of Rs. 174.73 crores as unexplained cash credit, which was set aside in revision. In the revision petition under section 264, the Revisional Authority upheld the method under section 49(2A) for cost of acquisition, leading to the present writ petition. The petitioner contended that clause 7(4) of the FCCB Scheme must prevail, while the Revenue relied on the specific statutory provision of section 49(2A) and the legislative history. The High Court heard arguments and examined the provisions of sections 47(xa), 115AC, and the FCCB Scheme, but the available judgment text ends after narrating the facts and contentions, without providing the final decision or reasoning.
Headnote
A) Income Tax - Capital Gains - Cost of Acquisition of Shares on Conversion of FCCBs - Income-tax Act, 1961, Sections 49(2A), 47(xa), 115AC; FCCB Scheme, 1993, Clause 7(4) - The petitioner, a non-resident corporate assessee, computed short-term capital gains on sale of NBVL shares by taking the cost of acquisition as per clause 7(4) of the FCCB Scheme, i.e., closing price on NSE on date of conversion. The Assessing Officer and Revisional Authority applied section 49(2A), determining cost as the price paid for the FCCBs. The Revisional Authority partly allowed revision on unexplained cash credit but upheld the cost computation under section 49(2A). The High Court examined the factual background and the legal provisions, noting the conflict between the general scheme and the specific statutory provisions. The final decision is not included in the available excerpt. (Paras 7-10, 13-14)
Issue of Consideration
Whether the cost of acquisition of equity shares obtained on conversion of Foreign Currency Convertible Bonds should be determined as per clause 7(4) of the FCCB Scheme (closing price on date of conversion) or under section 49(2A) of the Income-tax Act, 1961 (cost of the FCCBs).
Law Points
- cost of acquisition of shares on conversion of FCCBs
- clause 7(4) of FCCB Scheme 1993
- section 49(2A) of Income-tax Act 1961
- non-resident taxation
- capital gains computation
Case Details
2019 LawText (BOM) (03) 254
WRIT PETITION (ST) NO. 19262 OF 2018
S.C. Dharmadhikari, B.P. Colabawalla
Porus F. Kaka (for Petitioner), Abhay Ahuja (for Respondents)
Kingfisher Capital CLO Ltd.
1 Commissioner of Income Tax, (International Taxation)-3, Mumbai; 2 Deputy Commissioner of Income Tax (International Taxation) -3(1)(2); 3 The Union of India
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Nature of Litigation
Writ petition under Article 226 of the Constitution of India challenging a revisional order under section 264 of the Income-tax Act, 1961 regarding the computation of capital gains on sale of equity shares obtained upon conversion of Foreign Currency Convertible Bonds.
Remedy Sought
Quashing of the order dated 29 March 2018 passed by the Commissioner of Income Tax (International Taxation), and a direction to withdraw or cancel the said order concerning the determination of cost of acquisition and period of holding for the transfer of shares.
Filing Reason
The Assessing Officer and Revisional Authority applied section 49(2A) of the Income-tax Act to compute the cost of acquisition of shares as the cost of the FCCBs, while the petitioner contended that clause 7(4) of the FCCB Scheme mandated the closing price on the date of conversion.
Previous Decisions
The Assessing Officer passed an assessment order adding the entire sale proceeds as unexplained cash credit and computing capital gains under section 49(2A). The Revisional Authority partly allowed the revision, deleting the addition as unexplained cash credit but upheld the computation of capital gains under section 49(2A).
Issues
Whether the cost of acquisition of shares obtained on conversion of FCCBs should be determined under clause 7(4) of the FCCB Scheme, 1993 or under section 49(2A) of the Income-tax Act, 1961.
Whether the revisional authority's order upholding the application of section 49(2A) is legally sustainable and not prejudicial to the assessee.
Submissions/Arguments
Petitioner argued that clause 7(4) of the FCCB Scheme explicitly provides that the cost of acquisition for a non-resident investor converting FCCBs shall be the conversion price based on the stock exchange price on the date of conversion, and that section 49(2A) should not override this scheme having statutory recognition under section 115AC.
Respondents supported the revisional order, contending that section 49(2A) of the Income-tax Act specifically deals with the cost of acquisition of shares acquired on conversion of bonds or debentures and must be applied, and that the order was not erroneous or prejudicial to the assessee.
Judgment Excerpts
7(4) For the purpose of conversion of Foreign Currency Convertible Bonds, the cost of acquisition in the hands of the non-resident investors would be 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 Foreign Currency Convertible Bonds into shares.
However, the AO held that the provision of section 49(2A) of the IT Act should be considered for the purpose of computing the cost of acquisition of the shares of NBVL received from the conversion of the FCCBs.
Procedural History
Petitioner filed return of income for FY 2011-12 reporting short-term capital gains. Assessing Officer passed assessment order adding sale proceeds as unexplained cash credit and computing capital gains under section 49(2A). Petitioner filed Revision Petition under section 264 on 12 May 2016. Respondent No.1 partly allowed revision, granting relief on unexplained cash credit but upholding computation under section 49(2A) by order dated 29 March 2018. Thereafter, writ petition filed on 6 July 2018.
Acts & Sections
- Income-tax Act, 1961: 111A, 49(2A), 47(xa), 115AC(1)(a), 264
- Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993: 7(4), 8(3), 8(4)
