1993 (11) TMI 85 - AT - Income Tax

Cost allocation for original and bonus shares clarified by Tribunal; bonus shares subject to capital gains tax.

Deputy Commissioner Of Income Tax. Versus Corning Glass Works, USA (Corning INC).

The Tribunal partly allowed the department's appeal, upholding the CIT (Appeals)'s decision on the cost of original shares but modifying the computation ... Capital Gains, Computation Of Issues Involved:1. Computation of capital gains in foreign currency.2. Determination of the cost of acquisition for original and bonus shares.Detailed Analysis:Issue 1: Computation of Capital Gains in Foreign CurrencyDepartment's Appeal:The primary issue raised by the department was whether the capital gains should be computed in US Dollars and then converted into Indian Rupees as per Rule 115 of the Income-tax Rules, 1962. The department contended that the proviso to section 48 of the Income-tax Act, which allows such a conversion, was inserted only from 1-4-1990 and is not applicable for the assessment year under consideration.Assessee's Argument:The assessee, a non-resident company, argued that the sale price of Rs. 51 per share should be converted into US Dollars at the prevailing rate of exchange on the date of transfer of shares. Similarly, the cost of acquisition of shares should also be converted into US Dollars after applying the conversion rate as on 1-4-1974. The assessee sought to apply Rule 115 for conversion of income expressed in foreign currency into Indian Rupees.Tribunal's Decision:The Tribunal noted that the Bombay High Court had recently held in Asbestos Cement Ltd. v. CIT [1993] 203 ITR 358 that where the transaction of transfer of shares took place in India, the non-resident company could not convert the cost of acquisition of shares and their sale price into foreign currency for the purposes of computing the capital gains. Respectfully following this decision, the Tribunal reversed the decision of the CIT (Appeals) and allowed the department's ground of appeal.Issue 2: Determination of the Cost of Acquisition for Original and Bonus SharesDepartment's Appeal:The department contested the CIT (Appeals)'s direction to the Assessing Officer not to reduce the cost of original shares when determining the cost of bonus shares. The CIT (Appeals) had directed the Assessing Officer to attribute the average price as the cost of the bonus shares.Assessee's Computation:The assessee computed the cost of acquisition of 5,91,063 original shares at Rs. 15.85 per share, which was the fair market value on 1-4-1974. This amounted to Rs. 93,68,348. The assessee then spread this cost over the total number of shares (original + bonus) to arrive at the cost of the bonus shares.Assessing Officer's View:The Assessing Officer, relying on the Supreme Court decisions in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567 and CIT v. Gold Mohore Investment Co. Ltd. [1969] 74 ITR 62 (SC), held that the cost of acquisition of the original shares should be spread over both the original and bonus shares.CIT (Appeals)'s Decision:The CIT (Appeals) accepted the assessee's computation, relying on the Supreme Court's decision in Shekhawati General Traders Ltd. v. ITO [1971] 82 ITR 788, which held that the cost of original shares cannot be reduced by spreading it over the bonus shares.Tribunal's Decision:The Tribunal upheld the CIT (Appeals)'s decision regarding the cost of original shares, stating that the cost of original shares, opting for the fair market value on 1-4-1974, cannot be reduced on account of subsequent issue of bonus shares. However, the Tribunal partially allowed the department's appeal regarding the cost of bonus shares. It held that the cost of the original shares should be spread over both the original and bonus shares collectively, not the fair market value of the original shares.Cross Objection by the AssesseeAssessee's Argument:The assessee argued that if the department's claim of reducing the cost of original shares for determining the cost of bonus shares is accepted, then the proceeds from the sale of bonus shares should not be eligible for tax as capital gains. They relied on the Supreme Court's decision in B.C. Srinivasa Shetty (128 ITR 294).Tribunal's Decision:The Tribunal rejected the cross objections filed by the assessee, following the decision of the Special Bench of the Tribunal in Rohiniben Trust v. ITO [1985] 13 ITD 830 (Bom.), which held that the surplus from the sale of bonus shares should be included as long-term capital gains.Conclusion:The appeal by the department was partly allowed, and the cross objections filed by the assessee were dismissed. The Tribunal upheld the CIT (Appeals)'s decision regarding the cost of original shares but modified the computation method for the cost of bonus shares, directing that the cost of the original shares should be spread over both the original and bonus shares collectively.