TaxTMI 
TaxTMI 
2005 (6) TMI 525
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....for manufacture of hoists. In consideration of having supplied the know-how and machinery, and also having granted the licence to manufacture hoists, the assessee-company was allotted 2,500 equity shares of Rs. 100 each. The agreements entered into by the assesseecompany with the HHL, copies of which are placed before us at pages 1 to 26 of the paper book, specifically provided that the assessee “has become owner of 2,500 equity shares of Rs. 100 each and of the agreed value of Rs.2,50,000 in the capital of the company” and that “it is expressly agreed and declared that the shares of total value of Rs. 2,50,000 held” by the assessee shall not be sold in India before a period of ten years. The said issue of shares was duly authorised by the Reserve Bank of India, vide letter dated June 23, 1964,-a copy of which was placed before us at pages 27 and 28 of the paper book. In the books of the assessee, as certified by the assessee vide letter dated September 28, 1998, the 2,500 shares in HHL were shown as having been acquired by the assessee for a consideration of DM 2,17,175.53. In the same letter, the assessee has further certified that the costs incurred in supply of know-how....
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....rrency as was initially used in purchase of shares. In this case, the assessee was entitled to receive certain payments from the Indian company in Deutsche Marks. Instead of making this payment, the assessee was issued shares of HHL, an Indian company of value equivalent to rupee value of the amount due in Deutsche Marks. It does not automatically imply that the shares were purchased in foreign currency Deutsche Marks. Since there is ambiguity in determining the foreign currency that was utilized in purchase of shares, it is not possible to convert full value of consideration received in transfer of shares into any particular foreign currency. In fact, it was the Indian currency that was utilized in purchase of shares and the conversion rate as on the date of issue of shares was used to determine only the number of shares. Since it is not possible to ignore the fact that shares were acquired in Indian currency, the first proviso to section 48 is not applicable. Accordingly, capital gains arising from transfer of the shares is computed indexing the actual cost of acquisition or fair market value as on April 1, 1981. In this case, the fair market value as on April 1, 1981 has not bee....
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.... of foreign currency, there would not have been any requirement of approval by the Foreign Exchange Control Branch of the Reserve Bank of India under the FERA.” However, as far as the question of adoption of fair market value in respect of bonus shares is concerned, the Commissioner of Income-tax (Appeals) was unimpressed with the arguments of the assessee on the merits. On this issue, his conclusions were as reproduced below : “ …… Logically, the process of compensation for inflation in the quantum of cost cannot be applied when there is no cost, i.e., cost is nil . . . Further, the substitution of cost by market value is for the benefit and if the cost incurred by him were more than the market value, the same having been reduced over a period of time, he is not required to exercise the option. This also implies that substitution option is available when real cost is incurred by an assessee. In view of this, I hold that in respect of bonus shares, where the cost of acquisition is nil in terms of amended provision [of section 55(2)(iiia)] the cost cannot be substituted by the market value even if the bonus shares were issued before April 1, 1981. This is the logical i....
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.... the case before us is concerned, describes the cost of acquisition as “the cost of acquisition of the asset to the assessee or the fair market value of the asset as on April 1, 1981, at the option of the assessee”. The general meaning of the expression “cost of acquisition” shall have to be ascertained on the basis of the principles laid down by courts from time to time, and the normally understood meaning of that expression shall have to be taken into account. The hon’ble Supreme Court has, in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, and though in the context of connotation of actual cost for the purpose of depreciation and development rebate, observed that (page 173): “ as the expression ‘actual cost’ has not been defined, it should, in our opinion, be construed in the sense which no commercial man would misunderstand” and that “for this purpose it would be necessary to ascertain the connotation of the above expression in accordance with the normal rules of accountancy prevailing in the commerce or industry”. Viewed in this perspective, when an assessee incurs an expenditure to execute a contract under which he is to get certain shares ....
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....t proviso to section 48, is like this. All the costs, i.e., cost of acquisition and cost of improvement, are measured in terms of the currency as was utilized in the acquisition of shares. The full value of sale consideration received or accruing as a result of transfer of shares or debentures is also converted into the same currency, so as to make the two figures comparable. Then capital gain is worked out in the same foreign currency. The capital gain so worked out is converted back into Indian rupees, and in terms of the provisions of Explanation 2(f) to rule 115, at the TT buying rate on the last day of the month preceding the month in which the shares or debentures are transferred. The underlying scheme of this provision is unambiguously clear. The capital gains are to be computed in terms of the foreign currency in which the non-resident has invested in acquiring the shares. This would nullify the notional advantage to the assessee of gains in rupee terms which are primarily on account of fall in value of Indian rupees vis-a-vis that foreign currency. If an assessee invests US $ 1,000 in 1985, which was equal to say Indian Rs. 15,000 at that point of time, and gets back US $ ....
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.... One of the things which is clearly discernible from the above observations of their Lordships is that while interpreting the statutes, one must not surrender to become prisoner of the words employed and thereby disregard the context and underlying scheme of the legislation in which the words are set out. When we examine the applicability of proviso to section 48 in the light of these principles and in the light of the fact that it is not only on purchases through which one can incur the cost of acquisition and that what is to be taken into account is the cost of acquisition and not the cost of purchases alone, the expression “the currency initially utilised in purchase of shares or debentures” is to be construed as, including in its scope the currency initially utilized in “acquisition” of shares or debentures as well. We see no support for the Assessing Officer’s stand that the currency utilized for purchase of shares was Indian currency inasmuch as in the agreements rupee value of consideration was given. In making this observation, the Assessing Officer has lost sight of the fact that what is cost of acquisition for the assessee is not the consideration of supplying t....
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....e assessee, in respect of a capital asset which becomes property of the assessee before April 1, 1981, to take the fair market value as on April 1, 1981 as the cost of acquisition. This substitution option is available only for assets covered by section 55(2)(aa) and does not extend to assets covered by the provisions of section 55(2)(a), i.e., tenancy rights, stage carriage permits and loom hours, and goodwill, etc. The scope of section 55(2)(aa) extends to, inter alia, bonus shares as well as the same are “allotted without any payment and on the basis of holding of any other financial asset” and are specifically covered by section 55(2)(aa)(iiia). The provisions of the statute are unambiguous. Accordingly, to the extent bonus shares were issued to the assessee prior to April 1, 1981, the option is with the assessee to take its cost of acquisition as its fair market value as on April 1, 1981. Even otherwise, it makes no sense to decline the option of fair market value as on April 1, 1981, to bonus shares and restrict this option only to original shares. When bonus shares are issued, there is a corresponding fall in the market value of shares because the same valuation of compa....