TaxTMI 
TaxTMI 
2009 (10) TMI 824
X X X X Extracts X X X X
X X X X Extracts X X X X
....llenged the disallowance of the deduction under Section 54EC of the Act. The benefit of the deduction is available to the assessee only if the capital gains are treated as long term capital gains. The ground is therefore consequential to our decision with regard to ground no.2. 4. The facts giving rise to the controversy may be noticed. The assessee was allotted 1180 deep discount bonds (hereinafter referred to as "bonds") of Nirma Limited, each amounting to Rs.1,00,000/-. The cheque issued by the assessee in favour of the company was cleared on 28-7-2000. The Board of Directors of Nirma Limited passed a resolution on 23-9-2000 and a letter of allotment was issued to the assessee on that date. According to the letter of allotment the deemed date of allotment of the bonds was to be taken as 28-7- 2000. The letter of allotment was to be exchanged by the assessee by surrendering the same to the company against which the company was to issue debenture certificates or bonds. The bonds were accordingly issued to the assessee on 10-5-2001. They were demated on 19-9-2001 and ultimately the bonds were sold on 20-3-2002 for Rs.14,41,18,902/-. The cost of acquisition of the bonds was Rs.11....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uired as claimed by the assessee and it is only the date of issuance of the certificate of the holding i.e. 10-5-2001 which can be taken as the date on which the bonds were acquired. Since the assessee sold the bonds on 20-3-2002, within 12 months from 10-5-2001, the capital gains are to be treated as short term capital gains only. e) The basic condition for being termed as long term capital gains is that the bonds should be listed in recognized stock exchange. The bonds acquired by the assessee were listed in NSE only on 20-9-2001 and reckoning from this date, the sale of the bonds on 20-3-2002 is within the period of 12 months and therefore the capital gains are to be treated as short term capital gains. For the above reasons, the AO treated the capital gains of Rs.2,61,18,902/- as short term capital gains and consequently also rejected the deduction claimed under Section 54EC of the Act. 6. On appeal the CIT(A) confirmed the view taken by the AO and upheld his order. The findings of the CIT(A) can be summarised as under: a) The real question for consideration relates to the period of holding of the bonds by the assessee. b) The bonds were listed in the NSE on 20-9....
X X X X Extracts X X X X
X X X X Extracts X X X X
....complex property of the company. The nature and character of the bonds under consideration were defined and determined only under the trust deed and accordingly the assessee cannot be said to have acquired the capital asset in the form of debenture certificates before 10-5-2001. g) The legislative intention has always been to treat the gains arising from the sale of deep discount bonds as interest. The legislature has always prohibited the treatment of the gains as capital gains (long term). It is only a concession available to zero coupon bonds issued by an infrastructure capital company that too after 1-6-2005 that the gains will be treated as capital gains. Nirma Limited which issued the bonds to the assessee is not such a company nor were the bonds issued after 1-6- 2005. h) The assessee and the company issuing the bonds have indulged in tax planning. While the assessee has claimed that the surplus arising on the sale of the bonds should be treated as capital gains, the company has claimed the interest accrued on the bonds as deduction every year. Both have thus taken contrary stands as part of tax planning measure which cannot be approved. In view of the above finding....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ital asset was held by the assessee should therefore be the date of the letter of allotment and not the date on which the debenture certificate was issued. 8. As regards the stand taken by the departmental authorities that the period of holding, if it cannot be reckoned from the date of the debenture certificate, should be reckoned from the date on which the debentures were listed in the NSE which was on 20-9-2001, the learned counsel for the assessee submitted that this stand was untenable and under the proviso to Section 2(42A) of the Income Tax Act what was required was that the security should be listed in a recognised stock exchange at the time of sale and there was no requirement that it should have also been listed at the point of time when the assessee acquired it. He also submitted that the bond holder has no control over the list of the bonds in a recognized stock exchange and it would be unjust and contrary to the law to exclude the time taken by a company to get the bonds listed in the stock exchange from the period for which the bonds were held by the assessee. In support of his submissions, the learned counsel for the assessee drew our attention to the judgment of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to page 102 of the paper book which contains the terms and conditions of the issue of the bonds of Nirma Ltd., the learned CIT-DR pointed out that the company clearly stated that it is in the process of appointing a trustee for the "proposed" bond issue which implied that the bonds or the debentures issued by the Nirma Ltd., were yet to be allotted as on 28-7-2000 which is the date on which the information memorandum was issued by the company. He also drew our attention to the other terms and conditions of the issue of bonds at page 105 of the paper book under the head "mode of transfer" and at page 108 and submitted that these terms clearly showed that the issue of the bond certificates was a future event on 28-7-2000. It was the attempt of the learned CIT-DR to show to us, by referring to the above pages of the paper book that the starting point of period of holding of the bonds can in no event be earlier to the actual issue of the debenture certificate. 11. The learned CIT-DR strongly relied on the reasoning adopted by the departmental authorities and drew our attention to the following aspects which according to him were strongly in favour of the department's view: a) The....
X X X X Extracts X X X X
X X X X Extracts X X X X
....certificate and that the certificate merely evidences the debt due to the assessee, and such debt was initially represented or evidenced by a letter of allotment and since the letter of allotment was issued first in point of time acknowledging the debt due to the assessee, it was the date on which such letter was issued that should be considered to be the starting point of the holding period. 13. As regards the question as to whether the press release issued by the CBDT should be followed in preference to the circular, the learned counsel for the assessee referred to the following judgments to contend that the press release is equally binding on the department: i) Union of India & Anr. Vs. Azadi Bachao Andolan & Another, (2003) 263 ITR 706 (SC) ii) Unit Trust of India & Anr. Vs. P.K. Unni and Anr. (2001) 249 ITR 612 (Bom) iii) Taiyabji Lukmanji Vs. CIT, (1981) 131 ITR 642 It was submitted that in the present case the press note only explained the circular and was not contrary to what was contained in the circular. It was finally argued by the learned counsel for the assessee that the issue whether the circular or the press release should be followed is academic in th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l assets if they are held for a period of not more than 12 months. A long term capital asset has been defined by section 2(29A) of the Income Tax Act as meaning a capital asset which is not a short term capital asset. The result is that in the case of the capital asset specified in the proviso to section 2(42A), it becomes a long term capital asset if it is held for more than 12 months and it is not necessary that such an asset should be held at least for a period of 36 months in order to qualify as a long term capital asset. One of the assets specified in the proviso is a security listed in a recognised stock exchange in India. Such a security was added in the proviso by the Finance Act, 1994 with effect from 1-4-1995. It is common ground that in the present case the department's case is that the capital asset acquired by the assessee from Nirma Ltd. falls under this category of assets viz. security listed in a recognised stock exchange in India. We may also refer to section 2(h) (i)of the Securities Contracts (Regulation) Act, 1956 which defines securities to "include shares, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorpora....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndum of transfers says that "transfer of DDB-Series A comprised in the Letter of Allotment will be registered by the company upon surrender of this Letter of Allotment with duly completed transfer deed". Item 2 says that "this letter of allotment should be preserved by the Holder(s) carefully. DDB-Series A certificate(s) will be exchanged against surrender of letter of allotment duly discharged by the Holder(s)". The contents of the letter of allotment and the categorical manner in which the assessee has been shown as the holder of the bonds with distinctive numbers and a registered folio number show that on the issue of the letter of allotment the assessee became entitled to the bonds. From the date of the letter of allotment, viz. 23-9-2000, the company became a debtor to the assessee. For the time being and until the debenture certificate was issued, the letter of allotment evidenced the assessee's title to the bonds. There can be no doubt that the assessee, if such a situation had arisen, could have sued the company on the basis of the letter of allotment for repayment of the debt. The issue of the debenture certificate on 10-5-2001, after the formalities such as entering into ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the relationship of debtor - creditor came into being. At page 607 of the above treatise, in the commentary relating to section 69 of the Companies Act, which prohibits allotment of shares unless the company receives the minimum subscription, it has been observed that "the mere subscription to shares in a company does not constitute a subscriber a shareholder of the company; he acquires the status of shareholder and the right to demand shares and to exercise the rights of a shareholder only when shares are allotted to him and a communication of the allotment is made to him". Similarly, it appears to us to be the position in law that on and from the date of allotment of the bonds the assessee became entitled to exercise the rights of a bond holder or debenture holder which means that he has started holding the bonds from that date. If the assessee has started holding the bonds from 23-9- 2000 which is the date on which he was informed that they were allotted to him, then it would be anomalous to say that they were acquired by him again when the debenture certificates were issued on 10-5-2001. This aspect of the matter has been dealt with by the Hon'ble Gujarat High Court in the case....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The difficulty in accepting the contention of the revenue is that there is no indication in the proviso that the security viz. the bonds should be listed in a recognised stock exchange in India at both points of time viz. when they are acquired by the assessee and when they are sold. It seems to us that we have to only see that the condition stands satisfied at the point of time when the security is sold and it hardly matters that the security was not listed when it was acquired. On this question also we are of the view that the judgment of Hon'ble Gujarat High Court in the case of Ranchhodbhai Bhaijibhai Patel Vs. CIT(supra) applies. As already noticed, in that case the land was originally agricultural in nature and was not included in the definition of capital asset under the Income Tax Act. When it was acquired by the assessee it was not a capital asset. However, when it was sold, it was not agricultural land as it had been converted by the assessee for non-agricultural use. It was thus a capital asset as defined by the Act at the time of sale. The argument of the assessee was that the asset sold should be a capital asset under the Act both at the point of acquisition and at t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee has renounced his right to subscribe to the share or the security, the period of holding shall be reckoned from the date of allotment of the share or other security. We are unable to appreciate the relevance of this clause to the controversy before us. The clause applies only to a share or other security subscribed to by the assessee on rights basis. It says that if the assessee has subscribed to the share or the security on rights basis then the period of holding shall commence on the date of allotment of the share or the security. This clause in terms does not apply to the facts of the present case because the assessee herein has not subscribed to the bonds on rights basis, even taking note of the fact that the bonds and also securities covered by the clause. If anything, this clause supports the contention of the assessee that the period of holding of the security shall commence from the date of allotment of the bonds i.e. on 23-9-2000 because the clause specifically says that it is the allotment of the share or security, subscribed to by the assessee on rights basis, that will be the starting point of the period of holding. 20. Clause (f) of Explanation 1 says that in the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uch a case that in respect of the second financial asset, the period of holding shall be reckoned from the date of allotment thereof. We are accordingly, with respect, unable to give effect to the argument of the learned CIT-DR based on the said clause. 21. It now remains for us to consider the argument of the department that the rights of the assessee as a bond holder became crystallised only when the debenture trust deed was drawn up and trustees were appointed. Accordingly, it is contended that it was only on 27-4-2001 that the assessee can be said to have become a bond holder in the real and full sense of the term. The debenture trust deed merely secures the debt due to the assessee by the company by creating a charge or mortgage of the asset belonging to the company. There is no change effected in the nature of the debt. What perhaps can be said at best is that the bond certificates were issued by the company on the finalisation of the debenture trust deed but it must be remembered that the capital asset is not represented by the bond certificates themselves, which are mere evidence of the assesse's title to them and the substance of the matter is that it is the debt due to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed case. 24. The order of the Bangalore Bench of the Tribunal in the case of Giridhar Krishna (supra) also turned on different facts. There the assessee was given a stock option under the employees' stock option scheme (ESOP). Under the scheme the assessee was vested with right to purchase certain number of shares within certain period. This option was exercised by the assessee on 7-11-2002. The shares were sold on 18-5-2003. The assessee claimed that the capital gains arising on the sale of the shares should be treated as long term capital loss. The claim was rejected on the footing that the period of holding of the shares is to be reckoned from the date of allotment of the shares and not from the date on which the right to purchase the shares vested in the assessee. Even if the ratio of this order is to be applied to the present case, it seems to us the date on which the assessee before us was allotted the deep discount bonds by issue of letter of allotment should be the starting point of the holding period. The Bangalore Bench held that whatever happened before the shares were allotted, viz. the vesting of the right in the employee to purchase the shares within a particular p....