TaxTMI 
TaxTMI 
TaxTMI 
2018 (11) TMI 859
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....r section 45 of the Act. For this assessee has raised the following ground No. 1: - "1. The Hon'ble Commissioner of Income-tax (Appeals)-17, Mumbai [CIT(A)] has erred in law and on facts and in circumstances of the case by confirming the addition made by the learned Assessing Officer on account of conversion of Cumulative Compulsory Convertible Preference Shares (CCPS) into equity shares as transfer within the meaning of section 2(47) of the act and computing Long-term capital gains of Rs. 2,55,46,266/- as per section 45 of the Act on the said conversion." 3. Briefly stated facts relating to this issue are that the AO noted from the schedule of non-current investment forming part of balance sheet of the assessee as on 31.03.2012 that during the previous year 2011-12 relevant to AY 2012-13, the assessee company held 51,634 number of CCPS series A of Trent Ltd. as investment and converted the same into equity shares. According to AO, the conversion of CCPS into equity shares is transfer within the meaning of the definition provided in section 2(47)(i) of the Act. According to AO, the amount of Rs. 2,85,01,968/- being difference of market value of 51,634 number of equity shares of....
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....pe of shares is converted into another type of share (including conversion of debentures into equity shares), there is, in fact, no 'transfer' of a capital asset within the meaning of section 2(47) of the Income Tax Act, 1961." 6. Hence, any profits derived from such conversion are not liable to capital gains tax under section 45(1) of the Act. However, when such newly converted share is actually transferred at a later date, the cost of acquisition of such share for the purpose of computing the capital gains shall be calculated with reference to the cost of the acquisition of the original share of stock from which it is derived. At such, the circular being beneficial to the assessee, has to be adopted by the Income Tax Department without any option. Accordingly, no capita gain tax liability arose upon the conversion. In case, and otherwise also the circular is perfectly in consonance with the legislative intention as well as the legislative scheme of taxing capital gain. This is evident from section 55(2)(b)(v)(e). Simply put, it is provided that where the capital asset being share of company, became property of the asset on conversation of any kind of shares of the company into ....
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....rence Shares (CCPS) of Series A of Trent Ltd. amounting to Rs. 2,83,98,700/- on a rights issue basis. The price of the above CCPS was at Rs. 550/- per share and the entire issue price was paid on application itself. As per the terms of the Scheme for issue of CCPS, one CCPS of Series A will compulsorily and automatically get converted into one fully paid up equity share of Rs. 10/-. Accordingly, in terms of the above Scheme, assessee was allotted one equity share of Trent Ltd. for every preference share held in Trent Ltd., i.e. 51634 CCPS. Such conversion was compulsory and automatic. There was neither any option with the assessee nor any further step that was required to be taken by the assessee for conversion, being compulsory and automatic. The Assessing Officer while framing the assessment considered the conversion of CCPS into equity shares as 'transfer' within the meaning of Sec. 2(47) of the Act and brought to tax under Long Term Capital Gains an amount of Rs. 2,55,46,266/-. The CIT(A) also confirmed the action of the Assessing Officer exactly on the same reasoning. Now, we have to consider whether any transfer of a capital asset has taken place or not. The provisions of Sec....
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....come-tax Act, 1961. Hence, any profits derived from such conversion are not liable to capital gains tax under section 45(1) of the Income-tax Act. However, when such newly converted share is actually transferred at a later date, the cost of acquisition of such share for the purposes of computing the capital gains shall be calculated with reference to the cost of acquisition of the original share of stock from which it is derived." 10. We have gone through the jurisdictional Tribunal's decision in the case of ITO vs Vijay M. Merchant, [1986] 19 ITD 510 (Bom.) and noted that the Tribunal placing reliance on the CBDT Circular (supra) held as under :- "........according to the circular, when the shares which are converted and are sold, capital gains are to be calculated on the basis of cost of original shares. Thus, the factum of conversion does not make any material difference in calculating the capital gains....... the circular of the Government to which we have made reference above, clearly lays down that there is no transfer when one type of share is converted into another type of share...." 11. We have gone through the provisions of Sec. 48 of the Act which specifies the mod....
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....nce share capital. The rights and obligations attached to the two kinds of share capital are different. On the face of the above provisions of the Companies Act, it is not possible to hold that the equity shares held by the assessee since 1965 and the irredeemable preference shares acquired by the assessee in exchange thereof pursuant to the resolution dated 30-9-1971 were the same. That being so, the preference shares in question cannot be said to be acquired by the assessee prior to 30-9-1971, the date on which they came into existence. In fact, consequent to the resolution dated 30-9-1971, the equity share capital held by the assessee was exchanged for the three new types of equity shares and the irredeemable preference shares in question. It was not a case of change of nomenclature of the shares. It was an exchange of one kind of shares for another kind of shares, having different rights and liabilities." 13. The ld. Counsel for the assessee in view of the above argued that the decision of the Hon'ble Bombay High Court in the case of Santosh L. Chowgule (supra) and the decision of the Hon'ble Andhra Pradesh High Court in the case of Addl. CIT vs. Trustees of H.E.H. Th....
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....sset transferred" and it is provided that if certain conditions are satisfied as mentioned in the first proviso to section 12B(2) of 1922 Act, the market value of the asset transferred though not equivalent to the full value of the consideration for the transfer, may be deemed to be the full value of the consideration." 14. The ld. Counsel also drew our attention to the decision of Hon'ble Bombay High Court in the case of CIT vs Texspin Engg. & Mfg. Works, 263 ITR 345 (Bom.), wherein the issue of full value of consideration received/accrued u/s 48 r.w.s 45(4) of the Act has been discussed and held as under :- "Now, in the present case, it is argued on behalf of the department before the Tribunal, for the first time, that in this case, on vesting of the properties of the erstwhile Firm in the Limited Company, there was a transfer of capital assets and, therefore, it was chargeable to income-tax under the head "Capital gains" as, on such vesting, there was extinguishment of all right, title and interest in the capital assets qua the Firm. We do not find any merit in this argument. In the present case, we are concerned with a Partnership Firm being treated as a company under t....
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....ll value of the consideration received/accruing" under Section 48 de hors Section 45(4) and if one reads Section 48 with Section 45(1) de hors Section 45(4) then the expression "full value of consideration" in Section 48 cannot be the market value of the capital asset on the date of transfer. In such a case, we have to read the said expression in the light of the two judgments of the Supreme Court in the cases of George Henderson & Co. Ltd. (supra) and Gillanders Arbuthnot & Co. (supra) in which it has been held that the expression "full value of the consideration" does not mean the market value of the asset transferred, but it shall mean the price bargained for by the parties to the transaction. It has been further held that consideration for the transfer of a capital asset is what the transferor receives in lieu of the assets he parts with viz. money or money's worth and, therefore, the very asset transferred or parted with cannot be the consideration for the transfer and, therefore, the expression "full value of the consideration" cannot be construed as having a reference to the market value of the asset transferred and that the said expression only means the full value of t....
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....uity shares of Trent Ltd. received pursuant to CCPS, then, as per the provisions of Sec. 55(2)(b)(v)(e) of the Act, the cost of acquisition would be the original cost of CCPS. He further submitted that as the Assessing Officer has also taxed the difference between the original cost of CCPS and the fair market value in the captioned year, thus, on actual sale of shares it would tantamount to double taxation considering the provisions of the Act. It was also explained that the CBDT vide its Circular (supra) has explained that legislature has chosen to ignore the intermediate event of conversion for taxation purposes. If there arises any capital gain event upon such conversion, then, the cost of acquisition would be the consideration adopted while computing such capital gain and the exercise in regard to such conversion will be tax-neutral. The decisions relied on by the Assessing Officer and the CIT(A) for taxing the CCPS to equity shares as being transfer of capital asset are distinguished by the ld. Counsel for the assessee particularly in the case of CIT vs Motors & General Stores Pvt. Ltd., 66 ITR 692 (SC) by stating that this judgment by the Hon'ble Supreme Court was deliver....
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.... that case stating that the exchange of cinema house to preference shares is not to be considered as a transfer for the purpose of taxability considering the provisions of Sec. 10(2)(vii) of the Income Tax Act, 1922 corresponding to Sec. 41(2) of the present Income Tax Act, 1961. Accordingly, the decision of Hon'ble Supreme Court in the case of Motors & General Stores Pvt. Ltd. (supra) is entirely distinguishable on facts of the present case. 17. According to us, there is no leakage of revenue if such interpretation is adopted. Not only this interpretation would be in furtherance to the legislative intention but would also make the competition provision of capital gain work smoothly, in synchronization with other provisions, without any conflict with other provisions. On the other hand, if the view is adopted that capital gain tax liability arose upon conversion, the same would be not only against the legislative intention but also would make the composition of capital gain unworkable and would bring conflict with other provisions of the Act. In fact, the contrary interpretation would lead to double taxation in as much as, having taxed the capital gain upon such conversion, at....