Ita/385/2013 Of The Director Of Income-Tax v. M/S. Intel Capital (Cayman) Corporation

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 6 DAY OF OCTOBER 2020| PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD LT.A. NO.385 OF 2013 BETWEEN: 1.THE DIRECTOR OF INCOME-TAX INTERNATIONAL TAXATION RASHTROTHANA BHAVAN NRUPATHUNGA ROAD, BANGALORE. 2 |THE JOINT DIRECTOR OF INCOME-TAX. (INTERNATIONAL TAXATION )-I RASHTROTHANA BHAVAN NRUPATHUNGA ROAD, BANGALORE. ... APPELLANTS (BY SRI. K.V. ARAVIND, ADV.,) AND: M/S. INTEL CAPITAL (CAYMAN) CORPORATION NO.23-56P, DEVARABEESANAHALLI|OUTER RING ROAD, VARTHUR HOBLIBANGALORE-560103. ... RESPONDENT (BY SRI. T. SURYANARAYANA, ADV.) THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,196L ARISING OUT OF ORDER DATED 28.03.2013 PASSED IN ITA]NO.805/BANG/2011 FOR THE ASSESSMENT YEAR 2008-09,|PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO: (I) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.STATED THEREIN. (II) ALLOW THE APPEAL AND SET ASIDE THE ORDERPASSED BY THE ITAT, BANGALORE IN ITA NO.805/BANG/2011|DATED 28-03-2013 AND CONFIRM THE ORDER OF THE APPELLATE|COMMISSIONER CONFIRMING THE ORDER PASSED BY THE JOINT|DIRECTOROFINCOME|TAX,INTERNATIONALTAXATION-I,BANGALORE. THISITACOMINGONFOR.HEARING,|THISALOK ARADHE J.,DELIVERED THE FOLLOWING: DAY, JUDGMENT This appeal under Section 260A of the Income Tax)Act, 1961 (hereinafter referred to as the Act for short)has been preferred by the revenue. The subject matterof the appeal pertains to the Assessment year 2008-09. The appeal was admitted by a bench of this Court videorder dated 27.11.2015 on the following substantialquestion of law: WhetherOf)thefacts|and|circumstances of the case, the Tribunal|was right in holding that the computation|of capital gains by assessee is right and.capitalgainscomputedby assessing authority by adopting rate of acquisition at.Rs.200 is erroneous and further holding| that period of holding shares should be.from the date of conversion into sheres fothe date of sale of shares and it Is short|term capital gain as it Is less than 12)months only. 2. Facts leading to filing of the appeal briefly stated|are that assessee is a non-resident company. Thecompany filed its return of income for Assessment Year2008-09 by declaring a total income of=49,95,03,232/-. |In the assessment proceedings under Section 143(3)read with Section 144C of the Act, the AssessingAuthority, vide order dated 18.02.2011.inter aliaheld |that assessee had acquired foreign currency convertiblebonds and after conversion of the same into shares, soldthe same during the relevant previous year and|disclosed short term capital gains from the transactionand paid tax thereon at the prescribed rate. It was.further held that the cost of acquisition of equity shares|on conversion of foreign currency convertible bonds wasShown to be at.4873.83 and=858.08 per share whereas| in fact the assessee converted the bonds into shares at=200/- per share. The Assessing Authority thereforeconcluded that cost of acquisition of share has to beassessed at4200/- per share and not at=873.83 and=858.08 per share as claimed by the assessee and_completed the assessment. 3. Being aggrieved, the assessee filed an appeal|before the Commissioner of Income Tax (Appeals), whoby an order dated 14.07.2011 dismissed the appeal.The assessee thereupon approached the Income TaxAppellate Tribunal. The Tribunal, by an order dated28.03.7013|inter aliaheld that under Section 115AC of the Act, the Central Government has formed the schemepermitting some companies like NIIT to issue|foreigncurrency convertible bonds which can at any point of time be converted into equity shares. It was further heldthat subscription agreement which is approved byReserve Bank of India, that is the regulatory body and as.per the terms and conditions for the issuance of foreign. 3. Being aggrieved, the assessee filed an appeal|before the Commissioner of Income Tax (Appeals), whoby an order dated 14.07.2011 dismissed the appeal.The assessee thereupon approached the Income TaxAppellate Tribunal. The Tribunal, by an order dated28.03.7013|inter aliaheld that under Section 115AC of the Act, the Central Government has formed the schemepermitting some companies like NIIT to issue|foreigncurrency convertible bonds which can at any point of time be converted into equity shares. It was further heldthat subscription agreement which is approved byReserve Bank of India, that is the regulatory body and as.per the terms and conditions for the issuance of foreign. Currency convertible ponds petween the NIIT anda theassessee, the bonds are to be initially converted intoSnares at ~200/- per share subject to aajustments underClause 6(c) of the agreement. Therefore, the assessee|was rightly allotted 21,28,000 shares at the rate of'~200/- aS per bond agreement at the prevalent.convertible foreign currency rate. It was further held that|Clause (xa) of Section 47 of the Act refers to transfer by way of conversion of bonds referred to in Clause (a) ofsup-Section LL5SAC of tne Act. Tnerefore, the aforesaidprovision Is not applicable to tne case In Nhand.Accordingly, the order passeaq by the Commissioner ofIncome Tax (Appeals) and the Assessing Officer was set|aside and the appeal preferred by the assessee was|allowed. In the aforesaid factual background, this appealhas been filed. 4. Learned counsel! for the revenue submitted tnatin view of Section 49(2A) of the Act, for the purposes ofSection 45 of the Act, the cost of acquisition has to be taken as the cost of debentures. It is further submitted|that in case of any conflict between scheme / Rules andthe provisions of the Act, the provisions of the Act wouldprevail. It is also submitted that the Bombay High Court. In“KINGFISHERCAPITALCLOLTD.Vs.COMMISSTONER|OF|INCOME-TAX| (INTERNATIONAL TAXATION), MUMBAI (2019)413 ITR 1 (Bombay), Was dealing with the schemewhich was introduced in the year 1993 and was madeapplicable for the Assessment Year 2002-03 and hasinvited our attention to para 80 to 82 of the aforesaiddecision. 5.|On the other hand, learned counsel for theassessee nas invited the attention of this court to tne!scheme for facilitating issue of foreign currency,convertible Donds and ordinary shares through globaldepository mechanism by Indian companies and hasinvited our attention to Clause 2(f) of the Scheme andNas pointed out that the words and expressions not defined in the scheme but defined in the Act, theCompanies Act, 1956 or the Securities and ExchangeBoard of India Act, 1992 or the Rules and Regulationsframed under these acts shall have the same meaningrespectively assigned to them as the case may be inIncome Tax Act, or the Companies Act or the Securitiesand Exchange Board of India Act. It is also pointed out.that Clause 7 of the scheme deals with transfer anddetention and sub-Clause (4) of Clause 7 cannot be readin isolation and has to be read along with sub-Clause.(3). It is also argued that clause 4 of the scheme dealswith cost of acquisition of shares in respect ofconversion of foreign currency convertible bonds. It is.also pointed out that 2008 scheme deals with foreigncurrency exchangeable bond and therefore, does notapply to the fact situation of the case. It is also urgedthat the issue involved in this appeal is covered by adecision in KINGFISHER CAPITAL CLO LTD. supra andthere is no conflict between the provisions of the scheme and either the Act or the Rules and therefore, the cost ofacquisition of shares has rightly been assessed as perthe provisions of the scheme by the Tribunal. and either the Act or the Rules and therefore, the cost ofacquisition of shares has rightly been assessed as perthe provisions of the scheme by the Tribunal. 6.|We have considered the submissions madeby learned counsel for the parties and have perused therecord. The singular issue, which arises for considerationin this appeal is whether the Tribunal was right incomputing the capital gains by adopting the rate ofacquisition at Rs.200/-. The Central Government hasissued the scheme viz., issue of foreign currencyconvertible.bondsand|ordinary|shares.(throughDepository Receipt Mechanism) Scheme, 1993. Theaforesaid scheme has been made applicable for theAssessment Year 2002-03 onwards vide notificationdated 10.09.2002. Clause 2(f) of the Scheme providesthat the words and expressions not defined in thescheme, but defined in the Income Tax Act, 1961 or theCompanies Act, 1956, or the Securities and ExchangeBoard of India Act, 1992 or the Rules and Regulations framed under These Acts, shall have the meaningrespectively assigned to them, as the case may be, inthe Income Tax Act, 1961 or the Companies Act, or theSecurities and Exchange Board of India Act. Clause 7 ofthe scheme deals with transfer and detention. Sub-Clause (4) of Clause 7 of the scheme reads as under: For the purposes of conversions of.Foreign Currency Convertible Bonds, the cost|of acquisition in the nanas of the non-resident investors would b the conversion|price determined on the basis of the price ofthe shares at the Bombay Stock Exchange,or the National Stock Excnange, on the aateof conversion of the Foreign Currency|Convertible Bonds into sheres. J.Tnus, tne cost of acquisition has to bedetermined as per provisions of Clause 7(4) of theScneme for computation of capital gains. It is alsopertinent to mention here that Clause (xa) of Section47, which refers to transfer by way of conversion of bonds has been inserted with effect from 01.04.7008which is applicable to the Assessment Year 2009-10onwards. 8.|Even otherwise, this issue has been dealtwith by division bench of Bombay High Court inKINGFISHER CAPITAL CLO LTD. supra. The relevantextract of the judgment is reproduced for the facility ofreference: 15. Section 115AC deals with taxabilityof only certain types of income that couldarise in respect FCCBs and GDRs. a) Interest payments made to non-resident holders of FCCBs would be liable to|tax in India at 10 percent. b) Long-term capital gain realized from)the transfer of FCBBs or sheres to a resident|would be liable to tax in India at 10 percent. 16. In light of the amendment to.section 115AC of the Act, clause (x) oOfSection 47 was amended simultaneously to include “bonds” to address the taxability| arising from the conversion into equity|shares of the issuing company. Section 47 ofthe Act, specifies the cases in which transfer|of a capital asset is not assessable to tax|under the head “Capital Gains”. Clause (x) ofsection 47 reads as under: “(X)qdhhtransferby Wayofconversion or debentures, debenture-stock|or deposit certificates in any form, of a|company into shares or debentures of that|company. 17. Section 49 of the Act specifies the.cost with reference to certain modes ofacquisition. Section 49(2A) of the Act was|not amended to Include "bonds". Section|49(2A) of the Act at the time of introductionto section 115AC and 4/7(x) of the Act readas under: "(2A) Where the capital asset, beinga share or debenture in a company, became|the property of the assessee in considerationof a transfer referred to in clause (xX) ofsection 47, the cost of acquisition of the|asset to the assessee shall be deemed to be thatpart|oftheCOSTofdebenture,debenture-stock or deposit certificates in|relation to which such asset Is acquired by|the assessee. " 18. In 2008, the Central Governmentnotified a new and separate scheme as\Foreign CurrencyExchangeableBondScheme, 2008 (for short “FCEB Scheme’).|The.footnoteCO sectionLI5AC|Wasamended. [ne relevant part of section|115AC including the amended footnote is reproduced as below: "(2A) Where the capital asset, beinga share or debenture in a company, became|the property of the assessee in considerationof a transfer referred to in clause (xX) ofsection 47, the cost of acquisition of the|asset to the assessee shall be deemed to be thatpart|oftheCOSTofdebenture,debenture-stock or deposit certificates in|relation to which such asset Is acquired by|the assessee. " 18. In 2008, the Central Governmentnotified a new and separate scheme as\Foreign CurrencyExchangeableBondScheme, 2008 (for short “FCEB Scheme’).|The.footnoteCO sectionLI5AC|Wasamended. [ne relevant part of section|115AC including the amended footnote is reproduced as below: "Tax on [Income from bonds or'§sGlobal Depository Receipts purchased in|foreign currency or capital gains arising fromtheir transfer. 115AC (1) Wnere the total income ofan assessee, being a nonresident, includes -- (a) income by way of interest onbonds of an Indian company issued in|accordance with such scheme as the Central|Government may, by notification in the|Official Gazette* specify in this benalf or on| bonds of a public sector company sold by theGovernment and purchased by him_ inforeign currency; or: ’ *The|footnoteionsection 115AC(1)(a) reads as under: 66. See Issue of Foreign CurrencyExchangeable Bonds Scheme, 1 2008/Issue|of Foreign Currency Convertible Bonds andOrdinaryShneare(TnrougnDepositoryReceiptMecnanism)Scneme,1993/Depository Receipts Scheme, 2014", 19. Section 47(xa) was introduced bythe Finance Act, 2008, with effect from April|1, 2008. Clause (xa) of section 4/7 reads asUnder: (Xa)|AnytransferDy Wedyofconversion of bonds referred to in clause (a)of sub-section (1) of section 115AC into|snares or debentures of any company. 20. Section 49(2A) as amended by tne.Finance Act, 2008 with effect from April 1, 2008. Clause (2A) of section 49 reads as|Under: "(2A) Where the capital asset, beinga share or debenture of a company, became|the property of the assessee in considerationof a transfer referred to in clause (x) or|clause (xa) of section 4/7, the cost ofacquisition of the asset to the assessee shall|be deemed to be that part of the cost of|debenture, debenture-stock, bond or deposit|certificate in relation to which such asset Is)acquired by the assessee” 21. The notes to clauses dealing with.Section 4/7(xa) and 49(2A) at the time ofintroduction read as under: "47 (xa) It is proposed to insert anew clause (xa) to provide that any transfer|by way of conversion of bonds referred to inclause (a) of sub-section (1) of section|115AC into shares or debentures of any|company shall not be considered as transfer. 49(2A) Sub-section (2A) of the saidsection provides that where the. capitalasset, being a share or debenture in acompany, became the property of the|assessee /n consideration of a § transfereferred to in clause (x) of section 4/7, thecost of acquisition of the asset to the|assessee Shall be deemed to be that part of|the cost of debenture, debenture-stock or.deposit certificates in relation to which such|asset is acquired by the assessee. It is proposed to substitute the saidsub-section to provide that where the capital|asset, being a share or debenture of a|company, became the property of the|assessee /n consideration of a § transfereferred to in clause(x) or clause (xa) oOfsection 47, the cost of acquisition of the|asset to the assessee shall be deemed to be thatpart|oftheCOSTofdebenture,debenture-stock, bond or deposit certificatesin relation to which such asset is acquired by the assessee. This amendment will take effectfrom 1st April, 2008 and will accordingly|apply in relation the assessment year 2008-O09 and subsequent assessment years. DZ).The.explanatorymemorandum|dealingwith|49(2A)at.thetimeofintroduction reads as under: It is proposed to substitute the saidsub-section to provide that where the capital|asset, being a share or debenture of a|company, became the property of the|assessee /n consideration of a § transfereferred to in clause(x) or clause (xa) oOfsection 47, the cost of acquisition of the|asset to the assessee shall be deemed to be thatpart|oftheCOSTofdebenture,debenture-stock, bond or deposit certificatesin relation to which such asset is acquired by the assessee. This amendment will take effectfrom 1st April, 2008 and will accordingly|apply in relation the assessment year 2008-O09 and subsequent assessment years. DZ).The.explanatorymemorandum|dealingwith|49(2A)at.thetimeofintroduction reads as under: "In 1992, the Government allowedestablishedIndian|companiesto.ISSUe|Foreign CurrencyConvertible|Bonds|(FCCBs), with special tax regime for non-resident investors, so as to encourage the|flow of foreign exchange to India. The|Government has now allowed established|Indian companies to issue Foreign Currency|Exchangeable Bond (FCEB). These are bondsexpressed in foreign currency, the principaland interest in respect of which is payable inforeign currency. The FCEBs differ from|FCCBs in as much as tne latter can only be|convertedIntosharesoftheISSUINGcompany, whereas FCEBs can also. beconverted into or exchanged for the shares|of a group company. With a view to| providing a level playing field to FCEBs, it is proposed to provide that the conversion of|FCEBs into shares or debentures of any|company Shall not be treated as a ‘transfer’|within the meaning of Income-tax Act.|Further it is also proposed to substitute sub-section (2A) of section 49 to provide that thecost of acquisition of the shares received|upon conversion of the bond shall be the|price at which the corresponding bond was|acquired. © 23. The bonds issued to the Petitionerare under the FCCB Scheme of 1993. Under|the FCCB Scheme, the cost of acquisition of eguity shares upon conversion of FCCBs areto be determined in accordance with the|provisions of clause 7(4) and 8(3). It is|submitted that: a. The provisions of the aforesaidclauses of the FCCB Scheme continue to-operate; and b. Section 49(2A) of the Act was.amended by the Finance Act, 2008 and was|to be read with the FCEB Scheme. 24. Prior to its substitution by the.Finance Act, 2008, w.e.f. 1-4-2008, sub-section (2A) of section 49, as inserted by tneFinance Act (No. 2) Act, 1991, w.e.f. 1-4-1962 did not contain any reference to|“bonds”. Under this circumstance, the cost ofacgulsitionofequitysharesUpor)theconversion of FCCBs was not governed by|the provisions of section 49(2A) instead it was always to be determined in accordance|with the special provisions of clause /(4)|read with clause 8(3) of the FCCB Scheme. 9 |In the instant case also, bonds issued to thepetitioner were issued under the FCCB scheme and theconversion price determined on the basis of price ofShares at Bombay Stock Exchange or National StockExchange on the date of conversion of FCBBs intoShares. It is also pertinent to mention here that there isno conflict between the provisions of the scheme and the Acts / Rules. We respectfully agree with the viewtaken by the High Court of Bombay and therefore,answer the substantial question of law against the revenue and in favour of the assessee. In the result, the appeal fails and is hereby|dismissed. SS| Sd/-JUDGE. Sd/-—JUDGE.