Of Acquisition Of Convertible Debentures Had To Be From The Date Ofconversion Of Convertible Debentures Into Shares And Not From The Date Oforiginal Allotment. v. Commissioner Of Income Tax,(1983)141 Itr 45 (Cal) And Pronouncement Of Bombay High Court Incommissioner Ofincome Tax Vs. Santosh L.chowegule And Others,(1998)23

ITA No.153 of 2008 1 IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH ITA No. 153 of 2008Date of decision: 19.8.2015 Commissioner of Income Tax-lI, Ludhian .....- Appe Shri Naveen Bhatia ....mesponden CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTALHON’ BLE MR. JUSTICE RAMENDRA JAIN 1. Whether Reporters of local papers may be allowed to see the judgment?2. To be referred to the Reporters or not?3. Whether the judgment should be reported 1n the Digest? Present: Mr. Rajesh Katoch, Advocate for the appellant-revenue, Mr. S.K.Mukhi, Advocate with Mr. Rajiv Sharma, Advocate forthe respondent. | Ajay Kumar Mittal,J, 1]The revenue has preferred this appeal under Section 260A ofthe Income Tax Act, 1961 (in short, “the Act’) against the order dated17.5.2007, Annexure A.III passed by the Income Tax Appellate TribunalChandigarh Bench ‘A’, Chandigarh (in short, “the Tribunal’) in ITANo.469/CHD/2006 for the assessment year 2003-04, claiming followingsubstantial question of law:- “Whether on the facts and in law, the Hon'ble Income TaxAppellate Tribunal was justified in reckoning the period for longterm capital gains from the date of purchase of convertible ITA No.153 of 2008 2 debentures instead of actual date of allotment of shares onconversion trom debentures?’ D2A few facts relevant for the decision of the controversyinvolved as narrated in the appeal may be noticed. The respondent-assesseeis an individual. He filed his return of income for the assessment year 2003-04 on 27.11.2003 declaring total Income ofa4,13,110/- including long termcapital gain amounting to=a25,97,147/- which was claimed by him asexempt under Section 54F of the Act. He was allotted 27160 convertibledebentures of TELCO Limited on 20.12.2001 which were converted to27160 shares on 31.3.2002. Such shares were held by the assessee for aperiod of less than 12 months and were sold between 23.12.2002 to10.3.2003 in different lots. The Assessing Officer vide order dated25.10.2005, Annexure A.1 assessed the capital gain from sale of these sharesas short term capital gain and disallowed the deduction under Section 54F ofthe Act amounting toLy25,97,147/- claimed by the respondent. Aggrievedby the order, the respondent preferred appeal before the Commissioner ofIncome Tax (Appeals)-I, Ludhiana [(CIT(A)]. Vide order dated 31.3.2006,Annexure A.II, the CIT(A)_ partly allowed the appeal observing that theperiod of 12 months had to be reckoned from the date of acquisition of thefully convertible debentures. Not satisfied with the order, the revenue wentin appeal before the Tribunal. Vide order dated 17.5.2007, Annexure A.III,the Tribunal dismissed the appeal. Hence the instant appeal by the revenue.| 3]We have heard learned counsel for the parties. 4 Learned counsel for the revenue relied upon Section 2(42A)and also clause (f) to Explanation I (1) appended thereto to urge that the date ITA No.153 of 2008 3 of acquisition of convertible debentures had to be from the date ofconversion of convertible debentures into shares and not from the date oforiginal allotment. Support was drawn from the judgment of the CalcuttaHigh Court 1n-Mrs. A. Ghosh vs. Commissioner of Income Tax,(1983)141 ITR 45 (Cal) and pronouncement of Bombay High Court inCommissioner ofIncome tax vs. Santosh L.Chowegule and others,(1998)234 ITR 787 (Bom.). | 4 Conversely, learned counsel for the assessee placed reliance onSections 47(x) and 49(2A) of the Act to contend that in case of securedconvertible debentures, the date of acquisition of the shares received onconversion would be the date when originally convertible debentures wereallotted to the assessee. 6.It would be expedient to reproduce the relevant statutoryprovisions which read thus:- section 2(42A) *2(42A)short- term capital asset means a capital asset held byan assessee for not more thanthirty- six months immediatelypreceding the date of its transfer: 4 Conversely, learned counsel for the assessee placed reliance onSections 47(x) and 49(2A) of the Act to contend that in case of securedconvertible debentures, the date of acquisition of the shares received onconversion would be the date when originally convertible debentures wereallotted to the assessee. 6.It would be expedient to reproduce the relevant statutoryprovisions which read thus:- section 2(42A) *2(42A)short- term capital asset means a capital asset held byan assessee for not more thanthirty- six months immediatelypreceding the date of its transfer: Provided that in the case of a share held in a companyOT allyother security listed in a recognised stock exchange in India ora unit of the Unit Trust of India established under the Unit Trustof India Act, 1963 (52 of 1963 ) or a unit of a Mutual Fundspecified under clause (23D) of section 10, the provisions ofthis clause shall have effect as if for the words “thirty- sixmonths", the words" “twelve months" had been substituted,Explanation1-- In determining the period for which any capitalasset 1s held by the assessee-- -----------(a) to (e) Xx xx ITA No.153 of 2008 4 (f)in the case of a capital asset, being a financial asset, allottedwithout any payment and on the basis of holding of any otherfinancial asset, the period shall be reckoned from the date of theallotment of such financial asset;” section 47(x) 04’)Nothing contained in|section 45Shall apply to theHfollowing transfers :-------------------- (x) any transfer by way of conversion of bonds or debentures,debenture-stock or deposit certificates in any form, of acompany into shares or debentures of that company’. Section 49(2A) (2A) Where the capital asset, being a share or debenture of alcompany, became the property of the assessee in considerationof a transfer referred to in clause (x) or clause (xa) of|section93, the cost of acquisition of the asset to the assessee shall bedeemed to be that part of the cost of debenture, debenture-stock, bond or deposit certificate 1n relation to which such assetis acquired by the assessee.” ToSection 2(42A) of the Act defines a short term capital asset and 1n case of shares where the assessee holds the said shares for 12 months orless than 12 months, it shall be short term capital asset. Clause (f) ofExplanation I(1) to Section 2(42A) of the Act states that in case of capitalasset being a financial asset, allotted without any payment and on the basisof holding of any other financial asset, the period shall be reckoned from the date of the allotment of such financial asset. Section 47(x) and 49 (2A) were inserted by the Finance (No.2) Act, 1961 with retrospective effect from1.4.1962. Section 47(x) provides that any transfer by way of conversion of ITA No.153 of 2008 5 bonds or debentures, debenture-stock or deposit certificates 1n any form, ofa company into shares or debentures of that company shall not mean transferwithin the meaning of Section 45 of the Act. Further, Sub section 2A ofSection 49 provides that the cost of acquisition of the asset to the assesseeshall be deemed to be that part of the cost of debenture, debenture-stock,bond or deposit certificate in relation to which such asset 1s acquired by theassessee. In other words, the original cost at the time of allotment would betaken to be cost of acquisition. date of the allotment of such financial asset. Section 47(x) and 49 (2A) were inserted by the Finance (No.2) Act, 1961 with retrospective effect from1.4.1962. Section 47(x) provides that any transfer by way of conversion of ITA No.153 of 2008 5 bonds or debentures, debenture-stock or deposit certificates 1n any form, ofa company into shares or debentures of that company shall not mean transferwithin the meaning of Section 45 of the Act. Further, Sub section 2A ofSection 49 provides that the cost of acquisition of the asset to the assesseeshall be deemed to be that part of the cost of debenture, debenture-stock,bond or deposit certificate in relation to which such asset 1s acquired by theassessee. In other words, the original cost at the time of allotment would betaken to be cost of acquisition. § A plain reading of Section 47(x) would indicate that theconversion of convertible debentures into shares would not constitutetransfer for the purposes of computation of income under the head ‘capitalgains’. Similarly, Section 49(2A) of the Act clarifies that for computing thecapital gains on sale of shares received on conversion of convertibledebentures, the cost of acquisition of shares shall be the cost of convertibledebentures and thus 1t shall be deemed to be the cost of such shares receivedon conversion. In such a situation, as a necessary corollary, it would be butlogical to reckon the date of acquisition of the convertible debentures as thedate of acquisition of such shares received on conversion of convertibledebentures. Now examining the factual matrix herein, the assessee wasallotted 27160 convertible debentures of TELCO Limited on 20.12.2001which were converted into equal number of shares on 31.3.2002. Theassessee sold the said shares between 23.12.2002 to 10.3.2003 in differentlots. This shall result in long term capital gains as the shares shall bedeemed to have been held for a period exceeding 12 months by the assessee. Q | The Tribunal while rejecting the contention of the revenue and ITA No.153 of 2008 6 upholding the order of the CIT(A) had recorded 1n its order dated 17.5.2007,Annexure A_I[I] as under: “3. We have considered the rival submissions and perused thematerial available on the file. The assessee declared totalincome of Ly4,13,110/- in its return filed on 27.11.2003)alongwith copy of audit report. The assessee is a share broker,Showed capital gains of <a25,97,147/- on the sale of 27,147Shares of TELCO Ltd which were claimed exempt undersection 54F of the Act. In order to justify the claim of suchexemption, the assessee was asked to furnish the proof ofallotment of shares alongwith investment so made for suchShares. The assessee in its reply enclosed the copy oftransaction statement as on 20.12.2001 issued by the D.P. 1.e,LSE Securities Limited revealing to be issued in favour of thedepository participant. It further revealed that 27160 TELCOsecured convertible debentures were credited to his account ason 20.12.2001. The learned Assessing Officer invokedExplanation 1(1)(f) to Section 2(42A) by holding that the dateof allotment of shares (converted from debentures) 1s relevantdate tor reckoning the period of 12 months by opining that thedate of investment is of no consequence and the period of 12months is to be reckoned from the date of allotment of sharesand not the convertible debentures. However, Explanation 1(1)(f) to Section 2(42A) 1s very clear. In determining the period for which any capital asset 1s held bythe assessee - ({) In the case of capital asset being a financial asset allottedwithout any payment and on the basis of holding of any otherfinancial asset,the period shall be reckoned from the date ofallotment of such financial asset. However, the conclusion of the Assessing Officer and thecontention of the learned DR 1s that the period of 12 months 1sto be reckoned from the date of allotment of shares and not ITA No.153 of 2008 7 In determining the period for which any capital asset 1s held bythe assessee - ({) In the case of capital asset being a financial asset allottedwithout any payment and on the basis of holding of any otherfinancial asset,the period shall be reckoned from the date ofallotment of such financial asset. However, the conclusion of the Assessing Officer and thecontention of the learned DR 1s that the period of 12 months 1sto be reckoned from the date of allotment of shares and not ITA No.153 of 2008 7 from the date of conversion. The Explanation was introducedby the Finance Act, 1995 with effect from 1.4.1996 to clarifythe provision in the case of bonus shares, the date ofacquisition should be taken as date of allotment of such sharesand computation of capital gains accordingly. Circular No.717dated 14.8.1995 makes the provision very clear. The cost ofacquisition of convertible debenture is deemed to be the cost ofShares by virtue of deeming provision of Section 49(2A) andsuch fiction has to be taken its logical end. Therefore, theperiod of 12 months under Section 2(42A) proviso has to bereckoned from the date of acquisition of convertible debenture.Our view is further fortified by the decision of the AhmedabadBench of the Tribunal in the case of Smt.Roda vs. ITO UTANo.1069/AHD/96) wherein it was held that the period of 12months has to be reckoned from the date of acquisition of theconvertible debentures. Bonus shares are issued to an existing share holderwithout making payment in cash. Therefore, the period ofholding of the bonus asset will be reckoned from the date ofallotment of such asset. No contrary decision has been broughtto our notice by the revenue and no specific mistake has beenpointed out in the conclusion of the learned CIT(A). Therefore,the order of the learned first Appellate authority is upheld.” 10. In view of the above, contention raised on behalf of the revenue cannot be accepted. It may also be noticed that reliance on the judgment inMrs. A.Ghosh'scase (supra) was relating to a case where the assessee hadacquired debentures. However, subsequently, the debentures were convertedinto equity shares and sold. At the time of allotment, there was nostipulation that the shares were convertible into equity shares. In such asituation, Calcutta High Court held that in computing the capital gains, the ITA No.153 of 2008 8 debentures as on the date of its conversion on which they were exchangedfor shares. Similarly, Bombay High Court 1n Santosh L.Chowgule andOthers’case (supra) was dealing with a case where the assessee originallyheld equity shares in a company which by a subsequent resolution wereconverted into a new set of four different shares including irredeemablepreference shares. Further, the equity shares held earlier and the preferenceshares acquired in exchange thereof were not the same. It was held that in|such circumstances, irredeemable preference shares issued to the assesseebeing different from the equity shares issued in lieu thereof shall be deemedto have been held by the assessee from the date of their issue and not fromthe date of issue of the equity shares. Thus, the pronouncements cited bythe revenue do not come to its rescue as those cases related to conversionof financial asset into another form of asset where there was no rightaccruing on the date of acquisition, whereas in the case of convertibledebentures, a right 1s appended to the debenture for the debenture holder toreceive shares on conversion after the stipulated period. Thus, in suchcircumstances, cases relied upon by the revenue shall be on different footingV1S-a-v1S case of secured convertible debentures. 114In view of the above, the substantial question of law 1sanswered against the revenue and in favour of the assessee. Consequently,the appeal is dismissed. (Ajay Kumar Mittal)Judge August 19, 2015 =<"= (Ramendra Jain) Judge