Wp/4364/2019 Of Kingfisher Capital Clo Ltd v. Commissioner Of Income Tax, (International Taxation) 3, Mumbai And Ors

ASWP(ST)19262.18.doc IN THE HIGH COURT OF JUDICATURE AT BOMBAYCIVIL APPELLATE JURISDICTION WRIT PETITION (ST) NO. 19262 OF 2018 Kingfisher Capital CLO Ltd., ]87, Walker House, Mary Street,]Grand Cayman, Cayman Islands]KY 1-9002] … PetitionerVersus1 Commissioner of Income Tax,](International Taxation)-3, Mumbai]16th Floor, Room No.1601, Air India]Building, Nariman Point,]Mumbai – 400 021]2 Deputy Commissioner of Income Tax](International Taxation) -3(1)(2)]Room No.133, Scindia House,]Ballard Estate, N.M. Road,]Mumbai – 400 038.]3 The Union of India, through the]Secretary, Ministry of Finance,]Government of India, North Block,]New Delhi 110 101] ... Respondents Mr. Porus F. Kaka, senior advocate with Mr. Divesh Chawala i/bAtul K. Jasani for the Petitioner. Mr. Abhay Ahuja with P.A. Narayanan and Ms. Sangeeta Yadav forthe Respondents. SRP Page 1 of 79 ASWP(ST)19262.18.doc CORAM : S.C. DHARMADHIKARI &B.P. COLABAWALLA, JJ. RESERVED ON : 23RD OCTOBER, 2018PRONOUNCED ON : 27TH MARCH, 2019 JUDGMENT :[Per S.C. Dharmadhikari, J.] 1By this writ petition under Article 226 of theConstitution of India, instituted on 6th July, 2018, the petitionerseeks to quash and set aside an order passed on 29th March, 2018.This order is passed by the respondent No.1. The second relief isthat of a writ of mandamus or any other appropriate writ, orderor direction under Articles 226 and 227 of the Constitution ofIndia be issued directing the respondents to forthwith withdrawand/or cancel this order insofar as the cost of acquisition andperiod of holding in regards to the transfer of shares. That aspectof the matter has been held against the petitioner. 2Since the writ petition was directed to be listed foradmission with an intent to dispose it off finally, we proceed toissue Rule. The respondents waive service. By consent, Rule ismade returnable forthwith. SRP Page 2 of 79 ASWP(ST)19262.18.doc 3The facts necessary to appreciate the challenge to theimpugned order, briefly stated, are as under : 4The petitioner entered into an agreement dated June24, 2008 with Lehman Brothers Commercial Corporation AsiaLimited (hereinafter referred to as “Lehman Brothers”), a non-resident company incorporated in Hong Kong, to purchase, interalia, 352 Zero-Coupon Foreign Currency Convertible Bonds inNava Bharat Ventures Limited (for short “NBVL”) an Indiancompany listed on the National Stock Exchange of India Limited(for short “NSE”). 5NBVL issued the FCCBs on September 29, 2006, underthe issue of Foreign Currency Convertible Bonds and OrdinaryShares (Through Depositary Receipt Mechanism) Scheme, 1993(for short “FCCB Scheme”) to Lehman Brothers. 6The FCCB Scheme was notified by the CentralGovernment in 1993 and applicable with effect from April 1,1992. It governed the issue of (i) Foreign Currency ConvertibleBonds and (ii) Global Depositary Receipts (for short “GDRs”)withequity shares of the Indian company as the underlying securities. SRP Page 3 of 79 ASWP(ST)19262.18.doc The relevant clauses of the FCCB Scheme that requireconsideration in the matter are reproduced below : “7(4) For the purpose of conversion of Foreign CurrencyConvertible Bonds, the cost of acquisition in the hands of thenon-resident investors would be the conversion pricedetermined on the basis of the price of the shares at theBombay Stock Exchange, or the National Stock Exchange, onthe date of conversion of Foreign Currency Convertible Bondsinto shares.” … … … 8(3)Conversion of Foreign Currency Convertible Bonds intoshares shall not give rise to any capital gain liable to income-tax in India. 8(4)Transfers of Foreign Currency Convertible Bonds madeoutside India by a non-resident investor to another non-resident investor shall not give rise to any capital gains liableto tax in India. 7 During the Financial Year 2011-12, the petitioner - “7(4) For the purpose of conversion of Foreign CurrencyConvertible Bonds, the cost of acquisition in the hands of thenon-resident investors would be the conversion pricedetermined on the basis of the price of the shares at theBombay Stock Exchange, or the National Stock Exchange, onthe date of conversion of Foreign Currency Convertible Bondsinto shares.” … … … 8(3)Conversion of Foreign Currency Convertible Bonds intoshares shall not give rise to any capital gain liable to income-tax in India. 8(4)Transfers of Foreign Currency Convertible Bonds madeoutside India by a non-resident investor to another non-resident investor shall not give rise to any capital gains liableto tax in India. 7 During the Financial Year 2011-12, the petitioner - assessee had entered into transactions pertaining to ForeignCurrency Convertible Bonds (for short “FCCBs”) issued by NavaBharat Ventures Limited (for short “NBVL”) an Indian companyand the equity shares underlying these FCCBs. It had reportedshort-term capital gain of Rs.7,36,52,016 on the sale of 83,89,938equity shares of NBVL which were acquired on conversion of theFCCBs held in NBVL. This short-term capital gain was shown as SRP Page 4 of 79 ASWP(ST)19262.18.doc taxable under section 111A of the Act at 15% plus applicablesurcharge and education cess. 8During the Assessment proceedings, the AssessingOfficer (for short “AO”) observed that the assessee had purchased352 zero-coupon FCCBs of NBVL and on 18th August, 2011, 323FCCBs were converted into 1,29,23,073 equity shares of NBVLout of which 83,89,938 equity shares were sold by the petitionerin the period January, 2012 to March, 2012 and the short-termcapital gain arising on the same was duly shown in the Income taxreturn filed by the petitioner-assessee on 5th April, 2013. Theremaining equity shares (45,33,125) were sold by the petitionerin November, 2012. The balance 29 FCCBs were redeemed byNBVL on 29th September, 2011 at a premium of 25.96% over theface value. While framing the assessment, the AO made referenceto the petitioners contentions, but did not accept the same in viewof the amended provisions of the Income-tax Act vide CircularNo.1 of 2009 dated 27th March, 2009, Finance Act 2008 -Explanatory Notes to the provisions of the Finance Act 2008. SRP Page 5 of 79 ASWP(ST)19262.18.doc 9The assessment order was served on the assessee on13th May, 2015, and being aggrieved thereby, the assessee-petitioner filed a Revision Petition under section 264 of theIncome-tax Act on 12th May, 2016. The contention in thatRevision Petition was that the entire sale proceeds of 83,89,958equity shares of NBVL an Indian company, amounting toRs.174,73,12,155/-had been treated as unexplained cash credit inthe hands of the assessee by the AO in the final assessment order.After referring to the details of the transaction it is urged that theAO had added the entire sale proceeds received on sale of sharesof NBVL which were received on conversion of FCCBs into shareson the presumption that the petitioner had subscribed to theseFCCBs in September 2006 whereas it was incorporated in theCayman Islands only on 2nd August, 2007. It was urged that thiswas a wrong presumption. On this premise only the AO added thesale proceeds of the shares received on conversion as anunexplained cash credit in the hands of the assessee. Based onthese submissions made by the assessee, relief to the tune ofRs.174.73 crores was granted to the tax payer by the respondentNo.1 on this account. SRP Page 6 of 79 ASWP(ST)19262.18.doc SRP Page 6 of 79 ASWP(ST)19262.18.doc 10The second issue was that the cost of acquisition of theequity shares of NBVL taken by the AO in the assessment order isincorrect. In the return of income filed by the assessee, it hadcomputed the short-term capital gain by considering the closingprice of the equity shares of NBVL on the National StockExchange on the date of conversion of the FCCBs into NBVLequity shares. That is taken as a cost of acquisition of the shares(Rs.198.85). The assessee relied on clause 7(4) of the FCCBScheme reproduced above. However, the AO held that theprovision of section 49(2A) of the IT Act should be considered forthe purpose of computing the cost of acquisition of the shares ofNBVL received from the conversion of the FCCBs. On this basis,the AO had considered the cost of acquisition of the equity sharesat the price prevailing (Rs.113.9) on the date of issue of theFCCBs (September 2006) and computed the capital gains atRs.78.9 crores as against Rs.7.9 crores computed by the assessee.It is claimed by the first respondent that during the course of theproceedings, these aspects were examined in detail and theRevisional Authority, after considering the amended provisions ofsection 49(2A), section 47(xa) and section 115AC (1)(a) of theIncome-tax Act, calculated the capital gains as set out inSRP Page 7 of 79 ASWP(ST)19262.18.doc paragraph 11.11 of the order of the Revisional Authority. Inparagraph 6.7 of the affidavit-in-reply, at running pages 168 and169, the working made by the Revisional Authority is set out.That reads as under : “Calculation of Capital gain by the Respondent No.1 6.7It is clear that 323 FCCBs were acquired by the assessee on24.06.2008 from LBCCA for a consideration of Japanese Yen 3230million. The exchange rate as prevalent on 24.06.2008 was JPY 100 =Rs. 39.73 as per RBI website. Therefore, 323 FCCBs were purchasedby KCLO on 24.06.2008 for Rs.128,32,79,000. These 323 FCCBs wereconverted into 1,29,23,073 equity shares of Rs.2 face value each ofNBVL. Therefore, as per Section 49(2A), the cost of acquisition of theshares of NBVL will be equal to the total consideration paid by KCLO toLBCCA for purchase of 323 FCCBs on 24.06.2008 divided by No. ofshares allotted to it on conversion i.e. 1,29,23,073 (Rs.993/share).The closing price of the shares of NBVL as on 07.09.2006 as taken byA.O. to be the cost of acquisition of shares for calculating the STCG isnot as per Section 49(2A). As per Section 49(2A), capital gains on thesale of shares of NBVL should be calculated as given below : -Capital asset Sale consideration-(Jan-March 12) 83,89,936 shares of NBVL Rs.174,73,12,155 Cost of acquisition of the capital asset =Rs.128,l32,79,000 -----------------------------x 83,89,938 1,29,23,073 =Rs.83,31,32,432 SRP Page 8 of 79 ASWP(ST)19262.18.doc Brokerage paid = 26,20,968Capital gains = Rs.174,73,12,155 – Rs.83,31,l32,432- Rs.26,20,968= Rs.91,15,58,755” 11In the affidavit-in-reply, therefore, the conclusions ofthe authorities as referred above have been supported and it isclaimed that the order under section 264 of the Income-tax Actcould not be prejudicial to the interest of the assessee, hence theorder of the AO was not revised on this count and the contentionof the assessee was rejected. 12Thereafter, we find that in the affidavit-in-reply to thispetition, the petition has been dealt with para-wise. The order ofthe Revisional Authority is thus challenged on several grounds inthis petition. The petitioner has also referred to the legalprovisions and set out the same in somewhat details. Wereproduce them. 13Prior to the introduction of the FCCB Scheme, section115AC was introduced by the Finance Act, 1992 with effect fromApril 1, 1993, to govern the taxability of income arising fromSRP Page 9 of 79 ASWP(ST)19262.18.doc FCCBs and GDRs. Section 115AC along with the footnote at the time of introduction of FCCB Scheme is reproduced below : 12Thereafter, we find that in the affidavit-in-reply to thispetition, the petition has been dealt with para-wise. The order ofthe Revisional Authority is thus challenged on several grounds inthis petition. The petitioner has also referred to the legalprovisions and set out the same in somewhat details. Wereproduce them. 13Prior to the introduction of the FCCB Scheme, section115AC was introduced by the Finance Act, 1992 with effect fromApril 1, 1993, to govern the taxability of income arising fromSRP Page 9 of 79 ASWP(ST)19262.18.doc FCCBs and GDRs. Section 115AC along with the footnote at the time of introduction of FCCB Scheme is reproduced below : “Tax on income from bonds or Global Depository Receiptspurchased in foreign currency or capital gains arising fromtheir transfer. 115AC (1)Where the total income of an assessee, being anon resident, includes - (a)income by way of interest or dividends, on bonds orshares of an Indian company issued in accordance with suchscheme as the Central Government may, by notification in theOfficial Gazette*, specify in this behalf and purchased by him inforeign currency; or *The footnote to section 115AC(1)(a) is reproduced below“Foreign Currency Convertible Bonds and Ordinary Shares(Through Depository Receipt Mechanism) Scheme has beennotified – Notification No.SO 1032(E), dated 24-12-1993”. 14The explanatory memorandum dealing with section 115AC at the time of introduction reads as under : “The Government has approved, in principle, the schemepermitting issue abroad of foreign currency convertiblebonds/equity by established Indian companies. These bondshave to be denominated in foreign currencies with a view tobringing in foreign exchange. It is, therefore, necessary that SRP Page 10 of 79 ASWP(ST)19262.18.doc the tax regime for the non-resident investors of these bonds /equities is competitive vis-vis the tax regimes of other suchinstruments of investments available in the internationalmarket. Accordingly, it is proposed to insert a new section115AC in the Income-tax Act to provide for special rates of taxapplicable to income from such bonds or shares purchased inforeign currency or long-term capital gains arising from theirtransfer. The income by way of interest or dividends in respect of thebonds issued by or shares in an Indian company purchased inforeign currency in accordance with the scheme notified by theCentral Government in this behalf and income by way of long-term capital gains arising from transfer of such bonds orshares is proposed to be charged to tax at the rate of tenpercent. However, this rate of tax will apply on gross income ofthe nature specified above without allowing deduction undersection 28 to 44CC, 48 and 57 and Chapter VI-A. Theprovisions for protection from fluctuation of rupee valueagainst foreign currency will not apply to the aforesaid shares.Further, when the said bonds or shares are transferred outsideIndia, by a non-resident to another non-resident, it will not beregarded as a transfer for the purpose of capital gains tax.” The notes to clause dealing with section 115AC at the time ofintroduction reads as under : “Sub-section (1) of the new section seeks to provide that in thecase of a non-resident, the income tax payable shall be the SRP Page 11 of 79 ASWP(ST)19262.18.doc aggregate of (i) ten percent of the income by way of interest ordividends in respect of bonds issued by or, as the case may be,shares in respect of bonds issued by or, as the case may be,shares in an Indian company purchased in foreign currency inaccordance with such scheme as the central government may,by notification in the Official Gazette, specify in this behalf, ifany (ii) ten percent in case of long-term capital gains arisingfrom the transfer of the aforesaid bonds or shares, if any, and(iii) the amount of income-tax on the total income as reducedby the income from the said bonds or shares. “Sub-section (1) of the new section seeks to provide that in thecase of a non-resident, the income tax payable shall be the SRP Page 11 of 79 ASWP(ST)19262.18.doc aggregate of (i) ten percent of the income by way of interest ordividends in respect of bonds issued by or, as the case may be,shares in respect of bonds issued by or, as the case may be,shares in an Indian company purchased in foreign currency inaccordance with such scheme as the central government may,by notification in the Official Gazette, specify in this behalf, ifany (ii) ten percent in case of long-term capital gains arisingfrom the transfer of the aforesaid bonds or shares, if any, and(iii) the amount of income-tax on the total income as reducedby the income from the said bonds or shares. Sub-section (2) of the new section seeks to provide that in thecase of the aforesaid non-resident, no deduction shall beallowed under section 29 to 44C or clause (i) or clause (iii) ofsection 57 or under Chapter VI-A where the gross total incomeconsists only of income from bonds or shares. However, wherethe gross total income includes income from shares or bonds,the reduction under Chapter VI-A shall be allowed as if thegross total income does not include the income from units.” 15Section 115AC deals with taxability of only certaintypes of income that could arise in respect FCCBs and GDRs.types of income that could arise in respect FCCBs and GDRs. a)Interest payments made to non-resident holders ofFCCBs would be liable to tax in India at 10 percent. b)Long-term capital gain realized from the transfer ofFCBBs or shares to a resident would be liable to tax in India at 10percent.percent. SRP Page 12 of 79 ASWP(ST)19262.18.doc 16In light of the amendment to section 115AC of the Act,clause (x) of Section 47 was amended simultaneously to include“bonds” to address the taxability arising from the conversion intoequity shares of the issuing company. Section 47 of the Act,specifies the cases in which transfer of a capital asset is notassessable to tax under the head “Capital Gains”. Clause (x) ofsection 47 reads as under : “(x)any transfer by way of conversion or debentures,debenture-stock or deposit certificates in any form, of acompany into shares or debentures of that company.” 17Section 49 of the Act specifies the cost with referenceto certain modes of acquisition. Section 49(2A) of the Act was notamended to include “bonds”. Section 49(2A) of the Act at the timeof introduction to section 115AC and 47(x) of the Act read asunder : “(2A)Where the capital asset, being a share or debenture in acompany, became the property of the assessee in considerationof a transfer referred to in clause (x) of section 47, the cost ofacquisition of the asset to the assessee shall be deemed to bethat part of the cost of debenture, debenture-stock or depositcertificates in relation to which such asset is acquired by theassessee.” SRP Page 13 of 79 ASWP(ST)19262.18.doc 18 In 2008, the Central Government notified a new and separate scheme as Foreign Currency Exchangeable Bond Scheme, 2008 (for short “FCEB Scheme”). The footnote to section 115AC was amended. The relevant part of section 115AC including the amended footnote is reproduced as below : “Tax on income from bonds or Global Depository Receiptspurchased in foreign currency or capital gains arising fromtheir transfer. 115AC(1) Where the total income of an assessee, being a non-resident, includes - (a)income by way of interest on bonds of an Indiancompany issued in accordance with such scheme as the CentralGovernment may, by notification in the Official Gazette*specify in this behalf or on bonds of a public sector companysold by the Government and purchased by him in foreigncurrency; or:” *The footnote to section 115AC(1)(a) reads as under : 66.See Issue of Foreign Currency Exchangeable BondsScheme,l 2008/Isssue of Foreign Currency Convertible Bonds including the amended footnote is reproduced as below : “Tax on income from bonds or Global Depository Receiptspurchased in foreign currency or capital gains arising fromtheir transfer. 115AC(1) Where the total income of an assessee, being a non-resident, includes - (a)income by way of interest on bonds of an Indiancompany issued in accordance with such scheme as the CentralGovernment may, by notification in the Official Gazette*specify in this behalf or on bonds of a public sector companysold by the Government and purchased by him in foreigncurrency; or:” *The footnote to section 115AC(1)(a) reads as under : 66.See Issue of Foreign Currency Exchangeable BondsScheme,l 2008/Isssue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository ReceiptMechanism) Scheme, 1993/Depository Receipts Scheme,2014”. 19Section 47(xa) was introduced by the Finance Act,2008, with effect from April 1, 2008. Clause (xa) of section 47reads as under : SRP Page 14 of 79 ASWP(ST)19262.18.doc “(xa)Any transfer by way of conversion of bonds referred toin clause (a) of sub-section (1) of section 115AC into shares ordebentures of any company.” 20Section 49(2A) as amended by the Finance Act, 2008 with effect from April 1, 2008. Clause (2A) of section 49 reads asunder : “(2A)Where the capital asset, being a share or debenture of acompany, became the property of the assessee in considerationof a transfer referred to in clause (x) or clause (xa) of section47, 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 in relation to which such assetis acquired by the assessee” 21The notes to clauses dealing with Section 47(xa) and 49(2A) at the time of introduction read as under : “47 (xa) It is proposed to insert a new clause (xa) toprovide that any transfer by way of conversion of bondsreferred to in clause (a) of sub-section (1) of section 115AC intoshares or debentures of any company shall not be consideredas transfer. 49(2A) Sub-section (2A) of the said section provides thatwhere the capital asset, being a share or debenture in acompany, became the property of the assessee in considerationof a transfer referred to in clause (x) of section 47, the cost of SRP Page 15 of 79 ASWP(ST)19262.18.doc acquisition of the asset to the assessee shall be deemed to bethat part of the cost of debenture, debenture-stock or depositcertificates in relation to which such asset is acquired by theassessee. It is proposed to substitute the said sub-section to provide thatwhere the capital asset, being a share or debenture of acompany, became the property of the assessee in considerationof a transfer referred to in clause(x) or clause (xa) of section47, 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 certificates in relation to which suchasset is acquired by the assessee. This amendment will take effect from 1st April, 2008 and willaccordingly apply in relation the assessment year 2008-09 andsubsequent assessment years.” 22The explanatory memorandum dealing with 49(2A) atthe time of introduction reads as under : “In 1992, the Government allowed established Indiancompanies to issue Foreign Currency Convertible Bonds(FCCBs), with special tax regime for non-resident investors, soas to encourage the flow of foreign exchange to India. TheGovernment has now allowed established Indian companies toissue Foreign Currency Exchangeable Bond (FCEB). These arebonds expressed in foreign currency, the principal and interestin respect of which is payable in foreign currency. The FCEBs SRP Page 16 of 79 ASWP(ST)19262.18.doc This amendment will take effect from 1st April, 2008 and willaccordingly apply in relation the assessment year 2008-09 andsubsequent assessment years.” 22The explanatory memorandum dealing with 49(2A) atthe time of introduction reads as under : “In 1992, the Government allowed established Indiancompanies to issue Foreign Currency Convertible Bonds(FCCBs), with special tax regime for non-resident investors, soas to encourage the flow of foreign exchange to India. TheGovernment has now allowed established Indian companies toissue Foreign Currency Exchangeable Bond (FCEB). These arebonds expressed in foreign currency, the principal and interestin respect of which is payable in foreign currency. The FCEBs SRP Page 16 of 79 ASWP(ST)19262.18.doc differ from FCCBs in as much as the latter can only beconverted into shares of the issuing company, whereas FCEBscan also be converted into or exchanged for the shares of agroup company. With a view to providing a level playing fieldto FCEBs, it is proposed to provide that the conversion ofFCEBs into shares or debentures of any company shall not betreated as a ‘transfer’ within the meaning of Income-tax Act.Further it is also proposed to substitute sub-section (2A) ofsection 49 to provide that the cost of acquisition of the sharesreceived upon conversion of the bond shall be the price atwhich the corresponding bond was acquired.” 23The bonds issued to the Petitioner are under the FCCBScheme of 1993. Under the FCCB Scheme, the cost of acquisitionof equity shares upon conversion of FCCBs are to be determinedin accordance with the provisions of clause7(4) and 8(3). It issubmitted that: a.The provisions of the aforesaid clauses of the FCCB Schemecontinue 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. 24Prior to its substitution by the Finance Act, 2008,w.e.f. 1-4-2008, sub-section (2A) of section 49, as inserted by the SRP Page 17 of 79 ASWP(ST)19262.18.doc Finance Act (No.2) Act, 1991, w.e.f. 1-4-1962 did not contain anyreference to “bonds”. Under this circumstance, the cost ofacquisition of equity shares upon the conversion of FCCBs was notgoverned by the provisions of section 49(2A) instead it wasalways to be determined in accordance with the special provisionsof clause 7(4) read with clause 8(3) of the FCCB Scheme. 25On the basis of the applicable provisions, and theamendment to the footnote of Section 115AC along with the notesto clauses along with the explanatory memorandum to theFinance Act, 2008 it is clear that Section 47(xa) and section49(2A) was introduced in the Act to govern transactionspertaining to FCEBs and not FCCBs which are anyway governedby the FCCB Scheme from 1993 onwards. 26The petitioner converted 323 FCCBs (out of 352FCCBs) into underlying equity shares of NBVL on August 18,2011. This conversion is exempt from tax in accordance with theclause7(4) read with 8(3) of the FCCB Scheme. Subsequently, thePetitioner sold 83,89,938 equity shares on the NSE in tranchesduring the Assessment Year 2012-13. The petitioner was liable toSRP Page 18 of 79 The petitioner converted 323 FCCBs (out of 352 ASWP(ST)19262.18.doc securities transaction tax on such sale, that was duly paid by thepetitioner. The balance 29 FCCBs were redeemed by NBVL onSeptember 29, 2011, at a premium of 25.96 % over the face valueof the FCCBs in accordance with the terms of the issue. 26The petitioner converted 323 FCCBs (out of 352FCCBs) into underlying equity shares of NBVL on August 18,2011. This conversion is exempt from tax in accordance with theclause7(4) read with 8(3) of the FCCB Scheme. Subsequently, thePetitioner sold 83,89,938 equity shares on the NSE in tranchesduring the Assessment Year 2012-13. The petitioner was liable toSRP Page 18 of 79 The petitioner converted 323 FCCBs (out of 352 ASWP(ST)19262.18.doc securities transaction tax on such sale, that was duly paid by thepetitioner. The balance 29 FCCBs were redeemed by NBVL onSeptember 29, 2011, at a premium of 25.96 % over the face valueof the FCCBs in accordance with the terms of the issue. 27The petitioner filed its return of income for theAssessment Year 2012-13 on 5th April, 2013. The FCCB does notspecify the manner of computing the period of holding of theequity shares received from the conversion of FCCBs. Thepetitioner computed the short-term capital gains by consideringthe equity shares of Nava Bharat Ventures Limited which havebeen held by it since the date of allotment of the shares uponconversion of the relevant FCCBs. The petitioner relied uponclause 7(4) of the Scheme and computed the short-term capitalgain by considering the closing price of the equity shares of theabove company on the National Stock Exchange on the date ofconversion of FCCBs into NBVL equity shares. The petitionerreported a taxable income of Rs.7,63,52,016/- being the short-term capital gain arising from the sale of equity shares. Thepetitioner accordingly paid the required taxes in accordance withlaw. The petitioner’s case was selected for scrutiny assessment SRP Page 19 of 79 ASWP(ST)19262.18.doc vide notice dated 5th September, 2014, issued under section143(2) of the Income Tax Act, 1961 (for short ‘IT Act”). Thepetitioner, on realising that the issuing company short paid theactual tax that ought to have been deducted and deposited inrespect of the premium, voluntarily deposited this additional taxamount of Rs.1,91,198/-, including interest payable.Subsequently, the Assessing Officer passed an order dated 13thMarch, 2015, copy of which is at Exhibit-E to the petition and onreceipt of this assessment order, the petitioner-assessee realisedthe mistake therein and sought to correct the same by filing arectification application. The Assessment Officer passed arectification order to rectify the defect and this order is dated 17thFebruary, 2016, copy of which is at Exhibit-F to the petition. 28The petitioner filed a Revision Application undersection 264 of the IT Act before the Commissioner of Income Taxagainst the order of assessment, copy of which is Exhibit-G. 29The impugned order dated 29th March, 2018, copy-of which is at ExhibitA to the petition has been passed onthis Revision Application. It is aggrieved and dissatisfied withthis order that the petitioner has filed the instant petition. SRP Page 20 of 79 ASWP(ST)19262.18.doc 30In the meanwhile, the Assessing Officer, acting on theorder of the Commissioner, issued a notice of demand undersection 156 of the IT Act dated 10th April, 2018. A copy of thisorder is annexed at Exhibit-H to the petition. A demand in thesum of Rs.22,40,46,220/- as also the interest under section 234-B of the Act came to be included in this demand, but withoutgiving any credit for the taxes already paid. The petitioner wasadvised to file a rectification application with the secondrespondent, which it filed on 10th May, 2018. 31However, in the meanwhile, the instant petition hasbeen filed. 32On this petition, we have heard Mr. Porus Kaka,learned senior advocate appearing on behalf of the petitionersand Mr. Abhay Ahuja, advocate for the Revenue / respondents. 30In the meanwhile, the Assessing Officer, acting on theorder of the Commissioner, issued a notice of demand undersection 156 of the IT Act dated 10th April, 2018. A copy of thisorder is annexed at Exhibit-H to the petition. A demand in thesum of Rs.22,40,46,220/- as also the interest under section 234-B of the Act came to be included in this demand, but withoutgiving any credit for the taxes already paid. The petitioner wasadvised to file a rectification application with the secondrespondent, which it filed on 10th May, 2018. 31However, in the meanwhile, the instant petition hasbeen filed. 32On this petition, we have heard Mr. Porus Kaka,learned senior advocate appearing on behalf of the petitionersand Mr. Abhay Ahuja, advocate for the Revenue / respondents. 33Mr. Porus Kaka explained to us in great detail the Scheme, thetransactions and thereafter took us through the relevant Schemesand the provisions of the amended as well as the unamendedAct, the salient features of the FCCB and FCEB Schemes SRP Page 21 of 79 ASWP(ST)19262.18.doc and submitted that the Revisional Authority completely misreadand misconstrued the legal provisions to arrive at a finding whichis wholly illegal and perverse. It is submitted by Mr. Kaka thatthe FCCB Scheme as notified by the Central Government forfacilitating issue of foreign currency convertible bonds andordinary shares through Global Depository Receipt mechanismby Indian companies is titled as “The Foreign CurrencyConvertible Bonds and Ordinary Shares (Through DepositaryReceipt Mechanism) Scheme, 1993”. It shall be deemed to havecome into force from 1st day of April, 1992. Inviting our attentionto the definitions contained in clause (2) of the Scheme andparticularly the words FCCBs, issuing company and clause (3)which is titled as ‘Eligibility for Issue of Convertible Bonds orOrdinary Shares of Issuing Company’, Mr. Kaka urged that thisScheme contains under the heading ‘Transfer and Redemption’,the relevant clauses relied upon, namely, clauses 7(1) and 7(4).Mr. Kaka would then submit that once a non-resident holder ofGlobal Depositary Receipts may transfer those receipts, or mayask the Overseas Depositary Bank to redeem these receipts, then,there is a mechanism set out in clause 7(1), (1A), (2) and (3) forthe purpose of conversion of FCCBs. Sub-clause (4) of clause 7 SRP Page 22 of 79 ASWP(ST)19262.18.doc sets out that the cost of acquisition in the hands of the non-resident investors would be the conversion price determined onthe basis of the price of the shares at the Bombay Stock Exchangeor the National Stock Exchange, on the date of conversion ofForeign Currency Convertible Bonds into shares. Hence Mr. Kakawould submit that the taxation on shares issued under the GlobalDepositary Receipt Mechanism would denote that this is acompletely distinct Scheme. 34On 23rd September, 2008, Circular No.17 was issuedand the attention of the authorised dealers was invited to the“Issue of Foreign Currency Exchangeable Bonds (FCEB) Scheme,2008”. That Scheme was notified by the Government of India,Ministry of Finance, Department of Economic Affairs videNotification of G.S.R.89(E) dated 15th February, 2008. Tooperationalise this Scheme in order to facilitate the issue ofFCEBs by Indian companies, the Scheme was specifically definedand FCEB means a bond expressed in foreign currency, theprincipal and interest in respect of which is payable in foreigncurrency and issued by an Issuing Company and subscribed to bya person who is resident outside India, in foreign currency. Mr. SRP Page 23 of 79 ASWP(ST)19262.18.doc 34On 23rd September, 2008, Circular No.17 was issuedand the attention of the authorised dealers was invited to the“Issue of Foreign Currency Exchangeable Bonds (FCEB) Scheme,2008”. That Scheme was notified by the Government of India,Ministry of Finance, Department of Economic Affairs videNotification of G.S.R.89(E) dated 15th February, 2008. Tooperationalise this Scheme in order to facilitate the issue ofFCEBs by Indian companies, the Scheme was specifically definedand FCEB means a bond expressed in foreign currency, theprincipal and interest in respect of which is payable in foreigncurrency and issued by an Issuing Company and subscribed to bya person who is resident outside India, in foreign currency. Mr. SRP Page 23 of 79 ASWP(ST)19262.18.doc Kaka says that this is exchangeable, into equity shares of anothercompany to be called the Offered Company, in any manner, eitherwholly, or partly or on the basis of any equity related warrantsattached to debt instruments. The FCEB may be denominated inany freely convertible foreign currency. Therefore, Mr. Kakawould submit that a whole new regime after the Notification wasissued, bringing into effect the FCEB Scheme. It is clear thatwhenever there are distinct Schemes, those Schemes are notifiedand it is clear that when FCEB was repealed by NotificationF.No.9/1/2013-ECB-Depository Receipts Scheme, 2014 on 21stOctober, 2014, the Central Government in clause 11 of thisScheme known as Depository Receipts Scheme, 2014 (for short“DRS 2014”) inserted a repeal and saving clause and clarified theissue of Foreign Currency Convertible Bonds and Ordinary Shares(Through Depository Receipt Mechanism) Scheme 1993 shall berepealed except to the extent relating to FCCBs. Once this repealand saving clause is taken into consideration, then, Mr. Kakawould submit the full picture becomes clear. Then, Mr. Kaka tookus through the above referred provisions of the Income-tax Act,1961 and urged that this understanding of the Scheme, togetherwith the governing clauses is the focal point. If this SRP Page 24 of 79 ASWP(ST)19262.18.doc understanding is wholly faulty and erroneous as is contended andelaborated in the writ petition, then, Mr. Kaka would submit thatthe conclusions of the Revisional Authority cannot be sustained.They are erroneous and contrary to law. We must then proceed toquash and set aside the said order. 35Mr. Kaka has also taken us through the Memorandumexplaining the provisions of the Finance Bill 1992, the BillNo.17/2008 which is a Bill to give effect to the financial proposalsof the Central Government for the Financial Year 2008-09 and theFinance Act 2008 to urge that the said Bill purports to amend,inter alia, section 49 of the Income Tax Act, 1961 by adding sub-section (2A) and thus urged that in the Statement of Objects andReasons, it is stated that the object of the Bill is to give effect tothe finance proposals of the Central Government for the FinancialYear 2008-09. Mr. Kaka then referred to the notes on clauses andurged that by clause 12 of the same, it was proposed to substitutethe sub-section to provide that where the capital asset being ashare or debenture of a company, became the property of theassesee in consideration of a transfer referred to in clause (x) orclause (xa) of section 47, the cost of acquisition of the asset to the SRP Page 25 of 79 ASWP(ST)19262.18.doc SRP Page 25 of 79 ASWP(ST)19262.18.doc assesse shall be deemed to be that part of the cost of debenture,debenture stock, bond or deposit certificates in relation to whichsuch asset is acquired by the assessee. This amendment will takeeffect from 1st April, 2009 and will, accordingly, apply in relationto the Assessment Year 2008-09 for subsequent assessmentyears. Mr. Kaka, therefore, submits that the petitioner rightlycalculated the cost of acquisition in accordance with clause 7(4)of the FCCB Scheme so as to compute the short-term capital gain.Mr. Kaka submits that the first respondent calculated the cost ofacquisition as per provisions of section 49(2A) of the Income-taxAct by taking the actual amount paid by the petitioner forpurchase of each share of NBVL. Mr. Kaka submits that it isobvious that the petitioner did not purchase any shares of NBVLfrom the market, but received Rs.1,29,23,073 shares from NBVLon 18th August, 2011 upon conversion of 323 FCCBs. Hence Mr.Kaka would submit that if the cost of acquisition is considered inaccordance with this amended Section 49(2A) of the Income-taxAct, it creates discrimination amongst assessees. The assesseeswho have sold their shares prior to the amendment cannot be puton par with those who have undertaken a similar transaction postthe amendment. SRP Page 26 of 79 ASWP(ST)19262.18.doc 36Mr. Kaka also submitted that there are decisions inthe field which would buttress the arguments of the petitionerthat amendment to section 49(2A) to include bonds cannot andwas not meant to retrospectively cover bonds issued prior to thedate under the FCCB Scheme. Thereby, the cost of acquisition ofequity shares upon conversion of FCCBs was not governed by theprovisions of section 49(2A) of the Income-tax Act. Instead, thecost was to be determined in accordance with the specificprovisions of clause 7(4) read with clause 8(3) of the FCCBScheme read with section 115AC of the Income-tax Act. 37Mr. Kaka argued that the provisions of section 115ACread with the FCCB Scheme should govern the FCCB relatedtransactions to the extent that corresponding provisions are notrepealed in the Act. Mr. Kaka once again highlights that theinclusion of section 47(xa) and the amendment to section 49(2A)to include bonds and a footnote in section 115AC was only togovern FCEBs and not FCCB transactions. Mr. Kaka states thatcorrespondingly the conversion should be in accordance with theprovisions of section 47(x) which was insertedcontemporaneously with the introduction of the FCCB Scheme SRP Page 27 of 79 ASWP(ST)19262.18.doc and not section 47(xa) which was inserted contemporaneouslywith the introduction of the FCEB Scheme. Mr. Kaka was at painsto point out that the FCCB Scheme governs the FCCB transactionsand has been notified in the Official Gazette by the relevantauthorities and referred to in section 115AC of the Income-taxAct. 38It is urged that we must look into all the grounds onwhich the Revisional Authority’s order has been challenged inthis petition so as to get a complete picture. Mr. Kaka submitsthat otherwise what we would be doing is to grant a discretionarypower in the authorities to consider the cost of acquisition ofcapital asset on a particular date and subsequently disregard thesame date for determining the period for holding of the capitalasset. Mr. Kaka, therefore, submits that the gain arising from thesale of shares should be regarded as a long-term capital gain andshould be exempt from tax under section 10(38) of the Act in thehands of the petitioner. Mr. Kaka finally submits that therespondent No.1 then should also consider the date of acquisitionof FCCBs for determining the period of holding of shares and theperiod post the conversion. The failure of the respondent No.1 to SRP Page 28 of 79 ASWP(ST)19262.18.doc consider the same is wholly erroneous, arbitrary and contrary tolaw. SRP Page 28 of 79 ASWP(ST)19262.18.doc consider the same is wholly erroneous, arbitrary and contrary tolaw. 39Mr. Kaka relied upon the decision in the case ofCommissioner of Income-tax vs Naveen Bhatia 287 ITR 587rendered by the Punjab and Haryana High Court andCommissioner of Income-tax vs. Manjula J. Shah rendered by thisCourt and reported in 355 ITR 474. The only ground on whichthese decisions have been brushed aside is that the same have notbeen accepted by the Department and an Appeal has beenpreferred in the Hon’ble Supreme Court of India in the case ofManjula Shah. Mr. Kaka took us through the summary of theconclusions which he terms as erroneous and to be found in theorder of the respondent No.l impugned in the writ petition and,according to him, paragraph 38 of the petition and the table belowit would demonstrate as to how the factual and legal position hasnot been appreciated at all or has not been appreciated in itsproper perspective. The correct factual and legal position shouldhave been noticed and that having not been done, the impugnedorder is vitiated by an error of law apparent on the face of therecord. SRP Page 29 of 79 ASWP(ST)19262.18.doc 40On the other hand, Mr. Ahuja appearing on behalf ofthe Revenue would support the impugned order. It is submittedby him that the petitioners are not disclosing or rather have notdisclosed the true and correct facts. They have been succinctlyset out both in the impugned order and in the affidavit-in-replyfiled to this petition. Mr. Ahuja submits that it is correct that theFCCB Scheme notified by the Central Government in 1993 isapplicable with effect from 1st April, 1992 and the same governedthe issue of FCCBs and GDRs with equity shares of the Indiancompanies as underlying securities. Mr. Ahuja submits that acopy of the same has been enclosed as Exhibit-B to the writpetition, but the print-out of the FCCB Scheme 2003 has beentaken from the official website of the Income Tax Department. Itis a matter of record that FCCB Scheme is not a part of theIncome-tax Act and was not issued by the Income TaxDepartment. The FCCB Scheme is purely a Scheme of the CentralGovernment of India and for facilitating raising of capital/loans bythe Indian companies from non-resident investors. The clauses ofthis Scheme, therefore, ought to be construed and interpreted inthe light of this objective. The objectives for facilitating the issueof FCCBs and GDRs by the Indian companies to the foreignSRP Page 30 of 79 ASWP(ST)19262.18.doc investors as discernible from various clauses of the Scheme donot override the express provisions of the Income-tax Act, 1961with regard to the calculation of the capital gains and the cost ofthe acquisition in the hands of the non-resident investors unlessspecific provisions to that extent are made in the Income-tax Act.Mr. Ahuja then submits that the NBVL, an Indian company, cameout with its offering circular for the FCCBs on 29th September,2006 and the assessee purchased 352 zero-coupon FCCBs ofNBVL from Ms. Lehman Brothers, a non resident companyincorporated in Hong Kong vide an agreement dated 24th June,2008. However, it is not correct to say that the capital gains onthe sale of equity shares of NBVL would be the cost of conversionof FCCBs and to be determined in accordance with the FCCBScheme. Mr. Ahuja submits that the capital gains arising from thetransfer of capital assets are required to be calculated inaccordance with the provisions of sections 45 to 54 of the Income-tax Act. The clauses of the FC