Back
1982 Supreme(Cal) 256
High Court Of Calcutta
SABYASACHI MUKHERJI, SUHAS CHANDRA SEN
MRS.A.GHOSH - Appellant
Versus
COMMISSIONER OF INCOME-TAX - Respondent
Income-Tax Reference 291 Of 1975
Decided On : 07/19/1982
AJIT SEN GUPTA, AMAL BARAN CHATTERJEE, PRABIR MAJUMDAR, Sanjoy Bhattacharyya
The cost of acquisition of shares acquired through the exchange of debentures is not the cost incurred for the debenture bonds, but the price the debentures would have fetched if sold in the open market on the date they were exchanged for the shares.
Headnote:
CAPITAL GAINS - COMPUTATION - COST OF ACQUISITION OF SHARES - EXCHANGE OF DEBENTURES FOR SHARES - WHETHER COST OF ACQUISITION OF DEBENTURES IS COST OF ACQUISITION OF SHARES - INCOME-TAX ACT, 1961, SEC. 45, 48(II), 55(2)(V).
Fact of the Case:
The assessee acquired debenture bonds of a company and later exchanged them for equity shares of the same company. The assessee sold the equity shares and claimed that the surplus earned on the sale was not taxable as business income but as capital gain. The Income-tax Officer treated the surplus as short-term capital gain, which was upheld by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal.
Finding of the Court:
The Calcutta High Court held that the surplus earned on the sale of the equity shares was liable to be assessed to income-tax as short-term capital gains. However, the court held that the Tribunal erred in holding that the cost of acquisition of the shares was the cost incurred for the debenture bonds. The court held that the cost of acquisition of the shares was the price the debentures would have fetched if sold in the open market on the date they were exchanged for the shares.
Issues: 1. Whether the surplus earned on the sale of the equity shares was liable to be assessed to income-tax as short-term capital gains? 2. Whether the cost of acquisition of the shares was the cost incurred for the debenture bonds?
Ratio Decidendi: 1. Section 45 of the Income-tax Act, 1961 imposes a charge of income-tax on any profits or gains arising from the transfer of a capital asset. Section 48 lays down the mode of computation and deductions for the purpose of ascertaining the chargeable quantum of capital gain. Under Section 48(ii), the cost of acquisition of the capital asset and the cost of any improvement thereto will have to be deducted from the full value of the consideration received or accruing as a result of the transfer of a capital asset. The cost of acquisition of capital assets has to be found out in accordance with the ordinary commercial principles. 2. In the instant case, the assessee acquired the debentures on 20th December, 1962. As a debenture-holder under the terms of the issue of the debentures the assessee possessed certain rights. The assessee was entitled to a fixed percentage of interest for a number of years. The assessee also had a floating charge on the assets of the company. The assessee was also entitled to exercise an option for obtaining equity shares of the company at a prescribed rate of exchange. Therefore, when the assessee gave up the debentures and acquired the shares on 1st October, 1963, the assessee acquired an asset which was quite distinct and separate from the debentures. It is well settled that a share is a bundle of rights. The rights, as a shareholder, the assessee enjoyed were quite different from the rights that the assessee had as a debenture-holder. It will not be right to say that the cost of acquisition of the shares was the issue price of the debentures on 20th December, 1962.
Final Decision: The court answered the question referred to it by saying that the Tribunal was justified in holding that the sale proceeds of the equity shares in this case were liable to be assessed to income-tax as short-term capital gains. However, the Tribunal was in error in holding that the cost of acquisition of the shares in this case was the cost the assessee had incurred for the debenture bonds. The Tribunal will have to recompute the cost of the equity shares in the light of the principles indicated by the court.
( 1 ) THIS case arises out of an order passed by the Income-tax Appellate Tribunal in I. T. A. No. 5105 (Cal) of 1972-73 preferred by Mrs. Anna Ghosh. The relevant assessment year being the assessment year 1965-66.
( 2 ) MRS. Anna Ghosh had acquired 433 debenture bonds of the value of Rs. 4 3,300 of M/s. Standard Pharmaceutical Ltd. on 20th December, 1962. Similarly, Dr. H. Ghosh had acquired 365 debenture bonds of the value of Rs. 36,500 of M/s. Standard Pharmaceutical Ltd. on 20th December, 1962. Under the second mortgage debenture trust deed dated 21st September, 1963, the debenture holders had the option to exchange the debentures into fully paid up equity shares. Mrs. Ghosh had exercised her option on 1st October, 1963, and exchanged 433 debenture bonds for 4,330 equity shares of Rs. 10 each. She sold 4,000 shares to M/s. Synbiotics Ltd. of Ahmedabad for Rs. 1,24,000 on March 30, 1964, earning a surplus of Rs. 84,000. Similarly, Dr. Ghosh had exercised the option on 1st October, 1963, and exchanged 365 debenture bonds for 3,650 equity shares of Rs. 10 each. Later on, he sold 3,500 shares to M/s. Synbiotics Ltd. of Ahmedabad for Rs. 1,08,500 on 30th March, 1964, earning a surplus of Rs. 73,500. The ITO treated the surplus of the above amounts as business income. On appeal, the AAC held that the surplus was in the nature of capital gain but not business income which was upheld by the Tribunal by its order dated 21st December, 1971, in I. T. A. Nos. 1798 and 2797 (Cal) of 1971-72. In pursuance of the order of the AAC, which was upheld by the Tribunal, the ITO modified the assessment order so as to treat the surplus as capital gain. While doing so the ITO treated the surplus as short-term capital gain.
( 3 ) APPEALS were again preferred to the AAC. The AAC in his order dated 21st November, 1973, held that the conversion of the debenture bonds into equity shares was not self-generated or automatic. As holder of debenture bonds the assessee was only a creditor of the company. She ceased to be such a creditor on 1st October, 1963, when she exchanged the debenture bonds for fully paid up equity shares and the debenture bonds ceased to exist. The asset which was acquired on 1st October, 1963, i. e. , the equity shires, was entirely different from the asset which she possessed before that date. Thus, he held that the asset which was sold on 30th March, 1964, was acquired only on 1st October, 1963, and, consequently, the period during which the assessee held the asset was less than 12 months and as such the surplus earned on the sale of the asset must be treated as short-term capital gain.
( 4 ) MRS. Anna Ghosh preferred two separate appeals to the Income-tax Appellate Tribunal from the order passed by the AAC. I. T. A. No. 5705 (Cal) of 1972-73 was filed by Mrs. Anna Ghosh in her individual capacity; I. T. A. No. 5706 (Cal) of 1972-73 was preferred by her as the legal representative of her husband, late Dr. H. Ghosh. The Tribunal by a consolidated order disposed of both the appeals. The Tribunal found that the assessee acquired the debenture bonds on 20th December, 1962, with a right of option to convert the same into fully paid up equity shares at any time after the expiry of the period of six months but not later than one year. The right of option was exercised on 1st October, 1963, and the equity shares were thus acquired. The Tribunal further held that the debenture holders were only creditors having claim against the company, but the shareholders were the members of the company. Thus, prior to the date of acquisition of the equity shares, the assessee was only a creditor being a debenture holder. Thus, the Tribunal held that even though the assessee had a right of option to convert the debenture bonds into fully paid up equity shares, it was not possible to hold that the equity shares were acquired by the assessee from the date when the debenture bonds were held, i. e. , from 20th December, 1962. It w
