The Director of Income-tax International Taxation, Bangalore / The Joint Director of Income-tax (International Taxation)-I, Bangalore v. Intel Capital (Cayman) Corporation
[Citation -2020-LL-1006-47]

Citation 2020-LL-1006-47
Appellant Name The Director of Income-tax International Taxation, Bangalore / The Joint Director of Income-tax (International Taxation)-I, Bangalore
Respondent Name Intel Capital (Cayman) Corporation
Court HIGH COURT OF KARNATAKA
Relevant Act Income-tax
Date of Order 06/10/2020
Assessment Year 2008-09
Judgment View Judgment
Keyword Tags cost of acquisition of shares • convertible foreign currency • global depository receipts • national stock exchange • subscription agreement • bombay stock exchange • date of conversion • period of holding • foreign exchange • sale of shares • non-resident • debentures • capital gain
Bot Summary: Learned counsel for the revenue submitted that in view of Section 49(2A) of the Act, for the purposes of Section 45 of the Act, the cost of acquisition has to be 6 taken as the cost of debentures. On the other hand, learned counsel for the assessee has invited the attention of this court to the scheme for facilitating issue of foreign currency, convertible bonds and ordinary shares through global depository mechanism by Indian companies and has invited our attention to Clause 2(f) of the Scheme and has pointed out that the words and expressions not 7 defined in the scheme but defined in the Act, the Companies Act, 1956 or the Securities and Exchange Board of India Act, 1992 or the Rules and Regulations framed under these acts shall have the same meaning respectively assigned to them as the case may be in Income Tax Act, or the Companies Act or the Securities and Exchange Board of India Act. Clause 2(f) of the Scheme provides that the words and expressions not defined in the scheme, but defined in the Income Tax Act, 1961 or the Companies Act, 1956, or the Securities and Exchange Board of India Act, 1992 or the Rules and Regulations 9 framed under These Acts, shall have the meaning respectively assigned to them, as the case may be, in the Income Tax Act, 1961 or the Companies Act, or the Securities and Exchange Board of India Act. In light of the amendment to section 115AC of the Act, clause of Section 47 was amended simultaneously to include bonds to address the taxability 11 arising from the conversion into equity shares of the issuing company. Section 49(2A) of the Act at the time of introduction to section 115AC and 47(x) of the Act read as under: Where the capital asset, being a share or debenture in a company, became the property of the assessee in consideration of a transfer referred to in clause of section 47, the cost of acquisition of the asset to the assessee shall be deemed to be 12 that part of the cost of debenture, debenture-stock or deposit certificates in relation to which such asset is acquired by the assessee. Under the FCCB Scheme, the cost of acquisition of equity shares upon conversion of FCCBs are to be determined in accordance with the provisions of clause 7(4) and 8(3). It is submitted that: a. The provisions of the aforesaid clauses of the FCCB Scheme continue to operate; and 18 b. Section 49(2A) of the Act was amended by the Finance Act, 2008 and was to be read with the FCEB Scheme. Prior to its substitution by the Finance Act, 2008, w.e.f. 1-4-2008, sub- section of section 49, as inserted by the Finance Act Act, 1991, w.e.f. 1-4- 1962 did not contain any reference to bonds.


1 IN HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS 6TH DAY OF OCTOBER 2020 PRESENT HON BLE MR. JUSTICE ALOK ARADHE AND HON BLE MR. JUSTICE H.T.NARENDRA PRASAD I.T.A. NO.385 OF 2013 BETWEEN: 1. DIRECTOR OF INCOME-TAX INTERNATIONAL TAXATION RASHTROTHANA BHAVAN NRUPATHUNGA ROAD, BANGALORE. 2. 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 HOBLI BANGALORE-560103. ... RESPONDENT (BY SRI. T. SURYANARAYANA, ADV.) --- THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 28.03.2013 PASSED IN ITA NO.805/BANG/2011 FOR ASSESSMENT YEAR 2008-09, PRAYING THAT THIS HON BLE COURT MAY BE PLEASED TO: 2 (I) FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. (II) ALLOW APPEAL AND SET ASIDE ORDER PASSED BY ITAT, BANGALORE IN ITA NO.805/BANG/2011 DATED 28-03-2013 AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY JOINT DIRECTOR OF INCOME TAX, INTERNATIONAL TAXATION-I, BANGALORE. THIS ITA COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED FOLLOWING: JUDGMENT This appeal under Section 260A of Income Tax Act, 1961 (hereinafter referred to as Act for short) has been preferred by revenue. subject matter of appeal pertains to Assessment year 2008-09. appeal was admitted by bench of this Court vide order dated 27.11.2015 on following substantial question of law: Whether on facts and circumstances of case, Tribunal was right in holding that computation of capital gains by assessee is right and capital gains computed by assessing authority by adopting rate of acquisition at Rs.200 is erroneous and further holding 3 that period of holding shares should be from date of conversion into shares to 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 appeal briefly stated are that assessee is non-resident company. company filed its return of income for Assessment Year 2008-09 by declaring total income of `49,95,03,232/-. In assessment proceedings under Section 143(3) read with Section 144C of Act, Assessing Authority, vide order dated 18.02.2011 inter alia held that assessee had acquired foreign currency convertible bonds and after conversion of same into shares, sold same during relevant previous year and disclosed short term capital gains from transaction and paid tax thereon at prescribed rate. It was further held that cost of acquisition of equity shares on conversion of foreign currency convertible bonds was shown to be at `873.83 and `858.08 per share whereas 4 in fact assessee converted bonds into shares at `200/- per share. Assessing Authority therefore concluded that cost of acquisition of share has to be assessed at `200/- per share and not at `873.83 and `858.08 per share as claimed by assessee and completed assessment. 3. Being aggrieved, assessee filed appeal before Commissioner of Income Tax (Appeals), who by order dated 14.07.2011 dismissed appeal. assessee thereupon approached Income Tax Appellate Tribunal. Tribunal, by order dated 28.03.2013 inter alia held that under Section 115AC of Act, Central Government has formed scheme permitting some companies like NIIT to issue foreign currency convertible bonds which can at any point of time be converted into equity shares. It was further held that subscription agreement which is approved by Reserve Bank of India, that is regulatory body and as per terms and conditions for issuance of foreign 5 currency convertible bonds between NIIT and assessee, bonds are to be initially converted into shares at `200/- per share subject to adjustments under Clause 6(c) of agreement. Therefore, assessee was rightly allotted 21,28,000 shares at rate of `200/- as per bond agreement at prevalent convertible foreign currency rate. It was further held that Clause (xa) of Section 47 of Act refers to transfer by way of conversion of bonds referred to in Clause (a) of sub-Section 115AC of Act. Therefore, aforesaid provision is not applicable to case in hand. Accordingly, order passed by Commissioner of Income Tax (Appeals) and Assessing Officer was set aside and appeal preferred by assessee was allowed. In aforesaid factual background, this appeal has been filed. 4. Learned counsel for revenue submitted that in view of Section 49(2A) of Act, for purposes of Section 45 of Act, cost of acquisition has to be 6 taken as cost of debentures. It is further submitted that in case of any conflict between scheme / Rules and provisions of Act, provisions of Act would prevail. It is also submitted that Bombay High Court in KINGFISHER CAPITAL CLO LTD. Vs. COMMISSIONER OF INCOME-TAX (INTERNATIONAL TAXATION), MUMBAI (2019) 413 ITR 1 (Bombay), was dealing with scheme which was introduced in year 1993 and was made applicable for Assessment Year 2002-03 and has invited our attention to para 80 to 82 of aforesaid decision. 5. On other hand, learned counsel for assessee has invited attention of this court to scheme for facilitating issue of foreign currency, convertible bonds and ordinary shares through global depository mechanism by Indian companies and has invited our attention to Clause 2(f) of Scheme and has pointed out that words and expressions not 7 defined in scheme but defined in Act, Companies Act, 1956 or Securities and Exchange Board of India Act, 1992 or Rules and Regulations framed under these acts shall have same meaning respectively assigned to them as case may be in Income Tax Act, or Companies Act or Securities and Exchange Board of India Act. It is also pointed out that Clause 7 of scheme deals with transfer and detention and sub-Clause (4) of Clause 7 cannot be read in isolation and has to be read along with sub-Clause (3). It is also argued that clause 4 of scheme deals with cost of acquisition of shares in respect of conversion of foreign currency convertible bonds. It is also pointed out that 2008 scheme deals with foreign currency exchangeable bond and therefore, does not apply to fact situation of case. It is also urged that issue involved in this appeal is covered by decision in KINGFISHER CAPITAL CLO LTD. supra and there is no conflict between provisions of scheme 8 and either Act or Rules and therefore, cost of acquisition of shares has rightly been assessed as per provisions of scheme by Tribunal. 6. We have considered submissions made by learned counsel for parties and have perused record. singular issue, which arises for consideration in this appeal is whether Tribunal was right in computing capital gains by adopting rate of acquisition at Rs.200/-. Central Government has issued scheme viz., issue of foreign currency convertible bonds and ordinary shares (through Depository Receipt Mechanism) Scheme, 1993. aforesaid scheme has been made applicable for Assessment Year 2002-03 onwards vide notification dated 10.09.2002. Clause 2(f) of Scheme provides that words and expressions not defined in scheme, but defined in Income Tax Act, 1961 or Companies Act, 1956, or Securities and Exchange Board of India Act, 1992 or Rules and Regulations 9 framed under These Acts, shall have meaning respectively assigned to them, as case may be, in Income Tax Act, 1961 or Companies Act, or Securities and Exchange Board of India Act. Clause 7 of scheme deals with transfer and detention. Sub- Clause (4) of Clause 7 of scheme reads as under: For purposes of conversions of Foreign Currency Convertible Bonds, cost of acquisition in hands of non- resident investors would b conversion price determined on basis of price of shares at Bombay Stock Exchange, or National Stock Exchange, on date of conversion of Foreign Currency Convertible Bonds into shares. 7. Thus, cost of acquisition has to be determined as per provisions of Clause 7(4) of Scheme for computation of capital gains. It is also pertinent to mention here that Clause (xa) of Section 47, which refers to transfer by way of conversion of 10 bonds has been inserted with effect from 01.04.2008 which is applicable to Assessment Year 2009-10 onwards. 8. Even otherwise, this issue has been dealt with by division bench of Bombay High Court in KINGFISHER CAPITAL CLO LTD. supra. relevant extract of judgment is reproduced for facility of reference: 15. Section 115AC deals with taxability of only certain types of income that could arise 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 transfer of FCBBs or shares to resident would be liable to tax in India at 10 percent. 16. In light of amendment to section 115AC of Act, clause (x) of Section 47 was amended simultaneously to include "bonds" to address taxability 11 arising from conversion into equity shares of issuing company. Section 47 of Act, specifies cases in which transfer of capital asset is not assessable to tax under head "Capital Gains". Clause (x) of section 47 reads as under: "(x) any transfer by way of conversion or debentures, debenture-stock or deposit certificates in any form, of company into shares or debentures of that company." 17. Section 49 of Act specifies cost with reference to certain modes of acquisition. Section 49(2A) of Act was not amended to include "bonds". Section 49(2A) of Act at time of introduction to section 115AC and 47(x) of Act read as under: "(2A) Where capital asset, being share or debenture in company, became property of assessee in consideration of transfer referred to in clause (x) of section 47, cost of acquisition of asset to assessee shall be deemed to be 12 that part of cost of debenture, debenture-stock or deposit certificates in relation to which such asset is acquired by assessee." 18. In 2008, Central Government notified new and separate scheme as Foreign Currency Exchangeable Bond Scheme, 2008 (for short "FCEB Scheme"). footnote to section 115AC was amended. relevant part of section 115AC including amended footnote is reproduced as below: "Tax on income from bonds or Global Depository Receipts purchased in foreign currency or capital gains arising from their transfer. 115AC (1) Where total income of assessee, being nonresident, includes - (a) income by way of interest on bonds of Indian company issued in accordance with such scheme as Central Government may, by notification in Official Gazette* specify in this behalf or on 13 bonds of public sector company sold by Government and purchased by him in foreign currency; or:" *The footnote to section 115AC(1)(a) reads as under: 66. See Issue of Foreign Currency Exchangeable Bonds Scheme, 1 2008/Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993/Depository Receipts Scheme, 2014". 19. Section 47(xa) was introduced by Finance Act, 2008, with effect from April 1, 2008. Clause (xa) of section 47 reads as under: "(xa) Any transfer by way of conversion of bonds referred to in clause (a) of sub-section (1) of section 115AC into shares or debentures of any company." 20. Section 49(2A) as amended by Finance Act, 2008 with effect from April 1, 14 2008. Clause (2A) of section 49 reads as under: "(2A) Where capital asset, being share or debenture of company, became property of assessee in consideration of transfer referred to in clause (x) or clause (xa) of section 47, cost of acquisition of asset to assessee shall be deemed to be that part of cost of debenture, debenture-stock, bond or deposit certificate in relation to which such asset is acquired by assessee" 21. notes to clauses dealing with Section 47(xa) and 49(2A) at time of introduction read as under: "47 (xa) It is proposed to insert new clause (xa) to provide that any transfer by way of conversion of bonds referred to in clause (a) of sub-section (1) of section 115AC into shares or debentures of any company shall not be considered as transfer. 15 49(2A) Sub-section (2A) of said section provides that where capital asset, being share or debenture in company, became property of assessee in consideration of transfer referred to in clause (x) of section 47, cost of acquisition of asset to assessee shall be deemed to be that part of cost of debenture, debenture-stock or deposit certificates in relation to which such asset is acquired by assessee. It is proposed to substitute said sub-section to provide that where capital asset, being share or debenture of company, became property of assessee in consideration of transfer referred to in clause(x) or clause (xa) of section 47, cost of acquisition of asset to assessee shall be deemed to be that part of cost of debenture, debenture-stock, bond or deposit certificates in relation to which such asset is acquired by assessee. 16 This amendment will take effect from 1st April, 2008 and will accordingly apply in relation assessment year 2008- 09 and subsequent assessment years." 22. explanatory memorandum dealing with 49(2A) at time of introduction reads as under: "In 1992, Government allowed established Indian companies to issue Foreign Currency Convertible Bonds (FCCBs), with special tax regime for non- resident investors, so as to encourage flow of foreign exchange to India. Government has now allowed established Indian companies to issue Foreign Currency Exchangeable Bond (FCEB). These are bonds expressed in foreign currency, principal and interest in respect of which is payable in foreign currency. FCEBs differ from FCCBs in as much as latter can only be converted into shares of issuing company, whereas FCEBs can also be converted into or exchanged for shares of group company. With view to 17 providing level playing field to FCEBs, it is proposed to provide that conversion of FCEBs into shares or debentures of any company shall not be treated as 'transfer' within meaning of Income-tax Act. Further it is also proposed to substitute sub- section (2A) of section 49 to provide that cost of acquisition of shares received upon conversion of bond shall be price at which corresponding bond was acquired." 23. bonds issued to Petitioner are under FCCB Scheme of 1993. Under FCCB Scheme, cost of acquisition of equity shares upon conversion of FCCBs are to be determined in accordance with provisions of clause 7(4) and 8(3). It is submitted that: a. provisions of aforesaid clauses of FCCB Scheme continue to operate; and 18 b. Section 49(2A) of Act was amended by Finance Act, 2008 and was to be read with FCEB Scheme. 24. Prior to its substitution by Finance Act, 2008, w.e.f. 1-4-2008, sub- section (2A) of section 49, as inserted by Finance Act (No. 2) Act, 1991, w.e.f. 1-4- 1962 did not contain any reference to "bonds". Under this circumstance, cost of acquisition of equity shares upon conversion of FCCBs was not governed by provisions of section 49(2A) instead it was always to be determined in accordance with special provisions of clause 7(4) read with clause 8(3) of FCCB Scheme. 9. In instant case also, bonds issued to petitioner were issued under FCCB scheme and conversion price determined on basis of price of shares at Bombay Stock Exchange or National Stock Exchange on date of conversion of FCBBs into shares. It is also pertinent to mention here that there is no conflict between provisions of scheme and 19 Acts / Rules. We respectfully agree with view taken by High Court of Bombay and therefore, answer substantial question of law against revenue and in favour of assessee. In result, appeal fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE ss Director of Income-tax International Taxation, Bangalore / Joint Director of Income-tax (International Taxation)-I, Bangalore v. Intel Capital (Cayman) Corporation
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