TMI Blog2005 (6) TMI 525X X X X Extracts X X X X X X X X Extracts X X X X ..... machinery, and also having granted the licence to manufacture hoists, the assessee-company was allotted 2,500 equity shares of Rs. 100 each. The agreements entered into by the assesseecompany with the HHL, copies of which are placed before us at pages 1 to 26 of the paper book, specifically provided that the assessee “has become owner of 2,500 equity shares of Rs. 100 each and of the agreed value of Rs.2,50,000 in the capital of the company” and that “it is expressly agreed and declared that the shares of total value of Rs. 2,50,000 held” by the assessee shall not be sold in India before a period of ten years. The said issue of shares was duly authorised by the Reserve Bank of India, vide letter dated June 23, 1964,-a copy of which was placed before us at pages 27 and 28 of the paper book. In the books of the assessee, as certified by the assessee vide letter dated September 28, 1998, the 2,500 shares in HHL were shown as having been acquired by the assessee for a consideration of DM 2,17,175.53. In the same letter, the assessee has further certified that the costs incurred in supply of know-how, machinery and licence fees were incurred in Germany and in German currency. Apart from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payments from the Indian company in Deutsche Marks. Instead of making this payment, the assessee was issued shares of HHL, an Indian company of value equivalent to rupee value of the amount due in Deutsche Marks. It does not automatically imply that the shares were purchased in foreign currency Deutsche Marks. Since there is ambiguity in determining the foreign currency that was utilized in purchase of shares, it is not possible to convert full value of consideration received in transfer of shares into any particular foreign currency. In fact, it was the Indian currency that was utilized in purchase of shares and the conversion rate as on the date of issue of shares was used to determine only the number of shares. Since it is not possible to ignore the fact that shares were acquired in Indian currency, the first proviso to section 48 is not applicable. Accordingly, capital gains arising from transfer of the shares is computed indexing the actual cost of acquisition or fair market value as on April 1, 1981. In this case, the fair market value as on April 1, 1981 has not been provided by the assessee. Therefore, the fair market value is taken as the same figure as the cost of acquisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion of adoption of fair market value in respect of bonus shares is concerned, the Commissioner of Income-tax (Appeals) was unimpressed with the arguments of the assessee on the merits. On this issue, his conclusions were as reproduced below : “ …… Logically, the process of compensation for inflation in the quantum of cost cannot be applied when there is no cost, i.e., cost is nil . . . Further, the substitution of cost by market value is for the benefit and if the cost incurred by him were more than the market value, the same having been reduced over a period of time, he is not required to exercise the option. This also implies that substitution option is available when real cost is incurred by an assessee. In view of this, I hold that in respect of bonus shares, where the cost of acquisition is nil in terms of amended provision [of section 55(2)(iiia)] the cost cannot be substituted by the market value even if the bonus shares were issued before April 1, 1981. This is the logical interpretation of the amended Act. In view of this, on the merits, the fresh claim of the appellant made during the appellate proceedings is rejected . . .” None of the parties is satisfied by the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The general meaning of the expression “cost of acquisition” shall have to be ascertained on the basis of the principles laid down by courts from time to time, and the normally understood meaning of that expression shall have to be taken into account. The hon’ble Supreme Court has, in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, and though in the context of connotation of actual cost for the purpose of depreciation and development rebate, observed that (page 173): “ as the expression ‘actual cost’ has not been defined, it should, in our opinion, be construed in the sense which no commercial man would misunderstand” and that “for this purpose it would be necessary to ascertain the connotation of the above expression in accordance with the normal rules of accountancy prevailing in the commerce or industry”. Viewed in this perspective, when an assessee incurs an expenditure to execute a contract under which he is to get certain shares in consideration of executing that contract, the cost of acquisition of those shares is the cost of executing the contract in consideration of which the assessee gets the shares. In plain words, if one gets certain shares for doing some w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sult of transfer of shares or debentures is also converted into the same currency, so as to make the two figures comparable. Then capital gain is worked out in the same foreign currency. The capital gain so worked out is converted back into Indian rupees, and in terms of the provisions of Explanation 2(f) to rule 115, at the TT buying rate on the last day of the month preceding the month in which the shares or debentures are transferred. The underlying scheme of this provision is unambiguously clear. The capital gains are to be computed in terms of the foreign currency in which the non-resident has invested in acquiring the shares. This would nullify the notional advantage to the assessee of gains in rupee terms which are primarily on account of fall in value of Indian rupees vis-a-vis that foreign currency. If an assessee invests US $ 1,000 in 1985, which was equal to say Indian Rs. 15,000 at that point of time, and gets back US $ 1,010 in 2005, which is equivalent to Rs. 45,450 in 2005, his gain in rupee terms is 30,450 but then in real terms his gain is only US $ 10. Therefore, from a non-resident’s point of view, the capital appreciation can only be relevant to the extent he ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the words are set out. When we examine the applicability of proviso to section 48 in the light of these principles and in the light of the fact that it is not only on purchases through which one can incur the cost of acquisition and that what is to be taken into account is the cost of acquisition and not the cost of purchases alone, the expression “the currency initially utilised in purchase of shares or debentures” is to be construed as, including in its scope the currency initially utilized in “acquisition” of shares or debentures as well. We see no support for the Assessing Officer’s stand that the currency utilized for purchase of shares was Indian currency inasmuch as in the agreements rupee value of consideration was given. In making this observation, the Assessing Officer has lost sight of the fact that what is cost of acquisition for the assessee is not the consideration of supplying technical know-how and machinery, etc., stated in the contract but the costs incurred by the assessee in executing this contract. What is stated in agreement is the value of the shares but at this stage we are not really concerned as to what is the value of these shares and our concern is con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of section 55(2)(a), i.e., tenancy rights, stage carriage permits and loom hours, and goodwill, etc. The scope of section 55(2)(aa) extends to, inter alia, bonus shares as well as the same are “allotted without any payment and on the basis of holding of any other financial asset” and are specifically covered by section 55(2)(aa)(iiia). The provisions of the statute are unambiguous. Accordingly, to the extent bonus shares were issued to the assessee prior to April 1, 1981, the option is with the assessee to take its cost of acquisition as its fair market value as on April 1, 1981. Even otherwise, it makes no sense to decline the option of fair market value as on April 1, 1981, to bonus shares and restrict this option only to original shares. When bonus shares are issued, there is a corresponding fall in the market value of shares because the same valuation of company is spread over more number of units of shares. In such a situation, on the one hand, the assessee gets the lower fair market value as on April 1, 1981, for the original shares, and fair market value as on April 1, 1981 is declined in respect of bonus shares. This incongruity can be better appreciated wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rket value as on April 1, 1981 as the cost of acquisition. The plea of the assessee is well taken and deserves acceptance. We uphold the plea. In the light of the above discussions, the computation of capital gains on sale of shares is to be divided in to three parts-(a) sale of 25,000 original shares for which cost of acquisition is to be taken at DM 2,17,175 ; (b) sale of 55,000 bonus shares for which cost of acquisition is to be taken at the fair market value as on April 1, 1981 ; and (c) sale of the remaining, i.e., 33,333 bonus shares, for which cost of shares is to be taken as nil. The onus of furnishing the fair market value of shares as on April 1, 1981, however, is on the assessee and the assessee will furnish the same to the Assessing Officer for verification. We, accordingly, direct the Assessing Officer to recompute the capital gains in the light of the above observations. That leaves us with the Revenue’s grievance that the Commissioner of Income-tax (Appeals) should not have accepted a plea which was not taken at the stage of assessment and which would result in the assessee being assessed at an income which is lower than the returned income. This controversy is no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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