TMI Blog1982 (7) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valued at Rs. 10 per share as on 1st October, 1963. The Tribunal held that it was only in the cases of assets acquired on or before 1st January, 1954, the question of adopting the fair market value at the option of the assessee would arise. Since the assets under consideration were acquired on 1st October, 1963, the question of option to the assessee did not arise. The Tribunal held that the cost of acquisition of equity shares was the cost that the assessee had incurred for the debenture bonds and hence the ITO was justified in taking the cost of the debenture bonds as the cost of the equity shares. This method is also in conformity with s. 55(2)(v)(e) of the I.T. Art, 1961. Thus, the Tribunal upheld the orders of the AAC, in both the appeals. An application was made by the assessee to refer the following two questions of law arising out of the order of the Tribunal to this High Court under s. 256(1) of the I.T. Act, 1961 : " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 73,500 is liable to be assessed to income-tax as short-term capital gains ? 2. Whether the Tribunal was justified in taking the dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in special rules for computation of cost of acquisition has been laid down. These are special provisions applicable to special cases in special circumstances. These rules, however, do not do away with the usual rules for ascertaining the cost of acquisition of shares. For instance, a case of buying and selling of shares in the stock market will not come within the ambit of s. 55(2)(v) ; a case of sale of bonus shares will also not be covered by these rules. Because some special rules have been enacted for special circumstances, it does not follow that the general law which is otherwise applicable will be excluded altogether. It has been affirmed in a number of cases that the expression " cost of acquisition " in s. 48(ii) must be understood in the commercial sense. Section 45 of the I.T. 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 s. 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961, as a capital asset held by an assessee for not more than twelve months immediately preceding the date of its transfer. In this case, the debentures were converted into equity shares on 1st October, 1963, and then the equity shares were sold on 4th April, 1964. Therefore, the assessee held the shares for a little over six months and the shares clearly came within the definition of " short-term capital asset ". The date of issue of the debentures is immaterial for this purpose. The capital assets that have been sold in the instant case are the equity shares of the company. The mode of acquisition of the shares was by exchange or surrender of the debentures held by the assessee. The assessee acquired the shares on 1st October, 1963. The shares were sold on 4th April, 1964. The transaction clearly was a transaction in short-term capital assets. The next question that arises for consideration is the calculation of the surplus for the purpose of levy of tax. Under the provisions of s. 48(ii) the cost of acquisition will have to be found out and deducted from the sale proceeds. The cost of acquisition in the instant case has been taken by the Tribunal to be the cost of acquisition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of debenture and its price fluctuates as the market rate or bank rate of interest goes up or down. There was an additional factor in this case that the debentures were convertible debentures. The debenture-holder had an option to convert the debentures into equity shares of the company. convertible debenture of a company whose share price is very high is likely to have a market value much higher than its face value. The cost of acquisition in case of an exchange must be the market price of the property that has been given up or transferred by the assessee. The assessee instead of converting the debentures into equity shares might have sold them in the open market. Different considerations might follow if the debentures were not transferable. But it does not appear from the trust deed that the debentures in this case were non-transferable. In that view of the matter, in our opinion, the Tribunal in this case erred in holding that the cost of acquisition of the debentures was the cost of acquisition of the shares. Reliance was placed on behalf of the Revenue in the case of CIT v. General Investment Co. Ltd. [1981] 131 ITR 366 (Cal). In our opinion, the principles laid down in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 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. In our opinion, the Tribunal erred in law in equating the cost of acquisition of the debentures with the cost of acquisition of the shares. The assessee could have sold the debentures on the date the assessee exchanged the debentures for the shares. Therefore, the price for the acquisition of the shares must be the price the debentures would have fetched if sold in the open market on the date on which the debentures were exchanged for the shares. An argument was also advanced on behalf of the Revenue that this question was not referred by the Tribunal to this court and, therefore, we should not go into this question at all. We are unable to accept this contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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