AUTHORITY FOR ADVANCE RULINGS, NEW DELHI
Kern Liebers International GmbH, In re
JUSTICE
P.V. REDDI, CHAIRMAN
A.
SINHA AND RAO RANVIJAY SINGH, MEMBERS
A.A.R.
NO. 761 OF 2007
April
30, 2008
Section 48, read with section 55, of the Income-tax Act, 1961 - Capital gains - Computation of - Whether in case of bonus shares acquired before 1-4-1981, fair market value prevaling on 1-4-1981 ought to be taken as cost of acquisition in view of provisions of section 55(2)(aa)(iiia), read with section 55(2)(b) for purpose of computing capital gains - Held, yes
The applicant, foreign company, was allotted shares in Indian company during financial year 1964-65 as a consideration for the sale of plant and machinery. In course of time, bonus shares were allotted to the applicant prior to 1-4-1981 and it also subscribed to right issues. The applicant sold all its shares to an Indian individual. The applicant filed an application before Assistant Commissioner (International Taxation) for determination of the appropriate tax which was to be deducted on sale consideration of the shares and computed the capital gains by taking the cost of acquisition of bonus shares allotted before 1-4-1981 as equivalent to their fair market value as on 1-4-1981. The Assessing Officer, however took the cost of acquisition of the bonus shares as ‘Nil’. Pursuant thereto the Indian buyer deducted the amount of tax while making payment to the applicant and deposited the amount with the Government. The applicant filed an application seeking advance ruling on the following questions (i) in case of bonus shares acquired before 1-4-1981 whether fair market value prevailing on 1-4-1981 can be taken as cost of acquisition in view of provisions of section 55(2)(aa)(iiia), read with section 55(2)(b) for purpose of computing capital gains; (ii) whether applicant was required to file a return under section 139(1) for claiming refund of taxes deducted in excess by the Indian buyer while remitting sale proceeds of shares in Indian company.
HELD
In view of the clear language of the relevant provisions contained in section 55(2), the deemed cost of acquisition can be taken to be the fair market value of the asset on the 1-4-1981. Section 48 provides for computation of capital gains. The key factors to be taken into account while computing the capital gain are (i) the full value of consideration for transfer (ii) the cost of acquisition of the capital asset and the cost of improvement; and (iii) the expenditure incurred in connection with the transfer. Items (ii) and (iii) have to be deducted from item (i). [Para 3]
There are four categories of capital assets enumerated in clauses (a), (aa), (ab) and (b) of sub-section (2) of section 55. Clause (b) is a residuary provision governing ‘any other capital asset’. The bonus shares allotted without payment of consideration is an additional financial asset that falls within Part (B) of clause (aa) and, therefore, in the normal course, the cost of acquisition shall be taken to be ‘nil’ in view of what is laid down in sub-clause (iiia). But, in relation to clause (aa) asset, that principle of computation stands excluded by the phrase ‘subject to the provisions of sub-clause (i) and (ii) of clause (b)’. The said expression ‘subject to…..’ is significant and it points to the applicable provision for the purpose of ascertaining the cost of acquisition of an asset falling under clause (aa). In other words, the rules of computation of cost laid down in various sub-clauses of clause (aa) have been expressly made subject to the provisions of sub-clause (i) & (ii) of clause (b). Thus, in the case of a capital asset answering the description given in sub-clauses (i) and (ii) of clause (b), the rules of computation laid down by those sub-clauses of clause (b) would prevail over the rules in the preceding sub-clause (aa). The expression ‘subject to the provisions’ of sub-clause (i) and (ii) of clause (b)’ was advisedly introduced to extend the benefit of deduction of deemed cost of acquisition in respect of a capital asset of the nature specified in clause (aa), if it was acquired before 1-4-1981. Otherwise, there is no purpose in ordaining that the operation of clause (aa) is subject to the provisions of sub-clause (i) & (ii) of clause (b). The ‘capital asset’ referred to in clause (b) takes with in its fold the financial assets in the form of shares or other securities as specified in clause (aa). It is clear from clause (b) of section 55(2) that in the case of a capital asset falling within the ambit of that clause, acquired before 1-4-1981, the cost of acquisition can be taken as fair market value of the that asset as on 1-4-1981. This provision prevails over sub-clause (iiia) of clause (aa). The applicant is, therefore, entitled to the benefit conferred by clause (b)(i) of section 55(2). [Para 4]
Accordingly, the fair market value prevailing on 1-4-1981 ought to be taken as the cost of acquisition in the case of bonus shares held by the applicant on 1-4-1981. [Para 6]
It is obvious that the order passed by the ITO under section 195(2), read with section 154 amounts to tentative fixation of tax liability and its subject to final view taken in the course of regular assessment. Now that the legal position as regards the first question has been clarified, the applicant can adopt the normal procedure by filing a return and claiming refund under section 139 in the prescribed form. In fact, there is no controversy on this aspect. [Para 7]
CASE REVIEW:
Heinrich De Fries Gmbh v. Jt. CIT [2006] 281 ITR 18 (Tri. – Mum.) Approved [Para 5]