AUTHORITY FOR ADVANCE RULINGS NEW
DELHI
Kern-Liebers International GmbH
v.
Director of Income-tax
(International Taxation) Bangalore
JUSTICE P.V. REDDI CHAIRMAN
A SINHA AND RAO RANVIJAY
SINGH
A.A.R. NO. 761 OF 2007
April 30, 2008
Justice P.V. Reddi., Chairman - The applicant hereafter referred to as K-L IG is a company incorporated under the laws of Federal Republic of Germany and is therefore a foreign company. The applicant acquired a 26 per cent stake in an Indian company, namely, M/s Stump, Schuele and Somappa Pvt. Ltd., Bangalore (“SSS Ltd.”) during the financial year 1964-65. It appears that these shares were allotted to K-L IG as a consideration for the sale of plant and machinery to SSS Ltd. In course of time, bonus shares were allotted to the applicant and it also subscribed to right issues. The total shares held by the applicant on 1st April, 2007 were 78750 including its bonus and right shares. The bonus shares allotted prior to 1st April, 1981 were 25,750. The entirety of shares was sold to an Indian individual. The said purchaser approached the assessing officer under section 195(2) of the Income Tax Act, 1961 for passing an order in regard to the deduction of tax at source. Similarly, K-L IG also filed an application before the Assistant Commissioner of Income Tax (International Taxation), Bangalore, for determination of the appropriate tax which needs to be deducted on sale consideration of the shares. In that application, the applicant K-L IG computed the capital gain by taking the cost of acquisition of bonus shares allotted before 1st April, 1981 as equivalent to their fair market value as on 1st April, 1981. The ITO passed an order on 8-5-2007 taking the cost of acquisition of the bonus shares as ‘nil’. Pursuant to this order of the ITO, the Indian buyer deducted the amount of tax while making payment to the applicant and deposited the amount with the Government. A tax-withholding certificate was issued to the applicant by the Indian buyer. In these circumstances, the applicant has filed this application to obtain a ruling on the following questions:“i. In case of bonus shares acquired before April 1, 1981 whether fair market value prevailing on April 1, 1981 can be taken as cost of acquisition in view of provisions of section 55(2) (aa)(iiia) read with section 55(2)(b) of the Income-tax Act, 1961 for the purpose of computing capital gains?
2. The Director of Income Tax (International Taxation), Bangalore had in his comments pointed out that the question raised in the application involved determination of fair market value of property within the meaning of clause (ii) of the provisio to Section 245R(2) of the Income-tax Act and therefore the advance ruling cannot be sought. On hearing the applicant and the Departmental Representative, the objection raised by the Revenue was over-ruled and the application was allowed under 245R(2) for the purpose of hearing on merits. In the said order, the Authority observed thus:“What we are called upon to decide is the principle and the basis on which the cost of acquisition of bonus shares has to be computed. We are of the view that the answer to the question raised does not involve any exercise as to the valuation and determination of fair market value of the property.”
3. Question No.(i):3. Coming to the merits, we have, no doubt, that in view of the clear language of the relevant provisions contained in section 55(2) of the Income-tax Act, 1961, the deemed cost of acquisition can be taken to be the fair market value of the asset on the 1st April, 1981.
Let us look at the relevant provisions: 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). Section 55(2) defines the expression “cost of acquisition”. The relevant parts of the said sub-section are extracted hereunder:“(2) For the purposes of sections 48 and 49, “cost of acquisition”,-
then, subject to the provisions of sub-clause (i) and (ii) of clause (b)^
(iiia) in relation to the financial asset allotted to the assessee without any payment and on the basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee; and (ab) in relation to a capital asset, being equity share or shares allotted to a shareholder of a recognized stock exchange in India under a scheme for demutualisation or corporationisation approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), shall be the cost of acquisition of his original membership of the exchange.Provided that the cost of a capital asset, being trading or clearing rights of the recognized stock exchange acquired by a shareholder who has been allotted equity share or shares under such scheme of demutualisation or corporationisation, shall be deemed to be nil.”(b) in relation to any other capital asset,-
(ii) where the capital asset became the property of the assessee by any of the modes specified in { 12 {sub-section (1) of }} 12 section 49, and the capital asset became the property of the previous owner before the 16 {{1st day of April, 1981 10}} 16, means the cost of the capital asset to the previous owner or the fair market value of the asset on the {{1st day of April, 1981}} 10, at the option of the assessee;
4. 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”. We are concerned here with the capital asset falling within the scope of sub-clause (aa) and category (B) thereof. 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 1st April, 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 1st April, 1981, the cost of acquisition can be taken as fair market value of the that asset as on 1st April, 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 S.55(2).
5. 5. The learned Counsel for the applicant has drawn our attention to a recent decision of the Income-tax Appellate Tribunal (Mumbai ‘C’ Bench) reported in 281 ITR18. At p.28, The Tribunal observed thus:
“The next question then is the computation of capital gains so far as sale of bonus shares is concerned. There is no doubt or controversy that the cost of acquisition of bonus shares, in terms of the specific provisions of s.55(2)(aa)(iiia), is to be taken at nil, but then, as specifically provided for in s.55(2) itself, the provisions of s.55(2)(aa)(iiia) are subject to the provisions of, inter alia, s.55(b)(i) which gives an option to the assessee, in respect of a capital asset which becomes property of the assessee before 1st April, 1981, to take fair market value as on 1st April, 1981 as the cost of acquisition. This substitution option is available only for the assets covered by s.55(2)(aa) and does not extend to the assets covered by the provisions of s.55(2)(a), i.e., tenancy rights, stage carriage permits and loom hours, and goodwill, etc. The scope of s.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 s.55(2)(aa)(iiia). The provisions of the statute are unambiguous. Accordingly, to the extent bonus shares were issued to the assessee prior to 1st April, 1981, the option is with the assessee to take its cost of acquisition as its FMV as on 1st April, 1981.”
The reasoning appeals to us and we share the same view as that expressed by the learned Members of the Tribunal.
6. Accordingly, we answer the 1st question in affirmative and give the ruling that the fair market value prevailing on 1st April, 1981 ought to be taken as the cost of acquisition in the case of bonus shares held by the applicant on 1-4-1981.
7. Question No.(ii)
7. It is obvious that the Order passed by the ITO under Section 195(2) read with Section 154 of the Income Tax Act amounts to tentative fixation of tax liability and its subject to final view taken in the course of regular assessment (vide Transmission Corporation of A.P. Ltd v. CIT). 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 of the Act in the prescribed form. In fact, there is no controversy on this aspect. Hence the question is answered in the affirmative.
Accordingly, the Ruling is given and the application disposed of.