Case: Kingfisher Capital Clo Limited Vs. Commissioner of Income Tax and Others

2. Since the writ petition was directed to be listed for admission with an intent to dispose it off finally, we proceed to issue Rule. The respondents waive service. By consent, Rule is made returnable forthwith.The facts necessary to appreciate the challenge to the impugned order, briefly stated, are as underThe petitioner entered into an agreement dated June 24, 2008 with Lehman Brothers Commercial Corporation Asia Limited (hereinafter referred to as "Lehman Brothers"), a non- resident company incorporated in Hong Kong, to purchase, inter alia, 352 Zero-Coupon Foreign Currency Convertible Bonds in Nava Bharat Ventures Limited (for short "NBVL") an Indian company listed on the National Stock Exchange of India Limited (for short "NSE").NBVL issued the FCCBs on September 29, 2006, under the issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993 (for short "FCCB Scheme") to Lehman Brothers.The FCCB Scheme was notified by the Central Government in 1993 and applicable with effect from April 1, 1992. It governed the issue of (i) Foreign Currency Convertible Bonds and (ii) Global Depositary Receipts (for short "GDRs")with equity shares of the Indian company as the underlying securities. The relevant clauses of the FCCB Scheme that require consideration in the matter are reproduced belowFor the purpose of conversion of Foreign Currency Convertible Bonds, the cost of acquisition in the hands of the non-resident investors would be the conversion price determined on the basis of the price of the shares at the Bombay Stock Exchange, or the National Stock Exchange, on the date of conversion of Foreign Currency Convertible Bonds intoConversion of Foreign Currency Convertible Bonds into shares shall not give rise to any capital gain liable to income- tax inTransfers of Foreign Currency Convertible Bonds made outside India by a non-resident investor to another non- resident investor shall not give rise to any capital gains liable to tax in India.During the Financial Year 2011-12, the petitioner - assessee had entered into transactions pertaining to Foreign Currency Convertible Bonds (for short "FCCBs") issued by Nava Bharat Ventures Limited (for short "NBVL") an Indian company and the equity shares underlying these FCCBs. It had reported short-term capital gain of Rs.7,36,52,016 on the sale of 83,89,938 equity shares of NBVL which were acquired on conversion of the FCCBs held in NBVL. This short-term capital gain was shown as taxable under section 111A of the Act at 15% plus applicable surcharge and education cess.During the Assessment proceedings, the Assessing Officer (for short "AO") observed that the assessee had purchased 352 zero-coupon FCCBs of NBVL and on 18 th August, 2011, 323 FCCBs were converted into 1,29,23,073 equity shares of NBVL out of which 83,89,938 equity shares were sold by the petitioner in the period January, 2012 to March, 2012 and the short-term capital gain arising on the same was duly shown in the Income tax return filed by the petitioner-assessee on 5 th April, 2013. The remaining equity shares (45,33,125) were sold by the petitioner in November, 2012. The balance 29 FCCBs were redeemed by NBVL on 29th September, 2011 at a premium of 25.96% over the face value. While framing the assessment, the AO made reference to the petitioners contentions, but did not accept the same in view of the amended provisions of the Income-tax Act vide Circular No.1 of 2009 dated 27 th March, 2009, Finance Act 2008 - Explanatory Notes to the provisions of the Finance Act 2008.The assessment order was served on the assessee on 13th May, 2015, and being aggrieved thereby, the assessee- petitioner filed a Revision Petition under section 264 of the Income-tax Act on 12th May, 2016. The contention in that Revision Petition was that the entire sale proceeds of 83,89,958 equity shares of NBVL an Indian company, amounting to Rs.174,73,12,155/-had been treated as unexplained cash credit in the hands of the assessee by the AO in the final assessment order. After referring to the details of the transaction it is urged that the AO had added the entire sale proceeds received on sale of shares of NBVL which were received on conversion of FCCBs into shares on the presumption that the petitioner had subscribed to these FCCBs in September 2006 whereas it was incorporated in the Cayman Islands only on 2 nd August, 2007. It was urged that this was a wrong presumption. On this premise only the AO added the sale proceeds of the shares received on conversion as an unexplained cash credit in the hands of the assessee. Based on these submissions made by the assessee, relief to the tune of Rs.174.73 crores was granted to the tax payer by the respondent No.1 on this account.The second issue was that the cost of acquisition of the equity shares of NBVL taken by the AO in the assessment order is incorrect. In the return of income filed by the assessee, it had computed the short-term capital gain by considering the closing price of the equity shares of NBVL on the National Stock Exchange on the date of conversion of the FCCBs into NBVL equity shares. That is taken as a cost of acquisition of the shares (Rs.198.85). The assessee relied on clause 7(4) of the FCCB Scheme reproduced above. However, the AO held that the provision of section 49(2A) of the IT Act should be considered for the purpose of computing the cost of acquisition of the shares of NBVL received from the conversion of the FCCBs. On this basis, the AO had considered the cost of acquisition of the equity shares at the price prevailing (Rs.113.9) on the date of issue of the FCCBs (September 2006) and computed the capital gains at Rs.78.9 crores as against Rs.7.9 crores computed by the assessee. It is claimed by the first respondent that during the course of the proceedings, these aspects were examined in detail and the Revisional Authority, after considering the amended provisions of section 49(2A), section 47(xa) and section 115AC (1)(a) of the Income-tax Act, calculated the capital gains as set out in paragraph 11.11 of the order of the Revisional Authority. In paragraph 6.7 of the affidavit-in-reply, at running pages 168 and 169, the working made by the Revisional Authority is set out. That reads as underof Capital gain by the RespondentIt is clear that 323 FCCBs were acquired by the assessee on 24.06.2008 from LBCCA for a consideration of Japanese Yen 3230 million. The exchange rate as prevalent on 24.06.2008 was JPY 100 = Rs. 39.73 as per RBI website. Therefore, 323 FCCBs were purchased by KCLO on 24.06.2008 for Rs.128,32,79,000. These 323 FCCBs were converted into 1,29,23,073 equity shares of Rs.2 face value each of NBVL. Therefore, as per Section 49(2A), the cost of acquisition of the shares of NBVL will be equal to the total consideration paid by KCLO to LBCCA for purchase of 323 FCCBs on 24.06.2008 divided by No. of shares allotted to it on conversion i.e. 1,29,23,073 (Rs.993/share). The closing price of the shares of NBVL as on 07.09.2006 as taken by A.O. to be the cost of acquisition of shares for calculating the STCG is not as per Section 49(2A). As per Section 49(2A), capital gains on the sale of shares of NBVL should be calculated as given belowIn the affidavit-in-reply, therefore, the conclusions of the authorities as referred above have been supported and it is claimed that the order under section 264 of the Income-tax Act could not be prejudicial to the interest of the assessee, hence the order of the AO was not revised on this count and the contention of the assessee was rejected.Thereafter, we find that in the affidavit-in-reply to this petition, the petition has been dealt with para-wise. The order of the Revisional Authority is thus challenged on several grounds in this petition. The petitioner has also referred to the legal provisions and set out the same in somewhat details. We reproduce them.Prior to the introduction of the FCCB Scheme, section 115AC was introduced by the Finance Act, 1992 with effect from April 1, 1993, to govern the taxability of income arising from FCCBs and GDRs. Section 115AC along with the footnote at the time of introduction of FCCB Scheme is reproduced belowon income from bonds or Global Depository Receipts purchased in foreign currency or capital gains arising from their(1) Where the total income of an assessee, being a non resident, includesincome by way of interest or dividends, on bonds or shares of an Indian company issued in accordance with such scheme as the Central Government may, by notification in the Official Gazette*, specify in this behalf and purchased by him in foreign currency;footnote to section 115AC(1)(a) is reproduced below "Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme has been notified - Notification No.SO 1032(E), dated 24-12-1993".The explanatory memorandum dealing with section 115AC at the time of introduction reads as underGovernment has approved, in principle, the scheme permitting issue abroad of foreign currency convertible bonds/equity by established Indian companies. These bonds have to be denominated in foreign currencies with a view to bringing in foreign exchange. It is, therefore, necessary that the tax regime for the non-resident investors of these bonds / equities is competitive vis-vis the tax regimes of other such instruments of investments available in the international market. Accordingly, it is proposed to insert a new section 115AC in the Income-tax Act to provide for special rates of tax applicable to income from such bonds or shares purchased in foreign currency or long-term capital gains arising from theirincome by way of interest or dividends in respect of the bonds issued by or shares in an Indian company purchased in foreign currency in accordance with the scheme notified by the Central Government in this behalf and income by way of long- term capital gains arising from transfer of such bonds or shares is proposed to be charged to tax at the rate of ten percent. However, this rate of tax will apply on gross income of the nature specified above without allowing deduction under section 28 to 44CC, 48 and 57 and Chapter VI-A. The provisions for protection from fluctuation of rupee value against foreign currency will not apply to the aforesaid shares. Further, when the said bonds or shares are transferred outside India, by a non-resident to another non-resident, it will not be regarded as a transfer for the purpose of capital gainsnotes to clause dealing with section 115AC at the time of introduction reads as under(1) of the new section seeks to provide that in the case of a non-resident, the income tax payable shall be the aggregate of (i) ten percent of the income by way of interest or dividends in respect of bonds issued by or, as the case may be, shares in respect of bonds issued by or, as the case may be, shares in an Indian company purchased in foreign currency in accordance with such scheme as the central government may, by notification in the Official Gazette, specify in this behalf, if any (ii) ten percent in case of long-term capital gains arising from the transfer of the aforesaid bonds or shares, if any,the amount of income-tax on the total income as reduced by the income from the said bonds or(2) of the new section seeks to provide that in the case of the aforesaid non-resident, no deduction shall be allowed under section 29 to 44C or clause (i) or clause (iii) of section 57 or under Chapter VI-A where the gross total income consists only of income from bonds or shares. However, where the gross total income includes income from shares or bonds, the reduction under Chapter VI-A shall be allowed as if the gross total income does not include the income from units.Section 115AC deals with taxability of only certain types of income that could arise in respect FCCBs andInterest payments made to non-resident holders of FCCBs would be liable to tax in India at 10Long-term capital gain realized from the transfer of FCBBs or shares to a resident would be liable to tax in India at 10 percent.In light of the amendment to section 115AC of the Act, clause (x) of Section 47 was amended simultaneously to include "bonds" to address the taxability arising from the conversion into equity shares of the issuing company. Section 47 of the Act, specifies the cases in which transfer of a capital asset is not assessable to tax under the head "Capital Gains". Clause (x) ofsection 47 reads as underany transfer by way of conversion or debentures, debenture-stock or deposit certificates in any form, of a company into shares or debentures of that company.Section 49 of the Act specifies the cost with reference to certain modes of acquisition. Section 49(2A) of the Act was not amended to include "bonds". Section 49(2A) of the Act at the time of introduction to section 115AC and 47(x) of the Act read as underWhere 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 (x) of section 47, the cost of acquisition of the asset to the assessee shall be deemed to be that part of the cost of debenture, debenture-stock or deposit certificates in relation to which such asset is acquired by the assessee.In 2008, the Central Government notified a new and separate scheme as Foreign Currency Exchangeable Bond Scheme, 2008 (for short "FCEB Scheme"). The footnote to section 115AC was amended. The relevant part of section 115AC including the amended footnote is reproduced as belowon income from bonds or Global Depository Receipts purchased in foreign currency or capital gains arising from their(1) Where the total income of an assessee, being a non- resident, includesincome by way of interest on bonds of an Indian company issued in accordance with such scheme as the Central Government may, by notification in the Official Gazette* specify in this behalf or on bonds of a public sector company sold by the Government and purchased by him in foreign currency;footnote to section 115AC(1)(a) reads as underSee Issue of Foreign Currency Exchangeable Bonds Scheme,l 2008/Isssue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993/Depository Receipts Scheme, 2014".Section 47(xa) was introduced by the Finance Act, 2008, with effect from April 1, 2008. Clause (xa) of section 47 reads as underAny 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.Section 49(2A) as amended by the Finance Act, 2008 with effect from April 1, 2008. Clause (2A) of section 49 reads asWhere the capital asset, being a share or debenture of a company, became the property of the assessee in consideration of a transfer referred to in clause (x) or clause (xa) of section 47, the cost of acquisition of the asset to the assessee shall be deemed to be that part of the cost of debenture, debenture- stock, bond or deposit certificate in relation to which such asset is acquired by theThe notes to clauses dealing with Section 47(xa) and 49(2A) at the time of introduction read as under(xa) It is proposed to insert a 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 asSub-section (2A) of the said section provides that 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 (x) of section 47, the cost of acquisition of the asset to the assessee shall be deemed to be that part of the cost of debenture, debenture-stock or deposit certificates in relation to which such asset is acquired by theis proposed to substitute the said sub-section to provide that where the capital asset, being a share or debenture of a company, became the property of the assessee in consideration of a transfer referred to in clause(x) or clause (xa) of section 47, the cost of acquisition of the asset to the assessee shall be deemed to be that part of the cost of debenture, debenture- stock, bond or deposit certificates in relation to which such asset is acquired by theamendment will take effect from 1 st April, 2008 and will accordingly apply in relation the assessment year 2008-09 and subsequent assessment years.The explanatory memorandum dealing with 49(2A) at the time of introduction reads as under1992, the Government allowed established Indian companies to issue Foreign Currency Convertible Bonds (FCCBs), with special tax regime for non-resident investors, so as to encourage the flow of foreign exchange to India. The Government has now allowed established Indian companies to issue Foreign Currency Exchangeable Bond (FCEB). These are bonds expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency. The FCEBs differ from FCCBs in as much as the latter can only be converted into shares of the issuing company, whereas FCEBs can also be converted into or exchanged for the shares of a group company. With a view to providing a level playing field to FCEBs, it is proposed to provide that the conversion of FCEBs into shares or debentures of any company shall not be treated as a transfer within the meaning of Income-tax Act. Further it is also proposed to substitute sub-section (2A) of section 49 to provide that the cost of acquisition of the shares received upon conversion of the bond shall be the price at which the corresponding bond was acquired.The bonds issued to the Petitioner are under the FCCB Scheme of 1993. 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 clause7(4) and 8(3). It is submittedThe provisions of the aforesaid clauses of the FCCB Scheme continue to operate;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 (2A) of section 49, as inserted by theFinance Act (No.2) Act, 1991, w.e.f. 1-4-1962 did not contain any reference to "bonds". Under this circumstance, the cost of acquisition of equity shares upon the conversion of FCCBs was not governed by the provisions of section 49(2A) instead it was always to be determined in accordance with the special provisions of clause 7(4) read with clause 8(3) of the FCCB Scheme.On the basis of the applicable provisions, and the amendment to the footnote of Section 115AC along with the notes to clauses along with the explanatory memorandum to the Finance Act, 2008 it is clear that Section 47(xa) and section 49(2A) was introduced in the Act to govern transactions pertaining to FCEBs and not FCCBs which are anyway governed by the FCCB Scheme from 1993 onwards.The petitioner converted 323 FCCBs (out of 352 FCCBs) into underlying equity shares of NBVL on August 18, 2011. This conversion is exempt from tax in accordance with the clause7(4) read with 8(3) of the FCCB Scheme. Subsequently, the Petitioner sold 83,89,938 equity shares on the NSE in tranches during the Assessment Year 2012-13. The petitioner was liable to securities transaction tax on such sale, that was duly paid by the petitioner. The balance 29 FCCBs were redeemed by NBVL on September 29, 2011, at a premium of 25.96 % over the face value of the FCCBs in accordance with the terms of the issue.The petitioner filed its return of income for the Assessment Year 2012-13 on 5th April, 2013. The FCCB does not specify the manner of computing the period of holding of the equity shares received from the conversion of FCCBs. The petitioner computed the short-term capital gains by considering the equity shares of Nava Bharat Ventures Limited which have been held by it since the date of allotment of the shares upon conversion of the relevant FCCBs. The petitioner relied upon clause 7(4) of the Scheme and computed the short-term capital gain by considering the closing price of the equity shares of the above company on the National Stock Exchange on the date of conversion of FCCBs into NBVL equity shares. The petitioner reported a taxable income of Rs.7,63,52,016/- being the short- term capital gain arising from the sale of equity shares. The petitioner accordingly paid the required taxes in accordance with law. The petitioners case was selected for scrutiny assessment vide notice dated 5th September, 2014, issued under section 143(2) of the Income Tax Act, 1961 (for short IT Act"). The petitioner, on realising that the issuing company short paid the actual tax that ought to have been deducted and deposited in respect of the premium, voluntarily deposited this additional tax amount of Rs.1,91,198/-, including interest payable. Subsequently, the Assessing Officer passed an order dated 13th March, 2015, copy of which is at Exhibit-E to the petition and on receipt of this assessment order, the petitioner-assessee realised the mistake therein and sought to correct the same by filing a rectification application. The Assessment Officer passed a rectification order to rectify the defect and this order is dated 17 th February, 2016, copy of which is at Exhibit-F to the petition.The petitioner filed a Revision Application under section 264 of the IT Act before the Commissioner of Income Tax against the order of assessment, copy of which is Exhibit-G.The impugned order dated 29 th March, 2018, copy of which is at Exhibit-A to the petition has been passed on this Revision Application. It is aggrieved and dissatisfied with this order that the petitioner has filed the instant petition.In the meanwhile, the Assessing Officer, acting on the order of the Commissioner, issued a notice of demand under section 156 of the IT Act dated 10th April, 2018. A copy of this order is annexed at Exhibit-H to the petition. A demand in the sum of Rs.22,40,46,220/- as also the interest under section 234- B of the Act came to be included in this demand, but without giving any credit for the taxes already paid. The petitioner was advised to file a rectification application with the second respondent, which it filed on 10th May, 2018.However, in the meanwhile, the instant petition has been filed.

Court's reasoning:
48. A bare perusal of this section would indicate that the Revisional Authority is invoked so as to seek a revision of other orders and while that jurisdiction is invoked, the authority can exercise the powers under section 264 and make an enquiry or cause an enquiry to be made to enable it to pass, subject to the provision of this Act, such order but not an order prejudicial to the assessee. The order that he thinks fit should be passed must, therefore, conform to the conditions set out in sub-sections (1), (2) and (3) of section 264.We are really not concerned with this conclusion because the Assessee is satisfied with it and obtained the relief it sought from the Commissioner.As already stated above, it is the second issue and in that regard the Revisional Authority reproduced paragraphs 16 and 18 of the assessment order and in paragraphs 9 and 10, the Commissioner says that the assessee has considered the cost of acquisition of the shares to be the closing price of the shares of NBVL on the National Stock Exchange on the date of allotment of the shares to the assessee i.e. on 18 th August, 2011, but the AO faulted it. The Revisional Authority then, in paragraph 11, reproduces section 49(2A) and says that this provision refers to the transfers mentioned in clause (xa) of section 47 of the Income-tax Act, which was inserted by the Finance Act2008 with effect from 1st April, 2008. Upon reproducing this provision in paragraph 11.4, the Revisional Authority comes to the conclusion that it is a combined reading of the three provisions which enable him to reject the contentions of the petitioner.Firstly, we will see only the main conclusion and what we find is that section 115AC(1) clearly refers to income by way of interest on bonds of an Indian company issued in accordance with such Scheme as the Central Government may, by notification in the Official Gazette, specify in this behalf. Section 49(2A), to which we have already made detailed reference above, deals with a capital asset being a share or debenture of a company becoming the property of the assessee in consideration of a transfer referred to in clause (x) or (xa) of section 47 and section 47(x) under a transfer by way of conversion of bonds or debentures and (xa) 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. The assessee may maintain that there is nothing in the Act which enables the authorities to deal with a situation and it is only clause 7 dealing with transfer and redemption and particularly sub-clause (4) thereof, as spelt out in the Scheme, which will apply. We are of the clear opinion that it is the conversion of foreign currency convertible bonds that the cost of acquisition in the hands of non-resident Indian investors would be the conversion price determined on the basis of the price of the shares as in this case, the National Stock Exchange, on the date of conversion of foreign currency convertible bonds into shares. This is the cost of acquisition in the hands of a non-resident investor. That would be the conversion price determined on the basis of the price of the shares at the National Stock Exchange and, therefore, conversions of FCCBs would be donethese circumstances, it is evident that any scheme prior thereto and particularly the one involved before us, namely, the FCCB Scheme notified by Central Government in 1993 and applicable with effect from 1 st April, 1992 and enabling the computation of cost of acquisition, in terms thereof, was held to be unaffected. It was, therefore, possible to compute the cost in terms of the clauses of that scheme and which was admittedly an earlier scheme.To our mind, therefore, Mr.Kaka is right in his contention that the revisional authority fell in clear error in taking assistance of the amendments made by the Finance Act, 2008. To our mind, Mr. Kaka is right in urging that the cost of acquisition of the shares was to be determined with reference to the date of acquisition of the FCCBs, then, the period for which the shares should be regarded as having been held by the petitioner- assessee should also be reckoned to the date of acquisition. He is right in urging that the second respondent failed to consider the scheme and therefore, once these clauses are included in the FCCB Scheme itself, then, they would govern the FCCB related transactions to the extent the corresponding provisions are not made in the Act. The authority was not right in holding that the cost of acquisition of the shares as per clause 7(4) of the FCCB Scheme is not tenable. Thus, the Government of India notified Scheme effected from 1992 held the field and was the applicable one. The FCEB Scheme has equal status but is admittedly a later one.The reliance placed by Mr.Kaka on the compilation tendered by him is thus accurate.We do not think that this view of the High Court of Punjab and Haryana at Chandigarh is in any way inaccurate. Similarly,Mr.Kaka laid emphasis on certain observations in the case of Commissioner of Income Tax vs. Manjula J. Shah (supra)and to our mind, though the principle laid down in this judgment may be of some assistance to the petitioners, still, merely because the judgment in the case of Commissioner of Income Tax vs. Naveen Bhatia, reported in 287 ITR 587 of the High Court of Punjab and Haryana at Chandigarh is not accepted by the Department and a Special Leave Petition is pending, its persuasive value is not lost. More so, when it is dealing with an identical issue.We are aware of the fact that Mr.Ahuja has also tendered a compilation and he has given certain list of dates, but, once we find that the reliance on these dates and events and particularly the date of conversion would not in any manner dilute the clauses of the FCCB Scheme of 1993, then, these dates and events as compiled by the Revenue are of no assistance.In the compilation tendered on behalf of the Revenue, several other materials are also introduced, including the Budget Speech of the Finance Minister. It also contains the new Industrial Policy, 1991 and relevant part of Taxmanns Foreign Exchange Management Manual. These may also make reference to the FCCB, but what we find is that an attempt is made to read the provisions of the Income Tax Act and introduced with effect from 1st April, 2008 in relation to Foreign Currency Exchangeable Bond Scheme, 2008 and apply it to the FCCB Scheme of 1993. That is notprinciple that was pressed into service is that the schemes that are framed and referred in this judgment were later on not totally endorsed by the Honble Supreme Court. In any event, neither the policy nor the scheme can be called law and ignored in preference to the clear statutory provisions. Hence, the scheme framed under the direction of the court cannot be said to be framed under the power to frame Byelaws which flows from the statute. The scheme, therefore, does not have the status of law or even subordinatedo not think that there is any quarrel about this principle, but its application will depend on the facts and circumstances of an individual case. Hence, we are not dealing with other judgments cited by him, including Smt.Taralata Shyam and Ors. vs. Commissioner of Income Tax , reported in (1977) 108 ITR 345.   The other judgments on similar point also need not be referred in further details.