C I T vs. NAVEEN BHATIA

ITA No.153 of 2008 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 153 of 2008 Date of decision: 19.8.2015 Commissioner of Income Tax-I, Ludhiana ……Appellant Shri Naveen Bhatia …..Respondent CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTAL HON’BLE MR. JUSTICE RAMENDRA JAIN

Ajay Kumar Mittal,J.

ITA No.153 of 2008 2 debentures instead of actual date of allotment of shares on conversion from debentures?”

ITA No.153 of 2008 4 (f) in the case of a capital asset, being a financial asset, allotted without any payment and on the basis of holding of any other financial asset, the period shall be reckoned from the date of the allotment of such financial asset;” Section 47(x) “47. Nothing contained in section 45 shall apply to the following transfers : — xxx xxx xx xx xx xx xx xx xx (x) any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificates in any form, of a company into shares or debentures of that company”. Section 49(2A) “(2A) 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 certificate in relation to which such asset is acquired by the assessee.”

ITA No.153 of 2008 5 bonds or debentures, debenture-stock or deposit certificates in any form, of a company into shares or debentures of that company shall not mean transfer within the meaning of Section 45 of the Act. Further, Sub section 2A of Section 49 provides that 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 the assessee. In other words, the original cost at the time of allotment would be taken to be cost of acquisition.

ITA No.153 of 2008 6 upholding the order of the CIT(A) had recorded in its order dated 17.5.2007, Annexure A.III as under:- “3. We have considered the rival submissions and perused the material available on the file. The assessee declared total income of ` 4,13,110/- in its return filed on 27.11.2003 alongwith copy of audit report. The assessee is a share broker, showed capital gains of ` 25,97,147/- on the sale of 27,147 shares of TELCO Ltd which were claimed exempt under section 54F of the Act. In order to justify the claim of such exemption, the assessee was asked to furnish the proof of allotment of shares alongwith investment so made for such shares. The assessee in its reply enclosed the copy of transaction statement as on 20.12.2001 issued by the D.P. i.e. LSE Securities Limited revealing to be issued in favour of the depository participant. It further revealed that 27160 TELCO secured convertible debentures were credited to his account as on 20.12.2001. The learned Assessing Officer invoked Explanation 1(i)(f) to Section 2(42A) by holding that the date of allotment of shares (converted from debentures) is relevant date for reckoning the period of 12 months by opining that the date of investment is of no consequence and the period of 12 months is to be reckoned from the date of allotment of shares and not the convertible debentures. However, Explanation 1(i) (f) to Section 2(42A) is very clear. In determining the period for which any capital asset is held by the assessee - (f) In the case of capital asset being a financial asset allotted without any payment and on the basis of holding of any other financial asset,the period shall be reckoned from the date of allotment of such financial asset. However, the conclusion of the Assessing Officer and the contention of the learned DR is that the period of 12 months is to be reckoned from the date of allotment of shares and not GURBAX SINGH 2015.09.30 10:41 integrity of this document No.1069/AHD/96) wherein it was held that the period of 12 months has to be reckoned from the date of acquisition of the convertible debentures. Bonus shares are issued to an existing share holder without making payment in cash. Therefore, the period of holding of the bonus asset will be reckoned from the date of allotment of such asset. No contrary decision has been brought to our notice by the revenue and no specific mistake has been pointed out in the conclusion of the learned CIT(A). Therefore, the order of the learned first Appellate authority is upheld.”

ITA No.153 of 2008 8 debentures as on the date of its conversion on which they were exchanged for shares. Similarly, Bombay High Court in Santosh L.Chowgule and others' case (supra) was dealing with a case where the assessee originally held equity shares in a company which by a subsequent resolution were converted into a new set of four different shares including irredeemable preference shares. Further, the equity shares held earlier and the preference shares acquired in exchange thereof were not the same. It was held that in such circumstances, irredeemable preference shares issued to the assessee being different from the equity shares issued in lieu thereof shall be deemed to have been held by the assessee from the date of their issue and not from the date of issue of the equity shares. Thus, the pronouncements cited by the revenue do not come to its rescue as those cases related to conversion of financial asset into another form of asset where there was no right accruing on the date of acquisition, whereas in the case of convertible debentures, a right is appended to the debenture for the debenture holder to receive shares on conversion after the stipulated period. Thus, in such circumstances, cases relied upon by the revenue shall be on different footing vis-a-vis case of secured convertible debentures.

the appeal is dismissed. (Ajay Kumar Mittal) Judge August 19, 2015 (Ramendra Jain) 'gs' Judge GURBAX SINGH 2015.09.30 10:41 integrity of this document High Court Chandigarh