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[2019] 103 taxmann.com 446 (Bombay)/[2019] 263 Taxman 198 (Bombay)/[2019] 413
ITR 1 (Bombay)

Section 49, read with sections 2(42A) and 47, of the Income-tax Act, 1961 and Clause 7(4) of
the issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository
Receipt Mechanism) Scheme, 1993 - Capital gains - Cost with reference to certain modes of
acquisition [Sub-section (2A)] - Assessee, a Cayman Islands entity, purchased Foreign
Currency Convertible Bonds (FCCB) issued under FCCB Scheme of 1993 in NBVL, a listed
Indian company, from another non-resident investor LB in year 2008 - In August 2011, by
exercising option attached to FCCBs, assessee converted majority of FCCBs into equity
shares of NBVL and sold a part of such converted shares on stock exchange during period
from January to March, 2012 and reported short-term capital gains - Assessing Officer held
that provision of section 49(2A) should be considered for purpose of computing cost of
acquisition of shares received from conversion of FCCBs - Whether cost of acquisition of
equity shares upon conversion of FCCBs was not governed by provisions of section 49(2A)
instead it was always to be determined in accordance with special provisions of clause 7(4)
read with clause 8(3) of the FCCB Scheme - Held, yes - Whether therefore, for purpose of
computation of capital gains, cost of acquisition of equity shares received on conversion of
FCCBs, in hands of non-resident investors, would be conversion price determined on basis of
closing price of shares on National Stock Exchange on date of such conversion - Held, yes
[Paras 24 and 82] [In favour of assessee]
FACTS

■ The assessee, a Cayman Islands entity, entered into an agreement with a non-resident company (LB)
incorporated in Hong Kong, to purchase, inter alia, 352 Zero-Coupon Foreign Currency Convertible Bonds
(FCCBs) in Nava Bharat Ventures Limited (NBVL) an Indian company listed on the National Stock
Exchange of India Limited (NSE). NBVL issued the FCCBs on 29-9-2006, under the issue of Foreign
Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993
(FCCB Scheme) to LB.
■ The FCCB Scheme was notified by the Central Government in 1993 and applicable with effect from 1-4-
1992.
■ Out of 352 FCCBs, the assessee converted 323 FCCBs into equity shares of NBVL in August 2011 and
redeemed balance FCCBs in November 2011. During the assessment year 2012-13, the assessee sold
through stock exchange a part of equity shares acquired on conversion of FCCBs and the short-term capital
gain arising on the same was duly shown in the Income tax return filed by the petitioner-assessee on 5-4-
2013. The assessee treated the capital gains arising on sale of shares through stock exchange liable to
Securities Transaction Tax as short-term capital gains since the shares were sold within one year of
acquisition upon conversion of FCCBs. For the purpose of computing the quantum of capital gains, the
assessee relied on clause 7(4) of the FCCB scheme and adopted closing price of equity shares of NBVL on
the NSE on the date of conversion of FCCBs into shares as its cost of acquisition.
■ The Assessing Officer however held that the provision of section 49(2A) of the Income-tax 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 Assessing Officer 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.
■ The assessee filed a Revision Application under section 264 before the Commissioner of Income Tax

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against the order of assessment contending that the cost of acquisition of the equity shares of NBVL taken
by the Assessing Officer in the assessment order was incorrect.
■ The Revisional authority rejected the assessee's contention.
■ On Writ Petition before the High Court:
HELD

■ Prior to its substitution by the Finance Act, 2008, w.e.f. 1-4-2008, sub-section (2A) of section 49, as
inserted by the ASWP(ST)19262.18.doc Finance 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.
■ The FCCB is a Scheme notified by the Central Government. It shall be deemed to have come into effect
from the 1-4-1992. The definitions in the Scheme open with the words 'Unless the context otherwise
requires the foreign currency convertible bonds means bonds issued in accordance with the FCCB Scheme
and subscribed by a non-resident in a foreign currency and convertible into ordinary shares of the issuing
company in any manner, either in whole or in part, on the basis of any equity related warrants attached to
that instrument'. The word 'issuing company' is defined to mean a company permitted to issue FCCBs or
ordinary shares of that company against global depository receipts. Now, clause (2) sub-clause (f) of the
Scheme very clearly says that the words and expressions not defined in the Scheme, but defined in the
Income-tax Act 1961 or the Companies Act 1956 or the Securities Exchange Board of India Act, 1992, or
the Rules and Regulations framed under these Acts shall have the meaning respectively assigned to them, as
the case may be, in the Income-tax Act, or the Companies Act or the SEBI Act. [Para 52]
■ Once , it is very clearly understood that FCCBs mean bonds issued in accordance with the FCCB Scheme
and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing
company, coupled with the definition of the term issuing company, then, the word 'shares' having not been
defined in the Scheme would carry the same meaning as is assigned to it in the laws or enactments referred
in sub-clause (f) of clause (2) of the Scheme. [Para 53]
■ It is evident that the Scheme sets out the procedure and it has been set out in the Scheme itself that the
FCCBs shall be denominated in any convertible foreign currency and the ordinary shares of an issuing
company shall be denominated in Indian rupees. The salient features of the Scheme together with eligibility
for issue of convertible bonds or ordinary shares of issuing company are set out in clause 3. Thereafter
clause 3A deals with issue of Global Depository Receipts and then there is a special provision clause 3B for
Indian companies engaged in Information Technology Software and Information Technology Services.
Then, there are several other companies registered in India, but engaged in the sectors/areas of operation
referred to in clause 3C and by clause 4 there are limits set out of foreign investment in the issuing
company. Clause 7 is titled as Transfer and Redemption and it is stated in clause 7(1) that a non-resident
holder of Global Depository Receipts may transfer those receipts or may ask the Overseas Depository Bank
to redeem those receipts and thereafter the procedure following redemption is set out. However, for the
purposes of conversion of FCCBs, the cost of acquisition in the hands of the non-resident investor would be
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 the conversion of FCCBs into shares. [Para 54]
■ By sub-clause (1) of clause 8, interest payments on the bonds until the conversion option is exercised shall
be subject to deduction of tax at source at the rate of ten per cent. Conversion of Foreign Currency
Convertible Bonds into shares shall not give rise to any capital gains liable to income-tax in India and
transfers of FCCBs 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. Now, heavy reliance is placed on this clause and the
clause pertaining to taxation on shares issued under Global Depository Receipt Mechanism in clause 9 to
urge that whenever there is a liability to tax and in terms of the Indian Law (Income-tax Act) the FCCB
Scheme has clearly spelt it out. [Para 56]
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■ For dealing with that aspect of the matter, some of the provisions of the Income-tax Act, 1961 need to be
noticed. [Para 57]
■ Section 49 deals with cost with reference to certain modes of acquisition. By sub-section (2A) of section 49
inserted by Finance Act, 2008 with effect from 1-4-2008, the Legislature deals with a capital asset being a
share or debenture of a company. [Para 67]
■ Therefore, if such a 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. [Para 68]
■ Ordinarily, in section 47 the clauses set out therein deal with transactions not regarded as transfers. That,
inter alia, includes transfer by way of conversion of bonds of a company into shares or debentures of that
company and 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, but if it becomes the property of the assessee in
consideration of a transfer set out in the aforesaid clauses, then, its cost of acquisition has to be computed.
The cost of acquisition of the asset to the assessee shall be deemed to be that part of the cost of the bond or
deposit certificate in relation to which such asset is acquired by the assessee. [Para 69]
■ Chapter XII deals with determination of tax in certain special cases. Section 115 which was appearing in the
Act was omitted by Finance Act, 1987 with effect from 1-4-1988 and thereafter section 115A deals with tax
on dividends, royalty and technical service fees in the case of foreign companies. Section 115AB deals with
tax on income from units purchased in foreign currency or capital gains arising from their transfer and
section 115AC which has been substituted by Finance Act, 2001 with effect from 1-4-2002, deals with tax
on income from bonds or Global Depository Receipts purchased in foreign currency from capital gains
arising from their transfer. [Para 70]
■ The provision, therefore, enables the revenue to bring to tax the income from bonds or global depository
receipts purchased in foreign currency or capital gains arising from their transfer. If one sees the later part
of it, which is of concern here, what emerges from a reading of this provision is that by sub-section (3), it is
clarified that nothing contained in the first and second provisio to section 48 shall apply for the computation
of long-term capital gains arising out of the transfer of long-term capital asset, being bonds or global
depository receipts referred to in clause (c) of sub-section (1). Thus, section 115AC(1)(c) deals with such
income which is earned from the transfer of bonds referred to in clause (a) or, as the case may be, the GDRs
referred to in clause (b) and by sub-section (3) what is clarified is that provisos 1 and 2 to section 48 shall
not apply for the computation of long-term capital gains arising out of the long-term assets being bonds or
GDRs referred to in sub-section (1). [Para 71]
■ Pertinently, section 48 is a provision which sets out the mode of computation. The income chargeable under
the head capital gains shall be computed by deducting from the full value of the consideration received or
accruing as a result of the transfer of the capital asset, the amounts mentioned in clauses (i), (ii) and
thereafter the two provisos. [Para 72]
■ This part of section 48 is being produced only to note that where the assessee is a non-resident, capital gains
arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be
computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection
with such transfer and the full value of the consideration received or accruing as a result of the transfer of
the capital asset into the same foreign currency as was initially utilised in the purchase of the shares or
debentures. Thereafter, capital gains are computed. Such foreign currency shall be reconverted into Indian
currency so as to bring the result outlined in the first proviso and when the second proviso comes into play,
it is providing for a long-term capital gain arising from the transfer of a long-term capital asset other than
capital gain arising to a non-resident from the transfer of shares in or into debentures of an Indian company
referred to in the first proviso. It is in these circumstances that it is found that there is a mechanism, set up
and eventually Chapter IV deals with computation of income from capital gains, whereas Chapter XII is
dealing with determination of tax in certain special cases. [Para 73]
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■ It is found 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), 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. It is opined 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 done accordingly. [Para 77]
■ Section 47 is a provision which keeps out certain transactions from the purview of section 45 and section 45
deals with capital gains. One such transaction is the transfer by way of conversion of bonds or debentures or
debenture-stock or deposit certificates in any form of a company into shares or debentures of that company
and the other is transfer by way of conversion of bonds referred to in clause (a) of sub-section (1) of section
115AC into shares or debentures of that company. This is, therefore, not a transfer as is evident from the
reading of section 47. However, the cost with reference to certain modes of acquisition is a matter dealt
with by section 49 and where the capital asset becomes the property of the assessee on any distribution of
assets on the total or partial partition of a Hindu undivided family or under a gift or will, by succession,
inheritance or devolution, then, that is an aspect dealt with by sub-section (1). Where the capital asset being
a share or shares in an amalgamated company which is an Indian company and that becomes property of the
assessee in consideration of a transfer referred to in clause (vii) of section 47, the cost of acquisition of the
asset shall be deemed to be the cost of acquisition to him of the share or shares in the amalgamating
company and by sub-section (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 (xa) of section 47, then
the cost of acquisition of the asset to the assesee shall be deemed to be that part of the cost of bond or
deposit certificate in relation to which such asset is acquired by the assessee. [Para 78]
■ Prior to the substitution, sub-section (2A) was inserted by Finance Act No.2 of 1991 with retrospective
effect from 1-4-1962. [Para 79]
■ A bare perusal of the unamended provision denotes that insofar as on introduction of clause (xa) of section
47 effective from 1-4-2008 by the 2008 Finance Act, this sub-section (2A) of section 49 was also amended.
Simultaneously, with the introduction of clause (xa) in section 47, this amendment has been effected.
Therefore, though section 47 opens with the words 'nothing contained in section 45 shall apply to the
following provisions', section 49 provides for determination of cost with reference to certain modes of
acquisition. Earlier, where the capital asset being a share or debenture in a company, became a property of
an assessee in consideration of a transfer referred to in section 47, the determination of the cost of that
acquisition was provided for. By the substituted sub-section (2A) of section 49, the cost of acquisition of the
asset of the assesee 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. The introduction of the word 'bond'
and the word 'or' before the words 'deposit certificate' with effect from 1-4-2008 is thus crucial. [Para 80]
■ All this came once Chapter XII titled as 'Determination of Tax in Certain Special Cases' had, by virtue of
amendment with effect from 1st April, 2002 enabled imposition of tax on income from bond or global
depository receipt purchased in foreign currency or capital gains arising from their transfer. Now, even in
that part, while clause (a) of sub-section (1), which deals with the total income by an assesse, being a non-
resident, including what is provided by in clause (a) of sub-section (1) of section 115AC of the Income-tax
Act, 1961 the legislature had in mind the scheme. In these circumstances, it is evident that any scheme prior
thereto and particularly the FCCB Scheme notified by Central Government in 1993 and applicable with
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effect from 1st 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. [Para 81]
■ Therefore, assessee 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. The assessee 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 FCCB Scheme has equal status but is admittedly a later one. [Para 82]
■ The reliance placed by the assessee on the compilation tendered by him is thus accurate. In the compilation,
there is an order passed by the High Court of Punjab and Haryana at Chandigarh in CIT v. Naveen Bhatia
[2015] 62 taxmann.com 87/285 Taxman 178. In this ruling, the Punjab and Haryana High Court held that
considering that the conversion of debentures into shares is not regarded as 'transfer' and cost of debentures
is substituted for cost of shares, it would be logical to reckon the date of acquisition of convertible
debentures as the date of acquisition of such shares. [Para 83]
■ This view of the High Court of Punjab and Haryana at Chandigarh is not in any way inaccurate. Similarly,
assessee laid emphasis on certain observations in the case of CIT v. Manjula J. Shah [2011] 16
taxmann.com 42/[2012] 204 Taxman 691/[2013] 355 ITR 474 (Bom.) and, 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 Naveen Bhatia (supra), 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. [Para 85]
■ The revenue has also tendered a compilation and has given certain list of dates, but, once it is found 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. [Para 86]
■ 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 Taxmann's Foreign Exchange Management Manual. These may also make reference to the FCCB, but
what is found is that an attempt is made to read the provisions of the Income-tax Act and introduced with
effect from 1-4-2008 in relation to Foreign Currency Exchangeable Bond Scheme, 2008 and apply it to the
FCCB Scheme of 1993. That is not correct. [Para 87]
■ 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 subordinate legislation. [Para 88]
■ There is no quarrel about the principle that rules framed under a statute stand on a different footing.
Therefore, they can be considered as binding. But, its application will depend on the facts and
circumstances of an individual case. [Para 89]
■ As a result of the above discussion, it is firmly opined that this writ petition deserves to succeed. [Para 90]
CASE REVIEW

CIT v. Naveen Bhatia [2015] 62 taxmann.com 87/235 Taxman 178 (Punj. & Har.) (para 85) followed. Ispat
Industries Ltd. v. Commissioner of Customs 2006 taxmann.com 285 (SC) (para 89) distinguished.

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CASES REFERRED TO

CIT v. Naveen Bhatia [2015] 62 taxmann.com 87/235 Taxman 178 (Punj. & Har.) (para 39), CIT v. Manjula J.
Shah [2011] 16 taxmann.com 42/[2012] 204 Taxman 691/[2013] 355 ITR 474 (Bom.) (para 39), Gainda Ram v.
Municipal Corpn. of Delhi [2010] 10 SCC 715 (para 88), Ispat Industries Ltd. v. Commissioner of Customs
2006 taxmann.com 285 (SC) (para 89) and Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC) (para 89).
Porus F. Kaka, Sr. Adv. and Divesh Chawala for the Petitioner. Abhay Ahuja, P.A. Narayanan and Ms.
Sangeeta Yadav for the Respondent.

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