KERN-LIEBERS INTERNATIONAL GMBH Vs. COMMISSIONER CONCERNEDDIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION)

JUDGEMENT

(1.) 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:

(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:

(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". 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 Section 55(2).