Suhas Chandra Sen, J.
1. This case arises out of an order passed by the Income-tax Appellate Tribunal in I.T.A. No. 5105 (Cal) of 1972-73preferred by Mrs. Anna Ghosh. The relevant assessment year being the assessment year 1965-66.
2. Mrs. Anna Ghosh had acquired 433 debenture bonds of the value of Rs. 4 3,300 of M/s. Standard Pharmaceutical Ltd. on 20th December, 1962. Similarly, Dr. H. Ghosh had acquired 365 debenture bonds of the value of Rs. 36,500 of M/s. Standard Pharmaceutical Ltd. on 20th December, 1962. Under the second mortgage debenture trust deed dated 21st September, 1963, the debenture holders had the option to exchange the debentures into fully paid up equity shares. Mrs. Ghosh had exercised her option on 1st October, 1963, and exchanged 433 debenture bonds for 4,330 equity shares of Rs. 10 each. She sold 4,000 shares to M/s. Synbiotics Ltd. of Ahmedabad for Rs. 1,24,000 on March 30, 1964, earning a surplus of Rs. 84,000. Similarly, Dr. Ghosh had exercised the option on 1st October, 1963, and exchanged 365 debenture bonds for 3,650 equity shares of Rs. 10 each. Later on, he sold 3,500 shares to M/s. Synbiotics Ltd. of Ahmedabad for Rs. 1,08,500 on 30th March, 1964, earning a surplus of Rs. 73,500. The ITO treated the surplus of the above amounts as business income. On appeal, the AAC held that the surplus was in the nature of capital gain but not business income which was upheld by the Tribunal by its order dated 21st December, 1971, in I.T.A. Nos. 1798 and 2797 (Cal) of 1971-72. In pursuance of the order of the AAC, which was upheld by the Tribunal, the ITO modified the assessment order so as to treat the surplus as capital gain. While doing so the ITO treated the surplus as short-term capital gain.
3. Appeals were again preferred to the AAC. The AAC in his order dated 21st November, 1973, held that the conversion of the debenture bonds into equity shares was not self-generated or automatic. As holder of debenture bonds the assessee was only a creditor of the company. She ceased to be such a creditor on 1st October, 1963, when she exchanged the debenture bonds for fully paid up equity shares and the debenture bonds ceased to exist. The asset which was acquired on 1st October, 1963, i.e., the equity shires, was entirely different from the asset which she possessed before that date. Thus, he held that the asset which was sold on 30th March, 1964, was acquired only on 1st October, 1963, and, consequently, the period during which the assessee held the asset was less than 12 months and as such the surplus earned on the sale of the asset must be treated as short-term capital gain.
4. Mrs. Anna Ghosh preferred two separate appeals to the Income-tax Appellate Tribunal from the order passed by the AAC. I.T.A. No. 5705 (Cal) of 1972-73 was filed by Mrs. Anna Ghosh in her individual capacity; I.T.A. No. 5706 (Cal) of 1972-73 was preferred by her as the legal representative of her husband, late Dr. H. Ghosh. The Tribunal by aconsolidated order disposed of both the appeals. The Tribunal found that the assessee acquired the debenture bonds on 20th December, 1962, with a right of option to convert the same into fully paid up equity shares at any time after the expiry of the period of six months but not later than one year. The right of option was exercised on 1st October, 1963, and the equity shares were thus acquired. The Tribunal further held that the debenture holders were only creditors having claim against the company, but the shareholders were the members of the company. Thus, prior to the date of acquisition of the equity shares, the assessee was only a creditor being a debenture holder. Thus, the Tribunal held that even though the assessee had a right of option to convert the debenture bonds into fully paid up equity shares, it was not possible to hold that the equity shares were acquired by the assessee from the date when the debenture bonds were held, i. e., from 20th December, 1962. It was only after the right of option was exercised that the assessee acquired the equity shares. Hence, the date of acquisition of the equity shares was only 1st October, 1963, and not 20th December, 1962. Thus, it was held that the date of acquisition was 1st October, 1963, the date of sale being 30th March, 1964, the period of holding the asset would be far less than 12 months and the surplus on the sale of shares would be assessable as short-term capital gain. The Tribunal also did not accept the alternative contention of the assessee that the equity shares should be valued at Rs. 10 per share as on 1st October, 1963. The Tribunal held that it was only in the cases of assets acquired on or before 1st January, 1954, the question of adopting the fair market value at the option of the assessee would arise. Since the assets under consideration were acquired on 1st October, 1963, the question of option to the assessee did not arise. The Tribunal held that the cost of acquisition of equity shares was the cost that the assessee had incurred for the debenture bonds and hence the ITO was justified in taking the cost of the debenture bonds as the cost of the equity shares. This method is also in conformity with Section 55(2)(v)(e) of the I.T. Act, 1961. Thus, the Tribunal upheld the orders of the AAC, in both the appeals.
5. An application was made by the assessee to refer the following two questions of law arising out of the order of the Tribunal to this High Court under Section 256(1) of the I.T. Act, 1961 :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 73,500 is liable to be assessed to income-tax as short-term capital gains
2. Whether the Tribunal was justified in taking the date of conversion of the debentures into equity shares for the purpose of holding the sum of Rs. 73,500 as short-terra capital gains when the Tribunal hadtaken the cost of debenture bonds as the cost of acquisition of the shares ?'
6. The Tribunal, however, referred only the following question of law to this court:
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the surplus arising out of the sale of the equity shares was liable to be assessed to income-tax as short-term capital gains ?'
7. The Tribunal was of the opinion that this question was wide enough to cover all the aspects of the case.
8. It has been contended on behalf of the assessee before us that this was not a case of capital gain at all. It is contended that although Section 2(14) of the I.T. Act, 1961, has given a very wide definition of a capital asset, capital gain will have to be computed in accordance with the provisions of Section 45 to Section 55A of the I.T. Act, 1961. If it is not possible to compute the capital gain in accordance with the rules of computation laid down in the sections dealing with the computation of capital gain, there is no scope for levying income-tax on gains made by a transaction in capital assets. In this case debentures have been converted into shares and then the shares have been sold. The profits and/or gains arising from the sale of shares cannot be brought to tax under Section 45 because the transactions does not come within Section 55(2) of the I.T. Act, 1961. It is contended that special modes of computation have been laid down for the purpose of computing the cost of acquisition of shares in a company. The transaction of conversion of debentures into shares and then sale of such shares does not come under any of the sub-clauses under Section 55(2)(v). Therefore, it has been submitted that since in this case the machinery of ascertainment of capital gain cannot be applied there cannot be any levy or imposition of tax under the head 'Capital gain' at all.
9. We are unable to accept this contention. Section 55(2)(v) deals with certain special contingencies, like consolidation and division of the share capital of the company, conversion or reconversion of any stock of the company or sub-division of the shares of a company into smaller amount or conversion of one kind of share of the company into another kind. For this purpose certain special rules for computation of cost of acquisition has been laid down. These are special provisions applicable to special cases in special circumstances. These rules, however, do not do away with the usual rules for ascertaining the cost of acquisition of shares. For instance, a case of buying and selling of shares in the stock market will not come within the ambit of Section 55(2)(v); a case of sale of bonus shares will also not be covered by these rules. Because some special rules havebeen enacted for special circumstances, it does not follow that the general law which is otherwise applicable will be excluded altogether. It has been affirmed in a number of cases that the expression 'cost of acquisition' in Section 48(ii) must be understood in the commercial sense.
10. Section 45 of the I.T. Act, 1961, imposes a charge of income-tax on any profits or gains arising from the transfer of a capital asset. Section 48 lays down the mode of computation and deductions for the purpose of ascertaining the chargeable quantum of capital gain. Under Section 48(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto will have to be deducted from the full value of the consideration received or accruing as a result of the transfer of a capital asset. The costs of acquisition of capital assets have to be found out in accordance with the ordinary commercial principles.
11. Under Section 2(47) transfer in relation to a capital asset has been defined to include sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law. Therefore, a case of exchange of capital assets or extinguishment of any right therein comes within the ambit of Section 45 of the Act. Cost of acquisition in a case of transfer must be the value of the asset that has been transferred on the date on which the transfer took place.
12. Reliance was placed on behalf of the assessee on a number of decisions which, in our opinion, do not lend any support to the case of the assessee. In the case of Smt. Mrudula Nareshckandra v. CED : 100ITR297(Guj) , the scope and effect of Section 7 and Section 40 of the E.D. Act, was examined by the Gujarat High Court. This was not a case of capital gains at all.
13. The assessee also relied on a number of cases for the proposition that where the asset was self-created or self-generated, it did not have any cost of acquisition and in a case of that nature tax on capital gains could not be levied. For this proposition reliance was placed on the cases of CIT v. Anglo India Jute Mills Co. Ltd. : 129ITR352(Cal) and CIT v. v. General Investment Co. Ltd. : 131ITR366(Cal) ; but these are cases where the assessee by his own effort created a right and/or an asset and later sold away that right or asset for valuable consideration. But in the case before us the assessee has acquired debentures for valuable consideration. After holding the debentures for sometime the assessee has converted the debentures into shares. The shares have thereafter been sold in the market. It is not a case of creation of an asset by the assessee by his own effort as in the case of goodwill. It is a case of a straight forward transaction in capital assets resulting in profits. Therefore, it will not be right to say that in a case like this Section 45 is not attracted at all.
14. The next question is whether the shares can be described as short-term capital assets and if so, what will be the cost of acquisition of the shares. 'Short-term capital asset' has been defined in Section 2(42A) of the I.T. Act, 1961, as a capital asset held by an assessee for not more than twelve months immediately preceding the date of its transfer. In this case, the debentures were converted into equity shares on 1st October, 1963, and then the equity shares were sold on 4th April. 1964. Therefore, the assessee held the shares for a little over six months and the shares clearly came within the definition of 'short-term capital asset'. The date of issue of the debentures is immaterial for this purpose. The capital assets that have been sold in the instant case are the equity shares of the company. The mode of acquisition of the shares was by exchange or surrender of the debentures held by the assessee. The assessee acquired the shares on 1st October, 1963. The shares were sold on 4th April, 1964. The transaction clearly was a transaction in short-term capital assets.
15. The next question that arises for consideration is the calculation of the surplus for the purpose of levy of tax, Under the provisions of Section 48(ii) the cost of acquisition will have to be found out and deducted from the sale proceeds. The cost of acquisition in the instant case has been taken by the Tribunal to be the cost of acquisition of the debentures. This, in our opinion, is an entirely wrong approach. The debentures were bought and after some time were exchanged for shares. The question is what did the assessee pay for the shares on 1st October, 1963, that is, the date of acquisition of the shares.
16. It was contended on behalf of the Revenue that the debentures were nothing more than an acknowledgement of the indebtedness of the company to the debenture-holders and by converting the debentures into shares the company had in effect written off its loan account and issued shares in lieu thereof to the assessee. Reliance has been placed upon the terms and conditions of the issue of debentures as set out in the second mortgage debentures trust deed. It has been contended that the cost of acquisition of the shares could not be anything more than the amount of the loan represented by the debentures. It has been contended that by the issue of the debentures the company in effect obtained a loan from the assessee and the loan was also secured by a floating charge on the properties and assets of the company. The loan was to carry interest at the rate of 6 1/2 per cent. per annum. Under the terms and conditions of the issue of debentures the principal sum was repayable by the company on or before 3Ist March, 1973. The debenture-holder also had a right at any time after the expiry of six months from the date of issue of the debentures but not later than one year from the date of such issue to require the company to exchange the debentures into fully paid up equity shares ofthe company and on exercise of such option by the debenture-holder the company had to issue 10 fully paid up equity shares of the company of the face value of Rs. 10 each in exchange for each debenture.
17. In view of the terms and conditions of the issue of debentures it cannot be said that when the shares were issued by the company in lieu of debentures, the assessee merely gave up the loan given to the company in exchange for the shares. It is true that the debentures were issued in acknowledgement of the indebtedness of the company to the. assessee. But debentures very often have a market value of their own, quite distinct and apart from the loan amount. The market price will depend upon the period of redemption of the debentures, the rate of interest and various other factors embodied in the terms and conditions of the issue of debenture and its price fluctuates as the market rate or bank rate of interest goes up or down. There was an additional factor in this case that the debentures were convertible debentures. The debenture-holder had an option to convert the debentures into equity shares of the company. A convertible debenture of a company whose share price is very high is likely to have a market value much higher than its face value. The cost of acquisition in case of an exchange must be the market price of the property that has been given up or transferred by the assessee. The assessee instead of converting the debentures into equity shares might have sold them in the open market. Different considerations might follow if the debentures were not transferable. But it does not appear from the trust deed that the debentures in this case were non-transferable. In that view of the matter, in our opinion, the Tribunal in this case erred in holding that the cost of acquisition of the debentures was the cost of acquisition of the shares.
18. Reliance was placed on behalf of the Revenue in the case of CIT v. General Investment Co. Ltd. : 131ITR366(Cal) . In our opinion, the principles laid down in this case has no application to the problem that has been raised in this reference. In that case the question was how the cost of acquisition of bonus shares was to be determined. The principles laid down in the case of Miss Dhun Dadabhoy Kapadia v. CIT : 63ITR651(SC) , also do not lend support to the contention of the Revenue that the cost of acquisition of the shares must be the price which the assessee paid for acquisition of the debentures. The case before the Supreme Court was a case of capital gain. The capital assets which the assessee originally possessed consisted of 710 ordinary shares of the company. The assessee became entitled to receive 710 new shares when the company decided to issue bonus shares. The right could be exercised by actually purchasing bonus shares at the prescribed rate or by renouncing that right in favour of another person and obtaining monetary gain in the transaction. The assessee renounced her right in favour of some other person and received Rs. 45,262.50. When this amount was sought to be taxed as capital gain, the assessee claimed that the cost of acquisition of the right to the bonus shares was the depreciation in the market price of the shares that were issued. The Supreme Court held (p. 655):
'A concomitant of the acquisition of the new right was the depreciation in the value of the old shares, and the depreciation may, in a commercial sense, be deemed to be the value of the right which she subsequently transferred. The capital gain made by her would, therefore, be represented only by the difference between the money realised on transfer of the right, and the amount which she lost in the form of depreciation of her original shares in order to acquire that right.'
19. The Supreme Court in that case clearly stated that the value of the capital assets of the assessee in that case included the right of renouncing the option to obtain new shares in favour of some other person.
20. In this case the assessee had acquired the debentures on 20th December, 1962. As a debenture-holder under the terms of the issue of the debentures the assessee possessed certain rights. The assessee was entitled to a fixed percentage of interest for a number of years. The assessee also had a floating charge on the assets of the company. The assessee was also entitled to exercise an option for obtaining equity shares of the company at a prescribed rate of exchange. Therefore, when the assessee gave up the debentures and acquired the shares on 1st October, 1963, the assessee acquired an asset which was quite distinct and separate from the debentures. It is well settled that a share is a bundle of rights. The rights, as a shareholder, the assessee enjoyed were quite different from the rights that the assessee had as a debenture-holder. It will not be right to say that the cost of acquisition of the shares was the issue price of the debentures on 20th December, 1962. In our opinion, the Tribunal erred in law in equating the cost of acquisition of the debentures with the cost of acquisition of the shares. The assessee could have sold the debentures on the date the assessee exchanged the debentures for the shares. Therefore, the price for the acquisition of the shares must be the price the debentures would have fetched if sold in the open market on the date on which the debentures were exchanged for the shares.
21. An argument was also advanced on behalf of the Revenue that this question was not referred by the Tribunal to this court and, therefore, we should not go into this question at all. We are unable to accept this contention. Before the Tribunal this point was specifically argued by the assessee. In the application for reference before the Tribunal the assessee raised two questions. The Tribunal, however, referred the question setout hereinabove to this court and stated that the question was wide enough to cover all the aspects of the case.
22. We, therefore, answer the question referred to us by saying that the Tribunal was justified in holding that the sale proceeds of the equity shares in this case were liable to be assessed to income-tax as short-term capital gains. But the Tribunal was in error in holding that the cost of acquisition of the shares in this case was the cost the assessee had incurred for the debenture bonds. The Tribunal will have to recompute the cost of the equity shares in the light of the principles indicated above. We, therefore, answer the question accordingly.
23. In the facts and circumstances of this case, there will be no order as to costs.
Sabyasachi Mukharji, J.
24. I agree.