The Hindu Business Line : Cost of a share, post-merger

I WAS an original subscriber to the debenture issue of Reliance Petroleum Ltd (RPL) in 1993. I was allotted 100 triple option convertible debentures (TOCDs) in December 1990. Against these the company allotted fully paid equity shares of the face value of Rs 10 each during 1993, 1995, 1999, 2000 and 2001, thereby completely extinguishing the TOCDs. I have thereafter purchased equity shares of RPL from time to time.

On the merger of RPL with Reliance Industries Ltd (RIL), with effect from October 19, 2002, I was allotted equity shares of the face value of Rs 10 each in RIL for shares of RPL held by me on that day in the ratio of 1:11. I was at that time holding 2,200 shares of RPL and was, therefore, allotted 200 shares of RIL.

How are the cost of acquisition and the indexed cost of acquisition to be worked for the 200 shares of RIL?

Gauri Shankar

Reply

Section 49 of the Income-Tax Act provides that where the shareholder of an amalgamating company is allotted shares in the amalgamated company, which was exempt under Section 47 as not being regarded as a transfer, the cost of acquisition of the shares in the amalgamated company is to be taken as the cost of acquisition of shares in the amalgamating company.

The cost of acquisition of the 200 shares of RIL in the instant case will therefore be the cost of acquisition of the 2,200 shares in RPL. As some part of the 2,200 shares of RPL were allotted by way of conversion of debentures into shares of that company, the cost of acquisition of these shares, which were allotted by way of conversion of debentures into shares, would be the amount paid for acquiring the debentures (Section 49). Therefore, in the instant case, the cost of shares in RPL allotted in the scheme of conversion will first have to be taken as the cost paid for acquiring the debentures which have been converted into shares. Thereafter the purchase price of other shares of RPL acquired in the stock market will have to be added to the same. This aggregate will be the cost of acquisition of the 200 shares allotted to the questioner in RIL as a result of the amalgamation of RPL with RIL. The indexed cost of acquisition is computed under Section 48 as follows:

Cost of acquisition x cost inflation index of the financial year of transfer / cost inflation index of the financial year in which the asset was first held by the assessee or the cost inflation index of the financial year 1981-82, whichever is later.

A plain reading of the section gives a view that the benefit of indexation would be available only from the date on which the shares of the amalgamated company were allotted to the questioner and that the same will not be available from the date on which the shares in the amalgamating company were held by the questioner or from the date on which the debentures were converted into shares.

This view, however, is a narrow one and it is felt that a broad view must be taken in the matter. It is, therefore, felt that the benefit of indexation will be available even from the date on which the questioner purchased the shares of the amalgamating company or from the date on which debentures in the amalgamating company (converted into shares) were allotted to the questioner. In this connection, reference may be made to the decision of the Chandigarh Bench of the Tribunal in Smt. Pushpa Sofat vs ITO (2002 81 ITD 1 Chandigarh).

Query

I have earned some long-term capital gains and also incurred some losses on transfer of such long-term assets being equity shares and also earned short-term capital gains and also incurred losses on transfer of short-term capital assets in the financial year 2002-03 (assessment year 2003-04). Can I set off the gain/loss against income from the same head and also from other heads?

Rakesh Kumar Mittal

Reply

Sections 70 and 74 provide for set off and carry forward and set off of losses under the head capital gains against income from the same head. A loss under the head capital gains cannot be set off against income from any other head. It can only be set off and carried forward and set off against income from the same head in the following manner:

the loss arising from the transfer of a short-term capital asset may be set off against income arising from the transfer of either a short-term capital asset or a long-term capital asset and the balance, if any, may be carried forward and set off against the income arising from the transfer of either a long-term capital asset or short-term capital asset within eight assessment years immediately succeeding the assessment year in which the loss was first computed.

the loss arising from the transfer of long-term capital asset may be set off only against income arising from the transfer of the long-term capital asset and the balance, if any, may be carried forward and set off against income arising from the transfer of a long-term capital asset within eight assessment years immediately succeeding the AY in which the loss was first computed.

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