Section 47(X) stipulates that any transfer by way of conversion of bonds or debentures in any form, of a company, into shares or debentures of that company will not be regarded as transfer for the purpose of capital gains u/s 49(2A). Where shares become the property of the assessee by virtue of conversion, the cost of acquisition shall be deemed to be that part of the cost of the debentures, in relation to which the shares are acquired by the assessee.

However, though the deemed cost of acquisition is specified as above, the Act does not deal with the deemed date of acquisition in the case of such converted shares. Naturally,experts differ on this issue. Some of them feel that when the conversion itself is not regarded prima facie as a transfer, how can the date of acquisition of the shares be the date of conversion?

It is clear that the intent of legislation, from the language used by it, is that no transfer has taken place and, therefore, one can construe that the original instrument of convertible debenture has changed its character. In the place of the original debentures, the assessee now possesses two different instruments, one being the share and the other being the non-convertible khokha debenture. The assessee became the owner of the right of conversion on the original date on which the convertible debenture was purchased. The cancellation of that right effected by the conversion is definitely not a transfer since, by no stretch of the imagination can the transfer or/and the transferee be one and the same person. If the transfer has not taken place, the date of acquisition can never be, either deemed orotherwise, the date of conversion. It has to be the date on which the convertible debentures were purchased.

There are some other experts who hold a diagonally opposite view. Shares are a different species, distinct from the convertible debentures. Shares came into existence on the date of conversion and it is wholly unreal and artificial to imagine that the date of their holding was some fictional date in the past. In other words, to imagine that an asset was held from a certain fictional date though it actually came into existence at a future date, would produce manifestly absurd and unjust results.

In my opinion, the cost as well as the date of acquisition of shares is the cost and the date of the original convertible debentures.

I have applied for a house to the Central Government Welfare Housing Organisation, under their self-financing scheme, at Kharghar, New Mumbai. The payment has to be made in installments. I paid the earnest money in 1996 and was issued an allotment letter on January 2,1997, which stated that the allotment would be automatically confirmed on receipt of payment of the first installment. I paid the first installment (25 per cent) and obtained a receipt dated April 7, 1997. The construction is likely to be completed in three years.

I now wish to dispose of my present house (bought from CIDCO in 1980) and avail of exemption of capital gains u/s 54 by investing the proceeds in the installments toward the new house. Will the acquisition of the new house be treated as a case of purchase or construction?

If I sell the old house on, say, April 12, 1998, and use the capital gains component of the proceeds toward payment of installments for the new house before April 11, 2001, will I be exempted u/s 54, irrespective of whether or not the construction is completed before this date?
-- A Taxpayer, Mumbai

To earn eligibility for exemption u/s 54, an assessee has to purchase a residential house within one year or before two years after the date of transfer.Alternatively, he can construct a residential house property within three years. You may note that in the case of construction, there is no limit on the period for commencing the construction. The only requirement is that it must be completed within three years after the date of transfer (CIT vs J R Subramanya Bhat (1986) 28Taxman578,Kar).

Allotment of flats under the self-financing schemes of the DDA (or under a similar scheme of cooperative societies or other institutions) shall be treated as a case of construction for the purpose of Section 54 -- Circular No. 672 (dated December 16, 1993). It is clear that the new flat in CGHO will be construed to be a case of construction. You will be entitled to the benefits u/s 54, if and only if, CGHO hands over the possession of the new flat to you before March 12, 2001. All installments made by you for the new house, inclusive of the installments made prior to the sale of the old house, will be eligible for exemption.

If, however, this were a case of purchase,only the installments made from one year before the date of sale of the old house would be eligible.In case you have disposed of your old house in April 1998, you will have to open a special bank account under `Capital Gains Account Scheme' before June 30, 1999, or the date of filing your returns for FY 97-98, whichever is earlier. All your future installments will have to come out of this new account. You get a clear 15 months' period to use this money any way you like.

Now, what if the construction is not completed within the stipulated period of three years? Do you lose all the benefit, for no fault of yours? Luckily there is a landmark decision, CIT v Dr L N Nagda 211ITR804 Bom (1991), which deals with a case where the assessee ITO had declined to grant exemption u/s 54 on the ground that the registered sale deed for the sale of the new house purchased was not executed within one year of sale of the old house.

The judgement was in favour of the assessee and the court observed, "Taking intoconsideration the letter as well as the spirit of Section 54 of the Income Tax Act, 1961, and the word `toward' used before the word `purchase' in Section 54, it is clear that the said word is not used in the sense of legal transfer and, therefore, the holding of a legal title within a period of one year is not a condition precedent for attracting Section 54 of the Act...."