For tax purposes, what is the real cost/ price of the shares received after Merger?

Section 55(2) of the Income-tax Act, 1961 defines "cost of acquisition" as follows:

(2) For the purposes of sections 48 and 49, "cost of acquisition",—

(a) ...

(aa) in a case where, by virtue of holding a capital asset, being a share or any other security, within the meaning of clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter in this clause referred to as the financial asset), the assessee—

(A) becomes entitled to subscribe to any additional financial asset ; or

(B) is allotted any additional financial asset without any payment,

then, subject to the provisions of sub-clauses (i) and (ii) of clause (b),—

(i) in relation to the original financial asset, on the basis of which the assessee becomes entitled to any additional financial asset, means the amount actually paid for acquiring the original financial asset ;

(ii) in relation to any right to renounce the said entitlement to subscribe to the financial asset, when such right is renounced by the assessee in favour of any person, shall be taken to be nil in the case of such assessee ;

(iii) in relation to the financial asset, to which the assessee has subscribed on the basis of the said entitlement, means the amount actually paid by him for acquiring such asset ;

(iiia) in relation to the financial asset allotted to the assessee without any payment and on the basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee ; and

...

Accordingly, under clause (iiia), the cost of acquisition of the shares of Canara Bank shall be taken to be Nil as you have not made any payment for it and you received it on the basis of holding of the shares of Syndicate Bank.

If you have acquired the shares prior to 31st January 2018, you are entitled to adopt the fair market value (FMV) of the shares of Canara Bank as the cost of acquisition.

 

I have to correct the initial answer because it is not applicable to an amalgamation where the amalgamating company ceases to exist. The correct answer is provided by section 49(2) of the Income-tax Act which reads as follows:

(2) Where the capital asset being a share or shares in an amalgamated company which is an Indian company became the 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.

Section 47(vii) reads as follows:

(vii) any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company, if—

(a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company except where the shareholder itself is the amalgamated company, and

(b) the amalgamated company is an Indian company;

Accordingly, the correct answer is that the cost of acquisition of the shares of the erstwhile Syndicate Bank shall be treated as the cost of acquisition of Canara Bank.

Yes, as per section 55(2) (quoted earlier), the cost of acquisition of the original shares shall remain unchanged while the cost of the bonus shares shall be taken to be NIL.

As regards the date of acquisition, section 2(42A) provides as follows:

(f) in the case of a capital asset, being a financial asset, allotted without any payment and on the basis of holding of any other financial asset, the period shall be reckoned from the date of the allotment of such financial asset;

This means that if the original shares are sold immediately after the bonus, they would give rise to a long-term capital gain or loss (depending on the period of holding) while the bonus shares will give rise to a short-term capital gain.

 

The answer is provided by section 55(2)(b) of the Income tax Act which provides as follows:

(v) where the capital asset, being a share or a stock of a company, became the property of the assessee on—

(a) the consolidation and division of all or any of the share capital of the company into shares of larger amount than its existing shares,

(b) the conversion of any shares of the company into stock,

(c) the re-conversion of any stock of the company into shares,

(d) the sub-division of any of the shares of the company into shares of smaller amount, or

(e) the conversion of one kind of shares of the company into another kind,

means the cost of acquisition of the asset calculated with reference to the cost of acquisition of the shares or stock from which such asset is derived.

Accordingly, the cost of the original holding will have to be spread over the entire holding to determine the cost of each share.

The date of allottment of the shares will be the date of purchase of the new shares.

 

The answer is in section 2(42A) of the Act which provides that the date of acquisition shall be:

(f) in the case of a capital asset, being a financial asset, allotted without any payment and on the basis of holding of any other financial asset, the period shall be reckoned from the date of the allotment of such financial asset ;

Accordingly, the date of allottment of the original shares shall also be the date of acquisition of the split shares for determining whether the said split shares are a long-term or a short-term capital asset.