ACIT RG 1(2), MUMBAI V. IGH HOLDINGS P. LTD, MUMBAI

ITA 1022/MUM/2013

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 2104 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 8 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-10-2015
• Appeal Filed By: Department
• Bench Allotted: I
• Next Hearing Date: 26-08-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 06-02-2013
• Court: TRIBUNAL
• Department Lawyers: PRATAP SINGH
• Assessee Lawyers: DINESH VYAS
• Keywords: Cost of acquisition; Speculation loss
• Section: 43(5)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL I , BENCH MUMBAI . . , , BEFORE SHRI R.C.SHARMA , A M & SHRI PAWAN SINGH , J M ./ ITA NO . 1022 / MUM/20 13 ( / ASSESSMENT YEAR : 20 0 9 - 20 10 ) DCIT. RG.1(2), MUMBAI VS. M/S IGH HOLDINGS PRIVATE LIMITED, M/S INDUSTRY HOUSE, 159, CHURCHGATE RECLAMATION, MUMBAI - 40020 ./ ./ PAN/GIR NO. : A A BCI 4426 F ( / AP PELLANT ) .. ( / RESPONDENT ) /REVENUE BY : SHRI PRATAP SINGH /ASSESSEE BY : SHRI DINESH VYAS / DATE OF HEARING : 2 7 /0 8 / 2015 / DATE OF PRONOUNCEMENT 07/10 /2015 / O R D E R PER R.C.SHARMA (A.M) : TH IS IS AN APPEAL FILED BY THE REVENUE A GAINST THE ORDER OF CIT (A) , MUMBAI , FOR THE ASSESSMENT YEAR 20 09 - 10 , WHEREIN FOLLOWING SOLITARY ISSUE HAS BEEN RAISED BY THE REVENUE : - 1. WHETHER ON THE FACTS AND IN THE CIR CUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) WAS JUSTIFIED IN HOLDING THAT THE LOSS SHOULD BE ASSESSED AS SHORT TERM CAPITAL LOSS UNDER THE HEAD INCOME FROM CAPITAL GAIN RELYING UPON THE HONBLE DELHI HIGH COURTS DECISION IN THE CASE OF CIT VS. CHA ND RATAN BAGRI (2010) REPORTED IN 329 ITR 356 (DEL) WHEREAS THE FACTS OF THE CASE ARE DIFFERENT?. 2. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. IN THIS APPEAL THE REVENUE IS AGGRIEVED BY THE ORDER OF CIT(A) IN ALLOWING ASSESSEES CLAIM FOR SHOR T TERM CAPITAL LOSS ON ACCOUNT OF WARRANT ISSUED ITA NO. 1022 /20 13 2 WHICH WAS TREATED BY THE AO AS COST OF ACQUISITION OF ORIGINAL SHARES. BY THE IMPUGNED ORDER THE CIT(A) ALLOWED ASSESSEES CLAIM OF SHORT TERM CAPITAL GAINS AFTER HAVING THE FOLLOWING OBSERVATIONS : - 5.10 I HAVE CONSIDERED THE ISSUE. IN THIS CASE, THE APPELLANT HAS APPLIED FOR 8,00,00,000 WARRANTS TO APPLY FOR AND OBTAIN ALLOTMENT OF ONE EQUITY SHARE AGAINST ONE WARRANT AT A PRICE OF RS.173.87 AND THE WARRANTS WERE ALLOTTED TO THE APPELLANT BY HINDALCO INDUST RIES LTD. ON 28.3.2007. THE APPELLANT HAS PAID 10% OF THE COST OF THE WARRANTS OF RS.139,09,60,000/ - ON 11.4.2007 AND TREATED AS 'INVESTMENTS' IN ITS BOOKS OF ACCOUNTS AND IT IS REFLECTED UNDER THE HEAD 'INVESTMENTS' IN THE BALANCE SHEET AS ON 31.3.2008. TH E FINAL PAYMENT (90% OF THE PRICE) HAS TO BE PAID BY 10.10.2008. BUT BY THE TIME, THE SHARE PRICES OF HINDALCO FELL AND IN VIEW OF THAT THE APPELLANT HAD NOT PAID THE REMAINING AMOUNT AND THE AMOUNT PAID OF RS. 139.09,60.000/ - WAS FORFEITED BY HINDALCO AS PER SEBI GUIDELINES. THE APPELLANT HAS CLAIMED THIS LOSS AS 'SHORT TERM CAPITAL LOSS' STATING THAT ITS RIGHT FOR ACQUISITION OF SHARES IS EXTINGUISHED AND THEREBY COMING WITHIN THE AMBIT OF SECTION 2(47) OF THE IT. ACT AND SECTION 45 OF THE IT. ACT. HOWEVE R, THE AO HAS NOT ACCEPTED THE APPELLANT'S CLAIM. THE AO NOTICED THAT THE APPELLANT ALSO APPLIED FOR RIGHTS ISSUE OF HINDALCO INDUSTRIES LTD. WHICH WAS ISSUED IN SEPTEMBER/OCTOBER 2008 AND THE ISSUE PRICE IS RS. 96/ - PER SHARE. 5.11 THE AO HAS CONSIDERE D THE LOSS OF RS. 139,09,60,000/ - AS PART OF CONSIDERATION FOR ACQUISITION OF SHARES IN THE RIGHTS ISSUE AND THE AO . HAS NOT A CCEPT E D THE APPELLANT'S CLAIM THAT THE LOSS IS ASSESSABLE UNDER THE HEAD 'SHORT TERM CAPITAL GAINS'. THE AO IS ALSO OF THE VIEW TH AT THAT WARRANT IS A DERIVATIVE INSTRUMENT AND THE WARRANTS AR E NOT LISTED IN THE STOCK EXCHANGES AND HENCE THE LOSS SHOULD BE CONSIDERED AS SPECULATION LOSS. 5.12 I HAVE GONE THROUGH THE ASSESSMENT ORDER AND THE: APPELLANT'S SUBMISSIONS. THE ISSUE OF WA R RANTS AND THE ISSUE OF RIGHTS ISSUE HAVE TAKEN PLACE IN DIFFERENT PERIODS OF TIME, THE APPELLANT APPLIED FOR WARRANTS IN APRIL 2007 WHEREAS THE APPELLANT APPLIED FOR RIGHTS ISSUE IN SEPTEMBER 2008. THESE TWO ARE TWO SEPARATE TRANSACTIONS AND THERE IS NO IN TERLINKING BETWEEN THESE TWO TRANSACTIONS. THE APPELLANT APPLIED FOR RIGHTS ISSUE AS PER THE APPELLANT WAS ALREADY A SHAREHOLDER AND NOT BECAUSE IT IS THE HOLDER OF THE WARRANTS. IN VIEW OF THIS, I AM OF THE VIEW THAT THE AOS ACTION IN INTERLINKING THESE TWO TRANSACTIONS IS NOT JUSTIFIED. 5.13 F URTHER , THE APPELLANT APPLIED FOR WARRANTS TO PURCHASE THE SHARES AT A PRICE OF RS. 173.87 PER SHARE. THE PURCHASE RIGHT HAS TO BE EXERCISED ON OR BEFORE 10.10.2008. BY THAT TIME, THE SHARE PRICES OF H INDALCO HAS GONE DOWN DRASTICALLY AND NO PRUDENT MAN WILL PURCHASE THE SHARES AT RS. 173.87 AT THAT POINT OF TIME. A S A RESULT, THE APPELLANT HAS NOT EXERCISED ITS RIGHT TO PURCHASE THE SHARES AND AUTOMATICALLY BY THE OPERATION OF SEI3I GUIDELINES THE ITA NO. 1022 /20 13 3 RIGHT TO PURCHASE THE SHARES GOT EXTINGUISHED AND THE AMOUNT PAID BY THE APPELLANT WAS FORFEITED. THE, FACTS OF THE APPELLANT'S CASE IS SIMILAR TO THE FACTS OF THE CASE OF CIT VS CHAND RATAN BAGRI 329 ITR 356 (DEL). IN THAT CASE, THE HONBLE DELHI HIGH COURT IN PARAS 13 TO 15 OF THE ORDER HAS HELD AS FOLLOWS: '13. MORE IMPORTANTLY, THE SECOND ISSUE AS 10 WHETHER THE FORFEITURE OF THE CONVERTIBLE WARRANT AMOUNTED TO A TRANSFER WITHIN THE MEANING OF SECTION 2( 4 7) OF THE SAID ACT HAS NOW BEEN MADE CLEAR BY THE SUPREME COURT IN THE CASE OF GRACE COLLIS (SUPRA) AS ALSO BY THE KARNATAKA HIGH COURT IN BPL SANYO FINANCE LTD. (SUPRA). WE AGREE WITH THE INTERPRETATION GIVEN BY THE KARNATAL:A HIGH COURT IN BPL SANYO FINANCE LTD. (SUPRA) AND WE SEE 110 REASON TO TAKE A DIFFERENT VIEW. THE RESTRICTIVE MEANING GIVEN TO THE WORD 'TRANSFER' BY THE SUPREME COURT DECISION IN VANIA SILK MILLS (P) LTD. (SUPRA) HAS BEEN OVERRULED BY THE LARGER BENCH OF THE SUPREME COURT IN THE CASE OF GRACE COLLIS (SUPRA). 14. IN THE PRESENT CASE, WE FIND THA T THE FORFEITURE OF THE CONVERTIBLE WARRANT HAS RESULTED IN EXTINGUISHMENT OF THE RIGHT OF THE ASSESSEE TO OBTAIN A SHARE IN BLB LTD. IT IS NOT A CASE WHERE THE ASSET ITSELF HAS BEEN EXTINGUISHED OR DESTROYED. A SHARE IN A COMPANY IS NOTHING - BUT A SHARE I N [HE OWNERSHIP OF THE COMPANY' WHILE THE RIGHT OF THE ASSESSEE TO SHARE IN THE OWNERSHIP OF THE COMPANY (BLB LTD) STANDS EXTINGUISHED ON ACCOUNT OF THE FORFEITURE, THE COMPANY, WITH ALL ITS ASSETS, CONTINUES TO EXIST. THE FORFEITURE ONLY RES ULTS IN ONE LE SS SHAREHOLDER. IT IS NOT AS IF THE 'ASSET' IN WHICH A SHARE W AS BEING CLAIMED WAS ALSO EXTINGUISHED. THUS. THE SECOND POINT URGED BY THE LEARNED COUNSEL FOR THE REVENUE IS ALSO NO T TE N ABLE. 15. IN VIEW OF THE FOREGOING REASONS, NO SUBSTANTIAL QUESTION O F LAW ARISES FOR OUR CONSIDERATION. THE APPEAL IS DISMISSED'. THE HON'BLE DELHI HIGH COURT HAS HELD THAT THIS EXTINGUISHMENT OF RIGHTS WILL AMOUNT TO TRANSFER AND THE INCOME OR LOSS HAS TO BE ASSESSED UNDER THE HEAD CAPITAL GAINS BASED ON THE HON'BLE SUP REME COURT'S DECISION IN THE CASE OF MS. GR ACE COLLIS & ORS 24R ITR 323 (SC ). RESPECTFULLY, FOLLOWING THE HORI'BLE DELHI HIGH COURT'S DECISION IN THE CASE OF CH AND RATAN BAGRI (SUPRA), [ HOLD THAT THE LOSS SHOULD BE ASSESSED AS SHORT TERM ~ITAL LOSS UND ER THE HEAD 'INCOME FROM CAPITAL GAINS'. 5. 14 IN THE ALTERNATE ARGUMENT, THE A.O. HAS STATED THAT THIS LOSS SHOULD BE CONSIDERED AS SPECULATION LOSS. IN THIS REGARD, AT THE OUTSET IS SHOULD BE POINTED OUT THAT THE APPELLANT HAS TREATED THE INVESTMENT IN CONVERTIBLE WARRANTS AS AN INVESTMENT IN THE BOOKS OF ACCOUNT AS ON 31.3.08 AND HAS NOT TREATED AS A STOCK IN TRADE. SECTION 43(5) CAN BE ONLY FOR THE PURPOSES OF COMPUTATION OF ITA NO. 1022 /20 13 4 INCOME UNDER THE HEAD 'INCOME FROM BUSINES S OR PROFESSION'. WHILE COMPUTING T HE INCOME UNDER THE HEAD 'CAPITAL GAINS', THERE IS NO CONCEPT CALLED SPECULATIVE CAPITAL GAINS AND NON SPECULATIVE CAPITAL GAINS. FURTHER, IN THE SPECULATIVE TRANSACTION (AS DEFINED IN SECTION 43(5) OF THE LT. ACT) THE CONTRACT FOR PURCHASE OF SHARES SHOUL D HAVE BEEN PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OF SHARES. IN THIS CASE, THE CONTRACT IS N OT SETTLED BETWEEN THE PARTIES. IN THIS CASE, THE RIGHT GOT EXTINGU ISHED BY THE OPERATION OF SEBI GUIDELINES AND NOT BECAUSE OF A NY SETTLEMENT BETWEEN THE PARTIES. IN THE CASES OF SPECULATION TRANSACTION, THE TRANSACTION WILL BE FOR PURCHASE AND SALE OF SHARES I.E. ONE PERSON SHOULD BE READY TO SELL THE SHARES AND THE OTHER PERSON IS READY TO PURCHASE THE SHARES. IN THE APPELLANT'S CASE, THE AGREEMENT IS FOR INVESTMENT IN SHARES AND NOT FOR PURCHASE OF SHARES. IN FACT, HINDALCO CANNOT SELL ITS SHARES. HINDALCO CAN ONLY ALLOT ADDITIONAL SHARES TO THE APPELLANT COMPANY. IN VIEW OF THIS, THE TRANSACTIONS BETWEEN THE APPELLANT AND HINDAL CO CANNOT BE CONSIDERED AS A TRANSACTION FOR PURCHASE OR SALE OF SHARES. IN VIEW OF THIS, THE TRANSACTION BETWEEN THE APPELLANT AND HINDALCO CANNOT BE CONSIDERED AS SPECULATIVE TRANSACTION AS DEFINED U/S. 43(5) OF THE I.T ACT. AS A RESULT THE APPELLANT'S CONTENTION THAT THE LOSS HAS TO BE CONSIDERED AS 'SHORT TERM CAPITAL LOSS' UNDER THE HEAD 'CAPITAL GAINS' IS UPHELD. THE A.O. IS DIRECTED TO TREAT THE LOSS AS 'SHORT TERM CAPITAL LOSS' UNDER THE HEAD 'CAPITAL GAINS. 3. WE HAVE CONSIDERED RIVAL CONTENTIO NS AND FOUND FROM THE RECORD THAT THE ASSESSEE HAD SUBSCRIBED TO 8 CRORES WARRANTS OF HINDALCO INDUSTRIES LIMITED ('HINDALCO') BY MAKING A PAYMENT OF RS. 139.09 CRORES (LE. 8 CRORES WARRANTS X RS. 173.87 PER SHARE X 10%) AND WAS ALLOTTED THE SAME ON APRIL 11, 2007. THE SAME WERE SHOWN UNDER THE HEAD 'INVESTMENTS' IN THE BALANCE SHEET AS ON MARCH 31, 2008. AS PER THE PROVISIONS OF SECURITIES AND EXCHANGE BOARD OF INDIA (DISCLOSURE AND INVESTOR PROTECTION) GUIDELIN ES, 2000, EACH WARRANT ENTITLED THE ASSESSEE TO APPLY FOR AND BE ALLOTTED ONE EQUITY SHARE OF RE 1/ - FU!LY PAID UP AT A PRICE OF RS.173.87 PER SHARE ON PAYMENT OF BALANCE AMOUNT OF RS. 156.483 PER SHARE WITHIN 28 MONTHS FROM THE DATE OF ALLOTMENT AND HENCE THE LAST DATE FOR MAKING SUCH PAYMENT WAS OC TOBER 10, 2008. ITA NO. 1022 /20 13 5 SUBSEQUENT TO THE SUBSCRIPTION OF WAR RANTS, THERE WAS GLOBAL ECONOMIC MELTDOWN , AS A RESULT OF WHICH THE STOCK PRICES CRASHED IN SEPTEMBER - OCTOBER, 2008, SO MUCH SO THAT THE PRICE PER SHARE TUMBLED DOWN TO LESS THAN RS. 100/ - PER SHARE AS AGAINST THE WARR ANT SUBSCRIPTION PRICE OF RS.173.87 PER SHARE (AS MENTIONED ABOVE ). AS PER SEBI DIP GUIDELINES, 2000 IN THE EVENT THE APPELLA NT FAILS TO PAY THE BALANCE AMOUNT OF 91% WITHIN 18 MONTHS FROM THE DATE OF ALLOTMENT OF WARRANTS, THE WARRANTS S H A L L STAND FORFEITED. THE ASSESSEE DID NOT PAY THE BALANCE AMOUNT WITHIN THE PRESCRIBED TIME RESULTING IN FORFEITURE LAPSE OF THE RIGHTS UNDER THE WARRANTS. AFTER RECORDING DETAILED FINDING TO THE EFFECT THAT IT WAS INVESTMENT BY THE ASSESSEE, THEREFORE, LO SS IN RESPECT OF WARRANT WAS LIABLE TO BE ASSESSEE AS SHORT TERM CAPITAL LOSS. AFTER PLACING RELIANCE ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CHAND RATAN BAGRI 329 ITR 356, THE CIT(A) HAS GIVEN DETAILED FINDING AT PARA 5.13 AND 5.14, WHI CH HAVE NOT BEEN CONTROVERTED BY LD.DR. ACCORDINGLY, WE DO NOT FIND ANY REASON TO INTERFERE IN THE FINDINGS SO RECORDED BY CIT(A), WHICH IS AS PER MATERIAL ON RECORD, RESULTING INTO ALLOWING ASSESSEES CLAIM OF SHORT TERM CAPITAL LOSS. 4 . IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED . O RDER PRONOUNCED IN THE OPEN COURT ON THIS 07/10 / 201 5 . SD/ - SD/ - ( ) ( PAWAN SINGH ) ( . . ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 07/10 /201 5 . . /PKM , . / PS ITA NO. 1022 /20 13 6 / COPY OF THE ORDER FORWARDED TO : / BY ORDER, / ( ASSTT. REGISTRAR) , / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A), MUMBAI. 4. / CIT 5. , , / DR, ITAT, MUMBAI 6 . / GUARD FILE. //TRUE COPY//