2007 (5) TMI 555 - AT - Income Tax

Tribunal Rules No Short-Term Capital Loss Claim Due to Lack of Consideration Value in Warrant Transfer.

The Tribunal dismissed the assessee's appeal, holding that although the extinguishment of rights in the warrants constitutes a transfer under section ... Computation of capital gains - extinguishment of warrants - “Short-term capital loss” - whether there is a loss incurred by the assessee on the transfer of a capital asset - HELD THAT:- In our opinion, there is an extinguishment of right in the warrant. It is not a case of extinguishment of the assets itself. The warrant is a capital asset. It may not have any value subsequent to the extinguishment of the rights available to the assessee for subscription to the equity shares. The hon’ble Supreme Court in the case of CIT v. Mrs. Grace Collis [2001 (2) TMI 9 - SUPREME COURT] has held that the expression “transfer” included the extinguishment of rights in assets independent. We have also gone through the decision of the hon’ble Supreme Court in the case of Kartikeya V Sarabhai [1997 (9) TMI 2 - SUPREME COURT]. In this decision, the hon’ble Supreme Court has held that this is only one of the modes of transfer envisaged by section 2(47). The relinquishment of the assets or extinguishment of any rights in it which may not amount to a sale can also be considered as a transfer. Therefore, on this issue, we do not agree with the finding of the CIT (Appeals) that there is no transfer in the case of the assessee and accordingly we reverse the finding of the CIT (Appeals) on this issue and hold that in the case of the assessee there is a transfer when the rights of the assessee to subscribe for the shares got extinguished. In view of the provisions of section 48 there must be full value of consideration out of which the expenditure and the cost of acquisition has to be deducted for computing the capital gains. In the absence of any value being assigned to the consideration received on the transfer of warrants, in our opinion, the capital loss cannot be computed in the case of the assessee. We are therefore of the view that in the case of the assessee the capital loss cannot be computed u/s 45 read with section 48 and therefore the assessee will not be entitled for claiming the deduction under the head “Short-term capital loss” as the computation provisions relating to the short-term capital gain fail. In the result, the appeal of the assessee is dismissed. Issues Involved:1. Disallowance of short-term loss on account of extinguishment of warrants.2. Classification of warrants as capital assets.3. Determination of transfer and capital loss under sections 2(14), 2(47), and 45 of the Income-tax Act.4. Computation of capital gains/loss under section 48.Issue-wise Detailed Analysis:1. Disallowance of Short-term Loss on Extinguishment of Warrants:The primary issue in this case revolves around the disallowance of a short-term loss of Rs. 4,32,000 claimed by the assessee due to the extinguishment of warrants. The assessee had applied for 2,00,000 warrants but exercised the right only for 40,000 warrants, resulting in the extinguishment of the remaining 1,60,000 warrants. The Assessing Officer disallowed this loss, arguing that the sale of warrants cannot be treated as a capital asset under section 2(14) of the Act.2. Classification of Warrants as Capital Assets:The Commissioner of Income-tax (Appeals) (CIT(A)) held that the warrants are capital assets as they possess a valuable right and a clear market value. The CIT(A) referenced the Supreme Court's decision in Ahmed G Ariff v. CWT and the Karnataka High Court's decision in Syndicate Bank Ltd. v. Addl. CIT to support this classification. However, the CIT(A) did not agree that the extinguishment of the warrants constituted a transfer, thus denying the capital loss claim.3. Determination of Transfer and Capital Loss:The assessee argued that the extinguishment of rights in the warrants should be considered a transfer under section 2(47) of the Act. The CIT(A) disagreed, citing the absence of a transferee and likening the situation to the Calcutta High Court's decision in CIT v. East India Charitable Trust, where the asset's disappearance did not result in capital gains/loss. The CIT(A) also referenced the Supreme Court's decision in Kartikeya V Sarabhai v. CIT, emphasizing the necessity of a transfer between two parties for capital gains/loss to arise. The Tribunal, however, found that the extinguishment of rights in the warrants does constitute a transfer, reversing the CIT(A)'s finding on this issue.4. Computation of Capital Gains/Loss:For computing capital gains, section 45(1) requires the transfer of a capital asset, and section 48 outlines the method of computation. The Tribunal noted that the computation provisions cannot supersede the charging provisions. The definition of 'transfer' under section 2(47) includes the extinguishment of any rights in the capital asset. The Tribunal concluded that the extinguishment of rights in the warrants is indeed a transfer. However, for computing the capital loss, the full value of consideration received or accruing as a result of the transfer must be ascertained. In this case, the Tribunal found that in the absence of any value assigned to the consideration received on the transfer of warrants, the capital loss cannot be computed. Thus, the assessee is not entitled to claim the short-term capital loss.Conclusion:The appeal of the assessee is dismissed. The Tribunal held that while the extinguishment of rights in the warrants constitutes a transfer, the capital loss cannot be computed due to the absence of a value assigned to the consideration received. Therefore, the assessee is not entitled to claim the short-term capital loss.