1980 (8) TMI 53 - HC - Income Tax

Court upholds assessee's claim for short-term capital loss on extinguishment of rights in promissory note.

The court upheld the decision in favor of the assessee, ruling that the extinguishment of rights in the promissory note under the approved scheme ... Capital Loss, Transfer Issues Involved:1. Entitlement to short-term capital loss.2. Definition and scope of 'transfer' under Section 2(47) of the I.T. Act.3. Requirement of consideration for the transfer of a capital asset.4. Applicability of previous case law (CIT v. R. M. Amin).5. Interpretation of the scheme of compromise and arrangement in liquidation.Detailed Analysis:1. Entitlement to Short-term Capital Loss:The primary issue was whether the assessee was entitled to claim a short-term capital loss of Rs. 11,617 due to the extinguishment of rights in a promissory note. The Income-tax Appellate Tribunal held that the assessee was entitled to this loss, which was challenged by the revenue.2. Definition and Scope of 'Transfer' under Section 2(47):The term 'transfer' in relation to a capital asset includes the sale, exchange, relinquishment, or extinguishment of any rights therein. The assessee argued that the extinguishment of rights in the promissory note due to the liquidation scheme amounted to a transfer under Section 2(47).3. Requirement of Consideration for the Transfer of a Capital Asset:The revenue contended that for a transfer to result in capital gains or losses, it must be backed by consideration as per Section 48. The Tribunal, however, found that the scheme of compromise and arrangement provided sufficient consideration for the extinguishment of the assessee's rights.4. Applicability of Previous Case Law (CIT v. R. M. Amin):The revenue relied on CIT v. R. M. Amin, arguing that there must be an element of consideration for the extinction of rights in capital assets. The Tribunal distinguished this case, stating that the facts were different as the assessee in R. M. Amin received money due to his pre-existing rights as a shareholder, not due to a new scheme of arrangement.5. Interpretation of the Scheme of Compromise and Arrangement in Liquidation:The scheme approved by the court required unsecured creditors to accept 45% of their verified claims without interest. The Tribunal found that this constituted a valid consideration for the extinguishment of the remaining 55% of the claim, thereby creating a new set of rights and obligations.Conclusion:The Tribunal's decision in favor of the assessee was upheld. The court concluded that the extinguishment of the assessee's rights in the promissory note under the approved scheme constituted a transfer backed by consideration. The assessee was therefore entitled to claim the short-term capital loss. The revenue's contention that the transfer lacked consideration was rejected, and the previous case law (CIT v. R. M. Amin) was found not applicable to the present facts. The question was answered in the affirmative, favoring the assessee.