2019 (5) TMI 559 - HC - Income Tax

High Court affirms ITAT decision on short-term capital loss, finding no substantial question of law

Pr. Commissioner of Income Tax-5, Mumbai Versus Shri Kanaiyalal M. Sheth.

The High Court upheld the ITAT's decision to delete the disallowance of a short-term capital loss claimed by the Assessee. The court found that the ... Disallowance of short term capital loss in view of provisions of Section 2(14) and 2(42) - issue of warrants convertible into equity share at any time within the period of 18 months upon payment of the remaining amount of ₹ 280.75 per warrant - AO rejected the claim on the ground that at the end of the period of 18 months, the warrant had become valueless and that, therefore, there is no transfer of capital asset - HELD THAT:- We notice that in the case of Deputy Commissioner of Income Tax Vs. BPL Sanyo Finance Ltd. [2008 (2) TMI 386 - KARNATAKA HIGH COURT] under similar circumstances, had held that the loss suffered by the Assessee on forfeiture of its rights in the share was a capital loss. Delhi High Court, relying on the said decision of Karnataka High Court in the case of BPL Sanyo Finance Ltd. (supra), in case of Commissioner of Income Tax Vs. Chand Ratan Bagri [2010 (1) TMI 123 - DELHI HIGH COURT] under similar circumstances, had held that the forfeiture of payment towards convertible warrant was a short term capital loss - Decided against revenue. Issues:Challenge to ITAT judgment on deletion of short term capital loss disallowance.Analysis:The appeal filed by the Revenue challenges the ITAT judgment regarding the deletion of a short-term capital loss disallowance. The main issue for consideration is whether the ITAT was justified in deleting the disallowance of a short-term capital loss of Rs. 14,40,00,000 made by the Assessing Officer. The case involves an individual Assessee who was allotted 45 lakhs warrants of a Limited Company at a certain rate per warrant. The warrants were convertible into equity shares upon payment of the remaining amount within a specified period. However, as the Assessee could not make the payment, the entire amount paid for the warrants was forfeited, which the Assessee claimed as a short-term capital loss. The Assessing Officer rejected the claim, arguing that the warrants had become valueless, and thus, there was no transfer of a capital asset.The CIT (Appeals) and the Tribunal allowed the Assessee's claim based on decisions from the Karnataka High Court and the Delhi High Court. These courts had held that the loss suffered by the Assessee due to the forfeiture of rights in the share or payment towards convertible warrants constituted a capital loss or a short-term capital loss. The High Court analyzed the decisions of the Karnataka High Court and the Delhi High Court, emphasizing that the forfeiture of the convertible warrant resulted in the extinguishment of the Assessee's right to obtain a share in the company but did not lead to the destruction of the company itself. The court noted that the asset, which was the share in the company, was not extinguished, and the company continued to exist. Therefore, the court dismissed the Income Tax Appeal, stating that no substantial question of law arose in the case.In conclusion, the High Court upheld the decision of the ITAT in deleting the disallowance of the short-term capital loss claimed by the Assessee. The court relied on previous judgments and interpretations regarding the concept of transfer and capital loss in similar circumstances, ultimately dismissing the Revenue's appeal.