TaxTMI 
TaxTMI 
2005 (3) TMI 392
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....lly or in part. Alternatively, it could also renounce its right to apply, wholly or in part, in favour of any other person. Each PCD had two parts. Part A comprised of convertible portion of Rs. 65, which would be compulsorily and automatically converted into a share of face value of Rs. 10 with a premium of Rs. 55 within 6 months of allotment of PCDs. Part B comprised of non-convertible portion being debenture of face value of Rs. 85 and carrying interest at the rate of 14 per cent. 3. As per the terms of the offer, the assessee company applied only for 785 PCDs and, as mentioned by Assessing Officer, payment was made by cheque. The same were also allotted to assessee. The non-convertible debenture portion of 785 PCD was sold to M/s. Credit Capital Financial Corporation Ltd., New Delhi at the rate of Rs. 64.32 per PCD (Part B). Thus, it suffered a loss of Rs. 20.68 per PCD (Rs. 85 less Rs. 64.32) aggregating to Rs. 16,233.80. However, for the balance entitlement of 1,15,000 PCDs, the assessee under an arrangement renounced its right in favour of LICMF. Such arrangement was made through one Shri Dhruv M. Sawhney. The terms of such arrangement were contained in the letter dated 1....
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....p; Rs. 16,234 --------------- Rs. 25,88,784 --------------- The above claim was accepted by A....
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....e relevant year." However, the Assessing Officer took the view that the assessee instead of transferring the right to purchase PCD has entered into an agreement with LICMF to avoid paying the full Rs. 150 per PCD and instead by paying Rs. 22.37 per PCD to LICMF has acquired the future right to purchase the part A of the PCD from LICMF at a future date. Therefore, the payment of Rs. 22.37 is in the nature of an acquisition of a right to purchase shares of Triveni Engineering Works at a future date from LICMF. Therefore the amount is in the nature of capital expenditure to acquire a future right in shares and it cannot be said that there has been any capital loss to the assessee since LICMF has not paid any amount to the assessee to purchase any capital asset. 5. Further, it was opined by the Assessing Officer that right to apply for PCD was a composite right in the sense that it was bound to purchase both the parts of the debenture at the cost of Rs. 150. That means that both the parts were inextricably linked to each other and it could not have purchased Part A or Part B separately. This composite right was transferred to LICMF with an option to buy-back Part A within three y....
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....s. 22.37 per PCD to LICMF for acquiring future right to purchase the Part A of PCD at a future date was assailed on the ground that LICMF has also a right to sell the shares of TEWL, obtained on conversion of Part A, in the open market in case of TITL does not buy-back these shares. Thus acquisition of shares by the appellant and the other group companies is a future event which may not take place depending upon the market condition. As such, the loss incurred by the appellant on renunciation of the right to subscribe to PCD cannot be linked to the acquisition of shares in future and thus loss incurred by assessee is not a part of price for acquisition of shares in future. 9. The CIT(A), however, did not agree with the appellant and held that the loss of Rs. 25,88,784 incurred by the assessee is neither allowable as a capital loss on the transfer of capital asset nor is the same allocable towards the cost of shares of TEWL which the assessee may acquire in the future. According to him, it is an expenditure incurred to ensure subscription of PCD of a group company which is, therefore, an expenditure of a capital nature incurred for the benefit of the group company. The reason adv....
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....hand, the learned DR has reiterated the reasonings of lower authorities and, therefore, need not be repeated. 12. Rival submissions of the parties have been considered carefully. The question for consideration is whether the payment of Rs. 22.37 per debenture paid by assessee to LICMF at the time of renunciation of its right to subscribe the debenture can be allowed as capital loss under the head 'capital gains'. In my humble opinion, the answer to this question is in negative for the reasons hereafter mentioned. Section 45 of the Act is the changing section which provides that any profits or gains arising from the transfer of a capital asset effected during the previous year is chargeable to tax under the head 'capital gains'. Section 48 prescribes the mode of computation of such profits or gains. According to this section, expenditure incurred in connection with the transfer as well as the cost of acquisition of the asset and the cost of improvement thereof has to be deducted from the full value of the consideration received or accruing as a result of the transfer of the capital asset. The word 'transfer' in relation to capital asset has been defined in section 2(47) of the Ac....
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....d squarely apply. If the consideration received by assessee on the transfer of asset could not be taxed under the head 'capital gain' in view of the ratio of above Supreme Court judgment where there was no cost of acquisition then for the same reasons, the loss also cannot be computed under section 45 of the Act. Hence, the contention of assessee's counsel cannot be accepted. 14. Let me also examine this issue from another angle. As per the offer made by TEWL, there was no compulsion on the assessee to subscribe such debentures. Accordingly, no prudent man would renounce such right with a view to incur loss by making payment to the transferee. If the payment is made to transferee, then one has to find out the intention of the parties as to why such payment was made. The entire scheme, under which the payment of Rs. 22.37 per debenture was made by assessee, has been looked into. The contents of the letter written by Mr. Sawhney has already been reproduced in the earlier part of the order. The reading of the same shows that LICMF has actually charged service charges at the rate of 19 per cent of investment made by LICMF for Part A of the debenture and the same was worked out to Rs....
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.... stands reversed on this aspect of the issue. 17. Before parting with this order, it would be appropriate to mention that various orders of the Tribunal, relied upon by learned counsel for assessee, are quite distinguishable inasmuch as:- (i) in none of those cases, the assessee had renounced the right to subscribe the PCDs but on the contrary, in all those cases, the assessee had subscribed to the PCDs by making part payment out of their own funds at the time of application and it was only after the allotment of PCDs, the assessee had sold the non convertible portion of the debenture (which is called khoka in the commercial world) in favour of financing institutions while in the present case what was renounced was only the right to subscribe the PCDs and that too without consideration. (ii) That in none of those cases, the assessee had made any payment at the time of renunciation of non-convertible portion of PCDs while in the present case, not only the right was renounced but the assessee also paid the sum of Rs. 22.37 per debenture to the financial institutions without consideration. (iii) That in the case of Karam Chand Thaper & Bros. (Coal Sales) Ltd., the Non-Conv....