TaxTMI 
TaxTMI 
2007 (11) TMI 336
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.... income at a negative figure, i.e., loss of Rs. 2,07,98,394. In the said return, income from interest and dividend was shown by the assessee at Rs. 1,24,68,142 and Rs. 16,19,488 respectively whereas loss on sale of debentures was shown at Rs. 1,57,94,206. In Schedule 8 to the balance sheet and profit & loss account filed along with its return of income giving the details of significant accounting policies and notes to accounts, the following note was given in this context as Item No. 5:- "During the year the company was allotted 1,95,000, 12.5 secured redeemable NCDs of Rs. 250 each (with detachable warrants) of Max India Ltd. the NCDs (without warrants) were sold in terms of letter of offer at the rate of Rs. 169 each. The difference between face value of NCDs (with warrant) and sale value (without warrant) has been treated as loss on shares of debentures and warrants have been taken at nil value. The warrants will entitle the company to apply for and be allotted one equity share of Max India Ltd. at a price to be calculated at a discount of 33 per cent on the prevailing market price. or at a price of Rs. 225 whichever is less, any time between the period of 24-48 months from t....
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....Ds on allotment was Rs. 169 per NCD as against a face value of Rs. 250 each, it claimed to have suffered a total loss of Rs. 1,57,95,000, i.e., Rs. 81 per debenture on sale of 1,95,000 debentures. 4. The claim of the assessee for a loss suffered on sale of debentures was examined by the Assessing Officer during the course of assessment proceedings. In this context, he referred to the terms of the prospectus as also the offer made by M/s. Max India Limited for NCDs with detachable warrants and after reproducing such terms relevant in this context in his assessment order and after examining the same, the following inference was drawn by him in paragraph Nos. 2.2-6 to 2.2-8 of his assessment order:- "2.2-6 Let us at this stage, first of all examine the terms of the issue. From reading of the terms of issue extracted above, it is clear that the investors are given two options: ------------------------------------------------------------- Regd. Application No. of equity No. of NCDs Scheme A: Folio Form No. shares held as offered Applicants  ....
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....bsp; ----------- Scheme B: Applicants who opt for &....
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....--- Scheme A:- applicants who do not opt for buy back of NCDs, application money at the rate of Rs. 250 per NCD. Scheme B:- applicants who buy back of NCDs, application money Rs. 81 per NCD. 2.2-7 It follows, therefore, that the investor right from the beginning, opting for Scheme-B, is aware of the product he is purchasing and the price he is paying. Here, the product is, the warrant, and the price is Rs. 81. Because of the tripartite agreement as referred to in para 2.2-1, the NCD part automatically is purchased by IL&FS for Rs. 169, i.e., Rs. 250-81. So, the transaction results in no acquisition of NCD by the investor, in this case, the assessee, at all. Whatever may be the arrangements which the transaction has been gone through, one has to look at the very essence of the transaction. The essence of the transaction, here, is that, if the investor opts for Scheme A, he gets two products namely, one combined price warrant plus NCD for Rs. 250, but, if he opts for Scheme-B, he gets only one product, i.e., the warrant, for Rs. 81 and the other product, the NCD is given to IL&FS for Rs. 169. 2.2-8 There is no transaction suggestive of the assessee selling NCD to IL&FS fo....
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....g Officer in disallowing the claim of the assessee for loss on sale of NCDs for the following reasons given in paragraph No. 4 of his impugned order:- "4. I have carefully considered the matter. To my mind, the Assessing Officer's order suffers from no infirmity on this count. The Assessing Officer has correctly observed that the entire arrangement was preconceived. I find that the Assessing Officer has discussed this issue in a comprehensive manner and has correctly arrived at the finding that the cost of the warrant is to be taken at Rs. 81 only and not nil I am in agreement with the arguments given by the Assessing Officer in the assessment order. Accordingly, this ground is decided against the appellant company. The disallowance of loss on sale of debentures of Rs. 1,57,95,000 is upheld." Aggrieved by the order of the learned CIT(A) confirming the disallowance made by the Assessing Officer as aforesaid, the assessee-company has preferred this appeal before the Tribunal. 7. The learned counsel for the assessee submitted before us that the assessee-company was a shareholder of M/s. Max India Limited and being the holder of the said shares, a right offer was received by i....
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.... of Rs. 169 each, the said price could not be treated as cost of acquisition to the assessee ignoring the legal effects of the relevant transactions as done by the authorities below. He contended that even though the price paid by IL&FS for purchase of the NCDs from the assessee was Rs. 169 each, what they actually got were the NCDs of the face value of Rs. 250 each and as a result of the said acquisition, IL&FS became entitled for interest at the rate of 12.5 per cent on the face value of Rs. 250 itself. According to him, had the assessee-company not exercised the option of transferring the NCDs to IL&FS, it would have shown the cost of acquisition of NCDs at Rs. 250 each being its face value whereas the cost of acquisition of detachable warrant would have been taken at nil He submitted that the said transfer of NCDs by the assessee-company to IL&FS was possible only after allotment of the NCDs to it and it was thus a case of acquiring the said NCDs first at Rs. 250 each and then transferring the same to IL&FS at Rs. 169 each. He contended that the said transfer of NCDs thus had resulted in a loss of Rs. 81 per NCD and the said loss having been actually suffered by the assessee-co....
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....Abhinandan Investments Ltd. thus is operative and this Special Bench is also bound by the same. In support of this contention, he also relied on the decision of Hon'ble Delhi High Court in the case of CIT v. Achal Investments Ltd. [2004] 268 ITR 211 and Hon'ble Rajasthan High Court in the case of CIT v. Shree Barkha Synthetics Ltd. [2004] 270 ITR 477. 10. The learned counsel for the assessee then took us through the decision of Hon'ble Delhi High Court in the case of Abhinandan Investments Ltd. to point out that the issue involved as well as facts relevant thereto involved in the said case are similar to that of the present case. He submitted that the option-B given by Max India Limited in connection with allotment of NCDs which has been exercised by the assessee in the present case is similar to the one involved in the case of Jindal Equipment Leasing & Consultancy Services Ltd decided by the Tribunal vide its common order dated 5-6-2000 and affirmed by the Hon'ble Delhi High Court and since the terms of the issues involved in both the cases were also almost similar, the issue in fact stands squarely covered in favour of the assessee by the decision of Hon'ble Delhi High Court ....
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....India AIR 1979 SC 798 and Panchugopal Barua v. Umesh Chandra Goswami AIR 1997 SC 1041, he contended that the findings of fact, however erroneous, cannot be disturbed by the High Court in exercise of the powers under section 260A. 13. As regards the decision of the Hon'ble High Court of Gujarat in the case of Nirma Industries Ltd. cited by the learned counsel for the assessee, the learned DR submitted that the Hon'ble High Court has mainly referred to the decisions of the Hon'ble Supreme Court of India dealing with doctrine of merger and while discussing the same, it has been observed that the Hon'ble Supreme Court can grant Special Leave before the appeal is heard whereas there is no such procedure in the case of High Court. In this regard, he referred to the provisions of sub-sections (3) and (4) of section 260A and submitted that the mandatory procedure laid down therein of formulating the question of law before the appeal is heard itself suggests that the due process of appeal being taken for decision on merits arises only after the question of law is formulated by the Hon'ble High Court. He contended that if the appeal is disposed of by the Hon'ble High Court under section 2....
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..... (P.) Ltd. v. ITO [1964] 52 ITR 399. He submitted that a detachable warrant giving the holder thereof such a right cannot be said to be of no value in the facts and circumstances of the case especially when the said warrant made the holder thereof entitled to acquire one share for each of such DW at reduced value in comparison to the market value. He contended that the said dividend warrant thus had certain value and the assessee cannot be allowed to take the value of such a DW at nil for the purpose of taxation. Relying on the decision of Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651, he contended that in working out capital gain or loss, the principles that have to be applied are those which are a part of the commercial practice or which an ordinary man of business will resort to when making computation for his business purpose. 17. The learned DR submitted that the assessee actually retained the DW only because of the inherent valuable right vested therein which entitled him to translate the right into monetary terms, i.e., subscribing the share at lower value than the market value of such shares. He explained such monetary translat....
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....taxing authorities cannot put on blinkers while looking at the documents produced before them and they are entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents as held by Hon'ble Supreme Court in the case of CIT v. Durga Prasad More [1971] 82 ITR 540. He also relied on the decision of Hon'ble Supreme Court in the case of Sumati Dayal v. CIT [1995] 214 ITR 801 to contend that the matter has to be considered in the light of human probabilities. In this context, he submitted that there are many questions arising in the present case relating to the claim of the assessee which cannot be answered applying the test of human conduct and probabilities such as:- (a) Why the assessee under Scheme-B (buy back scheme) is subsidizing the buyer, i.e., IL&FS for an amount of Rs. 81? Because, neither he is buying NCD (as he is selling it to IL&FS) nor he is paying for NCD (as IL&FS is paying for the NCD). (b) Can this be said that the same NCD costed to IL&FS at the rate of Rs. 169 but it costed to the assessee at the rate of Rs. 250? Certainly not, because the stripped NCD valued at Rs. 169 whereas the DW bearing NCD costed Rs....
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....nguish the said decision. He submitted that the price for Rs. 81 paid by the assessee in the present case is not certainly the cost paid for acquiring the warrant or the shares to be allotted. 22. We have considered the rival submissions in the light of material available on record and the judicial pronouncements cited at the bar. The issue involved in the present case relates to the allowability of loss claimed to have been incurred by the assessee on sale of NCDs. As pointed out by the learned counsel for the assessee, a similar issue had come up earlier for consideration before the, Tribunal in many cases and in one of such cases of Mohair Investment & Trading Co. (P.) Ltd. v. Jt. CIT [IT Appeal No. 1121 (Delhi) of 2000, dated 30-1-2004], a similar issue involving identical facts was decided in favour of the assessee holding that the price of Rs. 250 each was entirely paid by the assessee for acquiring NCD and there was no price allocated to the detachable warrant. It was also held that the sale of NCDs at Rs. 169 each thus had resulted in a loss of Rs. 81 per NCD which was rightly claimed by the assessee as revenue loss. For this conclusion drawn in the case of Mohair Invest....
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....against the aforesaid order of the Tribunal passed in the case of Abhinandan Investments Ltd. holding that no substantial question of law arose is a decision on merit and constitutes a binding precedent which this Special Bench is bound to follow? (iii) If the answer to Question No. (i) or (ii) is negative, the issue involved in the present appeal as incorporated in the question referred to by the Hon'ble President to this Special Bench will have to be decided on merits. 25. As regards the first issue as to whether the facts involved in the present case are similar or not to the case of Nalwa Investment Ltd., it would be relevant to compare all the material facts relevant to the issue under consideration as involved in both the cases. In this regard, the learned counsel for the assessee has filed a chart giving such comparison which is extracted below:- ---------------------------------------------------------------- CIT v. Abhinandan Investments Ltd. Medicare Investment Ltd. [2002] 254 ITR 538/121 Taxman 161 (Delhi) Right Issue of JISCO Right issue of Max India &....
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....sp; prevailing market price or at a price of Rs. 225, whichever is less. Application money for this right Application money for issue Rs. 111 per NCD and this right issue-Rs. 89 allotment money Rs. 389 per NCD. per NCD and allotment money - Rs. 169 per NCD. JISCO made arrangem....
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....en for all Rs. 350 crores and did not without any monetary limit. restrict only for the promoters. Assessee sold 2/3rd of detachable Assessee-companies claimed warrants at the rate of Rs. 20 Rs. 81 as cost of per share. Assessee in the return debentures and claimed of income claimed the difference capital loss as of Rs. 91 (Rs. 111 - Rs. 20) per short-term capital loss, detachable warrant to as on sale of debentures to short-term capital loss. However, IL&FS. in appeal proceedings before CIT(A), the assessee claimed Rs. 111 as cost of debentures and claimed capital loss as short-term capital loss, on sale of debentures to UTI. The above claim of the assessee was allowed by the Tribunal and also accepted by the Delhi High Court. ---------------------------------------------------------------- 26. The learned DR, on the other hand, has made a similar exercise by preparing two comparative charts in an att....
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.... sale of treated as business loss. DWs. Later on claimed loss on sale of NCDs before CIT(A). All the five assessee- companies were used by the &n....
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....sp; meanwhile creating fictitious loss? Medicare Investments Ltd. Abhinandan Investments Ltd.'s case. The facts of the case are squarely different from ....
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.... were posed for adjudication: (a) Whether the Tribunal is correct in law in directing the Assessing Officer to allow &n....
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.... the UTI paid Rs. 389 per debenture JISCO and in turn the assessee's transferred the NCDs in the name  ....
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.... the allottees Rs. 111 per NCD amounts sold the NCD to it. In both to forfeiture of capital cases, DWs were held by the or is to be treated as allottees. business loss? Appellant treated cost of DW as (f) Whether the order of the NIL thus, difference of Rs. 250 Income- tax Appellate and Rs. 169, i.e., Rs. 81 Tribunal is perverse on treated as business loss. facts and in law? ....
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....p; questions, no question of law, much less a substantial question of law, arises out of its order. ---------------------------------------------------------------- 27. Keeping in view the comparative analysis as furnished by both the sides and the submissions made by them in the light of such comparison as well as taking note of the distinguishing features attempted to be pointed out by the Division Bench in their referral order, we now proceed to consider and decide this basic issue as to whether the facts involved in the pres....
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....nt. However, the fact remains to be seen is that the claim of the assessees as originally made in the said cases was that the amount of Rs. 111 per NCD paid by them actually represented cost paid for each detachable warrant and the remaining amount of Rs. 389 was the cost actually paid for acquiring each NCD. This claim of the assessee, however, was not accepted by the revenue authorities by taking a stand that the cost of acquisition of each NCD was Rs. 500 and the detachable warrant was received gratis without any consideration as per the scheme itself. It cannot be, therefore, said that it was nobody's case that the sum of Rs. 111 should be treated as the price paid by the assessee-companies for acquisition of detachable warrants. As a matter of fact, this was the case made out originally by the assessees themselves while claiming loss on sale of detachable warrants at Rs. 20 each which was not accepted by the revenue. 29. Before the Tribunal, the issue raised no doubt was relating to the claim of the assessee for loss of Rs. 111 per debenture and having already taken a stand that the entire amount of Rs. 500 paid by the assessee was on account of cost of acquisition of deben....
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.... any material difference in the facts and to say on the basis of such change in the position taken by them that the earlier decision rendered by the Tribunal on a similar issue involving almost identical facts is not applicable. 30. The other distinction sought to be made out is on the basis of two options given to the investors by the offer letter issued in the present case vis-a-vis the only one option stated to be given in the case of Abhinandan Investments Ltd. It is pointed out that in the case of Abhinandan Investments Ltd., the NCDs were offered at a face value of Rs. 500 each and as per the terms of payment given in the offer document, a sum of Rs. 111 was payable on application whereas the remaining amount of Rs. 389 was payable on allotment. There was an arrangement made by the issuing company with UTI whereby the allottee of the NCDs had an option to surrender the NCDs to the UTI at Rs. 389 on allotment which amount in turn was to be paid to the issuing company as the allotment money payable against NCDs. It was argued that in the case of the assessee, the terms of payment as given in the offer document itself offered two options to the allottees and depending upon th....
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....going for option (b), there was however no such amount and since the entire amount was to be paid along with the application as per the terms of payment given in the offer document, he was required to pay a sum of Rs. 250 per NCD on application itself. In die case of Abhinandan Investments Ltd., the terms of payment given in the offer document, however, were different inasmuch as a sum of Rs. 111 was payable on application whereas Rs. 389 was payable on allotment and since the option to surrender the NCDs to UTI was to be exercised only on allotment, there was no difference in the amount payable on application by the allottees deciding to surrender the NCDs to UTI and the allottees not going for opting for such surrender. It was thus merely a difference in the terms of payment of NCDs as per the offer document whereby in one case, the entire amount payable against NCDs was to be paid along with the application itself whereas in the other cases, the amount payable against NCDs was to be paid in two instalments, one at application stage and the remaining on allotment. 32. There were thus two distinctive features in the scheme of allotment as per the offer made in the case of the p....
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....uthority before superior forum and such superior forum modifies, reverses or affirms the decision put in issue before it, the decision by the subordinate forum merges in the decision by the superior forum and it is the latter which subsists, remains operative and is capable of enforcement in the eye of law. (ii) The jurisdiction conferred by article 136 of the Constitution is divisible into two stages. First stage is up to the disposal of prayer for special leave to file an appeal. The second stage commences if and when the leave to appeal is granted and special leave petition is converted into an appeal. (iii) Doctrine of merger is not a doctrine of universal or unlimited application. It will depend on the nature of jurisdiction exercised by the superior forum and the content or subject-matter of challenge laid or capable of being laid shall be determinative of the applicability of merger. The superior jurisdiction should be capable of reversing, modifying or affirming the order put in issue before it. Under article 136 of the Constitution the Supreme Court may reverse, modify or affirm the judgment, decree or order appealed against while exercising its appellate jurisdiction and ....
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....ding that no substantial question of law arises implies that the order of the Tribunal on the issue stands merged in the order of the High Court and for all intents and purposes, it is the decision of the High Court which is operative and which is capable of being given effect to. In the case of Nirma Industries Ltd., it was held by the Ahmedabad Special Bench of ITAT that as per the provisions of section 260A, an appeal lies to the High Court only where a substantial question of law is involved and, therefore, when the High Court dismisses the same by stating that no substantial question of law arises, it cannot be said that it was a decision of the High Court on merits. Hon'ble Gujarat High Court, however, has not agreed with this view expressed by the Special Bench of ITAT observing that a plain reading of section 260A inclusive of sub-sections of the said section makes it clear that the only jurisdictional powers that the High Court can exercise are to hear an appeal and the High Court does not have any powers under the statute to grant any leave as such for filing an appeal. Explaining further, it was observed by Their Lordships that the person filing the appeal is not require....
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.... the subordinate forum in the order of the superior forum cannot be applied became there is no "order" made by the superior forum on merits and the controversy between the parties has not been gone into by the appellate forum. It was thus held by the Hon'ble Gujarat High Court in the case of Nirma Industries Ltd. that the effect of dismissal of appeal by the High Court holding that no substantial question of law arises is that the order of the Tribunal on the issue which was agitated by the appellant before the High Court stands merged in the order of the High Court and for all intents and purposes, it is the decision of the High Court which is operative and which is capable of being given effect to. It was also held that it is thus not open to any person to contend that there is no decision of the High Court and the subordinate forum is entitled to take a contrary view than the one adopted in the earlier proceedings which have been affirmed by the High Court by a process of dismissal of appeal simplicitor. 36. In our opinion, the ratio of the decision of Hon'ble Gujarat High Court in the case of Nirma Industries Ltd. is clearly applicable in the present case and respectfully fo....
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....e so as to entitle it to claim the loss as business loss? (e) Whether the amount of Rs. 111 per NCD amounts to forfeiture of capital or is, treated as business loss? (f) Whether the order of the Income-tax Appellate Tribunal is perverse on facts and in law?" 37. A perusal of the judgment of Hon'ble Delhi High Court passed in the case of Abhinandan Investments Ltd. shows that all the facts relevant to the issues raised in the form of aforesaid questions were discussed by Their Lordships in detail and after considering the said facts as well as the arguments advanced by both the sides, it was held that question Nos. (c) and (d) were not even urged before the Tribunal by the revenue. As regards the rest of the questions, it was found by the Hon'ble High Court that the Tribunal has analysed the factual position in coming to the conclusion that the assessee-company's claim was admissible as business loss. Hon'ble High Court also perused the decisions of various Benches of the Tribunal to which reference had been made by the Tribunal and found that there was no basic difference so far as the transactions involved which were the subject-matter of consideration in those cases. Hon....