TaxTMI 
TaxTMI 
2012 (3) TMI 79
X X X X Extracts X X X X
X X X X Extracts X X X X
....61?" 3. The erstwhile company viz.,M/s New Ambadi Investments Private Limited, who was the assessee before the authorities below, was merged with M/s New Ambadi Estates Private Limited with effect from 01.04.2006. The said erstwhile company was a private limited company carrying on the business of investments and the relevant assessment year is 1993-1994 and the corresponding accounting year ended on 31.03.1993. For the said assessment year, the assessee filed its return of income on 31.12.1993 admitting the loss of Rs.10,08,121/-. The said return was processed under Section 143(1)(a) of the Income Tax Act on 22.07.1994 and later taken up for scrutiny and notice was issued under Section 143(2) of the Act and the assessment was completed under Section 143(3) of the Act and determined the total taxable income at 1,36,570/-. While computing the taxable income, the assessing officer rejected the contention that the loss at Rs.11,44,692/- claimed by the assessee as capital loss and held is only speculative loss under Section 43(5) of the Act and the same cannot be set off against capital gain. Aggrieved by that order, the assessee had filed an appeal before the Commissioner of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se since there is no existence of the commodity before the allotment and relied on the following judgments to support his case. (1) The judgment of Supreme Court in R.D.GOYAL AND ANOTHER V. RELIANCE INDUSTRIES LIMITED (2003) 1 Supreme Court Cases 81 and (2) The judgment of Calcutta High Court in COMMISSIONER OF INCOME TAX V. NIRMAL TRADING COMPANY (1971) 82 ITR 782. He further submitted that the Tribunal has given a categorical finding that there was actual delivery and the bank had purchased the said non-convertible debentures at discount and therefore, the order passed by the Tribunal is in accordance with law and the same has to be confirmed. 6. Heard the learned counsel on either side and perused the documents on record. The issue for our consideration is whether the transaction relating to non-convertible security debentures would fall under the definition of "speculative transaction" under Section 43(5) of the Act, which reads as follows: "Speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or trans....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bsp; -------------- 11,44,692 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ual instalments of Rs.16/-, Rs.17/- and Rs.1Rs. 7/- at the end of the seventh, eighth and ninth year respectively from the date of allotment. Terms of Payment: As regards the payment of application money, you have two options viz., Option 1-- Pay Rs.61/- (Rupees sixty two) per PCD on application and accept Hongkong Bank's Khokha offer (see details below). If you decide to accept Hongkong Bank's offer to purchase Part B of the PCD, then you should: (a) Pay Rs.62/- only per PCD both on your entitlement and the additional PCDs applied for. (b) Sign the Letter of Authority contained in the application. Hongkong Bank has by its letter dated 18-3-1992 offered to purchase the Non-convertible portion (i.e. Part B) of the PCD at a price of Rs.38/-. Non-resident applicants are not eligible to avail this option. The purchase price of Rs.38/- for Part B is based on the discount on sale of the Part B and the interest from the time the bank makes payment directly to the company towards the subscription amount as if it was made on behalf of the applicant till the time company transfers the Part B to the bank. The procedure vide Securities and Exchange Board of India's letter ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to the issue before us. 5. The letter of offer has clearly brought out the procedure that the company shall follow on the basis of response from the existing shareholder to its proposed to choose between the two options. The existing shareholders are also advised about the outcome of opting for one of the options. The existing shareholders on opting for option A are required to enclose payment of Rs.62/- or Rs.65/- as the case may be along with their acceptance of letter of authority in favour of the Hongkong Bank in token of accepting the khokha of the bank. The existing shareholders are further advised that the letter of acceptance in favour of the bank shall be sent to the bank to enable the bank to remit Rs.38 per PCDs. The amount of Rs.38/- per PCD received from the bank, shall be initially treated as a loan advanced by the bank to the existing shareholders. The amounts received from the existing shareholders along with the application and the amount received from the bank shall be kept in a separate account. 5.1 The existing shareholders are further advised that PCDS shall be allotted according to the recognised procedure, i.e., depending upon the applicants and the amo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ount of application money relatable to the NCSD portion which the existing shareholder would never get back, is a loss suffered and is a capital loss that could get adjusted against the income from capital gains. The assessee being in the business as an investment company, the loss suffered to the extent of Rs.12/- or Rs.15/- per PCD, is obviously a capital loss and in the circumstances of the case, for the aforesaid reasons, it is held as a capital loss. 5.4 Before we part we may observe that the decisions relied upon by AO the Apex Court in CIT v. Sutlej Cotton Mills Supply Agency Ltd. (1975) 100 ITR 706 and Devanport & Co. v. CIT (1975) 100 ITR 715 have no application to the instant case before us. The former was on the point whether a single transaction could lead to an adventure in the nature of trade and that it could be a speculative transaction. The latter is on the point of actual delivery. The decision of Calcutta High Court in CIT V. Prasad Birla (HUF) (1993) 199 I TR 173 relied by CIT (A) was considering the purchase and sale of shares that took place by settlement without taking of delivery. In the instant case before us, there is clear delivery as well as constructive....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... In respect of Part-I, i.e. Convertible portion, the existing shareholder would receive one equity share for every PCD allotted to them and the value of the share is Rs.50/-. The second part consisting of non convertible portion sent directly to the bank and the existing shareholder cannot further claim from the company regarding payment of Rs.12/- and Rs.15/- paid towards other part of non-convertible portion. The case of the Revenue is that the second portion represented by non-convertible security debentures is not actually received by the existing shareholder and therefore, no delivery is taken by the existing shareholder, but transferred to the bank and hence, it falls within the definition of "speculative transaction". The partial convertible debenture as we stated earlier is converted into two parts, (1) equity shareholders and (2) non-convertible security debentures. Non-convertible portion is not a separate one and originated from PCD. It is one transaction. In such circumstances, the Tribunal held that it was only non-convertible security debentures, which is part of the partial convertible debentures allotted in favour of the existing shareholder and then transferred to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e issue of debentures in the same manner as it deals with the issue of shares, but the similarity ends with the mode and manner of issue, their allotment, their transferability and in the applicability of forfeiture provisions. The corpus of the two issues forms two different segments of capital shares representing the share capital and the debentures representing the loan capital. Shareholders are the owners of the company till the company is folded up fully while debenture-holders are only creditors of the company sometimes secured and sometimes unsecured and that too for a defined period. The rights of the shareholders and debenture-holders are different as also their remedies. To the extent the comparison could bear between the two, the procedures are by and large the same for both in the matter of issue, allotment, transfers and forfeiture. Shares, therefore, are distinct from debentures, although in the usual parlance they both are grouped together in many legislations and referred to sometimes by the generic term of scrip . It is on account of their free transferability and marketability, they are referred together. The stamp duty on the share certificates and debenture cert....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion of "goods" nor "shares" or "stocks". The only distinction in the present case and the Supreme Court case is that the expression "goods" is the subject matter of the Supreme Court. But in the present case, the expression "commodity" is in dispute. The said distinction does not make any difference. So the principle enumerated in the above judgment is squarely applicable. Further, the debenture is an instrument of debt executed by the company acknowledging its receipt to repay the same at a specified rate along with interest. The learned counsel for the respondent-assessee contended that the word commodity cannot include debenture because debenture is an instrument. Therefore, in view of the first part of the transaction, that purchase or sale of any commodity including stock and shares will not include debentures. Further, the learned counsel also relied on the same judgment for the proposition that no question of buying and selling of commodities arises when there is no allotment. In the present case, no allotment has been made and there is no dispute regarding the same. The learned counsel also relied the R.D.GOYAL's case cited supra, wherein the Apex Court has considered the s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....w allotment means the appropriation out of the previously unappropriated capital of a company of a certain number of shares to a person. Till such allotment the shares do not exist as such. It is an allotment in this sense that the shares come into existence. 39. In view of the aforementioned authoritative pronouncement of this Court it must be held that shares pending allotment in view of the provisions of law as thence existed could not be said to be goods." Therefore, in this case, pending allotment, there cannot be existence of the commodity. Therefore, the Revenue is wrong in arguing that there is a purchase or sale of the commodity even before the allotment. In the present case, before allotment, the assessee had incurred loss, which loss they claimed as capital loss. In view of the same, we are of the view that non-convertible secured debentures cannot be purchased or sold before allotment. Following the above judgement, we are of the view that pending allotment, non-convertible portion does not exist as such as commodities. In the case of COMMISSIONER OF INCOME TAX V. NIRMAL TRADING COMPANY reported in (1971) 82 ITR 782, the Calcutta High Court considered the scope of....