TaxTMI 
TaxTMI 
2015 (3) TMI 852
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.... the following terms: "Whether, on the facts and circumstances of this case, the Tribunal was justified in directing the Assessing Officer to allow deduction of the losses at Rs. 111/- per NCD as a business loss?" 2. The brief facts are that the assessee in ITA 25/2001 (hereafter "Abhinandan") and assessee in ITA 26/2001 (hereafter "JELCS") claimed a loss of Rs. 111 per debenture on the sale of debentures of Jindal Iron and Steel Co ("JISCO") to UTI. These assessees were shareholders of JISCO, which declared a right issue of secured redeemable non-convertible debentures (NCD) of Rs. 500/- each. The size of the issue was about Rs. 500 crores. The issue opened on 21.11.94 and closed on 19.12.94. Interest @10.5% was payable by JISCO on those debentures. To make the debenture issue attractive, JISCO fixed a detachable warrant (DW) with each debenture, the holder of which was eligible to apply for one share of JISCO within a specified period. The salient features of the rights issue of NCD as approved by SEBI were as under:- a) Each debenture was of face value of Rs. 500/-. b) Every residential shareholder had to pay a sum of Rs. 111/- per debenture on making application and....
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..../appellant companies. The AO therefore felt that it was JISCO's own fund which was used in subscribing to its NCD issue in the name of assessees. The AO also held that all the five assessees/ appellants were not acting in their own capacity or taking market oriented decisions and were acting on behalf of JISCO. He further observed that the funds flowed into the assessees from JISCO which has flowed back to JISCO in the shape of application money for NCDs. Thus the assessees were merely conduits in this transaction and, therefore, the loss claimed by it was not allowable. The AO further observed that the agreement between JISCO and UTI was for the benefit of the promoter company only. He observed that there was no reference to this arrangement in the letter of offer though the arrangement with UTI was already reached before the offer dated 12.11.94. The AO also noted that the five assessee companies endorsed the allotment letters issued to them, in favour of UTI, which paid the allotment money and that there was no agreement between the UTI and the assessees for making the payment of allotment money on their behalf. Rather, the arrangement was between JISCO and UTI and the assessee ....
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....ted on January 14, 1995 on payment of application money of Rs. 111/- per NCD. Between January 20, 1995 and January 25, 1995, the assessees and others transferred the NCDs to UTI without consideration. It was also held that the assessees never became owners of the fully paid NCDs and that they had paid Rs. 111/- as application money to acquire NCD; the DWs were received gratis. The claim of loss of Rs. 111/- per debenture on its sale was made for the first time in appeal and not in assessment proceedings. It was noted that the assessees applied for NCDs after the arrangement between JISCO and the UTI without any consideration and with the intention of incurring loss of Rs. 111/- on each NCD and that they had not fully paid for the NCDs. Therefore they were disentitled to the DWs, because in terms of the issue conditions, the DW was to be allotted only after the NCDs were fully paid. The NCDs were transferred to UTI immediately after the allotment and entirely according to the arrangement between JISCO and the UTI. Such transfer was an act of forfeiture of application money at Rs. 111/- per NCDs. The beneficiary of the transfer was not UTI but JISCO. Thus, the loss was deliberately i....
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....ey to JISCO on behalf of the assessees and in turn the assessees transferred the NCDs in favour of UTI which was registered in UTI's name and therefore the factual conclusions of the CIT (A) were wrong. The assessees denied that they were the beneficiaries of the transaction but it was UTI who became the owner of the NCDs of the face value of Rs. 500/- by paying Rs. 389/- only per NCD. UTI also received interest from JISCO at full value of Rs. 500/- each debenture. Moreover UTI was entitled to the full redemption money at Rs. 500/- per debenture on redemption though actually they had paid at Rs. 389/-. UTI earned a substantial annual gain of 256% on this transaction. It was urged that the assessees too benefited due to the arrangement because after losing Rs. 111/- on each debenture it became entitled to one dividend warrant which enabled it (the assessee) to own an equity share at Rs. 200/- though the market price of the share on that date was much higher. A chart indicating the gains by the assessee-companies was also furnished before the ITAT. The assessees argued that there was no camouflage in the transaction to evade tax. 10. The ITAT, in its impugned order held that the f....
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.... deduction. The claim was, inter alia, rejected on the preliminary ground that such a ground was not before the AO. The ITAT noted that in a large number of decisions it was held that any view the assessees propound may be irrelevant while considering assessment under the Act. The only consideration for the revenue at that point of time is as to what was the true legal effect of the transaction. Reference was made to several decisions in Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income Tax [1971] 82 ITR 363 (SC) ; Delhi Stock Exchange Association Ltd. v. Commissioner of Income Tax [1961] 41 ITR 495 (SC) and First Addl. ITO v. T. M. K. Abdul Kassim [1962] 46 ITR 149 (SC). It was therefore observed that even if the return filed by the assessee did not set out the proper position that cannot be a reason for not allowing the claim. 11. The ITAT considered the reasoning of the AO and CIT (A) and held, firstly that when the assessees applied for NCDs and paid the requisite sum of Rs. 111/- per NCD, the offer of allotment was issued to them in terms of which all applicant companies had to make a further payment at Rs. 389/- per NCD. As the arrangement was in place with the UTI (w....
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....enture was not a colourable device. It also noted that when JISCO came with the rights issue of NCDs, many other companies like Apollo Tyres, Usha Ispat Ltd., Dhunseri Tea Industries Ltd., and Sri Ram Industrial Enterprises, etc., had come out with similar rights issues with almost identical terms and conditions. In the case of Apollo Tyres, the buy-back was done by JM Financial and Investment Consultancy Services Ltd. whereas in the case of Usha Ispat, Dhunseri Tea and Sri Ram Industrial Enterprises, the buy-back was by UTI, DSP Financial Consultancies Ltd. and Sri Ram Financial Services Ltd. respectively. In the case of the assessees, the buy-back was by UTI which could not be influenced by the terms of either the assessee or JISCO. Consequently, it was held that the sum of Rs. 111/- per share had to be treated as business loss. Facts in Medicare Investments, ITA No. 840 of 2008 12. The assessee company held shares in Max India Ltd. a widely held, listed company. During the previous year ended 31.03.96 Max India Ltd. came up with a Rights Issue in which the assessee company also participated as a shareholder. The facts relating to the said issue of Max India Ltd. were that ....
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....share of Max India Limited at a price which was to be calculated at a discount of 33% on the prevailing market price or Rs. 225, whichever was less, any time between the period of 24 to 48 months from the date of allotment of NCDs. It was argued that if the right attached to the warrant had not been exercised by the holder thereof within the period specified by Max India Ltd., the entitlement for the shares was liable to be automatically lapsed. It was also clarified that the warrant holders exercising their option for allotment of equity shares were not entitled to seek any appropriation of the amount paid on the NCDs against the amount payable for the equity shares which was to be paid in full separately. It was contended that the said warrants thus were completely detachable from the NCDs and their holders were entitled to sell the NCDs separately after detaching the warrants. It was also contended that since the purchase price, face value as well as redemption price of the said NCDs was Rs. 250 each, that was rightly taken as cost of acquisition by the assessee and the loss resulting in the sale of the said NCDs by taking the said cost of acquisition was allowable in the hands ....
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....Here the DWs were issued to the assessee whereas the UTI had paid the allotment money. The assessee had shown the amount of application money as the cost of DWs which was evident from the fact that the assessee claimed the loss to the extent of DWs sold. It was in fact a financial arrangement between JISCO and the UTI and the UTI agreed to pay Rs. 389/- per debenture on the condition that (i) interest would be paid at 10.5 %; and (ii) refund of Rs. 500/- would be given in three instalments. In the process, the assesse allowed its capital to be forfeited by JISCO, which was a unilateral act on its part. It is like the case of unclaimed credits/ debts. A sum of Rs. 111/- per NCD was capital investment in the hands of the assessee as it had shown it as investment and declared the loss as short-term capital loss while filing its return. The assesse is an investment company of the Jindal group. 16. It was argued that no definition of "investment company" existed in the statute. However, several definitions were enacted. "Financial investment company" was inserted by the Finance (No. 2) Act, 1991. By Section 2(9)(d) it is defined as "a company whose gross total income consists main....
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....rding to the revenue itself the assessee's JISCO shares were stock in trade (and therefore in the revenue account). In view of this stand, the Revenue cannot argue to the contrary. It would be contradictory and illogical to say that the shares of JISCO are to be held as stock in trade but the NCD's which were acquired by virtue of the shareholding in JISCO and which were held for 10 days are to be treated as an investment and held on capital account. Analysis & Findings 19. Before we proceed to analyse the contentions of the parties, it would be useful to set out, in a tabular form, the salient facts relating to the two sets of appeals:- Sl. No. Abhinandan Investment & JELCS Medicare Investment Ltd 1 Right issue of JISCO: 10.5% redeemable NCDs with DW Right issue of Max India: 12% redeemable NCDs with DW 2 NCD face value Rs. 500/- each NCD face value Rs. 250/- each 3 DW entitled holder to apply for an equity share of JISCO of Rs. 10/- face value at a premium of Rs. 190/- per share DW entitled holder to apply for an equity share of JISCO of Rs. 10/- face value at a price to be calculated at a discount of 33% of prevailing market price or at ....
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.... entire amount of Rs. 500 paid by the assessee was on account of cost of acquisition of NCDS, the revenue never stated that Rs. 111/- paid by the assessee should be treated as the price paid for acquiring DWs. The ITAT nonetheless considered the salient features of the NCD rights issue with DWs as approved by SEBI; it also took note of the assessee's original claim before the AO which was subsequently altered due to the revenue's position i.e., that of the sum of Rs. 500 paid by the assessee under the said right issue, nothing was attributable to DWs which was received gratis without any consideration. The ITAT considered the different bases on which the assessee's claim regarding loss of Rs. 111/- on sale of debenture was disallowed by the AO as well as by the learned CIT (A). Thereafter, the ITAT considered the terms of the right issue and held that the true legal effect of the relevant transaction has to be seen for the purpose of income-tax assessment and not the entries made in the books of account or claim made in the return of income. ITAT therefore, accepted the claim of the assessee for loss of Rs. 111 per debenture stemming from sale thereof to UTI and consequ....
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....cheme was a ruse to defraud the revenue. What was not considered was that the UTI scheme was apparently wide in nature; it sought to fund NCD applicants - the assessee shareholders and other companies being some of them, to the extent of 30.93 %, as much as 40% shares being held by the general public and the rest being institutional shareholders. Significantly, UTI limited the funding under the scheme to Rs. 350 crores. Equally, what was lost sight of was that both the UTI and the applicants stood to benefit, because (a) UTI picked up the NCDs at a discounted rate, i.e., Rs. 389/- whereas its face value was Rs. 500/- each (that amount being the redeemable value at the end of the maturity period). It also received 10.5% per annum interest on Rs. 500/- even though it invested only Rs. 389/- per NCD. The assessees on the other hand, retained the right to the DWs which entitled allotment of shares at a pre-determined rate of Rs. 200/-. The assessees held quoted shares as on 31.03.1995 to the extent of Rs. 165,526,458/50 of which the value of JISCO's shares was Rs. 43,143,836/00. They held shares in 12 other listed companies besides shares in unlisted companies, debentures and other sec....
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....- was payable by UTI, as the result of a prior arrangement whereas in the latter case, the terms of payment given in the offer document itself offered two options to the allottees and depending upon their exercise of option (at the stage of application itself), the amount payable was determined. The subscriber going for option (a) thereby agreeing to sell the NCDs, which is called Khoka sale, amount payable on application was only Rs. 81/- per NCD whereas the subscriber not exercising the option of Khoka sale as given in option (b), the entire face value of Rs. 250/- was payable on application. The contention was that the subscriber opting for option (a) thus, was paying Rs. 81/- per NCD on application as a consideration for detachable warrant and this was explicitly the true effect of the transaction. This court notices that the distinction was rejected by the ITAT, which reasoned as follows: "31. After having given a careful consideration to this entire matter relating to the different options given to the allottee/subscriber in the offer documents in both the cases, we find it difficult to accept that the two options given by the issuing company in the present case made a wor....
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....lotment as per the offer made in the case of the present assessee and in the case of Abhinandan Investments Ltd. and Ors. (supra). Firstly, there was a difference in the stage at which the option of Khoka sale was to be exercised and secondly, there was a difference in terms of payment. These two distinctive features, however, were hardly of any material nature as far as the final outcome of the transaction is concerned inasmuch as in both the cases, the allottee/subscriber going for Khoka option ultimately paid Rs. 81 and Rs. 111 on application for getting allotted one detachable warrant whereas the remaining amount of Rs. 389 and Rs. 169 received/receivable on account of sale of NCDs to the financial institution was adjusted/paid against the remaining amount payable towards NCDs. In our opinion, the effect of these transactions thus ultimately was the one and the same and the distinctive features of allotment of NCDs in these cases as pointed out on behalf of the Revenue would not change the very nature of the transaction which, in our opinion, was exactly similar." This court holds that the above reasoning is sound and logical. The revenue could not show any fallacy; nor is i....
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....ny (i.e., JISCO) on October 31, 1994 ; (e) 23 debentures for every 100 equity shares held as on October 31, 1994, were required to be issued. 6. It is important to note that at the relevant point in time, in JISCO the public held nearly 40.43 per cent. of the shares, while the financial institutions, mutual funds and banks together held nearly 18.80 per cent. This was excluding the shares held by foreign institutional investors and nonresidents of the Indian origin. 7. Continuing with the aforesaid narration, the rights issue of SRNCDs opened on November 21, 1994, with December 19, 1994, as the date of closure. In order to attract a large number of subscribers to the rights issue JISCO attached a fixed DW with each debenture with a face value of Rs. 10 and a premium of Rs. 190. JISCO being aware of the fact that in order to make the rights issue a success it had to ensure availability of finance to its investors. In order to achieve the said purpose JISCO entered into an arrangement with the Unit Trust of India (hereinafter referred to as "UTI") whereby the UTI agreed to pay the balance sum of Rs. 389 per SRNCD on behalf of the allottees to JISCO. The assessee being an exi....
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.... "14. By the very same order the Assessing Officer observed that since the loss on the SRNCD had been determined by him pursuant to an order of the Tribunal, it was not a loss determined in pursuance of a return filed under section 139(3) of the Act and, hence, the said assessed loss on Rs. 6,27,81,805 shall not be allowed to be carried forward and set off against future income of the assessee. It is important to note that the order passed by the Assessing Officer dated October 27, 2000, is captioned as one having been passed under section 254 of the Act. 15. Aggrieved by the observation of the Assessing Officer that the said assessed loss could not be carried forward and set off against its future income the assessee preferred an appeal to the Commissioner of Income- tax (Appeals). The Commissioner of Income-tax (Appeals) by an order dated February 22, 2002, rejected the appeal both on the ground that it was not maintainable as well as on the merits. On the maintainability the Commissioner of Income-tax (Appeals) was of the view that since the order passed by the Assessing Officer (Joint Commissioner of Income-tax) was evidently passed under section 254 of the Act, it was no....
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....titution-UTI and JISCO for part financing the investment had been examined by the Tribunal in the first round. The Tribunal after noting the benefit which had accrued both to the assessee and UTI, that is, while the assessee had acquired an equity share on the other hand UTI had acquired not only a SRNCD of a face value of Rs. 500 at the rate of Rs. 389 but also a yield of nearly 24 per cent. ; it reversed the orders of the Assessing Officer and the Commissioner of Income-tax (Appeals) and held that the assessee was entitled to claim a loss on sale of SRNCD to UTI as a "business loss" at the rate of Rs. 111 per SRNCD. By the very same order dated June 5, 2000, the Tribunal directed the Assessing Officer to allow deduction of loss at the rate of Rs. 111 per SRNCD. 18. The Assessing Officer (Joint Commissioner of Income-tax) while giving effect to the order of the Tribunal dated June 5, 2000, verified the loss of SRNCD. Upon verification of the loss the Assessing Officer adjusted the loss on the sale of 11,98,000 SRNCD at the rate of Rs. 111 per SRNCD amounting to Rs. 13,29,78,000 against an income of Rs. 7,01,96,195 and arrived at a loss of Rs. 6,27,81,805 under section 143(3) of....
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....mportant and relevant was the true legal effect of a transaction and in coming to the said conclusion the view that the assessee may take in the return of income or the treatment that is meted out in the books of account or the method of accounting that an assessee uses are not relevant in considering the effect to be given to the transactions which are governed by the provisions of the Act. The Tribunal went on to observe while allowing the claim of loss by the assessee that the fact that in the return filed by the assessee wherein the assessee does not take a proper position, cannot be a ground to take advantage of the ignorance of the assessee if the assessee is otherwise entitled to relief and/or claim of loss as in the instant case. Keeping the aforesaid rationale in mind the Tribunal, vide order dated June 5, 2000, had directed the Assessing Officer to allow the assessee's claim of loss on sale of SRNCDs at the rate of Rs. 111 as a business loss. It is evident that the Assessing Officer (Joint Commissioner of Income-tax) in the second round while giving effect to the orders of the Tribunal dated June 5, 2000, was determining the income/loss in pursuance of an original ret....
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....ases (Abhinandan, JELCS and Medicare) the assessees are investment companies, whose business includes share acquisition and transfer. The balance sheet and share inventories of Abhinandan and JELCs clearly reflected - as on 31.03.1994 and as on 31.03.1995, the value of shares of JISCO and several other companies. Having treated those and other shares as distinct from assets, but rather as part of the share inventory, it could not be said that the NCDs and the resultant DWs were to be treated otherwise. Here, the court is conscious that the assessees did claim initially to have incurred capital loss; however, they later corrected their stand and claimed business loss. We are of the opinion that the earlier stand of the assessees could not have shackled them to that position, preventing them from asserting the true character of the amount. Nor is the revenue bound to treat the position of the assessee as the gospel truth, or pin it to one or the other stand. The revenue is obliged to independently assess the amounts having regard to the provision of the Act. In Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) this was underlined: "Whether the assessee is entitle....
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....ce of any exercise of quantification by the Assessing Officer there was no occasion for the assessee to carry the matter any further and therefore the said issue could not arise out of the order of Commissioner (Appeals). Once that was the position the Tribunal could not have taken it upon itself to raise the issue and decide the same which did not properly arise out of the Order of Commissioner (Appeals) as no ground could be taken by either side in absence of any findings by the Commissioner (Appeals)." 32. The findings of the AO and CIT regarding the NCD funding not being at arms' length are unsustainable, because UTI on redemption, was entitled to full redemption money @ Rs. 500 each debenture on redemption though actually they had paid @ Rs. 389 only. The ITAT's discussion reveals that material was led to establish that UTI earned a substantial annual gain of about 25% on the transaction. Furthermore it was held that on the other hand, the assessees too benefitted because after losing the initial application money on each debentures they were entitled to one dividend warrant which enabled them to an equity share of Rs. 200/- (in the case of JISCO NCDs) and based on a pre-de....