TaxTMI 
TaxTMI 
2001 (10) TMI 66
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....NCDs in the name of the UTI? (c) Whether the NCDs were subscribed by the assessee-company as stock-in-trade or capital investment? (d) Whether the NCDs held by the assessee-company were as stock-in trade 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 to be treated as business loss? (f) Whether the order of the Income-tax Appellate Tribunal is perverse on facts and in law? The factual background common to all five appeals are essentially as follows. During the assessment year in question, each of the assessee-respondents came up with a private placement of its preferential shares and also subscribed to the rights issue of non-converitible debentures (in short "NCD") of Jindal Iron and Steel Co. (in short, "JISCO"). The assessee also subscribed to the equity issue of Jindal Vijay Nagar Steel Ltd. (in short, "JDSL"), a new com pany of the Jindal group floated during February, 1995. During the relevant period, JISCO came up with a rights issue of 10.5 per cent. redeemable NCD with a detachable warrant or cash at par. The value of the NCD was Rs.500 and it carried a detachable warr....
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....d. 5,79,67,000 Jindal Equipment Leasing and Consultancy Services Ltd. 2,81,19,000 ----------------------------------------------------------------------- The assessee's claim was that Rs.111 paid as application money for NCD represented cost of DW and since the DW was transferred at a price of Rs.20, the difference of Rs.91 per DW was the loss suffered by the assessees. The Assessing Officer indicated that the actual cost of the warrant was nil. To this, the assessee's stand was that section 55(2)(aa) has come into operation with effect from April 1, 1996, only, and therefore there was no adverse inference available to be drawn. The assessee pointed out that the salient features of the rights issue of NCD, as approved by the SEBL were as under: (a) Each debenture will be of face value of Rs. 500 each. (b) Every residential shareholder will pay a sum of Rs.111 per debenture on making applica....
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....; 2.14 6. Foreign institutional investors 2.88 7. Public 40.43 100 ----------------------------------------------------------------------- The Assessing Officer did not accept the claim of the assessees and held that JISCO had given loans to some Bombay based companies. All those companies have invested in the private placement of preference shares of the five assessee-companies. He was therefore of the view that it was JISCO's fund which was used in subscribing to the DWs. He further observed that all the five assessee-companies ....
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....for NCDs in the background of the arrangement between JISCO and the UTI without any consideration and with the intention of incurring loss of Rs.111 on each NCD. She also observed that the assessee-companies have not fully paid for the NCDs and therefore they were not entitled to the DWs because as per the terms of issue the DW was to be given only after the NCDs were fully paid. The NCDs have been transferred to the UTI immediately after the allotment. The transfer is made entirely as per 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 the UTI but JISCO. Thus, the loss was deliberately cultivated for the benefit of JISCO. It was held that no such loss arose to the assessee on transfer of the NCDs and, therefore, the question of allowing loss did not arise. It was also observed that the reference to McDowell's case [1985] 154 ITR 148 (SC) was well made. Reference was also made to the decision in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 (SC) to the effect that the Department has the right to penetrate the veil and ascertain the truth. The matter was taken in sec....
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....ect that they have made payment at Rs.389 per NCD to JISCO on behalf of the assessee-companies, was not considered. In a sense their stand was that only when the entire consideration for the NCDs was received by JISCO further course of action was followed. The materials were placed to show that DWs were given to the assessees when NCDs were fully paid up. As to the conclusion of the Commissioner of Income-tax (Appeals) that the assessee never became the owner of NCD/DWs, the assessee-companies submitted that the letter of allot ment was in the name of the assessee-companies; the UTI made payment of allotment money to JISCO on behalf of the assessee-companies and in turn the assessee-companies transferred their NCDs in favour of the UTI which was registered in the UTI's name and therefore the factual conclusions of the Commissioner of Income-tax (Appeals) were wrong. It was also submitted that the assessees were not the beneficiaries of the transaction but it was the UTI who became the owner of the NCDs of the face value of Rs.500 by paying the amount at Rs.389 only per NCD. The UTI has also received interest from JISCO at full value of Rs.500 each debenture. Moreover the UTI wou....
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....der the issue. It was thus a compulsion on the part of the assessee-companies to subscribe to the rights issue. The failure of such issue would have been detrimental to the appellant companies being investors/promoter companies of JISCO. Thus, the assessee-companies had no option but to subscribe to the rights issue of NCDs. A sum of Rs.111 per NCD was payable on making application as per the terms of the issue and the balance Rs.389 was to be paid on allotment. In order to make the issue attractive, it was also provided that on payment of the full value of the NCD, the subscriber was entitled to one DW which in turn will entitle the holder to one equity share of JISCO at Rs.200 per share. The market value of one share of JISCO was Rs.320. As these conditions attached to the issue had SEBI approval all the assessee-companies applied for the rights issue and paid a sum of Rs.111 per NCD on application. JISCO was also interested that the rights issue should meet with grand success. They therefore negotiated with the UTI and the UTI was agreeable to making payment of allotment money on behalf of any subscriber on the sale of NCDs to the UTI. But the price quoted by the UTI after a lon....
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....al act and the beneficiary of the transfer was not the UTI but JISCO. 4. The funds of JISCO itself have been utilised indirectly in subscribing to the rights issue of its own NCD. 5. The entire transaction was not at arm's length. It was a colourable device to evade future tax. With reference to the first ground, it was observed by the Tribunal that when the assessee-companies made application for NCD and paid the requisite sum of Rs.111 per NCD, the offer of allotment was issued to the assessee companies according to which all the assessees were asked to make a further payment at Rs.389 per NCD. As the arrangement was already fianlised with the UTI that they were to purchase the NCDs at Rs.389 per NCD, the assessee-companies gave effect to such arrangement. The UTI paid Rs.389 per debenture to JISCO and in turn the assessee-companies transferred their NCDs in the name of the UTI. Such transfers were also registered in the register of JISCO. Payment was made by the UTI to JISCO on behalf of the assessee-companies. So far as the second ground was concerned, it was noted that the view taken by the Revenue authorities was against the provisions of the issue itself. It was ....
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....terest of the assessee-companies who were promoter companies of JISCO. It also referred to the chart of yield obtained by the UTI and the assessee-companies and found that the UTI had got annual yield of about 25 per cent. Therefore, it was held that the transaction of selling NCDs at the face value of Rs.500 to the UTI at Rs.389 per debenture was not a colourable device and the ratio of McDowell's case [1985] 154 ITR 148 (SC), had no application. 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 done by the UTI, DSP Financial Consultancies Ltd. and Sri Ram Financial Services Ltd. respectively. In the case of the assessee-companies buy back was done by the UTI which could not be influenced by the terms of either the assessee-companies or JISCO. The Tribu....
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....ISCO which was a unilateral act on the part of the assessee-companies. It is the case like unclaimed credits/ debts. A sum of Rs.111 per NCD was capital investment in the hands of the assessee-company as the assessee-companies had shown it as investment and declared the loss as short-term capital loss while filing its return. The assessee-companies are investment companies of the jindal group. No definition of "investment company" exists in the statute. However, there are several definitions which have defined the term. "Financial investment company" as appearing in the Finance (No.2) Act, 1991, in section 2(9)(d) is "a company whose gross total income consists mainly of income which is chargeable under the heads 'Income from house property', 'Capital gains' and 'Income from other sources' or of income by way of interest on securities." The factual position so far as the scheme floated by Apollo Tyres, etc., is different. There was a device adopted by the group as a whole whereby JISCO who floated the NCDs had advanced the money to the assessee-companies through its associate concern, Sun Investment Ltd. and five other Bombay based companies who in turn subscribed to the preferenti....