TaxTMI 
TaxTMI 
TaxTMI 
2022 (7) TMI 262
X X X X Extracts X X X X
X X X X Extracts X X X X
....r personal estate properties. The Assessing Officer noted that as per computation of income, the assessee company has shown business loss of Rs. 29,690/- and short term capital loss of Rs. 76,12,50,000/-. With regard to the transaction resulting in short term capital loss, the note 20 of the note to financial statement for the year ended 31.03.2012 read as under:- "During the previous period ended 31.03.2011, the company had paid Rs. 76,12,50,000/- as upfront amount for part payment against 10,50,00,000/'- warrants of Indiabulls Power Ltd. (IPL) which, if exercised, would have entitled the Company to an equal number of equity shares of IPL fully paid up of the face value of Rs. 2 each, anytime after November 30, 2010 but no later than May 29, 2012, in accordance with the terms of issue of such warrants. During the year ended 31.03.2012 the company has conveyed its unwillingness to IPL to excise the warrant of IPL per se consequently the upfront amount of Rs. 76,12,50,000/- paid by the company towards part payment against the said warrant was forfeited by IPL and the same was charged to the profit and loss account as loss on share warrants." 4. The Assessing Officer asked t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ucture Pvt. Ltd. Thereafter, the Assessing Officer noted the following chronology of dates:- Sl. No. Particulars Date 1 Decision of investment 07.10.2010 2 Date of taking loan 29.11.2010 3 Date of investment in share warrant of IPL 29.11.2010 4 Date of Board meeting for unwilling to exercise share warrant of Indiabulls Power Ltd. 17.11.2011 5 Date of letter of unwilling to exercise Share warrant of Inidabulls Power Ltd. 18.11.2011 6. The Assessing Officer referred to the Board resolution dated 17.11.2011 for not exercising the option. The Assessing Officer was of the opinion that the transactions were pre-decided for making investment of Rs. 76,12,50,000/- with Indiabull Power Ltd. Thereafter the Assessing Officer referred to warrant certificate and noted that the assessee company was entitled to purchase one equity share of India bulls Power Ltd. having face value of Rs. 10/- by paying in full the exercise price of Rs. 28/- (as reduced by the upfront money of Rs. 7.25 per warrant already paid) for each warrant exercised at any time on or after 30.10.2010 but not later than 29.05.2012. The assessee company however chose to forego its right to exercise the convert....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ould fall within the ambit of section 2(47) and consequently forfeiture of shares would be allowed as a capital loss. Further, attention of your goodself is invited to the law pronounced by Jurisdictional High Court of Delhi in the case of CIT vs. Shri Chand Ratan Bagri TTA 31/2010 (Copy attached). In the said case, the assessee had subscribed towards 10 lakhs preferential convertible warrants issued by M/s. BLB Limited. The assessee after making the initial payment of Rs. 59.5 lakhs could not make the balance payment and therefore, M/s. BLB Limited forfeited the amount of Rs. 59.5 lakhs earlier paid by the assessee. The assessee claimed this loss as short term capital loss under the head "capital gain". It was submitted on behalf of the assessee that the company had debited loss to its capital account and not to the profit and loss account and consequently, there was no effect on the profit and loss account of the assessee company. The Assessing Officer however, observed that the same had cast an effect on the short term capital gains of the assessee showing and the forfeiture of this amount in the manner indicated by the assessee was a tax evasion tactic, prohibited by law, The....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tal loss to the assessee." "With regard to the extinguishment of any rights, we may profitably refer to the judgment of the Supreme Court in the case of Commissioner of Income-tax vs. M/s. Grace Collis and Others". Considering the legal position emerging from the above discussions, it is clear that the forfeiture of share warrant money is nothing but transfer and hence, the amount of loss incurred is duly allowable as short term capital loss." 7. The Assessing Officer observed that he has carefully considered the same and the case laws are distinguishable without pointing out the reasons. He observed that this is not genuine transaction and the transactions are coloured in the nature to pass on the amount in question to Indiabulls Power Ltd. in disguise of the convertible warrants. The Assessing Officer enquired from the assessee that why the share warrants were not sold. The Assessing Officer noted the assessee's response in this regard is as under:- "During the financial year 2010-11, Indiabulls Power Ltd. proposed to allot 105,000,000 share warrant to the assessee, which upon conversion, would have entitled the assessee to acquire an expel no of equity shares of the c....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... He further observed as under:- "7.1. It would be further interesting to see the allotment of total 42 crore convertible warrants by Indibulls Power Ltd. Following is the table which shows that name of allottee, number of warrants allotted and amount: Name of the allottee Number of warrants Total amount @ Rs.7.25 per warrant Azalea Infrastructure Pvt. Ltd. 15,00,00,000 Rs.108,75,00,000 Gloxinia Infrastructure Pvt. Ltd. 6,00,00,000 Rs.43,50,00,000 Jarul Infrastructure Pvt. Ltd. 10,50,00,000 Rs.76,12,50,000 Alona Infrastructure Pvt. Ltd. 10,50,00,000 Rs.76,12,50,000 Total 42,00,00,000 Rs.304,50,00,000 Thus, the entire amount of Rs. 304.50 crores borrowed by Chloris Properties Ltd. from Indiabulls Infrastructure Ltd. has actually been invested in 42 crores convertible shares warrants of Indiabulls Power Ltd." 9....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Indiabulls Power Ltd. as capital receipt. Thereafter, the AO referred to bond results of Rattan India Power Ltd. and observed as under:- "It is interesting to note that the entire investment of Rs. 304.50 crores has been forfeited by Rattan India Power Ltd. on a single day i.e. 30.11.2010 thereby forfeiting the entire amount invested by all the four companies. As if all the four companies have simultaneously decided to not to exercise the option of conversion before 30.11.2010 even though they were entitled to exercise its option till 29.05.2012. M/s. Indiabulls Power Ltd. (Now Rattan India Power Ltd.) has also by a single resolution dated 19.11.2011 forfeited the entire amount of Rs. 305.50 crores and has shown as a capital receipt." 11. Hence, the Assessing Officer held that the entire transaction is actually a conduit for transfer of the amount to credit the amount as a capital receipt in the books of Indiabulls Power Ltd. (Now Rattanlndia Power Ltd.) The Assessing Officer referred to the decision of the Hon Tale Supreme Court in the case of McDowell and Co. Limited vs. CIT 154 ITR 148 (SC) and other decision in this regard and concluded as under:- "It has also been observ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... agent and all other related and ancillary objects. The AR has submitted that during FY 2010-11, Indiabulls Power Limited ("IPL") proposed to allot 42,00,00,000 convertible (non-transferrable) warrants representing equal number of equity shares of IPL having face value of Rs. 10 per share at a conversion price of Rs. 29 per share. As per the terms of allotment, an upfront payment of 25% of conversion price i.e. Rs. 7.25 per share was required to be made by allottees and the balance was payable at the time of exercise of option i.e. within eighteen months from the date of allotment. The above mentioned convertible warrants were issued by IPL to the following 4 allottees: Name of the allottee Number of warrants Total amount paid upfront @ Rs.7.25 per warrant (Amount in Rs.) Azalea Infrastructure Pvt. Ltd. 15,00,00,000 Rs.108,75,00,000 Gloxinia Infrastructure Pvt. Ltd. 6,00,00,00....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e appellant has also explained in earlier parts of this submission that as per provisions of section 2(47) of the Act, the forfeiture of share warrants representing a right in IPL's ownership represents extinguishment of asset (being the right), such forfeiture results in transfer u/s. 2(47) of the Act, thereby resulting in short term capital loss in the hands of the appellant. AO In the assessment order, the AO disallowed the short term capital loss of Rs. 76,12,50,000/- claimed by the appellant by treating the transaction as a sham transaction. In the assessment order, the AO has observed that the investment by appellant into IPL and consequent forfeiture was a colourable device used by the appellant to camouflage the credit of amount to IPL as a capital receipt to avoid the test of section 68 of the Act; the appellant company acted as a conduit to the transaction to provide ultimate benefit to IPL; since the appellant company did not wait till end of conversion period to convey unwillingness, the said forfeiture was pre-decided; even if the appellant company did not want to invest further in the shares of IPL, then the unwillingness should have been expressed in May 2812....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee submitted that assessing officer has tried to sit into the shoes of a businessman and decide what is prudent. He submitted that this is not at all legally sustainable. He submitted that all the necessary details were available before the assessing officer. He did not find any fault therein. On the basis of conjectures and surmises he had made the disallowance. He submitted that on identical facts in case of another company M/s. Azalea Infrastructure Pvt. Ltd. which has also similarly contributed to Indiabulls Power Ltd. and has suffered similar loss the claim was duly allowed by the ITAT. Hence, he submitted that the issue is in fact covered by the ITAT decision on similar facts. Furthermore learned counsel of the assessee summarised in submission as under:- 1. Justification with regard to decision of investment and decision of mot exercising: Share Price Trend: i. Oct 2009 to Nov 2010: At the time of investment i.e. on 30.11.2010, share Price of IPL (listed on NSE and BSE) in last 12 months was ranging from Rs. 45.5 per share to Rs. 29.6 - refer page 15-19 of assessment order where the Ld. AO has specifically given a table showing historical data of share prices of IP....
X X X X Extracts X X X X
X X X X Extracts X X X X
....only prudent and rational and in accordance with economic indicators and market trends. 2. Prices are not controlled or manipulated by Assessee: IPL is a listed and publicly traded company on NSE and BSE and its prices are available on public domain. The Assessee has no control over its price of shares.-refer page 114, 214, 225, 237 of PBK and page 15 of assessment order 3. Shares were non transferrable and could not have been sold in open market to recover its money-refer para 6.2 at page 12 of assessment order 4. Exercising the option would have resulted in greater loss and no rational person would have exercised the option: Shares in open market were available for Rs. 10 per share then why would the Assessee pay balance amount of Rs. 21.75 per share. Assessee also submitted before the Ld. AO the computation of loss if option would have been exercised-refer page 43 of PBK 5. STCL not set off - No benefit obtained: Such STCL not set off against any CG and remains outstanding. Hence, no benefit is derived-refer return of Income of Assessee for AY 2020-21 at Annexure 2. 6. No restriction on obtaining loam from Holding Company: There is no legal restriction on obtaining a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt to Heliotrope Real Estate Put. Ltd.-Pg. 84 of PBK; v. Confirmation dated 20th March 2014 by Heliotrope Real Estate Put. Ltd. in respect of amount lent to Assessee-Pg 36 of PBK, vi. Audited Financials of Assessee - Refer note 5, 9, 10, 20, 21 at pages 5, 9, 10, 11, 12, 13 of PBK vii. Audited financials of IPL for AY 2012-13-refer page 92, 94, 95, 99, 100, 101, 108, 113, 114, 121, 123, 126, 132, 133, 135 viii. Audited Financials of IPL for AY 2011-12 - refer page 142, 144, 156, 167, 168, 179 of PBK ix. Audited Financials of Heliotrope Real Estate Put. Ltd.-refer note 6, 8, 10, 22 at page 58, 63, 64, 67 of PBK x. Audited Financials of Chloris Properties Limited-refer note 3 and 23 at page 74, 78, 81, 82 of PBK xi. Board Resolutions dated 7th October 2010 of Assessee regarding the investment-refer page 54 of PBK xii. Board Resolution dated 17th November 2011 of Assessee regarding decision to not exercise the option of conversion and regarding forfeiting the upfront money-refer page 55 of PBK xiii. Board Resolutions of IPL dated 19th November 10 regarding issue of share warrants and their terms and conditions. Provisions of Income tax Act, Companies Act, article of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....such transactions are to be treated as sham transaction are mere allegations and bereft of any merits: and no cogent material to substantiate this allegation is on record. * It is for the holder of the shares and not for the revenue to decide when to sell the shares held by it; * There is no provision in the Act which would prevent the assessee from selling loss-making shares; * If the sale of shares was not illegal, it could have been made to anyone, including a group company and it was immaterial that the purpose of sale of shares was to reduce the outstanding liabilities of the assessee. It was also absolutely immaterial that the liabilities of the assessee were towards group companies. Similarly, it was also immaterial that the shares sold by the assessee were of another group company. It was also immaterial as to who was the purchaser of the shares, so long as the shares were not sold at a price which was higher or lower than their fair price and there was no restriction on sale of such sha res to a group company. * Neither the assessee nor the amalgamated company adjusted the capital loss on account of sale of those shares against any long-term capital gain. No tax be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the extinguishment of rights in a capital asset distinct and independent of such extinguishment consequent upon the transfer thereof Conclusion: It is therefore prayed that the disallowance be deleted." 16. We have carefully considered the submissions and perused the records. We find that in this case assessee company has suffered short-term capital loss which arose out of forfeiture of share warrant money. It is not the case of the assessing officer that the legal claim of short-term capital loss arising out of forfeiture of share warrant money is not legally sustainable. Rather assessing officer in the beginning has questioned the wisdom of assessee is investing. For this he has referred to the share price movement of the investing company. Despite noting that prices were touching Rs. 28, he found Rs. 29 investment a wrong decision. His inference in this regard is not correct as the price movement by no stretch of imagination point out that investment was in a bogus or penny stock company. Further, it is settled law that Assessing Officer cannot sit in the shoes of businessman and decides the prudence of business decision. Thereafter Assessing Officer has wondered why instead ....