2003 (1) TMI 56 - HC - Income Tax

Whether, Tribunal was right in allowing the loss suffered on renouncing its rights entitlement to convertible debentures of Larsen and Toubro Ltd., ignoring the fact that the assessee was in receipt of Rs. 62,997 on account of sale of rights which was credited in the profit and loss account which was business income as these rights debentures were offered to the assessee in lieu of holding shares which were held as stock-in-trade and therefore any realisation/income which arose on account of stock-in-trade was definitely by way of income? - We have examined the balance-sheet, the profit and loss account and the computation tendered by the assessee before the Assessing Officer, which indicates that the old shares held as stock-in-trade were valued at cost and not at market price. Mr. R.V. Desai, learned senior counsel appearing on behalf of the Department, fairly conceded that the old shares were valued at cost and not at market price. - the appeal filed by the Department is dismissed.

Summary

Issues:
- Interpretation of tax laws regarding treatment of loss on renouncing rights entitlement to convertible debentures
- Applicability of judgments in similar cases to determine tax liability

Analysis:

Issue 1: Interpretation of tax laws regarding treatment of loss on renouncing rights entitlement to convertible debentures

The case involved an appeal under section 260A of the Income-tax Act, 1961, for the assessment year 1990-91. The Department contested the Tribunal's decision to allow the loss suffered on renouncing rights entitlement to convertible debentures of a company, arguing that the amount received from the sale of rights should be considered business income as the debentures were offered in lieu of holding shares that were treated as stock-in-trade. The Assessing Officer initially disallowed the claim for loss under "Capital gains," stating that since the old shares were held as stock-in-trade, capital loss did not apply. The Commissioner of Income-tax (Appeals) also rejected the claim, emphasizing the difference in the nature of shareholding between the present case and the precedents cited by the assessee.

Issue 2: Applicability of judgments in similar cases to determine tax liability

The assessee relied on two judgments, one by the Supreme Court and another by the Bombay High Court, to support their claim for setting off the loss on the sale of rights debentures against the depreciation in the value of old shares. The Commissioner of Income-tax (Appeals) distinguished these judgments, stating that the shares in the present case were held as stock-in-trade and not as investments, leading to the dismissal of the appeal. However, the Tribunal ruled in favor of the assessee, citing the precedents and allowing the appeal. The High Court examined the facts and clarified that the old shares were valued at cost, not market price, making the judgment of the Bombay High Court in K.A. Patch's case applicable to the case at hand.

Conclusion:

The High Court dismissed the Department's appeal, affirming that the old shares were valued at cost and not market price, aligning with the principles established in the K.A. Patch case. The judgment highlighted the correct valuation method and upheld the Tribunal's decision, emphasizing the application of relevant legal precedents in determining tax liability.