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Issues Involved:
1. Nature of the transaction involving sale of warrants. 2. Assessment of the transaction as capital gains or speculation business. 3. Deduction under section 80M. Detailed Analysis: 1. Nature of the Transaction Involving Sale of Warrants: The assessee sold 4 crores warrants of Essar Shipping Ltd. to its wholly owned subsidiary, Shubhangi Investments Trading Ltd., for Rs. 240 crores. The assessee claimed that the gain from this transaction was not taxable as it was a transfer covered by section 47(iv) of the Act. The cost of acquisition of the warrants was considered 'Nil' based on the Supreme Court judgment in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294, and thus no capital gains were computable. The Assessing Officer accepted this contention and completed the assessment under section 143(3) of the Act. 2. Assessment of the Transaction as Capital Gains or Speculation Business: The Commissioner of Income-tax, exercising powers under section 263, opined that the order framed by the Assessing Officer was erroneous and prejudicial to the interest of the Revenue for several reasons: - The warrants conferred only a contingent right to subscribe to shares and could be termed speculative, thus the profit should be taxed as speculation profit. - The Assessing Officer failed to examine how the warrants were shown as assets in the balance-sheet without any value and did not investigate the issuance and transfer details. - The nature of the transaction (capital gains or speculation business) needed thorough examination. The Commissioner issued a show-cause notice to the assessee, who responded that the warrants constituted an asset and their sale resulted in capital gain. The assessee argued that since the warrants were sold to a subsidiary, any profits would not be taxable under section 47(iv). The Commissioner, however, concluded that the transaction was a deliberate tax planning strategy within a group of companies and that the warrants had an embedded cost, including an interest-free refundable advance of Rs. 4.5 crores. The Commissioner directed the Assessing Officer to complete a de novo assessment after affording the assessee an opportunity. 3. Deduction Under Section 80M: The Commissioner noted that the deduction under section 80M was computed at Rs. 3.2 crores, but no dividend was assessed under "Income from other sources." The Commissioner highlighted that the maximum deduction entitled would be Rs. 1.44 crores based on the dividend declared by the assessee, resulting in an excess deduction of Rs. 2.04 crores. The assessee argued that this matter was already before the CIT(A) and should not be considered under section 263. Tribunal's Decision: The Tribunal found that the Assessing Officer had examined the transaction and the claims of the assessee, including the application of section 47(iv) and the cost of acquisition being 'Nil'. The Tribunal noted that the Assessing Officer had issued detailed questionnaires and reviewed various documents and explanations provided by the assessee. The Tribunal concluded that the Assessing Officer's order was not erroneous or prejudicial to the interest of the revenue, as the transaction was adequately explained and documented. The Tribunal agreed with the assessee that the right to apply for shares constituted a capital asset and that the provisions of section 47(iv) applied. However, the Tribunal upheld the Commissioner's direction regarding the deduction under section 80M, allowing the Assessing Officer to verify and correct any incorrect allowance. Conclusion: The appeal was partly allowed. The Tribunal held that the Assessing Officer's order regarding the sale of warrants was not erroneous or prejudicial to the revenue. However, the Tribunal sustained the Commissioner's order concerning the deduction under section 80M, requiring verification and correction by the Assessing Officer.
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