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2012 (3) TMI 79 - HC - Income TaxWhether pending allotment of NCSD would qualify as commodities u/s 43(5) whether its sale is Speculative transaction or Capital loss - PCD issued to existing shareholders entitlement to get equity shares and NCD under finance scheme bank offered to pay for portion of PCD and buy NCD portion at discounted price assessee accounted for difference in price of NCD and price paid by bank as capital loss Revenue contending it to be speculative transaction as no delivery is effected - Held that - In present case, it was only NCSD, which is part of the PCD allotted in favour of the existing shareholder and then transferred to the bank, because the amount paid by the bank was treated as a loan to the existing shareholders and the said loan is treated as satisfied by issue of the NCSD to the bank.Therefore, the Tribunal has correctly held that there is an actual delivery and constructive delivery and they will not come within the purview of the speculative transaction . Further, NCSD cannot be purchased or sold before allotment. Hence, pending allotment, non-convertible portion does not exist as such as commodities Decided against the revenue.
Issues Involved:
1. Whether the loss incurred by the assessee in the sale of partly convertible debenture is a capital loss. 2. Whether there was delivery of share within the meaning of Section 43(5) of the Income-Tax Act, 1961. Detailed Analysis: Issue 1: Capital Loss or Speculative Loss The primary issue was whether the loss incurred by the assessee in the sale of partly convertible debentures (PCDs) should be classified as a capital loss or a speculative loss under Section 43(5) of the Income Tax Act, 1961. The Tribunal upheld the assessee's claim that the loss was a capital loss. The Revenue contended that the transaction fell within the purview of Section 43(5) and should be considered speculative. The Tribunal found that the transaction involved actual delivery and constructive delivery, thus classifying the loss as capital. The High Court agreed with the Tribunal's finding that the transaction did not fall under speculative transactions as defined by Section 43(5). Issue 2: Delivery of Shares The second issue was whether there was actual delivery of shares within the meaning of Section 43(5). The Tribunal concluded that there was both actual and constructive delivery. The High Court noted that the PCDs issued by M/s Tube Investments of India Limited and M/s Carborandum Universal Limited consisted of equity shares and non-convertible secured debentures (NCSDs). The Tribunal found that the NCSDs were initially allotted to the existing shareholders and then transferred to the bank, satisfying the requirement for actual delivery. The High Court confirmed this finding, stating that the transaction involved clear delivery and constructive delivery, thus not falling within the definition of speculative transactions. Detailed Transaction Analysis: The Tribunal and High Court examined the detailed procedure of the transaction: - The PCDs had a face value of Rs.100/- each, consisting of two parts: Part A (convertible portion) and Part B (non-convertible portion). - Shareholders paid Rs.62/- per PCD, and the bank paid Rs.38/- per PCD, treated as a loan to shareholders. - Upon allotment, Part A was converted into equity shares, and Part B (NCSD) was transferred to the bank. - The Tribunal held that the loss incurred due to the discount price at which the bank purchased the NCSDs was a capital loss, not speculative. Legal Interpretations: The High Court relied on the Supreme Court judgment in R.D. Goyal and Another v. Reliance Industries Limited, which stated that debentures are distinct from shares and stocks and do not fall within the definition of "commodity" or "shares" or "stocks" under Section 43(5). The Calcutta High Court's judgment in Commissioner of Income Tax v. Nirmal Trading Company was also cited, which held that letters of renunciation are neither "shares" nor "commodities," supporting the view that debentures do not fall within speculative transactions. Conclusion: The High Court concluded that the transaction involving non-convertible secured debentures did not fall within the definition of speculative transactions under Section 43(5). The Tribunal's order was confirmed, and the appeal by the Revenue was dismissed. The questions were answered in favor of the assessee, confirming that the loss was a capital loss and that there was actual delivery of shares.
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