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2013 (5) TMI 614 - AT - Income TaxValuation of shares - section 48 - Difference between value of share on the date of its allotment and the price of warrant paid as per letter of allotment - whether be treated as Long Term Capital Gain - CIT(A) deleted the addition - Held that - AO not only wrongly interpreted the provisions of the I.T.Act, but also over extended the meaning of the same, so as to bring the amount in dispute into the taxable income of the assessee without any legal basis. The conversion of warrant into shares by paying the remaining 90% amount was neither any extinguishment nor relinquishment of any rights in the assets. It may be observed that the assessee had purchased the warrants by paying 10% of the pre-determined price of the shares. There was an option for the assessee to get the said warrants converted into shares by paying 90% of the amount within the stipulated period, the non-payment of which would have resulted in forfeiture of the money. While computing the income of the assessee, the AO has wrongly and illegally interpreted proviso (iv) to section 48 of the I.T. Act. A bare perusal of the said proviso reveals that the same is attracted in case the shares, debentures or warrants are transferred by the assessee to some other person without receiving any consideration in terms of money and in that event market value of the asset on the date of such transfer is deemed to be the value of consideration received as a result of transfer. In the case in hand, the assessee has not transferred any warrant or share to any other person rather he has just exercised his option to purchase the shares at a stipulated rate by paying the remaining 90% amount, which in clear term falls in the definition of investment and not in the definition of sale or transfer on his part. - Decided in favor of assessee.
Issues:
1. Whether the addition of Rs. 9,45,00,000 as Long Term Capital Gain by the AO was justified. 2. Whether the conversion of warrants into equity shares amounts to transfer as per IT Act provisions. 3. Whether the AO's interpretation of section 2(47) and section 48 of the IT Act was correct. 4. Whether the alternative argument of taxability under section 28(iv) of the Act is applicable. Analysis: 1. The appeal was filed by the revenue against the CIT(A)'s order deleting the addition of Rs. 9,45,00,000 made by the AO as Long Term Capital Gain for A.Y. 2008-09. The AO considered the conversion of warrants into equity shares as a transfer under section 2(47) of the IT Act, resulting in a benefit of Rs. 9.45 crores to the assessee. However, the CIT(A) held that there was no transfer as the appellant merely exercised its option without any consideration received, thus deleting the addition. 2. The AO argued that the conversion of warrants into shares amounted to transfer as per IT Act provisions. The CIT(A) disagreed, stating that the appellant did not extinguish any rights over the warrants, but merely exercised an option embedded in the warrant itself. The shares were acquired as an investment, and the gain or fall in market value did not constitute a transfer. The CIT(A) emphasized that the AO wrongly used deeming provisions and misinterpreted the law, leading to the deletion of the addition. 3. The AO also considered taxability under section 28(iv) of the Act alternatively. However, the CIT(A) held that since the appellant did not receive any consideration convertible into money or any kind, the question of taxability under section 28(iv) did not arise. The AO's proposition to tax the appellant under section 28(iv) was deemed unjustified, further supporting the deletion of the addition. 4. The ITAT Mumbai, comprising Sanjay Arora and Sanjay Garg, JJ., dismissed the revenue's appeal after considering the arguments of both parties. The tribunal found that the AO's calculation of the amount as Long Term Capital Gain and interpretation of the IT Act provisions were incorrect. The conversion of warrants into shares was deemed an investment, not a transfer, and did not attract tax liability. Therefore, the appeal filed by the revenue was dismissed, upholding the CIT(A)'s decision to delete the addition of Rs. 9,45,00,000.
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