2015 (11) TMI 1215 - HC - Income Tax

Sale consideration received by transfer of shares and sale of rights entitlement of partly convertible of partly convertible Debentures (PCDs) - ITAT held as income from capital gains and not income from business - Loss on sale of entitlement to acquire partly convertible debentures - ITAT held assessee is entitled to set off the alleged loss from the capital gains/income earned by the assessee - Held that - The Assessee had held the shares of JISCO and JSL as stock-in-trade in its final accounts as on 31st March, 1991 and had valued the same at cost or market price whichever was lower. According to the Assessee, its board of directors decided to retain the said shares on long term basis and consequently passed a resolution on 4th April, 1991 that the shares held by it be treated as investment/capital. The AO held that the funds received from sale of shares had been transferred to related companies within the group. The AO further held that the transaction of renunciation of rights were a sham transactions and a device to purchase notional losses. At the outset, the learned counsel for the parties submitted that the material facts and issues in the present appeal were similar to the issues involved in Commissioner of Income Tax Delhi-I v. M/s Abhinandan Investment Ltd. - Decided in favour of the Revenue and against the Assessee.

Summary

Issues:
1. Determination of whether the sale consideration from the transfer of shares and sale of rights entitlement of partly convertible debentures constitutes income from capital gains or income from business.
2. Assessment of whether the Assessee incurred a loss on the sale of entitlement to acquire partly convertible debentures and if the Assessee is entitled to set off the alleged loss from the capital gains/income earned.

Analysis:
1. The Revenue appealed against the ITAT's order, challenging the characterization of the sale consideration as capital gains instead of business income. The Assessee, an investment company, declared income and claimed a carry forward of short-term capital loss. The Assessee sold shares and renounced entitlement to subscribe to partly convertible debentures, claiming a loss on renunciation. The Assessee argued that the cost of acquisition of rights to subscribe to PCDs was the diminution in the value of share holdings. The AO contended that the transactions were sham and a device to create notional losses.

2. The Assessee held shares as stock-in-trade and later treated them as investments. The AO alleged that funds from share sales were transferred within the group, and the renunciation transactions were artificial. The parties noted similarities to a previous case, Commissioner of Income Tax Delhi-I v. M/s Abhinandan Investment Ltd. The judgment in that case was deemed applicable to the present appeal, ruling in favor of the Revenue and against the Assessee.

3. Consequently, the High Court allowed the appeal, leaving the parties to bear their own costs. The judgment clarified the nature of the sale consideration and the treatment of losses incurred by the Assessee, aligning with the decision in a similar precedent.