2015 (11) TMI 1284 - HC - Income Tax

Sale consideration received by the assessee by transfer of shares and sale of rights entitlement of Partly Convertible Debentures (PCDs) - income from capital gains OR income from business? - Held that - As relying on Commissioner of Income Tax Delhi-I v. M/s Abhinandan Investment Ltd. 2015 (11) TMI 1219 - DELHI HIGH COURT the Assessee appears to have claimed a change in the nature of his holdings depending on the tax incidence in the year in question; in AY 1988-89 the Assessee reflected to shares of JISCO purchased in that year at below cost treating them to be stock-in-trade and in AY 1992-93 sought to treat them as investments to avoid tax on the gains. None of the Assessee s actions in the previous year 1991-92 indicated any change in the Assessee s intention regarding its holding in shares and debentures. The ITAT observed that there were hardly any transactions in the past and on that basis concluded that the Assessee was in substance an investment company. However, the ITAT failed to appreciate that the Assessee had consciously held itself out as a company engaged in sale and purchase of shares; it was also assessed on the income earned from business and also claimed deduction on account of business expenses incurred by the Assessee. The shares in question were, concededly, held as stock-in-trade. All that happened in the year in question is that the Assessee sold substantial shares and renounced rights to subscribe to PCDs contrary to its stated intention of holding the same on a long term basis. In view of the above, the income received by the Assessee from sale of shares of JSL and the renunciation of rights to subscribe to the PCDs of JISCO was rightly held by the AO as business income and not income under the head capital gains. As discussed later, the Assessee could not have claimed any business income on account of renunciation of rights to subscribe to the PCDs. - Decided against the Assessee.

Summary

Issues:
1. Classification of sale consideration from transfer of shares and sale of rights entitlement of Partly Convertible Debentures (PCDs) as income from capital gains or income from business.
2. Allowance of loss on sale of entitlement to acquire PCDs and its set off against capital gains/income earned.

Analysis:
1. The High Court dealt with the issue of whether the sale consideration received by the assessee from the transfer of shares and sale of rights entitlement of Partly Convertible Debentures (PCDs) should be classified as income from capital gains or income from business. The Assessee claimed a capital gain from the sale of shares and also claimed a loss on the sale of entitlement to subscribe to PCDs. The court examined the nature of these transactions and the treatment of shares as capital assets by the Assessee. It was observed that the Revenue considered the transactions as a sham to avoid tax payment. Ultimately, the court held in favor of the Revenue, classifying the income as capital gains and not income from business.

2. The second issue revolved around the allowance of the loss claimed by the Assessee on the sale of entitlement to acquire PCDs and its set off against the capital gains/income earned. The Assessee sought to set off the substantial loss from the sale of PCD entitlement against the capital gains declared from the sale of shares. The court analyzed the computation of the loss claimed by the Assessee and the related transactions between the Assessee and related companies within the Jindal Group. Both the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) viewed the transactions as a device to avoid tax payment. The court, in line with its decision in a related case, ruled in favor of the Revenue, disallowing the set off of the claimed loss against the capital gains.

In conclusion, the High Court allowed the appeal filed by the Revenue, holding in favor of the Revenue and against the Assessee. The court found the transactions to be a means to avoid tax payment and disallowed the set off of the claimed loss against the capital gains. The parties were directed to bear their own costs, and the judgment was delivered in conjunction with a related case involving similar issues.