2015 (11) TMI 1285 - 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. Determination of income as capital gains or business income from the sale of shares and rights entitlement of debentures.
2. Allowability of loss incurred on the sale of entitlement to acquire debentures against capital gains/income earned.

Analysis:
1. The High Court addressed the first issue concerning the nature of income derived from the sale of shares and rights entitlement of debentures. The Appellant contested the ITAT's decision that the income was capital gains, not business income. The Court examined the facts, including the Assessee's renouncement of rights to subscribe to debentures, and the cost incurred. The Court clarified that the first question did not arise in the case.

2. Moving on to the second issue, the Court analyzed the allowability of the loss claimed by the Assessee on the sale of the entitlement to acquire debentures against the capital gains/income earned. The Assessee argued that the loss was genuine and should be set off against the income. However, the AO disallowed the notional cost of acquisition claimed by the Assessee, stating that the loss was only notional as the stock's value was reflected in the closing stock valuation. The CIT(A) allowed the Assessee's appeal, citing a decision by the Bombay High Court.

3. The Revenue appealed to the ITAT, which rejected the appeal. Subsequently, the Revenue filed the present appeal before the High Court. The Court noted that the issues in this case were similar to another case, and a decision in that case would apply here. Referring to their decision in the related case, the Court ruled in favor of the Revenue and against the Assessee.

4. Consequently, the High Court allowed the appeal filed by the Revenue, leaving the parties to bear their own costs. The judgment clarified the nature of income from the sale of shares and debenture entitlements, as well as the treatment of losses incurred in such transactions against capital gains or income.