2003 (1) TMI 236 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 10,00,000 received on sale of detachable warrants to business income.
2. Classification of detachable warrants as stock-in-trade or capital assets.
3. Determination of cost of acquisition for detachable warrants.
4. Applicability of various legal precedents to the case.

Issue-wise Detailed Analysis:

1. Addition of Rs. 10,00,000 Received on Sale of Detachable Warrants to Business Income:
The assessee contested the addition of Rs. 10,00,000 received from the sale of 25,000 detachable warrants of Reliance Industries Ltd. to its business income. The assessee argued that this amount was a capital receipt and not liable to tax. However, the Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) (CIT(A)) treated this amount as a trading receipt and included it in the business income under section 28 of the Income-tax Act.

2. Classification of Detachable Warrants as Stock-in-Trade or Capital Assets:
The assessee claimed that the detachable warrants were capital assets, citing the Punjab & Haryana High Court decision in the case of HariBros. (P.) Ltd. The AO and CIT(A) disagreed, stating that since the debentures were treated as stock-in-trade, the detachable warrants issued along with them also formed part of the stock-in-trade. The Tribunal upheld this view, noting that the debentures and warrants were part of the same transaction and could not be separated for tax purposes.

3. Determination of Cost of Acquisition for Detachable Warrants:
The assessee argued that the cost of acquisition for the detachable warrants was Nil, referencing the Supreme Court decision in CTT v. B.C. Srinivasa Setty. The AO countered this by attributing a cost of Rs. 2.5 per detachable warrant, derived from the difference between the issue price of the debentures (Rs. 37.50) and their sale price (Rs. 35). The Tribunal agreed with the AO, noting that the cost of the debentures included the cost of the detachable warrants.

4. Applicability of Various Legal Precedents to the Case:
The assessee relied on several court cases to support its position, including B.C. Srinivasa Setty, CIT v. Modiram Laxmandas (P.) Ltd., Addl. CIT v. K.S. Sheik Mohideen, and Kalyani Exports & Investments (P.) Ltd. The Tribunal found these cases inapplicable, as they dealt with the computation of capital gains, whereas the current case involved the classification of detachable warrants as trading assets. The Tribunal also referenced the Supreme Court decision in CIT v. Kunji Lal Gupta, which held that the sale proceeds of bonus shares held as stock-in-trade were revenue receipts, drawing a parallel to the current case.

Conclusion:
The Tribunal upheld the decision of the CIT(A) and AO, confirming that the detachable warrants were part of the stock-in-trade and that the Rs. 10,00,000 received from their sale was a trading receipt taxable under section 28 of the Income-tax Act. The appeal was dismissed.