2001 (6) TMI 170 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of the claim of business loss amounting to Rs. 34,12,695 incurred on the sale of 52,503 non-convertible portions of Partially Convertible Debentures (PCDs) of M/s. Ballarpur Industries Limited (BILT).

Detailed Analysis:

1. Disallowance of Business Loss:

Facts of the Case:
The assessee had certain shares of BILT and was offered the right to acquire 52,503 redeemable PCDs, comprising a convertible portion (Part A) and a non-convertible portion (Part B). The assessee paid Rs. 165 per debenture on application and surrendered Part B to Citi Bank, which paid Rs. 235 per debenture, resulting in no payment required on allotment. The assessee claimed a loss of Rs. 34,12,695 from the sale of Part B.

Assessing Officer's View:
The Assessing Officer (AO) did not accept the claim of loss, arguing that the assessee intended to retain Part A for acquiring shares in BILT, aiming for controlling interest. The AO noted that the assessee showed its shareholding as 'investment' and not 'stock-in-trade'. The AO argued that the loss on Part B was a constructive payment towards acquiring Part A and should be considered a capital loss.

CIT(A)'s View:
The CIT(A) noted that the assessee had not traded in BILT shares for 5-6 years, indicating an investment motive. The CIT(A) agreed with the AO that the transactions aimed at investment in Part A and that the loss on Part B should be considered a capital loss. However, the CIT(A) did not approve the AO's finding that Rs. 165 should be treated as the cost of Part A, noting that only Rs. 100 was shown as the cost of Part A in the scheme.

Assessee's Argument:
The assessee argued that Part A and Part B were distinct, with separate acquisition costs, and there was no case for mixing them. The assessee pointed out that it always held shares as stock-in-trade and that previous transactions in shares were considered on revenue account.

Revenue's Argument:
The Revenue argued that the right to contribute to a company's capital is a capital asset and cited several judgments to support this view. They contended that the assessee's control over BILT indicated that shares should be considered as investment, not stock-in-trade. They also argued that the results of transactions in shares should adjust the cost of original shares without any gain or loss.

Tribunal's Analysis:
The Tribunal found that neither the AO nor the CIT(A) challenged the genuineness of the transactions. It noted that the assessee was a dealer in shares and that previous transactions were considered on revenue account. The Tribunal held that Part A and Part B should be considered separately and that the loss on Part B was a trading loss. The Tribunal also noted that even if Part A was considered a capital asset, the loss on Part B should be treated as a revenue expense.

Conclusion:
The Tribunal reversed the orders of the lower authorities and directed that the loss of Rs. 34,12,695 claimed by the assessee in respect of Part B of the PCDs be allowed as a revenue loss. The appeal filed by the assessee was allowed.