2005 (3) TMI 392 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of short-term capital loss on renunciation of right to apply for partly convertible debentures (PCDs).
2. Disallowance of short-term capital loss on sale of non-convertible portion of PCDs.

Issue-wise Detailed Analysis:

1. Disallowance of Short-term Capital Loss on Renunciation of Right to Apply for PCDs:

The main contention revolves around the disallowance of a short-term capital loss of Rs. 25,88,784 claimed by the assessee. The assessee had renounced its right to apply for 1,15,000 PCDs in favor of LIC Mutual Fund (LICMF) and sold the non-convertible portion of 785 PCDs. The Assessing Officer (AO) initially accepted the claim but later reopened the assessment, disallowing the loss on grounds that the assessee did not disclose details of the loss in the return.

The assessee argued that the right to acquire PCDs is a capital asset, and the loss incurred on the transfer of this right is chargeable under 'capital gains.' The AO, however, viewed that the payment of Rs. 22.37 per PCD to LICMF was for acquiring a future right to purchase shares, thus considering it as capital expenditure for future acquisition rather than a capital loss.

The CIT(A) upheld the AO's decision, stating that the loss was neither allowable as a capital loss nor allocable towards the cost of shares to be acquired in the future. The CIT(A) reasoned that the payment was an expenditure to ensure subscription of PCDs of a group company, categorizing it as a capital expenditure for the benefit of the group company.

The Tribunal examined whether the payment of Rs. 22.37 per debenture could be allowed as a capital loss under 'capital gains.' It concluded that the right to subscribe to PCDs is a capital asset, and renunciation of such right constitutes a transfer. However, the assessee did not receive any consideration for this transfer, and the payment made to LICMF was linked to the future acquisition of shares, thus forming part of the cost of shares rather than a short-term capital loss. The Tribunal held that the payment was inextricably linked to the option to buy back shares from LICMF at a future date, and therefore, the loss of Rs. 25,72,550 was rightly disallowed by the lower authorities.

2. Disallowance of Short-term Capital Loss on Sale of Non-convertible Portion of PCDs:

The assessee also claimed a loss of Rs. 16,234 on the sale of the non-convertible portion of 785 PCDs. The Tribunal agreed with the assessee on this point, stating that the sale of the non-convertible portion of the debenture was a sale of a capital asset against consideration. The assessee had acquired 785 PCDs out of its own funds and sold the non-convertible portion, thus satisfying all conditions for computing capital loss under 'capital gains.' The Tribunal reversed the CIT(A)'s order on this aspect and allowed the loss of Rs. 16,234 as short-term capital loss.

Conclusion:

The Tribunal concluded that the payment of Rs. 22.37 per debenture was linked to the future acquisition of shares and could not be considered as a short-term capital loss. The loss of Rs. 25,72,550 on renunciation of the right to subscribe to PCDs was disallowed. However, the loss of Rs. 16,234 on the sale of the non-convertible portion of 785 PCDs was allowed as a short-term capital loss. The appeal was partly allowed.