2000 (5) TMI 192 - AT - Income Tax

Summary

Issues Involved:
1. Determination of the cost of Non-convertible Debentures (NCDs) when sold with detachable warrants.
2. Attribution of value to detachable warrants in computing capital gains.
3. Legal precedents and their applicability to the valuation of warrants and NCDs.

Detailed Analysis:

1. Determination of the cost of Non-convertible Debentures (NCDs) when sold with detachable warrants:
The primary issue in this case was whether the cost of NCDs, which were sold with detachable warrants, could be taken as anything other than Rs. 100, which was the subscription amount paid by the assessee. The assessee, an investment and finance company, claimed a short-term capital loss of Rs. 1,49,98,400 on the sale of debentures from Kirloskar Oil Engines Ltd. (KOEL). The Assessing Officer (A.O.) noted that the debentures were sold without attributing any value to the detachable warrants, which were retained by the assessee. The A.O. argued that the cost of the debentures should exclude the value of the warrants, which were tradeable and had a separate market value.

2. Attribution of value to detachable warrants in computing capital gains:
The A.O. determined that the cost price of Rs. 100 included the value of two warrants, which were tradeable and had a market value of Rs. 20 per warrant. Consequently, the A.O. calculated the cost of each debenture at Rs. 65 (Rs. 100 - Rs. 35) and computed a short-term capital gain of Rs. 75,41,600 instead of the loss claimed by the assessee. The CIT (Appeals) upheld the A.O.'s view, asserting that the warrants had inherent value as they provided the right to purchase shares at a price below the market value. However, the assessee argued that no cost should be attributed to the warrants as they were merely inducements and did not have a separate identifiable cost.

3. Legal precedents and their applicability to the valuation of warrants and NCDs:
The assessee's counsel cited several legal precedents, including CIT v. Modiram Laxmandas (P.) Ltd., where the Bombay High Court held that assets like import licenses, given as incentives, had no cost of acquisition. The counsel argued that the warrants, similar to import licenses, could not be acquired at the time of allotment by paying an identifiable price and hence should be considered to have no cost. The counsel also cited decisions from various High Courts supporting this view.

The Department's representative, however, argued that the warrants were valuable assets and their cost should be considered in computing capital gains. He cited several judgments, including CIT v. Vania Silk Mills (P.) Ltd. and Syndicate Bank Ltd. v. Addl CIT, which held that rights associated with capital assets should be considered in their valuation.

Judgment:
The Tribunal concluded that the warrants, although tradeable and valuable, conferred only a future, uncertain, and inchoate right, not an existing right. They were considered incentives or inducements for subscribing to the NCDs and had no acquisition value before the introduction of section 55(2)(aa)(iiia) by the Finance Act, 1995. The Tribunal held that the cost of acquisition of the warrants was 'Nil' and that the entire Rs. 100 paid by the assessee was for the NCDs. Consequently, the assessee's computation of the short-term capital loss was upheld, and the appeal was allowed.

The Tribunal also noted that the analogy of averaging the cost over original and bonus shares did not apply to this case, as the warrants and NCDs were issued simultaneously, and the warrants could not be acquired independently of the NCDs. The Tribunal distinguished the cited Supreme Court decisions on the grounds that the items in those cases could be acquired independently, unlike the warrants in this case.

Conclusion:
The appeal was allowed, with the Tribunal holding that the cost of acquisition of the NCDs was Rs. 100 each, as claimed by the assessee, and no separate cost was attributable to the warrants. The alternative contention regarding the date of acquisition of warrants was not addressed, as the main ground was decided in favor of the assessee.