2010 (1) TMI 123 - HC - Income Tax

Capital loss on account of forfeiture of shares tax evasion - The assessee after making the initial payment could not make the balance payment and, therefore, M/s BLB Limited forfeited the amount of Rs.59,50,000/- earlier paid by the assessee. The assessee claimed this loss as short-term capital loss under the head capital gain . It was submitted on behalf of the assessee that the company had debited the loss to its capital account and not to the profit and loss account and consequently, there was no effect on the profit and loss account of the assessee company. The Assessing Officer, however, observed that the same had cast an effect on the short term capital gains of the assessee showing and the forfeiture of this amount in the manner indicated by the assessee was a tax-evasion tactic, prohibited by law. CIT(A) and ITAT has decided in favor of assessee held that - the forfeiture of the convertible warrant has resulted in extinguishment of the right of the assessee to obtain a share in BLB Limited. It is not a case where the asset itself has been extinguished or destroyed. A share in a company is nothing but a share in the ownership of the company. While the right of the assessee to share in the ownership of the company (BLB Limited) stands extinguished on account of the forfeiture, the company, with all its assets, continues to exist. The forfeiture only results in one less shareholder. It is not as if the asset in which a share was being claimed was also extinguished. - the question of whether forfeiture amounted to transfer, was not at all raised before the authorities below, hence not acceptable decided in favor of assessee

Summary

Issues:
1. Forfeiture of convertible warrants and its tax implications under the head "capital gain".
2. Interpretation of "transfer" under Section 45 of the Income Tax Act, 1961.
3. Whether forfeiture of convertible warrants amounts to a transfer of assets.
4. Admission of appeal based on the question of whether forfeiture constitutes a transfer.

Analysis:

1. The case involved the forfeiture of an amount towards convertible warrants by the assessee, claimed as a short-term capital loss. The Assessing Officer contended that the forfeiture was a tax-evasion tactic, leading to protective taxation of the amount in the hands of the assessee due to their position as Promoter Director in the issuing company.

2. The central issue revolved around the interpretation of "transfer" under Section 45 of the Income Tax Act, 1961. The Revenue argued that the forfeiture did not constitute a transfer of assets as the rights extinguished were not related to a transfer of capital assets. The Revenue relied on the Supreme Court's decision in Vania Silk Mills case to support their argument.

3. The Revenue sought to challenge the lower authorities' decisions favoring the assessee by contending that the forfeiture did not result in a transfer of assets as per Section 2(47) of the Income Tax Act. They argued that since the right was extinguished and the asset remained intact, forfeiture did not amount to a transfer.

4. The respondent/assessee opposed the admission of the appeal, citing that the question of whether forfeiture constituted a transfer was not raised before the lower authorities. They also highlighted the Supreme Court's decision in Grace Collis case, which clarified that the extinguishment of rights in a capital asset independent of transfer constituted a transfer.

5. The High Court dismissed the appeal, stating that no substantial question of law arose for consideration. They emphasized that the forfeiture of convertible warrants resulted in the extinguishment of the assessee's right to a share in the company, not the destruction of the asset itself. The Court aligned with the Supreme Court's broader interpretation of "transfer" in Grace Collis case and the Karnataka High Court's decision in BPL Sanyo Finance case.

In conclusion, the judgment clarified the tax implications of forfeiture of convertible warrants, emphasizing the broader interpretation of "transfer" under the Income Tax Act and upholding the lower authorities' decisions in favor of the assessee.