2012 (9) TMI 444 - HC - Income Tax

Disallowance of loss on the sale of debentures - non-convertible Part B of the 15% redeemable partly convertible debentures - ITAT treated it as part of the cost of acquisition of the convertible Part A of the debentures - Held that - A separate treatment given by the assessee to its two separate types of property is not illegal and, therefore, it cannot affect the assessee s interest in any adverse manner whether for tax purposes or otherwise - that convertible Part A of the PCD was severable from the non-convertible Part B which was transferred at a loss by the assessee to Citi Bank and therefore the loss suffered could not be construed to be a part of the cost of acquisition of convertible Part A of the PCD retained by the appellant and thus the claim of loss of the assessee in the matter of sale of Part B of the PCD in the self-same rights issue was permissible as short term capital loss. Set aside the impugned order passed by the learned tribunal to the extent it confirmed the disallowance of Rs. 28,17,945/- as short term capital loss as claimed by the assessee and allowed by CIT (Appeals) - in favour of assessee.

Summary

Issues:
1. Whether the loss incurred on the sale of non-convertible debentures should be treated as short term capital loss or part of the cost of acquisition of convertible debentures?

Analysis:
The appellant assessee filed a return claiming a short term capital loss of Rs. 28,57,947 on the sale of non-convertible debentures. The Assessing Officer disallowed this loss. The CIT (Appeals) set aside the disallowance based on a tribunal decision. The revenue challenged this in the tribunal, which allowed the appeal, citing a different case's judgment. The appellant argued that the loss on the non-convertible debentures should not be part of the cost of acquiring the convertible debentures. They referred to previous tribunal decisions where similar losses were allowed. The department contended that the loss was part of the acquisition cost of the convertible debentures since they were not converted into shares at the time of the loss.

The High Court referred to a previous judgment where a similar loss was allowed as a short term capital loss. The court upheld that decision, stating that treating the loss as part of the cost of acquisition would be incorrect. The court emphasized that the two parts of the debentures were separable, and the loss on the non-convertible part could be treated independently. The court noted that similar losses were allowed in other cases, and the department had not appealed against those decisions. The court found the tribunal's decision to be contrary to established law and set aside the disallowance of the short term capital loss.

In conclusion, the High Court ruled in favor of the appellant assessee, holding that the loss on the sale of non-convertible debentures should be treated as a short term capital loss and not part of the cost of acquisition of convertible debentures. The court highlighted previous judgments supporting this interpretation and found the tribunal's decision to be incorrect. The court set aside the disallowance of the claimed loss and ruled in favor of the appellant.