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2015 (3) TMI 852 - HC - Income TaxDeduction of the losses - Tribunal directing AO to allow deduction of the losses at ₹ 111/- per NCD as a business loss - JISCO made certain arrangements with UTI in July 1994 according to which the allottees of NCDs could surrender all the NCDs to UTI after the application was made and UTI agreed to pay the balance allotment money (Rs.389/- per NCD) to JISCO and secure the NCD registered in its name - Held that - The findings of the AO and CIT regarding the NCD funding not being at arms length are unsustainable, because UTI on redemption, was entitled to full redemption money @ ₹ 500 each debenture on redemption though actually they had paid @ ₹ 389 only. The ITAT s discussion reveals that material was led to establish that UTI earned a substantial annual gain of about 25% on the transaction. Furthermore it was held that on the other hand, the assessees too benefitted because after losing the initial application money on each debentures they were entitled to one dividend warrant which enabled them to an equity share of ₹ 200/- (in the case of JISCO NCDs) and based on a pre-determined formula in the second instance (Medicare) though the market price of the shares on those dates was higher. A chart indicating the gains by the assessees too was furnished by the learned counsel. When JISCO came out with the NCDs right issue several other companies i.e., Apolo Tyres, Usha Ispat Ltd, Dhunseri Tea Industries Ltd., Sri Ram Industrial Enterprises etc. had floated similar right issues with almost identical terms and conditions. In the case of Apolo Tyres the buyback was done by Om Financial and Investment Consultancy Services Ltd. whereas in the case of Usha Ispat, Dhunseri Tea and Sriram Industrial Enterprises the buyback was done by UTI, DSP Financial Consultancies Ltd. and Sri Ram Financial Services Ltd. respectively. In the case of the assessee the buyback was done by UTI, a Central Government undertaking. Having once accepted the decision of the ITAT, in the same fact situation, - in fact in the same common order, the revenue cannot legitimately agitate a position contrary to the one it accepted in Nalwa - especially because Nalwa Investments is one of the share-holder companies of JISCO, which had sought and was allotted NCDs at ₹ 111/- per NCD and later transferred the allotments to UTI, which paid the balance amount. Its initial claim for capital loss was changed to business loss, and finally accepted by the ITAT. Another good reason for this Court to reject the revenue s contention is that in all the cases (Abhinandan, JELCS and Medicare) the assessees are investment companies, whose business includes share acquisition and transfer. The balance sheet and share inventories of Abhinandan and JELCs clearly reflected - as on 31.03.1994 and as on 31.03.1995, the value of shares of JISCO and several other companies. Having treated those and other shares as distinct from assets, but rather as part of the share inventory, it could not be said that the NCDs and the resultant DWs were to be treated otherwise. Here, the court is conscious that the assessees did claim initially to have incurred capital loss; however, they later corrected their stand and claimed business loss. We are of the opinion that the earlier stand of the assessees could not have shackled them to that position, preventing them from asserting the true character of the amount. Nor is the revenue bound to treat the position of the assessee as the gospel truth, or pin it to one or the other stand. In view of the above discussion, we hold that the assessee companies suffered business loss on their sale and such loss was business loss that constituted allowable deduction. - Decided in favour of the assessee.
Issues Involved:
1. Whether the Tribunal was justified in directing the Assessing Officer to allow the deduction of the losses at Rs. 111/- per NCD as a business loss. 2. The genuineness of the transactions involving the sale of NCDs to UTI and the subsequent claim of losses by the assessees. 3. The applicability of the SEBI-approved terms of the NCD rights issue and the subsequent financial arrangements with UTI. 4. The treatment of the detachable warrants (DWs) and their cost allocation in the context of the NCD rights issue. 5. The implications of the arrangement between JISCO and UTI on the tax liabilities of the assessees. 6. The determination of whether the losses claimed were business losses or capital losses. 7. The relevance of previous judicial decisions and their applicability to the present case. 8. The treatment of the transactions under the Income Tax Act and the legal interpretations of the transactions. Issue-wise Detailed Analysis: 1. Whether the Tribunal was justified in directing the Assessing Officer to allow the deduction of the losses at Rs. 111/- per NCD as a business loss: The Tribunal (ITAT) considered the salient features of the NCD rights issue with DWs as approved by SEBI and noted that the assessees initially claimed a short-term capital loss but later revised their claim to a business loss. The ITAT held that the true legal effect of the transaction should be considered for income-tax assessment, not the entries in the books of account or the claims made in the return of income. Consequently, the ITAT accepted the assessees' claim for a loss of Rs. 111 per debenture stemming from the sale thereof to UTI. 2. The genuineness of the transactions involving the sale of NCDs to UTI and the subsequent claim of losses by the assessees: The AO and CIT (A) initially rejected the assessees' claims, suspecting the transactions to be a colorable device to avoid tax liability. However, the ITAT found that the transactions were genuine and commercially compelled due to the SEBI stipulation requiring a 90% subscription for the NCD issue to be successful. The ITAT noted that the assessees were promoters of JISCO and had a substantial shareholding, which necessitated their participation in the rights issue to avoid reputational damage and financial loss. 3. The applicability of the SEBI-approved terms of the NCD rights issue and the subsequent financial arrangements with UTI: The ITAT observed that the NCD rights issue terms were approved by SEBI and included provisions for detachable warrants. The arrangement with UTI was made to ensure the success of the rights issue, allowing UTI to pay the balance allotment money on behalf of the assessees. The ITAT found that these arrangements were commercially reasonable and not intended to defraud the revenue. 4. The treatment of the detachable warrants (DWs) and their cost allocation in the context of the NCD rights issue: The ITAT held that the DWs were received gratis and the entire amount of Rs. 500 paid by the assessees was on account of the cost of acquisition of NCDs. The ITAT rejected the revenue's contention that the sum of Rs. 111 paid by the assessees should be treated as the price paid for acquiring DWs. The ITAT concluded that the true legal effect of the transaction was that the DWs were received without consideration. 5. The implications of the arrangement between JISCO and UTI on the tax liabilities of the assessees: The ITAT found that the arrangement between JISCO and UTI was commercially reasonable and benefited both parties. UTI acquired the NCDs at a discounted rate and received interest on the full face value, while the assessees retained the rights to the DWs. The ITAT concluded that the arrangement did not constitute a colorable device to avoid tax liability. 6. The determination of whether the losses claimed were business losses or capital losses: The ITAT accepted the assessees' revised claim that the losses were business losses. The ITAT noted that the assessees were investment companies whose business included share acquisition and transfer. The NCDs and DWs were part of their share inventory, and the losses incurred were in the course of their business activities. 7. The relevance of previous judicial decisions and their applicability to the present case: The ITAT referred to several judicial decisions, including Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income Tax [1971] 82 ITR 363 (SC), which emphasized that the true legal effect of a transaction should be considered for income-tax assessment. The ITAT also noted that similar arrangements in other cases, such as Apollo Tyres and Usha Ispat, had been accepted by the revenue authorities. 8. The treatment of the transactions under the Income Tax Act and the legal interpretations of the transactions: The ITAT held that the transactions should be assessed based on their true legal effect and commercial substance. The losses incurred by the assessees were genuine business losses and should be allowed as deductions under the Income Tax Act. The ITAT rejected the revenue's contention that the transactions were a colorable device to avoid tax liability. Conclusion: The High Court upheld the ITAT's decision, concluding that the losses claimed by the assessees were genuine business losses and should be allowed as deductions. The court emphasized the importance of considering the true legal effect and commercial substance of the transactions, as well as the relevance of previous judicial decisions. The revenue's appeals were dismissed, and the assessees' claims for business losses were accepted.
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