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2015 (11) TMI 1219 - HC - Income TaxLoss in respect of renunciation of rights to subscribe to partly convertible debentures (hereafter PCD ) - according to the Revenue, the transaction was entered into solely for the purpose of contriving a loss - whether the transaction of renunciation of rights for subscribing to PCDs of JISCO was a colourable device to contrive an artificial loss? - Held that - In the present case, the facts clearly indicative the transaction to be a part of a scheme, the sole purpose of which is to evade tax payable on the gains made on sale of certain shares of JSL. Several companies within the group have adopted a similar stratagem to avoid tax on the gains made by them. In our view, this stratagem cannot be considered as legitimate and the ITAT erred in not holding so - AO had rightly found the transaction of sale of rights as a transaction for purchasing taxable losses for the purposes of evading tax. It has been argued that the Assessee had in fact relinquished its rights to subscribe to PCDs and the transaction had been implemented by JSL subscribing to the PCDs and in the circumstances, it could not be disputed that the transaction was genuine. It was contended that such transaction were permissible in law and, therefore, the tax effect of such transactions would necessarily follow. It was further contended on behalf of the Assessee that it is permissible for an Assessee to part with its asset with a view to book a loss. In our view, it cannot be disputed that in a case where an Assessee transfers its income producing asset, there could be no objection by the Revenue on the ground that the same had resulted in reducing the tax liability of an Assessee. However, this would not hold good if it is found that the Assessee alongwith its inter-related parties that implemented transactions for no commercial purpose but to create a tax loss while at the same time ensuring that the benefits of the assets remain within the group. This would be an abuse of the corporate form and such transactions, even though implemented, cannot be considered to be other than a colourable device for avoidance of tax. In case the Assessee had actually paid the cum rights price of ₹ 625/- for purchase of the shares, the reduction in value of the shares on an ex-right basis would be duly reflected in the value of the closing stock. The Assessee not having paid the price of ₹ 625/- cannot claim a loss on account of a drop in its price. Surely, a trader cannot claim that he has lost more than the cost incurred. If the Assessee felt it was necessary to reduce the value of its shares of JISCO held by it on account of alienation of the rights entitlement, an appropriate proportionate amount could be reduced from the cost of closing stock. The CIT(A) has examined the issue in some detail and had concluded that if the Assessee did desire to record a diminution in the value of its holding on account of rights issued, it could do so by proportionally reducing the value of its shareholding in the same proportion as the drop in price of quoted shares. In other words, it could reduce the cost of shares of JISCO in the same proportion as the diminution in the value of the price of its shares on account of the shares being traded on an ex rights basis, that is, the cost of shares of JISCO could be reduced by applying a factor of 425/625 ex-right price divided by cum-right price. - Decided against assessee. Sale consideration received by transfer of shares and sale of right entitlement of Partly Convertible Debentures (PCD) - income from capital gains OR income from business - whether the Assessee intended to retain the shares in question as investments for the previous year 1991-92 relevant to the AY 1992-93 or was the resolution dated 4th April, 1991 only a self serving document to enable the Assessee to claim the profits from sale of shares as Capital Gains - Held that - The Assessee appears to have claimed a change in the nature of his holdings depending on the tax incidence in the year in question; in AY 1988-89 the Assessee reflected to shares of JISCO purchased in that year at below cost treating them to be stock-in-trade and in AY 1992-93 sought to treat them as investments to avoid tax on the gains. None of the Assessee s actions in the previous year 1991-92 indicated any change in the Assessee s intention regarding its holding in shares and debentures. The ITAT observed that there were hardly any transactions in the past and on that basis concluded that the Assessee was in substance an investment company. However, the ITAT failed to appreciate that the Assessee had consciously held itself out as a company engaged in sale and purchase of shares; it was also assessed on the income earned from business and also claimed deduction on account of business expenses incurred by the Assessee. The shares in question were, concededly, held as stock-in-trade. All that happened in the year in question is that the Assessee sold substantial shares and renounced rights to subscribe to PCDs contrary to its stated intention of holding the same on a long term basis. In view of the above, the income received by the Assessee from sale of shares of JSL and the renunciation of rights to subscribe to the PCDs of JISCO was rightly held by the AO as business income and not income under the head capital gains. As discussed later, the Assessee could not have claimed any business income on account of renunciation of rights to subscribe to the PCDs. - Decided against the Assessee.
Issues Involved:
1. Whether the Income Tax Appellate Tribunal (ITAT) was correct in holding that the sale consideration received by the assessee from the transfer of shares and the sale of right entitlement of Partly Convertible Debentures (PCD) is income from capital gains and not income from business. 2. Whether the ITAT was correct in holding that the assessee had incurred a loss on the sale of its entitlement to acquire PCDs and is entitled to set off the alleged loss from the capital gains/income earned. Detailed Analysis: Issue 1: Nature of Income - Capital Gains vs. Business Income Relevant Facts: - The assessee, part of the Jindal Group, held shares in Jindal Iron & Steel Co. Ltd. (JISCO) and Jindal Strips Limited (JSL). - The assessee claimed the shares were transferred from stock-in-trade to investments, thereby intending to hold them on a long-term basis. - The assessee sold 60,000 shares of JSL within a few months of passing a resolution to hold shares as investments. - The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] viewed the transactions as a sham designed to evade tax. Court's Reasoning: - The ITAT concluded that the shares were held as investments, not trading assets, based on the limited number of transactions since the company's incorporation. - The High Court found this conclusion unsustainable because the shares were initially reflected as stock-in-trade, and the assessee had booked losses in previous years on account of the reduction in market value. - The resolution to transfer shares to investments was seen as self-serving, given that the shares were sold shortly after the resolution. - The sale of shares and subsequent transactions did not reflect an intention to hold shares on a long-term basis. Conclusion: - The income from the sale of shares of JSL and the renunciation of rights to subscribe to PCDs of JISCO was rightly held by the AO as business income and not capital gains. - The first question was answered in the affirmative, in favor of the Revenue and against the assessee. Issue 2: Legitimacy of Claimed Loss on Renunciation of Rights Relevant Facts: - The assessee renounced its rights to subscribe to PCDs of JISCO at a significantly lower price than the market value, selling them to JSL. - The AO noted that the rights renunciation forms were quoted at a higher price on the stock exchange, and the assessee had not received consideration within the relevant financial year. - The AO concluded that the transaction was a colorable device to contrive a loss and evade tax. Court's Reasoning: - The High Court found that the transaction did not serve any business purpose and was designed to avoid tax. - The ITAT's reasoning that the sale of shares was to raise funds for subscribing to PCDs was found erroneous, as the assessee did not subscribe to the PCDs but renounced the rights. - The transaction was part of a scheme within the Jindal Group to avoid tax by creating a notional loss while ensuring that the rights remained within the group. - The court referenced the Supreme Court's stance on tax avoidance, emphasizing that colorable devices to avoid tax are impermissible. Conclusion: - The transaction of renunciation of rights was a colorable device to claim a contrived loss. - The second question was answered in the negative, in favor of the Revenue and against the assessee. Final Judgment: - The appeal was allowed in favor of the Revenue, with the court holding that the ITAT erred in its judgment. - The assessee's claimed loss on renunciation of rights was disallowed as it was a colorable device for tax avoidance. - The income from the sale of shares was to be treated as business income, not capital gains.
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