2021 (2) TMI 31 - AT - Income Tax

Short-term capital loss - loss originated from India bulls infrastructure Ltd on forfeiture of share warrants disallowed - HELD THAT - During the course of hearing, on looking at the strange set of facts, the information was called from the assessee with respect to the corporate restructuring and business justification for layering of the funds. Assessee merely submitted that the issue is squarely covered in favour of the assessee by several decisions and once again relying on the decision of the learned CIT A. As far as the scheme of things goes, it is evident for everybody. Nothing is further required to be mentioned that who is the beneficiary and who is the conduit. Further, it is not the assessee who is to be taxed in its hands, as the real beneficiary is India bulls Power Ltd, which further went into restructuring and scheme of amalgamations. So far as the issue for taxation in the hands of the assessee is squarely covered in favour of the assessee by the decision in case of CIT versus Chand Ratan Bagri 2010 (1) TMI 123 - DELHI HIGH COURT wherein the addition was made in the hands of the assessee on protective basis and the addition was made on substantive basis in the hands of the company who forfeited the shares. In paragraph number 2 there was also an allegation of tax evasion tactic prohibited by law employed by the assessee. It is also the allegation in the impugned case. In paragraph number 12 14 clearly clinches the issue in favour of the assessee. The honourable High Court held that the issue as to whether the forfeiture of the convertible warrant amount to a transfer within the meaning of Section 2 (47) of the said act has now been made clear by the Supreme Court in the case of Grace Collis 2001 (2) TMI 9 - SUPREME COURT as also by the Karnataka High Court in BPLSanyo finance Ltd 2008 (2) TMI 386 - KARNATAKA HIGH COURT and the honourable High Court also followed the same. In paragraph number 14 the honourable High Court held that forfeiture of the convertible warrant has resulted in extinguishment of the right of the assessee to obtain a share in the issuer company.

Summary

Issues Involved:
1. Disallowance of short-term capital loss claimed by the assessee.
2. Allegation of the transaction being a subterfuge to create a loss.
3. Legitimacy of the assessee company’s business activities.
4. The genuineness of the transaction and movement of funds.
5. The role of the assessee as a conduit for transferring funds.

Detailed Analysis:

1. Disallowance of Short-Term Capital Loss:
The primary issue in this appeal was the disallowance of a short-term capital loss of ?1,087,500,000 claimed by the assessee company. The loss originated from the forfeiture of share warrants issued by Indiabulls Power Ltd. The learned AO disallowed this loss, suspecting it was a scheme to create a loss without incurring any real cost. However, the learned CIT(A) allowed the claim, relying on precedents set by the Delhi High Court in CIT v. Ratan Chand Bagri and the Supreme Court in Grace Collis.

2. Allegation of the Transaction Being a Subterfuge:
The AO alleged that the entire scheme of allotment of share warrants was a subterfuge designed to create a loss in group companies for ulterior purposes. The AO noted that the funds originated from Indiabulls Infrastructure Ltd and were moved through various companies, ultimately creating a reserve in Indiabulls Power Ltd without any real cost. The CIT(A) disagreed, noting that the transactions were conducted through banking channels and the companies involved were regularly assessed under tax laws.

3. Legitimacy of the Assessee Company’s Business Activities:
The AO questioned the legitimacy of the assessee company, noting it was incorporated on 7 October 2010 and had no business activity during the relevant period. The assessee argued that it was involved in real estate activities and had made the investment in share warrants based on market conditions. The CIT(A) accepted the assessee’s explanation and allowed the loss.

4. The Genuineness of the Transaction and Movement of Funds:
The AO contended that the movement of funds through banking channels did not prove the genuineness of the transaction. The funds were moved through several group companies, ultimately benefiting Indiabulls Power Ltd. The CIT(A) found that the transactions were genuine, as they were conducted through banking channels and all companies involved were compliant with tax and company laws.

5. The Role of the Assessee as a Conduit for Transferring Funds:
The AO argued that the assessee acted as a conduit to transfer funds to Indiabulls Power Ltd, creating a capital receipt in its books. The AO viewed this as a colorable device to avoid tax. The CIT(A) disagreed, noting that the forfeiture of the share warrants resulted in a genuine short-term capital loss for the assessee. The CIT(A) relied on judicial precedents to conclude that the forfeiture of convertible warrants amounted to an extinguishment of rights, thereby justifying the capital loss.

Conclusion:
The Tribunal upheld the CIT(A)’s decision to allow the short-term capital loss claimed by the assessee. It found that the transaction was genuine and the loss was legitimate, following the precedent set by the Delhi High Court and the Supreme Court. The appeal by the revenue was dismissed, and the order was pronounced in the open court on 28/01/2021.