2021 (10) TMI 114 - AT - Income Tax

Short Term Capital Loss on forfeiture of convertible share warrants - transfer u/s 2(47) of asset - extinguishment of the right of the assessee to obtain a share - HELD THAT - As decided in PAVITRA COMMERCIALS LTD. VERSUS DCIT, CC 20, NEW DELHI. 2014 (12) TMI 1384 - ITAT DELHI allowed the Short Term Capital Loss on the forfeiture of Convertible Share Warrants - thus Assessing Officer is hereby directed to delete the addition. Accordingly, the ground of the assessee s appeal is allowed.

Summary

Issues:
1. Validity of order by CIT(A)
2. Disallowance of Short Term Capital Loss on forfeiture of convertible share warrants
3. Interpretation of legal provisions regarding forfeiture of share warrants

Issue 1: Validity of order by CIT(A)
The appeal challenges the order of the CIT(A) for Assessment Year 2009-10, alleging it to be bad in law, wrong on facts, and against natural justice principles. The appellant contends that the CIT(A) erred in confirming disallowances under section 153C of the Income Tax Act, asserting a lack of nexus with the material found during search operations. The appellant argues for deletion of the de-novo assessment made by the CIT(A).

Issue 2: Disallowance of Short Term Capital Loss on forfeiture of convertible share warrants
The core issue revolves around the disallowance of Short Term Capital Loss on forfeiture of convertible share warrants amounting to ?4,18,50,000. The appellant challenges this disallowance, emphasizing that the loss was initially allowed by the Assessing Officer in the original assessment order under section 143(3) of the Act. The appellant contests the CIT(A)'s conclusion that the forfeiture was not genuine and bonafide, arguing that it was a legitimate transaction.

Issue 3: Interpretation of legal provisions regarding forfeiture of share warrants
The dispute delves into the interpretation of legal provisions concerning the forfeiture of share warrants. The appellant asserts that the subscription to convertible warrants constitutes extinguishment of rights and falls under section 2(47)(ii) of the Income Tax Act, contrary to the CIT(A)'s view. Reference is made to judgments by the ITAT and the Delhi High Court in similar cases, where the forfeiture of share warrants was deemed valid, leading to the allowance of Short Term Capital Loss.

The Tribunal, after considering the arguments presented by both parties, ruled in favor of the appellant. It noted that similar additions were made in cases of group companies, where the Tribunal had allowed Short Term Capital Loss on forfeiture of convertible share warrants. Citing judgments by the Delhi High Court and the ITAT, the Tribunal found no substantial question of law justifying the disallowance. As the Revenue failed to provide contrary binding precedents, the Tribunal directed the Assessing Officer to delete the addition, thereby allowing the grounds of the appellant's appeal.