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TMI Blog2007 (5) TMI 555X X X X Extracts X X X X X X X X Extracts X X X X ..... that the sale of warrants cannot be treated as capital asset as per definition of capital asset given under section 2(14) of the Act. 4. The assessee went in appeal before the Commissioner of Income-tax (Appeals). Before the Commissioner of Income-tax (Appeals), the assessee stated that in accordance with the guidelines for preferential allotment of shares to the promoters of the company M/s. Deepak Nitrite Ltd. had issued warrants with a right attached to the holders of the warrants, to subscribe against payment in cash for one equity share of the company of Rs. 10 each for every warrant held, at such price and time as may be determined by the board in accordance with prevailing guidelines. The guidelines are related to the average of the market price of the company\qs share as quoted on the Bombay Stock Exchange for the preceding 6 months period from the date of board meeting, i.e., June 28, 1994, plus the margin of 10 per cent. over such average price. The holder of the warrants had to exercise their option within 18 months. The assessee could exercise the right only in respect of 40,000 warrants and on the balance the rights were extinguished. The balance 1,60,000 warrants wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not opt to convert 1,60,000 warrants. However such non action did not transfer the right to anyone and the warrants remained in his possession/ property. After the lapse of 18 months they became valueless in the normal way without any transfer occurring. This is merely a case of lapsing but can in no way be treated as transfer of an asset, which can be considered as a capital loss. There is the absence of a transferee in such a situation and hence as per the Supreme Court' s decisions mentioned above (Vania Silk Mills), I would hold that no capital loss is allowable to the assessee." 5. Before us, Shri S. N. Soparkar, the learned authorised representative had drawn our attention towards provisions of sections 45, 2(14) and 2(47) of the Act. It was contended that there is no dispute that the warrant is a capital asset, as the Revenue has not come in appeal in respect of finding given by the Commissioner of Income-tax (Appeals) on this account. The only dispute before us relates to whether there is a transfer of a capital asset or not. Our attention was drawn towards provisions of section 2(47) and it was contended that the definition given in this section is inclusive definiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. We have carefully considered the rival submissions, and perused the material on record and have also gone through the orders of the authorities below as well as the case law relied upon before us. There is no dispute on the proposition of law that the warrants applied for by the assessee are capital assets within the meaning of section 2(14) of the Act and this proposition seems to be accepted by the Revenue as the Revenue has not come in appeal against the order of the Commissioner of Income-tax (Appeals), when in paragraph 7 he held that the warrants are capital assets. For computing capital gains, section 45 lays down as under : " 45(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous year in which the transfer took place." 8. From the reading of this section it is apparently clear that the provisions of section 45(1) are charging provisions and for charging the profits or gains under this head there must be a capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included the extinguishment of rights in assets independent. We have also gone through the decision of the hon'ble Supreme Court in the case of Kartikeya V Sarabhai [1997] 228 ITR 163. In this decision, the hon'ble Supreme Court has held that this is only one of the modes of transfer envisaged by section 2(47). The relinquishment of the assets or extinguishment of any rights in it which may not amount to a sale can also be considered as a transfer. Therefore, on this issue, we do not agree with the finding of the Commissioner of Income-tax (Appeals) that there is no transfer in the case of the assessee and accordingly we reverse the finding of the Commissioner of Income-tax (Appeals) on this issue and hold that in the case of the assessee there is a transfer when the rights of the assessee to subscribe for the shares got extinguished. 10. The question before us is whether there is a loss incurred by the assessee on the transfer of a capital asset. Section 45 is a charging provision so far as the imposition of the tax on capital gains is concerned. The computation of the capital gains has to be made in accordance with the provisions of section 48, which stipulates as under : "48. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evident that such a case was not intended to fall within the charging section. All transactions encompassed by section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge. What is con templated by section 48(ii) is an asset in the acquisition of which it is possible to envisage a cost : it must be an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. None of the provisions pertaining to the head 'Capital gains' suggests that they include an asset in the acquisition of which no cost at all can be conceived. When goodwill generated in a new business is sold and consideration brought to tax, what is charged is the capital value of the asset is not any profit or gain. Further, the date of acquisition of the asset and a material factor in applying the computation provisions pertaining to capital gain ; but in the case of goodwill generated in a new business it is not possible to determine the date when it comes into existence." 12. Therefore, in view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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