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TMI Blog2012 (3) TMI 79X X X X Extracts X X X X X X X X Extracts X X X X ..... rtible portion does not exist as such as commodities – Decided against the revenue. - Tax Case (Appeal) No.203 of 2005 - - - Dated:- 10-2-2012 - MR.JUSTICE D.MURUGESAN, MR.JUSTICE P.P.S.JANARTHANA RAJA, JJ. For appellant : Mr.T.Ravikumar For respondent : Mr.C.V.Rajan for Mr.R.Sivaraman JUDGMENT P.P.S.JANARTHANA RAJA, J. The above Tax Case Appeal is filed by the Revenue under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, 'B' Bench, Chennai, dated 28.10.2002 made in ITA No.2041/Mds/1997 for the assessment year 1993-1994. 2. This Court, by order dated 13.06.2005, admitted the appeal on the following questions of law. "1.Whether on the facts and in the circumstances of the case, the Tribunal was right in its conclusion that the loss incurred by the assessee in the alleged sale of partly convertible debenture is a capital loss? 2.Whether the Tribunal was right in holding that there was delivery of share within the meaning of Section 43 (5) of the Income-Tax Act, 1961?" 3. The erstwhile company viz.,M/s New Ambadi Investments Private Limited, who was the assessee before the authorities below, wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.The Judgment of Gauhati High Court in SHAKUNTALA DEVI KILLA V. COMMISSIONER OF INCOME-TAX (1993) 202 ITR 108 5.The Judgment of Bombay High Court in RAMDAYAL SOMANI AND COMPANY V. COMMISSIONER OF INCOME-TAX BOMBAY CITY-II (1979)119 ITR 1 6. The judgment of Bombay High Court in COMMISSIONER OF INCOME V. BHARAT R.RUIA (2011) 337 ITR 452. Therefore, the order passed by the Tribunal is not in accordance with law and the same has to be set aside. 5. The learned counsel appearing for the assessee-respondent contended that the transaction relating to the non convertible secured debenture will not come within the definition of "speculative transaction" under Section 43(5) of the Act. He further contended that non-convertible debenture would neither be considered as a commodity nor shares or stocks. The expression commodity or shares or stocks will not include debentures. He further submitted that the present transaction is related to allotment of debentures and therefore, the question of purchase or sale of commodities will not arise since there is no existence of the commodity before the allotment and relied on the following judgments to support his case. (1) The judgment of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92 M/s Carborandum Universal Ltd., 4700 15 70,500 -------------- 11,44,692 -------------- The assessee claimed a loss of Rs.11,44,692/- as Khoha loss on the sale of partly convertible debenture of the said two companies. The respondent/assessee held equity shares of M/s Tube Investments of India Limited and M/s Carborandum Universal Limited. The abovesaid companies needed finance and therefore, they tapped the resources of its shareholders and brought the Banker to hold its debentures. Both the companies came out with a scheme to issue Partly Convertible Debentures(PCD in short) for its existing shareholders. The said PCD consisted of equity shares and non convertible security debenture. The face value of each, particularly, PCD was Rs.100/-. When the shareholders subscribing to the said partly convertible debentures, they are entitled to get on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehalf of the applicant till the time company transfers the Part B to the bank. The procedure vide Securities and Exchange Board of India's letter reference MBD (1)/158/4008/92 dated April 21, 1992 will be as follows: The applicant concerned shall communicate acceptance of the loan offer along with application form and also authorize the company to transfer the khokha portion of the PCDs allotted to the applicant to the bank on cancellation of the loan. Under this procedure applicant will in the first instance, after filling the necessary forms, remit an amount at the rate of Rs.62/- per debenture. The company, in its part, will inform the Hongkong bank the names of the applicants who have opted to accept the loans and sell the non convertible portion of the PCD to the bank after the allotment. The Bank will pay Rs.38/- per debenture on behalf of the applicant. This amount together with the amounts received from the applicants shall be kept in a separate account till the allotment is made. After allotment of PCD is made to the applicant, the bank will be advised in the matter whereupon the loan to the applicant will be cancelled and on the basis of this authority given by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs are further advised that PCDS shall be allotted according to the recognised procedure, i.e., depending upon the applicants and the amount received on allotment, number of PCDs to be allotted to each applicant would be decided. The PCDs would then be allotted to the applicants. This will be followed by conversion to equity share of Rs.50/- and the balance portion as NCSD. The existing shareholders would receive one equity share for every PCD allotted to them and its value shall be Rs.50/-. The second part consisting of NCSD shall be directly sent to the bank. At this point the loan of Rs.38/- in favour of the applicant would be cancelled. The applicant shall have no further claim from the company regarding Rs.12/- paid towards that part of PCD represented by NCSD. 5.2 The above procedure shows that the existing shareholders who apply for the PCDs are allotted PCDs on the basis of some formula depending upon the applications received. Following such allotment the conversion of the PCD takes place as equity share that is received by the existing shareholder and the second portion which the existing shareholder had agreed to be given over to the bank is sent to the bank directly. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat took place by settlement without taking of delivery. In the instant case before us, there is clear delivery as well as constructive delivery. The jurisdictional High Court in Chinnasamy Chettiar v. CIT (1974) 96 ITR 353 explained the transaction that in effect had real delivery and not notional delivery, would not be treated as speculative. We, for the foregoing reasons upheld the claim of the asseseee and allow the appeal." From reading of the above, it is clear that the Tribunal has given a categorical finding that there is a clear delivery as well as constructive delivery. In the present case, M/s Tube Investments of India Limited and M/s Carborandum Universal Limited had come out with a scheme to issue PCD and the face value of each PCD is Rs.100/- and each PCD of Rs.100/- will result in one equity share of Rs.10/- at a premium of Rs.40/- and the balance Rs.50/- will be non-convertible security debentures bearing interest at 15% per annum. Therefore, the face value of the each partial convertible debentures of Rs.100/- consists of two parts. Part-A convertible portion is Rs.50/-. One equity share of Rs.10/- at a premium of Rs.40/- is automatically and compulsorily convert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty debentures, which is part of the partial convertible debentures allotted in favour of the existing shareholder and then transferred to the bank, because the amount paid by the bank was treated as a loan to the existing shareholders and the said loan is treated as satisfied by issue of the non-convertible security debentures to the bank. By this arrangement, the bank has come forward to purchase the debentures at a discount price. In this process, there is a loss to the extent of Rs.12/- and Rs.15/- per PCD. Therefore, the Tribunal has correctly held that there is an actual delivery and constructive delivery and they will not come within the purview of the "speculative transaction". The learned counsel appearing for the Revenue is unable to bring any fresh evidence to show that there is no actual delivery in the present case. Therefore, the finding given by the Tribunal in this aspect is based on valid materials and the same is confirmed. 7. In respect of the second condition as to whether the expression "commodities" "shares" and "stocks include debentures; it was submitted that the debenture would not come within the purview of the expression "commodities" and further the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir free transferability and marketability, they are referred together. The stamp duty on the share certificates and debenture certificates and on their transfers is totally different and bears no comparison. The incidents of debenture certificates as seen from our discussion above are different from the incidents of share certificates and hence bear no comparison. Therefore, there is no equation between shares and debentures except as referred to above. 24. Share has been defined in Section 2(46) of the Companies Act to mean a share in the share capital of a company which in turn would mean that it would represent contribution of the shareholder towards the share capital of the company. On the other hand, a debenture is an instrument of debt executed by the company acknowledging its receipt to repay the same at a specified rate and also carrying an interest. It is in sum and substance a certificate of loan or a bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure yet it does not become a share capital. In any event, a debenture would not come wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egarding the same. The learned counsel also relied the R.D.GOYAL's case cited supra, wherein the Apex Court has considered the scope of words "creation", 'issue" and "allotment" and paragraphs 38 and 39 reads as follows: 38. It was noticed: (SCC pp. 86-87, para 10) The words allot and distribute found in clause (b) of the resolution do not carry the matter further. Their meaning should be gathered from the context in which they were used. Clauses (b) and (c) of the resolution must be read harmoniously with clause (a). The word allotment has not been defined in the Companies Act. The meaning of the word allot or allotment will have to be gathered from the context in which those words are used. This Court considered the meaning of the word allotment in Sri Gopal Jalan and Co. v. Calcutta Stock Exchange Assn. Ltd.3 Therein, it referred to a large number of English decisions which have considered the meaning of that word. In that decision this Court referred to the observations of Chitty, J., in Florence Land and Public Works Co., In re: To my mind there is no magic whatever in the term allotment as used in these circumstances. It is said that the allotment is an appropriation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R OF INCOME TAX V. NIRMAL TRADING COMPANY reported in (1971) 82 ITR 782, the Calcutta High Court considered the scope of "speculative transaction" and in that case, the assessee was a dealer of shares and the assessee had renounced right of allotment and the issue is whether the letter of renunciation amounts to "commodity" or "shares" or not and the Court held that letters of renunciation are neither "shares" nor "commodities" and hence, they cannot be "speculative transaction" and paragraph 6 of the above judgment reads thus: "6.Mr.A.K.Basu, learned counsel for the Department, contends before us that a sale of letters of renunciation means a sale of shares which is not completed by actual delivery. But we are unable to accept this contention. Letters of renunciation are executed when a shareholder renounces his right to apply for shares in favour of some other person. They can be sold and traded in the stock exchange (see Palmer's Company Law, 21st Edn., p.146 and 673). They confer on the renouncee the right to apply for shares of a company but they are neither "shares" nor "commodities" which may come within the purview of Expln.2 to S.24(1) of the Indian IT Act, 1922. If they ..... X X X X Extracts X X X X X X X X Extracts X X X X
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