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TMI Blog2015 (3) TMI 852X X X X Extracts X X X X X X X X Extracts X X X X ..... vidend warrant which enabled them to an equity share of ₹ 200/- (in the case of JISCO NCDs) and based on a pre-determined formula in the second instance (Medicare) though the market price of the shares on those dates was higher. A chart indicating the gains by the assessees too was furnished by the learned counsel. When JISCO came out with the NCDs right issue several other companies i.e., Apolo Tyres, Usha Ispat Ltd, Dhunseri Tea Industries Ltd., Sri Ram Industrial Enterprises etc. had floated similar right issues with almost identical terms and conditions. In the case of Apolo Tyres the buyback was done by Om Financial and Investment Consultancy Services Ltd. whereas in the case of Usha Ispat, Dhunseri Tea and Sriram Industrial Enterprises the buyback was done by UTI, DSP Financial Consultancies Ltd. and Sri Ram Financial Services Ltd. respectively. In the case of the assessee the buyback was done by UTI, a Central Government undertaking. Having once accepted the decision of the ITAT, in the same fact situation, - in fact in the same common order, the revenue cannot legitimately agitate a position contrary to the one it accepted in Nalwa - especially because Nalwa In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt (in CA 4596/2003, decided on 19.01.2010) which, inter alia, framed a question of law, in the following terms: Whether, on the facts and circumstances of this case, the Tribunal was justified in directing the Assessing Officer to allow deduction of the losses at ₹ 111/- per NCD as a business loss? 2. The brief facts are that the assessee in ITA 25/2001 (hereafter Abhinandan ) and assessee in ITA 26/2001 (hereafter JELCS ) claimed a loss of ₹ 111 per debenture on the sale of debentures of Jindal Iron and Steel Co ( JISCO ) to UTI. These assessees were shareholders of JISCO, which declared a right issue of secured redeemable non-convertible debentures (NCD) of ₹ 500/- each. The size of the issue was about ₹ 500 crores. The issue opened on 21.11.94 and closed on 19.12.94. Interest @10.5% was payable by JISCO on those debentures. To make the debenture issue attractive, JISCO fixed a detachable warrant (DW) with each debenture, the holder of which was eligible to apply for one share of JISCO within a specified period. The salient features of the rights issue of NCD as approved by SEBI were as under:- a) Each debenture was of face value of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o some Mumbai based group companies and in turn these group companies invested in the placement of preference shares of all the said assesses/appellant companies. The AO therefore felt that it was JISCO s own fund which was used in subscribing to its NCD issue in the name of assessees. The AO also held that all the five assessees/ appellants were not acting in their own capacity or taking market oriented decisions and were acting on behalf of JISCO. He further observed that the funds flowed into the assessees from JISCO which has flowed back to JISCO in the shape of application money for NCDs. Thus the assessees were merely conduits in this transaction and, therefore, the loss claimed by it was not allowable. The AO further observed that the agreement between JISCO and UTI was for the benefit of the promoter company only. He observed that there was no reference to this arrangement in the letter of offer though the arrangement with UTI was already reached before the offer dated 12.11.94. The AO also noted that the five assessee companies endorsed the allotment letters issued to them, in favour of UTI, which paid the allotment money and that there was no agreement between the UTI and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessees suffered loss on the sale of NCDs to UTI, the loss at the rate of ₹ 111/- per NCD was allowable according to them. 7. The CIT (A) held that NCDs were allotted on January 14, 1995 on payment of application money of ₹ 111/- per NCD. Between January 20, 1995 and January 25, 1995, the assessees and others transferred the NCDs to UTI without consideration. It was also held that the assessees never became owners of the fully paid NCDs and that they had paid ₹ 111/- as application money to acquire NCD; the DWs were received gratis. The claim of loss of ₹ 111/- per debenture on its sale was made for the first time in appeal and not in assessment proceedings. It was noted that the assessees applied for NCDs after the arrangement between JISCO and the UTI without any consideration and with the intention of incurring loss of ₹ 111/- on each NCD and that they had not fully paid for the NCDs. Therefore they were disentitled to the DWs, because in terms of the issue conditions, the DW was to be allotted only after the NCDs were fully paid. The NCDs were transferred to UTI immediately after the allotment and entirely according to the arrangement betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re fully paid up. As to the conclusion of the CIT (A) that the assessees never became the owner of NCD/DWs, it was submitted that the letter of allotment was in the name of the assessees; UTI made payment of allotment money to JISCO on behalf of the assessees and in turn the assessees transferred the NCDs in favour of UTI which was registered in UTI s name and therefore the factual conclusions of the CIT (A) were wrong. The assessees denied that they were the beneficiaries of the transaction but it was UTI who became the owner of the NCDs of the face value of ₹ 500/- by paying ₹ 389/- only per NCD. UTI also received interest from JISCO at full value of ₹ 500/- each debenture. Moreover UTI was entitled to the full redemption money at ₹ 500/- per debenture on redemption though actually they had paid at ₹ 389/-. UTI earned a substantial annual gain of 256% on this transaction. It was urged that the assessees too benefited due to the arrangement because after losing ₹ 111/- on each debenture it became entitled to one dividend warrant which enabled it (the assessee) to own an equity share at ₹ 200/- though the market price of the share on that d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es who later sold them and originally claimed the loss incurred as deduction. However, during the course of assessment proceedings the assessees claimed that as they sold NCDs worth ₹ 500/- per NCD at ₹ 389/- per NCD, they had suffered a loss @ ₹ 111/- per NCD which should be allowed as deduction. The claim was, inter alia, rejected on the preliminary ground that such a ground was not before the AO. The ITAT noted that in a large number of decisions it was held that any view the assessees propound may be irrelevant while considering assessment under the Act. The only consideration for the revenue at that point of time is as to what was the true legal effect of the transaction. Reference was made to several decisions in Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income Tax [1971] 82 ITR 363 (SC) ; Delhi Stock Exchange Association Ltd. v. Commissioner of Income Tax [1961] 41 ITR 495 (SC) and First Addl. ITO v. T. M. K. Abdul Kassim [1962] 46 ITR 149 (SC). It was therefore observed that even if the return filed by the assessee did not set out the proper position that cannot be a reason for not allowing the claim. 11. The ITAT considered the reasoning of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and JISCO would have been compelled to refund the entire money. That would have been detrimental to the assessees, promoter companies of JISCO. ITAT found that UTI had secured an annual yield of about 25%. Therefore, it was held that the transaction of selling NCDs at the face value of ₹ 500/- to the UTI at ₹ 389/- per debenture was not a colourable device. It also noted that when JISCO came with the rights issue of NCDs, many other companies like Apollo Tyres, Usha Ispat Ltd., Dhunseri Tea Industries Ltd., and Sri Ram Industrial Enterprises, etc., had come out with similar rights issues with almost identical terms and conditions. In the case of Apollo Tyres, the buy-back was done by JM Financial and Investment Consultancy Services Ltd. whereas in the case of Usha Ispat, Dhunseri Tea and Sri Ram Industrial Enterprises, the buy-back was by UTI, DSP Financial Consultancies Ltd. and Sri Ram Financial Services Ltd. respectively. In the case of the assessees, the buy-back was by UTI which could not be influenced by the terms of either the assessee or JISCO. Consequently, it was held that the sum of ₹ 111/- per share had to be treated as business loss. Facts in Medi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e warrant has to be taken at ₹ 81/-For these reasons, the assessee s contentions were rejected. 14. The assessee appealed to the CIT (A) where it was contended that in terms of Max India Ltd s letter of offer dated December 8, 1995, each NCD carried a face value of ₹ 250 and was attached with one detachable warrant. Each warrant enabled the holder to apply for and be allotted one equity share of Max India Limited at a price which was to be calculated at a discount of 33% on the prevailing market price or ₹ 225, whichever was less, any time between the period of 24 to 48 months from the date of allotment of NCDs. It was argued that if the right attached to the warrant had not been exercised by the holder thereof within the period specified by Max India Ltd., the entitlement for the shares was liable to be automatically lapsed. It was also clarified that the warrant holders exercising their option for allotment of equity shares were not entitled to seek any appropriation of the amount paid on the NCDs against the amount payable for the equity shares which was to be paid in full separately. It was contended that the said warrants thus were completely detachable fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to UTI (as claimed by the assessee), the question of paying allotment money at ₹ 389 would not have arisen, on the part of the assessee. If a transaction was for sale of NCDs, the UTI would have paid on its own behalf. Here the sale did not take place because as per the scheme only a paid up debenture entitled the holder/allottees to receive the DW. If the sale had taken place, only UTI would have been entitled for the DW. Here the DWs were issued to the assessee whereas the UTI had paid the allotment money. The assessee had shown the amount of application money as the cost of DWs which was evident from the fact that the assessee claimed the loss to the extent of DWs sold. It was in fact a financial arrangement between JISCO and the UTI and the UTI agreed to pay ₹ 389/- per debenture on the condition that (i) interest would be paid at 10.5 %; and (ii) refund of ₹ 500/- would be given in three instalments. In the process, the assesse allowed its capital to be forfeited by JISCO, which was a unilateral act on its part. It is like the case of unclaimed credits/ debts. A sum of ₹ 111/- per NCD was capital investment in the hands of the assessee as it had shown i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome for previous years in support of this argument. Urging that it would be anomalous to uphold the revenue s stand that on the one hand, it urges that JISCO s shares were held as stock in trade and at the same time, contend that DWs - acquired as a consequence of the share-holding, had to be treated in the same manner. 18. Counsel also argued that the loss in question was a business loss and not a capital loss and further that according to the revenue itself the assessee s JISCO shares were stock in trade (and therefore in the revenue account). In view of this stand, the Revenue cannot argue to the contrary. It would be contradictory and illogical to say that the shares of JISCO are to be held as stock in trade but the NCD s which were acquired by virtue of the shareholding in JISCO and which were held for 10 days are to be treated as an investment and held on capital account. Analysis Findings 19. Before we proceed to analyse the contentions of the parties, it would be useful to set out, in a tabular form, the salient facts relating to the two sets of appeals:- Sl. No. Abhinandan Investment JELCS Medicare Investment L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 389 and the remaining amount of ₹ 111 was attributable to the DW cost. What entails scrutiny is whether the payment, by the assessee, towards ₹ 111/- per NCD signified the cost paid for each DW and the remaining sum, i.e., ₹ 389 was the cost actually paid for acquiring each NCD. This claim was rejected by the revenue authorities. They held that per NCD cost of acquisition was ₹ 500/- and the DW was received gratis, without consideration according to the terms of the scheme. The revenue could not suggest that the assessee never stated that the sum of ₹ 111/- paid by it, was to be treated as the price paid by it to acquire DWs: in fact, the assessee had contended as much when claiming loss on sale of DW @ ₹ 20/- each. The plea was rejected. 21. There is no doubt that the assessee claimed before ITAT that it incurred a loss of ₹ 111/- per debenture. Having spelt out its position that the entire amount of ₹ 500 paid by the assessee was on account of cost of acquisition of NCDS, the revenue never stated that ₹ 111/- paid by the assessee should be treated as the price paid for acquiring DWs. The ITAT nonetheless considered the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er- on allotment, the balance ₹ 389/- per NCD was payable. In this case, as a result of the terms agreed with UTI, the transfer of the NCD allotment to it meant that the balance ₹ 389 was payable. Concurrently, the rights to DW remained with the assessee companies. This court notices that fundamentally, the AO fell into error in overlooking that in fact, the NCDs were allotted on January 14, 1995 on payment of application money of ₹ 111 for NCDs. Between January 20, 1995 and January 25, 1995, they were transferred and transfer forms were executed. The CIT (A) no doubt took note of this singular omission (by the AO) but in turn erroneously held that the transfer was not based on any consideration. Both these authorities were considerably influenced by the fact that the NCD partial funding arrangement had been arrived at by JISCO with UTI sometime in July 1994. So they went about finding if there were other suspicious facts to establish that the entire scheme was a ruse to defraud the revenue. What was not considered was that the UTI scheme was apparently wide in nature; it sought to fund NCD applicants - the assessee shareholders and other companies being some of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incomplete appreciation of facts, there was no machination or tax evasion ruse. The NCDs were allotted to the assessees and transferred after the allotment (again a crucial point missed by the lower revenue authorities). Here, the right to allotment could not be renounced in favour of third party. The warrants were acquired for no price and the payment made was only for acquisition of the NCDs whose terms of issue included a return of 10.5 % annually. The purpose of issue was commercial and they were not issued by the JISCO only to attract subscriptions to the DWs attached thereto. Depending on share market volatility, the apparent sweetener (to the issue), i.e., the free DWs could become worthless; after all, the DWs entitled the holders to equity shares in the event of an issue, at a pre-determined price of ₹ 200/-. 26. A distinction made by the revenue between the case of Abhinandan and JELCS on the one hand and Medicare on the other was that in the former instance, the application cost was ₹ 111/- and the balance ₹ 389/- was payable by UTI, as the result of a prior arrangement whereas in the latter case, the terms of payment given in the offer document itse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id along with the application as per the terms of payment given in the offer document, he was required to pay a sum of ₹ 250 per NCD on application itself. In the cases of Abhinandan Investments Ltd. and Ors. (supra), the terms of payment given in the offer document, however, were different inasmuch as a sum of ₹ 111 was payable on application, whereas ₹ 389 was payable on allotment and since the option to surrender the NCDs to UTI was to be exercised only on allotment, there was no difference in the amount payable on application by the allottees deciding to surrender the NCDs to UTI and the allottees not going for opting for such surrender. It was thus, merely a difference in the terms of payment of NCDs as per the offer document whereby in one case, the entire amount payable against NCDs was to be paid along with the application itself, whereas in the other cases, the amount payable against NCDs was to be paid in two instalments, one at application stage and the remaining on allotment. 32. There were thus two distinctive features in the scheme of allotment as per the offer made in the case of the present assessee and in the case of Abhinandan Investments Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er cent. of the issue, the issue shall be deemed as having failed and JISCO shall be liable to refund the entire money collected under the said issue. With this crucial condition appended to the rights issue, JISCO embarked upon the said course and made an issue of ₹ 500 crores of SRNCDs of a face value of ₹ 500 each. The essential features of the rights issue of SRNCDs as approved by the SEBI and as indicated in the order of the authorities below were as follows : (a) each debenture will be of the face value of ₹ 500 each ; (b) every residential shareholder will pay a sum of ₹ 111 per debenture on making an application and the balance sum of ₹ 389 per SRNCD was payable on allotment ; (c) if the company does not receive a minimum subscription of 90 per cent. of the issue of SRNCD within sixty days from the closure of the company (i.e., JISCO) it shall refund the entire subscription amount received ; (d) SRNCD with detachable warrant (in short DW ) was offered to the existing shareholders of the company (i.e., JISCO) whose names appeared in the register of the company (i.e., JISCO) on October 31, 1994 ; (e) 23 debentures for every 100 eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with sub-section (3) of section 139. In the return a loss had been claimed even though the loss claimed, as indicated above initially was pegged at ₹ 91 per DW. It is also not disputed that if a revised return had been filed by the assessee the time for the said return would have expired on March 31, 1997. 10. The assessee, however, during the course of the assessment proceedings became wiser and consequently by way of a letter dated March 24, 1998, intimated the Assessing Officer that it was entitled to claim a loss at the rate of ₹ 111 on each SRNCD transferred to UTI. The said loss was claimed as a business loss. The Assessing Officer disallowed the loss on the ground that it was not genuine. The Assessing Officer was of the view that the appellant as well as the other investment companies were merely money-lenders and the arrangement so configured to give benefit to JISCO and UTI. Thereafter the court noticed the order of the ITAT (which is the subject matter of these appeals, i.e., ITA Nos.25-26/2001) and the background in which the AO disallowed the claim for carry forward of losses, impelling the assessee to approach ITAT again: 14. By the very same or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oved of the reasoning set out in the order of the Assessing Officer in disallowing the carry forward and set off of loss against the future income of the assessee. The Court thereafter held that the AO s approach was untenable: 17. Having heard the learned counsel for the Revenue as well as the assessee we are of the view that the answers to the questions framed have to be found in favour of the assessee and against the Revenue for the reasons given hereinafter. It is clear upon a perusal of the facts and circumstances quoted by us hereinabove that if JISCO had to have a successful rights issue it was incumbent that it received a subscription equivalent to at least 90 per cent. of the issue. The condition with respect to the same imposed by the SEBI while approving the rights issue was quite explicit in that regard. The fact that there was an arrangement between JISCO and UTI as also the fact that upon receipt of the face value of ₹ 500 per debenture JISCO would issue DW which would enable the holder to acquire one equity share in JISCO, was clearly part and parcel of the terms and conditions of the issue. The arrangement between a public financial institution-UTI and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section (3) of section 139. Section 80 of the Act reads as follows : Notwithstanding anything contained in this Chapter, no loss which has not been determined in pursuance of a return filed in accordance with the provisions of sub-section (3) of section 139 shall be carried forward and set off under sub-section (1) of section 72 or sub-section (2) of section 73 or sub-section (1) or sub-section (3) of section 74 or sub-section (3) of section 74A. 19. In the instant case, there is no doubt that the assessee had filed a return under section 139 of the Act within the prescribed time. It is also not disputed that a loss had been claimed even though the same had been claimed to the extent of ₹ 90 and that too as a capital loss with respect to DWs issued to the assessee, on the assessee investing in the rights issue of JISCO. The assessee carried out a course correction by claiming a loss on sale of SRNCDs to UTI at ₹ 111 per SRNCD as it had sold SRNCDs of a face value of ₹ 500 to UTI at ₹ 389 per SRNCD. The Tribunal in the first round in its order dated June 5, 2000, came to a conclusion based on the judgments of the Supreme Court as well as those of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss based on the reasoning that the assessments had to be carried out keeping in mind the real effect of a legal transaction notwithstanding the treatment meted out by the assessee, it would then appear anomalous and incongruous if the Assessing Officer while giving effect to the said order would denude the efficacy of the Tribunal's order by, in a manner of speaking, taking away with one hand what was given by the other, that is, even while adjusting loss in the assessment year 1995-96, deprive the assessee of a consequent benefit of carry forward and set off of the balance loss in the subsequent year(s). 28. Having once accepted the decision of the ITAT, in the same fact situation, - in fact in the same common order, the revenue cannot legitimately agitate a position contrary to the one it accepted in Nalwa - especially because Nalwa Investments is one of the share-holder companies of JISCO, which had sought and was allotted NCDs at ₹ 111/- per NCD and later transferred the allotments to UTI, which paid the balance amount. Its initial claim for capital loss was changed to business loss, and finally accepted by the ITAT. 29. Another good reason for this Court to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. In a decision of the Gujarat High Court in Deepak Nitrite Ltd v Commissioner of Income Tax 2008 (307) ITR 289 (Guj), the issue of whether such detachable warrants in the context of debenture issues had a monetary value, was dealt with in the following manner: The Tribunal failed to appreciate that at no stage was the issue of quantification ever in dispute between the parties. The Assessing Officer had categorically recorded that for the reasons stated in his order the claim of loss is not acceptable and the same is ignored in the computation of income . If the Assessing Officer had not undertaken quantification of the loss, the Commissioner (Appeals) had not undertaken such an exercise, there was no ground raised by the revenue before the Tribunal in the appeal the Tribunal on its own could not have undertaken the said exercise without first deciding the controversy brought before it by the parties, more particularly, the appellant. Merely because during the course of argument some contentions were raised as to whether detach- able warrants had any cost or not was not sufficient for the Tribunal to embark upon such an exercise in absence of any controversy between the part ..... X X X X Extracts X X X X X X X X Extracts X X X X
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