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TMI Blog2001 (10) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... stock-in-trade or capital investment? (d) Whether the NCDs held by the assessee-company were as stock-in trade so as to entitle it to claim the loss as business loss? (e) Whether the amount of Rs.111 per NCD amounts to forfeiture of capital or is to be treated as business loss? (f) Whether the order of the Income-tax Appellate Tribunal is perverse on facts and in law? The factual background common to all five appeals are essentially as follows. During the assessment year in question, each of the assessee-respondents came up with a private placement of its preferential shares and also subscribed to the rights issue of non-converitible debentures (in short "NCD") of Jindal Iron and Steel Co. (in short, "JISCO"). The assessee also subscribed to the equity issue of Jindal Vijay Nagar Steel Ltd. (in short, "JDSL"), a new com pany of the Jindal group floated during February, 1995. During the relevant period, JISCO came up with a rights issue of 10.5 per cent. redeemable NCD with a detachable warrant or cash at par. The value of the NCD was Rs.500 and it carried a detachable warrant (in short "DW"), which entitled the holder to apply for one equity share of JISCO with a face val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he rights issue of NCD, as approved by the SEBL were as under: (a) Each debenture will be of face value of Rs. 500 each. (b) Every residential shareholder will pay a sum of Rs.111 per debenture on making application and balance of Rs.389 per NCD was payable on allotment. (c) For non-residents/FI's NR renouncees will contribute a sum of Rs.500 each debenture on application. (d) If the company does not receive the minimum subscription of about 90 per cent. of the issue of NCDs within sixty days from the closure of the issue, the company shall refund the entire subscription amount received. (e) The NCDs with DWs were offered to existing shareholders of the company whose name appeared in the register of the company on October 31, 1994. (f) 23 debentures for every 100 equity shares held on October 31, 1994, were to be issued. The shareholding pattern of the JISCO as on August 12, 1994 was as under: ----------------------------------------------------------------------- Per cent. ----------------------------------------------------------------------- 1. Promoters 30.9 2. Finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT(A)"). The said authority came to hold that NCDs were allotted on January 14, 1995, on payment of application money of Rs.111 for NCD for the same money between January 2, 1995 and January 25, 1995. All the five assessees transferred the NCDs to the UTI without consideration. According to the Commissioner of Income-tax (Appeals), the five assessees never became owners of the fully paid NCDs. It was also observed that the assessee had paid Rs.111 as the application money for acquiring NCD. The DWs were received gratis. The claim of loss of Rs.111 per debenture on its sale has been made for the first time before the Commissioner of Income-tax (Appeals). The claim was not raised before the Assessing Officer at any time. It was therefore not open to the Assessing Officer to examine this issue. It was noted that the five assessee-companies made applications for NCDs in the background of the arrangement between JISCO and the UTI without any consideration and with the intention of incurring loss of Rs.111 on each NCD. She also observed that the assessee-companies have not fully paid for the NCDs and therefore they were not entitled to the DWs because as per the terms of issue the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e holder to apply for one equity share of JISCO at Rs.200 per share (Rs.10 face value + Rs.190 premium). As per the terms of the issue, a sum of Rs.111 per NCD was payable on application and the balance of Rs.389 was payable on allotment. The entitlement of DW was to take place only when the full payment at Rs.500 on each NCD was made. The assessee-companies therefore made application for the rights issue of NCDs and made the payment at Rs.111 per debenture on application as was prescribed. As they did not have enough funds to make payment of allotment money they sold the DWs. Accordingly, JISCO allotted DWs to the assessee-companies also. So far as the observations of the Commissioner of Income-tax (Appeals), that the assessee-companies had not paid the allotment money but it was paid by the UTI, it was submitted that the certificate of the UTI to the effect that they have made payment at Rs.389 per NCD to JISCO on behalf of the assessee-companies, was not considered. In a sense their stand was that only when the entire consideration for the NCDs was received by JISCO further course of action was followed. The materials were placed to show that DWs were given to the assessees wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment and the investment was made by borrowing funds from companies connected with JISCO. It was a clear cut case of colourable transaction and it was the duty of the Assessing Officer to lift the corporate veil. The Tribunal after analysing the rival submissions, essentially rerorded the following findings: The five assessee-companies were promoters of JISCO through whom JISCO made investment in various public limited companies. The assessee-companies held about 34 per cent. shareholding of JISCO. The rest was held by the financial institutions and the public. During the assessment year in question, JISCO came up with the rights issue worth about Rs.500 crores. As per the terms of the issue, as approved by the SEBI, if 90 per cent. of the issue was not subscribed then the issue had to fail and JISCO was to refund the entire money collected by it under the issue. It was thus a compulsion on the part of the assessee-companies to subscribe to the rights issue. The failure of such issue would have been detrimental to the appellant companies being investors/promoter companies of JISCO. Thus, the assessee-companies had no option but to subscribe to the rights issue of NCDs. A sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was made to several decisions in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC); Delhi Stock Exchange Association Ltd. v. CIT [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-companies did not set out the proper position that cannot be a reason for not allowing the claim. Referring to the assessment order, as well as the order of the Commissioner of Income-tax (Appeals), it appeared that the assessee's claims had been rejected on the following grounds: 1. The NCDs were transferred to the UTI without consideration. So the companies never became the owners of fully paid NCDs. 2. The DWs were sold on March 25, 1995, whereas the same were allotted to the appellant companies on May 3, 1997. 3. The transfer of NCDs was a unilateral act and the beneficiary of the transfer was not the UTI but JISCO. 4. The funds of JISCO itself have been utilised indirectly in subscribing to the rights issue of its own NCD. 5. The entire transaction was not at arm's length. It was a colourable device to evade future tax. With reference to the first ground, it was observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disallowance of the claim by the Assessing Officer and confirmed by the Commissioner of Income-tax (Appeals) that the transaction of sale of NCDs to the UTI at Rs.389 when its face value was Rs.500, was not at arm's length and was a device to evade future tax, it was found to be of no substance by the Tribunal. It noted that as per the scheme approved by the SEBI, the assessee-companies had no option but to subscribe to the rights issue. The same was true of all the shareholders. The general public accounted for about 40 per cent. of the shareholding of JISCO. In case the assessee-companies did not opt to subscribe to the issue, the entire issue would have failed, as it was provided in the terms of the issue that if the issue was subscribed less than 90 per cent., JISCO would refund the entire money. That would have been detrimental to the interest of the assessee-companies who were promoter companies of JISCO. It also referred to the chart of yield obtained by the UTI and the assessee-companies and found that the UTI had got annual yield of about 25 per cent. Therefore, it was held that the transaction of selling NCDs at the face value of Rs.500 to the UTI at Rs.389 per debent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 allottee to receive the DW. Had the sale taken place, only the UTI would have been entitled for the DW. Here the DWs were issued to the assessee-companies while the UTI had paid the allotment money. The assessee-companies had shown the amount of application money as the cost of DWs which is also evident from the fact that the assessee-companies had claimed the loss to the extent of DWs which were sold. It was in fact a financial arrangement between JISCO and the UTI and the UTI agreed to pay Rs.389 per debenture on the condition that (i) interest would be paid at Rs.10.5 per cent.; and (ii) refund of Rs.500 would be given in three instalments. In the process the assesseecompanies had let its capital to be forfeited by JISCO which was a unilateral act on the part of the assessee-companies. It is the case like unclaimed credits/ debts. A sum of Rs.111 per NCD was capital investment in the hands of the assessee-company as the assessee-companies had shown it as investment and declared the loss as short-term capital loss while filing its return. The assessee-co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xable under the head "Capital gains" but the Assessing Officer as well as the Commissioner of Income-tax (Appeals) treated such gains to be taxable as business gains and, therefore, the Revenue cannot be now permitted to change its stand. We shall first examine whether the questions posed arise out of the order of the Tribunal. So far as question No.(c) is concerned, it is to be noted that such a question was not even urged before the Tribunal by the Revenue. It was not under its consideration. Similar is the position as regards question No.(d). Coming to the rest of the questions, we find that the Tribunal has analysed the factual position which we have noted above in coming to the conclusion that the assessee-companie's claim was admissible as business loss. We have also perused the decisions of various Benches of the Tribunal to which reference has been made by the Tribunal. There was no basic difference so far as the transactions involved, which were the subject-matter of consideration in those cases, were concerned. We may add here that before the Assessing Officer, revised statement of income was filed in each case indicating the reasons of revising return. As the conclus ..... 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