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TMI Blog2022 (7) TMI 262X X X X Extracts X X X X X X X X Extracts X X X X ..... getting the share warrants forfeited assessee did not sell these shares. As informed that as per the agreement there was no clause of selling the shares. As subsequent movement in prices have duly corroborated that the share prices fell and the assessee s decision not to pay the balance amount was not at all unjustified. The prime emphasis of the assessing officer at the end is that the exercise was meant to bring capital receipt in the hands of Indiabulls Power Pvt. Ltd. and thwart examination from the perspective of section 68. This line of reasoning is wholly unsustainable. Firstly assessing officer is not at all seized with the assessment of Indiabulls Power Pvt. Ltd. as to how the capital receipt in his hand is to be examined from the perspective of section 68. Even if assessee had contributed the balance amount that would still be a capital contribution. Moreover, even for exempt capital receipt, there is no law that such credits are outside purview of section 68. Hence, AO s surmise also is without any basis whatsoever. Moreover, the amendment in section 68 providing for examination of source of source for share application money, share capital, and share premium, or any su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital loss of Rs. 76,12,50,000/-. With regard to the transaction resulting in short term capital loss, the note 20 of the note to financial statement for the year ended 31.03.2012 read as under:- "During the previous period ended 31.03.2011, the company had paid Rs. 76,12,50,000/- as upfront amount for part payment against 10,50,00,000/'- warrants of Indiabulls Power Ltd. (IPL) which, if exercised, would have entitled the Company to an equal number of equity shares of IPL fully paid up of the face value of Rs. 2 each, anytime after November 30, 2010 but no later than May 29, 2012, in accordance with the terms of issue of such warrants. During the year ended 31.03.2012 the company has conveyed its unwillingness to IPL to excise the warrant of IPL per se consequently the upfront amount of Rs. 76,12,50,000/- paid by the company towards part payment against the said warrant was forfeited by IPL and the same was charged to the profit and loss account as loss on share warrants." 4. The Assessing Officer asked the assessee to explain the Short Term Capital Loss. The assessee submitted as under:- "During the F.Y. 2010-11, Indiabulls Power Ltd. proposed to allot 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment 07.10.2010 2 Date of taking loan 29.11.2010 3 Date of investment in share warrant of IPL 29.11.2010 4 Date of Board meeting for unwilling to exercise share warrant of Indiabulls Power Ltd. 17.11.2011 5 Date of letter of unwilling to exercise Share warrant of Inidabulls Power Ltd. 18.11.2011 6. The Assessing Officer referred to the Board resolution dated 17.11.2011 for not exercising the option. The Assessing Officer was of the opinion that the transactions were pre-decided for making investment of Rs. 76,12,50,000/- with Indiabull Power Ltd. Thereafter the Assessing Officer referred to warrant certificate and noted that the assessee company was entitled to purchase one equity share of India bulls Power Ltd. having face value of Rs. 10/- by paying in full the exercise price of Rs. 28/- (as reduced by the upfront money of Rs. 7.25 per warrant already paid) for each warrant exercised at any time on or after 30.10.2010 but not later than 29.05.2012. The assessee company however chose to forego its right to exercise the convertible warrant well before the end date and wrote a letter to Indiabulls Power Ltd. on 18.11.2011. Hence, Assessing Officer wondered as to wha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital loss. Further, attention of your goodself is invited to the law pronounced by Jurisdictional High Court of Delhi in the case of CIT vs. Shri Chand Ratan Bagri TTA 31/2010 (Copy attached). In the said case, the assessee had subscribed towards 10 lakhs preferential convertible warrants issued by M/s. BLB Limited. The assessee after making the initial payment of Rs. 59.5 lakhs could not make the balance payment and therefore, M/s. BLB Limited forfeited the amount of Rs. 59.5 lakhs earlier paid by the assessee. The assessee claimed this loss as short term capital loss under the head "capital gain". It was submitted on behalf of the assessee that the company had debited loss to its capital account and not to the profit and loss account and consequently, there was no effect on the profit and loss account of the assessee company. The Assessing Officer however, observed that the same had cast an effect on the short term capital gains of the assessee showing and the forfeiture of this amount in the manner indicated by the assessee was a tax evasion tactic, prohibited by law, The Assessing Officer taxed the same in the hands of the assessee. Citing the contention of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of any rights, we may profitably refer to the judgment of the Supreme Court in the case of Commissioner of Income-tax vs. M/s. Grace Collis and Others". Considering the legal position emerging from the above discussions, it is clear that the forfeiture of share warrant money is nothing but transfer and hence, the amount of loss incurred is duly allowable as short term capital loss." 7. The Assessing Officer observed that he has carefully considered the same and the case laws are distinguishable without pointing out the reasons. He observed that this is not genuine transaction and the transactions are coloured in the nature to pass on the amount in question to Indiabulls Power Ltd. in disguise of the convertible warrants. The Assessing Officer enquired from the assessee that why the share warrants were not sold. The Assessing Officer noted the assessee's response in this regard is as under:- "During the financial year 2010-11, Indiabulls Power Ltd. proposed to allot 105,000,000 share warrant to the assessee, which upon conversion, would have entitled the assessee to acquire an expel no of equity shares of the company of face value of Rs. 10/- each at a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... :- "7.1. It would be further interesting to see the allotment of total 42 crore convertible warrants by Indibulls Power Ltd. Following is the table which shows that name of allottee, number of warrants allotted and amount: Name of the allottee Number of warrants Total amount @ Rs.7.25 per warrant Azalea Infrastructure Pvt. Ltd. 15,00,00,000 Rs.108,75,00,000 Gloxinia Infrastructure Pvt. Ltd. 6,00,00,000 Rs.43,50,00,000 Jarul Infrastructure Pvt. Ltd. 10,50,00,000 Rs.76,12,50,000 Alona Infrastructure Pvt. Ltd. 10,50,00,000 Rs.76,12,50,000 Total 42,00,00,000 Rs.304,50,00,000 Thus, the entire amount of Rs. 304.50 crores borrowed by Chloris Properties Ltd. from Indiabulls Infrastructure Ltd. has actually been invested in 42 crores convertible shares warrants of Indiabulls Power Ltd." 9. Thereafter, the Assessing Officer mentioned that the Board of the assessee company might have analyzed the prices of the shares of Indiabulls Power Ltd. before making a decision for purchase of share of this company @ Rs. 29/- per share during the period from 30.11.2010 but not later than 29.05.2012 which the assessee company was entitled by making investment in 10,50,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies. As if all the four companies have simultaneously decided to not to exercise the option of conversion before 30.11.2010 even though they were entitled to exercise its option till 29.05.2012. M/s. Indiabulls Power Ltd. (Now Rattan India Power Ltd.) has also by a single resolution dated 19.11.2011 forfeited the entire amount of Rs. 305.50 crores and has shown as a capital receipt." 11. Hence, the Assessing Officer held that the entire transaction is actually a conduit for transfer of the amount to credit the amount as a capital receipt in the books of Indiabulls Power Ltd. (Now Rattanlndia Power Ltd.) The Assessing Officer referred to the decision of the Hon Tale Supreme Court in the case of McDowell and Co. Limited vs. CIT 154 ITR 148 (SC) and other decision in this regard and concluded as under:- "It has also been observed that; "Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per share. As per the terms of allotment, an upfront payment of 25% of conversion price i.e. Rs. 7.25 per share was required to be made by allottees and the balance was payable at the time of exercise of option i.e. within eighteen months from the date of allotment. The above mentioned convertible warrants were issued by IPL to the following 4 allottees: Name of the allottee Number of warrants Total amount paid upfront @ Rs.7.25 per warrant (Amount in Rs.) Azalea Infrastructure Pvt. Ltd. 15,00,00,000 Rs.108,75,00,000 Gloxinia Infrastructure Pvt. Ltd. 6,00,00,000 Rs.43,50,00,000 Jarul Infrastructure Pvt. Ltd. 10,50,00,000 Rs.76,12,50,000 Alona Infrastructure Pvt. Ltd. 10,50,00,000 Rs.76,12,50,000 The appellant company along with 3 other companies invested in the share warrants at a lock in price of Rs. 29 per share on 29.11.2010. The facts of the case as submitted by the AR of the appellant is that in F.Y. 2010-11 Indiabulls Power Limited ("IPL") proposed to allot 105,000,000 share warrants to the appellant which upon conversion would have entitled the appellant to acquire an equal number of equity shares of IPL of face value of Rs. 10/- each at a convers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to camouflage the credit of amount to IPL as a capital receipt to avoid the test of section 68 of the Act; the appellant company acted as a conduit to the transaction to provide ultimate benefit to IPL; since the appellant company did not wait till end of conversion period to convey unwillingness, the said forfeiture was pre-decided; even if the appellant company did not want to invest further in the shares of IPL, then the unwillingness should have been expressed in May 2812 instead of November 2011; the forfeiture of warrants by IPL does not amount to transfer as per provisions of section 2(47) of the Act. The AO disallowed the short term capital loss of Rs. 76,12,50,000 claimed by the appellant. In addition to the appellant's submissions, the AR has also submitted the order of Ld. CIT(A)-1, who has allowed the short term capital loss claimed by Alona Azalea Infrastructure Pvt. Ltd., (AIPL), as AIPL was one of the allottees of the convertible warrants, and similar to the case of the appellant, AIPL's warrants were also forfeited resulting in capital loss. The shares of IPL having face value of Rs. 10 each were traded at prices ranging from Rs. 29.60 to Rs. 45.50 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed counsel of the assessee summarised in submission as under:- 1. Justification with regard to decision of investment and decision of mot exercising: Share Price Trend: i. Oct 2009 to Nov 2010: At the time of investment i.e. on 30.11.2010, share Price of IPL (listed on NSE and BSE) in last 12 months was ranging from Rs. 45.5 per share to Rs. 29.6 - refer page 15-19 of assessment order where the Ld. AO has specifically given a table showing historical data of share prices of IPL downloaded from website of BSE and page 1, 5, 11 of Annexure 1 showing data downloaded from website of NSE The same was expected to rise in future due to ongoing projects and future ready investments of IPL and the trading history-refer 108, 113, 135, 156 of PBK Therefore, it was a prudent decision to invest in IPL ii. Dec. 2010-Nov. 2011; -The share price fell from Rs. 29.6 to Rs. 11.8 - refer pg 16, 17 of assessment order and page 12, 17, 22 of Annexure 1 showing data downloaded from website of NSE iii. 17th October 2011; Merger and demerger of group companies vide order of Delhi High Court dated 17.10.11 effective from 25.11.11-as per the said scheme, the warrants issued to the Assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee pay balance amount of Rs. 21.75 per share. Assessee also submitted before the Ld. AO the computation of loss if option would have been exercised-refer page 43 of PBK 5. STCL not set off - No benefit obtained: Such STCL not set off against any CG and remains outstanding. Hence, no benefit is derived-refer return of Income of Assessee for AY 2020-21 at Annexure 2. 6. No restriction on obtaining loam from Holding Company: There is no legal restriction on obtaining a loan from Holding Company to make investment in promoter companies. 7. No restriction on timing of investment; There is no restriction on timing of investment. It is for parent company to decide whether they would like to keep substantial idle funds in the account of its subsidiary or to infuse funds only when the same are required to be invested in IPL. Assessee has no control over their fund management. Given the analogy suggested by the Ld. AO, it appears that Ld. AO is trying to suggest that in case the funds had stayed for a longer period in the bank Account of Assessee then this investment would have been genuine otherwise this investment would be termed as bogus. 8. AO cannot step into the ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 78, 81, 82 of PBK xi. Board Resolutions dated 7th October 2010 of Assessee regarding the investment-refer page 54 of PBK xii. Board Resolution dated 17th November 2011 of Assessee regarding decision to not exercise the option of conversion and regarding forfeiting the upfront money-refer page 55 of PBK xiii. Board Resolutions of IPL dated 19th November 10 regarding issue of share warrants and their terms and conditions. Provisions of Income tax Act, Companies Act, article of association, memorandum of association, listing agreement, SEBI and approvals, sanctions, permissions, consent of BOD and other authorities were complied with-refer page 189-191 of PBK xiv. Board Resolutions of IPL dated 30th November 2010 regarding allotment of 42 crores share warrants which shall upon conversion be locked in for a period as stipulated under SEBI; xv. Share Warrant certificate dated 30th November 2010-refer pg. 47 of PBK xvi. Communication to IPL vide letter dated 18th November 2011 regarding decision to not exercise the conversion at page 48 of PBK xvii. These companies are filing returns, have made due disclosure in their books. 10. Disallowance on Conjectures and surmises: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards group companies. Similarly, it was also immaterial that the shares sold by the assessee were of another group company. It was also immaterial as to who was the purchaser of the shares, so long as the shares were not sold at a price which was higher or lower than their fair price and there was no restriction on sale of such sha res to a group company. • Neither the assessee nor the amalgamated company adjusted the capital loss on account of sale of those shares against any long-term capital gain. No tax benefit was, therefore, obtained by the assessee. Hence, it could not be said that the transactions in question were a colourable device, meant to gain some unfair tax advantage. 12. Decision in case of other promoter companies who invested in share warrants of IPL. In fact, the warrants were issued by IPL to 4 promoter companies including Azalea Infrastructure Pvt. Ltd. and Alona Infrastructure Pvt. Ltd. In all the 4 cases, the upfront money was forfeited. The Hon'ble Delhi Tribunal has deleted the addition in case of DCIT v. Azalea Infrastructure Pvt. Ltd. ITA No. 3667/Del/2017 ITAT DELHI and the Ld. CIT(A) has deleted the addition in case of Alona Infrastructure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wisdom of assessee is investing. For this he has referred to the share price movement of the investing company. Despite noting that prices were touching Rs. 28, he found Rs. 29 investment a wrong decision. His inference in this regard is not correct as the price movement by no stretch of imagination point out that investment was in a bogus or penny stock company. Further, it is settled law that Assessing Officer cannot sit in the shoes of businessman and decides the prudence of business decision. Thereafter Assessing Officer has wondered why instead of getting the share warrants forfeited assessee did not sell these shares. It was informed that as per the agreement there was no clause of selling the shares. As subsequent movement in prices have duly corroborated that the share prices fell and the assessee's decision not to pay the balance amount was not at all unjustified. The prime emphasis of the assessing officer at the end is that the exercise was meant to bring capital receipt in the hands of Indiabulls Power Pvt. Ltd. and thwart examination from the perspective of section 68. This line of reasoning is wholly unsustainable. Firstly assessing officer is not at all seized w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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