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2015 Supreme(Del) 3185
IN THE HIGH COURT OF DELHI AT NEW DELHI
S. MURALIDHAR and VIBHU BAKHRU, JJ.
COMMISSIONER OF INCOME TAX DELHI-I - Appellant
versus
M/S ABHINANDAN INVESTMENT LTD.- Respondent
ITA 130/2001
Decided on : 19.11.2015
Advocate Appeared:
For the Appellant : Mr. Rohit Madan, Senior Standing counsel with Mr. Zoheb Hossain.
For the Respondent:Mr. Ajay Vohra, Senior Advocate with Ms. Kavita Jha.
Headnote:
INCOME TAX - Capital gains - Renunciation of rights to subscribe to partly convertible debentures (PCD) - Loss claimed - Whether the transaction was a colourable device to contrive an artificial loss - Whether the Assessee could claim that it has incurred a loss on the sale of its right to subscribe to the PCDs of JISCO and further set off the said loss against the other income from capital gains - Held, yes - The transaction of renunciation of rights in question was a colourable device to claim such loss.
Fact of the Case:
The Assessee, one of the companies belonging to the Jindal Group, claimed a loss of Rs.1,68,59,360/- in respect of renunciation of rights to subscribe to partly convertible debentures (PCD) of M/s Jindal Iron & Steel Co. Ltd. (JISCO). The Assessee was entitled to these rights by virtue of holding shares of JISCO. According to the Revenue, the transaction was entered into solely for the purpose of contriving a loss by unjustifiably relying on a decision of the Supreme Court in Dhun Dadabhoy Kapadia vs. CIT.
Finding of the Court:
The Tribunal had grossly erred in not appreciating that the AO had found the transactions to be a device to evade tax. The Assessee had passed a resolution for transferring the shares in question from stock-in-trade to investments in the balance sheet as on 31st March, 1992 solely for the purpose of taking benefit of the decision of the Supreme Court in Dhun Dadabhoy Kapadia (supra). The shares in question had been held by the Assessee as stock-in-trade and the resolution to transfer them to investments was taken only once the Assessee contemplated sale of the said shares. The transaction of sale of rights entitlement by the Assessee could not be termed as a sham transaction as the same had been given effect to. The rights renunciated by the Assessee in favour of JSL had been exercised by JSL and JSL had subscribed to the PCDs of JISCO which were subsequently issued and registered in the name of JSL. The transaction of sale of rights to subscribe to the PCDs had been accepted by the AO as the consideration received by the Assessee was reflected in the Profit & Loss Account of the Assessee and the AO had accepted the same. The Assessee had sold shares of JSL and advanced the funds received therefrom to JSL. The ITAT had observed that the shares of JSL were sold to raise funds to subscribe to the rights issued to PCDs of JISCO. However, the Assessee had not subscribed to those shares but had also renounced its rights in favour of JSL. There is no explanation provided by the Assessee whatsoever for entering into this transaction. The transaction of renunciation of rights in favour of JSL ensured that the right to subscribe remained within the group. Thus, looking at the transaction at a group level, it is apparent that the right to subscribe to the PCDs and consequently acquire further shares of JISCO was not alienated and remained within the Jindal Group. The Assessee had not incurred any real loss, the transaction of renunciation of rights was a colourable device to claim such loss.
Issues: 1. Whether the Income Tax Appellate Tribunal was right in holding that the sale consideration received by the assessee by transfer of shares and sale of right entitlement of Partly Convertible Debentures (PCD) is income from capital gains and not income from business? 2. Whether the Income Tax Appellate Tribunal was right in holding that the assessee had incurred loss on sale of its entitlement to acquire partly convertible debentures and the assessee is entitled to set off the alleged loss from the capital gains/income earned by the assessee?
Ratio Decidendi: The transaction of renunciation of rights in question was a colourable device to claim such loss. The Assessee had not incurred any real loss, the transaction of renunciation of rights was a colourable device to claim such loss.
Final Decision: Appeal allowed.
VIBHU BAKHRU, J
1. This is an appeal filed by the Revenue under Section 260A of the Income Tax Act, 1961 (hereafter ‘Act’) impugning an order dated 12 January, 2001 passed by the Income Tax Appellate Tribunal (hereafter ‘ITAT’) in ITA No. 5425(Del)/94. The said appeal (ITA 5425(Del)/94) was preferred by the Assessee against an order dated 18July, 1994 passed by Commissioner of Income Tax (Appeals) [hereafter ‘CIT(A)’] whereby the Assessee’s appeal against an assessment order dated 22April, 1993, passed by the Assessing Officer (hereafter ‘AO’) in respect of Assessment Year 1992-93, was rejected.
2. The controversy involved in the present case relates to a loss of Rs.1,68,59,360/-claimed by the Assessee in respect of renunciation of rights to subscribe to partly convertible debentures (hereafter ‘PCD’) of M/s Jindal Iron & Steel Co. Ltd. (hereafter ‘JISCO’). The Assessee was entitled to these rights by virtue of holding shares of JISCO which were acquired by the Assessee at an approximate average cost of Rs. 6.86 per share (The documents filed by the Assessee indicate that the Assessee had acquired 1,04,150 nos. of shares at the aggregate consideration of Rs.7,14,900/-). As against the aforesaid cost actually paid, the Assessee had claimed a cost of acquisition of rights entitlement to subscribe to PCDs at the rate of Rs. 200 per share of JISCO on the basis of which such rights were acquired.
3. According to the Revenue, the transaction was entered into solely for the purpose of contriving a loss by unjustifiably relying on a decision of the Supreme Court in Dhun Dadabhoy Kapadia vs. CIT: (1967) 63 ITR 657 (SC).
4. The present appeal was admitted by this Court on 12October, 2004 and the following questions of law were framed for determination:-
“1. Whether the Income Tax Appellate Tribunal was right in holding that the sale consideration received by the assessee by transfer of shares and sale of right entitlement of Partly Convertible Debentures (PCD) is income from capital gains and not income from business?
2. Whether the Income Tax Appellate Tribunal was right in holding that the assessee had incurred loss on sale of its entitlement to acquire partly convertible debentures and the assessee is entitled to set off the alleged loss from the capital gains/income earned by the assessee?”
5. The present appeal was heard alongwith CIT v. M/s Sun Investments Ltd.: ITA 91/2002 and CIT v. M/s Stainless Investment Ltd.: ITA 305/2002 in respect of companies which also belong to the Jindal Group and where similar issues were involved. The learned counsel for the parties argued that the present appeal be considered as a lead matter and a decision in the appeal would also cover the issue involved in M/s Sun Investments Ltd. (supra) and M/s Stainless Investment Ltd. (supra).
6. Briefly stated the relevant facts necessary to address the aforesaid questions are as under:-
6.1 The Assessee is one of the companies belonging to the Jindal Group and was incorporated in the year 1983. The Jindal Group is mainly engaged in manufacturing and production of ferrous metal and alloys. JISCO & Jindal Strips Limited (hereafter ‘JSL’) and Saw Pipes Ltd. are among the principal manufacturing companies of the Jindal Group. In addition to the manufacturing concerns, Jindal Group also includes investment companies such as the Assessee – which, inter alia, hold shares of the other manufacturing companies.
6.2 It is not disputed that the investment companies within the Group are under an overall common management and that the registered offices of some of the investment companies are located in residential flats occupied by employers/employees of other Group Companies. The Assessee noted that the Assessee was incorporated on 6April, 1983 and its Directors were Sajjan Kumar Jindal s/o Shri O.P. Jindal and Anand Prakash Garg (who was an employee of JSL). At the initial stage, 1,20,000 equity shares of Rs.10/-each amounting to Rs.12 lacs were offered to the pub
