Income Tax Appellate Tribunal - Kolkata
Karam Chand Thapar & Bros. (Coal Sales) ... vs Deputy Commissioner Of Income Tax on 25 June, 2001
Equivalent citations: [2002]83ITD171(KOL), (2003)78TTJ(KOL)825
ORDER
S. Bandyopadhyay, J.M.
1. The only issue in this appeal filed by the assessee relates to the question of disallowance of the claim of business loss amounting to Rs. 34,12,695 incurred on sale of 52,503 non-convertible portion of partially convertible debentures (PCDs) of M/s Ballarpur Industries Ltd. (BILT).
2. The facts of the case, as discussed in detail, by both the lower authorities, are that the assessee was having certain shares of BILT in the past. On the basis of such shareholdings, the assessee was offered by BILT the right to acquire 52,503 number of 15 per cent redeemable partially convertible debentures consisting of convertible portion (Part A) of the value of Rs, 100 and non-convertible portion (Part B) of the value of Rs. 300. On application for the said PCDs, the assessee was required to pay Rs. 50 and Rs. 115 in respect of Part A and Part B respectively (totalling to Rs. 165) per debenture. On allotment, however, the assessee was required to pay Rs. 50 against Part A and Rs. 185 against Part B, the aggregate amount thus payable on allotment being Rs. 235.
The letter of offer of the above-mentioned PCDs itself provided for arrangement of sale of the non-convertible portion (Part B) of the debenture. BILT had already made arrangement with Citi Bank in accordance with which Citi Bank purchased the Part B portion of the face value of Rs. 300 @ Rs. 235 per debenture resulting thereby no payment being required by the applicants for the PCDs on allotment and surrender of the Part B portion in favour of the Citi Bank. The assessee-company accepted the above offer, paid @ Rs, 165 per debenture on application and surrendered the Part B portion to the Citi Bank thereby securing the payment on allotment in respect of Part A portion.
The assessee thus claimed the loss in respect of the transactions in the non-convertible portion of the aforesaid debentures (Part B) as follows :
No. of debentures Cost per debenture (including payment required to be made on application and allotment) Total cost price Sale price per debenture Total Sale value Total Loss (1) (2) (3) (4) (5) (6) 52,603 300 1,57,50,900 235 1,23,38,206 34,12.696 (3-5) The AO did not accept the aforesaid claim of loss. He was firstly of the opinion that the assessee had intended to retain the convertible portion-(Part A) of the PCDs for the purpose of acquiring shares in BILT, the ultimate motive of the assessee being to have controlling interest of the said company. The AO also mentions in this connection that the assessee-company was showing its holding of shares as 'investment' and not as 'stock-in-trade'. The AO argue that the action of the assessee in acquiring the PCDs as a whole is required to be taken into consideration and there cannot be any case for splitting up the PCDs into Part A and Part B. The AO argues that the assessee had knowingly incurred the loss of Rs. 65 per share (Rs. 300 minus Rs. 235) in respect of Part B portion simply for the purpose of acquiring the Part A portion. According to the AO, therefore, the loss incurred by the assessee in this regard represents further constructive payment towards acquisition of Part A of debentures. The AO notes that the sale proceeds in respect of Part B portion were not credited to the accounts of the assessee and were merely appropriated towards payment required to be made by the assessee on allotment of the PCDs and paid on behalf of the assessee by the Citi Bank. The AO thus strongly argues, by placing reliance on a number of decisions, that the aforesaid loss of Rs. 65 per debenture should be added to the cost of Part A portion of the PCDs and should, therefore, be considered as capital loss only. Ultimately, the AO disallowed the claim of the assessee in respect of the loss by holding the expenditure to be of capital nature and furthermore being constructive payment towards the price of shares to be ultimately obtained by the assessee after conversion of Part A of the. debentures into shares.
3. The assessee appealed against the above order of the AO before the CIT(A). The CIT(A) noted that the assessee had not traded in the shares of BILT for the last 5-6 years which clearly showed that it had no intention for trading in such shares. He has thus been of the opinion that the transactions were made by the assessee with the sole motive of making investment in convertible portion of the debentures, and that the assessee had no intention to retain the non-convertible portion at any point of time. The CIT(A) furthermore states in this connection that by retaining the convertible portion (Part A) of the debentures, the assessee was able to participate in the phenomenal growth of BILT. The CIT(A) also noted that the assessee along with the other members of Thapar Group were having controlling shares in the BILT and that the right issues had been offered to the assessee as existing shareholders only.
The CIT(A) has further been of the opinion that even under the arrangement with Citi Bank, the purchase of PCDs was not complete by signing of the agreement or delivery of documents but only after the payment was made by the Citi Bank under the scheme entered into by that Bank with BILT. In this connection, the CIT(A) argues that unless the payment was made by the assessee-company on allotment, the earlier payment on application would have got completely lost and the assessee would not have been entitled to any debenture at all.
4. However, the CIT(A) did not approve of the finding of the AO that the entire amount of Rs. 165 (Rs. 100 in respect of Part A and Rs. 65 in respect of Part B claimed by the assessee as loss) should be treated as cost price of the convertible portion (Part A). The CIT(A) noted that under the scheme of issuance of PCDs, only Rs. 100 had been shown as the cost price of Part A which again consisted of Rs. 10 at face value and Rs. 90 towards premium. The CIT(A) thus disapproved of the action of the AO in considering Rs. 65 to be added to the cost of Part A portion of the PCDs. According to the CIT(A) the aforesaid amount of difference of Rs. 65 per debenture should be considered as loss of the assessee on account of retaining the convertible portion of the debentures. He thus held that this has got to be considered as of the nature of capital expenditure or capital loss for making arrangement of holding the shares without making any payment on allotment. The resultant loss has thus been treated by the CIT(A) to be of the nature of capital loss and not as loss on sale of the debentures--Part B portion.
5. At the stage of hearing of the appeal before us, Shri R.N. Bajoria, the learned counsel for the assessee, has brought our attention to the scheme of issuance of PCDs. It has been pointed out that Part A and Part B of the PCDs have been mentioned in the scheme distinctly and separate amounts are fixed in respect of cost of acquisition of such Parts. It is argued that there is no case for mixing up these two different parts and treating the loss incurred in disposal of one part (Part B) as cost of the other part (Part A). It is argued in this connection that had the assessee intended not to dispose of Part B portion, there would have been no case for the AO to treat a portion of the amount required to be paid in respect of Part B portion against the Part A portion, of the PCDs. .
It is also pointed out that the original shares in BILT as well as in other companies were always held by the assessee as stock-in-trade: It has also been contended by making a reference to the assessment orders along with details of computation of income for the past years that in all such past years, the results of transactions in shares, etc. have been considered on revenue account and never as capital gains or capital loss.
6. On the other hand, the learned Departmental Representative strongly argues that a right to contribute to the capital of a company itself is a capital asset. In this connection, the learned Departmental Representative has relied on the following judgments :
(1) Karam Chand Thapai & Bros. (P) Ltd. v. CIT (1971) 82 ITR 899 (SC);
(2) CIT v. R.M. Amin (1977) 106 ITR 368 (SC); and (3) Hari Bros. (P) Ltd. v. ITO (1964) 52 ITR 399 (Punj).
It has been argued by the learned Departmental Representative thereafter that in reality there has been renunciation on the part of the assessee of the right to acquire the Part B portion of the PCDs. It has also been argued that the assessee along with the other members of Thapar Group were having control over the BILT and hence, the shares of BILT should be considered to be lying in the investment portfolio of the assessee-company under capital head and not as stock-in-trade. It has also been pointed out in this connection that in its accounts the assessee was all along showing the shares not as 'trade investment' but as 'other investment'. It is thus contended that the original holding of the shares should be considered to be on capital account.
It is furthermore argued in this connection that the results of subsequent transactions in respect of one type of shares or debentures would merely go to increase or decrease the cost of the original shares without any gain or loss having accrued to the assessee. The following judgments have been relied upon in this connection ;
(1) Miss Dhun Dadabhoy Kapadia v. CIT (1967) 63 ITR 651 (SC);
(2) CIT v. Oberoi Building & Investment (P) Ltd. (1993) 203 ITR 403 (Cal); and (3) CIT v. Tushar Commercial Co. Ltd. (1998) 230 ITR 918 (Cal).
7. On the other hand, the learned counsel for the assessee argued that if the original asset was not on the capital account, the right to receive or renounce further right shares thereon cannot also be considered to be on capital account. It is furthermore argued that it is not exactly a case to give upon renunciation of right but the acquisition and sale of the Part B portion of the PCDs. It is furthermore argued in this connection that the method of payment towards acquisition of the debentures on allotment through adjustment of sale price of Part B debentures to Giti Bank is immaterial in considering the actual nature of the transaction.
8. On examination of the facts of the case, we find that neither the AO nor the CIT(A) has challenged the genuineness of the transactions under consideration. It is the assessee's claim and the same has also been established with evidence that the assessee is not only a dealer in shares but also the results of transactions in shares, whether profit or loss, were all along considered by the AO on the revenue account, i.e., as business profit or business loss. There is, therefore, no reason to suddenly jump to the conclusion that the assessee became an investor so far as the PCDs of BILT are concerned.
Again, although the acquisitions of Part A and Part B of the PCDs are linked together by a single activity of applying for the PCDs and thereafter making payments on application as well as allotment, since separate purchase prices are mentioned for Part A and Part B portions and both the parts can be segregated from each other (in the present case the same has actually been done by selling off of the Part B portion and retaining the Part A portion of the assessee), the acquisition and subsequent treatment thereto by way of sale or retention, whatever the case may be, of Part A and Part B are required to be considered separately. So far as Part B portions are concerned, the facts clearly show that the assessee, even at the very outset, intended not to retain the said portions but to dispose of the same immediately on acquisition of those portions. Hence, so far as the Part B portions are concerned, it has got to be admitted that the activity of the assessee in relation to the transactions in Part B portions was of trading nature. It is a fact that the results of the transactions were predetermined and the assessee was also motivated by the idea of obtaining the Part A portions which in their turn would yield shares of BILT to the assessee. But that by itself cannot lead to the conclusion that Part A and Part B portions should be taken together and the loss incurred by the assessee in the transactions in respect of Part B should be aggregated with the transactions in Part A. On many occasions, a businessman may be required to incur a predetermined as well as deliberate loss for the sake of bigger business interests. Hence, in our view not only the results of transactions in Part B are required to be considered separately from those with regard to Part A, but the said results in respect of Part B portions of the PCDs are to be treated as transactions on revenue account. In other words, the loss incurred by the assessee in such transactions is required to be allowed as revenue loss.
9. Even if it be argued that so far as the acquisition of Part A portion of the PCDs, is concerned, the objective of the assessee being acquiring the controlling interest in the company (BILT) by the Thapar Group, the Part A portion of the PCDs should be treated on capital account by way of considering them to be of the nature of "investment" yet, there is no authority anywhere that the concomitant expenses, if any, incurred by the assessee on revenue account for the purpose of acquiring Part A portions on capital account would themselves become capital expenses. If a capital asset is acquired by a businessman and loan is incurred for such purpose, the interest payment on such loan, although connected with the acquisition of capital asset, will, however, has to be treated as revenue expense. Various Courts, including the apex Court, have held in this regard. Therefore there is no scope for considering the loss incurred by the assessee in acquiring and disposing of the Part B portions of the PCDs, under consideration to be contributing to the direct cost of acquiring the Part A portions and hence in treating the said loss to be of the nature of addition to the cost of Part A portions of PCDs. Even, the CIT(A) is also not correct in holding the loss under consideration" as of the nature of capital loss. We have already discussed above that so far as Part B portion is concerned, there is no reason to hold that the said portion was intended by the assessee to have been acquired towards investment portfolio. Hence, the loss under consideration, in any case, is required to be allowed as revenue loss only. We, therefore, reverse the orders of the lower authorities and direct that the loss of Rs. 34,12,695, as claimed by the assessee, in respect of transactions in Part B portion of the PCDs, be allowed as revenue loss.
10. In the result, the appeal filed by the assessee is allowed.