Income Tax Appellate Tribunal - Ahmedabad
Shri Ajay C. Mehta vs The Deputy Commissioner Of Income-Tax on 18 May, 2007
Equivalent citations: (2008)115TTJ(AHD)281
ORDER
P.K. Bansal, Accountant Member
1. This Appeal by the Assessee is directed against the Order passed by the Commissioner of Income-tax (Appeals)-I, Baroda ["CIT(A)" for short] dated 05-08-ZOOS for the assessment year (AY) 1996-97.
2. The only ground taken by the assessee relates to the disallowance of short term loss of Rs. 4,32,000/- claimed by the assessee on account of extinguishment of warrants.
3. The brief facts of the case are that the assessee has applied for 2,00,000 warrants and paid Rs. 2.70 per share (i.e., 5% of Rs. 54) as upfront payment. The assessee however exercised the said right with respect to 40,000 warrants only and right with respect to balance 1,60,000 warrants was extinguished, which the assessee claimed as short term loss. The AO disallowed the loss holding that the sale of warrants can not be treated as Capital Asset as per definition of Capital Asset given Under Section 2(14) of the Act.
4. The assessee went in appeal before the CIT(A). Before the CIT(A), the assessee stated that in accordance with the guidelines for preferential allotment of shares to the promoters of the company M/s Deepak Nitrite Ltd. had issued warrants with a right attached to the holders of the warrants, to subscribe against payment in cash for one equity share of the company of Rs. 10/- each for every warrant held, at such price and time as may be determined by the Board in accordance with prevailing guidelines. The guidelines are related to the average of the market price of the company's share as quoted on the Bombay Stock Exchange for the preceding 6 months period from the date of Board meeting, i.e., 28th June, 1994, plus the margin of 10% over such average price. The holder of the warrants had to exercise their option within 18 months. The assessee could exercise the right only in respect of 40,000 warrants and on the balance the rights were extinguished. The balance 1,60,000/- warrants was extinguished. It was contended that the warrant is also a capital asset as per the definition of the capital asset given Under Section 2(14) of the Act. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of Ahmed G Ariff v. CWT 76 ITR 471 (SC) and also the decision of the Hon'ble Karnataka High Court in the case of Syndicate Bank v. Addl. CIT 155 ITR 682 (Kar). It was also contended that on extinguishment of right in 160000 warrants transfer has taken place and for this reliance was placed on the definition of 'transfer' given in Section 2(47). The CIT(A) after discussing the submissions of the assessee, took the view that warrants fall under the category of capital assets as they are a valuable right and in the present instance had clearly demarcated market value / price. It was also held that the assessee had spent Rs. 2.70 per warrant but in respect of other plea of the assessee that the extinguishment of the warrant will tantamount to be transfer, the CIT(A) did not agree with the assessee. The CIT(A) held that no capital loss is allowable to the assessee by observing as under:
3.6. Accordingly if an asset is irretrievably lost it cannot be said that the assessee suffered long term or short term loss. The Calcutta High Court in the case of CIT v. East India Charitable Trust 206 ITR 152 held that where the assessee's asset of debenture in a company were rendered valueless by reason of insolvency of the company, no capital gains/ loss arose as it was a case of disappearance of the assets themselves further the Supreme Court in the case of Kartikeya V Sarabhai v. CIT 228 ITR 163 has held that it there is reduction in the face value of shares there is extinguishment of right of the share holder to the extent of the reduction. Hence gains arising from such reduction were liable to capital gains tax. This clearly shows that an element of transfer between two parties has to be involved before there can be any liability to capital gains/ loss.
7. In the present instance I find that the appellant continued to have the right to apply for the shares of M/s Deepak Nitrite Ltd., and that right continued to be on paper in the form of dividend warrants available with him. It was his matter of choice, that he did not opt to convert 1,60,000 warrants. However such non action did not transfer the right to anyone and the warrants remained his possession/ property. After the lapse of 18 months they became valueless in the normal way without any transfer occurring. This is merely a case of lapsing but can in no way be treated as transfer of an asset, which can be considered as a capital loss. There is the absence of a transferee in such a situation and hence as per the Supreme Court's decisions mentioned above (Vania Silk Mills), I would hold that no capital loss is allowable to the assessee.
5. Before us, Shri S N Soparkar, the ld. AR drawn our attention towards provisions of Sections 45, 2(14) and 2(47) of the Act. It was contended that there is no dispute that the warrant is a capital asset, as the Revenue has not come in appeal in respect of finding given by the CIT(A) on this account. The only dispute before us relates to whether there is a transfer of a capital asset or not. Our attention was drawn towards provisions of Section 2(47) and it was contended that the definition given in this section is inclusive definition and relates to a capital asset. Clause (ii) of Section 2(47) is applicable in the case of the assessee. This clause states the extinguishment of any rights in the capital asset to be transferred. The assessee since did not exercise the option of subscription of equity shares against warrants there was extinguishment of rights in the asset, viz. warrants. Our attention was invited towards the decision of the Hon'ble Supreme Court in the case of CIT v. Grace Collies and Ors. 248 ITR 323 (SC) and on the basis of this decision it was pointed out that the Hon'ble Supreme Court in this decision at page 330 did not approve the decision in the case of Vania Silk Mills Pvt. Ltd. 191 ITR 647 (SC) that the extinguishment of any right therein should be on account of transfer. The Hon'ble Supreme Court held "extinguishment of any rights therein" can not be extended to mean the extinguishment of rights independent of or otherwise than on account of transfer. Since the rights of the assessee in the capital assets got extinguished when the assessee did not exercise the option to subscription for the equity shares, there is a transfer within the meaning of Section 2(47). Reliance was also placed on the decision of the Hon'ble Supreme Court in the case Kartikeya V Sarabhai v. CIT 228 ITR 163 for the proposition of law that Section 2(47) provides that relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset. It is not necessary for a capital gain to arise, that there must be a sale of a capital asset. Sale is only one of the modes of transfer envisaged by Section 2(47) of the Act. On a query from the Bench, if it is accepted that there is transfer in the case of the assessee, how the capital loss will be computed in the absence of sale consideration, Shri Soparkar pointed out that the sale consideration will be taken to be NIL.
6. The learned DR, on the other hand, relied on the order of the CIT(A) and by referring to Section 2(47), contended that there can not be any transfer in the case of the assessee because the assets no more remain in existence. Referring to Section 45, it was contended that for arising capital gain or loss, there must be a transfer of capital asset. In the absence of transfer of a capita asset, there can not be any capital loss.
7. We have carefully considered the rival submissions, and perused the material on record and have also gone through the orders of the authorities below as well as the case law relied upon before us. There is no dispute on the proposition of law that the warrants applied for by the assessee are capital assets within the meaning of Section 2(14) of the Act and this proposition seems to be accepted by the Revenue as the Revenue has not come in appeal against the order of the CIT(A), when in para-7 he held that the warrants are capital assets. For computing capital gain, Section 45 lays down as under:
45(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 54, 54B, 54D, 54E [54EA, 54EB,] 54F, [54G and 54H], be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place.
From the reading of this section it is apparently clear that the provisions of Section 45(1) are charging provisions and for charging the profits or gains under this head there must be a capital asset. The capital asset must be transferred. The method of computation of capital gain has been laid down Under Section 48. This is a settled law that the computation provisions can not supersede the charging provision. The word "transfer" has been defined Under Section 2(47) which lays down as under:
(47) "transfer", in relation to a capital asset, includes:
(i) the sale, exchange or relinquishment of the asset; or
(ii) the extinguishment of any rights therein; or
(iii) the compulsory acquisition thereof under any law; or
(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or
(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part of performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882 (4 of 1882); or
(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.
From this definition it is apparently clear that the definition of the "transfer" is inclusive definition which inter alia provides six situations under which there can be transfer in relation to the capital assets. Extinguishment of any rights in the capital assets is one of the situations enumerated in Section 2(47). The words "extinguishment of any rights therein" de notes that the extinguishment of rights should be only capital assets with reference to which the word "transfer" has been defined. The warrant is a capital asset. The moment the assessee loses the rights attached to the warrant for exercising the option of subscription to the equity shares, in our opinion, there is an extinguishment of right in the warrant. It is not a case of extinguishment of the assets itself. The warrant is a capital asset. It may not have any value subsequent to the extinguishment of the rights available to the assessee for subscription to the equity shares. The Hon'ble Supreme Court at page 330 in the case of CIT v. Grace Collies and Ors. 248 ITR 323 (SC) has held that the expression "transfer" included the extinguishment of rights in assets independent. We have also gone through the decision of the Hon'ble Supreme Court in the case of Kartikeya V Sarabhai (supra). In this decision, the Hon'ble Supreme Court has held that this is only one of the modes of transfer envisaged by Section 2(47). The relinquishment of the assets or extinguishment of any rights in it which may not amount to a sale can also be considered as a transfer. Therefore, on this issue, we do not agree with the finding of the CIT(A) that there is no transfer in the case of the assessee and accordingly we reverse the finding of the CIT(A) on this issue and hold that in the case of the assessee there is a transfer when the rights of the assessee to subscribe for the shares got extinguished.
8. The question before us is whether there is a loss incurred by the assessee on the transfer of a capital asset. Section 45 is a charging provision so far as the imposition of the tax on capital gain is concerned. The computation of the capital gain has to be made in accordance with the provisions of Section 48, which stipulates as under:
48,- Mode of computation.
The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement thereto:
From the reading of the aforesaid section, it is apparent that for computation of capital gains, full value of the consideration received or accrued on transfer of capital asset is to be ascertained and from this value of the consideration, the amounts as enumerated Under Section 48(i) and (ii) which consists of expenditure incurred in connection with such transfer and the cost of acquisition and the cost of improvement of capital asset has to be deducted. The charging section and computation provision together constitutes an integral code as has been held by the Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty 128 ITR 294. If computation provision can not apply at all the case will not fall within the charging provision 'cost of acquisition' and 'cost of improvement' are defined Under Section 55(1) for the purposes of Section 48 but no such definition has been given in respect of full value of consideration. We do not agree with the plea of the learned Senior Advocate that the full value of the consideration shall be deemed to be NIL. If the full value of the consideration in the absence of any definition given under Chapter IVE is to be taken NIL, the cost of the assets could also be taken to be NIL for computing the capital gains for the purpose of Section 48 and there was no need of inserting Clauses (a) and (aa) in Section 55(2) defining the cost of acquisition in respect of certain assets to be NIL. The definition relating to the cost of acquisition to be taken as NIL in respect of certain assets were brought into the statute Under Section 55(2) after the decision of the Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty 128 ITR 294, in which the Hon'ble Supreme Court has held as under:
The charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section.
All transactions encompassed by Section 45 must jail under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by Section 45 to be the subject of the charge. What is contemplated by Section 48(ii) is an asset in the acquisition of it is possible to envisage a cost: it must be an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. None of the provisions pertaining to the head "Capital gains" suggests that they include an asset in the acquisition of which no cost at all can be conceived. When goodwill generated in a new business is sold and consideration brought to tax, what is charged is the capital value of the asset is not any profit or gain. Further, the date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gain; but in the case of goodwill generated in a new business it is not possible determine the date when it comes into existence.
9. Therefore, in view of the provisions of Section 48 there must be full value of consideration out of which the expenditure and the cost of acquisition has to be deducted for computing the capital gains. In the absence of any value being assigned to the consideration received on the transfer of warrants, in our opinion, the capital loss can not be computed in the case of the assessee. We are therefore of the view that in the case of the assessee the capital loss can not be computed Under Section 45 read with Section 48 and therefore the assessee will not be entitled for claiming the deduction under the head "short term capital loss" as the computation provisions relating to the short capital gain fail.
10. In the result, the appeal of the assessee is dismissed.
Order pronounced in the open court today on 18-05-2007.