Income Tax Appellate Tribunal - Mumbai
Dy. Cit (Inv.) Circle 14(1) vs Dharmesh H. Doshi on 19 July, 2005
Equivalent citations: [2005]4SOT748(MUM)
ORDER
D.C. Agrawal, A.M. This is an appeal filed by the revenue against the order of CIT(A)-wherein it was held that there is no cost of acquisition of Detachable Warrants (DWs) acquired by the assessee along with Non-convertible debentures (NCDS) from the market and therefore the capital gains could not be worked out on the sale of DW.
2. The facts of the case are that the assessee purchased renunciation rights of 57.15 16% NCDs of the face value of Rs. 325 along with DW of Mukund Ltd. (ML) from the market through broker for Rs. 60,385 vide contract No. 174, dated 9-10-1992. Thereafter, the assessee paid application money of Rs. 160 per debentures. The balance of Rs. 165 was required to be paid on demand. Before the assessee could receive letter from the ML for the balance payment, the assessee sold these partly paid debentures in the assessment year 1993-94, i.e., in the earlier assessment year and incurred a loss of Rs. 3.00 lakhs, which was offered in the relevant assessment year. The assessee retained the DWs and sold, then in the financial year relevant to current assessment year for a sum of Rs. 5,75,100. The receipt of this money was claimed as exempt from capital gains. According to assessee, DWs had no cost. The main ground for claiming the receipt of Rs. 5,75,100 as exempt from tax was as under:
"The fact that neither Mukund has charged nor the appellant has paid any amount for the warrant would be evident from the following facts and submissions:
(i) In the Letter of Offer:
(1) The face value of the NCD is stated to be Rs. 325 and the issue is made at par i.e. at Rs. 325 per NCD.
(2) Under the heading 'Financial Plan' included in Para IV, which indicates the means of financing, the total issue amount for NCDs is stated to be Rs. 126 crores.
(3) Rs. 126 crores has been shown as receivable towards the issue of debentures and nothing towards the issue of warrants. In other words, according to Mukund, the warrants were issued free of cost or without any monetary consideration and the NCDs were issued at par.
(4) Also, in giving the financial highlights and in calculating the earnings per share and various other data, the amount attributed towards the NCDs was Rs. 126 crores and no credit was taken for the warrants.
(ii) In its books, Mukund has recorded the liability for NCDs at Rs. 325 per NCD aggregating to Rs. 126 crores. Further, for the purposes of security and stamp duty, it must have considered the principal amount of the NCDs as Rs. 126 crores.
(iii) Mukund is liable to pay, and has in fact been paying, interest at the rate of 16 per cent per annum on the paid up amount of Rs. 325 per NCD. If out of Rs. 325, had any amount been attributable to the warrant, then interest would have been paid on Rs. 325 less the amount attributable to the warrant and not on the entire amount of Rs. 325 per NCD.
(iv) Thus, the appellant while subscribing to the NCD and the warrant has paid Rs. 325 for the NCD only and has not paid any sum for the warrant."
3. The assessing officer, however, did not accept the contention of the assessee on the following basis:
The assessee is not original subscriber. He purchased renunciated rights to subscribe to NCDs from the broker and paid a price of Rs. 60,385. The assessing officer relied on a book authored by Sri Gautham Nayak 'Taxation of shares and securities transaction' published by BCAJ for a proposition that when debentures and DWs are purchased from the market, the payment made for acquiring the bundle of rights consisting of both debentures and DWs.
The assessing officer taxed the capital gains by treating a sum of Rs. 60,385 as cost of acquisition of DW, which were sold at Rs. 5,75,100. The CIT(A), however, did not agree with the assessing officer and deleted the addition on the main ground that the amendment made in section 55(2)(a), (aa) with effect from 1-4-1995/1-4-1996 by the Finance Act, 1995 was not retrospective and which did not permit assuming the cost of acquisition as nilprior to 1-4-1995 as no price was paid therefor. If assessing officer's views were to be accepted as correct, then there was no necessity for statutory changes. In this regard, the relevant part of the CIT(A)'s order is reproduced below :
"6. I have considered the contentions raised. The issues raised by the AR have lot of force. It is true, as pointed out by the assessing officer referring to the writings of certain experts, that it may be possible to attribute certain cost to DWs. But then, subsequent statutory amendments will demand the inference that the appellant's view should prevail. It is to be iioted that Finance Act, 1994 has inserted clauses (a) and (aa) with effect from 1-4-1995 and Finance Act, 1995 has inserted sub-clause (iiia) in clause (aa) of sub-section (2) of section 55 with effect from 1-4-1996. If the assessing officer's view is accepted, this will be tantamount to applying these amendments with retrospective effect from 1-4-1994, which is not permissible. After all, if the assessing officer's views were correct, there was no necessity for the statutory insertions. In any case, the insertions have been made cffective only from 1-4-1995 to 1-4-1996 and in view of this, it cannot be held that the same are clarificatory in nature. In view of this position, I hold that the assessing officer was not correct in taxing an amount of Rs. 5,14,715 as short term capital gains. The same may be deleted and the appellant succeeds in respect of first three grounds. This will also dispose of ground No. 6 since there is also no justificaticn to tax the amount as business income, In any case, the assessing officer had taxed it as short term capital gains".
4. Before us, it was contended by the learned Departmental Representative that ML had issued NCDs along with DWs to its existing shareholders on right basis. The NCDs without DWs had lesser value in the market, which is apparent from the loss suffered by the assessee. The difference would certainly be attributable to DWs. Further, the assessee was not the original subscriber to NCDs so as to raise the presumption that DWs were a gift to him by the ML and hence no cost was paid. It was purchased by assessee from market at a cost along with NCDs from the original subscriber by renunciation of the NCDs along with DWs. Thus, the assessee being not the original shareholder of the company, it cannot be presumed that DWs would not have any cost to the assessee. The cost is what was paid to the original shareholder/original offerer for purchasing NCDs with DWs. According to learned Departmental Representative, it was a composite payment for NCDs and DWs paid by the assessee. Thus, there was a cost to the assessee for DWs. For this proposition, the learned Departmental Representative relied on the decision given by Tribunal in Kamal Trading Co, v. Dy. CIT [IT Appeal No. 977 (Cal.) of 1998] for assessment year 1994-95 and Asstt. CIT v. Ganesh Enterprises [IT Appeal No. 2300 (Cal.) of 1997] for assessment year 1994-95. Thus, the concluding argument of learned Departmental Representative was that machinery provisions for computing capital gains have not failed and it is possible to work out capital gain as there is some cost of acquisition. Regarding deletion of addition by the CIT(A) on the basis that amendment in respect of section 55(2)(a), (aa) was not retrospective, the learned Departmental Representative submitted that CIT(A) had wrongly based reliance on this provision as this provision was enacted for working out cost of acquisition in the case of original shareholders of the company, when a financial instrument is given as a right, For this purpose, the learned Departmental Representative relied on the clarificatory notes issued at the time of amendment of this section.
5. On the other hand, the learned authorised representative of assessee defended the order of CIT(A) and submitted that gains on sale of warrants would be taxable only under the head 'capital gains' and not under any other head. For this proposition, he relied on the decision in the case of Nalinikant Ambalal Modi v. S.A.L. Narayan Row, CIT (1966) 61 ITR 428 (SC). Further, according to learned authorised representative of assessee profit and loss account on transfer of a capital asset can be computed in the manner laid down in section 48 and for this purpose, it is necessary to know the cost of acquisition and cost of improvement of the capital asset and expenses incurred in connection with transfer of DWs. The liability to capital gains would not arise in respect of those assets in the acquisition of which the element of cost is altogether inconceivable. For this proposition, he relied on the decision in the case of CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC), CIT v. Merchandisers (P.) Ltd. (1990) 182 ITR 107 (Ker.), CIT v. Mangtu Ram Jaipuria (1991) 192 ITR 533 (Cal.), CIT v. H.H. Maharaja Sahib Shri Likendra Singhii (1986) 162 ITR 931 (MP), Sri Krishna Dairy & Agrl. Farm v. CIT (1988) 169 ITR 291 (AP). Thus, according to learned authorised representative of assessee, if the warrant does not have cost of acquisition, then assessee would not be liable to any capital gains on sale of DWs. Relying on the submissions made before the assessing officer about the treatment given by ML to the NCDs in the letter of offer, the learned authorised representative of assessee submitted that the appellant by subscribing to the NCDs and DWs at Rs. 325 for NCD, did not pay anything for the DWs. In the present case, the cost of acquisition of DWs is unascertainable. Therefore, it is not possible to compute the capital gains. This proposition is supported by the decision in the case of Sunil Siddharthbhai v. CIT (1985) 156 ITR 509 (SC).
6. In nutshell, the arguments of the learned counsel for the assessee revolves around the proposition that the cost of acquisition of DWs is unworkable as no cost was paid by the assessee for DWs and whatever was paid was for NCDs and hence no capital gains are chargeable on the sale of DWs. The learned authorised representative of assessee relied on the decision in the case of Asara Sales & Investments (P.) Ltd. v. Dy. CIT (2001) 78 ITD 87 (Pune) for the proposition that whatever was paid while acquiring NCDs with DWs was only for the NCDs and nothing for DWs.
7. We have heard the rival submissions and considered the facts and materials on record. In our view, there is no dispute on the proposition that if cost of acquisition of an asset is un-workable and the case does not fall under section 55(2) or 55(3), then the capital gains would not be leviable on the transfer of capital asset as held in various decisions cited by learned counsel for the assessee. However, the facts in the present case are different, We are unable to accept the contention of the assessee that there was no cost of DWs to the assessee or that it is not workable within the meaning of section 55(2) or 55(3). The assessee was not original subscriber to the NCDs or DWs and it makes all the difference. As per letter of offer, the NCDs along with DWs were issued to original shareholders, as is evident from following extract from letter of offer :
"Offer of A (i) 36,94,744 Equity shares of Rs. 10 each at a premium of Rs. 90 aggregating Rs. 36.95 crores to the shareholders of the company on a rights basis, and
(ii) 84,737 Equity shares of Rs. 10 each at a premium of Rs. 90 each aggregating Rs. 1.84 crores to the permanent employees (including Indian working directors)/workers of the company on an equitable basis.
B (i) 36,94,74416% secured redeemable non-convertible debentures of the face value of Rs. 325 each for cash at par aggregating Rs. 120 crores with Detachable Equity Warrants to the Shareholders of the company on a rights basis entitling the warrant holders to apply for equity shares.
(ii) 1,84,73716% secured redeemable non-convertible debentures of the face value of Rs. 325 each for cash atpar aggregating Rs. 6 crores with Detachable Equity Warrants to the permanent employees (including Indian working directors)/workers of the company on an equitable basis entitling the warrant holders to apply for equity shares.
Principal terms of equity shares and debentures :
The equity shares and debentures being offered and the equity shares to be issued on the exercise of the rights attached to the detachable equity warrants are subject to terms of this letter of offer, the composite application form, the Memorandum and Articles of Association of the company and the Companies Act, 1956 (hereinafter referred to as 'the Act'). Debentures shall also be subject to such other terms and conditions as may be contained in the debenture trust deed, Debenture certificate and other relevant documents. Subject to the aforesaid, principal terms are as under:
(i) Issue price :
Each equity share of Rs. 10 each is being issued at a premium of Rs. 90. Each debenture will have a face value of Rs. 325 with a Detachable equity warrant.
Principal terms of the debentures Interest :
The debentures will carry interest at the rate of 16 per cent per annum (subject to deduction of income tax at source at the rates in force) on the amount outstanding.
Warrants attached to the debentures :
Each debenture will be issued along with detachable equity warrant which shall be separately listed on all stock exchanges where the securities issued by the company are listed. The warrant will be issued only to the original allottees of the debentures. Against each warrant the holder thereof will be entitled to apply for-one equity share of face value of Rs. 10 for cash at a price not exceeding Rs. 100 as determined by the Board and subject any requisite approvals, within twenty four (24) months from the date of allotment of debentures against payment to be made in a manner and at the time to be determined by the Board."
8. The assessee purchased the NCDs along with DWs from the open market through a broker vide contract No. 174 dated 9-10-1992 for a sum of Rs. 60,325. Thereafter, he paid a sum of Rs. 160 per each NCD to ML. Before NCDs could be allotted to the assessee, they were sold for a sum of Rs. 6 lakhs incurring a loss of Rs. 3 lakhs, which was considered in the assessment year 1993-94. The DWs were sold subsequently in the assessment year 1994-95. Thus, the assessee paid a composite price of Rs. 60,385 for NCDs + DWs to the original shareholder of ML to whom NCDs + DWs were allotted. For NCDS, he was required to pay Rs. 325 to ML, out of which Rs. 160 was paid on application and the balance of Rs. 165 was to be paid on demand. Thus, a sum of Rs. 60,385 was a composite price for applying to NCDs and DWs. The NCDs might be marketable at a discount whereas DWs would have been marketable at a premium. The market discount on NCDs and market premium of DWs put together is determinant for the composite market price of NCDs + DWs. This composite price at the relevant time was Rs. 60,385. Thus, we reject the contention of the assessee that DWs did not have any cost. Had the assessee been an original shareholder of ML, there could be an arguable point that there was no cost for DWs but this is not the case as NCDs + DWs were purchased from open market at a price. NCD had their own market value. A sum of Rs. 160 was paid to ML for NCD but they were marketable at a lesser price. The loss on sale of NCDs cannot be said to be the price paid to improve the title over DWs. The assessee had a right to continue to own both NCDs and DWs. He chose to dispose of NCDS. The loss suffered in the process cannot be attributed to or cannot be said to be cost of improvement or part of cost of acquisition of DWs. DWs were already acquired. Their acquisition or title over them would not depend on disposal of NCDs and hence loss suffered on disposal of NCDs cannot become the cost of acquisition or cost of improvement of DWs. Thus, we hold that the assessing officer was right in fixing this price paid to acquire DWs as cost of acquisition of DWs. In fact, part of the price paid at Rs. 60,385 can be attributed to NCDs and in the process cost of DWs would go down, but as the assessing officer has not considered this aspect, we too ignore it and confirm the action of assessing officer in adopting the sum of Rs. 60,385 as cost of acquisition of DWs.
9. Now, let us come to the reasonings adopted by the CIT(A) for deleting the addition. The CIT(A) has held that the provision of section 55(2)(aa) were inserted with effect from 1-4-1996. They are not clarificatory in nature and hence would not be applicable to the assessment year 1994-95. However, we find that said provisions are applicable only in respect of transfer of financial asset allotted to the original shareholder-. So, the cost of acquisition of a financial asset allotted to a person being original shareholder of company would be treated as nil In case such original allottee being shareholder renounces the same in favour of any representative at a price, the provisions have no application. This provision cannot help in determining the cost of acquisition in respect of purchases of a financial asset by any other assessee not being original shareholder of the company. The cost of acquisition in those cases would be worked out on the basis of price actually paid by such person Le. in the present case, the assessee.
10. Regarding the decision of the Tribunal in Asras Sales & Investments (P.) Ltd.'s case (supra) relied on by the learned counsel for the assessee, we find that the capital gains were required to be worked out in the case of an assessee who had sold NCDS. The cost of NCD had to be worked out and not the capital gains on sale of DW. In any case, the cost of acquisition of DW was held to be nil in this case also. There is no proposition laid down that cost of DWs will be not workable.
11. In Ganesh Enterprises' case (supra) cited by learned Departmental Representative, it was held that cost of acquisition of DW is the loss incurred on subscription and sale of NCDS. According to this decision of the Tribunal, cost of DWs would be difference between market price of NCDs and subscription price of NCDS. Thus, this decision supports the proposition that DWs had a cost of acquisition.
12. In Kamal Trqding Co.'s case (supra), it was held that application money paid by the assessee was the cost of acquisition of DWs. Thus, this decision also supports the preposition that DWs have cost which is workable. In view of the above, we hold that the CIT(A) was not justified in deleting the capital gains worked out on sale of DWs. Accordingly his order is reversed and that of assessing officer is restored.
13. In the result, the appeal of the revenue is allowed.