Madras High Court
The Commissioner Of Income Tax vs M/S New Ambadi Estates P. Ltd on 10 February, 2012
Bench: D.Murugesan, P.P.S.Janarthana Raja
IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 10.02.2012 Coram : THE HONOURABLE MR.JUSTICE D.MURUGESAN and THE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) No.203 of 2005 The Commissioner of Income Tax, Tamil Nadu-III, Madras. ... Appellant Vs. M/s New Ambadi Estates P. Ltd., Tiam House, Annexe, 2-Jehangir Street, Chennai-600 001. (Cause title amended vide order of Court dt.23.1.12 made in TCMP.1/12) ... Respondent Appeal filed under section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, 'B' Bench, Chennai dated 28.10.2002 made in ITA No.2041/Mds/1997 for the assessment year 1993-1994. For appellant : Mr.T.Ravikumar For respondent : Mr.C.V.Rajan for Mr.R.Sivaraman JUDGMENT
P.P.S.JANARTHANA RAJA,J.
The above Tax Case Appeal is filed by the Revenue under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, 'B' Bench, Chennai, dated 28.10.2002 made in ITA No.2041/Mds/1997 for the assessment year 1993-1994.
2. This Court, by order dated 13.06.2005, admitted the appeal on the following questions of law.
"1.Whether on the facts and in the circumstances of the case, the Tribunal was right in its conclusion that the loss incurred by the assessee in the alleged sale of partly convertible debenture is a capital loss?
2.Whether the Tribunal was right in holding that there was delivery of share within the meaning of Section 43 (5) of the Income-Tax Act, 1961?"
3. The erstwhile company viz.,M/s New Ambadi Investments Private Limited, who was the assessee before the authorities below, was merged with M/s New Ambadi Estates Private Limited with effect from 01.04.2006. The said erstwhile company was a private limited company carrying on the business of investments and the relevant assessment year is 1993-1994 and the corresponding accounting year ended on 31.03.1993. For the said assessment year, the assessee filed its return of income on 31.12.1993 admitting the loss of Rs.10,08,121/-. The said return was processed under Section 143(1)(a) of the Income Tax Act on 22.07.1994 and later taken up for scrutiny and notice was issued under Section 143(2) of the Act and the assessment was completed under Section 143(3) of the Act and determined the total taxable income at 1,36,570/-. While computing the taxable income, the assessing officer rejected the contention that the loss at Rs.11,44,692/- claimed by the assessee as capital loss and held is only speculative loss under Section 43(5) of the Act and the same cannot be set off against capital gain. Aggrieved by that order, the assessee had filed an appeal before the Commissioner of Income Tax (Appeals). The said CIT (Appeals), rejected the contention and dismissed the appeal. Aggrieved by that order, the assessee filed an appeal before the Income-tax Appellate Tribunal. The Tribunal, upheld the claim of the assessee and allowed the appeal and held that it is only a capital loss. Aggrieved by that order, the Revenue has filed the present appeal.
4. The learned counsel appearing for the Revenue contended that the order passed by the Tribunal is wrong since the transaction squarely falls within the purview of Section 43(5) of the Income Tax Act. The learned counsel contended that The Tribunal ought to have appreciated that the non-convertible secured debentures were transferred in favour of the bank and not to the existing shareholder. Therefore, the transaction was settled ultimately otherwise than by actual delivery. Therefore, the Tribunal is wrong in holding that the loss in the transaction is capital loss and relied on the following judgments to support his case.
(1) The judgment of Apex Court in NIRMAL TRADING COMPANY V. COMMISSIONER OF INCOME TAX (1980) 121 ITR 54;
2.The judgment of Apex Court in NDAVENPORT AND CO. P. LTD., V. COMMISSIONER OF INCOME TAX (1975) 100 ITR 0715;
3. The judgment of Gauhati High Court in BHIKAMCHAND BETALA AND SONS V. INCOME-TAX OFFICER (2007) 294 ITR 0010;
4.The Judgment of Gauhati High Court in SHAKUNTALA DEVI KILLA V. COMMISSIONER OF INCOME-TAX (1993) 202 ITR 108
5.The Judgment of Bombay High Court in RAMDAYAL SOMANI AND COMPANY V. COMMISSIONER OF INCOME-TAX BOMBAY CITY-II (1979)119 ITR 1
6. The judgment of Bombay High Court in COMMISSIONER OF INCOME V. BHARAT R.RUIA (2011) 337 ITR 452.
Therefore, the order passed by the Tribunal is not in accordance with law and the same has to be set aside.
5. The learned counsel appearing for the assessee-respondent contended that the transaction relating to the non convertible secured debenture will not come within the definition of "speculative transaction" under Section 43(5) of the Act. He further contended that non-convertible debenture would neither be considered as a commodity nor shares or stocks. The expression commodity or shares or stocks will not include debentures. He further submitted that the present transaction is related to allotment of debentures and therefore, the question of purchase or sale of commodities will not arise since there is no existence of the commodity before the allotment and relied on the following judgments to support his case.
(1) The judgment of Supreme Court in R.D.GOYAL AND ANOTHER V. RELIANCE INDUSTRIES LIMITED (2003) 1 Supreme Court Cases 81 and (2) The judgment of Calcutta High Court in COMMISSIONER OF INCOME TAX V. NIRMAL TRADING COMPANY (1971) 82 ITR 782.
He further submitted that the Tribunal has given a categorical finding that there was actual delivery and the bank had purchased the said non-convertible debentures at discount and therefore, the order passed by the Tribunal is in accordance with law and the same has to be confirmed.
6. Heard the learned counsel on either side and perused the documents on record. The issue for our consideration is whether the transaction relating to non convertible security debentures would fall under the definition of "speculative transaction" under Section 43(5) of the Act, which reads as follows:
"Speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips:"
From a reading of the above, it is clear that the following conditions have to be fulfilled.
(i) There should be a contract;
(ii) It is a purchase or sale of any commodity including shares and stocks; and
(iii) Periodically or ultimately settled otherwise than by actual delivery or transfer.
It is an admitted fact that there is no dispute regarding the first condition. The dispute is only in respect of conditions (ii) and (iii) stated above. In the present case, the Tribunal has considered only the third condition as stated above and came to the conclusion that there was actual delivery and therefore, it is only a capital loss and not a speculative transaction. In respect of the second issue, no arguments were advanced and hence there was no discussion by the Tribunal. For the sake of convenience, we would deal with the third condition first. The assessee claimed short term capital loss of Rs.11,44,692/-l and the details regarding the same are as follows:
Kohoka Loss (discussed separately) Under the head "Short-term capital loss' a sum of Rs.11,44,692/- has been deducted as "Khoka Loss' on sale of the followings:
Partially convertible No. of Loss per debentures PCDS PCD M/s Tube Investments 89516 12 10,74,192 M/s Carborandum Universal Ltd., 4700 15 70,500
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11,44,692
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The assessee claimed a loss of Rs.11,44,692/- as Khoha loss on the sale of partly convertible debenture of the said two companies. The respondent/assessee held equity shares of M/s Tube Investments of India Limited and M/s Carborandum Universal Limited. The abovesaid companies needed finance and therefore, they tapped the resources of its shareholders and brought the Banker to hold its debentures. Both the companies came out with a scheme to issue Partly Convertible Debentures(PCD in short) for its existing shareholders. The said PCD consisted of equity shares and non convertible security debenture. The face value of each, particularly, PCD was Rs.100/-. When the shareholders subscribing to the said partly convertible debentures, they are entitled to get one equity share of face value of Rs.10/- with a premium of Rs.40/- and one non convertible secured debenture face value of Rs.50/-. The details regarding the scheme and the findings of the Tribunal are in paragraphs 4 and 5 and the same reads as follows:
"Issue of 30,58,825 PCDs of Rs.100/- each on a rights basis to the existing shareholders of the company (other than TI International Holdings Limited, UK (TIIHL)) amounting to Rs.30.59 crores and 152,945 PCDs of Rs.100/- each to the employees amounting to Rs.1.53 crores.
Each PCD of Rs.100/- will result in one equity share of Rs,10/- at a premium of Rs.40/-, the balance Rs.50/- will be non-convertible secured debentures bearing interest at 15% per annum.
Value and conversion:
The face value of each PCD of Rs.100/- will comprise of two parts:
Part A Convertible portion of Rs.50/- to be automatically and compulsorily converted, without any further act or action by the Debenture holder into one equity share of Rs.10/- at a premium of Rs.40/- on the expiry of six months from the date of allotment. Thus, there will be a constructive receipt by the Debenture holder and a constructive payment of the same amount by the Debenture holder to the company pro rata towards the price of one equity share.
Part B Non convertible portion of Rs.50/- to be redeemed at par in three annual instalments of Rs.16/-, Rs.17/- and Rs.1`7/- at the end of the seventh, eighth and ninth year respectively from the date of allotment.
Terms of Payment:
As regards the payment of application money, you have two options viz., Option 1--
Pay Rs.61/- (Rupees sixty two) per PCD on application and accept Hongkong Bank's Khokha offer (see details below). If you decide to accept Hongkong Bank's offer to purchase Part B of the PCD, then you should:
(a) Pay Rs.62/- only per PCD both on your entitlement and the additional PCDs applied for.
(b) Sign the Letter of Authority contained in the application.
Hongkong Bank has by its letter dated 18-3-1992 offered to purchase the Non-convertible portion (i.e. Part B) of the PCD at a price of Rs.38/-. Non-resident applicants are not eligible to avail this option.
The purchase price of Rs.38/- for Part B is based on the discount on sale of the Part B and the interest from the time the bank makes payment directly to the company towards the subscription amount as if it was made on behalf of the applicant till the time company transfers the Part B to the bank.
The procedure vide Securities and Exchange Board of India's letter reference MBD (1)/158/4008/92 dated April 21, 1992 will be as follows:
The applicant concerned shall communicate acceptance of the loan offer along with application form and also authorize the company to transfer the khokha portion of the PCDs allotted to the applicant to the bank on cancellation of the loan. Under this procedure applicant will in the first instance, after filling the necessary forms, remit an amount at the rate of Rs.62/- per debenture.
The company, in its part, will inform the Hongkong bank the names of the applicants who have opted to accept the loans and sell the non convertible portion of the PCD to the bank after the allotment.
The Bank will pay Rs.38/- per debenture on behalf of the applicant. This amount together with the amounts received from the applicants shall be kept in a separate account till the allotment is made.
After allotment of PCD is made to the applicant, the bank will be advised in the matter whereupon the loan to the applicant will be cancelled and on the basis of this authority given by the applicant, the company will transfer the non-convertible portion of the debentures to the bank.
Applicants who avail of this option will receive the letter of allotment cum share certificate pertaining only to Part A of the PCD. The letter of allotment/certificate relating to Part B of the PCD will be directly given to Hongkong Bank. The interest accruing on Part B of the PCD will also be paid only to Hongkong Bank.
Any applicant who wishes to avail this option should also sign the letter of authority given in the application form. If the applicant pays Rs.62/- on application but omits to sign the letter of authority, then he will be deemed to have accepted Hongkong Bank's offer to purchase Part B of the PCD and will be deemed to have given the authorization mentioned in the letter of authority.
An applicant who desires to avail this option should do both in respect of his rights entitlement and in respect of the additional PCDs, if any, he applies for, in the event of additional PCDs not being allotted or in case lesser number of additional PCDs are allotted than asked for, then the sum of Rs.62/- per PCD which is not allotted will be refunded to the applicant without interest. The balance of Rs.38/- given by Hongkong Bank will refunded to them directly.
Option 2 is not reproduced here for it is not relevant to the issue before us.
5. The letter of offer has clearly brought out the procedure that the company shall follow on the basis of response from the existing shareholder to its proposed to choose between the two options. The existing shareholders are also advised about the outcome of opting for one of the options. The existing shareholders on opting for option A are required to enclose payment of Rs.62/- or Rs.65/- as the case may be along with their acceptance of letter of authority in favour of the Hongkong Bank in token of accepting the khokha of the bank. The existing shareholders are further advised that the letter of acceptance in favour of the bank shall be sent to the bank to enable the bank to remit Rs.38 per PCDs. The amount of Rs.38/- per PCD received from the bank, shall be initially treated as a loan advanced by the bank to the existing shareholders. The amounts received from the existing shareholders along with the application and the amount received from the bank shall be kept in a separate account.
5.1 The existing shareholders are further advised that PCDS shall be allotted according to the recognised procedure, i.e., depending upon the applicants and the amount received on allotment, number of PCDs to be allotted to each applicant would be decided. The PCDs would then be allotted to the applicants. This will be followed by conversion to equity share of Rs.50/- and the balance portion as NCSD. The existing shareholders would receive one equity share for every PCD allotted to them and its value shall be Rs.50/-. The second part consisting of NCSD shall be directly sent to the bank. At this point the loan of Rs.38/- in favour of the applicant would be cancelled. The applicant shall have no further claim from the company regarding Rs.12/- paid towards that part of PCD represented by NCSD.
5.2 The above procedure shows that the existing shareholders who apply for the PCDs are allotted PCDs on the basis of some formula depending upon the applications received. Following such allotment the conversion of the PCD takes place as equity share that is received by the existing shareholder and the second portion which the existing shareholder had agreed to be given over to the bank is sent to the bank directly. The second portion of PCD represented by NCSD is not received by the existing shareholder and it is this feature that the Department is construing as delivery not taken but transferred in favour of the bank as a speculative transaction.
5.3. The Department had clearly overlooked the first step of allotment of PCD to the existing shareholders only. This PCD is then converted into equity share portion and the NCSD portion. The origin of NCSD is the PCD that is allotted only to the existing shareholder and therefore, it has to be construed as if the NCSD that is brought out from PCD is allotted in favour of the existing shareholder and then transferred to the bank. To put it in other words, there is element of constructive delivery of NCSD to the existing shareholder followed by constructive delivery in favour of the bank by the existing shareholder. To our mind there could be no other construction possible because, at the time of allotment of PCDs the amount of Rs.38/- per PCD paid by the bank is treated as a loan to the existing shareholder and this loan is treated as satisfied by the issue of the NCSD to the bank. The most important connection link is the company that received the application for PCDs from the existing shareholder and the bank has come forward to purchase the debentures but at a discount. The amount of application money relatable to the NCSD portion which the existing shareholder would never get back, is a loss suffered and is a capital loss that could get adjusted against the income from capital gains. The assessee being in the business as an investment company, the loss suffered to the extent of Rs.12/- or Rs.15/- per PCD, is obviously a capital loss and in the circumstances of the case, for the aforesaid reasons, it is held as a capital loss.
5.4 Before we part we may observe that the decisions relied upon by AO the Apex Court in CIT v. Sutlej Cotton Mills Supply Agency Ltd. (1975) 100 ITR 706 and Devanport & Co. v. CIT (1975) 100 ITR 715 have no application to the instant case before us. The former was on the point whether a single transaction could lead to an adventure in the nature of trade and that it could be a speculative transaction. The latter is on the point of actual delivery. The decision of Calcutta High Court in CIT V. Prasad Birla (HUF) (1993) 199 I TR 173 relied by CIT (A) was considering the purchase and sale of shares that took place by settlement without taking of delivery. In the instant case before us, there is clear delivery as well as constructive delivery. The jurisdictional High Court in Chinnasamy Chettiar v. CIT (1974) 96 ITR 353 explained the transaction that in effect had real delivery and not notional delivery, would not be treated as speculative. We, for the foregoing reasons upheld the claim of the asseseee and allow the appeal."
From reading of the above, it is clear that the Tribunal has given a categorical finding that there is a clear delivery as well as constructive delivery. In the present case, M/s Tube Investments of India Limited and M/s Carborandum Universal Limited had come out with a scheme to issue PCD and the face value of each PCD is Rs.100/- and each PCD of Rs.100/- will result in one equity share of Rs.10/- at a premium of Rs.40/- and the balance Rs.50/- will be non-convertible security debentures bearing interest at 15% per annum. Therefore, the face value of the each partial convertible debentures of Rs.100/- consists of two parts. Part-A convertible portion is Rs.50/-. One equity share of Rs.10/- at a premium of Rs.40/- is automatically and compulsorily converted on expiry of six months from the date of the allotment. Another Part-B non-convertible portion of Rs.50/- will be redeemed at par in three annual instalments of Rs.16, Rs.1`7/- and Rs.17/- at the end of the seventh, eighth and ninth years respectively from the date of the allotment. In respect of the payment, there are two options given to the existing shareholder. In the present case, the assessee has opted for first option. In respect of M/s Tube Investments of India Limited, the assessee has adopted for first option regarding payment of application money i.e., the existing shareholder has to pay Rs.62/- per PCD. The Honkong Bank also made offer to purchase Part-B of the non convertible portion. The offer was accepted by the assessee and therefore, the assessee had to pay Rs.62/- per PCD and the balance amount of Rs.38/- was to be remitted by the Bank. The amount remitted by the bank is initially treated as a loan advanced by the bank to the existing shareholders and the amount received from the existing shareholder along with the application and the amount received from the bank are kept in a separate account. In respect of M/s Carborandum Universal Limited, similar method is adopted and only the amount alone varies and the existing shareholder has to pay a sum of Rs.65/- and the bank has to pay Rs.35/-. In respect of Part-I, i.e. Convertible portion, the existing shareholder would receive one equity share for every PCD allotted to them and the value of the share is Rs.50/-. The second part consisting of non convertible portion sent directly to the bank and the existing shareholder cannot further claim from the company regarding payment of Rs.12/- and Rs.15/- paid towards other part of non-convertible portion. The case of the Revenue is that the second portion represented by non-convertible security debentures is not actually received by the existing shareholder and therefore, no delivery is taken by the existing shareholder, but transferred to the bank and hence, it falls within the definition of "speculative transaction". The partial convertible debenture as we stated earlier is converted into two parts, (1) equity shareholders and (2) non-convertible security debentures. Non-convertible portion is not a separate one and originated from PCD. It is one transaction. In such circumstances, the Tribunal held that it was only non-convertible security debentures, which is part of the partial convertible debentures allotted in favour of the existing shareholder and then transferred to the bank, because the amount paid by the bank was treated as a loan to the existing shareholders and the said loan is treated as satisfied by issue of the non-convertible security debentures to the bank. By this arrangement, the bank has come forward to purchase the debentures at a discount price. In this process, there is a loss to the extent of Rs.12/- and Rs.15/- per PCD. Therefore, the Tribunal has correctly held that there is an actual delivery and constructive delivery and they will not come within the purview of the "speculative transaction". The learned counsel appearing for the Revenue is unable to bring any fresh evidence to show that there is no actual delivery in the present case. Therefore, the finding given by the Tribunal in this aspect is based on valid materials and the same is confirmed.
7. In respect of the second condition as to whether the expression "commodities" "shares" and "stocks include debentures; it was submitted that the debenture would not come within the purview of the expression "commodities" and further the expression "debentures", "shares" and "stocks" convey distinct and separate meanings. Definition of Section 43(5) of the Act is inclusive one. It includes only shares and stocks. Debentures are not included. Therefore, the learned counsel appearing for the assessee submitted that the debentures, viz., in the present case, the transaction is relating to non-convertible security debentures, which will not fall within the definition of "commodity" or "stocks" or "shares". In support of his contention, he relied on the the judgment of the Supreme Court cited supra in R.D.GOYAL AND ANOTHER V. RELIANCE INDUSTRIES LIMITED (2003) 1 Supreme Court Cases 81, wherein it has been held that debentures cannot come within the definition of shares as well as the stock. The expression debentures and shares conveyed separate meaning and paragraphs 23 to 25 reads as follows:
"23. Furthermore, the expressions debentures and shares convey distinct and separate meaning although they belong to the same genesis. In All About Debentures by Mr T.M. Sen and Mr C. Chandrasekhar, the distinction between shares and debentures has been stated thus:
Debentures distinguished from:
(a) Shares.Although shares and debentures belong to the same genesis yet they have distinct and different characteristics. The Companies Act, 1956 deals with the issue of debentures in the same manner as it deals with the issue of shares, but the similarity ends with the mode and manner of issue, their allotment, their transferability and in the applicability of forfeiture provisions. The corpus of the two issues forms two different segments of capital shares representing the share capital and the debentures representing the loan capital. Shareholders are the owners of the company till the company is folded up fully while debenture-holders are only creditors of the company sometimes secured and sometimes unsecured and that too for a defined period. The rights of the shareholders and debenture-holders are different as also their remedies. To the extent the comparison could bear between the two, the procedures are by and large the same for both in the matter of issue, allotment, transfers and forfeiture. Shares, therefore, are distinct from debentures, although in the usual parlance they both are grouped together in many legislations and referred to sometimes by the generic term of scrip. It is on account of their free transferability and marketability, they are referred together. The stamp duty on the share certificates and debenture certificates and on their transfers is totally different and bears no comparison. The incidents of debenture certificates as seen from our discussion above are different from the incidents of share certificates and hence bear no comparison. Therefore, there is no equation between shares and debentures except as referred to above.
24. Share has been defined in Section 2(46) of the Companies Act to mean a share in the share capital of a company which in turn would mean that it would represent contribution of the shareholder towards the share capital of the company. On the other hand, a debenture is an instrument of debt executed by the company acknowledging its receipt to repay the same at a specified rate and also carrying an interest. It is in sum and substance a certificate of loan or a bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure yet it does not become a share capital. In any event, a debenture would not come within the purview of the definition of goods, inasmuch as, although the shares and stocks are included in the definition of goods but debentures are not.
25. We may also note that having regard to the provisions contained in Section 36-A of the MRTP Act, there cannot be any doubt whatsoever that an inquiry proceeding can be initiated when an element of unfair trade practice arises in the matter of promoting sale, or use of any goods. Shares before their allotment, in our opinion, are not goods. In Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Assn. Ltd. it has been held that in company law allotment means the appropriation out of the previously unappropriated capital of a company, of a certain number of shares to a person. Till allotment is made, shares do not exist as such. It is only on allotment in this sense that the shares come into existence. Therefore, till the shares are actually issued, the question of the company having issued debentures as transferable property would not arise and thus there cannot be any doubt whatsoever that the shares before their allotment would not come into existence and they cannot be regarded as goods. Debentures would also not come within the purview of the definition of stock."
From reading of the above, it is clear that the debentures cannot come within the expression of "goods" nor "shares" or "stocks". The only distinction in the present case and the Supreme Court case is that the expression "goods" is the subject matter of the Supreme Court. But in the present case, the expression "commodity" is in dispute. The said distinction does not make any difference. So the principle enumerated in the above judgment is squarely applicable. Further, the debenture is an instrument of debt executed by the company acknowledging its receipt to repay the same at a specified rate along with interest. The learned counsel for the respondent-assessee contended that the word commodity cannot include debenture because debenture is an instrument. Therefore, in view of the first part of the transaction, that purchase or sale of any commodity including stock and shares will not include debentures. Further, the learned counsel also relied on the same judgment for the proposition that no question of buying and selling of commodities arises when there is no allotment. In the present case, no allotment has been made and there is no dispute regarding the same. The learned counsel also relied the R.D.GOYAL's case cited supra, wherein the Apex Court has considered the scope of words "creation", 'issue" and "allotment" and paragraphs 38 and 39 reads as follows:
38. It was noticed: (SCC pp. 86-87, para 10) The words allot and distribute found in clause (b) of the resolution do not carry the matter further. Their meaning should be gathered from the context in which they were used. Clauses (b) and (c) of the resolution must be read harmoniously with clause (a). The word allotment has not been defined in the Companies Act. The meaning of the word allot or allotment will have to be gathered from the context in which those words are used. This Court considered the meaning of the word allotment in Sri Gopal Jalan and Co. v. Calcutta Stock Exchange Assn. Ltd.3 Therein, it referred to a large number of English decisions which have considered the meaning of that word. In that decision this Court referred to the observations of Chitty, J., in Florence Land and Public Works Co., In re:
To my mind there is no magic whatever in the term allotment as used in these circumstances. It is said that the allotment is an appropriation of a specific number of shares. It is an appropriation, not of specific shares, but of a certain number of shares.' In Sri Gopal Jalan case Sarkar, J. (as he then was), quoted with approval the following passage from Farwell, L.J., in Mosely v. Koffyfontein Mines Ltd.:
As regards the construction of these particular articles, it is plain that the words creation, issue and allotment are used with the three different meanings familiar to business people as well as to lawyers. There are three steps with regard to new capital; first, it is created; till it is created the capital does not exist at all. When it is created it may remain unissued for years, as indeed it was here; the market did not allow of a favourable opportunity of placing it. When it is issued it may be issued on such terms as appear for the moment expedient. Next comes allotment. To take the words of Sterling, J., in Spitzel v. Chinese Corpn. he says: What is an allotment of shares? Broadly speaking, it is an appropriation by the directors or the managing body of the company of shares to a particular person. ' After examining the various decisions, Sarkar, J., observed:
It is beyond doubt from the authorities to which we have earlier referred, and there are many more which could be cited to show the same position, that in company law allotment means the appropriation out of the previously unappropriated capital of a company of a certain number of shares to a person. Till such allotment the shares do not exist as such. It is an allotment in this sense that the shares come into existence.
39. In view of the aforementioned authoritative pronouncement of this Court it must be held that shares pending allotment in view of the provisions of law as thence existed could not be said to be goods."
Therefore, in this case, pending allotment, there cannot be existence of the commodity. Therefore, the Revenue is wrong in arguing that there is a purchase or sale of the commodity even before the allotment. In the present case, before allotment, the assessee had incurred loss, which loss they claimed as capital loss. In view of the same, we are of the view that non convertible secured debentures cannot be purchased or sold before allotment. Following the above judgement, we are of the view that pending allotment, non-convertible portion does not exist as such as commodities. In the case of COMMISSIONER OF INCOME TAX V. NIRMAL TRADING COMPANY reported in (1971) 82 ITR 782, the Calcutta High Court considered the scope of "speculative transaction" and in that case, the assessee was a dealer of shares and the assessee had renounced right of allotment and the issue is whether the letter of renunciation amounts to "commodity" or "shares" or not and the Court held that letters of renunciation are neither "shares" nor "commodities" and hence, they cannot be "speculative transaction" and paragraph 6 of the above judgment reads thus:
"6.Mr.A.K.Basu, learned counsel for the Department, contends before us that a sale of letters of renunciation means a sale of shares which is not completed by actual delivery. But we are unable to accept this contention. Letters of renunciation are executed when a shareholder renounces his right to apply for shares in favour of some other person. They can be sold and traded in the stock exchange (see Palmer's Company Law, 21st Edn., p.146 and 673). They confer on the renouncee the right to apply for shares of a company but they are neither "shares" nor "commodities" which may come within the purview of Expln.2 to S.24(1) of the Indian IT Act, 1922. If they are not either "shares" or "commodities" at all, the question of transactions in them being speculative transactions cannot arise."
In the present case, the convertible secured debentures portion is given to the bank which is akin to giving up the right. Therefore, the above judgment also supports the case of the assessee. Following the principles enunciated in the judgment of Apex Court in R.D.Goyal's case as well as the judgment of the Calcutta High Court in COMMISSIONER OF INCOME TAX V. NIRMAL TRADING COMPANY cited supra, we are of the view that the transaction relating to the partial non-convertible security debentures will not come within the expression "commodity" or "shares" or "stocks" and since there was no allotment the question of purchase or sale will not arise.
8. In respect of the case laws relied on by the learned counsel appearing for the Revenue are different and distinct to the facts of the present case and therefore, they are not helpful to the Revenue and hence, we are not dealing with these case laws. In these circumstances, we are of the view that the transaction involved in the present case will not come within the definition of "speculative transaction" as defined under Section 43(5) of the Act. Therefore, we are of the view that the order passed by the Tribunal is in accordance with law and the same is liable to be confirmed. Accordingly, we answer the above questions in favour of the assessee and against the Revenue and the tax case appeal is dismissed.
raa To
1.The Deputy Commissioner of Income-tax, Special Range VI, Madras-600 034.
2.The Commissioner of Income-tax(Appeals)-V, Chennai.
3.The Income-tax Appellate Tribunal, Chennai Bench "B", Chennai