TMI Blog2010 (1) TMI 1307X X X X Extracts X X X X X X X X Extracts X X X X ..... ss and also disallowed certain expenses claimed by the assessee. Aggrieved, the assessee carried the matter in appeal. The first appellate authority granted part relief. Further aggrieved, both the assessee as well as the Revenue have filed these cross appeals. 3. The assessee s appeal is against the upholding of disallowance of expenses on account of rent, water charges, property tax as well as tenancy fees by the CIT(Appeals) and also against the denial by the CIT(Appeals) to allow short term capital loss as claimed by the assessee. 4. In the Revenue s appeal, the AO challenges the finding of the CIT(Appeals) directing the AO to allow the interest on delayed payment of service tax and also against the direction of the CIT(Appeals) to compute long term capital loss and allow set off as profit u/s 74. We first take up the Revenue s appeal. 5. We have heard Mr. Anil K. Singh, the learned DR and Mr. Percy Pardiwalla and Mr. Nitesh Joshi, learned counsel for the assessee. 6. The first issue that arises in Revenue s appeal is whether interest paid on delayed payment of service tax is penal in nature or not. The AO disallowed the amount of interest paid on delayed payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal, the first appellate authority took a view that the reduction in share capital, results in a transfer as defined in section 2(47) of the Act. As far as the computation of long term capital loss is concerned, the learned CIT(Appeals) allowed the claim of the assessee. But as far as the short term capital loss is concerned, the first appellate authority rejected the claim of the assessee on the ground that the transaction is apparently not of business prudence and in fact the assessee who had full knowledge of the fact that there would be a reduction in the capital of the group concerned by an order of the BIFR, had wilfully purchased shares in the group company. Aggrieved on these findings, both the assessee as well as the Revenue are in appeal. 9. The learned Senior Advocate, Mr. Pardiwalla submitted that under the Companies Act, reduction of capital is permissible in many ways and once such method is by diminishing the number of shares, by extinguishing the existing liability on certain shares, writing off or repaying the whole amount paid up thereon or cancelling them. In the present case, he submitted that M/s Polychem Ltd., pursuant to an order of BIFR, diminished the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee having long term or short term capital gain or loss does not arise. He distinguished the case laws relied upon by the learned counsel for the assessee and submitted that the first appellate authority was wrong in holding that there was a transfer as there was extinguishment in rights of the assessee. 11. After closure of the hearing, the learned counsel for the assessee submitted an application dated 6-11-2009 mentioning that on similar facts in the case of one of the assessee s group concern, the Tribunal has held that the transaction will result in a capital loss. He filed a copy of the decision of the C-Bench of the Mumbai Tribunal in ITA No. 4212/Mum/2007 order dated 19th Feb., 2009 wherein the judgment of the Hon ble Supreme Court in the case of CIT vs. Mrs. Grace Collis and others 248 ITR 323 was followed. For enabling the Revenue to reply to this fresh decision cited by the assessee the case was reposted for fresh hearing. 12. After hearing the rival contentions and perusing the papers on record and the orders of the authorities below as well as the case laws cited, we hold as follows. 13. The Board for Industrial and Financial Reconstruction i.e. BIFR had de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) The Applicant Company is exempted from the applicability of the provisions of Sections 100 101 of the Companies Act, 1956. c) The Company shall issue and allot at par to all shareholders of Polychem Ltd. one equity share of the face value of Rs.10/- each in the Company credited as fully paid up for 40 equity shares of the company held by them on such date after the record date as the Board of Directors of the Company may determine in accordance with the approval of BIFR under section 18(2)(f) of The Sick Industrial Companies (Special Provisions) Act, 1981 under the Revival scheme sanctioned by order dated 4th February, 2002. d) - - - - - - - e) All members whose name shall appear in the Register of Members of the Company on the record date shall surrender to the company their share certificates on such date/s as the Board of Directors may determine, for cancellation of their share certificates in respect of equity shares held in the company and the company shall issue to them certificates for equity shares in the company to which they may be entitled in terms of the above clause and every such shareholder of the company shall take all steps to obtain from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uding the value of the property so received, the portion attributable to accumulated profits had to be deleted. Only the balance amount could be treated as a capital receipt. Thereafter looking to the cost of acquisition of that portion of the share which had been diminished, capital gains would have to be determine. The Tribunal, while computing capital gains, would have to decide how this property should be valued for the purpose of deciding what the assessee had received on reduction in the value of his shares, and whether any capital gains had accrued to the assessee or not. This question was not required to be considered by the Tribunal because the Tribunal came to the conclusion that there being no transfer of any capital asset, the question of capital gains did not arise. But the question would now have to be considered and decided by the Tribunal when the matter went back before it for the determination of capital gains. 15.2 At page 332 of the reported decision, the Hon ble Supreme Court observed that in the case of Kartikeya V. Sarabhai vs. CIT 228 ITR 163 the Court held that relinquishment of the asset or extinguishment of any right in it, which may not amount to a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any rights therein as not extending to mean the extinguishment of rights independent of or otherwise than on account of transfer. To read so is to render the expression ineffective and its use meaningless. The expression includes the extinguishment or rights in a capital asset independent of and otherwise than on account of transfer. 16. Applying these propositions to the facts of the case, the coordinate bench of the Tribunal in the case of Polychem Ltd. (supra) held that there was a transfer on the reduction of share capital, consequent to an order of the BIFR and held that the assessee was entitled to claim long term capital loss. Consistent with a view therein, we agree with the contentions of Mr. Pardiwalla and uphold the finding of the first appellate authority that there is a transfer u/s 2(47) of the Act, entitling the assessee to claim long term capital loss. Thus we dismiss ground Nos. 2 and 3 of the Revenue. 17. We now take up the assessee s appeal. The first ground is on the issue of disallowance of expenses relating to rent, water charges and property tax. The facts are that the company occupied 14292.5sq.ft. of office space including share of the lobby ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er hearing the rival contentions, we find that the first appellate authority dismissed this ground as the claim is not supported by any documentary evidence. As there is no documentary evidence produced, even before us, we uphold the finding of the first appellate authority. 22. Ground No. 3 is on the issue of disallowance of short term capital loss. The learned counsel submits that the order of the BIFR was on 29th Nov., 2002 and hence the allegation of the Revenue that the order was passed on 4th Feb., 2002 was wrong. He submits that the fact remains that the assessee had purchased shares and there was a reduction in the value and hence the loss should be allowed as short term capital loss. 23. The learned DR submits that the assessee knew that there is going to be reduction in share capital and the decision to reduce the share capital was taken on 7-5-2001 by BIFR and objections/suggestions were invited. This shows that the assessee has wilfully undertaken this transaction with the view of booking short term capital loss. 24. After hearing rival contentions, we find that the AO has not invoked section 40A(2) or any other section. The only ground on which the CIT(Appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X
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