TMI Blog2005 (3) TMI 392X X X X Extracts X X X X X X X X Extracts X X X X ..... apply, wholly or in part, in favour of any other person. Each PCD had two parts. Part A comprised of convertible portion of Rs. 65, which would be compulsorily and automatically converted into a share of face value of Rs. 10 with a premium of Rs. 55 within 6 months of allotment of PCDs. Part B comprised of non-convertible portion being debenture of face value of Rs. 85 and carrying interest at the rate of 14 per cent. 3. As per the terms of the offer, the assessee company applied only for 785 PCDs and, as mentioned by Assessing Officer, payment was made by cheque. The same were also allotted to assessee. The non-convertible debenture portion of 785 PCD was sold to M/s. Credit Capital Financial Corporation Ltd., New Delhi at the rate of Rs. 64.32 per PCD (Part B). Thus, it suffered a loss of Rs. 20.68 per PCD (Rs. 85 less Rs. 64.32) aggregating to Rs. 16,233.80. However, for the balance entitlement of 1,15,000 PCDs, the assessee under an arrangement renounced its right in favour of LICMF. Such arrangement was made through one Shri Dhruv M. Sawhney. The terms of such arrangement were contained in the letter dated 13-6-1992 written by Mr. Sawhney to assessee. The same are being rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --------- Rs. 25,88,784 --------------- The above claim was accepted by Assessing Officer under section 143(1)(a) on 27-6-1994. Later on, the assessment was reopened under section 148 on the ground that assessee did not disclose, in the return, the details of the loss. In the course of re-assessment proceedings, the assessee's contention before the Assessing Officer, was as under: "In terms of Rights offer made by M/s. Triveni Engineering Works Ltd. the assessee company became entitled to 1,15,785 PCDs of Rs. 150 each. This right to acquire the PCD is a capital asset and the profit or loss on the transfer of such a right is chargeable to income-tax under the head 'capital gains'. The assessee company transferred its right to acquire the partly convertible debentures in favour of LIC Mutual Fund. In addition, the assessee company was also required as per the agreement to give Rs. 22.37 per PCD to LIC Mutual Fund since LICMF required the PCDs to be purchased at less than the face value and had to be compensated in this respect. The transfer of such right to acquire PCDs was a t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... linked to each other and it could not have purchased Part A or Part B separately. This composite right was transferred to LICMF with an option to buy-back Part A within three years. Part B was to be retained by LICMF. So, the transfer of such right was impliedly against acquisition of Part A at future date. Hence, the consideration of Rs. 22.37 paid by assessee was towards acquiring of Part A of the debenture. Accordingly, it was held by him that such payment, would form part of the cost of share which assessee would acquire at a future date. 6. It was also opined by him that there was no compulsion for assessee to transfer the right to subscribe. If it did not want to exercise that right, it could do so without incurring such loss. At the most, it was investment for acquiring asset in future. 7. Accordingly, it was held by the Assessing Officer that there was no transfer of any capital asset within the ambit of section 45 of the Act. The claim of assessee amounting to Rs. 25,88,784 as short-term loss was, therefore, disallowed. However, it was further held by him that the sum of Rs. 22.37 per PCD paid by assessee would form part of cost of Part A of the debenture. Thus, the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred to ensure subscription of PCD of a group company which is, therefore, an expenditure of a capital nature incurred for the benefit of the group company. The reason advanced by CIT(A) was that a capital asset cannot be transferred for a reverse consideration i.e., the consideration here flow from the transferor to transferee and not from transferee to transferor. Secondly, a capital asset is by definition a property which has a value. If its value reduced to zero, it ceases to be an asset and if assessee has to pay something for holding himself from it, then by definition it is a liability. The direction in which consideration flows from transferor to transferee is sole and sufficient determination of whether the subject-matter is asset or liability. The liability was to ensure that issue of group company is subscribed. The expenditure at the rate of Rs. 22.37 per PCD was incurred in the course of bona fide management of the company. 10. The learned counsel for assessee, Mr. Vohra, has reiterated the stand of assessee taken before the lower authorities and, therefore, need not be repeated as the same has been stated in detail in earlier part of this order. He also drew my att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n received or accruing as a result of the transfer of the capital asset. The word 'transfer' in relation to capital asset has been defined in section 2(47) of the Act. The combined reading of all these provisions shows that in order to bring any profits or gains within the net of taxation under section 45, then following conditions must be satisfied namely (i) there must be a capital asset; (ii) such capital asset is transferred during the previous year as per the definition clause 2(47) of the Act; (iii) such transfer must be for consideration; and (iv) there must be some cost of the asset. If the provisions of computation under section 48 fail, then nothing would be chargeable to tax under the head 'capital gain' as held by the Hon'ble Supreme Court in the case of B. Srinivas Setty. 13. Let me now examine whether such conditions are satisfied in the present case. There is no dispute to the contention of the assessee's counsel that right to subscribe the PCD is a valuable right and, therefore, falls within the definition of capital asset under section 2(14) of the Act. Even the Assessing Officer has accepted this legal position vide para 6 in his order. Further, it is also agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat LICMF has actually charged service charges at the rate of 19 per cent of investment made by LICMF for Part A of the debenture and the same was worked out to Rs. 22.37 per share after discounting. As per the terms of the agreement with LICMF, the assessee was entitled to buy-back the shares, allotted to LICMF on conversion of Part A of the debenture, within a period of three years. Therefore, in my opinion, the payment of Rs. 22.37 per debenture was inextricably linked with the acquisition of shares at a future date i.e., within a period of 3 years. Hence, the same would form the part of cost of acquisition of shares in future and by any logic cannot be considered as short-term capital loss. Hence, the finding of CIT(A) in this regard is incorrect and is vacated. In fact, the finding of Assessing Officer that payment by assessee formed part of the shares to be purchased at future date was correct in this regard. In view of the above discussion, it cannot be said that payment of Rs. 22.37 related to renunciation of right to subscribe the PCDs. Hence, the same could not be considered as short-term capital loss. Accordingly, the loss of Rs. 25,72,550 was rightly disallowed by the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .37 per debenture to the financial institutions without consideration. (iii) That in the case of Karam Chand Thaper Bros. (Coal Sales) Ltd., the Non-Convertible Portion (NCD) was sold by the assessee for consideration of Rs. 235 per debenture against the value of Rs. 300 per debenture and thus there was complete transfer of that portion of the debenture against consideration while in the present case, assessee did not receive any consideration on renunciation of its right to subscribe and strangely on the contrary paid Rs. 22.37 per debenture to the transferee which no prudent person would do in the normal circumstances. Similar is the factual position in other cases relied on by assessee. (iv) The judgment of Supreme Court in the case of Miss Dhun Dadabhoy Kapadia is also distinguishable on facts. In that case, the assessee renounced the right to subscribe against consideration while in the present case there was no consideration at all. Further, in that case, there was loss in respect of existing shareholding which was subject-matter before the Apex Court while in the present case, loss related to renunciation of right to subscribe as contended by assessee. Hence, the ratio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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