9911796707
TMI Blog2007 (11) TMI 336X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e., loss of Rs. 2,07,98,394. In the said return, income from interest and dividend was shown by the assessee at Rs. 1,24,68,142 and Rs. 16,19,488 respectively whereas loss on sale of debentures was shown at Rs. 1,57,94,206. In Schedule 8 to the balance sheet and profit & loss account filed along with its return of income giving the details of significant accounting policies and notes to accounts, the following note was given in this context as Item No. 5:- "During the year the company was allotted 1,95,000, 12.5 secured redeemable NCDs of Rs. 250 each (with detachable warrants) of Max India Ltd. the NCDs (without warrants) were sold in terms of letter of offer at the rate of Rs. 169 each. The difference between face value of NCDs (with warrant) and sale value (without warrant) has been treated as loss on shares of debentures and warrants have been taken at nil value. The warrants will entitle the company to apply for and be allotted one equity share of Max India Ltd. at a price to be calculated at a discount of 33 per cent on the prevailing market price. or at a price of Rs. 225 whichever is less, any time between the period of 24-48 months from the date of allotment or earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CD as against a face value of Rs. 250 each, it claimed to have suffered a total loss of Rs. 1,57,95,000, i.e., Rs. 81 per debenture on sale of 1,95,000 debentures. 4. The claim of the assessee for a loss suffered on sale of debentures was examined by the Assessing Officer during the course of assessment proceedings. In this context, he referred to the terms of the prospectus as also the offer made by M/s. Max India Limited for NCDs with detachable warrants and after reproducing such terms relevant in this context in his assessment order and after examining the same, the following inference was drawn by him in paragraph Nos. 2.2-6 to 2.2-8 of his assessment order:- "2.2-6 Let us at this stage, first of all examine the terms of the issue. From reading of the terms of issue extracted above, it is clear that the investors are given two options: ------------------------------------------------------------- Regd. Application No. of equity No. of NCDs Scheme A: Folio Form No. shares held as offered Applicants (Column 2) on 6-12-1995 (Column 4) who do not opt for buy back of NCD(s) Application Money @ Rs. 250 per NCD ----------- Scheme B: Applicants who opt for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited, each NCD had a face value of Rs. 250 and the same was attached with one detachable warrant. It was submitted that each warrant made the holder entitled to apply for and be allotted one equity share of Max India Limited at a price which was to be calculated at a discount of 33 per cent on the prevailing market price or Rs. 225, whichever is less, anytime between the period of 24 to 48 months from the date of allotment of NCDs. It was pointed out that if the right attached to the warrant had not been exercised by the holder thereof within the period specified by Max India Limited, the entitlement for the shares was liable to be automatically lapsed. It was also clarified that the warrant holders exercising their option for allotment of equity shares were not entitled to seek any appropriation of the amount paid on the NCDs against the amount payable for the equity shares which was to be paid in full separately. It was contended that the said warrants thus were completely detachable from the NCDs and the holder of the NCDs was entitled to sell the NCDs separately after detaching such warrants. It was also contended that since the purchase price, face value as well as redempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce value of NCDs offered by Max India Limited was Rs. 250 each. He submitted that the detachable warrant to be issued along with the said NCD, however, was not assigned any value and the same thus was allotted without any extra cost to the existing shareholders. He contended that the cost of acquisition of NCD to the assessee thus was Rs. 250 each whereas the cost of acquisition of the detachable warrants was nil for all purposes including the purpose of computation of profit/loss on sale of the said instruments. In support of this contention, he relied on the provisions of section 55(2)(aa)(iiia) and submitted that although the said provisions are applicable in the context of computation of capital gain, a similar analogy can be applied for computing the profit/loss on sale of shares in the preset case which is chargeable to tax under the head "Profits and gains of business or profession" by taking the cost of acquisition of detachable warrant at nil and, consequently, the cost of acquisition of NCDs at Rs. 250 each. 8. The learned counsel for the assessee also contended that the investment was made by the assessee-company in NCDs on payment of a price of Rs. 250 each and since t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the assessee, therefore, was directed by the Bench to address the arguments regarding the binding nature of the said judgment of the Hon'ble Jurisdictional High Court dismissing the appeal at the threshold under section 260A in the light of recent decision of Ahmedabad Special Bench of ITAT in the case of Nirma Industries Ltd. v. Asstt. CIT [2005] 95 ITD 199. The learned counsel for the assessee in this regard relied on the decision of Hon'ble Gujarat High Court in the case of Nirma Industries Ltd. v. Dy. CIT [2006] 283 ITR 402 stating that the effects of the decision of Hon'ble High Court dismissing the appeal on the ground that no question of law arises have been considered and explained by Their Lordships. He submitted that it has been held in this context by the Hon'ble Gujarat High Court that dismissal of tax appeal by the High Court holding that no substantial question of law arises implies that the order of the Tribunal on the issue stands merged in the order of the High Court and for all intents and purposes, it is the decision of the High Court which is operative and which is capable of being given effect to. He then invited our attention to the decision of Hon'ble Delh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no substantial question of law arose, there is no ruling of the High Court from which ratio can be drawn. He submitted that the decision of Hon'ble Delhi High Court in the case of Abhinandan Investments Ltd. is distinguishable on facts also inasmuch as different facts were involved in the said case as compared to the facts involved in the present case. He submitted that for instance the price of share for which the warrant holder was entitled to receive had been fixed at Rs. 200 each in the case of Abhinandan Investments Ltd. and the same was not dependent on the market price of the said shares at the time of allotment whereas in the present case, the same was dependent on the market price prevailing at the time of allotment. He submitted that the investment in warrant thus was made by the assessee in the case of Abhinandan Investments Ltd. not for earning/making any profit whereas such profit element was involved in the present case. 12. The learned DR submitted that the provisions of section 260A and section 261 of the Income-tax Act, 1961 clearly restrict the appeals only to the question of law before the Hon'ble High Court and Hon'ble Supreme Court respectively and thus, in ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt/forum only to the extent of items/issues considered and decided by the higher court/forum and the portion of the order of the lower court which was not subject-matter of the appeal before the higher court does not merge in the order of the higher court. In support of this contention, he cited the following case-laws:- (i) Karsandas Bhagwandas Patel v. ITO [1975] 98 ITR 255 (Guj.). (ii) CIT v. Sakseria Cotton Mills Ltd. [1980] 124 ITR 570 (Bom.). (iii) Alok Paper Industries v. CIT [1983] 139 ITR 1064 (MP). (iv) R.S. Banwarilal v. CIT [1983] 140 ITR 3 (MP). (v) Smt. Ganga Devi v. CIT [1987] 166 ITR 325 (Raj.). (vi) Addl. CIT v. India Tin Industries (P.) Ltd. [1987] 166 ITR 454 (Kar.). (vii) CIT v. Travancore Tea Estates Co. Ltd. [1988] 172 ITR 733 (Ker.). (viii) Hindustan Aluminium Corpn. Ltd. v. CIT [1989] 178 ITR 74 (Cal.). (ix) Central Indian Insurance Co. Ltd. v. ITO [1963] 47 ITR 895 (MP). (x) Kalooram Tirasilal v. ITO [1966] 59 ITR 308 (MP). 15. The learned DR contended that the ratio of the decision of the Hon'ble Gujarat High Court in the case of Nirma Industries Ltd. rendered relying on the doctrine of merger in any case is applicable only to the extent so far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the scheme, each NCD of face value of Rs. 250 could be offered for sale to IL&FS at the rate of Rs. 169 and this fact by itself was sufficient to show that the detachable warrant had been valued at Rs. 81 and the said value was collected in the form of application money from the applicants opting Option-B. He submitted that the question is as to why the assessee sold the NCD at the rate of Rs. 169 though the face value of such a NCD was Rs. 250 and the answer is simple and plain that the real value of such a NCD, stripped of DW, was Rs. 169 only which becomes further clear from the fact that under Scheme-A, applicant had to pay Rs. 250 for getting the NCD and the DW both whereas under Scheme-Bi applicant had to pay Rs. 81 only for retaining the DW. He contended that if the value of the DW was nil as claimed by the assessee, then what was the compulsion for the assessee to spend Rs. 81 for acquiring the same. According to him, the offer for allotment of NCD along with DWs by M/s. Max India Ltd. thus was very simple in the sense that every eligible person was to be allotted DWs at the rate of Rs. 81 and NCDs at the rate of Rs. 169 and the terms of payment of application were deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as nothing to do with the market value of the security. He explained that a security with face value of Re. 1 can command market price of Rs. 1,500 and vice versa. He submitted that the face value thus is not absolute in itself and it has connotations to the market forces as well, on the day of transaction. According to him, the market value of NCD may be much less or more than the face value and the face value is relevant only for the purpose of calculating interest, etc., which comes in picture only at the time of redemption. He contended that a definite benefit, in any case, was guaranteed to the assessee in the form of entitlement to get shares of the company against DWs at a price which was to be lower than the market price and this benefit was certainly paid for by the assessee as is evident from the terms of the scheme itself. In support of this contention, he relied on the order of the Tribunal in ITA No. 1121/Delhi/2000 as well as in the case of Tarnik Investment & Trading Ltd v. Jt. CIT [2005] 94 ITD 183 (Delhi)(SMC). He prayed that the orders of the authorities below on disallowance of Rs. 1,57,95,000 on account of loss on sale of debentures may be confirmed. 21. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision of the Tribunal rendered in the said cases on a similar issue. On perusal of the decisions rendered by the Tribunal as well as Hon'ble Delhi High Court in the said cases, the Division Bench, however, was of the opinion that the facts involved in the said cases were materially different from the facts involved in the present case and after discussing the same, the Division Bench expressed a view that the reliance of the Tribunal in the case of Mohair Investment & Trading Co. (P.) Ltd. on its earlier decision in the case of Nalwa Investment Ltd. as stated to be affirmed by the Hon'ble Delhi High Court to decide a similar issue as involved in the present case, was misplaced and the same was required to be reviewed by a Larger Bench. A reference, therefore, was made by the Division Bench to Hon'ble President of ITAT for constitution of Special Bench and, accordingly, the present case has been referred by the Hon'ble President to this Special Bench for considering the same issue. 24. The issues which thus are required to be considered by this Special Bench in the present case are as under:- (i) Whether the issue involved in the present case as well as facts relevant thereto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he NCD surrender the NCD to the UTI who could surrender the NCD would pay the allotment money of to the IL&FS who would Rs. 389 and secure the NCD while pay the allotment money the detachable warrant would of Rs. 169 and secure remain with the applicant. the NCD while the detachable warrant would remain with the applicant. Payment was made by UTI to JISCO Payment was made by on behalf of assessee. IL&FS to Max India Ltd. The UTI had agreed to this The arrangement with arrangement to the extent of IL&FS was open for all Rs. 350 crores and did not without any monetary limit. restrict only for the promoters. Assessee sold 2/3rd of detachable Assessee-companies claimed warrants at the rate of Rs. 20 Rs. 81 as cost of per share. Assessee in the return debentures and claimed of income claimed the difference capital loss as of Rs. 91 (Rs. 111 - Rs. 20) per short-term capital loss, detachable warrant to as on sale of debentures to short-term capital loss. However, IL&FS. in appeal proceedings before CIT(A), the assessee claimed Rs. 111 as cost of debentures and claimed capital loss as short-term capital loss, on sale of debentures to UTI. The above claim of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecting the Assessing Officer to allow deduction of the losses of Rs. 111 per NCD as business loss? (b) Whether the Income-tax Appellate Tribunal was correct in holding that the assessee-company sold the NCDs to the UTI as a consideration the UTI paid Rs. 389 per debenture JISCO and in turn the assessee's transferred the NCDs in the name of the UTI? (c) Whether the NCDs were subscribed by the assessee-company as stock-in-trade or capital investment? Made a claim of loss on sale of (d) Whether the NCDs held debenture, being business loss. by the assessee-company were as stock-in-trade Allotting company offered NCDs so as to entitle it to with DWs. who opted for Scheme-A, claim the loss as had to pay Rs. 250. For Scheme-B, business loss? allottees had to pay Rs. 81 on application and Rs. 169. was (e) Whether the amount of paid by IL&FS as the allottees Rs. 111 per NCD amounts sold the NCD to it. In both to forfeiture of capital cases, DWs were held by the or is to be treated as allottees. business loss? Appellant treated cost of DW as (f) Whether the order of the NIL thus, difference of Rs. 250 Income- tax Appellate and Rs. 169 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 payable for each NCD and the actual cost of detachable warrant as per the scheme itself was Nil The stand taken by the revenue in the said cases thus right from the beginning was that the detachable warrant was received by the assessee gratis without any consideration. 28. After having held that the cost of acquisition of each NCD by the assessee was Rs. 500, the alternative claim of the assessee of having incurred a loss of Rs. 111 per NCD on sale thereof at Rs. 389 per NCD, however, was still disallowed by the Assessing Officer as wel1 as the learned CIT(A). It is no doubt true that the reasons given for disallowing the said loss claimed by the assessee were different inasmuch as it was never the case of the revenue that the cost of acquisition of NCD in the hands of the assessees was only Rs. 389 and the remaining amount of Rs. 111 was attributable to the cost of detachable warrant. However, the fact remains to be seen is that the claim of the assessees as originally made in the said cases was that the amount of Rs. 111 per NCD paid by them actually represented cost paid for each detachable warrant and the remaining amount of Rs. 389 was the cost actually paid for acquiring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that as per the scheme of allotment, the cost of acquisition of each debenture was Rs. 500 whereas the warrant was received by the assessee gratis without any cost of acquisition which was the true legal effect of the relevant transaction, In these circumstances, we find it difficult to accept that the aspect of attribution of part of the price paid by the assessee as per the scheme of allotment towards cost of detachable warrant was not there before the Tribunal or that the Tribunal had no occasion to consider the same. In any case, the scheme of allotment involved in the said cases before the Tribunal was almost identical to the scheme in the present case and when one definite stand was taken by the revenue consistently in the said cases on a similar issue involving almost identical terms of allotment, it cannot be permitted to change that position in other cases without there being any material difference in the facts and to say on the basis of such change in the position taken by them that the earlier decision rendered by the Tribunal on a similar issue involving almost identical facts is not applicable. 30. The other distinction sought to be made out is on the basis of two op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the finance company as per the arrangement made by the issuing company and the difference was only in the stage at which such option was to be exercised. For example, in the case of Abhinandan Investments Ltd., such option was to be exercised only after allotment of the concerned NCDs whereas in the case of the assessee, such option was to be exercised at the time of filing an application itself. Since the said option was to be exercised at the time of filing of an application itself in the case of the assessee, the payment of Rs. 169 per NCD to be received by the subscriber from the finance company was agreed to be adjusted directly against the remaining amount payable against each NCD since it was clear at the time of application itself that the subscriber opting for option (a) would be entitled to receive that much amount from the finance company. In the case of subscriber going for option (b), there was however no such amount and since the entire amount was to be paid along with the application as per the terms of payment given in the offer document, he was required to pay a sum of Rs. 250 per NCD on application itself. In die case of Abhinandan Investments Ltd., the terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arose, is a decision on merits and constitutes a binding precedent which this Special Bench is bound to follow. In this regard, the learned DR has heavily relied on the decision of Ahmedabad Bench of ITAT in the case of Nirma Industries Ltd. wherein it was held that when the High Court dismisses an appeal filed under section 260A stating that no substantial question of law arises, it only means that the High Court has declined to entertain/admit the appeal in the absence of arty substantial question of law and there is no decision on merits by the Hon'ble High Court on the issues raised by the parties. He has also relied on the decision of Hon'ble Supreme Court in the case of Kunhayammed wherein the doctrine of merger was explained by the Hon'ble Apex Court as follows:- "(i) Where an appeal or revision is provided against an order passed by a Court, Tribunal or any other authority before superior forum and such superior forum modifies, reverses or affirms the decision put in issue before it, the decision by the subordinate forum merges in the decision by the superior forum and it is the latter which subsists, remains operative and is capable of enforcement in the eye of law. (ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Once leave to appeal has been granted and appellate jurisdiction of Supreme Court has been invoked the order passed in appeal would attract the doctrine of merger; the order may be of reversal, modification or merely affirmation. (vii) On an appeal having been preferred or a petition seeking leave to appeal having been converted into an appeal before Supreme Court the jurisdiction of High Court to entertain a review petition is lost thereafter as provided by sub-rule (1) of rule 1 of Order 47 of the CPC." 34. As pointed out by the learned counsel for the assessee, the decision of Special Bench of ITAT at Ahmedabad in the case of Nirma Industries Ltd. relied upon by the learned DR, however, has already been overruled by the Hon'ble Gujarat High Court by its judgment in Nirma Industries Ltd.'s case, wherein it has been held that dismissal of tax appeal by the High Court holding that no substantial question of law arises implies that the order of the Tribunal on the issue stands merged in the order of the High Court and for all intents and purposes, it is the decision of the High Court which is operative and which is capable of being given effect to. In the case of Nirma Industries L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which subsists and is operative and capable of enforcement. It was held that in all such eventualities, what merges is the operative part of the order under appeal after its confirmation, reversal or modification and there would be a merger even in a case where the reasoning of the subordinate forum is not expressly approved. It was held that if the merger is issue-specific, there is fusion of order only to that limited extent but it cannot be successfully contended that where the appellate court merely accords approval to the reasoning of the lower court or forum, there is no decision of the appellate court or forum. It was also clarified by the Hon'ble Gujarat High Court that where the appeal is dismissed on account of being barred by limitation, being defective in nature or the appellant having no locus standi to prefer the appeal, the theory of merger of the order of the subordinate forum in the order of the superior forum cannot be applied became there is no "order" made by the superior forum on merits and the controversy between the parties has not been gone into by the appellate forum. It was thus held by the Hon'ble Gujarat High Court in the case of Nirma Industries Ltd. th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esent case because a similar issue as involved in the present case was directly raised in the appeals filed before the Hon'ble Jurisdictional High Court in the case of Abhinandan Investments Ltd. which is quite evident from the following questions raised in the said appeal for adjudication:- "(a) Whether the Tribunal is correct in law in directing the Assessing Officer to allow deduction of the losses at Rs. 111 per NCD as business loss? (b) Whether the Income-tax Appellate Tribunal was correct in holding that the assessee-company sold the NCDs to the UTI as a consideration the UTI paid Rs. 389 per debenture to JISCO and in turn the assessees transferred the NCDs in the name of the UTI? (c) Whether the NCDs were subscribed by the assessee-company as stock-in-trade or capital investment? (d) Whether the NCDs held by the assessee-company were as stock-in-trade so as to entitle it to claim the loss as business loss? (e) Whether the amount of Rs. 111 per NCD amounts to forfeiture of capital or is, treated as business loss? (f) Whether the order of the Income-tax Appellate Tribunal is perverse on facts and in law?" 37. A perusal of the judgment of Hon'ble Delhi High Court passed ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
