TMI Blog2007 (11) TMI 336X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 as may be decided by the Board of Max ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other product, the NCD is given to IL FS for Rs. 169. 2.2-8 There is no transaction suggestive of the assessee selling NCD to IL FS for Rs. 169 at a loss of Rs. 81. Therefore, the warrant cost is to be taken at Rs. 81 only and not nil, as canvassed by the assessee. In sum, the claim of the assessee is erroneous and is rejected." On the basis of the aforesaid findings/observations recorded in the assessment order, it was held by the Assessing Officer that the claim of the assessee for loss on sale of debentures at Rs. 1,59,95,000 was not allowable. Accordingly, he disallowed the same in the assessment completed vide his order dated 10-12-1998 under section 143(3). 5. Aggrieved by the order of the Assessing Officer, an appeal was preferred by the assessee-company before the learned CIT(A) and it was submitted on its behalf before him that in terms of letter of offer dated 8-12-1995 of Max India 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 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee-company was a shareholder of M/s. Max India Limited and being the holder of the said shares, a right offer was received by it from the said company. He invited our attention to a copy of letter of offer received from M/s. Max India Limited placed at page Nos. 18 to 46 of his paper book in connection with the said right offering 12.5 per cent secured redeemable Nonconvertible Debentures (NCDs) of Rs. 250 each for cash at par along with detachable warrants on right basis in the ratio of one NCD for every 5 equity shares held to the existing equity shareholders. He took us through the relevant terms of the said right issue offered by Max India Limited and explained the salient features of the said offer as was done on behalf of the assessee before the authorities below as well. He pointed out that two options were given to the existing shareholders by the said offer and in both these options, the face 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer of NCDs thus had resulted in a loss of Rs. 81 per NCD and the said loss having been actually suffered by the assessee-company, the same was rightly claimed by it. 9. The learned counsel for the assessee also submitted that the similar issue has already been decided by the Delhi 'D' Bench of ITAT in the case of CIT v. Abhinandan Investments Ltd. [2002] 254 ITR 538 vide its common order dated 5-6-2000 in ITA No. 1949 (Delhi) of 1999 and the said decision rendered by the Tribunal has been confirmed by the Hon'ble Delhi High Court by a common judgment in Abhinandan Investments Ltd.'s case. On a perusal of the said judgment, it was noted by the Bench that the appeals filed by the revenue against the orders of the Tribunal involving a similar issue have been dismissed by Their Lordships of Delhi High Court observing that no question of law arose from the orders of the Tribunal. The learned counsel for 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 Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lmost similar, the issue in fact stands squarely covered in favour of the assessee by the decision of Hon'ble Delhi High Court in the case of Abhinandan Investments Ltd. He submitted that in the case of Abhinandan Investments Ltd. the price to the extent of Rs. 111, in fact, was initially attributed by the assessee himself to the warrant. The same, however, was subsequently changed on sale of NCDs claiming the loss on account of difference between the face value of NCD and selling price thereof. He contended that the assessee in the present case, on the other hand, has throughout assigned the full price of Rs. 250 to NCDs which makes his case stronger than that of Abhinandan Investments Ltd.'s case. 11. The learned DR, on the other hand, submitted that there cannot be a precedent on factual issues and when the appeal is dismissed by the Hon'ble High Court on the ground that it was a question of fact and 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 involve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmulated by the Hon'ble High Court. He contended that if the appeal is disposed of by the Hon'ble High Court under section 260A holding that no question of law arises, it is akin to turning away the petitioner at the threshold without having been allowed to enter in the appellate jurisdiction of the Court and the doctrine of merger does not apply in such a case. In support of this contention, he relied on the decision of Hon'ble Supreme Court in the case of Kunhayammed v. State of Kerala [2000] 245 ITR 360. He contended that it is thus clear that unless question of law is involved, there is no question of hearing the appeal or rendering the decision on the merits of the case and doctrine of merger has either no application or limited application. 14. As regards the limited application of doctrine of merger, the learned DR contended that the order of the lower court/forum merges in the order of the higher court/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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subscribing the share at lower value than the market value of such shares. He explained such monetary translation and benefit arising to the assessee on the basis of following illustrations:- Scenario (i):- If market value of share is Rs. 1,000 Assessee gets it for Rs. 670 (being 33 per cent less)/for Rs. 225 (whichever is less). Thus benefit of Rs. 775 [i.e. Rs. 1,000 (-) Rs. 225] Scenario (ii):- If market value of share is Rs. 225 Assessee gets it for Rs. 151 (being 33 per cent less)/for Rs. 225 (whichever is less). Thus benefit of Rs. 74 [i.e. Rs. 225 (-) Rs. 151] The learned DR submitted that the assessee thus was assured of the minimum benefit of Rs. 74 per DW and the same could have been derived by the assessee even on the next day of sale of NCDs as the period of 24-48 months could have been pre-poned by the allotting company as per Scheme? 18. The learned DR submitted that as per the terms and conditions 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tripped NCD valued at Rs. 169 whereas the DW bearing NCD costed Rs. 250. Thus, shall this still be wrong to say that the DW is valued at Rs. 81? (c) Why the NCDs shall be issued as rights issue to the shareholders if, the applicants are going to suffer loss? Can there be an intention on the part of such a company to cause loss to the applicants? If so, why will the existing shareholders bite the cake? Can the unsuspecting assessee be called naive enough to suffer such a huge loss at the hands of such a company? The learned DR contended that the aforesaid questions would certainly show that the issue is not the same as presented to be by claiming the loss and the claim of DW being of nil value is not only beyond common sense but also negates the fundamentals of accounting and finance. 20. The learned DR submitted that the face value of an instrument is a misnomer in the world of security market because the intrinsic value of any security has 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss. For this conclusion drawn in the case of Mohair Investment Trading Co. (P.) Ltd., reliance was placed by the Tribunal on its earlier decision in the case of Abhinandan Investments Ltd. which had been subsequently approved by the Hon'ble Delhi High Court in Abhinandan Investments Ltd.'s case, and it was thus held by the Tribunal that the issue stood squarely covered by the said decision of Hon'ble Jurisdictional High Court. 23. When the present case involving a similar issue and identical facts was heard by the Division Bench, reliance again was placed on behalf of the assessee on the aforesaid decision of the Tribunal in the case of Mohair Investment Trading Co. (P.) Ltd. in support of its stand pointing out that a similar issue involving identical facts has been decided by the Tribunal in the said case in favour of the assessee relying on the decision of Hon'ble Delhi High Court in the case of Abhinandan Investments Ltd. affirming the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. Right issue of 10.5 per cent Right issue of 12.5 per redeemable NCDs with a detachable cent secured redeemable warrant. non-convertible debentures with a detachable warrant. Face value of NCD = Rs. 500 Face value of NCD=Rs. 250 Detachable warrant entitled the Detachable warrant holder to apply for one equity entitled the holder to share of JISCO with a face value apply for one equity of Rs. 10 at a premium of Rs. share of Max India Ltd. 190 per share. with a face value of Rs. 10 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. Application money for this right Application money for issue Rs. 111 per NCD and this right issue-Rs. 89 allotment money Rs. 389 per NCD. per NCD a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo charts are reproduced below:- ---------------------------------------------------------------- Medicare Investments Ltd. Nalwa Investments Ltd.- 1948/Delhi/1999 (and others). Made a claim of loss on sale of Assessee first claimed debenture, being business loss. loss on sale of DWs. Later on claimed loss on sale of NCDs before CIT(A). Allotting company offered NCDs Allottee came out with NCD with DWs. who opted for Scheme-A, scheme of FV of Rs. 500. had to pay Rs. 250. For Scheme-B, Rs. 111 on application and allottees had to pay Rs. 81 on Rs. 389 to payable on application and Rs. 169 was paid allotment. by IL FS as the allottees sold the NCD to it. In both cases, DWs were held by the allottees. Appellant treated cost of DW as Each NCD had one DW NIL thus, difference of Rs. 250 attached. Assessee first and Rs. 169, i.e., Rs. 81 claimed loss on sale of treated as business loss. DWs. Later on claimed l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aring before us. The first distinction sought to be made out is that in the case of Abhinandan Investments Ltd., the claim of the assessee for loss of Rs. 111 per NCD was not disallowed on the ground that the said amount of Rs. 111 stated to be paid for each NCD was actually the price paid for acquisition of detachable warrant and it was thus nobody's argument in that case that the sum of Rs. 111 should be treated as the price paid by the assessee-companies for acquisition of detachable warrants as has been the stand taken by the revenue in the present case. In this regard, it is observed that the claim originally made by the assessees in the said cases was that a sum of Rs. 111 paid as application money for each NCD actually represented cost of each detachable warrant and since the detachable warrant was transferred at a price of Rs. 20, the difference of Rs. 91 per DW was claimed to be loss suffered by the assessee. This claim of the assessee, however, was not accepted by the Assessing Officer since he was of the opinion that the amount of Rs. 111 paid by the assessee as application money for each NCD actually represented the part of the total price of Rs. 500 payable for each NC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the claim originally made by the assessee before the Assessing Officer which was subsequently changed as a result of stand taken by the revenue that out of the sum of Rs. 500 paid by the assessee in terms of the said right issue, nothing was attributable to detachable warrant which was received gratis without any extra/separate consideration. The Tribunal also considered the different basis on which the claim of the assessee for loss of Rs. 111 on sale of debenture was disallowed by the Assessing Officer as well as by the learned CIT(A) and found no substance or merit in such basis by passing a welt-reasoned and well-discussed order. Thereafter, the Tribunal also considered and discussed the terms of the said right issue in paragraph No. 25 of its order and on such consideration and discussion, it was held by the Tribunal that the true legal effect of the relevant transaction has to be seen for the purpose of income-tax assessment and not the entries made in the books of account or claim made in the return of income. Ultimately, the Tribunal accepted the claim of the assessee for loss of Rs. 111 per debenture as arising from sale thereof to UTI and thereby held that as per the sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e option of khoka sale as given in option (b), the entire face value of Rs. 250 was payable on application. It was contended that there were thus two different products offered as per the scheme given in the offer document itself with two different prices and going by the comparison between the two options, the price of Rs. 81 per NCD was clearly paid for getting allotted a detachable warrant. The subscriber opting for option (a) thus was paying Rs. 81 per NCD on application as a consideration for detachable warrant and this was explicitly the true effect of the transaction. 31. After having given a careful consideration to this entire matter relating to the different options given to the allottee/subscriber in the offer documents in both the cases, we find it difficult to accept that the two options given by the issuing company in the present case made a world of difference as far as the true effect of the transactions or outcome thereof are concerned. We find that in all the cases, i.e., that of the assessee as well as that of Abhinandan Investments Ltd.'s case, options were given to the allottees/subscribers to surrender or sell the NCDs at a discounted price to the finance co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transaction is concerned inasmuch as in both the cases, the allottee/subscriber going for khoka option ultimately paid Rs. 81 and Rs. 111 on application for getting allotted one detachable warrant whereas the remaining amount of Rs. 389 and Rs. 169 received/receivable on account of sale of NCDs to the financial institution was adjusted/paid against the remaining amount payable towards NCDs. In our opinion, the effect of these transactions thus ultimately was the one and the same and the distinctive features of allotment of NCDs in these cases as pointed out on behalf of the revenue would not change the very nature of the transactions which, in our opinion, was exactly similar. 33. Having held that all the facts relevant to the issue under consideration as involved in the present case are similar to that of Abhinandan Investments Ltd.'s case already decided by the Delhi Division Bench of ITAT, the next issue which arises for our consideration is whether the decision of Hon'ble Delhi High Court dismissing the appeal filed by the revenue against the order of the Tribunal passed in the case d Abhinandan Investments Ltd. holding that no substantial question of law arose, is a dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine of merger. An order refusing special leave to appeal does not stand substituted in place of the order under challenge. All that it means is that the Court was not inclined to exercise its discretion so as to allow the appeal being filed. (v) If the order refusing leave to appeal is a speaking order, i.e., gives reasons for refusing the grant of leave, then the order has two implications. Firstly, the statement of law contained in the order is a declaration of law by the Supreme Court within the meaning of article 141 of the Constitution. Secondly, other than the declaration of law, whatever is stated in the order are the findings recorded by the Supreme Court which would bind the parties thereto and also the Court, Tribunal or authority in any proceedings subsequent thereto by way of judicial discipline, the Supreme Court being the Apex Court of the country. But, this does not amount to saying that the order of the Court, Tribunal or authority below has stood merged in the order of the Supreme Court rejecting special leave petition or that the order of the Supreme Court is the only order binding as res judicata in subsequent proceedings between the parties. (vi) Once leave to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Kunhayammed relied upon by the learned DR was also cited before the Hon'ble Gujarat High Court in the case of Nirma Industries Ltd. and a contention was raised that the powers exercised by the High Court at the stage of admission of appeal are akin to powers exercised by the Apex Court under article 136. The said contention, however, was rejected by the Hon'ble Gujarat High Court observing that there is no such dichotomy of powers under the provisions of section 260A available to the High Court as is conferred upon the Supreme Court by articles 132 to 136 of the Constitution. It was further observed by the Hon'ble Gujarat High Court that the High Court also does not have any powers which can be equated with the powers exercised by the Supreme Court under article 136 of the Constitution. It was held that the only jurisdiction that the High Court thus has while hearing appeal filed under section 260A is the appellate jurisdiction and where an order of a subordinate forum is reversed or modified exercising such appellate jurisdiction or the appeal filed is merely dismissed confirming the order under appeal without any modification, it is the appellate decision alone which subsist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent case as well as all the material facts relevant thereto, as discussed above, are similar to that of Abhinandan Investments Ltd.'s case, the said decision is binding on the subordinate forums within the jurisdiction of Hon'ble Delhi High Court including this Special Bench. As regards the contention of the learned DR in relation to the limited application of doctrine of merger, we are of the view that there cannot be any quarrel about the proposition that the order of the lower court or forum merges in the order of the higher court or forum only to the extent of items/issues considered and decided by the higher court or forum and the portion of the order of the lower court which was not the subject-matter of the appeal before the High Court does not merge in the order of the higher court. Even the Hon'ble Gujarat High Court in the case of Nirma Industries Ltd. has also expressed a similar view while observing that if the merger is issue-specific, there is fusion of the orders only to that limited extent. However, this contention raised by the learned DR about the limited application of doctrine of merger, in our opinion, is hardly of any help to the revenue in the present case b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal's order. It is thus clear that controversy between the parties as raised in questions (a), (b), (e) and (f) by the revenue in the case of Abhinandan Investments Ltd. had been gone into by the Hon'ble Delhi High Court and the appeal of the revenue was dismissed by it holding that no substantial question of law arose. The order of the Tribunal on the issues specifically raised and agitated in the said questions before the Hon'ble Delhi High Court in the case of Abhinandan Investments Ltd. thus stood merged in the order of the Hon'ble Delhi High Court passed in the said case and even going by the theory of limited application of doctrine of merger, it was the decision of the Hon'ble Delhi High Court on the said issues which was operative and which was capable of being given effect to. Since one of the issues so raised is similar to the one involved in the present case and as already discussed, the material facts relevant thereto are also similar, we hold that the decision rendered thereon in the case of Abhinandan Investments Ltd. by the Hon'ble Delhi High Court is the decision on merits and the same constitutes a binding precedent which this Special Bench is bound to follow. A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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