TMI Blog2007 (5) TMI 360X X X X Extracts X X X X X X X X Extracts X X X X ..... computable on the warrants sold. The Assessing Officer accepted the contention of the assessee and completed the assessment under section 143(3) of the Act. Subsequently, exercising his powers conferred on him under section 263 of the Act, the Commissioner of Income-tax framed an opinion that the order framed by the Assessing Officer under section 143(3) was erroneous and prejudicial to the interest of Revenue for the following reasons : ( i )That the rights of the persons holding it to subscribe in the shares as and when issued and called at any time between third and fifth year and thus the purpose of the warrants was to get share at a future date at an agreed price and hence cannot be treated as assets falling under the provisions of section 47( iv ) of the Act as it conferred only a contingent right and therefore, it could only be termed as a speculative transaction and the profit arose on such transaction should be brought to tax as speculation profit; ( ii )The Assessing Officer failed to take note of that fact that while in the balance-sheet the subject warrants were shown as assets, no value was ascribed to it and also he did not examine as to how and from which stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of facts of law. ( iv )Warrant has given right to purchase shares at specified price. The right is definite and the warrant holder has a definite right. It is not a future right and the warrant was a document like licence which has authority to get shares at a particular price and this was recognised under the law of the land as valuable right means the property means the asset. ( v )The warrants had a right to get shares at pre-determined price. All terms are fixed; these warrants were not tradable and therefore they cannot be traded in the market and treated as business. These were only investments and therefore capital assets. In a further letter dated 4-3-1999 it contended that a capital asset includes every kind of property as generally understood. Property included every conceivable thing, right or interest or liability. For this proposition the assessee relied on the decision in the case of Syndicate Bank Ltd. v. Addl. CIT [1985] 155 ITR 681. A right to obtain conveyance of immovable property is a property as contemplated by section 2( 14 ) of Income-tax Act and speculation is a transaction when no certainty is there and transac- tions are made without deliv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that while the commercial expediency of the hurry in "selling" the warrants to the wholly owned subsidiary and the existence of the urgent need for such a huge sum as Rs. 240 crores and that too at the cost of a wholly owned subsidiary as well as the source of this amount in the hands of the latter, all remained unexplored and therefore, unexplained, the assessee company was claiming that the value-less warrants formed part of its assets and therefore, there would be no capital gains on the transfer thereof for two reasons, viz. ( a ) there was no cost of acquisition as aforesaid; and ( b ) the surplus over zero value ( i.e . 240 crores) was covered by the exclusive provisions of sub-sections 45 and 47( iv ) of the Act, the transfer being to a wholly owned subsidiary. In other words, the assessee s stand was that there was no commercial venture of trading involved in the tripartite transactions all within the group comprising of the promoter holding controlling interest in one, the promoted ( i.e . the controller) company and the wholly owned subsidiary of the promoter of the promoted company and the "value-less" warrants were not trading articles i.e ., stock-in-trade. Des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Co Ltd.). It is not known if a warrant in original was called for by him and/or produced and filed by the assessee company so as to enable him (the Assessing Officer) to examine the nature thereof and the terms and conditions contained therein. Whether the amount of Rs. 4.5 Crores "advanced" by the assessee company to ESL has since been repaid by the latter and whether the said amount is depicted as the consideration for the issue of the warrants, also need to be looked into. As already mentioned, similar instances of warrants being issued to other (promoter) companies of ESL will also have to be seen, if such issues have taken place ever. 13. In other words, the Assessing Officer should not have accepted the claim without examining all the relevant aspects of the case as well as the evidence available in the records of the connected parties to the transactions. The Assessing Officer clearly failed to make the requisite investigation and enquiries resulting an erroneous assessment which clearly is prejudicial to the interests of revenue. 14. From the records it appears that the maximum entitlement to assessee under section 80M would be Rs. 1.44 crores only. The Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 263 of the Act. The revision order is based on the audit objections and therefore liable to be cancelled even on that account. The learned counsel for the assessee has filed a paper book containing 157 pages. In pages 1 to 5 the assessee has enclosed the computation of income which was filed along with the return of income. Drawing our attention to page 3 of the aforesaid paper book it was pointed out that the assessee has disclosed the realisation amount of Rs. 240 crores on sale of the warrants of Essar Shipping Ltd. and it was also disclosed that it was to its wholly owned subsidiary Subhangi Investments Trading Ltd. and the transfer is clearly covered under section 47( iv ) of the Act. The Assessing Officer has examined the entire issue relating to the assessment of capital gains in the hands of the assessee in page 4 of the order. Admittedly the Assessing Officer has accepted the claims of the assessee that the cost of acquisition of the warrant was Nil and the transfer is one which is covered under section 47( iv ) of the Act. Therefore the question of computing capital gains on the sale of warrants of Essar Shipping Ltd. to its wholly owned subsidiary Subhangi Investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt (Delhi Bench) in the case of Hari Bros. (P.) Ltd. v. ITO [1964] 52 ITR 399, wherein the High Court has clearly held that the right to subscribe for shares was property and, therefore, a capital asset within the meaning of section 2(4A) of the Indian Income-tax Act, 1922 and the amount realised by the assessee by sale of the right to subscribe for shares in the managed company amounted to a relinquishment of a capital asset for the purposes of section 12B of the Indian Income-tax Act, 1922. Drawing our attention further to the definition of the speculative transaction under section 43(5) the learned counsel for the assessee pointed out that a 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. Therefore, the treatment given to these transactions as speculative transaction by the learned Commissioner in his order under section 263 is illegal and unwarranted and totally strange to the facts of the case. The learned counsel for the assessee further pointed out that the transfer ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esentative, on the other hand, strongly justified the impugned order to the learned Commissioner of Income-tax. He pointed out that the Assessing Officer has not asked a single question on the disputed issue and therefore, such an order, according to the learned departmental representative, is clearly erroneous and is also prejudicial to the interests of revenue. The prejudice caused to the interests of revenue has been well explained by the Commissioner both in the show-cause notice issued under section 263 as also in the order passed by him under section 263. He relied upon these discussions to justify the impugned order. The Assessing Officer, according to the learned departmental representative has made no attempts to examine all the facts of the issue. Right to subscribe a share, according to him, is mere contingent and is not a property. He relied upon the decision Arvee International v. Addl. CIT [2006] 101 ITD 495 (Mum.) and strongly justified the impugned order. 14. We have carefully considered the rival contentions and have gone through the records including the voluminous paper book filed by the assessee wherein he has enclosed all the details which were filed be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue to be wholly owned subsidiary companies till date. ( c ) Shares sold to Shubhangi Investments Trading Limited were shown as "Investments" in their books, whereas the shares sold to Essar World Trade Limited were treated as "Stock-in-trade" by them." The Assessing Officer also wanted certain computation of the capital gains in respect of the shares sold to another wholly owned subsidiary company, viz. M/s. Essar World Trade Ltd. which has been furnished by the assessee as per paper book page 24. Again on 17-1-1997 the assessee reiterated the exemption claimed before the Assessing Officer. The assessee also appears to have filed all the papers relating to the issue of warrants which entitled the assessee the right to subscribe the shares in 2 to 5 years. Copies of resolutions passed at the Board Meeting of Essar Shipping Ltd., held on 14-10-1993 for issue of warrants to promoters are also been filed before the Assessing Officer, which are placed at paper book pages 19-22. Further copies of investment schedules and purchase details and the tradable warrants as also the history of the shares held in Essar Shipping Ltd. have all been filed before the Assessing Officer. All t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be satisfied of twin conditions, namely; ( i ) the order of the Assessing Officer sought to be revised is erroneous; and ( ii ) it is prejudicial to the interests of the revenue. If one of them is absent if the order of the Income-tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue recourse be had to section 263(1) of the Act. There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without apply the principles of natural justice or without application of mind. The phrase "prejudicial to the interests of the revenue" is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy and Co. v. S.P. Jain [1957] 31 ITR 872, the High Court of Karnataka i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of nil assessment without application of mind. Indeed, the High Court recorded the finding that the Income-tax Officer failed to apply his mind to the case in all perspective and the order passed by him was erroneous. It appears that the resolution passed by the board of the appellant-company was not placed before the Assessing Officer. Thus, there was no material to support the claim of the appellant that the said amount represented compensation for loss of agricultural income. He accepted the entry in the statement of the account filed by the appellant in the absence of any supporting material and without making any inquiry. On these facts the conclusion that the order of the Income-tax Officer was erroneous is irresistible. We are, therefore, of the opinion that the High Court has rightly held that the exercise of the jurisdiction by the Commissioner under section 263(1) was justified. The second contention has to be rejected in view of the finding of fact recorded by the High Court. It was not shown at any stage of the proceedings, that the amount in question was fixed or quantified as loss of agricultural income and admittedly it is not so , found by the Tribunal. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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