TMI Blog2010 (2) TMI 622X X X X Extracts X X X X X X X X Extracts X X X X ..... al income of Rs.2,58,86,442. The return of income was processed under section 143(1)(a) of the Income-tax Act 1961 (hereinafter referred to as "the Act" for short). Notice under section 142(1) of the Act was issued to the asses-see. The Commissioner of Income-tax (Appeals) by his order dated November 29, 1994, has set aside the intimation issued under section 143(1)(a) of the Act. Thereafterwards, the assessee filed a revised return on March 31, 1995. On seeking queries from the assessee, the assessee has once again filed the revised return of income on March 28, 1996, declaringa business income of Rs. 3,22,34,068 and long-term capital gains of Rs.10,25,005 as against the business income of Rs. 2,76,88,348 and short- term capital loss of Rs. 9,47,411. On the basis of the same and after hearing the assessee an order of assessment came to be passed. The Assessing Officer by his order dated March 29, 1996, made the following additions : (i) Bottle deposits of Rs. 266.65 lakhs ; (ii) Depreciation on beer bottles ; (iii) Short-term capital loss of renunciation of rights amounting to Rs.3,57,750 was brought to tax as short-term capital gains ; (iv) Receipt of Rs. 4.3 crores was brou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax (Appeals) had taken up the appeal of the assessee which was filed against the order dated February 15, 2000 passed by the Assessing Officer pursuant to the order of remanding the same by the Commissioner of Income-tax (Appeals) in his order dated February 26, 1998. The substantial question of law raised in I. T. A. No. 400 of 2004 is with regard to the claim of the assessee to treat the "non-competition fee" as a capital asset as against the claim of the Revenue to treat the same as "revenue receipt". 7. The said question of law is also raised in I. T. A. No. 142 of 2001 and hence for considering these two appeals (I. T. A. No. 142/2001 and I. T. A. No. 143/2001), the substantial questions of law are enumerated herein below : "(i) Whether the Tribunal was right in deleting the additions per- taining to the accretion to bottle deposits, without noting that the assessee-company had not proved that such accretion was in fact real and not noting the provisions of section 41(2) of the Act ? (ii) Whether the Tribunal was right in treating the beer bottles as plant ? (iii) Whether the Tribunal was right in ignoring the facts on record and allowing a capital loss of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted February 26, 1998, remanded the matter to the Assessing Officer for being adjudicated afresh with regard to consideration of its inclusion in the assessment year 1993-94 or 1994-95. However, the finding of the Assessing Officer to treat this receipt, as a revenue receipt, was confirmed. Against this confirmation of the order, the assessee filed an appeal before the Tribunal in I. T. A. No. 296/Bang/98. When the matter was pending in adjudication before the Tribunal, the Assessing Officer by virtue of the Commissioner of Income-tax (Appeals) direction passed an order on February 15, 2000, whereunder it was held that the said amount of Rs. 4.30 crores received by the assessee is to be treated as capital in nature and to be taxed during the year as capital gains and accordingly deleted the addition by order dated February 15, 2000. We find that against the order of the Assessing Officer dated February 15, 2000, an appeal had been filed by the very same assessee before the Commis- sioner of Income-tax (Appeals) in I. T. A. No. 205/CC-II(A)-I/99-2000 which had been allowed by the appellate authority by deleting the amount of Rs. 4.30 crores brought to tax as capital gains on the gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n I. T. A. No. 142 of 2001 as well as the order dated February 15, 2000 (annexure C in I. T. A. No. 400 of 2004). Re : Substantial question of law No. 1 12. In so far as substantial question of law No. 1 formulated hereinabove with regard to accretion to bottle deposit as formulated in I. T. A. No. 142 of 2001 is concerned, we find that the Assessing Officer has found that the assessee had not been accounting the entire sale proceeds of sale of beer bottles but splitting it into refundable bottle deposit and sales consideration in the invoice itself. It is found by the Assessing Officer during the course of assessment proceedings that bottle deposit is taken to the balance-sheet as liability to be discharged by the assessee to the wholesalers. Hence, the Assessing Officer examined one of the wholesale dealers, namely M/s. Vitari Enterprises, under section 131 of the Income-tax Act on February 27, 1996, to find out the nature of transaction and the copies of the statements recorded from witnesses, i.e., M/s. Dewar Wines and M/s. Prashanth Wholesale Wine Stores was supplied to the assessee-company and offer for cross-examination of the witnesses was also made by the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer to an extent of Rs. 31,30,840 and to this extent substantial question of law No. (i) formulated hereinabove is answered in the negative, i.e., in favour of the Revenue and against the assessee by holding that the assessee-company had not proved that such accretion was in fact real to the extent of the aforementioned amount. Re : Substantial question of law No. (ii) 15. The assessee had acquired bottle deposits of beer bottles sent to its cus- tomers. It was contended by the assessee that such deposits are not in the nature of sale proceeds of the bottles and this contention of the assessee came to be accepted by the first appellate authority in part and the Tribunal accepted the claim of the assessee in toto. Though the Revenue contends that the provisions of section 41(2) of the Act are squarely applicable to the facts of the case, we find that in respect of the assessee's own case for the earlier assessment years the issue has been held in favour of the assessee by the Tribunal (in I. T. A. Nos. 32-41 of 2001) and by this court which was carried to the hon'ble Supreme Court in Civil Appeals Nos. 8479-8482 of 1994 by the Revenue which came to be dismissed. In effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld by the assessee and not in respect of shares which the assessee did not subscribe and voluntarily gave up. 18. The Tribunal held that renouncing the rights shares involves transfer within the meaning of section 2(47) and further held that Miss Dhun Dadabhoy Kapadia's case is applicable to the facts of the case and the assessee was entitled to seek for set off of capital loss suffered on account of diminution in the value of shares. 19. Dr. R. B. Krishna learned advocate appearing for the Revenue would contend that the narrow issue required to be considered in the instant case is in respect of the shares, i.e., 36,96,644 renounced by the assessee without consideration in favour of a large number of shareholders who had applied for shares in the public. He would submit that admittedly no consideration has flowed for renouncing the said shares and submits that Miss Dhun Dadabhoy Kapadia's case would not be applicable to the facts of the case for the following reasons : (a) In Miss Dhun Dadabhoy Kapadia's case all shares were sold. Whereas in the instant case only a portion of the shares were sold. (b) A notional loss set off only against a realised loss. (c) There was no pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in the value of Rs. 10 per share, which fact has been accepted by the first appellate authority. 23. In order to examine the submissions made at the Bar the following facts which are not in dispute are required to be extracted. The computation of net short-term capital loss as claimed by assessee is as follows : "7. The assessee claimed that it incurred short-term capital loss on account of non-subscription to rights shares of Mc Dowell and Co. The computation given in this relevance was as under : Loss on account of rights forfeited McDowell and Co. Ltd. Rights eligible 61,26,394 shares Rights subscribed 22,75,650 shares 38,50,744 shares Quotation-cum-right Rs. 80/share Quotation ex-righ Rs. 70/share Difference Rs. 10/share Loss on account of rights foregone Rs. 38,88,50,744 x 10 Rs. 3,88,85,07,440 Gains from sale of rights entitlement : Proceeds on sale of 154100 Rights enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n capital indexed bonds issued by the Government : Provided also that where shares, debentures or warrants referred to in the proviso to clause (iii) of section 47 are transferred under a gift or an irrevocable trust, the market value on the date of such trans- fer shall be deemed to be the full value of consideration received or accruing as a result of transfer for the purposes of this section : Provided also that no deduction shall be allowed in computing the income chargeable under the head 'Capital gains' in respect of any sum paid on account of securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004. Explanation.-For the purpose of this section,- (i) 'foreign currency' and 'Indian currency' shall have the mean- ings respectively assigned to them in section 2 of the Foreign Exchange Regulation Act, 1973 (46 of 1973) ; (ii) the conversion of Indian currency into foreign currency and the reconversion of foreign currency into Indian currency shall be at the rate of exchange prescribed in this behalf ; (iii) 'indexed cost of acquisition' means an amount which bears to the cost of acquisition the same proportion as the Cost Inflation Index for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e claimed by the assessee came to be renounced in favour of unknown persons and that too for "nil consideration". A renouncement or relinquishment cannot be in a vacuum as is found in the instant case. Hence, there should be a renouncer to renounce the right in favour of the renouncee. If any one amongst these three is absent, then the act of renouncement will remain in a vacuum that is in favour of unknown per- sons and it would not result in renouncement. If there is renouncement in favour of unknown persons the transfer cannot take place. Even in case of transfer the two elements necessary for the transfer being complete are transferor and transferee. Though in the instant case the transferor is the assessee the act of the transferor is not complete inasmuch as there is no transfer in favour of a transferee. Transfer in favour of an unknown person there cannot be transfer. 28. It is no doubt true that the Revenue cannot sit in the arm chair of a busi- nessman to decide as to how the business is to be run and as held by the hon'ble Supreme Court in S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 at para 35 as contended by the learned senior counsel Sri Arvind Datar. Howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ows : "The equity shares reserved for firm allotment to U. B. Ltd. under C(b) above shall be bought in before the public issue opens. U. B. Ltd. is currently holding 76,57,992 equity shares, equivalent to 51.09 per cent. of the paid-up equity capital. It intends to subscribe to a minimum of 50,95,150 equity shares including 28,19,500 equity shares on a firm allotment basis with a lock-in-period of 5 years in accord- ance with the Securities and Exchange Board of India guidelines on promoters' contribution from out of the present issue. It intends to renounce 38,50,744 equity shares to maintain a minimum post issue holding of 33.33 per cent. on the enhanced post issue of equity shares." 29. For renouncement of 38,58,744 shares no objection certificate was issued to the SEBI by SBI Capitals Markets Limited, vide letter dated January 1, 1993, and the SEBI in turn have given its no objection, vide letter dated January 19, 1993, and this right in the rights shares surrendered by the assessee in favour McDowells was issued to the public who had applied to the shares earlier at the premium of Rs. 45 per share. It is to be noticed that even before the public issue was opened the quoted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e present case did not arise. The alleged loss was only notional. The judgment of the apex court in Miss Dhun Dadabhoy Kapadia's case was not applicable to the facts of the present case as there was no transfer as contemplated in Miss Dhun Dadabhoy Kapadia's case to a third party transfer as has been done in the facts of the present case. Secondly, the profit-making rights issue was given by the assessee in favour of its sister concern and, thirdly, even if it is to be construed as a transfer, the computation of loss was only notional. In these circumstances, the judgment of Miss Dhun Dadabhoy Kapadia's case, relied upon by the learned counsel for the assessee is not applicable to the facts and circumstances of the case. 32. Further, in Miss Dhun Dadabhoy Kapadia's case it was a solitary trans- action where Miss Kapadia owned 710 shares and she did not have any role in determining the rights issue or premium issue of shares. Whereas in the instant case the assessee itself was the majority shareholder of McDowell and its holding company and it is found in the instant case, sometime before the right public issue of a bonus issue at 1 : 2 had been quoted few months before the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period which can be called post-scam period during which the confidence of the public in share market was greatly shaken. It is also be noted that the price of the shares continued to slide down even after the rights shares were issued to a low figure of Rs. 52/42 in March, 1993. This fall in price may be also due to a combination of other factors such as : (1) Rigging of prices of shares substantially already the public to lure the public of shares subscribe to the shares. (2) Shaken confidence of the public as a result of the scam. (3) Issue of bonus shares. (4) Public issue of shares. The assessee has mentioned that the ex-rights and cum-rights prices of shares were Rs. 80 and Rs. 70 and there was a difference of Rs. 10 per share. It can be seen from the statistics given above that the difference between the ex-rights and cum-rights prices made out is even lower than the difference between the high and low prices for each of the months from December, 1992 to March, 1993. Since the assessee renounced the right to acquire 36,96,644 shares (nearly one- third of the total of 119,91,744 rights shares to be issued at lower premium of Rs. 30 share) and this was offered to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribe to 27,000 deben- tures for which it received consideration for Rs. 2,48,348. In the instant case, we find that the assessee was entitled to 61,26,394 number of rights shares which was allotted in the ratio of 4 : 5 out of the said number of shares. The assessee subscribed to 22,75,650 shares by paying through sub- scription and in respect of 154100 number of rights, the assessee renounced its right for consideration of Rs. 22,84,000. However, in respect of 36,96,344 shares there was no consideration but renounced it in favour of number of shareholders who had initially applied for shares in the public issue who are unknown to the assessee. Thus, on comparison of these two cases we find the 6,000 debentures which the assessee subscribed in Tushar Commercial case [1998] 230 ITR 918 (Cal) were referable to the 22,75,650 shares in the instant case. Likewise the 27,000 debentures, which right passed it transfer for consideration of Rs. 2,48,348 in Tushar Com- mercial case [1998] 230 ITR 918 (Cal) is in pari materia with 1,54,100 rights renounced for a consideration of Rs. 22,84,000 in the assessee' s case. Thus, in Tushar Commercial case [1998] 230 ITR 918 (Cal) the renouncement fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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