9911796707
TMI Blog2011 (9) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... ther on the facts and circumstances of the case, Ld. CIT(A) erred in disallowing the claim of long term capital loss. 3. Facts necessary for the disposal of the issue on hand are stated in brief. During the course of assessment proceedings, the Assessing Officer noticed that assessee had claimed long term capital loss amounting to Rs. 22,21,85,693/-. It is not in dispute that assessee made an investment of Rs. 2484.02 lacs in equity shares of a group company viz., Times Guarantee Limited [for short TGL]. Under sec. 100 of the Companies Act, 1956 TGL applied for reduction of equity share capital and approached the Hon'ble Bombay High Court for approval of the same. The Hon'ble High Court approved the petition of TGL and allowed reduction in its share capital by 50% by reducing the face value of each equity share from Rs. 10/- to Rs. 5/- . Consequently, assessee's investment in TGL got reduced from Rs. 2484.02 lacs to Rs. 1242.01 lacs. After applying the indexation a sum of Rs. 22,21,85,693/-was claimed as long term capital loss. On a query as to how this loss was allowable, it was mainly contended that in view of the decision of the Hon'ble Supreme Court in the case of Kartikeya V. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us, TGL reduced the face value of each equity share from Rs. 10/- to Rs. 5/-. After reduction of capital, two equity shares of Rs. 5/- each, were consolidated into one equity share. Thus, it resulted in reduction by way of reducing initially the face value of each share of Rs. 10/-to Rs. 5/- each and then by consolidating such equity shares of Rs. 5/- each into one equity share of Rs. 10/- fully paid. He adverted our attention to explanatory notes (page 61 of PB) which shows that carried forward loss of Rs. 42,96,53,000/- was also written off by reducing the amount of reduction of share capital amounting to Rs. 8,99,31,495/- and further the balance sum was written off by utilising the share premium account. In fact, TGL had suffered loss and the whole proposal and purpose of reduction in share capital was to write off the losses. Learned counsel referred to pages 62 to 71 of the paper book, which is copy of the order of the Hon'ble High Court through which the High Court allowed the petition for reduction of the capital. Then he referred to page 73 which is a copy of intimation letter issued by TGL through which assessee company was intimated regarding the reduction of share capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upra] and Anarkali Sarabhai v. CIT [224 ITR 422] have been distinguished by the Assessing Officer as well as the CIT(A) mainly on the ground that these decisions relate to reduction in face value of preference shares and, therefore, they are not applicable to the facts of assessee's case. He submitted that Hon'ble Supreme Court, in the case of Kartikeya V. Sarabhai [supra], observed that definition of transfer given in sec.2[47] is an inclusive definition and, inter alia, provides that relinquishment of an asset or extinguishment of any right therein would also amount to transfer of a capital asset. Apex court further noticed that to invoke of the provisions of section 45 r/w 2(47) sale of a capital asset is not a necessary condition.. After referring to various observations of the court he pointed out that even reduction in the value of preference shares was held to be a case of transfer. He then submitted that similar view was taken in the case of Anarkali Sarabhai v. CIT [supra]. 8. The Id. Counsel further submitted that even if it is assumed that the principles laid down by the Hon'ble Supreme Court in the case of preference shares are not applicable, the principle laid down i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8/M/07 & 4193/M/07 10. During the course of hearing it was pointed out that the capital loss has not been disallowed by the Assessing Officer on the only ground that it did not amount to transfer but mainly on the point that assessee had not received any consideration i.e., by applying the principle laid down by the Hon'ble Supreme Court in the case of B.C. Srinivasa Setty [128 ITR 294] wherein it was held that if computation provision fails, capital gains cannot be assessed u/s.45. 10A. Bench pointed out to the decision of Hon'ble Gujarat High Court in the case of CIT v. Mohanbhai Pamabhai [91 ITR 393] and the decision of Hon'ble Bombay High Court in the case of The Bombay Burmah Trading Corporation Ltd. v. CIT [147 Taxation Reports 570]. 11. To clarify the doubts posed by the bench the Ld. Counsel submitted that the Hon'ble Supreme Court, in the case of B.C. Srinivasa Setty [supra], was concerned with the transfer of goodwill and held that it was not possible to ascertain the cost of goodwill and therefore it was not possible to apply the computational provision. He stressed that the proposition was not that if no consideration was received then no gain can be computed but the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Bombay Burmah Trading Corporation Ltd. v. CIT [supra ], he submitted that since it was a very short judgment and facts are not discussed, therefore, he would not like to comment. However, he submitted that if in the case of zero consideration if transfer of a particular asset did not attract the levy of capital gain, then why clause [iii] was inserted to sec.47 [which provides that transactions provided in that provision shall not be considered as transfer] by which any transfer of a capital asset by way of a gift is exempt because in case of gift no consideration would be involved. If the idea was not to subject zero consideration transaction to capital gain tax u/s.45, then there was no need for clause [iii] for gifts in sec.47. He concluded his arguments by submitting that during the process of reduction of share capital, transfer has definitely taken place and consideration received by the assessee should be considered as zero and, therefore, capital loss should be allowed. 13. On the other hand Ld. Sr. DR Shri Pavan Ved, submitted that in this case capital has been reduced by the company in two phases. The face value of shares was reduced from Rs. 10/- each to Rs. 5 each, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are sold by such assessee. Similar principle needs to be applied in the case when assessee's shareholding is reduced on reduction of such capital. He also argued that at best in case bonus shares are sold by an assessee, cost of the same has to be taken on the basis of average cost as held by the Hon'ble Supreme Court in the case of CIT v. Dalmia Investment Co. Ltd. [52 ITR 567]. This means that in case of bonus shares, the cost of share gets adjusted and ultimately cost of acquisition is taken at average value and same principle would apply on reduction of share capital and in that case the average cost of balance holding after such reduction of capital would increase and the loss can be reckoned only when such shares are transferred for a consideration. He submitted that this principle has been further affirmed by the Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia v. CIT [63 ITR 651]. In this case when the assessee was allotted right shares the assessee instead of subscribing to such right shares sold such rights in the market at a premium. A question arose whether such premium would be taxable or the reduction in the value of shares which are held by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a case of substitution of one kind of share with another kind of share which has been received by the assessee because of its rights to the original shares on the reduction of capital. This position was clarified by the Hon'ble Supreme Court in the case of CIT v. Rasiklal Maneklal (HUF) [177 ITR 198] In that case, the assessee was holding 90 shares in one S. company of face value of Rs. 100/- each. Pursuant to the scheme of amalgamation sanctioned by the High Court, the holders of the shares in S. company were to be allotted one share of Rs. 125/-each of NS Company for two shares in S. company and S. Company was to be dissolved. The assessee in that case was allotted 45 shares in N.S company. A question arose, whether this would amount to transfer and the Hon'ble Supreme Court held that there was neither an 'exchange' nor a 'relinquishment' in this transaction. The Hon'ble Supreme Court observed as under: "An "exchange" involves the transfer of property by one person to another and reciprocally the transfer of property by that other to the first person. There must be a mutual transfer of ownership of one thing for the ownership of another. A "relinquishment" takes place when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed u/s.45. In the above mentioned case 90 non-cumulative preference shares, of the face value of Rs. 1000/-, were purchased at a price of Rs. 420/- per share from a company called Sarabhai Limited. In 1965, a sum of Rs. 500/- per preference shares was paid to the assessee upon reduction of share capital and the face value of preference shares was reduced to Rs. 50/- per share and further payment of Rs. 450/- per share was made to the assessee. The ITO was of the opinion that the sum of Rs. 450/- per share which was received now was liable to be taxed under the head 'capital gain'. However, assessee contended that since no transfer had taken place in terms of sec.2 [47], no tax could be imposed. When the matter travelled to Hon'ble Supreme Court it was held that definition of transfer u/s.2 [47] was inclusive and would include relinquishment of an asset or extinguishment of any right therein. It was further observed that even preference shareholders have right to vote on resolutions which would effect the right of preference shareholder u/s. 87(2)(a), 87(2)(b) and 87(2)(c). Therefore the rights of preference shareholders are curtailed to that extent. A careful analysis of the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any improvement thereto. The amounts specified in clauses (i) and (ii) are to be deducted from the " consideration received or accruing as a result of the transfer of the capital asset " for the purpose of determining the profits or gains chargeable to tax. It is, therefore, clear that the transfer of a capital asset, in order to attract the capital gains tax, must be a transfer as a result of which consideration is received by the assessee or accrues to the assessee. If there is no consideration received or accruing to the assessee as a result of the transfer, the machinery section enacted in section 48 would be wholly inapplicable and it would not be possible to compute profits or gains arising from the transfer of the capital asset. The transaction in order to attract the charge of tax as capital gains must, therefore, clearly be such that consideration is received by the assessee or accrues to the assessee as a result of the transfer of the capital asset. Where transfer consists in extinguishment of a right in the capital asset, there must be an element of consideration for such extinguishment, for then only it would be a transfer exigible to capital gains tax. Thus, it becom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain tax? The court held that such contribution of capital asset of a partner into the firm would definitely constitute a transfer because in that case the partner's interest in such asset is reduced from exclusive interest to a shared interest. In respect of taxability of this transfer, three arguments were made before the Hon'ble court which are being extracted from page 515 of the report of the above judgment in the case of Sunil Siddharthbhai v. CIT [supra] as under: 1. There must be a "transfer" of a capital asset either under the general law or within the definition in clause [47] of section 2 of the Income-tax Act. 2. Consideration must be received or must accrue as a result of the transfer and the consideration must be capable of being determined in monetary terms in order that the computation of capital gains may be made as required by section 48. 3. Profits or gains must arise from the transfer and must be embedded in the consideration. Since the point raised in the first argument is not material regarding the issue involved before us, therefore, it would suffice to point out that the Hon'ble court held that such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48. And as that provision is fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in s.45, such a case must be regarded as falling outside the scope of capital gains taxation altogether. The third contention of learned counsel for the assessee is that no profit or gain can be said to arise to a partner when he brings his personal asset into a partnership firm as his contribution to its capital. It is urged that the capital gains chargeable under s.45 are real capital gains computed on the ordinary principles of commercial accounting and that the capital gains must be embedded in the capital asset. In Miss Dhun Dadabhoy Kapadia v. CIT (1967) 63 I.T.R.. 651, the appellant held by way of investment some ordinary shares in a limited company. An offer was made by the company to her by which she was entitled to apply for an equal number of new ordinary shares at a premium with an option of either taking the shares or renouncing them in favour of others. The appellant renounced her rights to all the shares and realised Rs. 45,262.50. When this amount was sought to be wholly taxed as a capital gain the appellant claimed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ument of a Partnership Deed dated 28th July, 1954 and no valuation was made for the goodwill and it was provided that goodwill will be valued only on dissolution. The period of partnership was extended and when the firm was dissolved in 1965 goodwill of the firm was valued at Rs. 1,50,000/- and a new partnership by the same name was constituted which took over all assets including the goodwill and liabilities of the dissolved firm. This goodwill was not included as capital gain in the hands of the dissolved firm by the ITO but a revisionary order was passed by the Commissioner in which it was directed to make fresh assessment after taking into account the capital gain arising on the sale of goodwill. The head note of the above judgment reads as under: All transactions encompassed by s. 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by s. 45 to be the subject of the charge. What is contemplated by s.48[ii] is an asset in the acquisition of which it is possible to envisage a cost: it must be an asset which possesses the inherent quality of being available on the expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance Act, 1994 w.e.f. 1-04-1995 and the cost of acquisition of tenancy rights was to be taken at nil, therefore, this provision could not be applied retrospectively. Thus, it is clear that the decision of Hon'ble Supreme Court in the case of B.C. Srinivasa Setty [supra] was followed in principle wherein it has been held that if computation provision of sec.48 fails, then such transaction cannot be brought to tax u/s.45. The court specifically declined to entertain the argument that cost of tenancy right should be taken at zero because that would amount to charging of capital value of the asset and not capital gain. In the case of reduction of capital nothing moves from the coffers of the company and, therefore, it is a simple case of no consideration which cannot be substituted to zero. It is pertinent to note that after the decision of Hon'ble Supreme Court in the case of B.C. Srinivasa Setty [supra], the legislature has introduced specific provision wherein cost of acquisition of goodwill was to be taken at nil. Similar amendments were made to specify the cost with reference to trademark, cost of right to manufacture or produce or process any article or thing etc. Therefore, wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble questions of law." Thus, from the above it is clear that when no consideration is received, no loss can be allowed in view of the principles laid down by the Hon'ble Supreme Court in the case of B. C. Srinivasa Setty [supra] which was followed in above decision. In fact, assessee has not suffered any loss on reduction of share capital which we shall see little later. 22. Reliance was also placed before us on the decision of DCIT v. BPL Sanyo Finance Ltd. [supra]. In this case the court was concerned with the issue where assessee had applied for one lakh equity shares of IDBI Ltd. in response to the public issue. The assessee was allotted 89,200 shares against the application of one lakh shares and share application money was appropriated accordingly. The assessee was asked to remit the balance sum of Rs. 83,46,000/- for issuance of the shares and since the allotment money was not paid, IDBI Ltd. cancelled the allotment and forfeited the shares. A question arose whether such forfeiture would amount to capital loss. The Hon'ble Karnataka High Court observed that a binding contract existed between the assessee and IDBI Ltd. and once shares were cancelled, this would amount to tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e court after detailed discussion in CIT v. Grace Collis & Ors. [supra] held as under: "We have given careful thought to the definition of "transfer" in section 2(47) and to the decision of this court in Vania Silk Mills Pvt. Ltd.'s case [1991] 191 ITR 647. In our view, the definition clearly contemplates the extinguishment of rights in a capital asset distinct and independent of such extinguishment consequent upon the transfer thereof. We do not approve, respectfully, of the limitation of the expression "extinguishment of any rights therein" to such extinguishment on account of transfers or to the view that the expression "extinguishment of any rights therein" cannot be extended to mean the extinguishment of rights independent of or otherwise than on account of transfer. To so read the expression is to render it ineffective and its use meaningless. As we read it, therefore, the expression does include the extinguishment of rights in a capital asset independent of and otherwise than on account of transfer." Thus, from the above it is clear that even extinguishment of rights in a particular asset would amount to transfer. The chargeability of the capital gain was upheld because on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... increases to Rs. 200/-, because of profit, and in turn this company issued bonus shares, even then the profit would remain in the books of the company and mere allotment of such bonus shares cannot be subjected to tax. This position was accepted even by the Ld. Counsel of the assessee. Therefore, when the profits of the company which have been distributed to the shareholders by way of bonus shares cannot be assessed, on the same principle losses of the company which have been adjusted by reducing the capital cannot be allowed. 24. Now let us examine the issue from another angle. Let us assume that Mr. 'A' holds 100% shares of a company, and the company, in turn, has invested its entire funds in a property. If the value of this property falls and the company decides to reduce its capital and if the capital is reduced by 50% and Mr. A 's holding is reduced to 50 shares, it will not make any difference, because he is still holding 100% shares and the fall in the value of the property in the hands of the company is only a notional fall or notional loss which would not effect the shareholding. Let us take another illustration. A company known as 'Z' started with an equity capital of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow, let us assume further that share capital is reduced by 50% and the same is adjusted against loss, then following position would emerge: POSITION AFTER TO REDUCTION IN CAPITAL Rs. Rs. Share Capital 500 Assets 2500 Loans 2000 2500 2500 Net worth of the company (2500 - 2000) = Rs. 500 As can be seen from the above example, even after reduction of capital from Rs. 1000/- to Rs. 500/-, the net worth of the company remains the same and the share of every shareholder also remains the same. For example, suppose 'X' was holding 50 shares out of total 100 shares prior to reduction, he will hold 25 shares out of total 50 shares after reduction of 50%, but his share in the total share capital of the company as well as in the net worth of the company would remain the same i.e., at 50%. Thus, in this illustration, share of 'X' in the net worth remains at Rs. 250/- i.e. 50% of Rs. 500/- before and after reduction of the number of shares. There is thus no change in the intrinsic value of his shares and even his rights vis-a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcular letter dated 15th May, 1956, that she was in terms of the resolution, entitled to apply for 710 new ordinary shares to be paid for at the rate of Rs. 105 per new ordinary share. This payment was to represent Rs. 75 as the face value of the share and Rs. 30 as premium. She was also given the option of either taking the shares wholly or partly, or renouncing them either wholly or partly, in favour of any other person or persons. The appellant chose to renounce her right to all the 710 ordinary shares instead of taking the shares herself, and when renouncing the shares, she sold them in the open market on 12th June, 1956, as a result of which she actually realised a sum of Rs. 45,262,50P. It was common ground before the income-tax authorities as well as the Tribunal that this amount received by her was a capital gain and the whole of this amount was sought to be taxed as capital gain received by the appellant. On behalf of the appellant the plea was that, on the issue of the new ordinary shares, the value of her old ordinary shares depreciated, because the assets of the company remained stationary. while the number of shares increased. It was in consideration of this depreciati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the parties, was a capital gain. The capital asset which the appellant originally possessed consisted of 710 ordinary shares of the company. There was already a provision that, if the company issued any new shares, every holder of old shares would be entitled to such number of ordinary shares as the board may, by resolution, decide. This right was possessed by the appellant because of her ownership of the old 710 ordinary shares, and when the board of directors of the company passed a resolution for issue of new shares, this right of the appellant matured to the extent that she became entitled to receive 710 new shares. This right could be exercised by her by actually purchasing those shares at the shares Plus this right to take 710 new shares. At the time of her transaction, her old shares were valued at Rs. 253 per share, so that the capital asset in her possession can be treated to be the cash value of 710 multiplied by Rs. 253 of the old shares Plus this right to obtain new shares. After she had transferred this right to obtain new shares, the capital assets that came into her hands were the 710 old shares, which became valued at Rs. 198.75P. per share, together with the sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... represented only by the difference between the money realised on transfer of the right, and the amount which she lost in the form of depreciation of her original shares in order to acquire that right. Looked at in this manner also, it is clear that the net capital gain by her would be represented by the amount realised by her on transferring the right to receive new shares, after deducting therefrom the amount of depreciation in the value of her original shares, being the loss incurred by her in her capital asset in the transaction in which she acquired the right for which she realised the cash. This method of looking at the transaction also leads to the same conclusion which we have indicated in the preceding paragraph." In the above case, Hon'ble court has made it clear that capital gain on account of sale of rights shares has to be understood similarly as understood in the commercial world. It has to be noted that while stating the facts, the Hon'ble Supreme Court noted and stressed that assets of the company remained stationary and that is why depreciation has accrued in the value of old ordinary shares, because same assets would be represented by old ordinary shares plus the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: "It is neither permissible nor legal for any Court and Tribunal to comment upon the decision of Supreme Court/High Court. Similarly, it is also not permissible for the Tribunal to comment upon the manner in which a particular decision was rendered by Supreme Court/High Court. It is also not permissible for Tribunal to sidetrack or/and ignore the decision of High Court on the ground that it did not take into consideration a particular provision of law. If such approach is resorted to by subordinate Courts/Tribunals then it is held to be not in conformity with the law laid down by Supreme Court. It was deprecated by Supreme Court as being improper. When the High Court has no jurisdiction to comment upon any decision of Supreme Court nor High Court has a power to ignore such decision by virtue of mandate contained in Article 141 of Constitution then on the same reasoning, the Tribunal being subordinate to High Court has to follow the decision of jurisdictional High Court without making any comment upon the said decision or/and without ignoring it on any ground except those which are well recognized as indicated hereinbelow. In other words, when law laid down by Supreme Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after conversion etc. has to be taken with reference to the cost of original shares. Therefore, after reduction of share capital the cost of acquisition of the remaining shares would be reckoned with references to the original cost. Though at this stage assessee has not obtained any benefit because loss has been computed with reference to the actual cost, but, in future, if assessee decides to sell its shareholding in TGL then assessee has the right, U/s 55[v], to substitute the cost of acquisition with reference to the original shareholding and in that case it may amount to double benefit later on which is not permissible under the law. 29. Therefore, in the light of the above discussion, we are of the opinion, that the loss arising on account of reduction in share capital cannot be subjected to provisions of sec.45 r.w.s. 48 and, accordingly, such loss is not allowable as capital loss. At best such loss can be described as notional loss and it is settled principle that no notional loss or income can be subjected to the provisions of the I.T. Act. We hold accordingly. 30. The other grounds of appeal raised are as under: 1. On the facts and in the circumstance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns. We find that the cassettes becomes obsolete after expiry of considerable time and there is nothing wrong in the method of accounting of the assessee in valuing the obsolete cassettes at Rs. l/- per cassette resulting in loss to the assessee during the relevant period. The loss being genuine and very much incidental to the business is of allowable nature and is accordingly allowed and the ground of appeal No.6 with regard to the amount of Rs. 17,11,240/- of time music is allowed. The order of the Tribunal for the A.Y 2000-01 is also followed in the subsequent A.Y 2002-02. as the facts are identical in this year, therefore following the order of the Tribunal in assessee's own case cited [supra], we delete the addition confirmed by the Ld. CIT(A). Accordingly, ground No. l is allowed." Following the above order, this issue is decided in favour of the assessee. 34. The issue raised in ground No.2 has been adjudicated vide paras 15, 16 & 17 and para 17 reads as under: "17. We have heard the Learned D.R. on this issue, it is seen that the issue for allowability of the deduction u/s.80IB in respect of Chennai Unit has been dealt with by the Tribunal while deciding the order passed ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
