TMI Blog2008 (12) TMI 757X X X X Extracts X X X X X X X X Extracts X X X X ..... s of s. 49(1)(ii) of IT Act. The cost of shares was erroneously taken as cost to the donor, thereby deducting the capital gain to nil. 3. The factual panorama of the case is that the assessee is a partnership firm with two partners, M/s Kartik Financial Services Ltd. (KFSL) with 90 per cent share and M/s Esser Teleholdings Ltd. (ETL) with 10 per cent share. The return was filed declaring income at Rs. nil. During the course of assessment proceedings the AO noted that it had sold 10 lakhs shares of M/s Aircel Digilink India Ltd. (ADIL) for ₹ 10 each amounting to ₹ 1 crore to ETL and claimed the cost of such shares at ₹ 1 crore on the basis of the provisions of s. 49(1) of the Act, thereby declaring nil income as chargeable to tax. Before entering into the real controversy, it is relevant to note the brief history of the case. Sterling Cellular Ltd. (SCL), a mobile telecom company, invested ₹ 156.38 crores in equity shares of KFSL, which happens to be partner in the assessee firm. The SCL had also advanced unsecured loan of ₹ 2,47,55,56,000 to ADIL. The ADIL is subsidiary of KFSL. The SCL also gave corporate guarantee against guarantee f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment order as under : (i) SCL subscribed towards application money of ₹ 2,75,55,56,092 in CDs of ADIL to be allotted by ADIL. SCL has gifted the said amount of ₹ 2,75,55,56,092 being advance subscription money towards debentures of ADIL having nil and no marketable value to ET by way of a resolution passed on 2nd May, 2000. (ii) Reason for giving gift to firm : ADIL was unable to pay the fees under fixed license regime and had incurred huge losses, SCL wrote off the advances given to ADIL in their books and which is reflected in balance sheet at nil value as on 31st March, 2000. SCL funded the ADIL telecom venture only to run their business. (iii) Since the advance given to ADIL was written off and was not having any value in the books of SCL, the gift was accounted in the books of ETH at nominal value of Re. 1. Assessee's letter dated nil to AO stated that during the financial year 1999-2000 SCL decided to write off the application money lying with ADIL and accordingly wrotee off in its books in that year. SCL then decided not to fund ADIL any more and assigned its right in application money it paid to ADIL in favour of the assessee firm a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint of view that the provisions of s. 49(1) were applicable qua the cost of shares. He noted certain relevant dates as under : (i) Allotment of debentures by M/s ADIL 15-9-2000 (ii) Letter of the assessee asking for conversion of 10-1-2001 20,00,000 debentures into equity shares (iii) Resolution of M/s ADIL for allotment of shares to the 15-1-2001 assessee to be issued in the name of M/s ETHL, partner (iv) Resolution of the assessee for sale of shares to 12-1-2001 partners, M/s ETHL In the light of the above sequence of dates he held that the shares cannot be categorized as capital asset and the sale thereof would be assessable under the head 'Profits and gains of business or profession'. Since the assessee had realized the sale consideration of ₹ 1 crore, the AO subjected it to tax under the head business income, since the cost of such shares was nil. In the first appeal, the learned CIT(A) held that the gift made by SCL to the assessee was a valid gift in the shape of right to allotment of debentures and shares of ADIL, which constituted a capital asset. He held that 'right to subscribe' was a legal right arising 'under company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onally Fully Convertible Debentures (OFCD)'. Under the normal procedure, as per the Companies Act, 1956, when the legal formalities for issuing debentures are fulfilled, the debentures are offered for subscription, applications are called for. On the receipt of application money, the company has to allot debentures within the specified time. In case of oversubscription, or due to any other reason, if the company does not allot debentures, it has to refund the money to the applicants. The money so received cannot remain in the state of flux for years together, as has been attempted to be shown in this case on noticing that the amount due from ADIL was shown as unsecured recoverable loans in the accounts for the year ending 1998, 1999 and then again in the period from 1st April, 1999 onwards. The learned Authorised Representative was directed to place on record the necessary particulars as to the 'issue of debentures' brought out by ADIL, such as the date and sanction by the competent authority under the Companies Act, the date of the opening and closing of the issue of debentures, etc. Despite specific requirement for furnishing of the necessary details of the alleged is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion which is relevant and not the way in which it is reflected by the parties in their accounts, more so when the parties are related to each other. An unsecured loan will not become a secured loan, if it has been declared by a company under the head 'Secured loans' and vice versa. Since no issue of OFCDs was brought out by ADIL, it is manifested that the SCL had advanced simple loan to ADIL in the normal course over a period of time. When we remove the cloak, the reality which unearths is that since there was no issue of any OFCDs by ADIL, the question of the SCL applying for subscription to the alleged debentures does not arise. Going by the reality of the situation in the light of the attending circumstances, we have no doubt in our mind that the amount advanced as loan by SCL to ADIL was in fact a loan transaction, though described as 'application money for OFCDs' in the books of account of both the companies due to their close relationship. As no issue of debentures was brought out by the ADIL till the date of gift, obviously, the nature of the asset gifted was only an unsecured loan even though having understanding of it being changeable into OFCDs at a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the donee. That the donor had written off the said amount in its books to Rs. nil, being perceived as nonrecoverable in view of financial position of ADIL. That the board of directors of donor had gifted the said amount of ₹ 275,55,56,092 (Rupees two hundred seventy-five crores fifty-five lacs fifty-six thousand ninety-two only) being advance subscription towards debentures in ADIL to the donee by way of a resolution passed in the board meeting dt. 2nd May, 2000. 14. In view of our discussion above under point I and on going through the clauses of the deed of confirmation, it clearly emerges that the donor had gifted debt of ₹ 275.55 crores. The debt is an asset, which can be gifted as it falls in the category of actionable claim. As per s. 3 of the Transfer of Property Act, an actionable claim means a claim to any debt other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the civil Courts recognize as affording grounds for relief, whether such debt or beneficial interest be existe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow effected- For the purpose of making a gift of immovable property, the transfer must be effected by a registered instrument signed by or on behalf of the donor, and attested by at least two witnesses. For the purpose of making a gift of movable property, the transfer may be effected either by a registered instrument signed as aforesaid or by delivery. Such delivery may be made in the same way as goods sold may be delivered. This section deals with the effecting of transfer by way of a gift of immovable and movable properties separately. Insofar as immovable property is concerned, the transfer must be effected by a registered instrument signed by or on behalf of the donor and attested by at least two witnesses. However, as regards the gift of movable properties the transfer may be effected either by way of registered instrument, as prescribed for the gift of immovable properties, or by delivery. Thus, an option has been given for the making of gift of a movable property in either of the ways prescribed in s. 123. The contention of the learned Departmental Representative that both the conditions viz., executing registered instrument as well as effecting delivery must be simultaneo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his judgment relates to gifting of a sum by book entries. If the gift is of anything other than money, then the ratio decidendi of this judgment will not apply. It is patent for the reason that the logic behind this judgment is that the donor should possess what he is intending to gift. If he is proposing to gift money to the donee, then there should at least be the money available with the donor. If the gift is through the book entries, then the person allowing transfer entry in his books must have that much cash so as to satisfy the demand of the donee, even if immediately raised. If on the other hand the property to be gifted is something else, then again it is necessary that the same should be in existence and available with the donor at the time of making gift so as to constitute a valid gift. Adverting to the facts of the instant case, we find that the SCL gifted the actionable claim to the assessee with the book value at Rs. nil. The said gift was made on 2nd May, 2000 when the donor passed the board resolution in this regard and the assessee conveyed its acceptance to receive the same. We, therefore, partly approve the view of the learned CIT(A) on this score by holding tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares were reflected by the assessee as investments in its account, which has remained uncontroverted by the learned Departmental Representative. In view of this fact that the assessee had not made any purchase and sale of shares in the earlier as well as current year except for the instant transaction, as has been stated by the AO so in unequivocal terms in the assessment order, it cannot be held that the shares were stock-in-trade. Moreover, the question whether the shares are held as investment or stock-in-trade needs to be decided on the basis of couple of factors, including the nature of the assessee's business and the intention with which the shares were acquired. Since no business was commenced so far by the assessee, we do not find any difficulty in concluding that the shares were held by the assessee, in the instant year, as investment. We, therefore, hold that the profit, if any, on sale of shares to ETHL can be taxed only under the head Capital gains . The finding of the learned CIT(A) is approved pro tanto. (IV) Computation of income under the head capital gains As noted above the assessee declared income under the head 'Capital gains' at Rs. nil by r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnment of the debt, the Essar Group intended to have the double benefit for the same amount, which was impermissible as per law. He submitted that firstly, deduction for the full amount was claimed in the hands of the donor and then by taking the cost to previous owner at full value, again the chargeable amount of capital gains was sought to be reduced to Rs. nil. His further submission was to the effect that the cost of the debt to the donor would have remained at ₹ 275.55 crores if it had not been written off by it. But, having written off the amount and claimed deduction, the learned Departmental Representative stated that the cost of such debt to the previous owner cannot be allowed to re-emerge at the cost, prior to write off, as has been held by the learned CIT(A). He stated that there cannot be two costs of the same asset, at the same time, to the donor, one at Rs. nil in its accounts and then ₹ 275.55 crores for the purposes of computing the capital gain in the hands of the donee. His submission is found to be supported by the judgment in the case of Smt. Sushilaben Kantilal Shah vs. CIT (1995) 124 CTR (Guj) 6 : (1994) 208 ITR 912 (Guj), in which it was held tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he cost of any improvement of the asset incurred or borne by the previous owner or the assessee, as the case may be. He contended that this section will apply only if a capital asset becoming the property of the assessee by way of gift is subsequently transferred. In his opinion only in that case the cost to the previous owner shall become cost of acquisition to the donee. He put forth the contention that the cost to the previous owner refers to the same capital asset, which is subsequently transferred by the donee. If the capital asset, which is subject-matter of transfer by the recipient of the gift, is different from the one received as gift, then the application of s. 49(1) will be ousted as it will become a case for transfer of a capital asset other than that received by way of gift. He gave example by saying that if the capital asset (say A) received by the donee is converted into another capital asset (say B), the cost of A to the donor cannot be considered as the cost of acquisition in the hands of donee, when B is transferred for the reason that s. 48 talks of deducting the cost of acquisition of the same capital asset from the full value of consideration received or accru ..... X X X X Extracts X X X X X X X X Extracts X X X X
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