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TMI Blog2001 (10) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... NCDs were subscribed by the assessee-company as stock-in-trade or capital investment? (d) Whether the NCDs held by the assessee-company were as stock-in trade so as to entitle it to claim the loss as business loss? (e) Whether the amount of Rs.111 per NCD amounts to forfeiture of capital or is to be treated as business loss? (f) Whether the order of the Income-tax Appellate Tribunal is perverse on facts and in law? The factual background common to all five appeals are essentially as follows. During the assessment year in question, each of the assessee-respondents came up with a private placement of its preferential shares and also subscribed to the rights issue of non-converitible debentures (in short "NCD") of Jindal Iron and Steel Co. (in short, "JISCO"). The assessee also subscribed to the equity issue of Jindal Vijay Nagar Steel Ltd. (in short, "JDSL"), a new com pany of the Jindal group floated during February, 1995. During the relevant period, JISCO came up with a rights issue of 10.5 per cent. redeemable NCD with a detachable warrant or cash at par. The value of the NCD was Rs.500 and it carried a detachable warrant (in short "DW"), which entitled the holder to apply f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l shareholder will pay a sum of Rs.111 per debenture on making application and balance of Rs.389 per NCD was payable on allotment. (c) For non-residents/FI's NR renouncees will contribute a sum of Rs.500 each debenture on application. (d) If the company does not receive the minimum subscription of about 90 per cent. of the issue of NCDs within sixty days from the closure of the issue, the company shall refund the entire subscription amount received. (e) The NCDs with DWs were offered to existing shareholders of the company whose name appeared in the register of the company on October 31, 1994. (f) 23 debentures for every 100 equity shares held on October 31, 1994, were to be issued. The shareholding pattern of the JISCO as on August 12, 1994 was as under: ----------------------------------------------------------------------- Per cent. ----------------------------------------------------------------------- 1. Promoters 30.9 2. Financial institutions 14.4 3. Mutual funds 2.32 4. NRIs 6.46 5. Banks 2.14 6. Foreign institutional investors 2.88 7. Public 40.43 100 ----------------------------------------------------------------------- The Assessing Officer did not ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were received gratis. The claim of loss of Rs.111 per debenture on its sale has been made for the first time before the Commissioner of Income-tax (Appeals). The claim was not raised before the Assessing Officer at any time. It was therefore not open to the Assessing Officer to examine this issue. It was noted that the five assessee-companies made applications for NCDs in the background of the arrangement between JISCO and the UTI without any consideration and with the intention of incurring loss of Rs.111 on each NCD. She also observed that the assessee-companies have not fully paid for the NCDs and therefore they were not entitled to the DWs because as per the terms of issue the DW was to be given only after the NCDs were fully paid. The NCDs have been transferred to the UTI immediately after the allotment. The transfer is made entirely as per the arrangement between JISCO and the UTI. Such transfer was an act of forfeiture of application money at Rs.111 per NCDs. The beneficiary of the transfer was not the UTI but JISCO. Thus, the loss was deliberately cultivated for the benefit of JISCO. It was held that no such loss arose to the assessee on transfer of the NCDs and, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t have enough funds to make payment of allotment money they sold the DWs. Accordingly, JISCO allotted DWs to the assessee-companies also. So far as the observations of the Commissioner of Income-tax (Appeals), that the assessee-companies had not paid the allotment money but it was paid by the UTI, it was submitted that the certificate of the UTI to the effect that they have made payment at Rs.389 per NCD to JISCO on behalf of the assessee-companies, was not considered. In a sense their stand was that only when the entire consideration for the NCDs was received by JISCO further course of action was followed. The materials were placed to show that DWs were given to the assessees when NCDs were fully paid up. As to the conclusion of the Commissioner of Income-tax (Appeals) that the assessee never became the owner of NCD/DWs, the assessee-companies submitted that the letter of allot ment was in the name of the assessee-companies; the UTI made payment of allotment money to JISCO on behalf of the assessee-companies and in turn the assessee-companies transferred their NCDs in favour of the UTI which was registered in the UTI's name and therefore the factual conclusions of the Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest was held by the financial institutions and the public. During the assessment year in question, JISCO came up with the rights issue worth about Rs.500 crores. As per the terms of the issue, as approved by the SEBI, if 90 per cent. of the issue was not subscribed then the issue had to fail and JISCO was to refund the entire money collected by it under the issue. It was thus a compulsion on the part of the assessee-companies to subscribe to the rights issue. The failure of such issue would have been detrimental to the appellant companies being investors/promoter companies of JISCO. Thus, the assessee-companies had no option but to subscribe to the rights issue of NCDs. A sum of Rs.111 per NCD was payable on making application as per the terms of the issue and the balance Rs.389 was to be paid on allotment. In order to make the issue attractive, it was also provided that on payment of the full value of the NCD, the subscriber was entitled to one DW which in turn will entitle the holder to one equity share of JISCO at Rs.200 per share. The market value of one share of JISCO was Rs.320. As these conditions attached to the issue had SEBI approval all the assessee-companies applied fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee's claims had been rejected on the following grounds: 1. The NCDs were transferred to the UTI without consideration. So the companies never became the owners of fully paid NCDs. 2. The DWs were sold on March 25, 1995, whereas the same were allotted to the appellant companies on May 3, 1997. 3. The transfer of NCDs was a unilateral act and the beneficiary of the transfer was not the UTI but JISCO. 4. The funds of JISCO itself have been utilised indirectly in subscribing to the rights issue of its own NCD. 5. The entire transaction was not at arm's length. It was a colourable device to evade future tax. With reference to the first ground, it was observed by the Tribunal that when the assessee-companies made application for NCD and paid the requisite sum of Rs.111 per NCD, the offer of allotment was issued to the assessee companies according to which all the assessees were asked to make a further payment at Rs.389 per NCD. As the arrangement was already fianlised with the UTI that they were to purchase the NCDs at Rs.389 per NCD, the assessee-companies gave effect to such arrangement. The UTI paid Rs.389 per debenture to JISCO and in turn the assessee-companies tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bout 40 per cent. of the shareholding of JISCO. In case the assessee-companies did not opt to subscribe to the issue, the entire issue would have failed, as it was provided in the terms of the issue that if the issue was subscribed less than 90 per cent., JISCO would refund the entire money. That would have been detrimental to the interest of the assessee-companies who were promoter companies of JISCO. It also referred to the chart of yield obtained by the UTI and the assessee-companies and found that the UTI had got annual yield of about 25 per cent. Therefore, it was held that the transaction of selling NCDs at the face value of Rs.500 to the UTI at Rs.389 per debenture was not a colourable device and the ratio of McDowell's case [1985] 154 ITR 148 (SC), had no application. It also noted that when JISCO came with the rights issue of NCDs, many other companies like Apollo Tyres, Usha Ispat Ltd. Dhunseri Tea Industries Ltd., and Sri Ram Industrial Enterprises, etc., had come out with similar rights issues with almost identical terms and conditions. In the case of Apollo Tyres the buy back was done by JM Financial and Investment Consultancy Services Ltd. whereas in the case of Usha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere sold. It was in fact a financial arrangement between JISCO and the UTI and the UTI agreed to pay Rs.389 per debenture on the condition that (i) interest would be paid at Rs.10.5 per cent.; and (ii) refund of Rs.500 would be given in three instalments. In the process the assesseecompanies had let its capital to be forfeited by JISCO which was a unilateral act on the part of the assessee-companies. It is the case like unclaimed credits/ debts. A sum of Rs.111 per NCD was capital investment in the hands of the assessee-company as the assessee-companies had shown it as investment and declared the loss as short-term capital loss while filing its return. The assessee-companies are investment companies of the jindal group. No definition of "investment company" exists in the statute. However, there are several definitions which have defined the term. "Financial investment company" as appearing in the Finance (No.2) Act, 1991, in section 2(9)(d) is "a company whose gross total income consists mainly of income which is chargeable under the heads 'Income from house property', 'Capital gains' and 'Income from other sources' or of income by way of interest on securities." The factual positi ..... 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