TMI Blog2022 (7) TMI 262X X X X Extracts X X X X X X X X Extracts X X X X ..... per the agreement there was no clause of selling the shares. As subsequent movement in prices have duly corroborated that the share prices fell and the assessee's decision not to pay the balance amount was not at all unjustified. The prime emphasis of the assessing officer at the end is that the exercise was meant to bring capital receipt in the hands of Indiabulls Power Pvt. Ltd. and thwart examination from the perspective of section 68. This line of reasoning is wholly unsustainable. Firstly assessing officer is not at all seized with the assessment of Indiabulls Power Pvt. Ltd. as to how the capital receipt in his hand is to be examined from the perspective of section 68. Even if assessee had contributed the balance amount that would still be a capital contribution. Moreover, even for exempt capital receipt, there is no law that such credits are outside purview of section 68. Hence, AO's surmise also is without any basis whatsoever. Moreover, the amendment in section 68 providing for examination of source of source for share application money, share capital, and share premium, or any such amount was brought in by Finance Act, 2012 w.e.f. 01.04.2013 is not applicab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital loss of Rs. 76,12,50,000/-. With regard to the transaction resulting in short term capital loss, the note 20 of the note to financial statement for the year ended 31.03.2012 read as under:- During the previous period ended 31.03.2011, the company had paid Rs. 76,12,50,000/- as upfront amount for part payment against 10,50,00,000/'- warrants of Indiabulls Power Ltd. (IPL) which, if exercised, would have entitled the Company to an equal number of equity shares of IPL fully paid up of the face value of Rs. 2 each, anytime after November 30, 2010 but no later than May 29, 2012, in accordance with the terms of issue of such warrants. During the year ended 31.03.2012 the company has conveyed its unwillingness to IPL to excise the warrant of IPL per se consequently the upfront amount of Rs. 76,12,50,000/- paid by the company towards part payment against the said warrant was forfeited by IPL and the same was charged to the profit and loss account as loss on share warrants. 4. The Assessing Officer asked the assessee to explain the Short Term Capital Loss. The assessee submitted as under:- During the F.Y. 2010-11, Indiabulls Power Ltd. proposed to allot 10,50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Date 1 Decision of investment 07.10.2010 2 Date of taking loan 29.11.2010 3 Date of investment in share warrant of IPL 29.11.2010 4 Date of Board meeting for unwilling to exercise share warrant of Indiabulls Power Ltd. 17.11.2011 5 Date of letter of unwilling to exercise Share warrant of Inidabulls Power Ltd. 18.11.2011 6. The Assessing Officer referred to the Board resolution dated 17.11.2011 for not exercising the option. The Assessing Officer was of the opinion that the transactions were pre-decided for making investment of Rs. 76,12,50,000/- with Indiabull Power Ltd. Thereafter the Assessing Officer referred to warrant certificate and noted that the assessee company was entitled to purchase one equity share of India bulls Power Ltd. having face value of Rs. 10/- by paying in full the exercise price of Rs. 28/- (as reduced by the upfront money of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idering the law, propounded by the Hon'ble Apex Court, it is submitted that even when right to exercise warrant was extinguished independent of and otherwise than on account of transfer, such extinguishment of right would fall within the ambit of section 2(47) and consequently forfeiture of shares would be allowed as a capital loss. Further, attention of your goodself is invited to the law pronounced by Jurisdictional High Court of Delhi in the case of CIT vs. Shri Chand Ratan Bagri TTA 31/2010 (Copy attached). In the said case, the assessee had subscribed towards 10 lakhs preferential convertible warrants issued by M/s. BLB Limited. The assessee after making the initial payment of Rs. 59.5 lakhs could not make the balance payment and therefore, M/s. BLB Limited forfeited the amount of Rs. 59.5 lakhs earlier paid by the assessee. The assessee claimed this loss as short term capital loss under the head capital gain . It was submitted on behalf of the assessee that the company had debited loss to its capital account and not to the profit and loss account and consequently, there was no effect on the profit and loss account of the assessee company. The Assessing Officer howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is consequent to the forfeiture of its right in the share and the same is to be understood to be within the scope and ambit of transfer. In this view of the matter, the Tribunal was justified in holding that it would amount to short term capital loss to the assessee. With regard to the extinguishment of any rights, we may profitably refer to the judgment of the Supreme Court in the case of Commissioner of Income-tax vs. M/s. Grace Collis and Others . Considering the legal position emerging from the above discussions, it is clear that the forfeiture of share warrant money is nothing but transfer and hence, the amount of loss incurred is duly allowable as short term capital loss. 7. The Assessing Officer observed that he has carefully considered the same and the case laws are distinguishable without pointing out the reasons. He observed that this is not genuine transaction and the transactions are coloured in the nature to pass on the amount in question to Indiabulls Power Ltd. in disguise of the convertible warrants. The Assessing Officer enquired from the assessee that why the share warrants were not sold. The Assessing Officer noted the assessee's response in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 304,50,000/- from Indiabulls Infrastructure Ltd. which has been further given to four persons. He noted that the money has been utilized for investment in convertible share warrants of Indiabulls Power Ltd. has actually come from Indiabulls Infrastructure Ltd. He further observed as under:- 7.1. It would be further interesting to see the allotment of total 42 crore convertible warrants by Indibulls Power Ltd. Following is the table which shows that name of allottee, number of warrants allotted and amount: Name of the allottee Number of warrants Total amount @ Rs.7.25 per warrant Azalea Infrastructure Pvt. Ltd. 15,00,00,000 Rs.108,75,00,000 Gloxinia Infrastructure Pvt. Ltd. 6,00,00,000 Rs.43,50,00,000 Jarul Infrastructure Pvt. Ltd. 10,50,00,000 Rs.76,12,50,000 Alona Infrastructure Pvt. Ltd. 10,50,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss it cannot be presumed to be a sham transaction. 10. However, the Assessing Officer was not satisfied. He referred to the decision of the Hon Tale Supreme Court in the case of Sumati Dayal vs. CIT (214 ITR 801) (SC) and CIT vs. Durga Prasad More and held that apparent is not true actually, a colourable device and the entire amount is transferred to Indiabulls Power Ltd. as capital receipt. Thereafter, the AO referred to bond results of Rattan India Power Ltd. and observed as under:- It is interesting to note that the entire investment of Rs. 304.50 crores has been forfeited by Rattan India Power Ltd. on a single day i.e. 30.11.2010 thereby forfeiting the entire amount invested by all the four companies. As if all the four companies have simultaneously decided to not to exercise the option of conversion before 30.11.2010 even though they were entitled to exercise its option till 29.05.2012. M/s. Indiabulls Power Ltd. (Now Rattan India Power Ltd.) has also by a single resolution dated 19.11.2011 forfeited the entire amount of Rs. 305.50 crores and has shown as a capital receipt. 11. Hence, the Assessing Officer held that the entire transaction is actually a conduit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The appellant had filed its return of income for AY 2012-13, declaring a total loss of Rs. 76,12,79,690/-. The appellant is engaged in the business of purchasing, selling, developing, constructing, hiring or otherwise acquire and deal in all real or personal estate/properties either directly or through group companies, and construct, acquire hold/sell properties, buildings and acts as real estate agent and all other related and ancillary objects. The AR has submitted that during FY 2010-11, Indiabulls Power Limited ( IPL ) proposed to allot 42,00,00,000 convertible (non-transferrable) warrants representing equal number of equity shares of IPL having face value of Rs. 10 per share at a conversion price of Rs. 29 per share. As per the terms of allotment, an upfront payment of 25% of conversion price i.e. Rs. 7.25 per share was required to be made by allottees and the balance was payable at the time of exercise of option i.e. within eighteen months from the date of allotment. The above mentioned convertible warrants were issued by IPL to the following 4 allottees: Name of the allottee Number of warrants Tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reasons for investment in convertible share warrants, the trading history of the shares of IPL, the subsequent events of merger and demerger of group companies, and trading pattern of IPL's shares pursuant to investment to substantiate its decision to not proceed with any further investment in the share warrants thereby resulting in forfeiture of the warrants. The appellant has also explained in earlier parts of this submission that as per provisions of section 2(47) of the Act, the forfeiture of share warrants representing a right in IPL's ownership represents extinguishment of asset (being the right), such forfeiture results in transfer u/s. 2(47) of the Act, thereby resulting in short term capital loss in the hands of the appellant. AO In the assessment order, the AO disallowed the short term capital loss of Rs. 76,12,50,000/- claimed by the appellant by treating the transaction as a sham transaction. In the assessment order, the AO has observed that the investment by appellant into IPL and consequent forfeiture was a colourable device used by the appellant to camouflage the credit of amount to IPL as a capital receipt to avoid the test of section 68 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed. The appeal on ground No. 1 is allowed. 14. Against this order revenue has filed appeal before us. learned departmental representative relied upon the orders of the assessing officer. He submitted that assessing officer has given the finding that assessee has adopted a colourable device and hence the claim of loss has been rightly disallowed. 15. In the joinder learned counsel of the assessee submitted that assessing officer has tried to sit into the shoes of a businessman and decide what is prudent. He submitted that this is not at all legally sustainable. He submitted that all the necessary details were available before the assessing officer. He did not find any fault therein. On the basis of conjectures and surmises he had made the disallowance. He submitted that on identical facts in case of another company M/s. Azalea Infrastructure Pvt. Ltd. which has also similarly contributed to Indiabulls Power Ltd. and has suffered similar loss the claim was duly allowed by the ITAT. Hence, he submitted that the issue is in fact covered by the ITAT decision on similar facts. Furthermore learned counsel of the assessee summarised in submission as under:- 1. Justification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... too when the price of one share was Rs. 10. viii. The falling share prices with no expectation of price to rise, immediate financial outflow of Rs. 2.28 crores due to the directions of the Hon'ble High Court in November 2011 and balance amount of Rs. 225 crores to be paid in next 6 months i.e. in May 2012 was the reason the Assessee decided to not exercise the option and conveyed its decision on 18.11.11 to IPL. Hence, decision was only prudent and rational and in accordance with economic indicators and market trends. 2. Prices are not controlled or manipulated by Assessee: IPL is a listed and publicly traded company on NSE and BSE and its prices are available on public domain. The Assessee has no control over its price of shares.-refer page 114, 214, 225, 237 of PBK and page 15 of assessment order 3. Shares were non transferrable and could not have been sold in open market to recover its money-refer para 6.2 at page 12 of assessment order 4. Exercising the option would have resulted in greater loss and no rational person would have exercised the option: Shares in open market were available for Rs. 10 per share then why would the Assessee pay balance amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of source was also established i. Bank statements of Assessee showing receipt and transfer of funds on 29.11.2010 at page 45 of PBK ii. Bank statements of Heliotrope Real Estate Pvt. Ltd. showing receipt and transfer of funds on 29.11.2010 at page 68A of PBK iii. Bank statements of Chloris Properties Ltd. showing receipt and transfer of funds on 29.11.2010 at page 86 of PBK iv. Confirmation dated 1st January 2014 by Chloris Properties Ltd. in respect of amount lent to Heliotrope Real Estate Put. Ltd.-Pg. 84 of PBK; v. Confirmation dated 20th March 2014 by Heliotrope Real Estate Put. Ltd. in respect of amount lent to Assessee-Pg 36 of PBK, vi. Audited Financials of Assessee - Refer note 5, 9, 10, 20, 21 at pages 5, 9, 10, 11, 12, 13 of PBK vii. Audited financials of IPL for AY 2012-13-refer page 92, 94, 95, 99, 100, 101, 108, 113, 114, 121, 123, 126, 132, 133, 135 viii. Audited Financials of IPL for AY 2011-12 - refer page 142, 144, 156, 167, 168, 179 of PBK ix. Audited Financials of Heliotrope Real Estate Put. Ltd.-refer note 6, 8, 10, 22 at page 58, 63, 64, 67 of PBK x. Audited Financials of Chloris Properties Limited-refer note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces that a person lets go or permits forfeiture of his capital; If forfeiture is not claimed to be bogus nor it has been shown to be a fraud or colourable devise then the disallowance cannot be made; That there has to be a positive finding as to how the transaction is to be termed as a colourable device or a fraudulent transaction. No disallowance can be made on surmises and conjunctures, there has to be a finding to the effect that a colourable device was conceived by the assessee to defraud the revenue; the observation that such transactions are to be treated as sham transaction are mere allegations and bereft of any merits: and no cogent material to substantiate this allegation is on record. It is for the holder of the shares and not for the revenue to decide when to sell the shares held by it; There is no provision in the Act which would prevent the assessee from selling loss-making shares; If the sale of shares was not illegal, it could have been made to anyone, including a group company and it was immaterial that the purpose of sale of shares was to reduce the outstanding liabilities of the assessee. It was also absolutely immaterial that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of convertible warrant had resulted in extinguishment of the right of the assessee to obtain a share. It was not a case where the asset itself had been extinguished or destroyed. The assessee entitled to claim capital loss; loss suffered by the assessee, i.e., non-recovery of share application money was consequent to the forfeiture of its right in the shares and the same was to be understood to be within the scope and ambit of transfer. Loss would amount to short-term capital loss to the assessee; The definition of 'transfer' in section 2(47) clearly contemplates the extinguishment of rights in a capital asset distinct and independent of such extinguishment consequent upon the transfer thereof Conclusion: It is therefore prayed that the disallowance be deleted. 16. We have carefully considered the submissions and perused the records. We find that in this case assessee company has suffered short-term capital loss which arose out of forfeiture of share warrant money. It is not the case of the assessing officer that the legal claim of short-term capital loss arising out of forfeiture of share warrant money is not legally sustainable. Rather assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ource of funds is not given, or that Assessing Officer has unearthed some other transactions. Hence the assessing officer's order is only based upon surmises and conjecture and hence it is not sustainable in law. Moreover, we note that in identical circumstances, this ITAT in the case of DCIT vs. Azalea Infrastructure Pvt. Ltd. vide order dated 28/01/2021 had allowed the claim of short term capital loss. 18. Thus, the crux of the issue for taxation in the hands of the assessee in this case is whether the forfeiture of the convertible warrant amount to a transfer within the meaning of section 2(47). The ITAT in the case of M/s. Azalea Infrastructure Pvt. Ltd. (supra) has answered this by concluding as under:- 9. So far as the issue for taxation in the hands of the assessee is squarely covered in favour of the assessee by the decision of honourable Delhi High Court in 329 ITR 356 in case of CIT v. Chand Ratan Bagri, wherein the addition was made in the hands of the assessee on protective basis and the addition was made on substantive basis in the hands of the company who forfeited the shares. In paragraph number 2 there was also an allegation of tax evasion tactic prohibi ..... 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