TMI Blog2003 (1) TMI 236X X X X Extracts X X X X X X X X Extracts X X X X ..... om investment in shares. The company is a partner in the firm M/s. Advani Technology Devices whose profit is exempt under section 10A by virtue of an established in SEEPZ. The assessee-company income of Rs. 2,93,165 on 31-12-1993. The Assess Industrial Undertaking filed the return of its income of Rs. 2,93,165 on 31.12.1993. The assessing Officer found that it had credited its profit and loss account by a sum of Rs. 10 lakhs as "Capital receipt (on sale of entitlement/warrant)". The assessee had also deducted this sum from the statement of total income; and a note had been appended with the remarks "Amount received on transfer of Detachable Warrants of Rs. 10 lakhs, being in the nature of capital receipt is not liable to tax and hence, the same is not included in the total income declared in the return". 3. The Assessing Officer also noticed that during the accounting period relevant to assessment year 1992-93, the assessee had been allotted 25,000 debentures of Reliance Industries Ltd. The assessee-company had paid Rs. 9,37,500 for the same. The assessee had shown these debentures as stock-in-trade at the end of the accounting year 1991 -92. Along with the debentures, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, brought to tax the entire amount of Rs. 10,00,000 being the sale proceeds of detachable warrant of Reliance Industries Ltd. under section 28 of the Act. 6. The learned CIT(A) in his order has stated that the debentures along with the detachable warrants were issued to the, assessee-company by M/s. Reliance Industries Ltd. The said detachable warrants entitled the assessee to apply for the equity shares of M/s. Reliance Industries Ltd. at the prescribed time. These warrants issued along with the debentures were detachable and tradable on their own. According to the learned CIT(A), there is also no dispute that the said debentures constituted the stock-in-trade of the assessee-company. It is stated that the acquisition of these debentures was a part of its stock-in-trade and the assessee-company was prompted to acquire these debentures by the offer of detachable warrants which were going to be issued along with the debentures. The learned CIT(A) has further stated that the assessee company paid Rs. 75 per debenture being 50% of the face value of each debenture. The debenture had been allotted along with the warrants on payment of further sum of 25% of face value of each debent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of HariBros. (P.) Ltd.. He referred to page 3 of the compilation and contended that detachable warrants have not been mentioned as stock-in-trade therein. He argued that detachable warrants are nothing but a right to subscribe shares. The shares were to be allotted for detachable warrants and in addition to that some price was also paid to purchase the shares. He contended that the assessee-company did not pay any additional cost to acquire the detachable warrants. According to him the detachable warrants were self-generated assets and therefore, they were of capital nature and as there was no cost of acquisition, it does not fall in the computation of capital gains under section 48 as held by the Supreme Court in the case of B.C. Srinivasa Setty. The learned counsel placed his reliance on the following court cases : (i) B.C. Srinivasa Setty's case (ii) CIT v. Modiram Laxmandas (P.) Ltd. [1983] 142 ITR 702 (Bom.) (iii) Addl. CIT v. K.S. Sheik Mohideen [1978] 115 ITR 243 (Mad.) (FB) (iv) Kalyani Exports Investments (P.) Ltd. v. Dy. CIT [2001] 78 ITD 95 (Pune) (TM). In the alternative, the learned counsel contended that the cost of detachable warrants should be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50 each) and the same was shown as part of its stock-in-trade under the head "current assets, loans and advances" in its Balance-Sheet as on 31-3-1992. It was in the accounting period corresponding to assessment year 1993-94 under consideration that the assessee company made a further payment of Rs. 9,37,500 being the amount of Rs. 37.50 per debenture on 23-5-1992. Thus, allotment of 25,000 debentures was also made in favour of the company along with 25,000 detachable warrants. Immediately, thereafter, the assessee sold 250,00 detachable warrants at a rate of Rs. 40 per warrant for an aggregate sum of Rs. 10 lakhs on 10-6-1992, but it continued to hold 25,000 debentures for which it had paid Rs. 75 per debenture. Thereafter, the company sold 24,310 debentures at a rate of Rs. 35 per debenture on 19-9-1992. Since, the assessee was holding the debentures as its stock-in-trade, it had claimed a loss of Rs. 40 per debenture while preparing its P L account for assessment year 1993-94. Its Balance Sheet shows as on 31-3-1993, the remaining 690 debentures, paid up Rs. 75 per debenture (total cost Rs. 51,750) as forming part of its stock-in-trade. 9. As we have mentioned above, the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d shown the debentures as stock-in-trade, the warrant issued also formed part of the stock-in-trade. Therefore, the contention of the learned counsel that the detachable warrants were capital assets is without any substance. One has to look into the real nature of the transaction from the commercial point. The name which the parties may give to the transaction which is the source of receipt and the characterisation of the receipt by themselves are of little consequences as has been laid down by the Apex Court in the case of Travancore Sugars Chemicals Ltd. {supra). The detachable warrants were issued by Reliance Industries Ltd. along with the debenture certificates and, therefore, the detachable warrants formed part of the debentures. As the assessee had treated the debentures as stock-in-trade, therefore, the detachable warrants are also trading assets as they also form part of the stock-in-trade. 10. The first consideration before holding a receipt to be profits or gains of business within section 28 of the Act is to see if there was a business at ad of which it could be said to be income. In the present case the assessee was carrying on the business in debentures and shares. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any applied for 25,000 debentures on 7-1-1992. The assessee paid the application money of Rs. 9,37,500 being application money of Rs. 37.50 per debenture which is equal to 25 per cent of the face value of debentures for Rs. 150 each. The assessee had shown these debentures as stock-in-trade under the head "Current assets, loans and advances" in its Balance Sheet, as on 31-3-1992. The assessee-company made further payment of Rs. 9,37,500 being the amount of Rs. 37.50 per debenture on 23-5-1992. Thereafter the allotment of 25,000 debentures was made in favour of the assessee along with 25,000 detachable warrants. Immediately thereafter, the assessee sold 25,000 detachable warrants at a rate of Rs. 40 per warrant for an aggregate sum of Rs. 10 lakhs on 10-6-1992. The assessee sold 24,310 debentures at a rate of Rs. 35 per debenture on 19-9-1992. As the assessee was holding the debentures on its stock-in-trade, it had claimed a loss of Rs. 40 per debenture while preparing the profit and loss account for the assessment year 1993-94. Now the main issue for consideration is that why the value of debentures has gone to Rs. 35 when the same was purchased for Rs. 75. In our opinion, the valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utation of capital gains when the cost of acquisition of the asset is Nil In the present case, the detachable warrants have been considered by us as trading assets, and hence the computation of capital gains becomes irrelevant. The Madras High Court decision in the case of K.S. Sheik Mohideen is also on the issue of computation of capital gains, hence not relevant to the facts of the present case. Similarly, the decision of Punjab High Court in the case of HariBros. (P.) Ltd. and the findings of the Pune Tribunal in the case of Kalyani Exports Investments (P.) Ltd have no application to the facts of the present case. The facts and circumstances under which the above cases had been decided are entirely different from the facts of the present case. 13. In the case of CIT v. Kunji Lal Gupta [1971] 81 ITR 474 (SC) the shares were held as stock-in-trade and the bonus shares were allotted in proportion to existing holding. The main issue for consideration was whether sale proceeds of bonus shares in the hands of the assessee were capital in nature or the same were revenue receipts. The Hoh'ble Supreme Court held "on the facts, that the sale proceeds of bonus shares received in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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