DCIT, CIRCLE-13(1), NEW DELHI vs. JARUL INFRASTRUCTURE PVT. LTD, NEW DELHI

1. Disallowance on account of capital gain 76,12,50,000 Total loss 29,690 Assessed at loss of Rs. 29,690/-. The assessee is not allowed to carry forward the short term capital loss of Rs. 76,12,50,000/- for future year adjustment.” 12. Against the above order, the assessee preferred appeal before the Ld. CIT(A). The Ld. CIT(A) elaborately noted all the submission of the assessee. He summarized the facts of the case are as under:-

4.2.3.1. 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- transferrabie) 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 tothe following 4 allottees:

M/s Jarul Infrastructure Pvt. Ltd.

Name of the allottee Number of Total amount paid warrants upfront @ Rs.7.25 per warrant (Amount in Rs.) Azalea Infrastructure 15,00,00,000 Rs.108,75,00,000 Pvt. Ltd. Gloxinia Infrastructure 6,00,00,000 Rs.43,50,00,000 Pvt. Ltd. Jarul Infrastructure 10,50,00,000 Rs.76,12,50,000 Pvt. Ltd. Alona Infrastructure 10,50,00,000 Rs.76,12,50,000 Pvt. Ltd.

The appellant company along with 3 other companies invested in the share warrants at a lock in price of Rs.29 per share on 29.11.2010. The facts of the case as submitted by the AR of the appellant is that in F.Y.2010-11 Indiabulls Power Limited (“IPL”) proposed to allot 105,000,000 share warrants to the appellant which upon conversion would have entitled the appellant to acquire an equal number of equity shares of IPL of face value of Rs.10/- each at a- conversion price of Rs. 29/- per share. According to the terms of the offer, the appellant was required to pay Rs. 7.25/- per warrant (25% of conversion price of Rs. 29/-) amounting to Rs. 76,12,50,000/- as upfront at the time of allotment of share warrant and the balance was payable at the time of exercise of option i.e. within eighteen months from the date of allotment.”

“4.2.3.5. From a perusal of aforesaid judicial pronouncements and facts of the Appellant's case, it is evident that the appellant submitted entire evidence and explanations for the investment in IPL and subsequent forfeiture by IPL. Hence, the appellant had discharged its initial onus and burden to prove the transaction. Thereafter, it was the duty of the AO to verify the same or else bring on record any evidence to contradict the same. Based on a perusal of the assessment order, it is evident that the AO has not brought on record any evidence to contradict the explanations offered by the appellant. In fact the findings of the AO are in line with the explanations offered by the appellant. Moreover, at every stage, the appellant has also submitted rationale along with information available on the public domain to prove the reasons for investment in M/s Jarul Infrastructure Pvt. Ltd. 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 I'PL 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 of the Act; the appellant company acted as a conduit to the transaction to provide ultimate benefit to IPL; since the appellant company did not wait till end of conversion period to convey unwillingness, the said forfeiture was pre-decided; even if the appellant company did not want to invest further in the shares of IPL, then the unwillingness should have been expressed in May 2812 instead of November 2011; the forfeiture of warrants by IPL does not amount to transfer as per provisions of section 2(47) of the Act. The AO disallowed the short term capital loss of Rs. 76,12,50,000 claimed by the appellant. In addition to the appellant's submissions, the AR has also submitted the order of Ld. CIT(A)-1, who has allowed the short term capital loss claimed by Alona Azalea Infrastructure Pvt. Ltd, (AIPL), as AIPL was one of the allottees of the convertible warrants, and similar to the case of the appellant, AIPL's warrants were also forfeited resulting in capital loss. The shares of IPL having face value of Rs. 10 each were traded at prices ranging from Rs. 29.60 to Rs. 45.50 and were expected to increase in the near future, Thus, at such point in time, the appellant along with 3 other companies had invested in the convertible share warrants of IPL by way of making 25% part payment, wherein the balance payment was due upon conversion at any time in the next 18 months. The facts of the case have been considered and the submissions filed by the AR of the appellant have been perused. The Assessment order has M/s Jarul Infrastructure Pvt. Ltd. been considered. All case laws cited by the AO and tine Appellant have been considered. The order of Ld. CIT(A) 1, on similar facts has been perused. The relevant para of the order is reproduced below: Considering the facts of the case, it cannot be said that the appellant has used any colourable device to get the share warrants forfeited. The decision was taken by the appellant with the intention to earn money but such ad decision has gone wrong and to cut the further losses the appellant decided not to pay the further amount. Therefore, the disallowance of short term loss of the appellant as alleged by the Assessing Officer in para 4.6 and 5.1 of the assessment order is untenable and same is deleted. As the facts are identical, maintaining judicial discipline and respectfully following the decisions of Ld. CIT(A)-01 the appeal is allowed. The appeal on ground no.1 is allowed.”

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:-

share price was Rs. 12.10/ share - refer page 24,25 of Annexure 1 showing data downloaded from website of NSE and pg 17 of assessment order vi. Even today i.e. on 3 June 2022 the share price is Rs. 4.2/- per share- refer page 26 of Annexure 1 showing data downloaded from website of NSE vii. Additional immediate outflow and additional outflow after 6 months: The Assessee would have had to pay Rs. 2.28 crores immediately i.e. on 27th November 2011 -refer High Court Order dated 17 October 2011 at page 237,266,270 of PBK and would have had to pay balance Rs. 226 crores in May 2012 that 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.

M/s Jarul Infrastructure Pvt. Ltd. from Holding Company to make investment in promoter companies.

M/s Jarul Infrastructure Pvt. Ltd. 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 Pvt. Ltd -Pg 84 of PBK; v. Confirmation dated 20th March 2014 by Heliotrope Real Estate Pvt. 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 Pvt. Ltd - refer note 6,8,10,22 at page 58,63,64,67 of PBK x. Audited Financials of Chloris Properties Limited -refer note 3and 23 at page 74,78,81,82 of PBK xi. Board Resolutions dated 7th October 2010 of Assessee regarding the investment -refer page 54 of PBK xii. Board Resolution dated 17th November 2011 of Assessee regarding decision to not exercise the option of conversion and regarding forfeiting the upfront money -refer page 55 of PBK xiii. Board Resolutions of IPL dated 19th November 10 regarding issue of share warrants and their terms and conditions. Provisions of Income tax Act, Companies Act, article of association, memorandum of association, listing agreement, SEBI and approvals, sanctions, permissions, consent of BOD and other authorities were complied with- refer page 189-191 of PBK xiv. Board Resolutions of IPL dated 30th November 2010 regarding allotment of 42 crores share warrants which shall upon conversion be locked in for a period as stipulated under SEBI; xv. Share Warrant certificate dated 30th November 2010 - refer pg 47 of PBK

M/s Jarul Infrastructure Pvt. Ltd. xvi. Communication to IPL vide letter dated 18th November 2011 regarding decision to not exercise the conversion at page 48 of PBK xvii. These companies are filing returns, have made due disclosure in their books.

10. Disallowance on Conjectures and surmises: There was no independent inquiry by the Ld. AO to verify the reasons and justification given by Assessee, he has placed no objection to the evidence given by the Assessee. He has disallowed the claim on the ground that the transaction was sham as it was structured only to evade tax. There is no whisper or any allegation that the amount invested in the forfeited shares has come back to the Assessee in any form. The forfeiture is not claimed to be bogus nor has if been shown to be a fraud or colourable devise. 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.

M/s Jarul Infrastructure Pvt. Ltd.

• 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 any one, 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 the liabilities of the assessee were towards group companies. Similarly, it was also immaterial that the shares sold by the assessee were of another group company. It was also immaterial as to who was the purchaser of the shares, so long as the shares were not sold at a price..wh.ich_w.as higher or lower than their fair price and there was no restriction on sale of such sha res to a group company. • Neither the assessee nor the amalgamated company adjusted the capital loss on account of sale of those shares against any long-term capital gain. No tax benefit was, therefore, obtained by the assesse. Hence, it could not be said that the transactions in question were a colourable device, meant to gain some unfair tax advantage.

…………….” The following propositions have been held by the Hon'ble Apex Court and the Hon’ble Jurisdictional High Court-refer case law summary • It is not necessary that for a capital gain to arise there must be sale of a capital asset. Sale is only one of the modes of transfer envisaged by section 2(47). Relinquishment of the asset or the extinguishment of any right in it, which may not amount to sale, can also be considered as a transfer and any profit or gain which arises from the transfer of a capital asset is liable to be taxed under section 45; • Forfeiture 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.”

M/s Jarul Infrastructure Pvt. Ltd. decision. His inference in this regard is not correct as the price movement by no stretch of imagination point out that investment was in a bogus or penny stock company. Further, it is settled law that Assessing Officer cannot sit in the shoes of businessman and decides the prudence of business decision. Thereafter Assessing Officer has wondered why instead of getting the share warrants forfeited assessee did not sell these shares. It was informed that as 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. Morevoer, 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, Assessing Officer’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 applicable in this case.

M/s Jarul Infrastructure Pvt. Ltd.

“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 versus 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 prohibited by law employed by the assessee. It is also the allegation in the impugned case. In paragraph number 12 - 14 clearly clinches the issue in favour of the M/s Jarul Infrastructure Pvt. Ltd. assessee. The honourable High Court held that the issue as to whether the forfeiture of the convertible warrant amount to a transfer within the meaning of Section 2 (47) of the said act has now been made clear by the Supreme Court in the case of Grace Collis (supra) as also by the Karnataka High Court in BPLSanyo finance Ltd (supra) and the honourable High Court also followed the same. In paragraph number 14 the honourable High Court held that forfeiture of the convertible warrant has resulted in extinguishment of the right of the assessee to obtain a share in the issuer company.

Order pronounced in the open court on 23.06.2022.