COMMISSIONER OF INCOME TAX vs. SHRI CHAND RATAN BAGRI

The assessee had subscribed to these warrants issued by M/s BLB Limited. The assessee after making the initial payment could not make the balance payment and, therefore, M/s BLB Limited forfeited the amount of Rs.59,50,000/- 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 the 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, however, observed that the same had cast an effect on the short term capital gains of the assessee showing and the forfeiture of this amount in the manner indicated by the assessee was a tax-evasion tactic, prohibited by law.

Since the assessee was the Promoter Director in M/s BLB Limited, the Assessing Officer taxed the same in the hands of the assessee on protective basis and observed that the said amount could be taxed in the case of M/s BLB Limited.

The main issue sought to be raised by the learned counsel for the Revenue is that the forfeiture of the convertible warrants did not amount to transfer of assets. The learned counsel referred to Section 45 of the Income Tax Act, 1961 (hereinafter referred to as “the said Act”). The beginning words of which are as follows:- 2010:DHC:331-DB

The learned counsel for the Revenue submitted that the profits or gains and the loss must arise from the transfer of a capital asset. Her emphasis was on the word “transfer”, used in the aforesaid expression. She then referred to Section 2(47) (ii) of the said Act which defines “transfer”, in relation to a capital asset to inter alia, include the extinguishment of any rights therein. It was submitted that the forfeiture of the said amount of Rs.59,50,000/- does not amount to extinguishment of any rights in the transfer of capital assets. She submitted that the extinguishment of the right must be in relation to the transfer of a capital asset and for this preposition she placed reliance on the Supreme Court decision in the case of Vania Silk Mills P. Ltd. vs. Commissioner of Income Tax: 191 ITR 647. In the said decision the Supreme Court observed that:

Secondly, the learned counsel for the Revenue submitted that since the right itself came to be extinguished and the asset did not remain, the forfeiture would not amount to a transfer as contemplated under Section 2010:DHC:331-DB

Mr. Salil Aggarwal appearing on behalf of the respondent/assessee raised two points as to why this appeal should not be admitted. The first point raised by him was that the question whether the forfeiture in the present case amounted to transfer or not, was not raised before any of the authorities below and, therefore, the same cannot be taken for the first time before this Court. For this proposition he placed reliance on the decision of this Court in the case of Commissioner of Income Tax vs. Indocount Finance Limited:271 ITR 215.

The second point urged by Mr. Aggarwal was that the decision in Vania Silk Mills (supra) has been over-ruled by the Supreme Court in a Larger Bench decision in the case of Commissioner of Income Tax vs. Grace Collis:248 ITR 320 (SC). Our attention was invited to the following passage: “We have given careful thought to the definition of “transfer” in section 2(47) and to the decision of this court in Vania Silk Mills Pvt. Ltd.‟s case [1991] 191 ITR 647. In our view, the definition clearly contemplates the extinguishment of rights in a capital asset distinct and independent of such extinguishment consequent upon the transfer thereof. We do not approve, respectfully, of the limitation of the expression “extinguishment of any rights therein” to 2010:DHC:331-DB

Mr. Aggarwal also placed reliance on the decision of the Karnataka High Court in the case of Deputy Commissioner of Income Tax vs. BPL Sanyo Finance Limited:312 ITR 63 (KAR). In the latter decision, the question was similar to the one which the Revenue is seeking to raise before us. There also there was a short term capital loss claimed on account of forfeiture of the share application money. The Court observed that the assessee‟s rights to the shares were extinguished and, therefore, this amounted to short term capital loss. The Karnataka High Court also placed reliance on the decision of the Supreme Court in the case of Grace Collis (supra).

In the rejoinder, Ms Bansal, who appears on behalf of the Revenue placed reliance on the decision of the Bombay High Court Commissioner of Income Tax vs. Sterling Investment Corporation Limited (Bom.): 123 ITR 441.

We have considered the arguments and have gone through the 2010:DHC:331-DB

More importantly, the second issue as to whether the forfeiture of the convertible warrant amounted 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 BPL Sanyo Finance Limited (supra). We agree with the interpretation given by the Karnataka High Court in BPL Sanyo Finance Limited (supra) and we see no reason to take a different view. The restrictive meaning given to the word “transfer” by the Supreme Court decision in Vania Silk Mills P. Ltd. (supra) has been over-ruled by the Larger Bench of the Supreme Court in the case of Grace Collis (supra).

In the present case we find that the forfeiture of the convertible warrant has resulted in extinguishment of the right of the assessee to obtain a share in BLB Limited. It is not a case where the asset itself has been 2010:DHC:331-DB

In view of the foregoing reasons, no substantial question of law arises for our consideration. The appeal is dismissed.