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Income Tax Appellate Tribunal, DELHI BENCH: “E”, NEW DELHI
Before: SHRI H.S. SIDHU & SHRI O.P. KANT
ORDER PER O.P. KANT, A.M.: This appeal by the assessee is directed against consolidated order dated 25/02/2016 passed by the Ld. Commissioner of Income-tax (Appeals)-2, New Delhi, including the assessment year 2009-10, raising following grounds: 1). That, the order of the Ld. Commissioner of Income Tax - (Appeals) - 2, New Delhi is bad in law, wrong on the facts and against the principles of natural justice. 2). That on the facts and in the circumstances of the case, the Ld. CIT- (A) erred in confirming the disallowances in the impugned assessment order framed u/s 153C of the act on the issues which has no nexus with the alleged material unearthed during the course of search operations and thereby making a de-novo assessment, which needs to be deleted. 3). That on the facts and in the circumstances of the case, the Ld. CIT- (A) has erred in law in confirming the disallowance of the Short Term Capital Loss on forfeiture of convertible share warrants amounting to Rs. 4,18,50,000/- which needs to be deleted. 3.1) That on the facts and circumstances of the case, the Ld. CIT-(A) has erred in law in disallowing the Short Term Capital Loss on forfeiture of convertible share warrants of Rs.4,18,50,000/- without appreciating the evidences and submissions filed during appellate proceedings. 3.2) The Ld. CIT-(A) has erred in concluding that subscription to the convertible warrant by the appellant company in warrants of Monnet Ispat & Energy Ltd is not a capital asset u/s 2(14) of the Income Tax Act, 1961 when in fact it is extinguishment of rights therein and covered u/s 2(47)(ii) of the Income Tax Act, 1961. 3.3) The Ld. CIT-(A) has concluded that forfeiture of share warrant is not genuine and bonafide transaction but is a colorable transaction entered with a motive to create loss in one company without getting it taxed in another group company. The Ld CIT-(A) has grossly erred in making the aforesaid conclusion as the forfeiture of share warrant is a genuine and bonafide transaction. That the appellant craves to add, amend, alter or withdraw any Ground or Grounds of Appeal.
2. Briefly stated facts of the case are that view of certain documents belonging to the assessee found and seized during the course of search and seizure action under section 132 of the Income-tax Act, 1961 (in short ‘the Act’) on 19/11/2010 at the premises of M/s Monnet Group, assessment under section 153C of the Act was completed in six assessment years, including the assessment year under consideration on 28/03/2013. On further appeal, the Ld. CIT(A) allowed the appeal partly. Aggrieved with the addition sustained, the assessee is in appeal before the Tribunal raising the grounds as reproduced above.
3. Before us, the Ld. counsel of the assessee submitted that addition in dispute involved is loss claimed on forfeiture of share warrants, amounting to Rs.4,18,50,000/-. According to Ld. Counsel, the Assessing Officer referred to the identical addition sustained by the Ld. CIT(A) in the case of M/s Pavitra Commercial Limited. He submitted before us that the Tribunal in the case of M/s. Pavitra Commercial Limited in for assessment year 2009-10 has deleted the addition and which has been further upheld by the Hon’ble Delhi High Court. In view of the above, the Ld. counsel submitted that issue in dispute being covered in favour of the assessee, the appeal of the assessee might be allowed.
The Ld. DR, on the other hand, could not controvert the submission of the Ld. counsel of the assessee. 5. We have heard the rival submission and perused the relevant material on record. In the case, the assessee applied for 10,00, 000/- warrants of M/s Monnet Ispat and energy Ltd (MIEL), which were convertible into an equal number of equity shares of Rs. 10 each at a price of Rs. 418.50. The assessee company paid 10% of the subscription price at the time of making the application i.e. Rs.41.85 per warrant. According to the assessee, the market price of the equity shares of M/s. MIEL during the month of March, 2009 was ranging between Rs.138.75 to Rs.154.35 and, therefore, it was not viable and justifiable to have the warrants exercised at price of Rs. 418.50 per share. As per the request of the assessee company dated 25/03/2009, M/s MIEL forfeited the warrants. According to the assessee, the forfeiture of the convertible warrants resulted into short-term capital loss of Rs.4,18,50,000/-. According to the assessee, by way of subscription of warrant, substantial rights in the shares was created in the favour of the assessee and forfeiture of the same amount to extinguishment of such rights, which qualify for transfer as per section 2(47) of the Act as upheld by the Hon’ble Delhi High Court in the case of CIT Vs Chand Rattan Bagri, 329 ITR 356. However, according to the Assessing Officer this entire exercise was a colourable transaction entered into to evade the taxes. According to the Assessing Officer, the assessee’s right to get the equity share was subject to certain riders in the form of clause(o) of the document of warrant of subscription and it was not a definite unfettered right qualifying for capital asset under section 2(14) of the Act. The Assessing Officer highlighted that the assessee again applied and paid 25% for 17,00,000 shares at the rate of Rs.201.50 per warrant making total investment of Rs.8,56,37,500/- for the warrants of the MIEL, which according to the Assessing Officer is a planned way of evasion of taxes. Accordingly, he disallowed the claim of the assessee of short-term capital loss of Rs.4,18,50,000 on forfeiture of the share warrants. The Ld. CIT(A) observed that by making 10% payment, the assessee had not acquired any right in the capital assets by way of share warrants. She also observed that no corresponding income has been shown in the hands of MIEL, which is a group company. The Ld. CIT(A), accordingly, upheld the disallowance in view of the decision of the Hon’ble Supreme Court in the case of M/s. McDowell and Company Limited versus Commercial Tax Officer (SC) 154 ITR 148.
We find that the Tribunal in in the case of M/s Pavitra Commercial Limited for assessment year 2009-10, has allowed the short term capital loss claimed on forfeiture of the share warrant of M/s SMIEL, observing as under: “7.3. After hearing rival contentions, we hold as follows: Hon’ble Delhi High Court in the case of CIT vs. Chand Ratan Bagri reported in 329 ITR 356 has held as follows. “More importantly, the second issue as to whether the forfeiture of the convertible warrant amounted to a transfer within the meaning of s.2(47) of the said Act has now been made clear by the Supreme Court in the case of Mrs. Grace Collis (2001) 248 ITR 323 as also by the Karnataka High Court in BPL Sanyo Finance Ltd. (2009) 312 ITR 63. We agree with the interpretation given by the Karnataka High Court in BPL Sanyo Finance Ltd. (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. (1991) 191 ITR 647 has been over ruled by the larger Bench of the Supreme Court in the case of Mrs. Grace Collis (2001) 248 ITR 323. 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 Ltd. it is not a case where the asset itself has been extinguished or destroyed. A share in a company is nothing but a share in the ownership of the company . While the right of the assessee to share in the ownership of the company BLB Ltd. stands extinguished on account of the forfeiture, the company, with all its assets, continues to exist. The forfeiture only results in one less shareholder. It is not as if the asset in which a share was being claimed was also extinguished. Thus, the second point urged by the learned counsel for the Revenue is also not tenable. In view of the foregoing reasons no substantial question lf law arises for our consideration.the appeal is dismissed.”
The further appeal filed by the Revenue in above case has also been dismissed by the Hon’ble High Court of Delhi in judgment dt. 14.10.2015 in ITA 782/2015, observing as under: “2. The question sought to be urged is whether the share warrants could be treated as a capital asset under Section 2(14) of the Act and disallowance of short term capital loss by the Assessing Officer (‘AO’) on account of forfeiture of share warrants could have been deleted by the ITAT? 3. In the impugned order, the ITAT has relied upon the judgment of this Corut in CIT Vs. Chand Ratan Bagri (2010) 329 ITR 356 (Del.) which holds that the share warrant is a capital asset. It is stated Revenue has not filed an appeal against the said judgment on account of the low tax effect. 4. Be that as it may, since the aforementioned judgment of this Court holds the field, no substantial question of law arises in this appeal.”
Since the identical issue of short-term capital loss on forfeiture of the share warrant is involved in the instant case, respectfully following the finding of the Tribunal in the case of Pavitra Commercial Limited (supra), which has been upheld by the Hon’ble Delhi High Court, the issue in dispute involved in ground No. 3 to 3.3 of the appeal is allowed in favour of the assessee. The grounds No. 1 and 2 of the appeal were not specifically pressed before us, and thus we are not adjudicating upon the same.
In the result, the appeal of the assessee is allowed. Order is pronounced in the open court on 26th April, 2019.