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Income Tax Appellate Tribunal, DELHI BENCH “B”: NEW DELHI
Before: SHRI I.C.SUDHIR & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M.
These are the appeals filed by the assessee a. against the order dated 22.03.2010 of the ld CIT (A)-VI, New Delhi for the Assessment Year 2006-07 in Rs. 2 crores was not accepted as capital loss and further not allowing set up of short-term capital gain against such loss. It was further held that Page 2 of 17 short-term capital gain of Rs. 3978950/- on sale of shares as business income. b. Against the order dated 18.09.2013 of CIT(A)-VI, New Delhi against confirming the penalty of Rs. 673200000/- u/s 271(1)(c) of the Income Tax Act with respect to addition of Rs. 2 crores being loss on account of forfeiture of convertible warrants holding that assessee has furnished inaccurate particulars of its income.
The assessee has raised the following grounds in Assessment Year 2006-07:- “1. The Ld. CIT (Appeals) erred in holding that the loss on forfeiture of convertible warrants has been stage managed by the Appellant on the facts and circumstances of the case.
2. The Ld. CIT (Appeals) erred in coming to the conclusion that the loss suffered by the Appellant on account of forfeiture of warrants was not a genuine loss
3. The Ld. C I T(Appeals) erred in not allowing set off on account of forfeiture of convertible warrants against short term capital gains as also for not allowing carried forward on the facts and circumstances of the case.
4. The Ld. CIT (Appeals) erred in by-passing the decisions laid down before her during the course of assessment proceedings without caring for judicial discipline which requires every subordinate officer to follow the order of the superior authorities.
5. The Ld. CIT (Appeals) erred in treating the short term capital gain of Rs.39,78,950/- as business income of the Appellant on the facts and circumstances of the case.
6. The Ld. CIT (Appeals) has without any reason came to a conclusion that the nature of transactions entered into by the Appellant were on account of business and not for investment purpose on the facts and circumstances of the case.
7. The Ld. CIT (Appeals) did appreciate that the appellant was maintaining investment register but according to the Ld. CIT (Appeals), the treatment given in the books of accounts was not itself a deciding factor, although it may be a relevant factor.
8. The Ld. CIT (Appeals) failed to appreciate that the Appellant was not earring on any business of purchase and sale of shares and as such, the entire activity of the Appellant was in the nature of investment.
9. The Ld. CIT (Appeals) failed to appreciate that the Appellant had taken physical delivery of the shares. The shares have gone to D'mat account at the time of purchase and similarly payments had been received at the time of sale of shares and the shares had gone out of the D'mat account of the Appellant and as such the same Page 3 of 17 should have been treated as investment on the facts and circumstances of the case. 10. The authorities below have not brought any material on record to hold that the transactions entered into by the Appellant were in the nature of business transactions on the facts and circumstances of the case.” 3. The assessee has raised the following grounds in for the Assessment Year 2006-07:- “1. The Ld. CIT (Appeals) erred in confirming the penalty of Rs.67,32,00,000/- (Rupees sixty seven lacs thirty two thousand) imposed under section 271{l)(c) of the Act by the ACIT, Circle 3(1), on the facts and circumstances of the case.
2. The Ld. CIT (Appeals) erred in confirming the penalty under section 271(l)(c) of the Act even though the appellant had declared complete and true particulars in respect of the impugned transaction in the return of income, computation of income and financial statements annexed to the return of income on the basis of which penalty has been imposed.
3. The Ld. CIT (Appeals) erred in not appreciating that the claim of loss by the appellant would not per-se amount to furnishing of inaccurate particulars of income on the facts and circumstances of the case.
4. The Ld. CIT (Appeals) erred in not disposing off the following additional grounds of appeal raised vide letter dated 21.8.2013: i. On the facts and circumstances of the case the penalty order is bad in law in absence of specific charge of either concealment or furnishing of inaccurate particulars while initiating the penalty proceedings but vaguely stating "concealed the income/furnished inaccurate particulars''. ii. On the facts and circumstances of the penalty order is bad in law having initiated on account of routine printing notice without stating any specific charge.
5. The Ld. CIT (Appeals) erred in not following the principles of Judicial Discipline by ignoring the decision laid down by the Hon'ble Apex Court in its decision in the case of CIT Vs. Reliance Petro Private Limited report in 322 ITR 158 on the facts and circumstances of the case.”
4. First we take the appeal No. 2125/Del/2010 which is on the quantum proceedings. Brief facts of the case is that the assessee is an individual who filed its return of income on 31.10.2006 declaring an income of Rs 11646520/-. In the return of income assessee claimed loss on account of forfeiture of optionally convertible warrants of M/s. CNB Finwiz Ltd. The assessee is a director of this closely held company and in FY 2003-04 Page 4 of 17 assessee purchased two lakh warrants under a scheme formulated by the company paying a cheque of Rs. 2 crore on 29.11.2003. According to the terms of the scheme the assessee was also required to pay further sum of Rs. 2 crores between 15 to 18 months of the allotment, which assessee failed to pay and therefore, the warrants were forfeited by the company and hence, the assessee claimed the loss on such forfeiture. The ld Assessing Officer disallowed the same holding that the company in which investment was made is closely held company which is managed by assessee and its family and assessee with the sole intention to claim the capital loss set off against short term capital gain has stage managed the whole process which resulted into loss. Therefore, he disallowed the above capital loss.
The assessee claimed total short term capital gain of Rs. 3978950/- as profits on sale of shares which ld Assessing Officer has held that it is business income as assessee is engaged in the business of trading and investment of shares and securities and the shares were sold within short span of time without receiving the dividend.
6. Both the above issues were challenged by the assessee before the ld CIT(A). On the issue of capital loss , the order of the Ld was confirmed as it was decided looking at the close relationship between the company and the assessee and the nature of the transaction, the loss shown by the assessee is an artificial one. Therefore, he upheld the view of the Assessing Officer. On the issue of treatment of short term capital gain as business income he held that assessee has dealt in 14 scripts and the quantity of share purchases is 1083864 which were sold within a short span of time and there are frequent transactions of purchases and sales. It was further held that ld Assessing Officer has correctly treated the same as business income. Therefore these issues are contested by assessee in appeal before us.
Ground No 1, 2 and 4 are on the capital loss of Rs. 2 crores and the ld Authorised Representative Shri C. S. Agarwal, Sr. Advocate submitted a chronological events of the investment as under:- (a) It is an undisputed fact that, the assessee had applied for the convertible warrants, had been allotted 40 lacs warrants on Page 5 of 17 3.12.2003, and was allotted such warrants in terms of the letter of aforesaid allotment. (b) The assessee had made an actual physical payment, against the issue of said warrants of sum of Rs. 2,00,00,000/-on 03.12.2003. (c) The distinctive no. of such warrants was from 1 to 40 lacs. (d) The payment of the remaining amount on allotment could be made after 15 months (03.03.2005) and before 18 months (03.06.2005), so as to be entitled to an allotment of 10 equity shares against each warrant held by him. (e) since the assessee did not fulfill his obligation a request was made for an extension of term of 9 months as per the terms of the scheme. (f) On 05.05.2005 M/s CNB Finwiz Ltd. by Board's resolution dated 05.05.2005" extended the period of 9 months from 03.06.2005 till 02.03.2006 the exercise period. (g) Fresh warrants were accordingly issued in pursuance to the resolution passed by the Board of Directors. On 14.05.2005, M/s CNB Finwiz Ltd. sent intimation in respect of the issue of fresh certificate of convertible warrants (page 35-36). (h) On 02.12.2005, the Board of Director of M/s CNB Finwiz Ltd. had vide resolution passed in their meeting held on 02.12.2005 decided to call for the remaining payment of Rs. 2,00,00,000/- by way of first and final call and required the assessee to pay this first and final call @ Rs. 51- on each warrants on or before the 02.03.2006 (See page 34). (i) The assessee failed to fulfill his obligation of making the payment before 2n March 2006. Thus, the Board of Directors issued a letter dated 3rd March 2006 forfeiting the partly paid convertible warrants.
8. He also submitted that the date wise history as under:- S.No. Date Description i) 25/09/2003 Scheme of Issue of Convertible Warrant ii) 29/11/2003 Application for allotment with partial payment iii) 06/12/2003 Copy of Allotment letter Unpaid amount due on the date of Allotment Rs. 2,00,00,000/- so as to be entitled to 10 shares of Re. 11- iv) 16/03/2005 Request for extension of time for 9 months was made of the expiry. Period which was to expire after 1 5 months and before 1 8 months from the date of allotment. (Amount remaining unpaid Rs. 2,00,00,000/-)
Page 6 of 17 v) 05/05/2005 Time extended for a further period of 9 months w.e.f 03/06/2005 by resolution dated 5.05.2005 with exercise period starting from 03.12.2005 and ending of 02.03.2006 vi) 14/05/2005 Intimation from the company for issue of fresh certificate of convertible warrant in pursuance to the meeting held on 12.05.2005 vii) 02/12/2005 Intimation by the company to make payment of 1st and final call by 2nd March 2006 viii) 03.03.2006 Forfeiture of warrants and copy of resolution of Board of Directors dated 03.03.2006
9. On the basis of above he submitted that it cannot be said that the transactions are stage managed. He further referred the decision of the coordinate bench in in case of Investee Company wherein it has been held that allegations has not been substantiated of stage managing the transaction where the ld AO wanted to tax the above income in the hands of that company u/s 28(iv) of the act holding that it is not a capital receipt. The main allegation in that appeal was also of stage managing the transaction. He further submitted that in the hands of the investee company the total issue was for Rs. 5.75 crores where the assessee only invested Rs. 2 crores. Therefore ,he submitted that the issue is now squarely covered in favor of the assessee. On the issue of ld CIT(A) holding it as an artificial loss he submitted that for AY 2002-03 assessee has suffered similar loss of Rs. 59.50 lakhs on account of forfeiture of warrants and the ld Assessing Officer disallowed the same. The matter travelled up to the level of High Court, wherein the Hon’ble High Court held in favour of the assessee. He further submitted that the above loss which has been claimed by the assessee in subsequent years, has not been disturbed by the revenue, therefore his submission was that in earlier years Hon'ble High Court has decided the issue in favour of the assessee on identical facts and in subsequent years the revenue has not disturbed the return filed by the assessee up to AY 2014-15. Therefore, the loss on the merits as well as on the finding of the revenue itself in different years tilts the balance in favour of the assessee. He further submitted that the assessee is not a trader in shares but an investor and for this he submitted that since AY 2002-03 to 2006-07 the Page 7 of 17 assessee has kept on investing and disinvesting in the shares. It was further stated that in the past year also the Hon'ble High Court has approved that it is a capital loss.
The ld Departmental Representative on this issue submitted that as assessee and the company in which investment is made are controlled by the assessee and his family and therefore the capital loss incurred by the assessee is correctly held to be stage managed and artificial. He vehemently supported the orders of the lower authorities.
We have carefully considered the rival contentions. The issue is straight and simple whether loss incurred by the assessee on forfeiture of shares can be held to be capital loss or not looking at the relationship between investor and investee company. Firstly, we deal about the close link between the assessee and the company and whether there is any evidence that transaction is stage-managed or not. This issue has already been decided by the coordinate bench in vide order dated 13.12.2013. The coordinate bench has also considered about the company being managed by the assessee and his family and also the tax avoidance allegation levelled by revenue. The above issue has been discussed by the coordinate bench in para No. 3 to 13 of that order as under:-
“3. Apropos issue of deletion of addition of Rs. 5,75,00,000/- made on a/c of forfeiture of warrants. In this case the assessee is carrying on the business of purchase and sales of shares on its own account. Assessing Officer observed that the perusal of asstt. records and the Balance Sheet enclosed with the return reveals that the assessee co. has treated a sum of Rs. 5,75,00,000/- on a/c of Forfeiture of optionally convertible warrants as capital receipts; that the assessee company was incorporated in the year 2000; that during the financial year 2003- 04 the company sold warrants worth Rs.5,75,00,000/ under a scheme formulated by the Co.; that as per the scheme the investors were required to pay an initial amount and then subsequent amounts as per the calls by the company; that when the investors were unable to pay the amount called by the Co., the latter forfeited the optionally convertible warrants after giving a final show cause to them. 3.1 The assessee was show caused as to why gain on account of forfeiture of warrants not be treated as your business profit within Page 8 of 17 the meaning of section 28(iv) of the Act. Assessee responded as under:- "The amount of Rs 5,75,00,000/- was received by the Co. for convertible warrants which was forfeited for non fulfillment of the commitment made by the subscribers. It is respectfully submitted that the same does not become the income of the co. on the facts of the case, in terms of section 28 of the I.T. Act, 1961. There are always instances, where 'call money' is not paid by the subscribers to the public issue, even after repeated reminders of the co. and eventually the partly paid up amount of the shares subscribed by the shareholders is forfeited by the Co. But the same does not become the income of the co. in term of section 28 of the Act. Similarly premium paid on shares is also not the income of the Co." 3.2 The Assessing Officer was not convinced by the above reply. He observed that the assessee has treated the amount on account of forfeiture of warrants as capital receipts while the investors have shown artificial loss on forfeiture of warrants as short term capital loss. In this regard, the Assessing Officer observed as under:- "It needs to be mentioned here that these investors are the following two parties:- Mr. C. R. Bagri who is the Managing Director of M/s CNB Finwiz Ltd. and is also major share holder in this company. M/s BLB Ltd. which is one of the associated concerns of the assessee Co. Further, this company is a closely held company and its affairs are managed by Mr. C.R. Bagri and his family. There is hardly any share holding /stake in this co. of any outside party. In such a situation it is not at all difficult for the assessee to stage-manage the whole process resulting in an artificial and fictional loss shown by Sh. C.R. Bagri in his return. Thus in a way the whole affairs are manipulated in such a way that there is a capital loss in the hands of Mr. C.R. Bagri which has been set off with the short term capital gain on sale of shares for the year under consideration and on the other hand the co. after forfeiting the warrants has treated it as capital receipt and therefore its financial needs are also met. Thus it is a clear case of tax avoidance whereby the assessee used the colorable device in the nature of stage- managed transaction on a/c of issue of warrants, payment of part called up money and later forfeiture of warrants on nonpayment of remaining amount. In the case of tax avoidance, the tax payer apparently circumvents the law, without giving rise to a criminal offence, by the use of a scheme, arrangement or Page 9 of 17 device, often of a complex nature but where the main purpose is to defer, reduce or completely avoid the tax payable under the law." 3.3 Further, the Assessing Officer referred to the decision of the Hon'ble Apex Court in the case of McDowell & Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC) and CIT vs. Indian Express Newspapers (Madhurai) P Ltd. (1999) 238 ITR 70; decision of the Hon'ble Apex Court in the case of Workmen of Associated Rubber Industry Ltd. vs. Associated Rubber Industry Ltd. (1986) 157 ITR 77. The Hon'ble Jurisdictional High Court in the case K. Ramasamy vs. CIT (2003) 162 ITR 358. The Assessing Officer concluded that a sum of Rs. 5,75,00,000/- shown by the assessee as capital receipt is taxable in its hands as per the provisions of section 28(iv) of the I.T. Act, 1961. Assessing Officer held that since this is a benefit accruing to the assessee on a/c of carrying on of the business or arising from business. Hence, Rs. 5,75,00,000/- was added to the total income of the assessee on protective basis.
Upon assessee's appeal Ld. CIT(A) elaborately considered the issue. He held that he was strongly inclined to come to the conclusion that the payment of Rs. 5.75 crores shown as amount forfeited on account of non payment towards issue of convertible warrants cannot be treated as a revenue receipt in the hands of the assessee. He further held that provision of section 28(iv) of the Act are also not attracted as the receipts were not in the nature of perquisites, but were actually monetary receipts. He further observed that though the Assessing Officer has attempted to make a case for tax avoidance and planning, no substantive evidence, or argument is available on the basis of which the arguments of the Assessing Officer could be accepted. Ld. CIT(A) concluded as under:- "Since the basic fact of the nature of the receipt has also not been disputed by the Assessing Officer, I do not find any reason to uphold the argument of the Assessing Officer that this amount should be treated as a revenue receipt even though it has been shown as capital receipt. I am supported by several judicial pronouncements as also referred to by the AR of the appellant in his arguments stated above. Accordingly the Assessing Officer is directed to delete this addition of Rs.5.75 crores, as the same cannot be treated as a revenue receipt and income of the appellant. These grounds are therefore treated as allowed."
5. Against the above order the Revenue is in appeal before us.
We have heard both the counsel and perused the records. Ld. Departmental Representative relied upon the order of the Assessing Officer. Ld. Counsel of the assessee submitted that the aforesaid amount received on the issue of optionally convertible warrants Page 10 of 17 undisputedly is a capital receipt and the character of such receipt on forfeiture on account of the non exercise of the option to convert the warrant to equity shares could not change the character of receipt; that the same reflected in the books under the head 'capital reserve' and this fact has also been referred by the Auditors in their Report. He submitted that Assessing Officer in his order has added the aforesaid sum of Rs. 5,75,00,000/- by invoking the provisions of section 28(iv) of the I.T. Act by holding that the same is colorable device. He submitted that the Assessing Officer has failed to look into the transaction and his attempt though unsupported by any material "to look through" the transaction is also contrary to law laid down by the Hon'ble Apex Court in the case of Vodafone international Holdings BV vs. Union of India 341 ITR 129. He further submitted that there is no material for the Assessing Officer to hold that the transaction by the assessee is a colorable device. In this regard, Ld. Counsel of the assessee placed decision of the Hon'ble Apex Court in the case of Azadi Bachao Andolan vs. UOI 263 ITR 706. 6.1 The Ld. Counsel of the assessee further submitted that the Assessing Officer has invoked the provision of section 28(iv) of the I.T. Act. He submitted that such section is not applicable in this case. He also submitted that the aforesaid provision is applicable in respect of the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession. He submitted that in the instant case the amount forfeited is not on account of exercise of the business or profession but is towards the issue of the share capital and is a capital receipt. He further submitted that the main reason why the provisions of section 28(iv) would not be applicable to the instant case is that the benefit did not arise to the assessee on its revenue account. He further submitted that even according to the general commercial principles and various decisions of different courts, the amount received on account of capital receipts cannot be taxed under section 28(iv) of the Act. For the purpose of applicability of section 28(iv), the benefit or perquisite must relate to the revenue account of the assessee. In this regard, Ld. Counsel of the assessee placed reliance on the several case laws as under- - CIT vs. Chand Ratan Bagri reported in 36 DTR 244 (Del.) ITA NO. 3756/Del/2010 - Sunita Gupta Share Borkers Limited vs. ACIT in ITA No. 4188/Del/2010 vide order dated 7.12.2011. - Empire Jute Co. Ltd. vs. CIT 124 ITR 1 - TI Diamond Chain Ltd. vs. CIT reported in 151 Taxman 69. - Privy Council in Ralli Estates Ltd. vs. CIT (1961) 1 WLR 329 (PC).
Page 11 of 17 7. We have carefully considered the submissions and perused the records. In this case it is undisputed that the amount of Rs. 5,75,00,000/- had been received by the assessee on account of forfeiture of optionally convertible warrants which had been shown as capital receipts by the assessee. The company had sold warrants during the financial year 2003-04 on account of which the initial amount of Rs. 5.75 crores had been received by the company and since the investors were unable to pay the subsequent amounts, the assessee company forfeited the optionally convertible warrants after giving a final show cause to them. The Assessing Officer had provided opportunity to the assessee to explain as to why the gain on account of forfeiture of warrants should not be treated as a business profit under section 28(iv) of the I.T. Act. The Assessing Officer has highlighted that two investors who had paid the amount of Rs. 5.75 crores were Mr. CR Bagri, who was the Managing Director of the assessee company and M/s BLB Limited which is one of the associated concerns of the assessee company. It was highlighted by the Assessing Officer that the loss on account of this forfeiture had resulted in a gain to the two investors i.e. Sh. CR Bagri and M/s BLB Limited. Accordingly, the Assessing Officer came to the conclusion that this amount of Rs. 5.75 crores should be treated as income of the assessee.
The Assessing Officer has also invoked the provision of section 28(iv) of the I.T. Act. We find that section 28(iv) provides that following amount shall be chargeable to income tax under the head profit and gains of business or profession, "the value of any benefit or perquisite convertible into money or not arising from business or the exercise of a profession". We fail to understand as to how section 28(iv) is applicable on the facts of the case. Section 28(iv) covers only the value of any benefit or perquisite and not any cash benefit, which is the case in the present context. In our considered opinion, Assessing Officer could not resort to this provision as the receipt was of capital nature. Hence, we hold that this section cannot be applied for taxing this amount.
We further find that it is not clear as to how the receipt on account of forfeiture of warrants has been treated as a business transaction on the basis of which the amount has been treated as business income. It is undisputed that the amount received by the assessee was on account of part payment of convertible warrants. From the nature of the receipt it is abundantly clear that the amount which has been received is in the nature of capital receipts.
10. Several judicial pronouncements were relied upon by the Ld. Counsel of the assessee and the Ld. CIT(A) for the proposition that receipt on account of forfeiture has to be considered only as a capital receipt:
Page 12 of 17 - CIT vs. Chand Ratan Bagri reported in 36 DTR 244 (Del.) - Sunita Gupta Share Borkers Limited vs. ACIT in vide order dated 7.12.2011. - Empire Jute Co. Ltd. vs. CIT 124 ITR 1 - TI Diamond Chain Ltd. vs. CIT reported in 151 Taxman 69. - Privy Council in Ralli Estates Ltd. vs. CIT (1961) 1 WLR 329 (PC). - ACIT vs. Om Oils Seeds Exchange Ltd. 152 ITR 552, - Asiatic Oxygen vs. DCIT 49 ITD 359 - Mahindra and Mahindra vs. CIT 265 ITR 501 11. The above case laws amply support the proposition that amount received as a capital receipt toward financial instruments like warrants, share capital etc. cannot be treated as business receipts. Since the assessee company is not in the business of selling of shares. It has been held in the judicial pronouncements that in the case of any such forfeiture made, the same cannot be taxed as a revenue receipt if this amount has been transferred to the capital reserve account in the balance sheet. In the present set of facts it is observed that the various facts related to issue of warrant part payment of the amounts by the investors, notice for forfeiture etc. have not been disputed by the Assessing Officer. The basic nature of the transaction relates to raising of capital through convertible warrants. The amount forfeited on account of non payment of subsequent amounts cannot be treated as a business income of the assessee in view of the various judicial pronouncements as well as the basic nature of the receipt. Thus, we hold that amount received on account of forfeiture of amount due to non payment towards warrants issue has to be treated as capital receipt and since the assessee has also transferred it to the capital reserve account in the balance sheet, the amount cannot be taxed as income of the relevant financial year.
12. We further find that Assessing Officer has made allegation of tax avoidance and evasion on the part of the assessee company. This is on account of the fact that two investors viz. Sh. CR Bagri and M/s BLB Limited were closely related to the assessee company. Ld. Counsel of the assessee has submitted before the Ld. CIT(A) that this allegation of the Assessing Officer is not correct. Since in the case of M/s BLB Ltd. the total amount has been declared as income and no benefit has been derived out of this forfeiture. The short term capital gain or loss depends upon vagaries of the market and the allegation of the Assessing Officer that tax planning could be done on the basis of such vagaries does not appear to be logical. Thus, we find that tax avoidance/ tax evasion has not been Page 13 of 17 substantiated by the Assessing Officer in terms of who has avoided the tax and in what manner. In any case, there is no evidence whatsoever that assessee company has resorted to any tax avoidance to make any clandestine gain.
13. We further find that Assessing Officer has observed in the assessment order that this addition should be treated as protective in nature. It is also not clear as to what was the reason for treating this amount as protective. Ld. Departmental Representative also could not throw any light on this aspect. It solely indicates that Assessing Officer was not certain about the nature of these receipts. Thus, we come to the conclusion that the nature of receipt in this case if Rs. 5.75 crore has clearly been established as being the capital receipt. The provision of Income Tax Act does not provide for taxation of such capital receipt, even if it is forfeiture of amount. Accordingly, in the background of the aforesaid discussions and precedents, we do not find any infirmity in the order of the Ld. CIT(A). Accordingly, we uphold the same.”
Further in the appellant’s own case for the AY 2002-03 the Hon'ble High Court has decided the issue in favour of the assessee, where also the allegation of tax evasion tactics was mentioned by the revenue. The Hon'ble High Court vide order dated 20.01.2010 in has decided the issue against revenue and in favour of the assessee. Therefore, Hon'ble High Court rejected the contention of the revenue of tax evasion as well as the claim of the revenue that it is not a capital loss.
Further during the course of hearing on a query by the bench whether there is any change in the share holding of the investing company prior to forfeiture and post forfeiture it was submitted that there is no change in the share holding. From this it is clear that the benefit of forfeiture is not going to other parties but the original shareholders only.
In view of the decision of the coordinate bench in case of Investee Company, the decision of Hon'ble High Court in assessee’s own case in earlier years on similar circumstances in favour of the assessee, the treatment given by the revenue of the impugned loss claimed by the assessee in return of income for subsequent years remaining undisturbed, in absence of any change in shareholding of the investee company prior to and post forfeiture and in absence of any contrary evidence placed by revenue of stage managing transactions we are not inclined to agree with the views of the revenue. Further, the Hon'ble Page 14 of 17 High Court also covers the issue in favour of the assessee regarding whether the loss incurred by the assessee is a capital loss or revenue loss. Over and above, the investment shown by the assessee for AY 2002-03 from Rs. 4.77 crores to Rs. 6.72 crores for AY 2006-07 and consistent treatment regarding the past history of the assessee wherein no business has been carried on by the assessee in purchase and sale of shares, which has not been disputed by the revenue. It is clear that loss incurred by the assessee is a genuine capital loss not business loss. Therefore, we hold that the loss of Rs. 2 crores incurred by the assessee on account of forfeiture of the optionally convertible warrants is a capital loss in the hands of the assessee. In the result ground Nos. 1, 2 and 4 of the appeal of the assessee is allowed.
Grounds Nos. 5 to 10 of the appeal of the assessee were against treatment of short term capital gain earned by the assessee of Rs. 3978950/- as business income.
On this issue the ld AR submitted that the assessee can help two portfolios one as an investor and another as a trader and further, submitted that in the past year the assessee was considered as an investor in shares. He further submitted that:- (a) The actual delivery was taken at the time of purchase of shares. (b) Actual payment was made in respect of each of the purchase of share. (c) The shares were credited to the Demat account of the assessee and delivery of shares was received. (d) The actual delivery was given at the time of sale of shares. (e) Actual payment was received in respect of the each of the sale of shares. (f) The shares were debited to Demat account of the assessee when the delivery was given. (g) Investment Register was maintained by the assessee which was produces, (h) The appellant was not carrying on the trading of shares as well, (i) The appellant has paid STT on sale of shares and thus qualified as "short term capital gains" in terms of section 111A of Income Tax Act.
He further referred to the past history of the assessee and submitted that in AY 2002-03 the case of the assessee is covered by the decision of Page 15 of 17 Hon'ble High Court where it has been held that the assessee has incurred capital loss. In AY 2003-04 the assessee has incurred further capital loss which has not been disputed. Further AY 2004-05 and 2005-06 the assessee has not dealt with in any shares and in the impugned assessment year the revenue has racked up the issue.
The ld DR relied upon the order of the lower authorities.
We have carefully considered the rival contentions and not that assessee is an individual who has earned substantial sum as interest income and non compete fees for the year. In fact that is the only income earned by the assessee over and above bank interest. During the year the assessee has earned dividend of income of Rs. 60895/- and has also shown investment loss of Rs. 16021050/-. The assessee has also shown investment in the shares which are in sixteen companies and during the year has sold the shares of Reliance Group which are on demerger of the company. The assessee has further sold shares of 10 companies during the year as well as has purchased and sold mutual funds. The fact is not disputed by the assessee that assessee has not sold these shares after taking actual delivery and transferring them into his demat account. On the perusal of the balance sheet of the assessee it is found that assessee has its own capital of Rs. 24 crores and there are no borrowings. Whereas in the investment in the shares is Rs. 4.73 crores. Therefore it shows that there is no borrowing made by the assessee. in the tax audit report the nature of business of the assessee is shown to be earning of non compete fees and further the assessee has submitted the assessment history of the assessee till to date where the assessee has earned long term and short term capital gain in each of the year, however the revenue has accepted the claim of the assessee without disturbing it. Further in the past year the claim of the assessee is tabulated as under:-
SI. Financial Assessment Value of Short Term Long Term Treatment by No. Year Year investment on Capital Capital Assessing opening dates Gain/Loss Gain/Loss Officer 1 2001-02 2002-03 47758809.25 (5950000.00) (173851.00) Loss of Rs. 5950000/- disallowed, but allowed by Page 16 of 17 the high court 2 2002-03 2003-04 32434909.50 (13314352.00 ) 3 2003-04 2004-05 39722933.50 N.A. 4 2004-05 2005-06 60721933.50 N.A. 5 2005-06 2006-07 67221933.50 (16021050.43 (278137.00) Loss of Rs. 2 ) Crore disallowed and remaining profit of Rs. 3978950 treated as business income.