AXIS STEELS LTD.,KOLKATA vs. DCIT, CC-XXI, KOLKATA, KOLKATA

This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-Central-II, Kolkata dated 23.04.20114 Assessment was framed by DCIT, CC-XXI, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 28.03.2013 for assessment year 2010-11. Shri M. Satnaliwala, Ld. Authorized Representative appeared on behalf of assessee and Shri Sridhar Bhattacharya, Ld. Departmental Representative represented on behalf of Revenue.

The facts in brief are that assessee in the present case is a Limited Company and is also a Non-Banking Financial Company registered with Reserve Bank of India. The assessee acquired 50 lakhs share warrant of Electrosteel Castings Limited (ECL for short) from M/s Diwakar Commercials (P) Ltd. (MDCPL for short) on 24.03.2008 at a price of ₹ 76/- per share warrant. The price of share warrant of ₹76/- was inclusive of premium i.e. ₹75/- per share warrant. The assessee at the time of purchase of shares warrant was required to make 10% of the total payment of the share warrant and the balance amount was to be paid at the time of conversion of share warrant into equity shares. Therefore, assessee at the time of purchase paid ₹ 7.60 per share warrant being 10% of the total value of the price per share warrant. The gross price of share warrant at the time of conversion of share warrant was Rs. 35 per share warrant. Assessee chose not to make balance payment i.e. 90% total value of share warrants. As a result, the initial payment made by assessee was forfeited and loss of ₹3.80 crores was incurred by assessee which was claimed as Short Term Capital Loss (STCL for short). However, the AO disregarded the claim of assessee by observing that amount forfeited has not been offered to tax by ECL thus the loss as claimed by assessee was not allowed to be carried forward.

Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee submitted before Ld. CIT(A) that at the time of conversion of share warrant into equity share the price of the share of ECL was declined to ₹35/- per share. Therefore, the assessee abandoned the idea to purchase the shares warrant and accordingly the balance payment of the share warrant was not made. The assessee further submitted that the amount forfeited by ECL is in the nature of capital receipt and therefore the same cannot be taxable in the hands of ECL. Moreover, the assessee submitted that the tax treatment of the forfeited amount in the hands of ECL cannot be a deciding factor for the A.Y. 2010-11 Axis Steels Ltd. Vs. DCIT, CC-XXI, Kol. Page 3 disallowance of loss in the hands of assessee. However, Ld. CIT(A) has disregarded the plea of assessee and confirmed the order of AO by observing as under:- “5. I have considered the submission of the appellant and perused the assessment order. I have also gone through the documents filed by the appellant company. It is observed that M/s Electro Steel Castings Ltd. issued a warrant certificate to M/s Diwakar Commercials Pvt. Ltd. for fifty lakh warrants on 19.01.2008. The said warrants were purchased by the appellant company from M/s Diwakar Commercials Pvt. Ltd. and on 24.03.2008 the appellant company lodged the warrants with Elecro Steel Castings Ltd., for transfer of the same in the name of appellant company. As per the evidence submitted by the appellant company, M/s Electro Steel Castings Ltd., transferred the warrants in the name of appellant company on 24.03.2008 itself. However, surprising, M/s Electro Steel Castings Ltd., wrote a letter dated 19.06.2009 which was addressed to M/s Diwakar Commercials Pvt. Ltd., i.e. the original allottee for convertible share warrants in which M/s ECL requested Diwakar Commercials to make payment of balance 90% of the total consideration towards allotment of fifty lakhs convertible share warrants. Thus, the letter for payment of balance 90% consideration was issued by ECL to Diwakar Commercials and not to the appellant company though as per the warrant certificate the name of the appellant company was entered on 24.03.2008 itself. Further, M/s ECL issued a letter dated 21.07.2009 and that was also addressed to M/s Diwakar Commercial Pvt. Ltd., and not to the appellant company. In the said letter ECL informed Diwakar Commercials that since warrants were not converted into shares within 18 months from the date of allotment thereof, the initial payment of 10% is forfeited by the company and accordingly all fifty lakh convertible share warrants stands cancelled. From the above, it appears that all was not well with the transactions regarding claim of purchase of warrants by the appellant company. It is not known that if ECL already changed the name in the warrant certificate from Diwakr Commercial Pvt. Ltd., to Axis Steels Ltd. on 24.03.2008, as to why letters dated 19.06.2009 and 21.07.2009 were addressed to the original allottee for payment of balance consideration as well as forfeiture of 10% amount. In view of above, I am of the opinion that the loss of Rs.3.80 crore claimed by the appellant company did not appear to be a genuine loss. Hence, the action of the appellant company did not appear to be a genuine loss. Hence, the action of the AO making disallowance of loss claimed by the appellant company as well as denying of carry forward of loss is upheld. The Ground no. 1 & 2 are dismissed.”

Before us Ld. AR for the assessee filed paper book which is comprising pages 1 to 11 and he reiterated same submission as made before Ld. CIT(A).

We have heard rival contentions and perused the materials available on record. The issue in the instant case relates to disallowance made by the Assessing Officer on the ground that loss claimed by assessee has not been offered to tax by ECL. However Ld. CIT(A) also confirmed the order of AO but on different footings. The Ld. CIT(A) observed that ECL has written a letter to the original allottee i.e. MDCPL for the balance amount of payment i.e. 90% of the total consideration towards the allotment of 50 lakh convertible share warrants. Therefore the Ld. CIT(A) was of the view that loss claimed by assessee is bogus and accordingly, he disallowed the same. However on examination of the order of Authorities Below, we find that loss claimed by assessee as discussed above has been disallowed on different reasons. Firstly, the profit amount was not offered to tax by ECL. Secondly, the demand was raised by ECL to the original allottee of share warrant i.e. MDCPL by ECL. Admittedly, the loss incurred by assessee which was admitted by AO but the same was rejected on the ground that ECL has not offered to tax. Here, it is pertinent to note that what will be the tax treatment of the forfeited amount in the hands of ECL is not the concern of the AO whether it is taxable receipt or revenue receipt. The AO has to see the transactions and its effect in the hands of the assessee. Therefore, in our considered view, the tax treatment in the hands of ECL cannot be a deciding factor for the loss incurred and subsequently claimed by assessee. Therefore, the allegation framed by AO against the assessee is baseless and it was also seen that a notice was issued by the AO u/s 133(6) of the Act to ECL for the verification of loss incurred and claimed by assessee. The ECL in response thereto as clearly