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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI SANJAY ARORA, AM & SHRI PAWAN SINGH, JM
O R D E R Per Sanjay Arora, A. M.: The instant appeal by the Assessee agitates the revision u/s. 263 of the Income Tax Act, 1961 (‘the Act’ hereinafter) dated 31.3.2014 by the Commissioner of Income Tax-8, Mumbai (‘CIT’ for short) qua its assessment u/s. 143(3) dated 01.12.2011 for the assessment year (A.Y.) 2009-10.
The basis of the revision in the present case is the acceptance by the Assessing Officer (A.O.) of the assessee’s claim for short term capital gain (STCG) on the non- exercise of the option to subscribe to the (equity) share capital in Sintex Industries
(A.Y. 2009-10) Kolon Investment Pvt. Ltd. vs. CIT Ltd. (SIL) at the offered price of Rs.454.74 per share, including share premium of Rs.452.74 per share. Share warrants, 66 lacs in number, were subscribed to by the assessee-company in SIL on 18.1.2008 by making a payment of Rs.3001.284 lacs, being 10% of the value of same number of shares at the subscription price of Rs.454.74 per share. The assessee, however, subscribed to only 13.44 lac shares, paying the balance 90% share price. The amount of Rs.23,89,90,320/-, i.e., corresponding to the balance 52.56 (i.e., 66 – 13.44) lac shares was decided not to be subscribed to in view of the decline in the share price of SIL and, accordingly, written off by the assessee in its accounts and claimed as short-term capital loss (STCL) per its return of income for the relevant year. The assessee substantiated its claim in assessment by filing the relevant details, including in respect of the share price of SIL as on 31.3.2009; the write off – as it appears, being in March, 2009 (Schedule 8, Notes to Accounts/PB page 40). Extract of final accounts of SIL was also furnished to exhibit that the amount forfeited, which included that in respect of another party – Opel Securities Private Limited – who had been similarly allotted share warrants, was credited by it to capital reserve account. And, further, that the 10% amount paid was in terms of the SEBI guidelines in the matter. The ld. CIT was of the view that, even so, the claim was not examined from the stand point of the loss being a short-term capital loss. The same, in his view, was merely a capital loss, the amount represented by share warrants being only in the nature of advance to be adjusted against the price payable on the purchase of shares. The right that inures to the assessee is only to subscribe to the shares (at a price), within a defined period of time, so that it gets lapsed on the expiry of the stipulated period. The share warrant, thus, is only a long- term option, and the amount paid therefor in the nature of an option premium. Further still, the contract being settled otherwise than by delivery of the underlying asset, i.e., the shares in SIL, the transaction is a speculative transaction and the option premium paid and lost, a speculative loss, which could be set off against speculative income,
(A.Y. 2009-10) Kolon Investment Pvt. Ltd. vs. CIT directing the AO accordingly. Aggrieved, the assessee is in appeal, raising both jurisdictional as well as legal issues.
We have heard the parties, and perused the material on record. 3.1 The assessee’s case has two limbs to it. Firstly, that the impugned claim was accepted by the AO in the assessment proceedings after due verification, and that therefore his order cannot be regarded as erroneous and prejudicial to the interest of the Revenue, so as to warrant a revision u/s. 263. On merits, its’ case is that the share warrant is a capital asset, which stands extinguished on the non-exercise of the option. An extinguishment of a right is a transfer within the meaning of section 2(47) of the Act. The loss arising is thus a short-term capital loss (STCL), as claimed, and as allowed by the AO. Before us, the thrust of the assessee’s arguments was on the same lines, i.e., of the share warrant being a capital asset, and its extinguishment, thus, a transfer resulting in a capital gain or, as the case may be, loss.
3.2 We, after giving a careful consideration to the matter, are of the view that the assessee’s claim is not maintainable, and for more than one reason. To begin with, we may though clarify that the right to exercise the option at a price, and during the particular period, is without doubt a ‘capital asset’, which stands very broadly defined u/s. 2(14) of the Act to mean any property – barring some specified exceptions, held by the assessee. This, we may add, would be so even where the share warrant is not transferable and, thus, no more than an advance (non-assignable), toward subscription of a share, as contended by the ld. CIT. The only difference in that case would be that being non-transferable, loss on its forfeiture would be a loss of capital, or a capital loss (refer: Hasimara Industries Ltd. vs. CIT [1998] 230 ITR 927 (SC)).
3.3 Our first reason for holding the loss to be not a STCL, is that there has been no extinguishment of the right (or option) as on 31.3.2009. The right to acquire the shares (capital asset), a capital asset itself, would lapse by time or expire only on 17.7.2009
(A.Y. 2009-10) Kolon Investment Pvt. Ltd. vs. CIT (day-end), and not earlier. The loss booked by the assessee, stated to be in view of the loss in the value of the SIL shares – the capital asset to be acquired, and the consequent loss of value of the corresponding share warrants (the right or the option attached therewith) is thus only on account of a fall in its value. That is, from whatever value that may have been perceived by the assessee initially when the value of the SIL shares was higher. There is no expiry or extinguishment of the right and, therefore, no transfer, by 31.3.2009. There is, we may emphasize no forfeiture of the amount paid during the current year. The impugned loss, which can in fact also be said to be notional in-as-much as it is neither contractual nor incurred, but anticipated, i.e., where the share price of SIL does not recover by 17.7.2009, is on account of its valuation (i.e., of the share warrant) and, thus, a capital loss.
3.4 The second reason for so holding is that the loss, even on the expiry of the right - which would only be on 18.7.2009, i.e., on the expiry of the stipulated 18 month period over which the right/option could be exercised - and, thus, falls in the following year only, is in the nature of a capital loss. The reason is simple. The asset is a right conferred by a contract, which extends to a particular period. That is, the right, which is regarded as a capital asset, is itself defined to exist over a prescribed period, so that it ceases to exist on its lapse. Put differently, is a capital asset only for such period of time, and no further. There is as such no question of it’s transfer after 17.7.2009, by which date it could be either exercised or transferred in-as-much as an asset can be transferred only during its subsistence. What we wish to emphasize is the essential difference between the existence of the right or of it being a capital asset – by definition – over a limited period, i.e., from 18.1.2008 to 17.7.2009, after which it can no longer be regarded as a capital asset due to the limited period for which the right was conferred and its’ extinguishment per se. The extinguishment of a right in a capital asset, on the other hand, would be where the right gets destroyed or annihilated, as by the act of God or law or by the action of third party. Reference in (A.Y. 2009-10) Kolon Investment Pvt. Ltd. vs. CIT this context may be made to the definition of the word ‘extinguishment’ in P. Ramanatha Aiyar’s – The Law Lexicon – 3rd Edition 2012, reads as under:
‘Extinguishment: The extinction or annihilation, of a right, estate, etc., by means of its being merged in, or consolidated with another, generally a greater or more extensive, right or estate. Wherever a right, title or interest is destroyed, or taken away the act of God, operation of law, or act of the party this in many books is called an extinguishment. (Co. Lit. 147 b. Ro. Abr. 933).’ Here, however, is a case of self destruction of the ‘right’ as it were; the right lapsing on account of its’ non-exercise or non-transfer, i.e., by the unilateral act of the subscriber (right holder), over the period for which the right exists or is contracted to subsist. It is in this respect, i.e., on its’ non-transfer, no different than an advance which could be set off only against the cost of the asset for the purchase of which it was given. The loss, thus, is a loss of capital, or a capital loss. Our third reason for regarding it as so is by viewing the amount paid as an option premium. The subscriber, as the assessee, is, at the commencement of the contract, aware that in the event of it failing to subscribe to the shares within the contracted period, it stands to loose the amount paid, which could be adjusted only against the value of the shares to be subscribed. So considered, the amount bears, apart from the nature of an advance, a cost for acquiring the right, i.e., in the event of the shares being not subscribed to/the exercise of the right. We have already held the right (or option) to be a capital asset which, thus, is at cost. The loss in value (of its’ purchase cost) on the lapse of the right, thus, represents only a loss of value – a capital loss, i.e., represents a sunk cost, being not accompanied by creation of any fresh rights.
3.5 We may further, by way of abundant clarification, also state that the Reasons 2 & 3 deliberate the nature of the loss arising while Reason 1 is with regard to as to why the same cannot be considered as having been incurred and, thus, not arising during the current year. Needless to add, the loss in any case, would arise only in the (A.Y. 2009-10) Kolon Investment Pvt. Ltd. vs. CIT immediately succeeding year. Further, Reasons 2 & 3, which emphasize the absence of the element of ‘transfer’ in the instant case – the right being conceived for a defined period of time only, so that it is a sunk cost thereafter, are without prejudice to Reason 1, which disqualifies the assessee’s claim on the ground of the impugned loss being not incurred or sustained during the current year, ousting the same at the threshold.
We having travelled directly to the merits of the case, are conscious of the assessee’s Gd. No. 1, agitating the jurisdictional aspect. There is no whisper of this aspect, i.e., of the assessee subscribing to the share warrants or of providing for loss by writing off the amount paid, in the assessment order. Even no material was led before us during hearing to show its’ consideration during the assessment proceedings. The details in its respect called for during the assessment proceedings, which were adverted to during hearing, are towards the payment of the sum as well as the reason for not subscribing to the shares, i.e., qua the quantification and the genuineness of the loss, over which there is no dispute, and neither are the same the subject matter of this appeal, which is qua the nature of the loss arising on the non- exercise or non-trading of the right, if any, arising to the assessee during the current year. The revision stands made by alleging non-verification of the assessee’s claim of STCL by the assessing authority qua which we observe no inquiry or application of mind whatsoever by him. That lack of enquiry, where warranted, gives rise to revision is a part of well settled law. The Hon’ble Apex Court in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) has laid down a four-way test toward an order being erroneous. Succinctly put, these are: incorrect assumption of facts; incorrect application of law; without applying the principles of natural justice; and without application of mind. It is the fourth category which arises in the instant case, and with which we are therefore concerned with. The law in the matter is well-settled and the case law, legion, and toward which the ld. CIT has himself referred to some decisions, viz. CIT vs. Bhagwan Das [2005] 272 ITR 367 (All) and P. T. Lashkari Ram vs. CIT
(A.Y. 2009-10) Kolon Investment Pvt. Ltd. vs. CIT [2005] 272 ITR 309 (All); and Ashok Leyland Ltd. vs. CIT [2003] 260 ITR 599 (Mad). No wonder, the thrust of the assessee’s arguments before us, as afore-stated, was on the merits of the case. We are also conscious that while we have held the impugned loss to be a capital loss, the ld. CIT has regarded it as a speculative loss. We disapprove of the same in-as-much as there is no settlement of the contract, much less during the current year, and despite the assessee’s unilateral action in writing off the impugned sum, SIL is contractually bound to honour its’ obligation were the assessee to subscribe to its’ shares by 17/7/2009. It is the correct legal position that is relevant, and not the view that the parties may take of their rights in the matter [CIT v. C. Parakh & Co. (India ) Ltd. (1956) 29 ITR 661 (SC); Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC)]. Further, lest we be considered as having travelled outside the scope of this appeal, we may advert to the decisions, inter alia, in the case of Kapurchand Shrimal v. CIT [1981] 131 ITR 451 (SC) and Ahmedabad Electricity Co. Ltd. v. CIT [1993] 199 ITR 351 (Bom)(FB).
We decide accordingly (refer paras 3.1 through 3.5, and 4).
In the result, the assessee’s appeal is dismissed. प�रणामतः �नधा�रती क� अपील खा�रज क� जाती है ।
Order pronounced in the open court on August 23, 2016