Delhi H.C : Whether the Tribunal is correct in law in directing the AO to allow deduction of the losses @ Rs. 111 per NCD as business loss?

High Court Of Delhi

CIT vs. Abhinandan Investment Ltd. & Ors.

Sections 28(i), 260A

Asst. Year 1995-96

Arijit Pasayat, C.J. & D.K. Jain, J.

IT Appeal No. 25 of 2001

8th October, 2001

Counsel Appeared

Ms. Prem Lata Bansal with R.C. Pandey, for the Petitioner : J.D. Mistri with R.B. Hathikhanvala, for the

Respondent

JUDGMENT

ARIJIT PASAYAT, C.J. :

All these five appeals under s. 260A of the IT Act, 1961 (in short the Act) are interlinked and in fact arise out of a common judgment of the Income-tax Appellate Tribunal, Delhi Bench-D (in short, the Tribunal). The assessment year involved is 1995-96.

The following question have been posed for adjudication : (a) Whether the Tribunal is correct in law in directing the AO to allow deduction of the losses @ Rs. 111 per NCD as business loss? (b) Whether the Tribunal was correct in holding that the assessee-company sold the NCDs to UTI, as a consideration UTI paid Rs. 389 per debenture to JISCO and in turn the assessee transferred the NCDs in the name of UTI? (c) Whether the NCDs were subscribed by the assessee-company as stock-in-trade or capital investment? (d) Whether the NCDs held by the assessee-company were as stock-in-trade so as to entitle it to claim the loss as business loss? (e) Whether the amount of Rs. 111 per NCD amounts to forfeiture of capital or is to be treated as business loss? (f) Whether the order of the Tribunal is perverse on facts and in law?

2. Factual background common to all five appeals are essentially as follows. During the assessment year in question, each of the assessee-respondents came up with a private placement of its preferential shares and also subscribed to the right issue of non-convertible debentures (in short NCD) of Jindal Iron and Steel Co. (in short JISCO). The assessee also subscribed to the equity issue of Jindal Vijay Nagar Steel Ltd. (in short, JDSL), a new company of the Jindal group floated during February, 1995. During the relevant period, JISCO came up with a right issue of 10.5 per cent redeemable NCD with a detachable warrant for cash at par. The face value of NCD was Rs. 500 and it carried a detachable warrant (in short (DW) which entitled the holder to apply for one equity share of JISCO with a face value of Rs. 10 at a premium of Rs. 190 per share. The DW which was post-dated gave right, whereby the holder could buy one JISCO share @ Rs. 200 at a time to be determined by JISCO but not later than sixty months. The DWs were to be listed and traded separately. The application money for this right issue was Rs.

111 per NCD and the allotment money was Rs. 389 per NCD. The rights NCD issued opened on 11th Nov., 1994. JISCO made certain arrangements with Units Trust of India (in short UTI) in July, 1994, which were accepted by the latter in September, 1994. As per the arrangement, the allottee of the NCD could surrender the NCD to UTI who would pay the allotment money of Rs. 389 and secure the NCD while the DWs would remain with the

applicant. It was noticed by the AO that this arrangement with UTI was made only for the promoters. All the assessee-companies availed of this arrangement. In return the assessee-companies claimed Rs. 111 as cost of the debenture. On 25th March, 1995, they sold two-thirds of their DWs at the rate of Rs. 20 per DW and the difference of Rs. 91 per DW was booked as a short-term capital loss. The losses claimed by the assesseecompanies were as follows :

The assessees’ claim was that Rs. 111 paid as application money for NCD represented cost of DW and since the DW was transferred at a price of Rs. 20 the difference of Rs. 91 per DW was the loss suffered by the assessee. The AO indicated that the actual cost of warrant was nil. To this, the assessees’ stand was that s. 55(2)(aa) has come into operation w.e.f. 1st April, 1996 only, and therefore, there was no adverse inference available to be drawn. Assessee pointed out that the salient feature of the right issue of NCD, as approved by SEBI, were as under :

(a) Each debenture will be of face value of Rs. 500 each. (b) Every residential shareholder will pay a sum of Rs.

111 per debenture on making application and balance of Rs. 389 per NCD was payable on allotment. (c) For non- residence/FI’s NR renounces will contribute a sum of Rs. 500 each debenture on application. (d) If the company does not receive the minimum subscription of about 90 percent of the issue of NCD within sixty days from the closure of the issue the company shall refund the entire subscription amount received. (e) NCD with DW was offered to existing shareholders of the company whose name appeared in the register of a company on 31st Oct.,

1994. (f) 23 debentures of every 100 equity share held on 31st Oct., 1994, was to be issued. The shareholding pattern of the JISCO as on 12th Aug., 1994 was as under : Promoters 30.9 per cent Financial institutions 14.4 per cent Mutual funds 2.32 per cent NRIs 6.46 per cent Banks 2.14 per cent Foreign institutional investors 2.88 per cent Public 40.43 per cent 100 per cent

The AO did not accept the claim of the assessee and held that JISCO had given loan to some Bombay based companies. All those companies have invested in the private placement of preference shares of the five assessee- companies. He was, therefore, of the view that it was JISCO’s fund which was used in subscribing in DWs. He further observed that all the five assesseecompanies were not acting in their own capacity or taking market- oriented decisions. These were merely acting on behalf of JISCO. It was further observed that the funds came from JISCO which flowed back to JISCO in the shape of application money for NCDs. Thus, these five assessee- companies were merely conduits in the transaction and, therefore, the loss claimed by them was not allowable. He relied upon the case of McDowell & Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC). While disallowing the claim of loss made by the assessee-companies. The AO further observed that the agreement between JISCO and UTI was for the benefit of the promoter company only; there was no reference to this arrangement in the letter of offer though the arrangement with UTI was already reached before the offer dt. 12th Nov., 1994; the five assessee-companies endorsed the allotment letter issued in their names in favour of UTI, the UTI paid the allotment money, there was no agreement between the UTI and the assessee-companies for making the payment of allotment money on their behalf, the arrangement was between JISCO and, therefore, UTI and the assessee-companies could not take benefit of such arrangement. The AO was thus of the view that the assessee- companies were mere namelenders and it was a case of pre-determined exercise and, therefore, the loss claimed, by the assessee-companies was not genuine.

The matter was challenged in appeals before the Commissioner of Income-tax (Appeals) [in short, the CIT(A)]. Said authority came to hold that NCD were allotted on 14th Jan., 1995, on payment of application money of Rs.

111 for NCD for the same money between 2nd Jan., 1995 and 25th Jan., 1995. All five assessees transferred NCD to UTI without consideration. According to the CIT(A) five assessees never became owners of the fully paid NCDs. It was also observed that the assessee had paid Rs. 111 as the application money for acquiring NCD. DWs were received gratis. The claim of loss of Rs. 111 per debenture on its sale has been made for the first time before CIT(A). The claim was not raised before the AO at any time. It was, therefore, not open to the AO to examine this issue. It was noted that five assessee-companies made application for NCDs in the background of arrangement between JISCO and UTI without any consideration and with intention of incurring loss of Rs. 111 on each NCD. She also observed that the assessee-companies have not fully paid for the NCDs and, therefore, they were not entitled to DWs because as per terms of issue the DW was to be given only after NCDs were fully paid. NCDs have been transferred to UTI immediately after allotment. The transfer is made entirely as per arrangement between JISCO and UTI. Such transfer was an act of forfeiture of application money @ Rs. 111 per NCD. The beneficiary of the transfer was not UTI but JISCO. Thus, the loss was deliberately cultivated for the benefit of JISCO. It was held that no such loss arose to the assessee on transfer of NCDs and, therefore, question of allowing loss did not arise. It was also observed that reference to McDowell’s case (supra) was well made. Reference was also made to the decision in Sunil Siddharth Bhai vs. CIT (1985) 49 CTR (SC) 172 : (1985) 156 ITR 509 (SC) : TC 20R.900 to the effect that the Department has right to penetrate the veil and ascertain the truth.

The matter was taken in second appeals before the Tribunal. Stand of the assessee was that all the five companies are promoter companies and JISCO came out with right issue of NCD of Rs. 500 each to the existing shareholders. The assessee-companies together held 30.93 per cent and about 40.43 per cent was held by general public and the balance was with banks and financial institutions. As per guidelines approved by SEBI if 90 per cent of the issue was not subscribed the JISCO had to refund the entire application money received by it. It was also prescribed that even after the issue and allotment of one share of each DW attached with NCD the shareholding pattern of the promoters will not undergo any change. Under these circumstances there was no option for the assessee-companies but to subscribe to the issue of NCDs. If the assessee-companies had not subscribed to the public issue of NCD the entire issue of JISCO would have failed. As a promoter company this could have brought bad repute to the assessee-companies. It was further submitted that the most important aspect of the issue was that there were no underwriter to the issue. Thus, the assessee-companies were compelled to subscribe the issue of NCD. Since 90 per cent of the issue was to be subscribed by the existing shareholders only a small percentage of 10 of the existing shareholders were required to subscribe to the issue. This was not an easy task. In order to make the issue attractive DW was attached to each NCD which could entitle the holder to apply for one equity share of JISCO @ Rs. 200 per share (Rs. 10 face value + Rs. 190 premium). As per terms of the issue a sum of Rs. 111 per NCD was payable on application and balance Rs. 389 was payable on allotment. The entitlement of DW was to take place only when the full payment @ Rs. 500 on each NCD was made. The assessee-companies, therefore, made application for the right issue of NCD and made the payment @ Rs. 111 per debenture on application as was prescribed. As they did not have enough funds to make payment of allotment money they sold the DWs. Accordingly JISCO allotted DWs to the assessee-companies also.

So far as observations of CIT(A), that the assessee-companies had not paid the allotment money but was paid by UTI, it was submitted that certificate of UTI to the effect that they have made payment @ Rs. 389 per NCD to JISCO on behalf of the assessee-companies, was not considered. In a sense their stand was that only when the entire consideration for NCD was received by JISCO further course of action was followed. Materials were placed to show that DWs were given to the assessee when NCD were fully paid up. As to the conclusion of the CIT(A) that assessee never became owner of NCD/DWS the assessee-companies submitted that letter of allotment was in the name of the assessee-companies; UTI made payment of allotment money to JISCO on behalf of the assessee- companies and in turn the assessee-companies transferred their NCDs in favour of UTI which was registered in UTI’s name and, therefore, the factual conclusions of CIT(A) were wrong. It was also submitted that the assessee were not the beneficiaries of the transaction but it was the UTI who became the owner of NCDs of the face value of Rs. 500 by paying the amount @ Rs. 389 only per NCD. The UTI has also received interest from JISCO at full value of Rs. 500 each debenture. Moreover the UTI would be getting the full redemption money @ Rs. 500 each debenture on redemption though actually they had paid @ Rs. 389 only. It was also indicated that UTI has earned an annual gain of 256 per cent on this transaction which was quite substantial. It was urged that the assessee- companies were also benefited due to such arrangement because after losing Rs. 111 on each debenture they became entitled to one dividend warrant which entitled the assessee-companies to have one equity share @ Rs. 200 though the market price of the share on such date was much higher. A chart indicating the gains by the assessee- companies was also furnished before the Tribunal. It was also urged that the ratio of McDowell’s case (supra) was not available because there was no camouflage in the transaction to evade tax. Reference was made to decisions in several other cases as rendered by Calcutta and Bombay Benches of the Tribunal. In both the cases, the Tribunal held that loss on the sale of NCDs under similar circumstances was a business loss short-term capital loss, which should be allowed as deduction. Stand of the Revenue was that in the return of income, the loss on account of sale of DWs was claimed which was subsequently changed to loss on the sale of debentures. It was also argued that the transaction was not at arms length and the assessee-companies did not make any payment of allotment money. On the contrary payment was made by UTI. The assessee-companies had no funds to make investment and the investment was made by borrowing funds from companies connected with JISCO. It was a clear cut case of colourable transaction and it was the duty of the AO to lift the corporate veil. Tribunal after analysing the rival submissions, essentially recorded the following findings :

The five assessee-companies were promoters of JISCO through whom JISCO made investment in various public limited companies. The assessee-companies held about 34 per cent shareholding of JISCO. Rest was held by financial institutions and public. During the assessment year in question, JISCO came up with right issue worth about Rs. 500 crores. As per terms of the issue, as approved by SEBI, if 90 per cent of the issue was not subscribed then the issue had to fail and the JISCO was to refund the entire money collected by it under the issue. It was thus a compulsion on the part of the assessee-companies to subscribe to the right issue. The failure of such issue would have been detrimental to the appellant-companies being investor/promoter companies of JISCO. Thus the assessee- companies had no option but to subscribe to the right issue of NCDs. A sum of Rs. 111 per NCD was payable on making application as per terms of the issue and balance Rs. 389 was to be paid on allotment. In order to make the issue attractive, it was also provided that on payment of full value of NCD, the subscriber was entitled to one DW which in turn will entitle the holder one equity share of JISCO @ Rs. 200 per share. The market value of one share of JISCO was Rs. 320. As these conditions attached to the issue had SEBI approval all the assessee-companies applied for right issue and paid a sum of Rs. 111 per NCD on application. JISCO was also interested that right issue should meet grand success. They, therefore, negotiated with UTI and the UTI was aggreeable to make payment of allotment money on behalf of any subscriber on sale of NCD to UTI. But the price quoted by UTI after a long negotiation was Rs. 389 per NCD and that too was limited to investment of Rs. 350 crores. Such arrangement was given effect to by the assessee. In terms of the agreement, the UTI made payment @ Rs. 389 per NCD directly to JISCO and in turn the assessee-companies transferred their NCDs worth Rs. 500 per NCD in the name of UTI. The assessee-companies also benefited because they got DWs which entitled to one equity issue of JISCO @ Rs. 200 per share. The DWs were accordingly given to the assessee-companies. The assessee-companies sold the DWs and the loss incurred on such sale was originally claimed as deduction. However, during the course of assessment proceedings the assessee-companies claimed that as they have sold NCDs worth Rs. 500 per NCD

@ Rs. 389 per NCD it has suffered a loss of Rs. 111 per NCD which should be allowed as deduction. The claim was, inter alia, rejected on the preliminary ground that such a ground was not before the AO. The Tribunal referred to observations made by the AO and CIT(A) in the background of submissions made by the assessee. It noted that in a large number of decisions it has been held that any view the assessee may take whether by way of return of income, the entries in the books of account or the method of accounting are totally irrelevant while considering the assessment under the Act. The only consideration at that point of time as to what was true legal effect of the transaction. Reference was made to several decisions Kedar Nath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC) : TC 16R.668, Delhi Stock Exchange Association Ltd. vs. CIT (1961) 41 ITR 495 (SC) : TC 13R.1284, First Addl. ITO vs. TMK Abdul Kassim (1962) 46 ITR 149 (SC) : TC 10R.124. It was, therefore, observed that even if return filed by the assessee-companies did not set out the proper position, that cannot be a reason for not allowing the claim. Referring to the assessment order, as well as the order of the CIT(A), it appeared that the assessee’s claims had been rejected on the following grounds:

The NCDs were transferred to UTI without consideration. So the companies never became the owners of fully paid

NCDs.

The DW were sold on 25th March, 1995 whereas the same was allotted to the appellant-companies on 3rd May,

1997.

The transfer of NCD was unilateral act and the beneficiary of the transfer was not UTI but JISCO. The funds of JISCO itself have been utilised indirectly in subscribing to the right issue of its own NCD. The entire transaction was not at arms length. It was a colourable device to evade future tax.

With reference to the first ground, it was observed by the Tribunal that when the assesseecompanies made application for NCD and paid the requisite sum of Rs. 111 per NCD, the offer of allotment was issued to the assessee-companies according to which all the assessees were asked to make a further payment @ Rs. 389 per NCD. As the arrangement was already finalized with UTI that they were to purchase NCDs @ Rs. 389 per NCD the assessee-companies gave effect to such arrangement. The UTI paid Rs. 389 per debenture to JISCO and in turn the assessee-companies transferred their NCDs in the name of UTI. Such transfers were also registered in the register of JISCO. Payment was made by UTI to JISCO on behalf of the assessee-companies.

So far as second ground was concerned, it was noted that the view taken by the Revenue authorities was against the provisions of the issue itself. It was the approved condition of SEBI that on payment of full consideration the holder of NCD will be entitled to one DW which in turn entitled the holder to apply one equity share of JISCO. In their letter JISCO had clearly confirmed that DWs were given to assessee-companies only when JISCO had received the full amount of NCD either from them or from UTI on their behalf. Referring to the third ground, it was noted that the same was without any basis because the date which was mentioned by the AO was of the split transaction of DW and not the DW itself. Regarding the observations of the AO and the CIT(A) that entire transaction was aimed at giving an undue advantage to JISCO, reference was made to a chart filed by the assessee which indicated the extent to which the UTI had benefited from the transaction.

As regards the deployment of funds, it was noted that actually the payment of application money was made by the assessee-companies from their own funds. Much after making applications some companies close to JISCO had made advances to five assessee-companies. Tribunal observed that even assuming that the assessee-companies had been indirectly provided funds by JISCO to make investment in the right issue of NCDs, there was no legal bar for the same. Thus, according to the Tribunal, there was no substance in the observations made by the CIT(A).

Further, it was noted with reference to disallowance of claim by the AO and confirmed by the CIT (A) that transaction of sale of NCDs to UTI @ Rs. 389 when its face value was Rs. 500, was not at arms length and was a device to evade future tax, it was found to be of no substance by the Tribunal. It noted that as per scheme approved by SEBI, the assessee-companies had no option but to subscribe to right issue. Same was true of all the shareholders. The general public accounted for about 40 per cent of the shareholding of JISCO. In case the assessee-companies did not opt to subscribe the issue the entire issue would have failed. As it was provided in terms of the issue that if the issue was subscribed less than 90 per cent, the JISCO would refund the entire money. That would have been detrimental to the interest of assessee-companies who were promoter companies of JISCO. It also referred to chart of yield obtained by UTI and the assessee-companies and found that the UTI had got annual yield of about 25 per cent. Therefore, it was held that transaction of selling NCDs at the face value of Rs.

500 to UTI @ Rs. 389 per debenture was not a colourable device and ratio of McDowell (supra) had no application. It was noted that when JISCO came with right issue of NCD, many other companies like Apollo Tyres, Usha Ispat Ltd., Dhunseri Tea Industries Ltd. and Sri Ram Industrial Enterprises, etc. had come out with similar right issues with almost identical terms and conditions. In the case of Appollo tyres the buy back was done by JM Financial and Investment Consultancy Services Ltd. whereas in the case of Usha Ispat, Dhunseri Tea and Sri Ram Industrial Enterprises, the buy back was done by UTI, DSP Financial Consultancies Ltd. and Sri Ram Financial Services Ltd., respectively. In the case of assessee-companies buy back was done by UTI which could not be influenced by the terms of either the assessee-companies or JISCO. The Tribunal noted the decisions of the Bombay Bench of the Tribunal in the case of Lazor Syntex Ltd. (ITA No. 781/Ahd/1996), where under similar circumstances, the Tribunal had held that loss on sale of debenture was revenue loss and allowable deduction. Reference was also made to the case of Karam Chand Thapar & Bros. Ltd. (ITA No. 2649/Cal/1996) Calcutta Bench of the Tribunal holding that such loss suffered by the company on the sale of NCD was an allowable on short-term capital loss. Accordingly, it was held in the present case that the assessee-companies had suffered loss

@ Rs. 111 per NCD on the sale of UTI and such loss being business loss was allowable as deduction.

3. In these appeals, the contentions of the Revenue are that there was no sale of NCD by the assessee to UTI as there was no agreement of sale between them. Arrangement was between JISCO and UTI. There was no stipulation in the scheme for buy back of Khokha as was made by the other companies while issuing the prospectus for their right issues on which the Tribunal relied. No properties in goods were transferred to UTI as the assessee- companies had claimed and the Tribunal also observed that UTI paid Rs. 389 per debenture on behalf of assessee- companies. Had the NCDs been sold to UTI as was claimed by the assessee-companies, the question of making payment of allotment money @ Rs. 389 would not have arisen on behalf of assessee-companies. If transaction was for sale of NCD, UTI would have paid on its own behalf. Here sale did not take place because as per the scheme only paid-up debenture entitled the allottee to receive DW. Had sale taken place, only UTI would have entitled for DW. Here the DWs were issued to assesseecompanies while UTI had paid the allotment money. The assessee- companies had shown the amount of application money as cost of DWs which is also evident from the fact that assesseecompanies had claimed the loss to the extent of DWs which were sold. It was in fact financial arrangement between JISCO and UTI and the UTI agreed to pay Rs. 389 per debenture on the condition that (i) interest would be paid @ Rs. 10.5 per cent, and (ii) refund of Rs. 500 would be given in three instalments. In the process the

assessee-companies had let its capital to be forfeited by JISCO which was a unilateral act on the part of the assessee-companies. It is the case like unclaimed credits/debts. A sum of Rs. 111 per NCD was capital investment in the hands of assessee-company as assessee-companies had shown it as investment and declared the loss as short- term capital loss while filing its return. The assessee-companies are investment companies of Jindal Group. No definition of “investment company” exists in the statute. However, there are several definitions which have defined the term. “financial investment company” as appearing in the Finance (No. 2) Act, 1991, in s. 2(9)(d) is “a company whose gross total income consists mainly of income which is chargeable under the head income from house property, capital gain, income from other sources or income by way of interest on securities.” Factual position so far as the scheme floated by Apollo Tyres, etc. is different. There was a device adopted by the group as a whole whereby JISCO who floated the NCD had advanced the money to the assessee-companies through its associate concern M/s Sun Investment Ltd. and five other Bombay based companies who in turn subscribed to the preferential shares of the assessee-companies. It was admitted by the assessee-companies that this capital was utilised for investment in NCD issue of JISCO. Thus, money which had flowed from JISCO came back to JISCO with the appended finance from UTI and the assessee-companies also claimed loss in the year under consideration so that the same could be set off against income of present year as well as subsequent years. JISCO had made financial arrangement with UTI to finance the debentures @ Rs. 389 per debenture. UTI had agreed to the extent of Rs. 350 crore. UTI did not restrict it only for the promoters and to the exclusion of others. JISCO intended to avail whole of this benefit for itself and that is why it did not mention with reference to Khokha sale, in the scheme itself as was done by other companies.

Learned counsel for assessee-companies, on the other hand, submitted that the proposed questions do not arise out of the order of the Tribunal. In fact, factual position has been analysed by the Tribunal with reference to materials placed on record. The so-called distinguishing features pointed out by the Revenue to make a distinction vis-a-vis right issue in the case of Apollo Tyres and Karam Chand Thapar’s case and other decisions referred to by the Tribunal do not in reality make out any distinction so far as the issue involved is concerned. It is highlighted that in fact the gains arising from transfer of shares, securities, etc. were claimed by the assessees as taxable under the head “capital gains” but the AO as well as the CIT(A) treated such gains to be taxable as business gains and, therefore, the Revenue cannot be now permitted to change its stand.

4. We shall first examine whether the questions posed arise out of the order of the Tribunal. So far as question No. (c) is concerned, it is to be noted that such a question was not even urged before the Tribunal by the Revenue. It was not under its consideration. Similar is the position as regards question No. (d). Coming to the rest of the questions, we find that the Tribunal has analysed the factual position which we have noted above in coming to the conclusion that the assessee-companies’ claim was admissible as business loss. We have also perused the decisions of various Benches of the Tribunal to which reference has been made by the Tribunal. There was no basic difference so far as transactions involved, which were subject-matter of consideration in those cases, were concerned. We may add here that before the AO, revised statement of income was filed in each case indicating the reasons of revising return. As the conclusions of the Tribunal are essentially factual and have been arrived at after detailed analysis of the factual position with regard to relevant documents, no question of law, much less a substantial question of law, arises out of its order. Above being the position, we find no merit in these appeals, which are accordingly dismissed.

[Citation : 254 ITR 538]

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