Karnataka H.C : Whether the Answered in Tribunal was i right in treating the beer bottles as plant ?

High Court Of Karnataka

CIT vs. United Breweries Ltd. & Anr.

Section 4, 28(i), 41(2), 45, 48

Asst. Year 1993-94

K.L. Manjunath & Aravind Kumar, JJ.

IT Appeal Nos. 142 & 143 of 2001 & 400 of 2004

15th February, 2010

Counsel appeared :

Dr. R.B. Krishna & M.V. Seshachala, for the Revenue : Aravind P. Datar for S.

Parthasarathi, for the Assessee

Judgment

Aravind Kumar, J. :

Ref : IT Appeal Nos. 142 & 143 of 2001 The Revenue is in appeal questioning the correctness and legality of the orders passed by the Tribunal, Bangalore Bench, in ITA No. 296/Bang/1998 and ITA No. 315/Bang/1998 for the asst. yr. 1993-94. The assessee filed return of income for the asst. yr. 1993-94 on 31st Dec., 1993 declaring a total income of Rs. 2,58,86,442. The return of income was processed under s. 143(1) (a) of the IT Act, 1961 (hereinafter referred to as ‘the Act’ for short). Notice under s. 142(1) of the Act was issued to the assessee. The CIT(A) by his order dt. 29th Nov., 1994 has set aside the intimation issued under s. 143(1)(a) of the Act. There afterwards assessee filed a revised return on 31st March, 1995. On seeking queries from the assessee, the assessee has once again filed the revised return of income on 28th March, 1996 declaring a business income of Rs. 3,22,34,068 and long-term capital gains of Rs. 10,25,005 as against the business income of Rs. 2,76,88,348 and short-term capital loss of Rs. 9,47,411. On the basis of the same and after hearing the assessee an order of assessment came to be passed. The AO by his order dt. 29th March, 1996 made the following additions : (i) Bottle deposits of Rs. 266.65 lakhs; (ii) Depreciation on beer bottles; (iii) Short-term capital loss of renunciation of rights amounting to Rs. 3,57,750 was brought to tax as short-term capital gains; (iv) Receipt of Rs. 4.3 crores was brought to tax as revenue receipt, amongst others.

1. The assessee being aggrieved by the same filed an appeal before CIT(A) in ITA

76/CC-11/CIT (A)/1996-97. The appellate authority by order dt. 26th Feb., 1998 was pleased to set aside the disallowance made on account of non-competition fee of Rs. 4.3 crores and remitted the matter back for fresh consideration to the AO and confirmed the order of AO on other three issues.

2. The assessee being aggrieved by the order of remand passed by CIT(A) dt. 26th Feb., 1998 regarding remanding of the matter to AO filed further appeal before the Tribunal in ITA 297/Bang/1998. The assessee also filed an appeal in ITA No.

296/Bang/1998 against the assessment order dt. 26th Feb., 1998 of CIT(A) against the confirmation of assessment order. The said appeal came to be allowed by the Tribunal against which the Revenue is in appeal in IT Appeal No. 142 of 2001 by raising the substantial questions of law.

4. It is submitted at the Bar that insofar as IT Appeal No. 143 of 2001 which has been added in the prayer is by oversight and as such it is submitted by the learned senior counsel Sri R.B. Krishna that no substantial question of law is required to be answered in IT Appeal No. 143 of 2001 and accordingly submits that the same may be dismissed as not pressed. IT Appeal No. 142 of 2001 which is filed by the Revenue against the order passed by the Tribunal dt. 2nd Nov., 2000 is assailed by the Revenue by raising the substantial questions of law. Re : IT Appeal No. 400 of 2004

5. The Revenue is in appeal questioning the correctness and the legality of the order passed by the Tribunal in ITA No. 667/Bang/2001, dt. 28th Jan., 2004, whereunder the Tribunal has dismissed the appeal of the Revenue on the ground that the issue in the said appeal is settled in favour of the assessee by the Tribunal, Bangalore, by its order dt. 9th Nov., 2000 passed in ITA No. 296/Bang/1998. The Revenue was in appeal before the Tribunal in ITA 667/Bang/2001 challenging the order of CIT(A), dt. 7th June, 2001. The CIT(A) had taken up the appeal of the assessee which was filed against the order dt. 15th Feb., 2000 passed by the AO pursuant to the order of remanding the same by the CIT(A) in his order dt. 26th Feb., 1998. The substantial question of law raised in IT Appeal No.400 of 2004 is with regard to the claim of the assessee to treat the “noncompetition fee” as a capital asset as against the claim of the Revenue to treat the same as “revenue receipt”. The said question of law is also raised in IT Appeal No. 142 of 2001 and hence for considering these two appeals (IT Appeal No. 142 of 2001 and IT Appeal No. 143 of 2001), the substantial questions of law are enumerated hereinbelow :

“(i) Whether the Tribunal was right in deleting the additions pertaining to the accretion to bottle deposits, without noting that the assessee company had not proved that such accretion was in fact real and not noting the provisions of s. 41(2) of the Act ?

(ii) Whether the Tribunal was right in treating the beer bottles as plant ?

(iii) Whether the Tribunal was right in ignoring the facts on record and allowing a capital loss of Rs. 5,10,53,280 representing diminution in the value of shares held by the assessee in M/s McDowell & Co. Ltd., by misinterpreting the decision of the Hon’ble Supreme Court in Miss Dhun Dadabhoy Kapadia vs. CIT (1967) 63 ITR 651 (SC) ?

(iv) Whether the Tribunal exceeded its jurisdiction by adjudicating on the issue pertaining to the taxability of compensation of Rs. 4.3 crores received by the assessee, on merits, when the first appellate authority had

set aside the issue for readjudication by the AO ? (v) Whether the conclusion of the Tribunal that the sum of Rs. 4.3 crores received by the assessee as compensation was exempt from tax, was perverse and unsupported on facts and in law ? (vi) Whether the appellate authorities were correct in holding that the ‘non-competition fee’ of Rs. 4.30 crores claimed as capital asset cannot be treated as a revenue receipt and brought to tax as held by the AO ?” The substantial questions of law (i) to (v) referred to hereinabove are formulated in IT Appeal No. 142 of 2004 and substantial question of law No. (vi) referred to hereinabove is formulated in IT Appeal No. 400 of 2004. The substantial questions of law formulated in the above two appeals which are common to both appeals are with regard to the taxability of the amount of Rs. 4.3 crores received by the assessee as “non-competition fee” namely whether it should be treated as capital asset as claimed by assessee and cannot be treated as revenue receipt and brought to tax as claimed by Revenue which is at Nos. (iv), (v) and (vi).”

6. We have heard Dr. K.B. Krishna, learned senior counsel appearing for the appellant Revenue and Sri Aravind P. Datar, learned senior counsel assisted by Sri S. Parthasarathi appearing for the respondent assessee. Re : Substantial questions of law (iv), (v) and (vi)

7. Insofar as substantial questions of law Nos. (iv), (v) and (vi) are concerned, we find from the records that at the first instance the AO by order dt. 29th March, 1996 held that the amount of Rs. 4.30 crores received by the assessee as revenue receipt by virtue of disposing of its shares held in favour of M/s Brook Bond India Ltd. The entire assessment order was taken up in appeal by the assessee before the CIT(A) in ITA 76/CC- II/CIT(A)I/1996-97. The appellate authority by its order dt. 26th Feb., 1998 remanded the matter to the AO for being adjudicated afresh with regard to consideration of its inclusion in the asst. yr. 1993-94 or 1994-95. However, the finding of the AO to treat this receipt as a revenue receipt was confirmed. Against this confirmation of order the assessee filed an appeal before the Tribunal in ITA No. 296/Bang/1998. When the matter was pending adjudication before the Tribunal, the AO by virtue of the CIT(A)’s direction passed an order on 15th Feb., 2000 whereunder it was held that the said amount of Rs. 4.30 crores received by the assessee is to be treated as capital in nature and to be taxed during the year as capital gains and accordingly deleted the addition by order dt. 15th Feb., 2000. We find that against the order of the AO, dt. 15th Feb., 2000 an appeal had been filed by the very same assessee before the CIT(A) in ITA No. 205/CC-II(A)-I/1999-2000 which had been allowed by the appellate authority by deleting the amount of Rs. 4.3 crores brought to tax as capital gains on the ground that the Tribunal in ITA Nos. 296-298/Bang/1998, dt. 9th Nov., 2000 had held that the amount was not taxable. As seen from the records that against this order of CIT(A), dt. 7th June, 2001 the Revenue carried the same before the Tribunal in ITA No. 667/Bang/2001 and the Tribunal also on the same reason as assigned by the first appellate authority dismissed the appeal of the Revenue by its order dt. 28th Jan., 2004.

8. In the meanwhile the Tribunal in ITA Nos. 296-298/Bang/1998 has relied upon the order dt. 15th Feb., 2000 passed by the AO pursuant to the directions of the CIT(A) and the finding recorded in the first assessment order dt. 29th March, 1996 has not been considered by the Tribunal. In the fitness of things it would have been appropriate for the

Tribunal either to await the finality of the second assessment order dt. 15th Feb., 2000 or consider the reasoning given by the AO in the first assessment order dt. 23rd Sept., 1996. Having not embarked upon this exercise the Tribunal proceeded only on the second order of assessment dt. 15th Feb., 2000 and thus order of the Tribunal dt. 2nd Nov., 2000 passed in ITA No. 296/Bang/1998 and order dt. 28th Jan., 2004 passed in ITA No. 667/Bang/2001, dt. 28th Jan., 2004 insofar as the issue regarding non-competition fee is concerned suffers from legal infirmity which requires to be set aside by this appellate Court and accordingly we set aside the same and remit the matter to the Tribunal for consideration of the issue regarding taxability of “non-competition fee” received by the assessee by considering the contentions urged by respective parties. Hence, the substantial questions of law (iv), (v) and (vi) formulated hereinabove are answered partly in affirmative by us and on merits; matter being remanded to AO since the very foundation regarding the chargeability to tax the “non-competition fee” having not been properly analysed and considered by the Tribunal, we find that said issue has been erroneously determined by the Tribunal and accordingly we remit this issue for being adjudicated afresh by the Tribunal taking into consideration the order of the assessment dt. 29th March, 1996 (Annex. A in IT Appeal No. 142 of 2001 as well as the order dt. 15th Feb., 2000 (Annex. ’C’ in IT Appeal No. 400 of 2004). Re: Substantial question of law No. 1

1. Insofar as the substantial question of law No. 1 formulated hereinabove with regard to accretion to bottle deposit as formulated in IT Appeal No. 142 of 2001 is concerned, we find that the AO has found that the assessee had not been accounting the entire sale proceeds of sale of beer bottles but splitting it into refundable bottle deposit and sales consideration in the invoice itself. It is found by the AO during the course of assessment proceedings that bottle deposit is taken to the balance sheet as liability to be discharged by the assessee to the wholesalers. Hence, the AO examined one of the wholesale dealers, namely, M/s Vitari Enterprises under s. 131 of the IT Act on 27th Feb., 1996 to find out the nature of transaction and the copies of the statements recorded from witnesses i.e., M/s Dewar Wines and M/s Prashanth Wholesale Wine Stores were supplied to the assessee company and offer for cross-examination of the witness was also made by the AO. However, the assessee by letter dt. 11th March, 1996 informed that they did not prefer to cross-examine Sri Neeraj Rawal, proprietor of M/s Vitari Enterprises and accordingly gave up the cross-examination.

2. It was contended by the assessee before the AO that the net accretion to the bottle deposit for the year ending 31st March, 1993 was Rs. 291.95 lakhs which also included refundable bottle deposit due to M/s Vitari Enterprises in a sum of Rs. 31,30,840 which had been added to the assessee’s income since the assessee by its not cross-examining the witness and by consent letter dt. 11th March, 1996 has given up the cross-examination of this witness by virtue of which AO held that it is to be included in the income of the assessee.

3. It is contended by the learned counsel for the Revenue that liability shown by assessee in its books of accounts is not so reflected in the books of accounts of these persons to whom assessee is allegedly liable and when there is no corresponding liability found in the dealers books of account it is to be treated either as trading receipt in the hands of assessee or alternatively matter be remitted to AO for fresh consideration. Per contra the learned counsel for the assessee would contend that very issue having been considered by the Tribunal wherein it was held that similar contention of Revenue for earlier years having been held in favour of assessee does not call for interference. Having given our anxious consideration to the submissions made at the Bar, we find that AO in order to bring this amount of Rs. 266.65 lakhs as trading receipt has examined only witness viz., Sri Neeraj Rawal, proprietor of M/s Vitari Enterprises according to whom the sum of Rs. 31,30,840 said to be due from assessee to M/s Vitari Enterprises is not found from the books of accounts of M/s Vitari Enterprises, for the period ending 31st March, 1993 and without having categorically stated so amount is due from U.B. on account of bottle deposits, it cannot be said that purchase price paid by M/s Vitari Enterprises to U.B. towards cost of beer including cost of beer bottle cannot be debited to the trading account of assessee as cost of purchase of beer. Hence, we confirm the addition made by the AO to an extent of Rs. 31,30,840 and to this extent the substantial question of law No. (i) formulated hereinabove is answered in the negative, i.e., in favour of the Revenue and against the assessee by holding that the assessee company had not proved that such accretion was in fact real to the extent of the aforementioned amount.

Re: Substantial question of law No. (ii)

12. The assessee had acquired bottle deposits of beer bottles sent to its customers. It was contended by the assessee that such deposits are not in the nature of sale process of the bottles and this contention of the assessee came to be accepted by the first appellate authority in part and the Tribunal accepted the claim of the assessee in toto. Though the Revenue contends that the provision of s. 41(2) of the Act is squarely applicable to the facts of the case, we find that in respect of the assessee’s own case for the earlier assessment years issue has been held in favour of the assessee by the Tribunal (in IT Appeal Nos. 32-41 of 2001) by this Court which was carried to the Hon’ble Supreme Court in Civil Appeals 8479-8482 of 1994 by Revenue which came to be dismissed. In effect the contention of the assessee came to be accepted and this fact is not disputed by the learned counsel appearing for the Revenue, as such the substantial question of law No. (ii) is required to be answered in favour of the assessee and against the Revenue.

Re : Substantial question of law No. (iii)

1. Insofar as the issue regarding the capital loss claimed by the assessee in a sum of Rs. 5,10,53,280 representing diminished in the value of shares held by the assessee in M/s McDowell Co. is analysed as follows.

2. The assessee claimed a short-term capital loss of Rs. 3,62,23,440 on account of its failure to subscribe to the rights shares offered by M/s McDowell & Co. which is a company under the same management. The assessee had the right to subscribe to

61,26,394 and the number of rights shares subscribed was only to 22,75,650 shares and renounced the right to subscribe shares to 1,54,100 shares for a consideration of Rs.22,84,000. As a result the right to subscribe to the balance shares of Rs. 3,85,07,440 (Rs. 3,62,23,440 as per the Tribunal order) rights shares were lost. It was the claim of the assessee that before the rights issue of shares, the market quotation of McDowell was Rs.

80 per share and after rights issue was completed the market price came down to Rs. 70 per share. Hence there was a diminution in the value of shares by Rs. 10 per share. Hence, on account of the loss to right to subscribe 3,85,07,440 shares the assessee claimed to have suffered loss @ Rs. 10 per share which amounted to Rs. 22,84,000 and the total net loss was Rs. 3,62,23,440 according to the assessee. The assessee relied upon the decision of the Hon’ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia vs. CIT AIR 1967 SC 614 [hereinafter referred to as Miss Dhun Dadabhoy Kapadia’s case (supra)] contending that on account of diminution in the value of the shares which resulted in loss in the value of old shares, assessee was entitled to set off against the capital gains. The AO did not agree with the said contention by holding that the facts were dissimilar. The appellate authority also confirmed the finding of the AO and accordingly held that deduction is to be computed with reference to the asset i.e.,1,54,100 shares only sold by the assessee and not in respect of shares which assessee did not subscribe and voluntarily gave up.

3. The Tribunal held that renouncing the rights shares involves transfer within the meaning of s. 2 (47) and further held that Miss Dhun Dadabhoy Kapadia’s case (supra) is applicable to the facts of the case and assessee was entitled to seek for set off of capital loss suffered on account of diminution in the value of shares.

16. Dr. K.B. Krishna learned advocate appearing for Revenue would contend that the narrow issue required to be considered in the instant case is in respect of the shares i.e.,

36,96,644 renounced by the assessee without consideration in favour of large number of shareholders who had applied for shares in the public issue. He would submit that admittedly no consideration has flown for renouncing the said shares and submits that Miss Dhun Dadabhoy Kapadia’s case (supra) would not be applicable to the facts of the case for the following reasons : (a) In Miss Dhun Dadabhoy Kapadia’s case (supra) all shares were sold, whereas in the instant case only portion of the shares were sold. (b) A notional loss set off only against a realised loss. (c) There was no partial renouncement in Miss Dhun Dadabhoy Kapadia’s case (supra). (d) Notional loss can be set off only against realised gain. In support of his submissions Sri Krishna would rely upon the orders of the AO and CIT(A) wherein said issue has been discussed in detail and considered. He would submit that Tribunal was in error in holding that Miss Dhun Dadabhoy Kapadia’s case (supra) would be applicable to the facts of the case.

17. Per contra, Sri Arvind P. Datar, learned senior counsel appearing for respondent would contend that Miss Dhun Dadabhoy Kapadia’s case (supra) is squarely applicable to the facts of the present case for the following reasons : (a) All the shares came to be allotted by rights in Miss Dhun Dadabhoy Kapadia’s case (supra) as also in the instant case. (b) Diminution in the value of shares has occurred in both the cases. (c) There is no question of pro rata reduction and same is not permissible. (d) By virtue of diminution in the value of shares the original asset on the basis of which the shares came to be issued had also diminished and as such it has resulted in loss which requires to be set off against the gain. (e) Renouncement is also a transfer. The Department has accepted the loss occasioned on renouncement for consideration and held that assessee would also be

entitled for set off as also the shares subscribed and thus it cannot restrict in respect of shares renounced for nil consideration.

18. In support of his submissions, he would rely upon the following decisions : (i) Miss Dhun Dadabhoy Kapadia vs. CIT (supra): (ii) CIT vs. Oberoi Building & Investment (P) Ltd. (1994) 118 CTR (Cal) 103 : (1993) 203 ITR 403 (Cal); (iii) Navin Jindal & Ors. vs. Asstt. CIT (2006) 202 CTR (P&H) 86 : (2006) 280 ITR 608 (P&H); (iv) CIT vs. H. Holck Larsen (1986) 58 CTR (SC) 53 : (1986) 160 ITR 67 (SC).

1. Elaborating his submissions, Sri Arvind Datar, learned senior counsel appearing for the assessee would contend that initially assessee had claimed loss of Rs. 3,62,23,440 which had later been changed to Rs. 5,10,53,280 and this change in the quantum of loss was made before the first appellate authority which resulted on account of the market quotation of the shares of McDowell. Prior to the rights issued, which was at Rs. 80 fell down to Rs. 70 in the market after the rights issue was completed. Thus, on account of this fall in price there was diminution in the value of Rs. 10 per share. Which fact has been accepted by the first appellate authority.

2. In order to examine the submissions made at the Bar the following facts which are not in dispute are required to be extracted. The computation of net short-term capital loss as claimed by assessee is as follows : “7. The assessee claimed that it incurred short- term capital loss on account of non-subscription to right shares of McDowell & Co. The computation given in this relevance was as under : Loss on account of rights forfeited McDowell & Co. Ltd.

Rights eligible Rights subscribed

Quotation cum right Auotation ex- right Difference

Rs. 80/share

Rs. 70/share

Rs. 10/share

61,26,394 shares

22,75,650 shares

38,50,744 shares

Loss on account of rights foregone

Rs. 38,50,744 X 10 = Rs. 3,85,07,440

Gains from sale of rights entitlement : Proceeds on sale of 1,54,100

Rights entitlement Rs. 22,84,000

Consideration for Rs. Nil

relinquishment of right to public

Gains on account of sale of rights entitlements

Net short-term

Rs. 22,84,000

capital loss Rs. 3,62,23,440

21. The basis on which the short-term capital loss was claimed by the assessee hinges on s. 48 of the IT Act, which reads as under : “48. The income chargeable under the head

‘Capital gains’ shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely : (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquiring of the asset and the cost of any improvement thereto : Provided that in the case of an assessee, who is a non-resident, capital gains arising from the transfer of capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilised in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so, however, that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in or debentures of, an Indian company : Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of cl. (ii) shall have effect as if for the words ‘cost of acquisition’ and ‘index cost of any improvement’ had respectively been substituted : Provided also that nothing contained in the second proviso shall apply to the long-term capital gain arising from the transfer of a long-term capital asset being bond or debenture other than capital indexed bonds issued by the Government : Provided also that where shares, debentures or warrants referred to in the proviso to cl. (ii) of s. 47 are transferred under a gift or an irrevocable trust, the market value on the date of such transfer shall be deemed to be the full value of consideration received or accruing as a result of transfer for the purposes of this section : Provided also that no deduction shall be allowed in computing the income chargeable under the head ‘Capital gains’ in respect of any sum paid on account of securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004. Explanation : For the purpose of this section— (i) ‘foreign currency and Indian currency’ shall have the meanings respectively assigned to them in s. 2 of the Foreign Exchange Regulation Act,

1973 (46 of 1973); (ii) the conversion of Indian currency into foreign currency and the reconversion of foreign currency into Indian currency shall be at the rate of exchange prescribed in this behalf; (iii) ‘indexed cost of acquisition’ means an amount which bears to the cost of acquisition the same proportion as cost inflation index for the year in which the asset is transferred bears to the cost inflation index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later; (iv) ‘indexed cost of any improvement’ means an amount which bears

to the cost of improvement the same proportion as cost inflation index for the year in which the asset is transferred bears to the cost inflation index for the year in which the improvement to the asset took place; (v) ‘cost inflation index’, in relation to a previous year, means such index as the Central Government may having regard to seventy-five per cent of average rise in the consumer price index for urban non-manual employees for the immediately preceding previous year to such previous year, by Notification in the Official Gazette, specify, in this behalf.”

22. It is seen from the records that assessee company is a majority shareholder of McDowell. During the assessment year in question McDowell has proposed, rights-cum- public issue and according to assessee it was entitled to subscribe to 61,26,394 number of rights shares which were allotted in the ratio of 4 : 5 on its total holding of 76,57,992 number of shares. The claim of the assessee was in respect of 36,96,344 number of rights shares have been renounced for nil consideration in favour of large number of shareholders who had applied for allotment of shares in the public issue. The claim of the assessee was that on account of the loss of right to subscribe to 38,50,744 rights shares assessee company had lost Rs. 3,85,07,440 at Rs. 10 per share and this was short-term capital loss. However, It claimed that since it realised Rs. 22,84,000 for renouncing

1,54,100 shares for consideration there was a short-term capital gains to that extent, the net short-term capital loss of Rs. 3,62,23,440 was arrived at by setting off of short-term capital gain against short-term capital loss. It is seen from Miss Dhun Dadabhoy Kapadia’s case (supra) there existed following ingredients viz. (a) Transferor and transferee. (b) Sale of shares or rights-cum-public shares.

1. In the instant case these two elements are conspicuously absent. We find that neither there is transferor nor a transferee. In the instant case there is no transfer by transferor to transferee. In other words, the right which were claimed by the assessee came to be renounced in favour of unknown persons and that too for “nil consideration”. A renouncement or relinquishment cannot be in vacuum as is found in the instant case. Hence, there should be renouncer to renounce the right in favour of renouncee. If any one amongst these three are absent, then the act of renouncement will remain in vacuum that is in favour of unknown persons and it would not result in renouncement. If there is renouncement in favour of unknown person the transfer cannot take place. Even in case of transfer two elements necessary for the transfer being complete are transferor and transferee. Though in the instant case the transferor is the assessee the act of transferor is not complete in as much as there is no transfer in favour of a transferee. Transfer in favour of an unknown person there cannot be transfer.

2. It is no doubt true that Revenue cannot sit in the armchair of a businessman to decide as to how the business is to be run and as held by the Hon’ble Supreme Court in S.A. Builders Ltd. vs. CIT (2006) 206 CTR (SC) 631 : (2007) 288 ITR 1 (SC) at para 35 as contended by the learned senior counsel Sri Arvind Datar. However, the Revenue for purposes of bringing to tax which otherwise would have escaped is not prohibited from piercing the corporate veil to ascertain, analyse and arrive at a conclusion to examine the nature of transaction. It is in this background the issue addressed by the first appellate authority requires to be extracted in order to avoid repetition of facts. The same reads as

follows : “The appellant was holding 51,05,328 out of 99,93,120 equity shares as on 31st March, 1992. 25,52,664 bonus shares @ 1 share for every existing share, were issued to the appellant w.e.f. 1st June, 1992 as a result of which the shares of the appellant went upto 76,57,392. The appellant continued to be majority shareholder. As per the ‘letter of offer’ dt. 17th Sept., 1992 circulated to equity shareholders as private and confidential as a prelude to public issue of shares, McDowell & Co. (MDC) decided to go for issue of 23,22,69,744 equity shares of Rs. 10 each at a premium of Rs. 30 per share for rights and Rs. 45 share for public. 1,19,91,744 equity shares of Rs. 10 each for cash at a premium of Rs. 30 per share on right basis in the ratio of 4 shares for every 5 shares held on 18th Aug., 1992 through the letter of offer. 28,19,500 equity shares of Rs. 10 each for cash at a premium of Rs. 45 per share reserved for firm allotment to UB Ltd. the holding company. Offered to the public for subscription in terms of a separate prospectus 8,45,88,500 equity shares at a premium of Rs. 45 per share to the Unit Trust of India employees, shareholders. non-resident Indians, distributors of the company and some sister concerns and fixed deposit holders and debenture holders. 16,64,560 equity shares to general public at a premium of Rs. 45 per share. Thus, the assessee had right to acquire

61,26,394 rights shares at Rs. 40 per share (Rs. 10 + Rs. 30) and 28,19,500 equity shares at Rs. 55 per share as promoters’ contribution at the terms to be issued to public. The public and rights issue were opened on 5th Nov., 1992 and closed on 18th Dec., 1992. However, before the public issue was open the appellant company had taken the decision to relinquish part of its right in the rights shares. Note 4 on p. 3 of the ‘letter of offer’ mentioned earlier, ready as follows : ‘The equity shares reserved for firm allotment to U.B. Ltd. under cl. (b) above shall be bought in before the public issue opens. U.B. Ltd., is currently holding 76,57,992 equity shares, equivalent to 51.09 per cent of the paid-up equity capital. It intends to subscribe to a minimum of 50,95,150 equity shares including 28,19,500 equity shares on a firm allotment basis with a lock-in-period of 5 years in accordance with Securities and Exchange Board of India guidelines on promoters’ contribution from out of the present issue. It intends to renounce 38,50,744 equity shares to maintain a minimum post-issue holding of 33.33 per cent on the enhanced post-issue of equity shares.’”

25. For renouncement of 38,58,744 shares no objection certificate was issued to SEBI by SBI Capitals Markets Ltd. vide letter dt. 1st Jan., 1993 and SEBI in turn has given its no objection vide letter dt. 19th Jan., 1993 and this right in rights shares surrendered by the assessee in favour of McDowell was issued to the public who had applied to the shares earlier at the premium of Rs. 45 per share. It is to be noticed that even before the public issue was opened the quoted price of the shares of ex-right and cum-right were much above Rs. 40 which difference only it had to contribute per share if the rights shares were to be acquired. It is the assessee’s case that ex-rights price was Rs. 70 per share and cum- rights price was Rs. 80 per share which means assessee could have disposed some of the original and bonus shares and realized money for acquiring all the rights for which it had a right to acquire. Alternatively, it could have sold the rights to somebody else at margin and made profit out of it as it did with 1,54,100 rights shares. Having not done either of these, assessee had renounced right in the rights shares, by which act what the assessee did was to renounce the substantial portion of the right in the rights shares and then follow it up with a claim of capital loss for the purpose of claiming deduction under the

IT Act or alternatively to reduce incidence of tax. The assessee when giving up it right to acquire shares from McDowell & Co. Ltd. had not created any transfer or relinquishment of its right. It is on account of its own volition and consciously the assessee refused to acquire the rights and passed on its rights to McDowell & Co. Ltd. who later on sold the shares in open market at a premium. What was renounced for a consideration was

1,54,100 number of rights shares.

26. In order to test the claim of the assessee the facts as admitted by the assessee will have to be examined which are as follows : (i) Value of one share of McDowell & Co. as on 31st July, 1992 was traded @ Rs. 80 per share as per the information furnished by the Madras Stock Exchange vide letter dt. 10th Jan., 1974. (ii) The traded value of the share of McDowell & Co. Ltd. as on 14th Sept., 1992 was Rs. 70 per share, as per the information furnished by Madras Stock Exchange by their letter dt. 10th Jan., 1974. (iii) The assessee has itself sold its shares acquired under rights share and public issue @ Rs.

45 and Rs. 55 respectively (each share face value is Rs. 10). (iv) The assessee out of the rights held had transferred 1,54,100 rights for a consideration of Rs. 22,84,000. When a share can be sold at a profit either in the open market or at face value at Rs. 10, the suffering of loss in the facts of the present case did not arise. The alleged loss was only notional. The judgment of the apex Court in Miss Dhun Dadabhoy Kapadia’s case (supra) was not applicable to the facts of the present case as there was no transfer as contemplated in Miss Dhun Dadabhoy Kapadia’s case (supra) to a third party transfer as has been done in the facts of the present case. Secondly the profit making rights issue was given up by assessee in favour of its sister concern and thirdly even if it is to be construed as a transfer, the computation of loss was only notional. In these circumstances the judgment in Miss Dhun Dadabhoy Kapadia’s case (supra), relied upon by the learned counsel for assessee is not applicable to the facts and circumstances of the case.

Octob 19 13 8

er- 91 1 2

December

Januar 19 13 1

27. Further in Miss Dhun Dadabhoy Kapadia’s case (supra) it was a solitary transaction where Miss Kapadia owned 710 shares and she did not have any role in determining the rights issue or premium issue of shares, whereas in the instant case the assessee itself was the majority shareholder of McDowell and its holding company and it is found in the instance case, sometime before the right public issue of a bonus issue at 1 : 2 had been quoted few months before the shares were quoted ex-right and cum-right. Thus, it cannot be held in the surrounding circumstances where the assessee itself being majority shareholder of McDowell that ex-right and cum-right price of the shares quoted in the stock exchange were not artificial. The CIT(A) in para 19 of the order has clearly spelt out as to what was the contents of letter mentioned earlier and is required to be furnished to the existing shareholders before the public issue, upto 1992. The same reads as under : “As per the letter of offer mentioned earlier and circulated to existing shareholder before public issue, the quotations for period upto April, 1992 were as under : Month Year High Low (Rs.) (Rs.)

y

Febru ary

March April May 92 4 1

8

1

19 12 1

92 5 2

1

19 15 4

92 0 5

1

19 20 8

92 5 5

1

19 19 0

92 0 0

8

June 19

92 91 3

7

July 19

92 80 2

7

0

Augus

19 85

X X

R

t 92 R

The share prices quoted by Madras Stock Exchange from 31st July, 1992 to 17th Aug.,

Month H

i g

L o w

Mont h

H

i g h

6

Septe h

8

6

Janua

mber,

1992

Octob

5

8 7

6 ry,

1993

Febr

1

6

er, 0 5 uary, 1

1992 i.e., before closure of shareholders’ register to determine the persons to whom right shares were to be issued were as follows : 05-8-1992 62.50 ex-rights 06-8-1992 63.65 — do— 07-8-1992 70.00 —do— 17-8-1992 (1st, 2nd, 8th , 9th, 15th, and 16th—holidays and hence no transactions) The quotations in Madras Stock Exchange were as under for the months of September, 1992 to March, 1993.

Low

56

49

1992 1993

5

Nove

7 5 Marc

mber,

1 2 h, 2 42

1992 1993

Dece 5

mber, 6 1

1992 5

These statistics would show that the price of the shares of MCD recorded a peak in April, 1992 and started falling down in the period which can be called post-scam period during which the confidence of the public in share market was greatly shaken. It is also to be noted that the price of the shares continued to slide down even after the right shares were issued, to a low figure of Rs. 52/42 in March, 1993. This fall in price may be also due to a combination of other factors such as : (1) Rigging of prices of shares substantially already the public to lure the public of shares subscribe to the shares. (2) Shaken confidence of the public as a result of the scam. (3) Issue of bonus shares. (4) Public issue of shares. The assessee has mentioned that the ex-right and cum-right prices of shares were Rs. 80 and Rs. 70 and there was a difference of Rs. 10 per share. It can be seen from the statistics given above that the difference between ex-right and cum-right prices made out is even lower than the difference between the high and low prices for each of the months from December, 1992 to March, 1993. Since the assessee renounced the rights to acquire 36,96,644 shares (nearly 1/3rd of the total of 1,19,91,744 rights shares to be issued at lower premium of Rs. 30/share) and this was offered to public for subscription at the higher premium of Rs. 45 applicable to pubic issue which in turn must have affected the worth of the company and reduced the margin between ex-right and cum-right shares, therefore what was quoted as ex-right and cum-right prices upto December, 1992 might not have continued to exist even after the surrender of large number of rights by the assessee. In the circumstances, it is difficult to conclude that the difference made out between ex-right and cum-right prices was real and that there was a clear reduction in prices of shares attributable to the right issue.”

1. In this background when Miss Dhun Dadabhoy Kapadia’s case (supra) is examined with reference to the facts of the present case we are unable to accept the contention of the assessee that the Revenue cannot sit in the armchair of businessman to ascertain the nature of transaction (which proposition holds good only as to how business is to be run) and not to the proposition as to how the authorities are empowered to examine the transaction when it can be couched so as to have undue advantage.

2. The next incidental issue which arises for consideration is as to whether the diminution in the value of the shares (nucleus shares) which entitles the assessee to claim capital loss. We are of the opinion that said loss cannot be claimed by the assessee for the obvious reason that there is notional loss in respect of a notional transfer by way of renunciation. When we have held that there is no transfer by way of renunciation the question of allowing the capital loss in respect of notional loss would not arise. The judgment in the case of Thushar Commercial referred to supra [(1998) 148 CTR (Cal) 430 : (1998) 230 ITR 918 (Cal)—Ed.] pressed into service by the learned counsel for assessee wherein the judgment in Miss Dhun Dadabhoy Kapadia’s case (supra) is followed would also be not applicable to the facts of the present case, for the following reasons.

3. In Thushar’s case (supra) the assessee being an investment company was holding 33,000 equity shares of Indian Rayon Industries Ltd. The said company issued 13.5 per cent secured fully convertible debentures on rights basis to existing shareholders in the ratio of one debenture for one equity shareholder (sic-share). The assessee subscribed to 6,000 debentures and transferred the right to subscribe to 27,000 debentures for which it received consideration for Rs. 2,48,348. In the instance case, we find that the assessee was entitled to 61,26,394 number of rights shares which were allotted in the ratio of 4 : 5 out of the said number of shares. The assessee subscribed to 22,75,650 shares by paying through subscription and in respect of 1,54,100 number of rights, the assessee renounced its right for consideration of Rs. 22,84,000. However, in respect of 36,96,344 there was no consideration but renounced it in favour of number of shareholders who had initially applied for shares in the public issue who are unknown to assessee. Thus, on comparison of these two cases we find that the 6,000 debentures which assessee subscribed in Tushar Commercial case (supra) was referable to 22,75,650 in the instance case. Likewise, 27,000 debentures which right passed its transfer for consideration of Rs. 2,48,348 in Tushar Commercial case (supra) is in parameter with 1,54,100 rights renounced for a consideration of Rs. 22,84,000 in the assessee’s case. Thus, in the Tushar Commercial case (supra) the renouncement for no consideration is conspicuously absent and hence the said decision is not applicable to the facts of the case.

31. In the result the questions of law are answered as follows : No. Question of law Answer

(i) Whether Tribunal was right in deleting the additions pertaining to the accretion to bottle deposits, without noting that the assessee company had not proved that such accretion was in fact real and not noting the provisions of s. 41(2) of the Act ?

Partly negative. On facts to the extent of Rs. 31,30,840 an addition made by the AO is upheld and consequently order of Tribunal is held bad in law to this extent only.

(i ) Whether the Answered in Tribunal was i right in treating the beer bottles as plant ?

Whether the i Tribunal was i right in i ignoring the facts on record and allowing a capital loss of Rs. 5,10,53,280 representing diminution in the value of shares held by the assessee in M/s McDowell & Co. Ltd., by misinterpreting the decision of the Hon’ble Supreme Court in Miss Dhun Dadabhoy Kapadia vs. CIT (1967) 63 ITR 651 (SC) ?

(v) Whether the i Tribunal exceeded its jurisdiction by adjudicating on the issue pertaining to the taxability of compensation of Rs 4.30 crores received by the assessee, on merits, when favour of the assessee and against the Revenue.

Tribunal was in error in allowing the capital loss towards diminution of the values of the shares in a sum of Rs. 5,10,53,280 towards 36,96,344 number of shares renounced by the assessee in favour of unkown shareholders for “nil consideration “.

In the affirmative since on remand by the first appellate authority the Tribunal considered the remand order without considering the factual aspects discussed in the first appellate authority had set aside the issue for readjudication by the AO ?

Whether the v conclusion of the Tribunal that the sum of Rs 4.30 crores received by the assessee as compensation was exempt from tax, perverse and unsupported on facts and in law ?

Whether the v appellate authorities were correct in holding that the ‘non- competition fee’ of Rs. 4.30 crores claimed as capital asset cannot be treated as a revenue receipt and brought to tax as held by the AO ?” the first assessment order though remand order was the subject- matter of appeal.

Hence, we direct that the matter with regard to chargeability of non- competition fee be adjudicated by the Tribunal afresh in accordance with law by considering both the orders that is first assessment order dt. 29th March, 2006 and also the second assessment order dt. 15th Feb., 2000.

32. Accordingly, the appeal is allowed in part and the questions of law formulated in the appeal are answered as stated hereinabove and parties are directed to bear their respective costs.

[Citation : 325 ITR 485]

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