Commissioner Of Income Tax ... vs M/S Sun Investments Ltd.
2015 Latest Caselaw 8609 Del

              THE HIGH COURT OF DELHI AT NEW DELHI
%                                      Judgment delivered on: 19.11.2015
+       ITA 91/2002
COMMISSIONER OF INCOME TAX DELHI-III                      ..... Appellant
                          versus
M/S SUN INVESTMENTS LTD.                                  ..... Respondent
Advocates who appeared in this case:
For the Appellant    : Mr. N.P. Sahni, Senior Standing counsel
                       with Mr. Nitin Gulati.
For the Respondent   : Mr. Ajay Vohra, Senior Advocate with Ms.
                       Kavita Jha.

CORAM:
DR. JUSTICE S. MURALIDHAR
MR. JUSTICE VIBHU BAKHRU
                               JUDGMENT

VIBHU BAKHRU, J

1. The Revenue has filed this appeal under Section 260A of the Income

Tax Act, 1961 (hereafter the 'Act') impugning a common order dated 20th

December, 2001 passed by the Income Tax Appellate Tribunal (hereafter

'ITAT') in ITA No. 243/Del/2001 and ITA No. 314/Del/2001. ITA

243/Del/2001 was an appeal preferred by the Assessee against a common

order dated 3rd October, 2000 passed by the Commissioner of Income Tax

(Appeals) [hereafter 'CIT(A)'], inter alia, rejecting the Assessee's appeal

against the assessment order dated 29th July, 1994 relating to the assessment

year (hereafter 'AY') 1992-93. ITA No. 314/Del/2001 related to another

Assessee namely M/s Nalwa Investments Ltd. and the common order

passed by the ITAT insofar as it relates to the said appeal is not a subject

matter of the present appeal.

2. This Appeal was admitted on 12th October, 2004 and the following

questions of law were framed:-

"1. Whether the Income Tax Appellate Tribunal was right in holding that the sale consideration received by the assessee by transfer of shares and sale of rights entitlement of Partly Convertible Debentures (PCDs) is income from capital gains and not income from business?

2. Whether the Income Tax Appellate Tribunal was right in holding that the assessee had incurred loss on sale of its entitlement to acquire partly convertible debentures and the assessee is entitled to set off the alleged loss from the capital gains/income earned by the assessee?"

3. Briefly stated the relevant facts necessary to address the aforesaid

question are as under:-

3.1 The Assessee company is an investment company belonging to the

Jindal Group of companies. Jindal Group is mainly engaged in the

manufacturing and production of ferrous metals and alloys. Jindal Group

includes investment companies - such as the Assessee - which, inter alia,

hold and transact in shares of the operational companies of the Group.

3.2 The Assessee filed its return of income for the AY 1992-93

returning an income of Rs.26,14,312/- (twenty six lacs fourteen thousand

three hundred twelve) and also claiming a carry forward of short term

capital loss of Rs.48,84,176/- (forty eight lacs eighty four thousand one

hundred seventy six). The return was picked up for scrutiny and a notice

under Section 143(2) of the Act was issued to the Assessee. The Profit and

Loss Account of the Assessee disclosed a profit of Rs.4,71,16,041/- (four

crores seventy one lacs sixteen thousand forty one). In the aforesaid profits,

the Assessee had reduced profits on sale of certain shares held by it in other

companies which the Assessee claimed to be capital assets. The Assessee

had also claimed loss on account of renunciation of rights to subscribe to

PCDs.

3.3 At the material time, the Assessee was one of the shareholders of

Jindal Strips Limited (hereafter 'JSL'). The Assessee reflected the shares

held in JSL as stock-in-trade and had valued the same at cost or market

price whichever was less. According to the Assessee, its board of directors

decided to retain the shares on a long term basis and consequently passed a

resolution on 4th April, 1991 that all shares held by it should be treated as

investment/capital asset.

3.4 During the financial year relevant to AY 1992-93, JSL announced a

rights issue of partly convertible debentures (hereafter 'PCDs') of Rs.360/-

each. Out of the aforesaid sum, Rs.120/- per PCD was payable on

application and the balance Rs.240/- was payable on allotment. One part of

the PCD of the face value of Rs.100/- was to be automatically converted

into one share of Rs.10/- each at a premium of Rs.90/- after six months of

allotment.

3.5 During the year, the Assessee sold 1,25,000 (One lac twenty five

thousand) shares of M/s Saw Pipes Ltd. for a consideration of

Rs.1,33,90,720/- (One crore thirty three lacs ninety thousand seven hundred

twenty). According to the Assessee, the cost of acquisition of those shares

was Rs.3,13,500/- (three lacs thirteen thousand five hundred). Accordingly,

the Assessee reflected a capital gain of Rs.1,30,77,220/- (one crore thirty

lacs seventy seven thousand two hundred twenty) and after making

adjustments under Section 48(2) of the Act, the Assessee declared a capital

gain of Rs.91,43,554/- (ninety one lacs forty three thousand five hundred

fifty four). In addition, the Assessee also declared profit on sale of 2,500

shares of Reliance Industries and 30,000 shares of JSL amounting to

Rs.75,96,250/- (seventy five lacs ninety six thousand two hundred fifty).

3.6 The Assessee claimed that it sold its entitlement to subscribe to

2,12,000 PCDs at the rate of Rs.98/- each aggregating to Rs.2,07,76,000/-

(two crores seven lacs seventy six thousand). These rights were sold to M/s

Gagan Trading Co., another company belonging to the Jindal Group.

Admittedly, the cost of acquisition of shares of JSL on the basis of which

the Assessee was entitled to subscribe to PCDs were acquired at the price

much below Rs.98/-. Nonetheless, the Assessee claimed a loss of Rs.42/-

per PCD on the transaction. This was computed by taking the cost of

acquisition of the rights to subscribe to PCDs as a diminution in the quoted

value of JSL shares; JSL shares were quoted at a cum-right price of

Rs.615/- as on 20th December, 1991 and an ex-right price of Rs.475/- as on

24th December, 1991. It appears that the Assessee had claimed the said loss

at Rs.2,16,23,980/- (two crores sixteen lacs twenty three thousand nine

hundred eighty). The Revenue, in its appeal, has mentioned the Assessee's

claim of short term loss as Rs.1,68,59,360/- (one crore sixty eight lacs fifty

nine thousand three hundred sixty), however, that appears to be erroneous.

3.7 Thus, the Assessee claimed that it suffered a diminution of Rs.140/-

in the value of shares of JSL. It appears that the rights to subscribe to

2,12,000 PCDs arose in respect of 3,02,857 shares of JSL held by the

Assessee. Accordingly, the Assessee calculated the cost of acquisition of

the rights at Rs.4,23,99,980/- (four crores twenty three lacs ninety nine

thousand nine hundred eighty) (i.e. 3,02,857 x Rs.140/-). Since the said

rights were sold at an aggregate value of Rs.2,07,76,000/- (two crores seven

lacs seventy six thousand) (2,12,000 x Rs.98/-), the Assessee claimed a

capital loss of Rs.2,16,23,980/- (two crores sixteen lacs twenty three

thousand nine hundred eighty).

4. It appears that the Assessee sought to set off the aforesaid loss of

Rs.2,16,23,980/- from the capital gains of Rs.1,67,39,804/- declared by it

from sale of shares of M/s Saw Pipes Ltd. (Rs.91,43,554/-) and shares of

Reliance Industries and JSL (Rs.75,96,250/-), thus, claiming a carry

forward of loss of Rs.48,84,176/-.

5. The AO as well as the CIT(A) had noted that the principal

transactions in question were amongst related companies and the funds

from the said transactions were also transferred to related companies. The

AO as well as the CIT(A) were of the view that the transaction in question

was a sham transaction and a device to avoid payment of tax.

6. The present appeal was heard alongwith Commissioner of Income

Tax Delhi-I v. M/s Abhinandan Investment Ltd.: ITA No.130/2001 and

the questions of law framed in present the appeal and in ITA 130/2001

were also common. Further, the learned counsel for the parties contended

that the material facts and issues in the present appeal were similar to the

issues involved in ITA 130/2001 and a decision in ITA 130/2001 would

also be determinative of the questions in the present appeal.

7. Thus, in view of our decision in Commissioner of Income Tax

Delhi-I v. M/s Abhinandan Investment Ltd.: ITA 130/2001 delivered

today, the questions of law are answered in favour of the Revenue and

against the Assessee.

8. The appeal is allowed. The parties are left to bear their own costs.

VIBHU BAKHRU, J

S. MURALIDHAR, J NOVEMBER 19, 2015 RK