1 itxa490-04 sas IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.490 OF 2004 The Commissioner of Income Tax-VIII, Mumbai ..Appellant. V/s. M/s. Tainwala Trading & Investment Co. Ltd. ..Respondent. Mr. Suresh Kumar for the appellant. Mr. S.N. Inamdar, senior Advocate with Miuhir Naniwadekar for the respondent. CORAM : J.P. DEVADHAR AND A.A. SAYED, JJ. DATED : 10TH AUGUST, 2011 P.C. :- 1. Whether the ITAT was justified in holding that the loss of Rs. 72,99,996/- incurred by the respondent-assessee was allowable as a business loss under Section 37 of the Income Tax Act, 1961, is the question raised in this appeal. 2. The assessment year involved herein is AY 1997-98. 3. On 22nd February, 1995 the assessee was allotted 2 itxa490-04 10,04,126 naked convertible warrants on payment of Rs.72,99,996/- by Tainwala Chemicals and Plastics (India) Ltd. a group company to which the assessee belonged. The naked convertible warrants were issued at the rate of Rs.7.27 per warrant which were to be converted into equity shares at a specified date lateron. Accordingly, on the specified date for converting the naked convertible warrant i.e. 21st August, 1996, Tainwala Chemicals and Plastics (India) Ltd. offered conversion of naked convertible warrants into shares at a price of Rs.72.70 per share. The said price was quoted on the basis of the certificate issued by the Chartered Accountant in accordance with the guidelines laid down by the SEBI. At the relevant time, the market value of the shares of Tainwala Chemicals and Plastics (India) Ltd. was Rs.14/- per share. The assessee for commercial reasons thought it fit not to subscribe to the shares offered by the company, as a result thereof Tainwala Chemicals and Plastics (India) Ltd. forfeited the amount of Rs.72,99,996/- invested by the assessee company in the naked convertible warrants. 4. In the return of income filed for AY 1997-98, the assessee claimed loss of Rs.72,99,996/- as business loss since the naked convertible warrants were held as stock in trade and as a prudent business decision, the assessee chose not to invest any further amount by subscribing to the sharers offered on conversion of naked convertible warrants. The assessing officer disallowed the claim of the assessee. 3 itxa490-04 The CIT(A) upheld the order of the assessing officer. On further appeal, the ITAT allowed the appeal filed by the assessee and held that the loss incurred was the business loss. Challenging the aforesaid order, the revenue has filed the present appeal under Section 260A of the Income Tax Act, 1961. 5. The said appeal was earlier dismissed by this Court on 1/4/2009. On S.L.P. filed by the revenue, the Apex Court by its order dated 7/2/2011 set aside the order passed by this Court on 1/4/2009 and restored the appeal with a direction to reconsider the question as regards the financial position of Tainwala Chemicals and Plastics (India) Ltd. on the date of investment and whether the assessee made investments knowing fully well the vulnerable financial position of Tainwala Chemicals & Plastics (India) Limited. Accordingly, the matter is heard afresh. 6. The argument of the revenue is that the assessee purchased the naked convertible warrant knowing fully well that Tainwala Chemicals and Plastics (India) Ltd. will not be prosperous in the near future and that the transaction was entered into with a different motive other than earning profits, because, the assessee belonged to the same group of company. In the present case, it is not in dispute that 67% shares of Tainwala Chemicals and Plastics (India) Ltd. were held by the 4 itxa490-04 general public including banks and financial institutions, and only 33% shares of the company were held by the promoters. Thus, naked convertible warrants were issued in the ordinary course of business and not with any special motive by the group concern with ulterior motives. From the affidavit filed by the Director of the assessee company, it is seen that the profits of Tainwala Chemicals and Plastics (India) Ltd. for the year ending 31st March, 1995 were Rs.4.02 crores and dividend of 25% was declared by the company in September, 1995. Net profit of the said company before the depreciation for the year 31st March, 1996 was Rs.3.07 crores on a turnover of Rs.42.20 lakhs as against Rs.27.62 lakhs in the assessment year in question. In these circumstances, in the assessment year in question, in which the assessee had invested an amount of Rs.72,99,996/-, Tainwala Chemicals and Plastics (India) Limited was a profit making company and there was no reason to believe that the said company would suffer losses in the near future. The market value of the shares on the date of investment were between Rs.60/- to Rs.80/- per share and on the date of conversion of naked convertible warrants, the share value had fallen to Rs.14/- per share and as per the SEBI guidelines the shares were offered on the date of conversion at Rs.72.70 per shares. In these circumstances, the assessee took a commercial decision to forgo the amount invested in naked convertible warrants than to invest further amount by subscribing to the shares at a price offered by the company. Consequently, no fault 5 itxa490-04 can be found with the decision of the ITAT in allowing the loss incurred by the assessee on forfeiture of the amounts invested by the assessee in naked convertible warrants. Accordingly, the appeal is dismissed with no order as to costs. (A.A. SAYED, J.) (J.P. DEVADHAR, J.)