ITR/66/1998 1/12 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE NO. 66 OF 1998 For Approval and Signature : HONOURABLE MR. JUSTICE D.A.MEHTA HONOURABLE MR. JUSTICE Z.K.SAIYED 1. Whether Reporters of Local Papers may be allowed to see the judgment ? 2. To be referred to the Reporter or not ? 3. Whether Their Lordships wish to see the fair copy of the Judgment ? 4. Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5. Whether it is to be circulated to the Civil Judge ? ========================================================= DEEPAK NITRITE LIMITED - Applicant(s) Versus COMMISSIONER OF INCOME TAX - Respondent(s) ========================================================= Appearance : MR JP SHAH with MR MANISH J. SHAH for Applicant(s) : 1, MR MANISH R BHATT for Respondent(s) : 1, ========================================================= CORAM : HONOURABLE MR.JUSTICE D.A.MEHTA and HONOURABLE MR.JUSTICE Z.K.SAIYED Date : 06/05/2008 ITR/66/1998 2/12 JUDGMENT ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE D.A.MEHTA) 1. This Reference involves cross References by the assessee and the Revenue. The Income-Tax Appellate Tribunal, Ahmedabad Bench “A” has drawn up a consolidated statement of case under Section 256(1) of the Income-Tax Act, 1961 (“the Act”) and referred the following questions : RA NO.645/Ahd/98 BY ASSESSEE 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the detachable warrants which authorised the holders to obtain the equity shares of the investee company after a period of four years from the date of allotment, had a monetary value ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal has any materials on record to hold that the detachable warrants had a monetary value ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal took into account irrelevant and extraneous material into consideration to come to a finding that the detachable warrants had a monetary value ? 4. Whether the Tribunal was justified in law in restoring the question of quantification of loss on the sale of non-convertible portion Part-C of the debentures of Rs.50/- each to the Assessing Officer with a direction to take the cost thereof as reduced by the cost of detachable warrants ? RA NO 656/Ahd/98 BY REVENUE ITR/66/1998 3/12 JUDGMENT Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in allowing the assessee's claim for depreciation on the factory building and office building of the Sahyadri Dyestuff & Chemical Units at Pune although the said factory building and office building were not transferred in favour of the assessee, and the ownership of the said factory building and office building was not vested with the assessee ? RA NO. 657/Ahd/98 BY REVENUE 1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in upholding the CIT(A)'s order allowing deduction under Section 32AB of the Act claimed by the assessee through a subsequent return of income in lieu of the deduction under Section 32A of the Act claimed by the assessee in the original return of income ? 2. Whether, on the facts and in the circumstances of the case, the Income-Tax Appellate Tribunal was right in law in restoring the matter relating to quantification of loss on the sale of investment to the file of the Assessing Officer for fresh adjudication and in directing the Assessing Officer to take the cost price of the non-convertible portion Part-C of the debenture at Rs.50/- minus the cost of detachable warrant which was not transferred and then work out the capital gain/loss on the aforesaid transaction and also in directing the Assessing Officer to restrict the cost of detachable warrant to Rs.2.175 and to restrict the capital gain/loss on the said transaction at “NIL” ? 2. The Assessment Year in question is 1989-90, the relevant Accounting period being Financial Year ended on 31.3.1989. The assessee-company claimed loss on sale of investments amounting to Rs.24,43,750/-. The said loss was disallowed by the Assessing Officer for the reasons stated in Paragraph ITR/66/1998 4/12 JUDGMENT No.13 of the Assessment Order dated 28.2.1992. The assessee carried the matter in Appeal. The Commissioner (Appeals), for the reasons stated in his Order dated 12.11.1992, allowed the claim of loss. Thereupon Revenue preferred Appeal before the Tribunal and the ground in relation to allowance of loss reads as under : (1)On the facts and in the circumstances of the case and in law, the learned CIT(A) erred : (vi)in allowing the claim of loss of Rs.24,43,750/- on sale of non-convertible portion of debentures, which was held by the Assessing Officer as a colourable device with the sole purpose of reducing the taxable income.” 3. The Tribunal has framed the order in relation to these claims after recording the facts and contentions by issuing following directions : “Accordingly we will restore the question of quantification of loss on the sale of investment to the file of the Assessing Officer for fresh adjudication in accordance with law directing him to take the cost price of the non convertible portion PART-C of the debentures at Rs.50/- minus the cost of detachable warrants which was not transferred to the Unit Trust of India and then work out the capital gain/loss on the transaction of sale of Part C non-convertible portion of debentures by the assessee to U.T.I. We may point out that in case the cost of detachable warrant determined by the AO is more than Rs.2,175/- then the same is to be restricted to Rs.2.175/- and the capital gain/loss on this transaction may be determined at NIL because the assessee cannot be worse of having filed appeal against the order of the Assessing Officer and the Tribunal do not have any power of enhancement as held by the Supreme Court in the case of State of Kerala vs. Vijaya Stores (1979) 116 ITR 15 (SC). In the result this issue is set aside to the file of the AO and is deemed to have been allowed for statistical purposes.” ITR/66/1998 5/12 JUDGMENT 4. The aforesaid directions issued by the Tribunal are found to be unacceptable both by the Assessee and the Revenue, as can be seen from the four questions raised by the assessee and the question No.2 raised by Revenue in Reference Application No.657/Ahd/98. All the cross questions involve only one issue and, therefore, are taken up together. The learned Advocate for the assessee Shri J.P. Shah and learned Senior Standing Counsel for Revenue Shri M.R. Bhatt have been heard. 5. The facts as recorded by the Assessing Officer and the findings in relation to the claim of loss read as under : “13. Loss on sale of investment - Loss of Rs.24,43,750/- : Along with the return, the assessee has filed details of loss incurred of Rs.24,43,750/- on sale of investment. The assessee has furnished following details to explain the loss on sale of investment : Part C – Non-convertible part only (face value Rs.50/-each) of Rs. 11,50,000 convertible Debenture of Deepak Fertili- zers & Petrochemicals Corpn. Ltd. Cost 5,75,00,000 Sales Price at Rs.17.875 per Part C of 11,50,000 Debenture as above 5,50,56,250 ----------------- Loss 24,43,750 ======= During the course of assessment,it transpired that the assessee company is one of the promoters of M/s. ITR/66/1998 6/12 JUDGMENT Deepak Fertilizers & Petrochemicals Corpn. Ltd. (DFPCL). By virtue of their shareholding, the assessee company were allotted debentures to the extent of 11,50,000 by DFPCL. The debentures were divided into three parts, viz. (A), (B) and (C ). Part A and B were convertible whereas Part C was non-convertible. However, as per the terms of the issue, the shareholders were required to subscribe to the debentures in a composite form. As per the terms of payment of the Right Issue, Rs.25/- was payable on application, Rs.25/- on allotment and balance Rs.50/- on First and Final Call. The Non-convertible portion of Part C of the debenture of face value of Rs.50/- was issued with a detachable warrant, attached to it and the holder of the warrant had a right to apply one Equity Share of Rs.10/- at such a price not exceeding Rs.50/- as may be fixed by the C.C.I., in between the period of four to six years from the date of allotment of debentures. An option w3as given to the applicant of the Right Issue to pay the full amount on application or on allotment. The call money was payable on or before 16.10.1989. The assessee company made the payment of Rs.11,50,00,000/- to M/s. Deepak Fertilizers and Petrochemicals Corpn. Ltd., as under : 06.01.89 2,87,50,000 On application @ Rs.25/- for 1150000 debentures 27.03.89 1,87,50,000 Balance @ Rs.75/- for 250000 debentures 28.03.89 2,62,50,000 Balance @ 75/- for 200000 debentures 29.03.89 2,62,50,000 Balance @ 75/- for 350000 debentures 11,50,00,000 During the course of assessment, the assessee company has furnished copies of letters sent by M/s. DFPCL to the assessee company, Deepak Nitrite Ltd., wherein it has been stated that the allotment letters were actually delivered to the assessee company, M/s. Deepak Nitrite Ltd. The assessee company has also furnished the copy of the share transfer from dated 29.3.89, wherein it has ITR/66/1998 7/12 JUDGMENT been mentioned that the assessee company M/s. Deepak Nitrite Ltd., has sold the non-convertible portion of Part “C” of the debenture to the Unit Trust of India. In view of it, it was the contention of the representative of the assessee company that the delivery of these shares/debentures were duly received by them and thus, the shares were sold by actual delivery to Unit Trust of India at the price of Rs.47.875 per debenture. It is relevant to mention here that these debentures were not quoted in the Stock Exchange till 31.3.90 and both the Companies namely DFPCL and M/s. Deepak Nitrite Ltd., are under the same management. The contention put forth by the assessee company has been duly considered. However, the loss declared by the assessee due to sale of investment cannot be accepted for the following reasons : (1)Under the terms and conditions of the Right Issue, there was no obligation on the part of the assessee to make the full payment before 31.3.89. However, the assessee company has made the full payment for debentures before the Final Call. It is not understood that on the one hand, the assessee company is claiming that the Part C of the debentures were sold since the funds required for subscribing the debentures were of very high order and beyond its capacity. However, on the other hand, the assessee company has paid full amounts on the debenture issue before the final call was made. (2)As per payment schedule, the assessee company has made last payment on 29.3.89 to its sister concern, DFPCL. The delivery letter of M/s. DFPCL is also dated 29.3.89. The share transfer form is also dated 29.3.89. It is not understood as to how these transactions can be completed so early ? It is highly improbable that the assessee company received debentures by “actual delivery” on the same day, i.e. On 29.3.89 and these were transferred to Unit Trust of India on the same day. The part C of the Debenture issue of DFPCL was not quoted in the Share market as on the day of sale i.e. 29.3.89. It is thus clear that the assessee company has shown undue hurry in this transaction ITR/66/1998 8/12 JUDGMENT without any justifiable reasons. Thus, the loss declared in the transaction is contrived loan and not a normal business loss. (3)Part C of the Debenture comprises of two parts : a) Debenture of face value of Rs.50/-, and b) Detachable warrant which entitles the holder of the warrant to subscribe to the share of DFPCL after four to six years. The shares of M/s. Deepak Fertilizers & Petrochemicals Corpn. Ltd., was listed under 'Specified category' as on date of Right Issue. Thus, though no specific value can be assessed to the detachable warrant, however, it is an instrument which carries some value. The assessee company yas detained the detachable warrant with themselves and the same has not been sold. Thus, the loss as claimed by the assessee in this transaction is attributable because they have not transferred the detachable warrant to the seller, i.e. Unit Trust of India. From the above discussion, it is clear that the whole transaction is colourable. It is hardly believable that a person can get the debenture on the same day and sell it through a broker on the same day. It is thus clear that it is a contrived and manipulated loss which has got no nexus with the free transaction of the market. The loss claimed to be incurred on such manipulated transaction are not allowable under the provisions of the I.T. Act. Thus, the assessee's claim of loss on the sale of investment amounting to Rs.24,43,750/- is not acceptable and the same is ignored in the computation of income. 6. The Commissioner (Appeals) has merely held that the loss in question is an allowable loss. The ground of Appeal raised by Revenue which is reproduced hereinbefore also assails the order of Commissioner (Appeals) allowing the claim of loss which was held by the Assessing Officer to be a colourable device with the sole purpose of reducing the taxable income. Therefore, the only controversy between the ITR/66/1998 9/12 JUDGMENT parties was whether the loss in question is based on a genuine transaction or is a colourable transaction only for the purposes of reducing the taxable income. 7. The Tribunal was therefore expected to record a decision after appreciating the facts and evidence on record as to whether the Assessing Officer was justified in holding that the transaction was not a genuine transaction and the loss was thus disallowable, or whether the Commissioner (Appeals) was justified in holding that the loss was a result of genuine transaction. In fact, before the Tribunal, no ground was raised by the Revenue and none could be raised by the assessee as the Appeal on this Issue was in favour of the assessee, yet the Tribunal without deciding the Issue raised before the Tribunal undertook an exercise as to what would be the cost of detachable warrants for the purposes of working out the correct quantum of loss. The Tribunal failed to appreciate that at no stage was the Issue of quantification ever in dispute between the parties. The Assessing Officer had categorically recorded that for the reasons stated in his order the claim of loss “is not acceptable and the same is ignored in the computation of income.” If the Assessing Officer had not undertaken quantification of the loss, the Commissioner (Appeals) had not undertaken such an exercise, there was no ground raised by the Revenue before the Tribunal in the Appeal, the Tribunal on its own could not have undertaken the said exercise without first deciding the controversy brought before it by the parties, more particularly, the Appellant. Merely because during the course of argument some contentions were raised as to whether detachable warrants had any cost or not was not sufficient for the Tribunal to ITR/66/1998 10/12 JUDGMENT embark upon such an exercise in absence of any controversy between the parties. The Tribunal failed to appreciate that in absence of any exercise of quantification by the Assessing Officer there was no occasion for the assessee to carry the matter any further and therefore the said Issue could not arise out of the order of Commissioner (Appeals). Once that was the position the Tribunal could not have taken it upon itself to raise the Issue and decide the same which did not properly arise out of the Order of Commissioner (Appeals) as no ground could be taken by either side in absence of any findings by the Commissioner (Appeals). 8. In the aforesaid set of facts and circumstances of the case all the four questions raised on behalf of the assessee and question No.2 raised on behalf of Revenue in Reference Application No.657/Ahd/98 are required to be left unanswered leaving it open to the Tribunal to decide the ground of Appeal raised by the Revenue and determine, in the first instance, whether the loss in question was a genuine transaction or not. 9. In so far as the solitary question raised in Reference Application No.656/Ahd/98 at the instance of Revenue is concerned, it is in agreed position between the parties that the Tribunal has followed its own decision in assessee's own case for earlier years. That the said earlier order of the Tribunal was brought before this Court by way of Reference and the issue stands concluded by the Judgment in the case of COMMISSIONER OF INCOME-TAX v/s. DEEPAK NITRITE LTD., reported in (2000) 243 ITR 825. 10. Hence, it is not necessary to set out the facts and ITR/66/1998 11/12 JUDGMENT contentions in detail. For the reasons recorded in the earlier Judgment in assessee's own case the question is answered in the affirmative i.e. in favour of the assessee and against the Revenue. 11. That leaves Question No.1 in Reference Application No.657/Ahd/98, at the instance of Revenue. The facts in relation to this claim is that originally the assessee claimed deduction for investment allowance under Section 32A of the Act in the Return of income filed on 29.12.1989. Subsequently a revised Return of income tax filed on 31.12.1990 wherein deduction under Section 32AB of the Act was claimed instead of deduction under Section 32A of the Act. The stand of Revenue was that claim for investment allowance had already been granted when the Return was processed under Section 143(1)(a) of the Act and, therefore, there was no question of entertaining the claim under Section 32AB of the Act. The assessee succeeded before the Commissioner (Appeals) and Revenue challenged the order made by the Commissioner (Appeals). 12. The Tribunal has come to the conclusion that the intimation issued under Section 143(1)(a) of the Act is not an Assessment Order and the assessee was, therefore, entitled to file revised Return under Section 139(5) of the Act. 13. It is an admitted fact that the assessee, being a limited Company, was entitled to file Return of Income on or before 31.12.1989 for the Assessment Year in question. That original Return of income had actually been filed on 29.12.1989. Therefore, the assessee was entitled, as a matter of right, to ITR/66/1998 12/12 JUDGMENT file revised Return in terms of Section 139(5) of the Act. The Tribunal was correct in holding that mere intimation under Section 143(1)(a) of the Act could not be equated with an Assessment Order more particularly when the Assessing Officer himself has framed Assessment Order under Section 143(3) of the Act after issuance of Notice under Section 143(2) of the Act. Hence, there is no error committed by the Tribunal in so far as the Tribunal has come to the conclusion that the Commissioner (Appeals) had rightly upheld the claim for deduction under Section 32AB of the Act on the basis of revised Return of income in lieu of deduction claimed under Section 32A of the Act in original Return of income. 14. Hence, question No.1 in Reference Application No.657/Ahd/98 is answered in the affirmative i.e. in favour of the assessee and against the Revenue. 15. The Reference stands disposed of accordingly with no order as to costs. (D.A.MEHTA, J.) (Z.K.SAIYED,J.) sas