Commissioner of Income Tax Delhi-iii v. M/s Sun Investments Ltd
[Citation -2015-LL-1119-3]

Citation 2015-LL-1119-3
Appellant Name Commissioner of Income Tax Delhi-iii
Respondent Name M/s Sun Investments Ltd.
Court HIGH COURT OF DELHI AT NEW DELHI
Relevant Act Income-tax
Date of Order 19/11/2015
Assessment Year 1992-93
Judgment View Judgment
Keyword Tags capital gain • capital loss • carry forward of loss • cost of acquisition • investment company • market price • profit on sale • sale consideration • sham transaction • stock-in-trade
Bot Summary: 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. 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 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. Jindal Group ITA 91/2002 Page 2 of 7 includes investment companies such as the Assessee which, inter alia, hold and transact in shares of the operational companies of the Group. 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. According to the Assessee, its board of directors decided to retain the shares on a long term basis and consequently passed a ITA 91/2002 Page 3 of 7 resolution on 4th April, 1991 that all shares held by it should be treated as investment/capital asset. Accordingly, the Assessee reflected a capital gain of Rs.1,30,77,220/- and after making adjustments under Section 48(2) of the Act, the Assessee declared a capital gain of Rs.91,43,554/-.


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 Appellant : Mr. N.P. Sahni, Senior Standing counsel with Mr. Nitin Gulati. For Respondent : Mr. Ajay Vohra, Senior Advocate with Ms. Kavita Jha. CORAM: DR. JUSTICE S. MURALIDHAR MR. JUSTICE VIBHU BAKHRU JUDGMENT VIBHU BAKHRU, J 1. Revenue has filed this appeal under Section 260A of Income Tax Act, 1961 (hereafter Act ) impugning common order dated 20th December, 2001 passed by Income Tax Appellate Tribunal (hereafter ITAT ) in ITA No. 243/Del/2001 and ITA No. 314/Del/2001. ITA 243/Del/2001 was appeal preferred by Assessee against common order dated 3rd October, 2000 passed by Commissioner of Income Tax (Appeals) [hereafter 'CIT(A)'], inter alia, rejecting Assessee s appeal against assessment order dated 29th July, 1994 relating to assessment ITA 91/2002 Page 1 of 7 year (hereafter AY ) 1992-93. ITA No. 314/Del/2001 related to another Assessee namely M/s Nalwa Investments Ltd. and common order passed by ITAT insofar as it relates to said appeal is not subject matter of present appeal. 2. This Appeal was admitted on 12th October, 2004 and following questions of law were framed:- 1. Whether Income Tax Appellate Tribunal was right in holding that sale consideration received by 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 Income Tax Appellate Tribunal was right in holding that assessee had incurred loss on sale of its entitlement to acquire partly convertible debentures and assessee is entitled to set off alleged loss from capital gains/income earned by assessee? 3. Briefly stated relevant facts necessary to address aforesaid question are as under:- 3.1 Assessee company is investment company belonging to Jindal Group of companies. Jindal Group is mainly engaged in manufacturing and production of ferrous metals and alloys. Jindal Group ITA 91/2002 Page 2 of 7 includes investment companies such as Assessee which, inter alia, hold and transact in shares of operational companies of Group. 3.2 Assessee filed its return of income for AY 1992-93 returning income of Rs.26,14,312/- (twenty six lacs fourteen thousand three hundred twelve) and also claiming carry forward of short term capital loss of Rs.48,84,176/- (forty eight lacs eighty four thousand one hundred seventy six). return was picked up for scrutiny and notice under Section 143(2) of Act was issued to Assessee. Profit and Loss Account of Assessee disclosed profit of Rs.4,71,16,041/- (four crores seventy one lacs sixteen thousand forty one). In aforesaid profits, Assessee had reduced profits on sale of certain shares held by it in other companies which Assessee claimed to be capital assets. Assessee had also claimed loss on account of renunciation of rights to subscribe to PCDs. 3.3 At material time, Assessee was one of shareholders of Jindal Strips Limited (hereafter JSL ). Assessee reflected shares held in JSL as stock-in-trade and had valued same at cost or market price whichever was less. According to Assessee, its board of directors decided to retain shares on long term basis and consequently passed ITA 91/2002 Page 3 of 7 resolution on 4th April, 1991 that all shares held by it should be treated as investment/capital asset. 3.4 During financial year relevant to AY 1992-93, JSL announced rights issue of partly convertible debentures (hereafter PCDs ) of Rs.360/- each. Out of aforesaid sum, Rs.120/- per PCD was payable on application and balance Rs.240/- was payable on allotment. One part of PCD of face value of Rs.100/- was to be automatically converted into one share of Rs.10/- each at premium of Rs.90/- after six months of allotment. 3.5 During year, Assessee sold 1,25,000 (One lac twenty five thousand) shares of M/s Saw Pipes Ltd. for consideration of Rs.1,33,90,720/- (One crore thirty three lacs ninety thousand seven hundred twenty). According to Assessee, cost of acquisition of those shares was Rs.3,13,500/- (three lacs thirteen thousand five hundred). Accordingly, Assessee reflected 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 Act, Assessee declared capital gain of Rs.91,43,554/- (ninety one lacs forty three thousand five hundred fifty four). In addition, Assessee also declared profit on sale of 2,500 ITA 91/2002 Page 4 of 7 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 Assessee claimed that it sold its entitlement to subscribe to 2,12,000 PCDs at 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 Jindal Group. Admittedly, cost of acquisition of shares of JSL on basis of which Assessee was entitled to subscribe to PCDs were acquired at price much below Rs.98/-. Nonetheless, Assessee claimed loss of Rs.42/- per PCD on transaction. This was computed by taking cost of acquisition of rights to subscribe to PCDs as diminution in quoted value of JSL shares; JSL shares were quoted at cum-right price of Rs.615/- as on 20th December, 1991 and ex-right price of Rs.475/- as on 24th December, 1991. It appears that Assessee had claimed said loss at Rs.2,16,23,980/- (two crores sixteen lacs twenty three thousand nine hundred eighty). Revenue, in its appeal, has mentioned 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. ITA 91/2002 Page 5 of 7 3.7 Thus, Assessee claimed that it suffered diminution of Rs.140/- in value of shares of JSL. It appears that rights to subscribe to 2,12,000 PCDs arose in respect of 3,02,857 shares of JSL held by Assessee. Accordingly, Assessee calculated cost of acquisition of 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 said rights were sold at aggregate value of Rs.2,07,76,000/- (two crores seven lacs seventy six thousand) (2,12,000 x Rs.98/-), Assessee claimed capital loss of Rs.2,16,23,980/- (two crores sixteen lacs twenty three thousand nine hundred eighty). 4. It appears that Assessee sought to set off aforesaid loss of Rs.2,16,23,980/- from 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 carry forward of loss of Rs.48,84,176/-. 5. AO as well as CIT(A) had noted that principal transactions in question were amongst related companies and funds from said transactions were also transferred to related companies. AO as well as CIT(A) were of view that transaction in question ITA 91/2002 Page 6 of 7 was sham transaction and device to avoid payment of tax. 6. present appeal was heard alongwith Commissioner of Income Tax Delhi-I v. M/s Abhinandan Investment Ltd.: ITA No.130/2001 and questions of law framed in present appeal and in ITA 130/2001 were also common. Further, learned counsel for parties contended that material facts and issues in present appeal were similar to issues involved in ITA 130/2001 and decision in ITA 130/2001 would also be determinative of questions in 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, questions of law are answered in favour of Revenue and against Assessee. 8. appeal is allowed. parties are left to bear their own costs. VIBHU BAKHRU, J S. MURALIDHAR, J NOVEMBER 19, 2015 RK ITA 91/2002 Page 7 of 7 Commissioner of Income Tax Delhi-iii v. M/s Sun Investments Ltd
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