Waseem Ahmed, Accountant Member - This appeal by the Revenue is against the order of Commissioner of Income Tax (Appeals)-XII, Kolkata dated 21.11.2013. Assessment was framed by JCIT(OSD), Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') vide his order dated 08.12.2011 for assessment year 2009-10. The grounds raised by the Revenue per its appeal are as under:—
"1. |
"That on the facts and in the circumstances of the case and as per law ld. CIT erred in deleting the disallowance amounting to Rs. 55,00,010/- made by the AO as capital loss which was adjusted from the TCG b the assessee company." |
2. |
"That is the facts and in law of the case the ld. CIT(A) erred in allowing set of capital loss with the LTCG." |
3. |
"That is the facts and in law of the case the ld. CIT(A) erred in allowing to adjust the STCL amounting to Rs.27,19,888/- with the STCG where STT was not paid." |
4. |
"That is the facts and in law of the case the ld. CIT(A) erred in allowing to adjust STCL where STT was paid with the STCG where STT was not paid in violation of Sec. 111A of the IT Act." |
5. |
"That is the facts and in law of the case the ld. CIT(A) erred in deleting the addition made the AO u/s 14A read with rule 8D amounting Rs.8,31,749/- for earning exempted income." |
6. |
"That is the facts and in law of the case the ld. CIT(A) erred in restricting the disallowance u/s. 14A to Rs.3,41,720/- in violation of Rule 8D of the IT Act." |
Shri P.R. Kothari, Ld. Authorized Representative appeared on behalf of assessee and Shri Sallong Yaden, Ld. Departmental Representative appeared on behalf of Revenue.
2. First common issue raised by Revenue in Ground No. 1 and 2 is that Ld. CIT(A) erred in deleting the addition made by Assessing Officer for Rs. 55,00,010/- on account of capital loss.
2.1 The facts as have been brought on record are that assessee is a Limited Company and for the year under consideration has filed its return of income on 24.09.2009 declaring total income of Rs. 38,15,680/-. Thereafter case was selected for scrutiny and subsequently notice u/s. 143(2) of the Act was issued to initiate the proceedings under section 143(3) of the Act.
The assessee acquired 1,29,412 optional convertible share warrants on dated 03.09.2007 from M/s West Coast Paper Mills Ltd. (WCPM for short). The face value of the said share warrant was at Rs. 425.00 per share warrant. The assessee was to pay 10% of the face value of the total consideration i.e., Rs. 55.00 lakh (10% of 129412 x 425.00) at the time of application for the purchase of said warrants. Accordingly, assessee has made the payment to the WCPM for Rs.55.10 lakh as application money for the purchase of share warrant convertible into equity share at the option of assessee. The share warrant was to be converted into equity share of Rs.10 each of WCPM upon the payment of balance 90% of the total value of the share within the specified period. However, assessee did not exercise its option for converting the share warrant into equity share of WCPM. Accordingly, assessee did not pay the balance stipulated amount i.e. 90% of value of share warrant. As a result all the rights attached with the share warrant came to an end and the amount of Rs. 55.00 lakh paid earlier against the share warrant was forfeited by WCPM in terms of the issue of said share warrants. In view of the above, assessee claimed Short Term Capital Loss (STCL for short) of Rs. 55.00 lakh. However, AO observed that share warrants are not capital asset within the meaning of Sec. 2(14) of the Act. Therefore, loss arising from the forfeiture of shares warrant is not capital loss chargeable under the income tax Act. Therefore, loss claimed by assessee for an amount of Rs. 55.10 lakh was disallowed and added back to the total income of assessee.
3-4. Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas assessee submitted that the share warrant is a capital asset as per the Sec. 2(14) of the Act and assessee was having right to convert share warrant into equity share as per the terms of agreement of share warrant. The assessee did not exercise its option to acquire the share of the said company WCPM and accordingly right of the assessee got extinguished. Considering the submission of assessee, Ld. CIT(A) deleted the addition made by AO by observing as under:—
'… … As already found from the definition of "transfer", transfer includes relinquishment. Of the asset or extinguishment of any rights thereon. As the terms "relinquishment" and "extinguishment" are not denied under the Act, one has to depend upon the decided case law for understanding their ordinary meaning. According to the Shorter Oxford English Dictionary, while the word "relinquish" means: to withdraw from, desert, abandon; to cease to hold, adhere to, the word "extinguish" means to put a total end to, blot out of existence. In other words, in a transaction of relinquishment, the interest of a person in a property is either given up, abandoned, or surrendered; but the property in which interest is relinquished continues to exist and the property continues to be owned by some person or persons after the transaction of relinquishment - CIT v. (HUF) [1974] 95 ITR 656 (Bom.). A relinquishment takes place when the owner withdraws himself from the property and abandon his rights thereto. It presumes that the property continues to exist after the relinquishment - CIT v. Rasiklal Maenklal (HUF) [1980] 177 ITR 198 (SC) On the other hand, extinguishment refers not to extinguishment of asset itself but to extinguishment of holder's right to the assets - CIT v. East India Charitable Trust [1994] 206 ITR 152/73 Taxman 380 (Cal). Redemption of preference shares by a company; squarely comes within the phrase 'sale, exchange, or relinquishment of the asset' and, consequently, it is treated as transfer - Anarkali Sarabhai v. CIT [1977] 90 Taxman 509 (SC). However, if there is a reduction of share capital by a company by paying a part of capital to its shareholders, it would result in "extinguishment" of proportionate right in shares held by shareholders and chargeable to capital gains tax in the hands of shareholders as held in Kartikeya Vs. Saarabhai v. CIT [1997] 94 Taxman 164 (SC), CIT v. G. Narasimhan [1999] 102 Taxman 66 (SC). In the same way, forfeiture of share application money because of failure by an assessee to pay balance amount on allotment of shares, is "transfer' - CIT v. BPL Sanyo Finance Ltd. [2009] 312 ITR 63 (Kar.). In view of the facts of the case, the express provisions of the Act and the principle of law as laid down by the Apex Court and other High Court, I am of the view that the right over 129412 optionally convertible share warrants of West Coast Paper mills Ltd., owned by the appellant was a capital asset under sec. 2(14) of the Act and its forfeiture amounted to "transfer" under section 2(47) of the Act. Therefore, the loss arising out of the transfer amounting to Rs.55,00,010/- was eligible for adjustment against profits. Therefore, the Assessing Officer was not justified in rejecting the claim of the appellant. He is directed to allow the same allow appropriate relief to the appellant while giving effect to this order. This ground of appeal is allowed accordingly.'
Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.
5. We have heard rival parties and perused the materials available on record. Before us both the parties relied on the orders of authorities below as favourable to them. Ld. AR submitted paper book which is running pages from 1 to 51 and stated that share warrant is a capital asset within the meaning of Sec. 2(14) of the Act the extinguishment of the right attached to it is a transfer within the meaning to Sec. 2(47) of the Act, therefore, loss arisen from the extinguishment of the right attached share warrant is resulting Short term capital loss.
5.1 We find that assessee was allotted convertible share warrant on 03.09.2007 and assessee did not exercise its option to convert the share warrant into equity share. The assessee surrendered the share warrants within the specified time and as a result right attached to the share warrant of the assessee came to an end which has resulted into STCL which was disallowed by AO on the ground that share warrant is not a property as per the provisions of Sec. 2(14) of the Act. However, in appellate stage, Ld. CIT(A) dismissed the action taken by AO. Now the question before us arise so as to whether the share warrant which is optional convertible into shares are capital asset as per Sec. 2(14) of the Act. We find that several courts have held this issue in favour of assessee, which are reproduced below:-
| (1) |
Dynamic Foundations (P.) Ltd. v. CIT [2015] 57 taxmann.com 139/232 Taxman 501 (Cal.) |
(2) |
Dy. CIT v. BPL Sanyo Finance Ltd. [2009] 312 ITR 63 (Kar.) |
(3) |
CIT v. Chand Ratan Bagri [2010] 329 ITR 356/[2011] 10 taxmann.com 129 (Delhi) |
From the above judgments, we find that there was a binding contract between assessee and WCPM with the option to the assessee to acquire the equity share. The assessee, in the instant case, has paid only 10% of the total consideration and the balance was to be paid by assessee within the specified time. However, the market value of the share of WCPM came down drastically and assessee decided not to make further payment for the purchase of share warrant. As a result of non-payment of balance amount for the purchase of share warrant, the company forfeited the amount. In the instant case, share warrant is a capital asset within the meaning of Sec. 2(14) of the Act. At this juncture, we find to reflect the provision of Sec. 2(14) of the Act as under:—
2. In this Act, unless the context otherwise requires,-
(14) "capital asset" means-
| (a) |
property of any kind held by an assessee, whether or not connected with his business or profession; |
(b) |
any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) |
From a bare reading of Sec. 2(14) of the Act and we find that share warrant is a capital asset. So the loss generated from the forfeiture of share warrant is nothing but a capital loss and chargeable under the head "capital gain". In view of the above, the loss acquired from the forfeiture of share warrants is nothing but STCL. Hence, this loss should be allowed in favour of assessee. Therefore, we find no reason to interfere into the order of Ld. CIT(A). Hence, Revenue's ground is dismissed.
6. Next common issue raised by Revenue in Ground No. 3 and 4 is that Ld. CIT(A) erred in allowing to adjust the STCL of Rs. 27,19,888.00 based on STT paid transactions with Short Term Capital Gain (STCG for short) where Securities Transaction Tax (STT for short) was not paid.
The assessee for the year under consideration has shown STCL on this sale-purchase of securities on which STT was paid of Rs. 27,19,888/-. The assessee adjusted this loss against STCG which was arising from the sale-purchase of shares on which no STT was paid. The AO, during the course of assessment proceedings objected to allow the set off of current years STCL amounting to Rs. 27,19,888/- against current year's STCG on which no STT was paid on the ground that Sec.111A of the Act provide for special tax treatment of STCG where STT has been paid. Accordingly, loss of Rs. 27,19,888/- has not been allowed to the set off against other short term capital gains income.
7. Aggrieved, assessee preferred an appeal before Ld. CIT(A), whereas assessee submitted that Sec. 70(2) of the Act clearly provides for set off of any STCL of current year without making any distinction between STT paid and non STT paid transactions. It was also submitted that the provision of Sec. 111A comes into effect only after computation of total income under various heads of income. Accordingly, considering the submission, Ld. CIT(A) allowed the set off of STCL on which STT was paid by observing as under:—
'I have considered the submission. For the correct appreciation of the provisions of law, the relevant sections may be reproduced below:
Section 70(2): "where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset."
Section 111A: "where the total income of an assessee includes any income chargeable under the head "Capital gains", arising from the transfer of a short-term capital asset, being an equity share in a company or a unit of an equity oriented fund and-
| (a) |
the transaction of sale of such equity share or unit is entered into on or after the date of which Chapter VII of the Finance (No.2) Act, 2004 comes into force; and |
(b) |
such transaction is chargeable to securities transaction tax under that Chapter; |
the tax payable by the assessee on the total income shall be the aggregate of-
| (i) |
The amount of income-tax calculated on such short-term capital gains at the rate of fifteen per cent; and |
(ii) |
The amount of income-tax payable on the balance amount of the total income as if such balance amount were the total income of the assessee." |
From a plain reading of the provisions of the Act, it is clear that section 111A lays down the procedure for taking the capital gains in respect of equity shares, and this section does not prescribe condition for treatment of capital loss on transfer of such asset, whereas provisions of sec. 70 prescribes conditions for treatment of a capital loss of business, speculative or non-speculative. It is not the case of the Assessing Officer that there has not been any transfer of capital asset and there has not been loss, which could not be set off. The provisions do not make any distinction between the loss on transfer of a capital asset of equity shares or any other asset. Now, the exceptions in provisions of section 70 are-
| (i) |
Loss from speculation business can be set off only against the profits in a speculation business; |
(ii) |
Loss from a specified business under sec. 35AD; |
(iii) |
Loss from the activity of owning and maintaining race horses; |
(iv) |
Long term capital loss can be set off only against long-term capital gains; |
(v) |
Loss cannot be set off against winnings from lotteries, crossword puzzles, etc. |
(vi) |
Loss from purchase and sale of securities covered under sec. 94(7) of the Act. |
Barring the aforesaid cases, any other loss can be set off against any other income within the same heard of income. In other words-(a) loss from a non- speculation business can be set off against income from speculation or non- speculation business; and (b) short-term capital loss can be set off against any capital gain (whether long term or short term). Therefore, in my view, the Assessing Officer is found not justified in rejecting the claim of the appellant for the set off short term capital loss (STT paid) of Rs.2719888/- against the a gains under the same head. He is hereby directed to allow such set off instead of allowing the same to be carried forward. This ground of appeal is allowed.'
Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.
8. Before us Ld. DR vehemently relied on the order of Assessing Officer whereas Ld. AR relied on the order of Ld. CIT(A). Ld. AR submitted that AO has ignored the fact that Sec. 111A of the Act comes into play only after completion of computation of total income under various head of income, whereas Sec. 70(2) of the Act comes into play before computation of total income. Hence, the interpretation of Sec. 111A of the Act adopted by AO to deny inter head set off was misplaced and untenable.
9. We have heard the rival contentions of both the parties and perused the materials available on record. From the foregoing discussion, we find that assessee in the instant case has incurred loss from STCL on the sale-purchase of share on which STT was paid but AO observed that there is a special rate of tax u/s 111A of the Act for charging tax in case of sale-purchase of share on which STT has been paid. Therefore, such loss was disallowed by AO to adjust the income under the same head i.e., capital gains against the income of share sales & purchase on which no STT was paid. However, Ld. CIT(A) deleted the addition made by AO. Now the question before us arise so as to whether the transactions on which the provision of Sec. 111A of the Act is attracted is to be treated separately from other transactions of capital gains where no STT has been paid. In this connection, the perusal of Sec. 70(2) of the Act, which is reproduced below:—
"[Set off of loss from one source against income from another source under the same head of income.
70. (1) …. …
(2) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset."
From a plain reading of said Section, we find that said Act does not make any distinction between the income under the head "capital gain" on which STT was paid or STT was not paid. We further find that loss under the same head then set off from one source to another source is allowed if it is computed under the similar computation made for the relevant year. The word "similar computation" connotes that income should have been computed within the relevant Chapter i.e. Sec. 45 to 55A of the Act. In similar facts and circumstances the various co-ordinate Benches have decided the issue in favour of assessee as under:—
| (a) |
Capital International Emerging markets Fund v. Dy. DIT (IT) [2013] 145 ITD 499/37 taxmann.com 45 (Mum. - Trib.) |
(b) |
Asstt. DIT v. Legg Mason Asia (Ex-Japan) Analyst Fund [2013] 38 taxmann.com 12/[2014] 61 SOT 277 (Mum. - Trib.) |
(c) |
ADIT v. Lansforsakringar Asienfond [2013] 37 CCH 0361 (Mum. - Trib.) |
Accordingly respectfully following the precedent as above we hold that there is no infirmity in the order of the Ld. CIT. Accordingly, we uphold the same.
10. Last issue raised by Revenue in this appeal is that Ld. CIT(A) erred in restricting the addition to Rs. 3,41,720/- by reducing for an amount of Rs. 4,90,029/- made by AO.
11. Assessee for the year under consideration has earned dividend income which was exempted u/s 10(34) of the Act. The AO invoked the provision of Sec. 14A of the Act r.w.s Rule 8D(2)(iii) of the IT Rules, 1962 @ .5% of average investment of Rs. 17,37,72,408/- which is coming to Rs. 8,68,862/- The assessee at his own disallowed a sum of Rs. 37,113/- as per Sec. 14A of the Act. Accordingly, AO disallowed a sum of Rs. 8,31,749/- and added to the total income of assessee.
12. Aggrieved, assessee preferred an appeal before Ld CIT(A) who gave relief partly to assessee by observing as under:—
"I have considered the facts of the case and the submissions put forth on behalf of the appellant. In this case, the expenses incurred by the appellant are claimed for other business activities and not for the earning of dividend income. From the working as given by the Assessing Officer himself would show that the appellant had not incurred any expenditure on interest or other expenses relating to the investment for earning the dividend income during the year. The appellant has shown to have incurred demat expenses of Rs.18,208/-, portfolio management expenses of Rs.2,22,680/- and STT Rs.34,762/- aggregating to Rs.2,75,650/-, which are directly relatable to the share transactions, and which have been added back by the appellant itself in the computation of total income. However, since the appellant company itself has made disallowance under sec. 14A of the Act, it cannot put forward the claim that the Assessing Officer was unjustified in resorting provisions of Rule 8(2)(iii). It is not open to Assessing Officer to make disallowance under section 14A according to his own discretion or on ad hoc basis and he is statutorily required to compute disallowance in manner provided by sub-section (2) and (3) of section 14A - CIT v. Citicorp Finance (India) Ltd. [2007] 12 SOT 248 (Mu.). however, there is merit in the alternative ground taken by the appellant that the AO ought to have excluded the value of investments in units of debt/liquid fund with growth option, debentures & share warrant which are not capable of yielding any dividend income at all and capital gain, if any on their disinvestment would also not be exempted because of non-STT chargeable nature of such investments amounting to Rs.42875720/- in calculating the disallowance under Rule 8(2D)(iii). After excluding the aforesaid investment of Rs.42875720/-, the result investment capable of earning dividend would come to Rs130896788/- and the disallowance under sec. 14A is restricted to half per cent of the same would come to Rs.6,54,483/- as against Rs.3,12,763/- (Rs.2,75,650 + Rs.37113) added by the app. Thus, the addition on account of disallowance under sec. 14A is restricted to Rs.3,41,720/- as against the additional disallowance made by the Assessing Officer at Rs.8,31,749/-. The appellant shall get relief of Rs.4,90,029/- on this ground."
Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us for partly relief grant to assessee.
13. Ld. DR before us vehemently relied on the order of AO whereas Ld. AR relied on the order of Ld. CIT(A). Ld. AR submitted that there are certain investments which are not capable of giving rise to the dividend income therefore these should be excluded from the total value of investment. The Ld. CIT(A) while applying the provision of Sec. 14A of the Act has accordingly excluded those investments.
14. We have heard the rival contentions and perused the materials available on record. We find that the facts of the case have been duly explained in the aforesaid paragraph, therefore the same is not required to be reiterated. Further, at the outset, we find the investments which are not capable of yielding the dividend income needs to be excluded and accordingly several courts have decided this issue in favour of assessee. The Hon'ble High Court of Delhi in the case of ACB India Ltd. v. Asstt. CIT [2015] 374 ITR 108/235 Taxman 22/62 taxmann.com 71 has decided the issue in favour of assessee.
"Income—Expenditure incurred in relation to exempt income—Disallowance— Validity—Assessee reported a tax exempt income—AO made addition u/s 14A r.w. rule 8D by taking into consideration total quantum of interest other than that invested u/s 14A in terms of Rule 8D and arrived at the said figure after multiplying it with result of average value of investments and over average value of assets derived by him—CIT(Appeals) observed that that amount of investment attributable to dividend constituted less than 1% of total scheduled funds—CIT(A) accepted basis of calculation applied by AO and directed a disallowance of .05% of amount determined to be average investment—Tribunal restored AO's determination holding it to be a true calculation in terms of Rule 8D—Held, AO, instead of adopting average value of investment of income which was not part of total income i.e. value of tax exempt investment, chose to factor in total investment itself—Even though CIT(Appeals) noticed exact value of investment which yielded taxable income, he did not correct error but chose to apply his own equity—Given the record, that had to be done so to substitute figure of Rs.38,61,09,287/- with the figure of Rs.3,53,26,800/- and thereafter arrive at exact disallowance of .05%—Thus, findings of ITAT and the lower authorities were set aside—Matter remitted to work out tax effect to AO. The AO, instead of adopting the average value of investment of which income is not part of the total income i.e. the value of tax exempt investment, chose to factor in the total investment itself. Even though the CIT(Appeals) noticed the exact value of the investment which yielded taxable income, he did not correct the error but chose to apply his own equity. Given the record, that had to be done so to substitute the figure of Rs.38,61,09,287/- with the figure of Rs.3,53,26,800/- and thereafter arrive at the exact disallowance of .05%."
Respectfully following the aforesaid precedents, we find no reason to interfere with the order of Ld. CIT(A) and we uphold accordingly. This ground of Revenue's appeal is dismissed.
15. In the result, Revenue's appeal stands dismissed.