| SooperKanoon Citation | sooperkanoon.com/71047 |
| Court | Income Tax Appellate Tribunal ITAT Pune |
| Decided On | May-11-2000 |
| Judge | B Chhibber, K Singhal |
| Reported in | (2001)78ITD87(Pune.) |
| Appellant | Asara Sales and Investments (P.) |
| Respondent | Deputy Commissioner of |
2. The assessee is an investment and finance company. During the course of assessment proceedings, the Assessing Officer noted that the assessee had claimed short-term capital loss of Rs. 1,49,98,400 on sale of debentures of Kirloskar Oil Engines Ltd. (for short KOEL). He further noted that during the relevant previous year, KOEL had offered for subscription 15 per cent Secured Redeemable Non-Convertible Debentures of Rs. 100 each at par along with two detachable warrants and as per the letter of offer, each warrant-holder was entitled to subscribe to one share of KOEL at Rs. 60 per share at a future date (face value of Rs. 10 + premium Rs. 50). The assessee purchased 6,44,000 NCDs from KOEL in the month of March, 1993. These 6,44,000 NCDs were sold by the assessee to LIC Mutual Fund and GIC Mutual Fund for Rs. 4.94 crores. The transaction resulted in a loss of Rs. 1,49,98,400 to the assessee, which amount has been claimed by the assessee as a short-term capital loss. The Assessing Officer has mentioned in the assessment order that whereas in a letter dated 23-3-1996 filed before him the assessee had stated that the debentures were initially acquired in order to get benefit of detachable warrants entitling to subscribe to the shares of the company; but in the working of the short-term capital loss, the assessee claimed full value of Rs. 100 as cost of debentures without attributing any value to the two detachable warrants which were retained by the assessee because only debentures were sold. The Assessing Officer, therefore, asked the assessee as to how the cost of one debenture could be taken at Rs. 100 when two detachable warrants were enclosed with it and why no cost factor had been attributed to these two warrants. The assessee informed the Assessing Officer that NCDs are not an attractive investment proposal for the investors and the issue of NCDs generally remain undersubscribed. It was further stated by the assessee that the companies therefore offer some incentives like redemption with premium, detachable warrants etc. It was pointed out to the Assessing Officer that the warrant confers a future right to subscribe to shares and since in any case the shares have to be paid for, the warrant in itself has no cost. The Assessing Officer noted that the warrants are tradeable and these have been separately quoted in the Stock Exchange along with the debentures which are also separately quoted. In response to a query made by the Assessing Officer as to whether the assessee would have sold the debentures with the warrants at the same price to the Mutual Funds, the assessee did not deny that there would have been some variation in the sale price of the debentures. On further enquiry in the matter from KOEL, the Assessing Officer gathered that investors had traded in the warrants separately and the first transaction which had been registered by KOEL in tradeable warrants was @ Rs. 20 per warrant in July, 1993. The A.O. has specifically mentioned in the assessment order that the investors had traded in the warrants without waiting for the shares to be allotted to them in future. For the reasons mentioned above, the Assessing Officer came to the conclusion that the cost price of Rs. 100 is not of the debentures alone, but it also includes the value of two warrants. The Assessing Officer was, therefore, of the opinion that for working out the capital gain, the assessee should have excluded the cost of warrants from the cost of debentures, instead of taking the cost price at the full value of Rs. 3. For the purpose of arriving at the cost of warrants, it was noted by the Assessing Officer that on the date of issue of the NCD, the market value of one share of KOEL was Rs. 77.50 on the Bombay Stock Exchange.
As per the offer, the assessee was to get the share in future at the maximum price of Rs. 60. The Assessing Officer, therefore, came to the conclusion that the cost of warrant was Rs. 17.50 [Rs. 77.50 - Rs. 60].
Since the two warrants were attached to each debenture, the Assessing Officer calculated the cost of each debenture at Rs. 65 [Rs. 100 - Rs. 35]. Taking the cost of debenture at Rs. 65, the Assessing Officer computed the short-term capital gain at Rs. 75,41,600 as against short-term capital loss of Rs. 1,49,98,400 computed by the assessee.
4. On appeal, the CIT (Appeals) substantially endorsed the views of the Assessing Officer and held that the warrants had 'value' all the time.
He assumed that the warrants gave a right to the holder to purchase the shares of a 'very reputed company' like KOEL at less than market price.
This assumption itself was based on the assumption that KOEL share prices will continue to rise. He ignored the fact that it did not happen (he decided the appeal in August, 1996) even upto 1998 and the assessee allowed the warrants to lapse. He accordingly confirmed the order of the Assessing Officer. Aggrieved by the orders of the authorities below, the assessee is in appeal before us.
5. Shri S.N. Inamdar, the learned counsel for the assessee submitted that no cost can be attributed to warrants, which were intended as inducements, notwithstanding the fact that both the parties to the contract acknowledged that Rs. 1OO paid was the price paid for the debenture (which is a form of loan) and full Rs. 100 was to be repaid as a loan and interest was to be paid from day 1, on the full amount of loan of Rs. 100 and premium of 5 per cent was also calculated on full amount of Rs. 100. According to the learned counsel, the only reasonable inference can be that the cost of debenture must be t;aken at Rs. 100 each and warrants have come without any separate identifiable or assigned cost by way of incentive or inducements. The learned counsel relied upon the judgmentof the Hon'ble Bombay High Court in CIT v. Modiram Laxmandas (P.) Ltd. [1983] 142 ITR 702 : [1982] 11 Taxman 26.
In that case, import licences were granted as an incentive for exports.
He submitted that the Bombay High Court held that the asset must possess the inherent quality of being available on the expenditure of money to a person seeking to acquire it before it can be subject of capital gains. He submitted that the warrants have no such inherent quality, as these cannot be acquired at the time of allotment by paying an identifiable price or cost for it. If a person wants to acquire an NCD on the other hand, he has to pay full price of Rs. 100 whether he wants the warrants or not. The learned counsel further submitted that it must be noted that the fact that warrants can be purchased in the open market subsequently is of no relevance. Even in the above case, the import licences could be purchased in the open market. Such view has been taken by several High Courts. In this connection, he relied upon CIT v. Satya Paul [1984] 148 ITR 21 : [1983] 13 Taxman 235 (Cal.) and Addl. CIT v. K.S. Sheik Mohideen [1978] 115 ITR 243 (Mad.) (FB) and CIT v. T. Kuppuswamy Pillai & Co. [1977] 106 ITR 954 (Mad.).
6. Alternatively, the learned counsel submitted that if the difference between market value of KOEL shares and the highest premium price payable by warrant holders is to be treated as cost of acquisition of warrants, then such difference must be taken as on the date of acquisition and not on the date when warrants were merely offered. The cost of acquisition must have reference to date of acquisition which was on 10-3-1993 when the price was only Rs. 55/57.50 and there was a negative difference. He asserted that no cost therefore can be attributed to warrants even on the Assessing Officer's reasoning.
7. Shri Naresh Kumar, the learned senior D.R. strongly supported the order of the CIT (Appeals). He submitted that a warrant is a valuable asset and accordingly, its cost has to be taken into consideration while computing the capital gains. He referred to the decision of the Gujarat High Court in CITv. Vania Silk Mills (P.) Ltd. [1977] 107 ITR 300 wherein it was held, "that any right therein appearing in Section 2(14) takes in all kinds of rights". He further referred to the decision of the Karnataka High Court in Syndicate Bank Ltd. v.Addi CIT [1985] 155 ITR 681 : [1986] 29 Taxman 32 wherein it has been held that the term 'capital asset' has an all embracing connotation. He further relied upon the judgment of the Supreme Court in A.R. Krishnamurthy v.CIT [1989] 176 ITR 417 : 43 Taxman 30 and submitted that in this case it was held that mining rights are capital assets. He particularly drew our attention to page 420 of the judgment. He further relied upon the judgment of the Madras High Court in the case of R. Naresh v. CIT and submitted that in this case it was held that right to receive bonus is a valuable right. Similarly, the Calcutta High Court in CIT v. Tushar Commercial Co. Ltd. 230 ITR 918 has held that right shares are a valuable right. He further stated that the issue has been concluded in favour of the department by the decision of the Punjab High Court in Hari Bros. (P.) Ltd. v. ITO [1964] 52 ITR 399, wherein it has been held that right to subscribe for shares is a capital asset. He further relied upon the judgment of the Hon'ble Supreme Court in the case of COT v. Prabhat Mktg. Co. Ltd. [1967] 19 STC 84 where sale proceeds for Tin and Kerosene were bifurcated between taxable (Tin) and non-taxable (Kerosene) goods. The learned senior D.R. submitted that viewed in the light of the above decisions, it has to be held that warrants are valuable rights, as it was a financial package sold by the issuer to the assessee.
8. The learned senior D.R. then cited the example of somebody trying to sell a camel along with the bell as a package for Rs. 5,000. The seller valued the camel at Re. 1 and the bell at Rs. 4,999. However, the buyer bought both the camel and the bell, thinking the camel would cost Rs. 4,999 and the bell would cost only Re. 1. In a similar fashion, the issuer, i.e., KOEL has packaged the offer of NCDs along with the warrants in such a fashion, valuing both at Rs. 100. However, the market value of NCD is only Rs. 70. Therefore, the difference of Rs. 30 is to be attributed as cost of the warrants.
9. We have considered the rival submissions and perused the facts on record. In the Book "Guide to SEBI Capital Issues, Debentures & Listing" by K. Sekhar, 2nd Edn. 1996, 'Detachable Warrants' have been defined as under : These warrants are issued with the host instruments, namely, convertible or non-convertible debentures, preference shares, equity shares or other instruments and traded separately on the stock exchanges. Generally, no up front payment is required to be made against the warrants.
In the same Book, taxation aspect has been discussed in para 2.42 on page 32 as follows : Under the current tax laws, warrants are treated at par with equity shares. The cost of acquisition for the primary market investor is treated as Nil whereas for the secondary market investor, the actual price paid for the warrant is treated as the cost. Where warrants are issued along with NCDs and the NGDs are disposed at a loss, the capital loss on NCDs can be adjusted against the capital gains on warrants.
No doubt, a tradeable warrant confers a right - a valuable right which can be traded in the market. We also agree that it is not a dead right, but a live and a valuable right. But the warrant confers only a future, uncertain, volatile and inchoate right and not an existing right. It cannot be acquired at the time of allotment by paying an identifiable price or cost. In fact, a tradeable warrant/coupon is a sweetner with a debt instrument like NCDs or PCDs to improve the marketability of the main instrument. It is an incentive or inducement for ascribing to original NGDs. Such an incentive/inducement has no acquisition value before Section 55(2)(aa)(iiia) was brought on the statute book by the Finance Act, 1995 with effect from 1-4-1996. In the case of CIT v.Modiram Laxmandas (P.) Ltd. (supra), the Hon'ble Bombay High Court held that quota rights and import licences which are given as incentive have no cost of acquisition. The Hon'ble High Court further held that the asset must possess the inherent quality of being available on the expenditure of money to a person seeking to acquire it before it can be subject to capital gains. The warrants have no such inherent quality as they cannot be acquired at the time of allotment by paying an identifiable price or cost for it. If a person wants to acquire a NCD, he has to pay full price of Rs. 100 whether he wants the warrants or not. Further it must be noted that the fact that warrants can be purchased in the open market subsequently is of no relevance. In the case referred to supra, the import licences could be purchased in the open market. Such view has been taken by several High Courts. In Satya Paul's case (supra), the Calcutta High Court has held that in the case of tradeable import licences received along with foreign remittances, the assessee acquired the right as an inducement or incentive and it cannot be said that it is acquired for a cost nor was its cost capable of being estimated. [Emphasis supplied]. To the same effect are the decisions in K.S. Sheik Mohideen 's case (supra) and T. Kuppuswamy Pillai & Co. 's case (supra). Accordingly, we hold that the cost of acquisition of coupon/warrant is 'Nil' as it was a distinct asset from the NCD for which the assessee paid Rs. 100. In the light of above decisions, it cannot be held that the price of the warrant was embedded in the price of NCD. In Smt. Maharani Usha Devi v. CIT [1981] 131 ITR 445 : [1982] 8 Taxman 91 (MP), the assessee purchased 42,000 shares of a company in order to acquire a controlling interest in that company and paid Rs. 100 per share when the market value was admittedly only Rs. 76. The department contended that the excess price paid was the price of controlling interest and did not form part of cost of acquisition of the shares. The Hon'ble High Court negatived this contention and held as under : Controlling interest is an incidence of holding shares in the company. It cannot be separately acquired or transferred. It flows from the fact that a number of shares are held by a person. If for acquiring that number of shares a person is required to pay more than the market price of the share, thenHhe cost of acquisition of the shares is that which he has in fact paid for holding that block.
10. Coming to the submissions of the learned senior D.R., we find that the decisions relied upon by him are distinguishable on facts. In fact, the learned senior D.R. has drawn certain analogy between averaging the cost over original and bonus shares and also heavily relied upon two decisions of the Supreme Court in the case of A.R. Krishnamurthy (supra) and Prabhat Marketing Co. Ltd. (supra). In the first one, the composite price paid for land and mining rights was bifurcated for the purpose of capital gain and in the latter price paid for Tin and Kerosene were bifurcated for the purpose of sales-tax. In our opinion, the principle of averaging the cost to arrive at cost of bonus shares stands on a totally different footing and is not comparable with the point at issue in the present case. Firstly, the original shares and bonus shares are not issued simultaneously and it is nobody's case that when shares are purchased for a cost, its cost should be reduced because there is a possibility of bonus issue in future. In fact, if a share is sold cum-bonus, the cost will remain what was paid for the original shares and even consideration cannot be split though admittedly the ex-bonus price is always less than the cum-bonus price.
11. Secondly, bonus shares (though called 'bonus') are not issued as an incentive or inducement for subscribing to original shares. An equity shareholder's right to capitalisation of profits and bonus share is merely a manifestation of that right in the form of a separate share certificate.
12. Thirdly, when the Supreme Court considered the various methods for ascertaining the cost of bonus share, it took into account the fact that every equity share is pregnant with bonus possibility and hence cost incurred for acquiring original shares can legitimately be spread over the bonus shares also as they merely represent the same interest acquired.
13. Fourthly, bonus shares come much later than acquisition of original shares and there is no question of accepting or rejecting the bonus shares. In the case before us, warrants came along with the NCD and the holder had the option to convert the same only if he so desires depending on the circumstances then prevailing (i.e. after thirty six months) and that too by paying a price. In fact, in this case, the assessee allowed the warrants to lapse. Therefore, the analogy of bonus shares as propounded by the learned senior D.R. does not apply to the issue under consideration which stands totally on different factual and legal footing.
14. As regards the Supreme Court decisions relied upon by the learned senior D.R. and referred to supra, where sale price of land and mining rights was bifurcated and in the case where sale price of Tin and Kerosene was bifurcated between Taxable (tin) and non-taxable (Kerosene) goods, it is to be noted that land and mining rights and, for that matter, Tin and Kerosene are separate and independent saleable/acquirable items (goods) and any one of them can be acquired for a price without necessarily acquiring the other. In the case of warrants which accompany the NCDs as an inducement or incentive, they are incapable of being acquired for a price independently of the NCDs.
15. In the light of above discussion, we hold that the assessee paid a sum of Rs. 100 for one NCD and that is the cost of acquisition and while calculating capital gains, this cost of Rs. 100 has to be adopted. We accordingly reverse the findings of the authorities below and hold that the assessee rightly computed the short-term capital loss of Rs. 1,49,98,400 by taking the cost of acquisition of NCD at Rs. 100 because this was the price which was paid by the assessee at the time of acquisition of the NCDs.
16. As regards the alternative contention of the learned counsel Shri Inamdar that if the difference between the market value of KOEL shares and the highest premium price payable by warrant holders is to be treated as cost of acquisition of warrants, then such difference must be taken as on the date of acquisition and not on the date when warrants were merely offered, (para 6 supra) since the assessee has succeeded on the main ground, it is not necessary for us to go into the merits of the alternative contention in view of the decision of the ITAT, Nagpur Bench (Special Bench) in Rahulkumar Bajaj v. ITO [1999] 69 ITD 1, to which one of us (A.M.) was a party.