Brief Facts of the Case and Question of Law
Brief Facts
The assessee claimed a loss of Rs. 111 per debenture on the sale of debentures of Jindal Iron and Steel Co (“JISCO”) to UTI. These assessee were shareholders of JISCO, which declared a right issue of secured redeemable non-convertible debentures (NCD) of Rs. 500/- each. The size of the issue was about Rs. 500 crores. The issue opened on 21.11.94 and closed on 19.12.94. Interest @10.5% was payable by JISCO on those debentures. To make the debenture issue attractive, JISCO fixed a detachable warrant (DW) with each debenture, the holder of which was eligible to apply for one share of JISCO within a specified period.
The salient features of the rights issue of NCD as approved by SEBI were as under:-
a) Each debenture was of face value of Rs. 500/-.
b) Every residential shareholder had to pay a sum of Rs. 111/- per debenture on making application and balance of `389/- per NCD was payable on allotment.
c) For non-residence/FI’s NR renounces will contribute a sum of Rs. 500/- each debenture on application.
d) If the company did not receive the minimum subscription of about 90% of the issue of NCD within sixty days from the closure of the issue the company had to refund the entire subscription amount received.
e) NCD with DW was offered to existing shareholders of the company whose names appeared in the register of a company on 31.10.94.
f) 23 debentures for every 100 equity shares held on 31.10.94 were to be issued.
Before the right issue, JISCO made certain arrangements with UTI in July 1994 according to which the allottees of NCDs could surrender all the NCDs to UTI after the application was made and UTI agreed to pay the balance allotment money (Rs. 389/- per NCD) to JISCO and secure the NCD registered in its name. The assessee and other promoter companies applied for NCDs as per their shareholding and made the payment of Rs. 111/- each NCD on application. However, all the said promoter companies (including the assessee) opted for the arrangement entered into between JISCO and the UTI – mentioned earlier. Therefore, when UTI paid the balance allotment money (Rs. 389/- per NCD) on behalf of assessee, and in exchange became debenture holder, the assessee was allotted the DWs. Subsequently the assessee claimed before the AO that by such arrangement it sold their NDCs to UTI as a result of which it incurred a loss of `111 each NCD and, was deductible as business loss.
Question of Law
