Loss on sale of debentures – deduction allowed even if loss was known at time of applying for debentures – HC dismisses appeal as no substantial question of law arose – HC decision is binding on subordinate forums, including Special Bench : ITAT SB
NEW DELHI, JAN 23, 2008 : THE Special Bench decided on a substantial question of Law. A bench of the Tribunal decides an issue in favour of the assessee. The Revenue goes in appeal to the High Court, which dismisses the appeal as there was no substantial question of law. Is this decision of the High Court a binding precedent on the Special bench? `Yes’, ruled the Bench.
This Special Bench has been constituted for considering and deciding the question
“On the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in upholding the order of the learned Assessing Officer in respect of the disallowance of Rs. 1,57,95,000/ – on account of loss on sale of debentures.”
The assessee is an investment company which filed its return of income for the year under appeal on 19.11.1996 declaring a total income at a negative figure i.e. loss of Rs.2,07,98,394/ -. In the said return, income from interest and dividend was shown by the assessee at Rs. 24,68,142/- and Rs. 16,19,488/- respectively whereas loss on sale of debentures was shown at Rs. 1,57,94,206/ -. In Schedule-8 to the balance sheet and profit & loss account filed alongwith its return of income giving the details of significant accounting policies and notes to accounts, the following note was given in this context as item No.5 :-
“During the year the company was allotted 195000, 12.5 secured redeemable NCDs of Rs.250 each (with detachable warrants) of Max India Ltd. the NCDs (without warrants) were sold in terms of letter of offer at the rate of Rs.169/- each. The difference between face value of NCDs (with warrant) and sale value (without warrant) has been treated as loss on shares of debentures and warrants have been taken at nil value. The warrants will entitle the company to apply for and be allotted one equity share of Max India Ltd. at a price to be calculated at a discount of 33% on the prevailing market price or at a price of Rs.225/- whichever is less, any time between the period of 24-48 months from the date of allotment or earlier as may be decided by the Board of Max India Ltd.”
During the course of assessment proceedings, it was explained on behalf of the assessee company before the AO that it was allotted 1,95,000 number of 12.5% secured redeemable NCDs of Rs.250/- each with detachable warrant of Max India Ltd. in their right issue which had opened on 29.12.1995 and closed on 29.1.1996. It was pointed out that the detachable warrant attached with the NCD made the assessee entitled to apply for and be allotted one equity share each of Max India Limited at discount on the prevailing market price or a price of Rs.225/- whichever is less and this right to apply and get allotted the equity shares was going to be made available anytime between 24 to 48 months from the date of allotment of NCDs or earlier as may be decided by the Board of Directors of Max India Limited. The price for the said shares on allotment was to be paid fully by the allottees. It was also pointed out that the said warrants were detachable which means the NCD could be sold separately after detaching the said warrants. As per the terms and conditions of the said issue, M/s Max India Ltd. i.e. the allottee company was stated to have finalized arrangement with M/s Infrastructure Limited Leasing & Financial Services (IL&FS) whereby an option was given to the successful allottees to sell the NCDs allotted to them without warrants at a price of Rs.169/- per NCD.
It was also provided that the said option was to be exercised by the applicant at the time of filing the application itself and the applicants opting for such option would be required to pay only an amount of Rs.81/- per NCD as application money as against Rs.250/- otherwise payable by the applicants not exercising the said option. On successful allotment, the allottees exercising the said option were not required to pay anything further since the balance amount of Rs.169/- per NCD was to be received by M/s Max India Limited directly from IL&FS on behalf of the allottees against the sale of NCDs. The assessee having exercised the said option was required to pay only Rs.81/- per NCD on application whereas the balance amount of Rs.169/- was stated to be paid by IL&FS on its behalf as consideration for sale of NCDs on successful allotment. Since the consideration received by the assessee company on sale of NCDs on allotment was Rs.169/- per NCD as against a face value of Rs.250/- each, it claimed to have suffered a total loss of Rs. 1,57,95,000/ – i.e. Rs.81/- per debenture on sale of 1,95,000/- debentures.
The claim of the assessee for a loss suffered on sale of debentures was examined by the AO who held that, “There is no transaction suggestive of the assessee selling NCD to IL&FS for Rs.179/- at a loss of Rs.81/-. Therefore, the warrant cost is to be taken at Rs.81/- only and not nil, as canvassed by the assessee. In sum, the claim of the assessee is erroneous and is rejected.”
It was held by the AO that the claim of the assessee for loss on sale of debentures at Rs. 1,59,95,000/ – was not allowable and he disallowed the same.
The CIT (A) upheld the action of the AO and observed, “I have carefully considered the matter. To my mind, the AO’s order suffers from no infirmity on this count. The A.O. has correctly observed that the entire arrangement was preconceived. I find that the A.O. has discussed this issue in a comprehensive manner and has correctly arrived at the finding that the cost of the warrant is to be taken at Rs.81/-only and not nil. I am in agreement with the arguments given by the A.O. in the assessment order. Accordingly, this ground is decided against the appellant company. The disallowance of loss on sale of debentures of Rs. 1,57,95,000/ – is upheld.”
The matter is before the Special Bench of the ITAT due to difference of opinion of different benches on the same issue.
The issues which are required to be considered by this Special Bench in the present case are as under:-
(i) Whether the issue involved in the present case as well as facts relevant thereto are identical to that of Abhinandan Investments Ltd. & Others decided by the Delhi Bench of ITAT and affirmed by the Hon’ble Delhi High Court?
(ii) If the answer to Question No.(i) is in affirmative, whether the decision of Hon’ble Delhi High Court dismissing the appeal filed by the Revenue against the aforesaid order of the Tribunal passed in the case of Abhinandan Investments Ltd. & Others holding that no substantial question of law arose is a decision on merit and constitutes binding precedent which this Special Bench is bound to follow?
(iii) If the answer to Question No.(i) or (ii) is negative, the issue involved in the present appeal as incorporated in the question referred to by the President to this Special Bench will have to be decided on merits.
1. whether the facts involved in the present case are similar to the cases of Abhinandan Investments Ltd. & Others as held by Delhi ‘A’ Bench of ITAT in the case of M/s Mohair Investment & Trading Co.Pvt.Ltd. (supra) or there is any material difference as pointed out by ‘G’ Bench in the referral order passed in the present case and also argued by the learned DR.
The Tribunal observed,
“After having given a careful consideration to this entire matter relating to the different options given to the allottee/subscriber in the offer documents in both the cases, we find it difficult to accept that the two options given by the issuing company in the present case made a world of difference as far as the
true effect of the transactions or outcome thereof are concerned. We find that in all the cases i.e. that of the assessee as well as that of Abhinandan Investments Ltd. & Others (supra), options were given to the allottees/subscribe rs to surrender or sell the NCDs at a discounted price to the finance company as per the arrangement made by the issuing company and the difference was only in the stage at which such option was to be exercised. For example, in the case of Abhinandan Investments Ltd. & Others (supra), such option was to be exercised only after allotment of the concerned NCDs whereas in the case of the assessee, such option was to be exercised at the time of filing an application itself. Since the said option was to be exercised at the time of filing of an application itself in the case of the assessee, the payment of Rs. 169/- per NCD to be received by the subscriber from the finance company was agreed to be adjusted directly against the remaining amount payable against each NCD since it was clear at the time of application itself that the subscriber opting for option (a) would be entitled to receive that much amount from the finance company. In the case of subscriber going for option (b), there was however no such amount and since the entire amount was to be paid alongwith the application as per the terms of payment given in the offer document, he was required to pay a sum of Rs.250/- per NCD on application itself. In the cases of Abhinandan Investments Ltd. & Others (supra), the terms of payment given in the offer document, however, were different inasmuch as a sum of Rs.111/- was payable on application whereas Rs.389/- was payable on allotment and since the option to surrender the NCDs to UTI was to be exercised only on allotment, there was no difference in the amount payable on application by the allottees deciding to surrender the NCDs to UTI and the allottees not going for opting for such surrender. It was thus merely a difference in the terms of payment of NCDs as per the offer document whereby in one case, the entire amount payable against NCDs was to be paid alongwith the application itself whereas in the other cases, the amount payable against NCDs was to be paid in two installments, one at application stage and the remaining on allotment.
There were thus two distinctive features in the scheme of allotment as per the offer made in the case of the present assessee and in the case of Abhinandan Investments Ltd. & Others (supra). Firstly, there was a difference in the stage at which the option of Khoka sale was to be exercised and secondly, there was a difference in terms of payment. These two distinctive features, however, were hardly of any material nature as far as the final outcome of the transaction is concerned inasmuch as in both the cases, the allottee/subscriber going for khoka option ultimately paid Rs.81/- and Rs.111/- on application for getting allotted one detachable warrant whereas the remaining amount of Rs.389/- and Rs.169/- received/receivable on account of sale of NCDs to the financial institution was adjusted/paid against the remaining amount payable towards NCDs. In our opinion, the effect of these transactions thus ultimately was the one and the same and the distinctive features of allotment of NCDs in these cases as pointed out on behalf of the Revenue would not change the very nature of the transactions which, in our opinion, was exactly similar.”
2. Having held that all the facts relevant to the issue under consideration as involved in the present case are similar to that of Abhinandan Investment Ltd. & Others already decided by the Delhi Division Bench of ITAT, the next issue which arises for consideration is whether the decision of Hon’ble Delhi High Court dismissing the appeal filed by the Revenue against the order of the Tribunal passed in the case of Abhinandan Investment Ltd. & Others holding that no substantial question of law arose, is a decision on merits and constitutes a binding precedent which this Special Bench is bound to follow.
The Tribunal held, “that the decision of Hon’ble Delhi High Court in the case of Abhinandan Investment Ltd. & Others upholding the order of the Tribunal and dismissing the appeal filed by the Revenue on a similar issue holding that no substantial question of law arose, is a decision on merits and since the issue involved in the present case as well as all the material facts relevant thereto, as discussed above, are similar to that of Abhinandan Investment Ltd. & Others, the said decision is binding on the subordinate forums within the jurisdiction of Hon’ble Delhi High Court including this Special Bench.”
Accordingly, the Tribunal respectfully followed the said decision of the Jurisdictional High Court and directed the Assessing Officer to allow the claim of the assessee for loss incurred on sale of NCDs. The issue referred to this Special Bench is thus decided in favour of the assessee.