D.C. Agrawal, A.M. - (1.) THIS is an appeal filed by the revenue against the order of CIT(A)-wherein it was held that there is no cost of acquisition of Detachable Warrants (DWs) acquired by the assessee along with Non-convertible debentures (NCDS) from the market and therefore the capital gains could not be worked out on the sale of DW.
(2.) The facts of the case are that the assessee purchased renunciation rights of 57.15 16% NCDs of the face value of Rs. 325 along with DW of Mukund Ltd. (ML) from the market through broker for Rs. 60,385 vide contract No. 174, dated 9-10-1992. Thereafter, the assessee paid application money of Rs. 160 per debentures. The balance of Rs. 165 was required to be paid on demand. Before the assessee could receive letter from the ML for the balance payment, the assessee sold these partly paid debentures in the assessment year 1993-94, i.e., in the earlier assessment year and incurred a loss of Rs. 3.00 lakhs, which was offered in the relevant assessment year. The assessee retained the DWs and sold, then in the financial year relevant to current assessment year for a sum of Rs. 5,75,100. The receipt of this money was claimed as exempt from capital gains. According to assessee, DWs had no cost. The main ground for claiming the receipt of Rs. 5,75,100 as exempt from tax was as under: "The fact that neither Mukund has charged nor the appellant has paid any amount for the warrant would be evident from the following facts and submissions: (i) In the Letter of Offer: (1) The face value of the NCD is stated to be Rs. 325 and the issue is made at par i.e. at Rs. 325 per NCD. (2) Under the heading 'Financial Plan' included in Para IV, which indicates the means of financing, the total issue amount for NCDs is stated to be Rs. 126 crores. (3) Rs. 126 crores has been shown as receivable towards the issue of debentures and nothing towards the issue of warrants. In other words, according to Mukund, the warrants were issued free of cost or without any monetary consideration and the NCDs were issued at par. (4) Also, in giving the financial highlights and in calculating the earnings per share and various other data, the amount attributed towards the NCDs was Rs. 126 crores and no credit was taken for the warrants. (ii) In its books, Mukund has recorded the liability for NCDs at Rs. 325 per NCD aggregating to Rs. 126 crores. Further, for the purposes of security and stamp duty, it must have considered the principal amount of the NCDs as Rs. 126 crores. (iii) Mukund is liable to pay, and has in fact been paying, interest at the rate of 16 per cent per annum on the paid up amount of Rs. 325 per NCD. If out of Rs. 325, had any amount been attributable to the warrant, then interest would have been paid on Rs. 325 less the amount attributable to the warrant and not on the entire amount of Rs. 325 per NCD. (iv) Thus, the appellant while subscribing to the NCD and the warrant has paid Rs. 325 for the NCD only and has not paid any sum for the warrant." The assessing officer, however, did not accept the contention of the assessee on the following basis: The assessee is not original subscriber. He purchased renunciated rights to subscribe to NCDs from the broker and paid a price of Rs. 60,385. The assessing officer relied on a book authored by Sri Gautham Nayak 'Taxation of shares and securities transaction' published by BCAJ for a proposition that when debentures and DWs are purchased from the market, the payment made for acquiring the bundle of rights consisting of both debentures and DWs. The assessing officer taxed the capital gains by treating a sum of Rs. 60,385 as cost of acquisition of DW, which were sold at Rs. 5,75,100. The CIT(A), however, did not agree with the assessing officer and deleted the addition on the main ground that the amendment made in section 55(2)(a), (aa) with effect from 1-4-1995/1-4-1996 by the Finance Act, 1995 was not retrospective and which did not permit assuming the cost of acquisition as nilprior to 1-4-1995 as no price was paid therefor. If assessing officer's views were to be accepted as correct, then there was no necessity for statutory changes. In this regard, the relevant part of the CIT(A)'s order is reproduced below : "6. I have considered the contentions raised. The issues raised by the AR have lot of force. It is true, as pointed out by the assessing officer referring to the writings of certain experts, that it may be possible to attribute certain cost to DWs. But then, subsequent statutory amendments will demand the inference that the appellant's view should prevail. It is to be iioted that Finance Act, 1994 has inserted clauses (a) and (aa) with effect from 1-4-1995 and Finance Act, 1995 has inserted sub-clause (iiia) in clause (aa) of sub-section (2) of section 55 with effect from 1-4-1996. If the assessing officer's view is accepted, this will be tantamount to applying these amendments with retrospective effect from 1-4-1994, which is not permissible. After all, if the assessing officer's views were correct, there was no necessity for the statutory insertions. In any case, the insertions have been made cffective only from 1-4-1995 to 1-4-1996 and in view of this, it cannot be held that the same are clarificatory in nature. In view of this position, I hold that the assessing officer was not correct in taxing an amount of Rs. 5,14,715 as short term capital gains. The same may be deleted and the appellant succeeds in respect of first three grounds. This will also dispose of ground No. 6 since there is also no justificaticn to tax the amount as business income, In any case, the assessing officer had taxed it as short term capital gains".
(3.) BEFORE us, it was contended by the learned Departmental Representative that ML had issued NCDs along with DWs to its existing shareholders on right basis. The NCDs without DWs had lesser value in the market, which is apparent from the loss suffered by the assessee. The difference would certainly be attributable to DWs. Further, the assessee was not the original subscriber to NCDs so as to raise the presumption that DWs were a gift to him by the ML and hence no cost was paid. It was purchased by assessee from market at a cost along with NCDs from the original subscriber by renunciation of the NCDs along with DWs. Thus, the assessee being not the original shareholder of the company, it cannot be presumed that DWs would not have any cost to the assessee. The cost is what was paid to the original shareholder/original offerer for purchasing NCDs with DWs. According to learned Departmental Representative, it was a composite payment for NCDs and DWs paid by the assessee. Thus, there was a cost to the assessee for DWs. For this proposition, the learned Departmental Representative relied on the decision given by Tribunal in Kamal Trading Co, v. Dy. CIT [IT Appeal No. 977 (Cal.) of 1998] for assessment year 1994-95 and Asstt. CIT v. Ganesh Enterprises [IT Appeal No. 2300 (Cal.) of 1997] for assessment year 1994-95. Thus, the concluding argument of learned Departmental Representative was that machinery provisions for computing capital gains have not failed and it is possible to work out capital gain as there is some cost of acquisition. Regarding deletion of addition by the CIT(A) on the basis that amendment in respect of section 55(2)(a), (aa) was not retrospective, the learned Departmental Representative submitted that CIT(A) had wrongly based reliance on this provision as this provision was enacted for working out cost of acquisition in the case of original shareholders of the company, when a financial instrument is given as a right, For this purpose, the learned Departmental Representative relied on the clarificatory notes issued at the time of amendment of this section.;