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The Tax Publishers Cecil Webber Engineering Ltd. v. DCIT [ITA No. 4026/Del/2012, dt. 27-4-2016] : 2016 TaxPub(DT) 2214 (Del-Trib) Forfeiture of convertible share warrants whether a short term capital loss *Facts:* Assessee had subscribed to some convertible warrants of Monnet Ispat & Energy. The said warrants were forfeited. Assessee claimed the amount paid for the same as short term loss. This was disallowed by assessing officer and Commissioner (Appeals) holding that the transaction was colourable creating loss in one entity at the expense of the other. The Commissioner (Appeals) held that the subscription to warrants was not a capital asset under section 2(14). Assessees plea was relinquishing the same is a transfer under section 2(47(ii) which is impossible if it was not a capital asset. This went up to ITAT in appeal. Held in favour of the assessee that the short term loss was allowable and the warrants were indeed capital asset. Pavitra Commercial Ltd. v. DCIT (assessment year 2009-10) passed in ITA No. 5389/Del/2012 Del ITAT upheld by high court in Pr. CIT v. Pavitra Commercials Ltd. in ITA No. 782/2015 applied basing CIT v. Chand Ratan Bagri (2010) 329 ITR 356 (Del.) where it was held warrants were capital assets. "More importantly, the second issue as to whether the forfeiture of the convertible warrant amounted to a transfer within the meaning of section 2(47) of the said Act has now been made clear by the Supreme Court in the case of Mrs. Grace Collis (2001) 248 ITR 323 as also by the Karnataka High Court in BPL Sanyo Finance Ltd. (2009) 312 ITR 63. We agree with the interpretation given by the Karnataka High Court in BPL Sanyo Finance Ltd. (supra) and we see no reason to take a different view. The restrictive meaning given to the word transfer by the Supreme Court decision in Vania Silk Mills (P) Ltd. (1991) 191 ITR 647 has been over ruled by the larger Bench of the Supreme Court in the case of Mrs.Grace Collis (2001) 248 ITR 323. In the present case, we find that the forfeiture of the convertible warrant has resulted in extinguishment of the right of the assessee to obtain a share in BLB Ltd. It is not a case where the asset itself has been extinguished or destroyed. A share in a company is nothing but a share in the ownership of the company. While the right of the assessee to share in the ownership of the company BLB Ltd. Stands extinguished on account of the forfeiture, the company, with all its assets, continues to exist. The forfeiture only results in one less shareholder. It is not as if the asset in which a share was being claimed was also extinguished. Thus, the second point urged by the ld. counsel for the Revenue is also not tenable. In view of the foregoing reasons no substantial question of law arises for our consideration. The appeal is dismissed." The requirement of an asset alone need not trigger capital asset, the loss of it as well - was how Grace Collis was applied/read.

The Tax Publishers

Cecil Webber Engineering Ltd. v. DCIT [ITA No. 4026/Del/2012, dt. 27-4-2016] : 2016 TaxPub(DT) 2214 (Del-Trib)

Forfeiture of convertible share warrants whether a short term capital loss

Facts:

Assessee had subscribed to some convertible warrants of Monnet Ispat & Energy. The said warrants were forfeited. Assessee claimed the amount paid for the same as short term loss. This was disallowed by assessing officer and Commissioner (Appeals) holding that the transaction was colourable creating loss in one entity at the expense of the other. The Commissioner (Appeals) held that the subscription to warrants was not a capital asset under section 2(14). Assessees plea was relinquishing the same is a transfer under section 2(47(ii) which is impossible if it was not a capital asset. This went up to ITAT in appeal.

Held in favour of the assessee that the short term loss was allowable and the warrants were indeed capital asset.

Pavitra Commercial Ltd. v. DCIT (assessment year 2009-10) passed in ITA No. 5389/Del/2012 Del ITAT upheld by high court in Pr. CIT v. Pavitra Commercials Ltd. in ITA No. 782/2015 applied basing CIT v. Chand Ratan Bagri (2010) 329 ITR 356 (Del.) where it was held warrants were capital assets.

"More importantly, the second issue as to whether the forfeiture of the convertible warrant amounted to a transfer within the meaning of section 2(47) of the said Act has now been made clear by the Supreme Court in the case of Mrs. Grace Collis (2001) 248 ITR 323 as also by the Karnataka High Court in BPL Sanyo Finance Ltd. (2009) 312 ITR 63. We agree with the interpretation given by the Karnataka High Court in BPL Sanyo Finance Ltd. (supra) and we see no reason to take a different view. The restrictive meaning given to the word transfer by the Supreme Court decision in Vania Silk Mills (P) Ltd. (1991) 191 ITR 647 has been over ruled by the larger Bench of the Supreme Court in the case of Mrs.Grace Collis (2001) 248 ITR 323. In the present case, we find that the forfeiture of the convertible warrant has resulted in extinguishment of the right of the assessee to obtain a share in BLB Ltd. It is not a case where the asset itself has been extinguished or destroyed. A share in a company is nothing but a share in the ownership of the company. While the right of the assessee to share in the ownership of the company BLB Ltd. Stands extinguished on account of the forfeiture, the company, with all its assets, continues to exist. The forfeiture only results in one less shareholder. It is not as if the asset in which a share was being claimed was also extinguished. Thus, the second point urged by the ld. counsel for the Revenue is also not tenable. In view of the foregoing reasons no substantial question of law arises for our consideration. The appeal is dismissed."

The requirement of an asset alone need not trigger capital asset, the loss of it as well - was how Grace Collis was applied/read.