INCOME TAX ACT, 1961

Section 45

Capital gains - Disallowance of short-term capital loss - Forfeiture of payment made towards convertible share warrants -

Assessee-individual was allotted certain share warrants of a limited company for which assessee had paid hefty sum. Warrant was convertible into equity share at any time within the period of 18 months upon payment of the remaining amount. Since assessee could not make such payment, the entire amount paid by assessee was forfeited which he claimed by way of short-term capital loss. AO rejected the claim alleging that at the end of the period of 18 months, the warrant had become valueless and therefore, there was no transfer of capital asset. Held: The forfeiture of the convertible share warrant resulted in extinguishment of the right of assessee to obtain a share in the company. It was not a case where the asset itself was 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 stood extinguished on account of the forfeiture, the company, with all its assets, continued to exist. The forfeiture only resulted in ownerless shareholder. It was not as if the 'asset' in which a share was being claimed was also extinguished. The loss suffered by assessee on forfeiture of its rights in the share was a capital loss. Thus, the forfeiture of payment towards convertible warrant was a short term capital loss.

REFERRED : CIT v. Grace Collis & Ors. (2001) 248 ITR 323 (SC) : 2001 TaxPub(DT) 1188 (SC) Vania Silk Mill (P.) Ltd. v. CIT (1991) 191 ITR 647 (SC) : 1991 TaxPub(DT) 1542 (SC) CIT v. Chand Ratan Bagri (2010) 329 ITR 356 (Del) : 2010 TaxPub(DT) 1355 (Del-HC) Dy. CIT v. Bpl Sanyo Finance Ltd. (2009) 312 ITR 63 (Karn) : 2009 TaxPub(DT) 0312 (Karn-HC) CIT v. Indocount Finance Ltd. (2004) 271 ITR 215 (Del) : 2004 TaxPub(DT) 1198 (Del-HC)

FAVOUR : In assessee's favour

A.Y. :

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