JUDGMENT
Arijit Pasayat, C.J.
1. All these five appeal under Section 260A of the Income-tax Act, 1961 (in short the Act) are inter-linked and in fact arise out of a common judgment of the Income-tax Appellate Tribunal, Delhi Bench-D (in short, the Tribunal). The assessment year involved is 1995-96.
2. The following questions have been posed for adjudication :–
a) Whether the Tribunal is correct in law in directing the Assessing Officer to allow deduction of the losses @ Rs. 111/- per NCD as business losses?
b) Whether the ITAT was correct in holding that the assessed company sold the NCDs to UTI, as a consideration UTI paid Rs. 389/- per debenture to JISCO and in turn the assesee transferred the NCDs in the name of UTI?
c) Whether the NCDs were subscribed by the assessed company as stock in trade or capital investment?
d) Whether the NCDs held by the assessed company were as stock in trade so as to entitle it to claim the loss as business loss?
e) Whether the amount of Rs. 111/- per NCD amounts to forfeiture of capital or is to be treated as business loss?
f) Whether the order of the ITAT is perverse on facts and in law?
3. Factual background common to all five appeals are essentially as follows.
4. During the assessment year in question, each of the assessed-respondents came up with a private placement of its preferential shares and also subscribed to the right issue of non-convertible debentures (in short NCD) of Jindal Iron and Steel Co (in short, JISCO). The assessed also subscribed to the equity issue of Jindal Vijay Nagar Steel Ltd (in short, JDSL,) a new company of the Jindal group floated during February, 1995. During the relevant period, JISCO came up with a right issue of 10.5% redeemable NCD with a detachable warrant for cash at par. the face value of NCD was Rs 500/- and it carried a detachable warrant (in short DW) which entitled the holder to apply for one equity share of JISCO with a face value of Rs 10/- at a premium of Rs 190/- per share. The DW which was post-dated gave right, whereby the holder could by one JISCO share @ Rs. 200/- at a time to be determined by JISCO but not later than sixty months. The DWs were to be listed and traded separately. The application money for this right issue was Rs. 111/- per NCD and the allotment money was Rs. 389/- per NCD. The rights NCD issued opened on 11-11-1994. JISCO made certain arrangements with Units Trust of India (in short, UTI) in July, 1994 which were accepted by the latter in September, 1994. As per the arrangement, the allottee of the NCD could surrender the NCD to UTI who would pay the allotment money of Rs. 389/- and secure the NCD while the DWs would remain with the applicant. It was noticed by the Assessing Officer that this arrangement with UTI was made only for the promoters. All the assessed companies availed of this arrangement. In return the assessed companies claimed Rs. 111/- as cost of the debenture. On 25th March, 1995, they sold two-thirds of their DWs at the rate of Rs. 20/- per DW and the difference of Rs. 91/- per DW was booked as a short term capital loss. The losses claimed by the assessed companies were as follows:
Abhinandan Investments Ltd Rs. 3,73,10,000 Nalwa Investments Ltd Rs. 7,92,61,000 Stainless Investments Ltd Rs. 4,66,83,000 Mansarover Investments Ltd Rs. 5,79,67,000 Jindal Equipment Leasing & Consultancy Services Ltd.. Rs. 2,81,19,000
5. The assesseds’ claim was that Rs. 111/- paid as application money for NCD represented cost of DW and since the DW was transferred at a price of Rs. 20/-, the difference of Rs. 91/- per DW was the loss suffered by the assessed. The Assessing Officer indicated that the actual cost of warrant was nil. To this, the assesseds’ stand was that Section 55(2)(aa) has come into operation w.e.f. 1.4.1996 only and therefore there was no adverse inference available to be drawn.
6. assessed pointed out that the salient feature of the right issue of NCD, as approved by SEBI, were as under :-
a) Each debenture will be of face value of Rs. 500 each.
b) Every residential shareholder will pay a sum of Rs. 111 per debenture on making application and balance of Rs. 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 does not receive the minimum subscription of about 90% of the issue of NCD within sixty days from the closure of the issue the company shall refund the entire subscription amount received.
e) NCD with DW was offered to existing shareholders of the company whose name appeared in the register of a company on 31.10.1994.
f) 23 debentures for every 100 equity share held on 31-10-1994 was to be issued.
The shareholding pattern of the JISCO as on 12-8-1994 was under :–
1. Promoters 30.9%
2. Financial Institutions 14.4%
3. Mutual Funds 2.32%
4. NRIs 6.46%
5. Banks 2.14%
6. Foreign institutional
investors 2.88%
7. Public 40.43%
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100%
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7. The Assessing Officer did not accept the claim of the assessed and held that JISCO had given loan to some Bombay based companies. All those companies have invested in the private placement of preference shares of the five assessed companies. He was therefore of the view that it was JISCO’s fund which was used in subscribing in DWs. He further observed that all the vie assessed companies were not acting in their own capacity or taking market oriented decisions. These were merely acting on behalf of JISCO. It was further observed that the funds came from JISCO which flowed back to JISCO in the shape of application money for NCDs. Thus these five assessed companies were merely conduits in the transaction and therefore the loss claimed by them was not allowable. He relied upon the case of McDowell & Co Ltd v. Commercial Tax Officer, [1985] 154 ITR 148. While disallowing the claim of loss made by the assessed companies. The Assessing Officer further observed that the agreement between JISCO and UTI was for the benefit of the promoter company only; there was no reference to this arrangement in the letter of offer though the arrangement with UTI was already reached before the offer dated 12.11.1994; the five assessed companies endorsed the allotment letter issued in their names in favor of UTI, the UTI paid the allotment money, there was no agreement between the UTI and the assessed companies for making the payment of allotment money on their behalf, the arrangement was between JISCO and therefore UTI and the assessed companies could not take benefit of such arrangement. The Assessing Officer was thus of the view that the assessed companies were mere name lenders and it was a case of pre-determined exercise and therefore, the loss claimed by the assessed companies was not genuine.
8. The matter was challenged in appeals before the Commissioner of Income-tax (Appeals) (in short, the CIT(A). Said authority came to hold that NCD were allotted on 14.1.1995 on payment of application money of Rs. 111/- for NCD the same money between 2.1.95 and 25.1.1995. All five assesseds transferred NCD to UTI without consideration. According to the CIT(A) five assesseds never became owners of the fully paid NCDs. It was also observed that the assessed had paid Rs. 111/- as the application money for acquiring NCD. DWs were received gratis. The claim of loss of Rs. 111/- per debenture on its sale has been made for the first time before CIT(A). The claim was not raised before the Assessing Officer at any time. It was therefore not open to the Assessing Officer to examine this issue. It was noted that five assessed companies made application for NCDs in the background of arrangement between JISCO and UTI without any consideration and with intention of incurring loss of Rs. 111/- on each NCD. She also observed that the assessed companies have not fully paid for the NCDs and therefore they were not entitled to DW s because as per terms of issue the DW was to be given only after NCDs were fully paid NCDs have been transferred to UTI immediately after allotment. The transfer is made entirely as per arrangement between JISCO and UTI. Such transfer was an act of forfeiture of application money @ Rs. 111/- per NCD. The beneficiary of the transfer was not UTI but JISCO. Thus the loss was deliberately cultivated for the benefit of JISCO. It was held that no such loss arose to the assessed on transfer of NCDs and therefore question of allowing loss did not arise. It was also observed that reference to Mc Dowell’s case was well made. Reference was also made to the decision in Sunil Sidharth Bhai v. CIT [1985] 156 ITR 509 to the effect that the department has right to penetrate the veil and ascertain the truth.
9. The matter was taken in second appeals before the Tribunal. Stand of the assessed was that all the five companies are promoter companies and JISCO came out with right issue of NCD of R. 500/- each to the existing shareholders. The assessed companies together held 30.93% and about 40.43% was held by general public and the balance was with banks and financial institutions. As per guidelines approved by SEBI if 90% of the issue was not subscribed the JISCO had to refund the entire application money received by it. It was also prescribed that even after the issue and allotment of one share of each DW attached with NCD the shareholding pattern of the promoters will not undergo any change. Under these circumstances there was no option for the assessed companies but to subscribe to the issue of NCDs. If the assessed companies had not subscribed to the public issue of NCD the entire issue of JISCO would have failed. As a promoter company this could have brought bad repute to the assessed companies. It was further submitted that the most important aspect of the issue was that there were no underwriter to the issue. Thus, the assessed companies were compelled to subscribe the issue of NCD. Since 90% of the issue was to be subscribed by the existing shareholders only a small percentage of 10 of the existing shareholders were required to subscribe to the issue. This was not an easy task. In order to make the issue attractive DW was attached to each NCD which could entitle the holder to apply for one equity share of JISCO @ Rs. 200/- per share (Rs. 10 face value + Rs. 190/- premium). As per terms of the issue a sum of Rs. 111/- per NCD was payable on application and balance Rs. 389/ was payable on allotment. The entitlement of DW was to take place only when the full payment @ Rs. 500/ on each NCD was made. The assessed companies therefore made application for the right issue of NCD and made the payment @ Rs. 111/- per debenture on application as was prescribed. As they did not have enough funds to make payment of allotment money they sold the DWs. Accordingly JISCO allotted DWs to the assessed companies also.
10. So far as observations of CIT(A), that the assessed companies had not paid the allotment money but was paid by UTI, it was submitted that certificate of UTI to the effect that they have made payment @ Rs. 389/- per NCD to JISCO on behalf of the assessed companies, was not considered. In a sense their stand was that only when the entire consideration for NCD was received by JISCO further course of action was followed. Materials were placed to show that DWs were given to the assessed when NCD were fully paid up. As to the conclusion of the CIT(A) that assessed never became owner of NCD/DWs, the assessed companies submitted that letter of allotment was in the name of the assessed companies; UTI made payment of allotment money to JISCO on behalf of the assessed companies and in turn the assessed companies transferred their NCDs in favor of UTI which was registered in UTI’s name and therefore the factual conclusion of CIT(A) were wrong.
11. It was also submitted that the assesseds were not the beneficiaries of the transaction but it was the UTI who became the owner of NCDs of the face value of Rs. 500/ by paying the amount @ Rs. 389/ only per NCD. The UTI has also received interest from JISCO at full value of Rs. 500/- each debenture. Moreover the UTI would be getting the full redemption money @ Rs. 500/- each debenture on redemption though actually they had paid @ Rs. 389/- only. It was also indicated that UTI has earned an annual gain of 256% on this transaction which was quite substantial. It was urged that the assessed companies were also benefited due to such arrangement because after losing Rs. 111/- on each debenture they became entitled to one dividend warrant which entitled the assessed companies to have one equity share @ Rs. 200/- though the market price of the share on such date was much higher. A chart indicating the gains by the assessed companies was also furnished before the Tribunal. It was also urged that the ratio of Mc Dowell’s case was not available because there was no camouflage in the transaction to evade tax. Reference was made to decisions in several other cases as rendered by Calcutta and Bombay Benches of the Tribunal. In both the cases, the Tribunal held that loss on the sale of NCDs under similar circumstances was a business loss short term capital loss, which should be allowed as deduction. Stand of the revenue was that in the return of income, the loss on account of sale of DWs was claimed which was subsequently changed to loss on the sale of debentures. It was also argued that the transaction was not at arms length and the assessed companies did not make any payment of allotment money. On the contrary payment was made by UTI. The assessed companies had no funds to make investment and the investment was made by borrowing funds from companies connected with JISCO. It was a clear cut case of colourable transaction and it was the duty of the Assessing Officer to lift the corporate veil.
12. Tribunal after analysing the rival submissions, essentially recorded the following findings:-
13. The five assessed companies were promoters of JISCO through whom JISCO made investment in various public limited companies. The assessed companies held about 34% shareholding of JISCO. Rest was held by financial institutions and public. During the assessment year in question, JISCo came up with right issue worth about Rs. 500 crores. As per terms of the issue, as approved by SEBI, if 90% of the issue was not subscribed then the issue had to fail and the JISCO was to refund the entire money collected by it under the issue. It was thus a compulsion on the part of the assessed companies to subscribe to the right issue. The failure of such issue would have been detrimental to the appellant companies being investor/promoter companies of JISCO. Thus the assessed companies had no option but to subscribe to the right issue of NCDs. A sum of Rs. 111/- per NCD was payable on making application as per terms of the issue and balance Rs. 389/ was to be paid on allotment. In order to make the issue attractive, it was also provided that on payment of full value of NCD, the subscriber was entitled to one DW which in turn will entitle the holder one equity share of JISCO @ Rs. 200/- per share. The market value of one share of JISCO was Rs. 320/-. As these conditions attached to the issue had SEBI approval all the assessed companies applied for right issue and paid a sum of Rs. 111/- per NCD on application. JISCO was also interested that right issue should meet grand success. They therefore negotiated with UTI and the UTI was agreeable to make payment of allotment money on behalf of any subscriber on sale of NCD to UTI. But the price quoted by UTI after a long negotiation was Rs. 389/- per NCD and that too was limited to investment of Rs. 350/ crores. Such arrangement was given effect to by the assessed. In terms of the agreement, the UTI made payment @ Rs. 389/ per NCD directly to JISCO and in turn the assessed companies transferred their NCDs worth Rs. 500 per NCD in the name of UTI. The assessed companies also benefited because they got DWs which entitled them to one equity issue of JISCO @ Rs. 200/- per share. The DWs were accordingly given to the assessed companies. The assessed companies sold the DWs and the loss incurred on such sale was originally claimed as deduction. However, during the course of assessment proceedings the assessed companies claimed that as they have sold a NCDs worth Rs. 500 per NCD @ Rs. 389/- per NCD it has suffered a loss of Rs. 111/- per NCD which should be allowed as deduction. The claim was, inter alia, rejected on the preliminary ground that such a ground was not before the Assessing Officer. The Tribunal referred to observations made by the Assessing Officer and CIT(A) in the background of submissions made by the assessed. It noted that in a large number of decisions it has been held that any view the assessed may take whether by way of return of income, the entries in the books of account or the method of accounting are totally irrelevant while considering the assessment under the Act. The only consideration at the point of time as to what was true legal effect of the transaction. Reference was made to several decisions Kedar Nath Jute Mfg Co Ltd v. CIT (1971) 82 ITR 363, Delhi Strock Exchange Association Ltd v. CIT. (1961) 41 ITR 495, First Addl Income-tax Officer v. TMK Abdul Kassim (1962) 46 ITR 149. It was therefore observed that even if return, filed by the assessed companies did not set out the proper position, that cannot be a reason for not allowing the claim. Referring to the assessment order, as well as the order of the CIT(A), it appeared that the assesseds’ claims had been rejected and the following grounds:–
1. The NCDs wee transferred to UTI without consideration. So the companies never became the owners of full paid NCDs.
2. The DW were sold on 25.3.95 whereas the same was allotted to the appellant companies on 3.5.97.
3. The transfer of NCD was unilateral act and the beneficiary of the transfer was not UTI but JISCO.
4. The funds of JISCO itself have been utilised indirectly in subscribing to the right of its own NCD.
5. The entire transaction was not at arms length. It was a colourable device to evade future tax.
14. With reference to the first ground, it was observed by the Tribunal that when the assessed companies made application for NCD and paid the requisite sum of Rs. 111/- per NCD, the offer of allotment was issued to the assessed companies according to which all the assesseds were asked to make a further payment @ Rs. 389/ per NCD. As the arrangement was already finalized with UTI that they were to purchase NCDs @ Rs. 389/- per NCD the assessed companies gave effect to such arrangement. The UTI paid Rs. 389/- per debenture to JISCO and in turn the assessed companies transferred their NCDs in the name of UTI. Such transfers were also registered in the register of JISCO. Payment was made by UTI to JISCO on behalf of the assessed companies.
15. So far as second ground was concerned, it was noted that the view taken by the Revenue authorities was against the provisions of the issue itself. It was the approved condition of SEBI that on payment of full consideration the holder of NCD will be entitled to one DW which in turn entitled the holder to apply one equity share of JISCO. In their letter JISCO had clearly confirmed that DWs were given to assessed companies only when JISCO had received the full amount of NCD either from them or from UTI on their behalf. Referring to the third ground, it was noted that the same was without any basis because the date which transaction of DW and not the DW itself. Regarding the observations of the Assessing Officer and the CIT(A) that entire transaction was aimed at giving an undue advantage to JISCO, reference was made to a chart filed by the assessed which indicated the extent to which the UTI had benefited from the transaction.
16. As regards the deployment of funds, it was noted that actually the payment of application money was made by the assessed companies from their own funds. Much after making applications some companies close to JISCO had made advances to five assessed companies. Tribunal observed that even assuming that the assessed companies had been indirectly provided funds by JISCO to make investment in the right issue of NCDs, there was no legal bar for the same. Thus, according to the Tribunal, there was no substance in the observations made by the CIT(A).
17. Further, it was noted with reference to disallowance of claim by the Assessing Officer and confirmed by CIT(A) that transaction of sale of NCDs to UTI @ Rs. 389/- when its face value was Rs. 500/-, was not at arms length and was a device to evade future tax, it was found to be of no substance by the Tribunal. It noted that as per scheme approved by SEBI, the assessed companies had no option but to subscribe to right issue. Same was true of all the shareholders. The general public accounted for about 40% of the shareholding of JISCO. In case the assessed companies did not opt to subscribe the issue the entire issue would h ave failed. As it was provided in the terms of the issue that if the issue was subscribed less than 90% the JISCO would refund the entire money. That would have been detrimental to the interest of assessed companies who were promoter companies of JISCO. It also referred to Chart of yield obtained by UTI and the assessed companies and found that the UTI had got annual yield of about 25%. Therefore, it was held that transaction of selling NCDs at the face value of Rs. 500/- to UTI @ Rs. 389/- per debenture was not a colourable device and ratio of McDowell had no application. It also noted that when JISCO came with right issue of NCD, many other companies like Apollo Tyres, Usha Ispat Ltd, Dhunseri Tea Industries Ltd and Sri Ram Industrial Enterprises etc had come out with similar right issues with almost identical terms and conditions. In the case of Apollo Tyres the buy back was done by JM Financial and Investment Consultancy Service Ltd whereas in the case of Usha Ispat, Dhunseri Tea and Sri Ram Industrial Enterprises, the buy back was done by UTI, DSP Financial Consultancies Ltd and Sri Ram Financial Services Ltd respectively. In the case of assessed companies buy back was done by UTI which could not be influenced by the terms of either the assessed companies or JISCO. The Tribunal noted the decisions of the Bombay Bench of the Tribunal in the case of Lazor Syntex Ltd (ITA No. 781/Ahd/96), where under similar circumstances, the Tribunal had held that loss on sale of debenture was revenue loss and allowable deduction. Reference was also made to the case of Karam Chand Thapar & Bros Ltd (ITA No. 2649/Cal/96) Calcutta Bench of the Tribunal holding that such loss suffered by the company on the sale of NCD was an allowable on short terms capital loss. Accordingly, it was held in the present case that the assessed companies had suffered loss @ Rs. 111/- per NCD on the sale to UTI and such loss being business loss was allowable as deduction.
18. In these appeals, the contentions of the Revenue are that there was no sale of NCD by the assessed to UTI as there was no agreement of sale between them. Arrangement was between JISCO and UTI. There was no stipulation in the scheme for buy back of Khokha as was made by the other companies while issuing the prospectus for their right issues on which the Tribunal relied. No properties in goods wee transferred to UTI as the assessed companies had claimed and the Tribunal also observed that UTI paid Rs. 389/- per debenture on behalf of assessed companies. Had the NCDs been sold to UTI as was claimed by the assessed companies, the question of making payment of allotment money @ Rs. 389/- would not have arisen on behalf of assessed companies. If transaction was for sale of NCD, UTI would have paid on its own behalf. Here sale did not take place because as per the scheme only paid up debenture entitled the allottee to receive DW. Had sale taken place, only UTI would have been entitled for DW. Here the DWs wee issued to assessed companies while UTI had paid the allotment money. The assessed companies had shown the amount of application money as cost of DWs which is also evident from the fact that assessed companies had claimed the loss to the extent of DWs which were sold. It was in fact financial arrangement between JISCO and UTI and the UTI agree to pay Rs. 389/- per debenture on the condition that (i) interest would be paid @ Rs. 10.5% and (ii) refund of Rs. 500/- would be given in three Installments. In the process the assessed companies had let its capital to be forfeited by JISCO which was a unilateral act on the part of the assessed companies. It is the case like unclaimed credits/debts. A sum of Rs. 111/- per NCD was capital investment in the hands of assessed company as assessed companies had shown it as investment and declared the loss as short term capital loss while filing its return. The assessed companies are investment companies of Jindal Group. No definition of “investment company” exits in the statute. However, there are several definitions which have defined the term. “Financial Investment Company” as appearing in the Finance (No. 2) Act, 1991, in Section 2(9)(d) is “a company whose gross total income consists mainly of income which is chargeable under the head income from house property, capital gain, income from other sources or income by way of interest on securities.” Factual position so far as the scheme floated by Apollo Tyres etc is different. There was a device adopted by the group as a whole whereby JISCO who floated the NCD had advanced the money to the assessed companies through its associate concern M/S Sun Investment Ltd and five other Bombay based companies who in turn subscribed to the preferential shares of the assessed companies. It was admitted by the assessed companies that this capital was utilised for investment in NCD issue of JISCO. Thus, money which had flowed from JISCO came back to JISCO with the appended finance from UTI and the assessed companies also claimed loss in the year under consideration so that the same could be set off against income of present year as well as subsequent years. JISCO had made financial arrangement with UTI to finance the debentures @ Rs. 389 per debenture. UTI had agreed to the extent of Rs. 350 crore. UTI did not restrict it only for the promoters and to the exclusion of other. JISCO intended to avail whole of this benefit for itself and that is why it did not mention with reference to Khokha sale in the scheme itself as was done by other companies.
19. Learned counsel for assessed companies, on the other hand, submitted that the proposed questions do not arise out of the order of the Tribunal. In fact, factual position has been analysed by the Tribunal with reference to materials placed on record. The so-called distinguishing features pointed out by the Revenue to make a distinction vis-a-vis right issue in the case of Apollo Tyres and Karam Chand Thapar’s case and other decisions referred to by the Tribunal do not in reality make out any distinction so far as the issue involved is concerned. It is highlighted that in fact the gains arising from transfer of shares, securities, etc. were claimed by the assesseds as taxable under the head “capital gains” but the Assessing Officer as well as the CIT(A) treated such gains to be taxable as business gains and therefore the Revenue cannot be now permitted to change its stand.
20. We shall first examine whether the questions posed arise out of the order of the Tribunal. So far as question No. (c) is concerned, it is to be noted that such a question was not even urged before the Tribunal by the Revenue. It was not under its consideration.Similar is the position as regards question No.(d).
21. Coming to the rest of the questions, we find that the Tribunal has analysed the factual position which we have noted above in coming to the conclusion that the assessed companies’ claim was admissible as business loss. We have also perused the decisions of various benches of the Tribunal to which reference has been made by the Tribunal. There was no basic difference so far as transactions involved, which were subject matter of consideration in those case, were concerned. We may add here that before the Assessing Officer, revised statement of income was filed in each case indicating the reasons of revising return. As the conclusions of the Tribunal are essentially factual and have been arrived at after detailed analysis of the factual position with regard to relevant documents, no question of law, much less a substantial question of law, arises out of its order. Above being the position, we find no merit in these appeals, which are accordingly dismissed.