M/S. GINNERS & PRESSERS LTD, MUMBAI v. THE ITO 1(1)(4), MUMBAI

ITA 3981/MUM/2007 | 2003-2004
Pronouncement Date: 20-01-2010 | Result: Partly Allowed

Appeal Details

RSA Number 398119914 RSA 2007
Assessee PAN AAACG1415C
Bench Mumbai
Appeal Number ITA 3981/MUM/2007
Duration Of Justice 2 year(s) 7 month(s) 27 day(s)
Appellant M/S. GINNERS & PRESSERS LTD, MUMBAI
Respondent THE ITO 1(1)(4), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 20-01-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted G
Tribunal Order Date 20-01-2010
Date Of Final Hearing 27-10-2009
Next Hearing Date 27-10-2009
Assessment Year 2003-2004
Appeal Filed On 23-05-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G MUMBAI. BEFORE SHRI R.K. GUPTA JUDICIAL MEMBER AND SHRI J. SUDHAKAR REDDY ACCOUNTANT MEMBER. I.T.A.NO. 3981/MUM/2007 ASSESSMENT YEAR : 2003-04. GINNERS & PRESSERS LTD. TH E INCOME TAX OFFICER ORIENTAL HOUSE 5 TH FLOOR VS. 1(1)(4) MUMBAI. 7 J. TATA ROAD CHURCHGATE MUMBAI 400 020. PAN AAACG 1415C APPELLANT RESPONDENT I.T.A.NO.4193/MUM /2007 ASSESSMENT YEAR : 20 03-04 THE INCOME TAX OFFICER VS. GINNERS & PTRESSERS LTD. (1)(4) MUMBAI. MUMBAI. APPELLANT. RESPONDENT. ASSESSEE BY : SHRI PERCY PARDIWALA AND SHRI NITESH JOSHI. DEPARTMENT BY : SHRI ANIL K. SINGH. O R D E R PER J. SUDHAKAR REDDY A.M. THESE ARE CROSS APPEALS DIRECTED AGAINST THE ORDE R OF THE CIT(APPEALS)-I MUMBAI DATED 27-3-2007. 2. FACTS IN BRIEF : THE ASSESSEE IS A COMPANY AND IS ENGAGED IN THE BUSINESS OF TRADING INVESTMENT AND CONSULTANCY SERVICES. IT FIL ED ITS RETURN OF INCOME ON 28-11-2003 DECLARING A TOTAL LOSS OF RS.14 28 54 7/- IN ADDITION TO 2 SHORT TERM CAPITAL LOSS OF RS.8 96 000/- AND LONG T ERM CAPITAL LOSS AMOUNTING TO RS.2 04 47 425/-. THE AO COMPLETED THE ASSESSMENT U/S 143(3) VIDE HIS ORDER DATED 10-3-2006 WHEREIN HE CO MPUTED THE INCOME AT RS.10 29 906/-. THE AO HAD REJECTED THE CLAIM OF THE ASSESSEE BOTH ON ACCOUNT OF SHORT TERM CAPITAL LOSS AS WELL AS ON AC COUNT OF LONG TERM CAPITAL LOSS AND ALSO DISALLOWED CERTAIN EXPENSES C LAIMED BY THE ASSESSEE. AGGRIEVED THE ASSESSEE CARRIED THE MATTER IN APPEA L. THE FIRST APPELLATE AUTHORITY GRANTED PART RELIEF. FURTHER AGGRIEVED B OTH THE ASSESSEE AS WELL AS THE REVENUE HAVE FILED THESE CROSS APPEALS. 3. THE ASSESSEES APPEAL IS AGAINST THE UPHOLDING OF DISALLOWANCE OF EXPENSES ON ACCOUNT OF RENT WATER CHARGES PROPERTY TAX AS WELL AS TENANCY FEES BY THE CIT(APPEALS) AND ALS O AGAINST THE DENIAL BY THE CIT(APPEALS) TO ALLOW SHORT TERM CAPITAL LOS S AS CLAIMED BY THE ASSESSEE. 4. IN THE REVENUES APPEAL THE AO CHALLENGES THE FINDING OF THE CIT(APPEALS) DIRECTING THE AO TO ALLOW THE INTE REST ON DELAYED PAYMENT OF SERVICE TAX AND ALSO AGAINST THE DIRECTI ON OF THE CIT(APPEALS) TO COMPUTE LONG TERM CAPITAL LOSS AND ALLOW SET OFF AS PROFIT U/S 74. WE FIRST TAKE UP THE REVENUES APPEAL. 5. WE HAVE HEARD MR. ANIL K. SINGH THE LEARNED DR AND MR. PERCY PARDIWALLA AND MR. NITESH JOSHI LEARNED COUN SEL FOR THE ASSESSEE. 6. THE FIRST ISSUE THAT ARISES IN REVENUES APPEAL IS WHETHER INTEREST PAID ON DELAYED PAYMENT OF SERVICE TAX IS PENAL IN NATURE OR NOT. THE AO DISALLOWED THE AMOUNT OF INTEREST PAID ON DE LAYED PAYMENT OF SERVICE TAX ON THE GROUND THAT IT IS PENAL IN NATU RE. THE FIRST APPELLATE AUTHORITY HELD THAT THE SAID INTEREST WAS ONLY COMP ENSATORY IN NATURE AND 3 AS IT IS NOT LEVIED FOR VIOLATION OF A STATUTE NO DISALLOWANCE CAN BE MADE. WE FULLY AGREE WITH THESE FINDINGS OF THE FIRST APP ELLATE AUTHORITY. THE LEARNED SENIOR COUNSEL MR. PERCY PARDIWALLA POINTE D OUT THAT INTEREST ON DELAYED PAYMENT OF SERVICE TAX IS LEVIED U/S 75 OF THE SERVICE TAX ACT AND PENALTY FOR FAILURE TO PAY SERVICE TAX IS GOV ERNED U/S 76 OF THAT ACT. A PLAIN READING OF BOTH THE SECTIONS 75 AND 76 CLEA RLY DEMONSTRATE THAT AS FAR AS INTEREST IS CONCERNED IT IS PURELY COMPENSA TORY IN NATURE AND HENCE SHOULD BE ALLOWED AS SUCH. THE INTEREST IN THIS CAS E IS NOT LEVIED FOR VIOLATING ANY STATUTE. THUS WE UPHOLD THE FINDINGS OF THE FIRST APPELLATE AUTHORITY AND DISMISS THIS GROUND OF THE REVENUE. 7. GROUND NOS. 2 AND 3 ARE ON THE ISSUE OF LONG TE RM CAPITAL LOSS. THE FACTS IN BRIEF ARE AS FOLLOWS. 8. THE ASSESSEE HELD 4 94 794 EQUITY SHARES OF FAC E VALUE OF RS.10/- EACH OF M/S POLYCHEM LTD. THESE SHARES WERE PURCHASED BETWEEN JULY 1980 AND 31 ST MARCH 1994 FOR RS.98 77 326/-. THE ASSESSEE CLAIM S THAT IT HAD PURCHASED FURTHER 7 LAKHS OF SHARE FROM M/S POLYCHEM LTD. ON 14-2-2002 FOR RS.10 71 000/-. THE ASSESSEE KNEW TH AT M/S POLYCHEM LTD. IS BEFORE BIFR FROM THE YEAR 1999 ITSELF. THE UNDISPUTED FACT IS THAT THE ASSESSEE BELONGS TO THE SAME GROUP OF COMPANIES AS THAT OF M/S POLYCHEM LTD. M/S POLYCHEM LTD. ON ACCOUNT OF BI FRS ORDER DATED 4- 2-2002 REDUCED THE EQUITY SHARE CAPITAL OF THE COMP ANY FROM RS.16 16 18 080/- TO RS.40 40 450/- COMPRISING OF 4 04 450 EQUITY SHARES OF THE FACE VALUE OF RS.10/- EACH. THIS RESU LTED IN THE REDUCTION IN THE ASSESSEES SHARE HOLDING. THE 4 94 794 EQUITY SHARES HELD BY THE ASSESSEE COMPANY PRIOR TO 31-3-1994 GOT REDUCED TO 12 369 SHARES OF RS.10/- EACH. AS FAR AS THE 7 LAKHS SHARES PURCHASE D BY THE COMPANY ON 14 TH FEB. 2002 ARE CONCERNED THE ASSESSEE WAS ISSUED 17500 SHARES 4 SUBSEQUENT TO REDUCTION IN EQUITY CAPITAL. THE ASSE SSEE CLAIMED SHORT TERM CAPITAL LOSS ON THE 7 LAKHS SHARES PURCHASED ON 14- 2-2002 AND HAD CLAIMED LONG TERM CAPITAL LOSS ON THE SHARES PURCHA SED PRIOR TO 31 ST MARCH 1994. THE AO REJECTED THE CLAIM OF THE ASSES SEE BY HOLDING THAT REDUCTION IN SHARE CAPITAL DOES NOT RESULT IN TRAN SFER OF SHARES AND HENCE THERE CAN BE NO CAPITAL LOSS. ON APPEAL THE FIRST APPELLATE AUTHORITY TOOK A VIEW THAT THE REDUCTION IN SHARE CAPITAL RESULTS I N A TRANSFER AS DEFINED IN SECTION 2(47) OF THE ACT. AS FAR AS THE COMPUTATION OF LONG TERM CAPITAL LOSS IS CONCERNED THE LEARNED CIT(APPEALS) ALLOWED THE CLAIM OF THE ASSESSEE. BUT AS FAR AS THE SHORT TERM CAPITAL LOSS IS CONCERNED THE FIRST APPELLATE AUTHORITY REJECTED THE CLAIM OF THE ASSES SEE ON THE GROUND THAT THE TRANSACTION IS APPARENTLY NOT OF BUSINESS PRUDE NCE AND IN FACT THE ASSESSEE WHO HAD FULL KNOWLEDGE OF THE FACT THAT TH ERE WOULD BE A REDUCTION IN THE CAPITAL OF THE GROUP CONCERNED BY AN ORDER OF THE BIFR HAD WILFULLY PURCHASED SHARES IN THE GROUP COMPANY. AGGRIEVED ON THESE FINDINGS BOTH THE ASSESSEE AS WELL AS THE REVENUE ARE IN APPEAL. 9. THE LEARNED SENIOR ADVOCATE MR. PARDIWALLA SUB MITTED THAT UNDER THE COMPANIES ACT REDUCTION OF CAPITAL IS PE RMISSIBLE IN MANY WAYS AND ONCE SUCH METHOD IS BY DIMINISHING THE NUM BER OF SHARES BY EXTINGUISHING THE EXISTING LIABILITY ON CERTAIN SHA RES WRITING OFF OR REPAYING THE WHOLE AMOUNT PAID UP THEREON OR CANCEL LING THEM. IN THE PRESENT CASE HE SUBMITTED THAT M/S POLYCHEM LTD. PURSUANT TO AN ORDER OF BIFR DIMINISHED THE NUMBER OF SHARES AND CANCEL S THE SHARES BY EXTINGUISHING THE LIABILITY ON THE SHARES. HE POINT ED OUT THAT AS PER THE BIFR ORDER ALL THE MEMBERS WERE REQUIRED TO SURREN DER THE SHARES HELD BY THEM IN POLYCHEM LTD. AND M/S POLYCHEM LTD. WAS TO CANCEL THE SHARES AND ISSUE NEW SHARES WHICH THE MEMBERS ARE ENTITLED TO AS PER THE ORDER OF B.I.F.R. HE SUBMITS THAT THE SHARE IS A BU NDLE OF RIGHTS AND 5 REFLECTS THE CONTRIBUTION OF THE SHARE HOLDERS TOWA RDS THE SHARE CAPITAL OF THE COMPANY. THE CANCELLATION OF THE EXISTING SHARE S IN THE COMPANY AGAINST THE ISSUE OF NEW SHARES WOULD CLEARLY RESU LT IN EXTINGUISHMENT OF RIGHTS IN THE EXISTING SHARES AND HENCE COVERED UND ER THE DEFINITION OF TRANSFER AS GIVEN IN SECTION 2(47). MR. PARDIWALLA SUBMITS THAT THE SURRENDER OF THE EXISTING SHARES PURSUANT TO A CLAI M OF CAPITAL REDUCTION BY POLYCHEM LTD. THE ASSESSEE HAS EXTINGUISHED TERMI NATED AND CANCELLED ITS BUNDLE OF RIGHTS IN POLYCHEM LTD. AND THEREFOR E THERE IS A DEFINITE TRANSFER OF THE SHARES FROM POLYCHEM LTD IN TERMS O F SECTION 2(47) OF THE ACT. HE RELIED ON THE FOLLOWING CASE LAWS : KARTIKEYA V. SARABHAI VS. CIT 228 ITR 163. CIT VS. G. NARASIMHAN (DECD.) AND OTHERS 236 ITR 327. CIT VS. MRS. GRACE COLLIS AND OTHERS 248 ITR 323. AS PER MR. PARDIWALLA SHARES WHICH WERE SURRENDERE D WERE DIFFERENT ASSETS FROM THE SHARES WHICH WERE ISSUED AFRESH BY POLYCHEM LTD. THIS PRO-TANTO REDUCTION VARIES DIVIDEND RECEIPT RIGHTS AND HENCE IT IS A TRANSFER. ON A QUERY FROM THE BENCH HE BROUGHT TO OUR NOTICE SECTION 55(2)(B)(IV)(D) AND SUBMITTED THAT THE ACT CONSIDER ED SUB DIVISION OF SHARES BUT HAS NOT SPECIFIED ANY THING ABOUT REDUCT ION IN SHARE CAPITAL. HE SUBMITTED THAT IN SUB DIVISION OF SHARES THERE IS NO CHANGE IN CAPITAL STRUCTURE. 10. THE LEARNED DR VEHEMENTLY CONTROVERTED THE ARG UMENTS OF THE LEARNED COUNSEL FOR THE ASSESSEE AND SUBMITTED THAT ON REDUCTION OF SHARE CAPITAL THERE IS NO CHANGE IN THE STRUCTURE OF THE SHARE CAPITAL AS IN THE CASE OF THE SUB-DIVISION OF SHARES. HE SUBMITTE D THAT THE ASSESSEE 6 CONTINUES TO HOLD THE SAME PERCENTAGE OF SHARE CAPI TAL AS HE USED TO DO PRIOR TO THE REDUCTION OF SHARE CAPITAL. HE POINTED OUT THAT THERE IS NO TRANSFER OF CAPITAL ASSET AND AT BEST IT IS DIMINUT ION IN THE VALUE OF THE INVESTMENT OF THE ASSESSEE IN THE SHARES AND NOT A TRANSFER AS SPECIFIED IN SECTION 2(47) OF THE ACT AND HENCE THE QUESTION OF THE ASSESSEE HAVING LONG TERM OR SHORT TERM CAPITAL GAIN OR LOSS DOES N OT ARISE. HE DISTINGUISHED THE CASE LAWS RELIED UPON BY THE LEAR NED COUNSEL FOR THE ASSESSEE AND SUBMITTED THAT THE FIRST APPELLATE AUT HORITY WAS WRONG IN HOLDING THAT THERE WAS A TRANSFER AS THERE WAS EXTI NGUISHMENT IN RIGHTS OF THE ASSESSEE. 11. AFTER CLOSURE OF THE HEARING THE LEARNED COUN SEL FOR THE ASSESSEE SUBMITTED AN APPLICATION DATED 6-11-2009 M ENTIONING THAT ON SIMILAR FACTS IN THE CASE OF ONE OF THE ASSESSEES GROUP CONCERN THE TRIBUNAL HAS HELD THAT THE TRANSACTION WILL RESULT IN A CAPITAL LOSS. HE FILED A COPY OF THE DECISION OF THE C-BENCH OF THE MUMBAI TRIBUNAL IN ITA NO. 4212/MUM/2007 ORDER DATED 19 TH FEB. 2009 WHEREIN THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. MR S. GRACE COLLIS AND OTHERS 248 ITR 323 WAS FOLLOWED. FOR ENABLING THE R EVENUE TO REPLY TO THIS FRESH DECISION CITED BY THE ASSESSEE THE CASE WAS REPOSTED FOR FRESH HEARING. 12. AFTER HEARING THE RIVAL CONTENTIONS AND PERUSI NG THE PAPERS ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW A S WELL AS THE CASE LAWS CITED WE HOLD AS FOLLOWS. 13. THE BOARD FOR INDUSTRIAL AND FINANCIAL RECONST RUCTION I.E. BIFR HAD DECLARED THE COMPANY M/S POLYCHEM LTD. AS A SICK UNIT ON 10- 5-1999. AT PARA 1.12 OF ITS RECORD OF PROCEEDINGS HELD ON 29-11-2002 IT STATED AS FOLLOWS : 7 1.12 AS REGARDS DE-RATING: A) THE EQUITY SHARE CAPITAL OF APPROX. RS.1616.18 LACS WOULD BE REDUCED TO APPROX. RS.40 LACS. THE PREFERENCE SHARE CAPITAL OF RS.50 LACS IS NOT PROPOSED TO BE DE-RATED. B) BEFORE THE SCHEME WAS SANCTIONED AN ADVERTISEMENT WAS ISSUED ON 7.5.01 INVITING OBJECTIONS / SUGGESTIONS FROM SH AREHOLDERS IN REGARD TO REDUCTION OF SHARE CAPITAL. IDBI (OA) IN THEIR LETTER OF 15.6.01 HAD SUBMITTED THAT OBJECTIONS HAD BEEN RECE IVED FROM MAJOR INSTITUTIONAL SHAREHOLDERS (UTI GIC LIC C OMBINED HOLDING 28.55%) BUT THERE WAS NO RESPONSE FROM THE PUBLIC (HOLDING 39%). IDBI OPINED THAT PL WOULD HAVE BENEF ITED BY PAYMENT OF LESSER LISTING FEES AND HANDLING REDUCED VOLUME OF SHARES. HOWEVER KEEPING IN VIEW THE OBJECTIONS RAI SED IDBI HAD THEN SUGGESTED THAT NO CHANGE BE MADE IN THE SH ARE CAPITAL STRUCTURE. AT PARA 9 IT IS RECORDED AS FOLLOWS : 9. CONSIDERING THE FACTS ON RECORD AND THE SUBM ISSIONS MADE AT TODAYS HEARING THE BENCH DIRECTED AS UNDER : A) THE DE-RATING OF ISSUES OF EQUITY HAD ALREADY BEEN APPROVED BUT THE SAME HAD NOT BEEN INCORPORATED IN THE SS. P ARA 7.2(1) IS NOW ADDED ON PAGE 16 AS FOLLOWS : BIFR APPROVED THE DE-RATING OF/REDUCTION IN THE EQ UITY SHARE CAPITAL OF THE COMPANY AS PER ANNEXURE VII AN NEXED HERE. FURTHER THE EXISTING APPENDIX IV IS REPLACED WITH THE REVISED APPENDIX IV ANNEXED HERETO. 14. CONSIDERING THE FACTS ON RECORD AND SUBMISSION S MADE AT TODAYS HEARING THE BENCH DIRECTED AS UNDER : THE DE-RATING OF ISSUE OF EQUITY HAD ALREADY BEEN APPROVED BUT THE SAME HAS NOT BEEN INCORPORATED IN THE ASSES SEE PARA 7.2(1) IS NOW ADDED ON PAGE 16 AS FOLLOWS : 8 BIFR APPROVED THE DE-RATING OFF/REDUCTION IN EQUI TY SHARE CAPITAL ON THE COMPANY AS PER ANNEXURE VII ANNEXED THERETO. FURTHER THE EXISTING APPENDIX IV IS REPLACED WITH THE REVISED APPENDIX IV THERETO. ANNEXURE VII READS AS FOLLOWS : A) THE EQUITY SHARE CAPITAL OF POLYCHEM LTD. CONSISTIN G OF 1 61 61 808 EQUITY SHARES OF RS.10/- EACH SHALL STA ND REDUCED TO 4 04 045 EQUITY SHARES OF RS.10 EACH FROM THE ACCOU NTING YEAR 2000-01 IN TERMS OF THE PROVISIONS OF SECTION 18(2 )(1) OF THE SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT 1985 . B) THE APPLICANT COMPANY IS EXEMPTED FROM THE APPLICAB ILITY OF THE PROVISIONS OF SECTIONS 100 & 101 OF THE COMPANIES A CT 1956. C) THE COMPANY SHALL ISSUE AND ALLOT AT PAR TO ALL SHA REHOLDERS OF POLYCHEM LTD. ONE EQUITY SHARE OF THE FACE VALUE OF RS.10/- EACH IN THE COMPANY CREDITED AS FULLY PAID UP FOR 40 EQUITY SHARES OF THE COMPANY HELD BY THEM ON SUCH DATE AFTER THE RECORD DATE AS THE BOARD OF DIRECTORS OF THE COMPANY MAY DETERMINE IN ACCORDANCE WITH THE APPROVAL OF BIFR UNDER SECTION 18(2)(F) OF THE SICK INDUSTRIAL COMPANIES (SPECIAL PROVIDIONS) ACT 1981 UNDER THE REVIVAL SCHEME SANCTIONED BY ORDER DATED 4 TH FEBRUARY 2002. D) - - - - - - - E) ALL MEMBERS WHOSE NAME SHALL APPEAR IN THE REGISTER OF MEMBERS OF THE COMPANY ON THE RECORD DATE SHALL SURRENDER T O THE COMPANY THEIR SHARE CERTIFICATES ON SUCH DATE/S AS THE BOAR D OF DIRECTORS MAY DETERMINE FOR CANCELLATION OF THEIR SHARE CERTIFIC ATES IN RESPECT OF EQUITY SHARES HELD IN THE COMPANY AND THE COMPANY S HALL ISSUE TO THEM CERTIFICATES FOR EQUITY SHARES IN THE COMPANY TO WHICH THEY MAY BE ENTITLED IN TERMS OF THE ABOVE CLAUSE AND EV ERY SUCH SHAREHOLDER OF THE COMPANY SHALL TAKE ALL STEPS TO OBTAIN FROM THE COMPANY TO WHICH HE IS ENTITLED TO HEREIN ABOVE. UP ON THE NEW EQUITY SHARES BEING ISSUED AND ALLOTTED BY THE COMP ANY TO THE MEMBERS STANDING ON THE REGISTER OF MEMBERS OF THE COMPANY ON THE RECORD DATE SHARE CERTIFICATES IN RESPECT OF T HE SHARES HELD BY THEM IN THE COMPANY SHALL BE DEEMED TO STAND CANCEL LED. 15. FROM THE ABOVE IT IS CLEAR THAT THE EQUITY SH ARE CAPITAL OF POLYCHEM LTD. STANDS REDUCED FROM THE ACCOUNTING YE AR 2000-01. THE MEMBERS WHO APPEARED IN THE REGISTER OF MEMBERS SH ALL SURRENDER TO THE COMPANY THEIR SHARE CERTIFICATES FOR CANCELLATION A ND M/S POLYCHEM LTD. 9 SHALL ISSUE TO THEM CERTIFICATES OF EQUITY SHARES I N THE COMPANY TO WHICH THE SHAREHOLDER WILL BE ENTITLED IN TERMS OF THE BI FR ORDER. THE ISSUE BEFORE US IS WHETHER SUCH A PROCESS RESULTS IN TRAN SFER AS DEFINED IN SECTION 2(47) OF THE ACT. WE FIRST CONSIDER THE DECISION OF THE HO NBLE SUPREME COURT IN THE CASE OF CIT VS. G. NARASIMHAN (DECD.) AND OTHERS 2 36 ITR 327 WHICH IS RELIED UPON BY THE ASSESSEE. THE FACTS OF THE CASE ARE THAT THE ASSESSEE WAS A SHAREHOLDER IN A PRIVATE COMPANY. DURING THE ACCO UNTING PERIOD RELEVANT TO THE ASSESSMENT YEAR 1963-64 THE ASSESS EE HELD 70 SHARES IN THE COMPANY. THE FACE VALUE OF EACH SHARE WAS RS. 1 000/-. DURING THE ACCOUNTING PERIOD THE COMPANY PASSED A RESOLUTION TO REDUCE ITS CAPITAL. THE PROCEDURE PRESCRIBED UNDER THE COMPANIES ACT FO R THE REDUCTION OF SHARE CAPITAL WAS UNDERGONE AND AN APPROPRIATE ORDE R WAS OBTAINED FROM THE COURT. THE REDUCTION WAS GIVEN EFFECT ON AND FR OM MAY 26 1962 AS A RESULT THE FACE VALUE OF THE SHARES IN THE COMPANY WAS REDUCED FROM RS.1000 EACH TO RS.210 EACH. AS A RESULT OF THIS RE DUCTION THERE WAS A PRO-RATE DISTRIBUTION OF SOME PROPERTIES OF THE COM PANY AND PAYMENT OF MONEY TO THE SHAREHOLDERS INCLUDING THE ASSESSEE. IN THE INCOME-TAX PROCEEDINGS CONNECTED WITH THE PROPERTY/AMOUNTS SO RECEIVED BY THE ASSESSEE ON REDUCTION OF HIS SHARE CAPITAL IN THE S AID COMPANY THE TRIBUNAL WAS REQUIRED TO CONSIDER WHETHER ANY CAPIT AL GAINS ACCRUED TO THE ASSESSEE. THE TRIBUNAL HELD THAT NO CAPITAL GAI NS ACCRUED TO THE ASSESSEE. 15.1 THE HONBLE SUPREME COURT IN THE SAID CASE OB SERVED AS FOLLOWS : THAT THE ASSESSEE IN THE PRESENT CASE HAD BEEN PA ID NOT MERELY CASH BUT HAD ALSO BEEN GIVEN A PROPERTY FOR THE RED UCTION IN THE VALUE OF HIS SHARES FROM RS.1 000 TO RS.210. OUT OF THE TOTAL 10 AMOUNTS SO RECEIVED INCLUDING THE VALUE OF THE PROP ERTY SO RECEIVED THE PORTION ATTRIBUTABLE TO ACCUMULATED P ROFITS HAD TO BE DELETED. ONLY THE BALANCE AMOUNT COULD BE TREATED A S A CAPITAL RECEIPT. THEREAFTER LOOKING TO THE COST OF ACQUISIT ION OF THAT PORTION OF THE SHARE WHICH HAD BEEN DIMINISHED CAPITAL GAI NS WOULD HAVE TO BE DETERMINE. THE TRIBUNAL WHILE COMPUTING CAPI TAL GAINS WOULD HAVE TO DECIDE HOW THIS PROPERTY SHOULD BE VA LUED FOR THE PURPOSE OF DECIDING WHAT THE ASSESSEE HAD RECEIVED ON REDUCTION IN THE VALUE OF HIS SHARES AND WHETHER ANY CAPITAL GA INS HAD ACCRUED TO THE ASSESSEE OR NOT. THIS QUESTION WAS NOT REQUI RED TO BE CONSIDERED BY THE TRIBUNAL BECAUSE THE TRIBUNAL CAM E TO THE CONCLUSION THAT THERE BEING NO TRANSFER OF ANY CAPI TAL ASSET THE QUESTION OF CAPITAL GAINS DID NOT ARISE. BUT THE QU ESTION WOULD NOW HAVE TO BE CONSIDERED AND DECIDED BY THE TRIBUNAL W HEN THE MATTER WENT BACK BEFORE IT FOR THE DETERMINATION OF CAPITA L GAINS. 15.2 AT PAGE 332 OF THE REPORTED DECISION THE HO NBLE SUPREME COURT OBSERVED THAT IN THE CASE OF KARTIKEYA V. SAR ABHAI VS. CIT 228 ITR 163 THE COURT HELD THAT RELINQUISHMENT OF THE ASSET OR EXTINGUISHMENT OF ANY RIGHT IN IT WHICH MAY NOT AMOUNT TO A SALE CA N ALSO BE CONSIDERED AS A TRANSFER AND THE PROFIT OR GAIN WHICH ARISES FROM THE TRANSFER OF THE CAPITAL ASSET IS LIABLE TO BE TAXED UNDER SECTION 4 5. IT FURTHER OBSERVED AS FOLLOWS : AS A RESULT OF A REDUCTION IN THE FACE VALUE OF THE SHARE THE SHARE CAPITAL IS REDUCED THE RIGHT OF THE SHAREHOLDER TO THE DIVIDENDS AND HIS RIGHT TO SHARE IN THE DISTRIBUTION OF THE NET A SSETS UPON LIQUIDATION IS EXTINGUISHED PROPORTIONATELY TO THE EXTENT OF REDUCTION IN THE CAPITAL. EVEN THOUGH THE SHAREHOLD ER REMAINS A SHAREHOLDER HIS RIGHT AS A HOLDER OF THOSE SHARES STANDS REDUCED WITH THE REDUCTION IN THE SHARE CAPITAL. THEREFORE THIS EXTINGUISHMENT OF RIGHT IS A TRANSFER. THE AMOUNT R ECEIVED BY THE ASSESSEE FOR SUCH REDUCTION IS LIABLE TO CAPITAL GA INS UNDER SECTION 45. THE COURT FOLLOWED AN EARLIER DECISION OF THIS COURT IN ANARKALI SARABHAI LTD. V. CIT [1997] 224 ITR 422. IN VIEW OF THIS JUDGMENT THE PROPERTY AND MONEY RECEIVED BY THE AS SESSEE FROM THE COMPANY ON THE REDUCTION IN THE FACE VALUE OF H IS SHARES IS A CAPITAL RECEIPT SUBJECT TO SECTION 45 11 15.3 IN THE CASE OF KARTIKEYA V. SARABHAI VS. CIT 228 ITR 163 THE HONBLE SUPREME COURT HELD AS FOLLOWS : HENCE WHEN AS A RESULT OF THE REDUCING OF THE FA CE VALUE OF THE SHARE THE SHARE CAPITAL IS REDUCED THE RIGHT OF THE PREFERENCE SHAREHOLDER TO THE DIVIDEND ON HIS SHARE CAPITAL AN D THE RIGHT TO SHARE IN THE DISTRIBUTION OF THE NET ASSETS UPON LI QUIDATION IS EXTINGUISHED PROPORTIONATELY TO THE EXTENT OF REDUC TION IN THE CAPITAL. SUCH REDUCTION OF THE RIGHT IN THE CAPITA L ASSET WOULD CLEARLY AMOUNT TO A TRANSFER WITHIN THE MEANING OF THAT EXPRESSION IN SECTION 2(47) OF THE INCOME-TAX ACT 1961. 15.4 IN THE CASE OF CIT VS. MRS. GRACE COLLIS AND OTHERS 248 ITR 323 THE HONBLE SUPREME COURT HELD AS FOLLOWS : HELD ALSO THAT HAVING REGARD TO THE FACT THAT T HE ASSESSEE COULD HAVE DISCLOSED WITHOUT PREJUDICE TO THEIR CO NTENTIONS THE COST AT WHICH THEY HAD ACQUIRED THE SHARES IN THE A MALGAMATING COMPANY THERE WAS NO REASON TO DIFFER FROM THE VIE W OF THE INCOME-TAX OFFICER IN THE METHOD ADOPTED FOR COMPUT ING THE CAPITAL GAINS. THE DEFINITION OF TRANSFER IS SECTION 2(47) CLEAR LY CONTEMPLATES THE EXTINGUISHMENT OF RIGHTS IN A CAPI TAL ASSET DISTINCT FROM THE INDEPENDENT OF SUCH EXTINGUISHMEN T CONSEQUENT UPON THE TRANSFER THEREOF. IT IS NOT COR RECT TO VIEW THE EXPRESSION EXTINGUISHMENT OF ANY RIGHTS THEREI N AS NOT EXTENDING TO MEAN THE EXTINGUISHMENT OF RIGHTS INDE PENDENT OF OR OTHERWISE THAN ON ACCOUNT OF TRANSFER. TO READ S O IS TO RENDER THE EXPRESSION INEFFECTIVE AND ITS USE MEANI NGLESS. THE EXPRESSION INCLUDES THE EXTINGUISHMENT OR RIGHTS IN A CAPITAL ASSET INDEPENDENT OF AND OTHERWISE THAN ON ACCOUNT OF TRANSFER. 16. APPLYING THESE PROPOSITIONS TO THE FACTS OF TH E CASE THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF POL YCHEM LTD. (SUPRA) HELD THAT THERE WAS A TRANSFER ON THE REDUCTION OF SHARE CAPITAL CONSEQUENT TO AN ORDER OF THE BIFR AND HELD THAT THE ASSESSEE WAS ENTITLED TO CLAIM LONG TERM CAPITAL LOSS. CONSISTENT WITH A VIEW THER EIN WE AGREE WITH THE 12 CONTENTIONS OF MR. PARDIWALLA AND UPHOLD THE FINDIN G OF THE FIRST APPELLATE AUTHORITY THAT THERE IS A TRANSFER U/S 2(47) OF THE ACT ENTITLING THE ASSESSEE TO CLAIM LONG TERM CAPITAL LOSS. THUS WE DISMISS GR OUND NOS. 2 AND 3 OF THE REVENUE. 17. WE NOW TAKE UP THE ASSESSEES APPEAL. THE FIRS T GROUND IS ON THE ISSUE OF DISALLOWANCE OF EXPENSES RELATING TO R ENT WATER CHARGES AND PROPERTY TAX. THE FACTS ARE THAT THE COMPANY OCCUPI ED 14292.5SQ.FT. OF OFFICE SPACE INCLUDING SHARE OF THE LOBBY AREA IN T HE ORIENT HOUSE 7 J. TATA ROAD CHURCHGATE MUMBAI. M/S KILACHAND DEVECH AND & CO. P. LTD. (KDCPL) WHO ARE THE OWNERS OF THE PREMISES PA SSED A RESOLUTION AT THE BOARD OF DIRECTORS MEETING ON 1 ST AUGUST 1997 ACCEPTING THE AWARD OF THE ARBITRATOR AND TO ALSO DECIDED TO EXECUTE AP PROPRIATE DOCUMENTS IN THE FORM OF SUB-LEASE SUB TENANCY OR LICENCE ON TH E TERMS AND CONDITIONS WHICH ARE APPROVED BY CERTAIN SOLICITORS IN RESPECT OF AREAS ALLOTTED TO M/S GINNERS & PRESSERS LTD. THE ASSESSEE ON 29-7-1997 W ROTE A LETTER TO KDCPL AND AGREED TO PAY FROM 1 ST AUGUST 1997 THE CONSIDERATION AND SERVICE CHARGES AND OTHER OUTGOINGS SUCH AS MUNICIP AL TAXES ETC. FOR THE ABOVE AREA. MR. PARDIWALLA SUBMITTED THAT KDCPL WAS REQUIRED TO EXECUTE CERTAIN DOCUMENTS OF SUB TENANCY AND THAT T HIS WAS NOT DONE. HENCE THE ASSESSEE AS A MATTER OF TACTICS HAD NOT PAID THE RENT ETC. HE SUBMITTED THAT THE ASSESSEE HAS NEVER DENIED ITS LI ABILITY FOR PAYMENT OF RENT ETC. AND ON THESE FACTS THE AMOUNT SHOULD BE A LLOWED AS AN EXPENDITURE U/S 37 OF THE ACT. 18. THE LEARNED DR ON THE OTHER HAND SUBMITTED T HAT THERE IS NO AGREEMENT BETWEEN THE ASSESSEE AND KDCPL AND THE AS SESSEE HAS NOT FILED ANY DOCUMENT BY BOTH OF PARTIES. HE POINTED O UT THAT THE LITIGATION 13 WAS PENDING BETWEEN THE ASSESSEE AND THE LESSER AND IN SUCH CIRCUMSTANCES THE LIABILITY HAS NOT CRYSTALLIZED AN D HENCE NOT ALLOWABLE. 19. AFTER HEARING RIVAL CONTENTIONS WE ARE OF THE CONSIDERED OPINION THAT THE CLAIM IN QUESTION TOWARDS RENT PR OPERTY TAXES WATER CHARGES HAVE TO BE ALLOWED IN VIEW OF THE FACT THAT THE ASSESSEE HAS NOT DENIED ITS LIABILITY FOR PAYING THE SAME. THE ASSES SEE HAD WRITTEN TO THE LESSEE THAT IT WOULD PAY THE AMOUNTS IN QUESTION. KDCPL HAD ALSO REQUESTED THE ASSESSEE TO DEDUCT TAX AT SOURCE AT 2 % PLUS SURCHARGE INSTEAD OF 5%. THUS IT IS CLEAR FROM THE FACTS THAT THE LIABILITY IN QUESTION CANNOT BE TERMED AS A DISPUTED LIABILITY. NON PAYME NT OF RENT ETC. TO THE LANDLORD DOES NOT MEAN THAT THE LIABILITY IS NOT A SCERTAINED NOR CAN IT BE SAID THAT THE LIABILITY HAS NOT CRYSTALLIZED. HENCE THIS EXPENDITURE HAS TO BE ALLOWED. THUS WE AGREE WITH THE ARGUMENT OF THE LEARNED COUNSEL MR. PARDIWALLA AND ALLOW THIS GROUND OF THE ASSESSEE. 20. THE SECOND GROUND IS AGAINST THE DISALLOWANCE OF RS.57 000/- BEING RETAINERSHIP FEE. THE CIT(APPEALS ) HAS DEALT WITH THIS ISSUE AT PAGE 8 OF HIS ORDER. 21. AFTER HEARING THE RIVAL CONTENTIONS WE FIND T HAT THE FIRST APPELLATE AUTHORITY DISMISSED THIS GROUND AS THE CL AIM IS NOT SUPPORTED BY ANY DOCUMENTARY EVIDENCE. AS THERE IS NO DOCUMENTAR Y EVIDENCE PRODUCED EVEN BEFORE US WE UPHOLD THE FINDING OF THE FIRST APPELLATE AUTHORITY. 22. GROUND NO. 3 IS ON THE ISSUE OF DISALLOWANCE O F SHORT TERM CAPITAL LOSS. THE LEARNED COUNSEL SUBMITS THAT THE ORDER OF THE BIFR WAS ON 29 TH NOV. 2002 AND HENCE THE ALLEGATION OF THE REVENUE THAT THE ORDER WAS PASSED ON 4 TH FEB. 2002 WAS WRONG. HE SUBMITS THAT THE FACT REM AINS 14 THAT THE ASSESSEE HAD PURCHASED SHARES AND THERE WA S A REDUCTION IN THE VALUE AND HENCE THE LOSS SHOULD BE ALLOWED AS SHORT TERM CAPITAL LOSS. 23. THE LEARNED DR SUBMITS THAT THE ASSESSEE KNEW THAT THERE IS GOING TO BE REDUCTION IN SHARE CAPITAL AND THE DECI SION TO REDUCE THE SHARE CAPITAL WAS TAKEN ON 7-5-2001 BY BIFR AND OBJECTION S/SUGGESTIONS WERE INVITED. THIS SHOWS THAT THE ASSESSEE HAS WILFULLY UNDERTAKEN THIS TRANSACTION WITH THE VIEW OF BOOKING SHORT TERM CAP ITAL LOSS. 24. AFTER HEARING RIVAL CONTENTIONS WE FIND THAT THE AO HAS NOT INVOKED SECTION 40A(2) OR ANY OTHER SECTION. THE ON LY GROUND ON WHICH THE CIT(APPEALS) UPHOLDS THE ORDER OF THE FIRST APP ELLATE AUTHORITY IS THAT THIS IS A COLOURABLE TRANSACTION. IN OUR HUMBLE OPI NION THESE BEING GROUP CONCERNS AND THE FACTS OF THE CASE BEING WELL KNOWN TO ALL IN THE GROUP THE PURCHASE OF SHARES THAT TOO AT AN INFLATED RAT E BY THE ASSESSEE COMPANY DESPITE OF FACT THAT IT IS WELL KNOWN THAT POLYCHEM LTD. IS GOING TO REDUCE ITS CAPITAL IS NOTHING BUT A COLOURABLE DEVICE AND A MAKE-BELIEF TRANSACTION. THERE IS NO LOGIC TO THE FACT THAT SH ARES ARE PURCHASED AT HIGHER RATE THAN WHAT THE ASSESSEE WOULD GET AFTER REDUCTION SPECIFICALLY WHEN WHAT WOULD BE OBTAINED ON REDUCTION IS WELL K NOWN TO ALL PARTIES AS THE ORDER OF B.I.F.R IS CLEAR ON THE MATTER. THE GE NUINENESS OF THE TRANSACTION IS NOT PROVED. THUS WE UPHOLD THE FIN DINGS OF THE FIRST APPELLATE AUTHORITY AND DISMISS THIS GROUND OF THE ASSESSEE. 15 25. IN THE RESULT THE APPEAL OF THE ASSESSEE IS A LLOWED IN PART AND THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON THI S 20 TH DAY OF JANUARY 2010. SD/- SD/- (R.K. GUPTA) (J. SUDHAKARY REDDY) JUDICIAL MEMBER. ACCOUNTANT MEMBER. MUMBAI DATED : 20 TH JANUARY 2010. WAKODE COPY FORWARDED TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR A-BENCH (TRUE COPY) BY ORDER ASSTT.REGISTRAR ITAT MUMBAI BENCHES