Commissioner Of Income Tax v. M/S. Abhinandan Investment Ltd

$~ * IN THE HIGH COURT OF DELHI AT NEW DELHI % RESERVED ON: 26.02.2015 PRONOUNCED ON:20.03.2015 + ITA 25/2001 COMMISSIONER OF INCOME TAX versus M/S. ABHINANDAN INVESTMENT LTD. ..... Appellant ..... Respondent ITA 840/2008 COMMISSIONER OF INCOME TAX DELHI II ..... Appellant versus MEDICARE INVESTMENTS LTD. ..... Respondent ITA 26/2001 COMMISSIONER OF INCOME TAX ..... Appellant versus JINDAL EQUIPMENTS LEASING & CONS. SERV. .... Respondent Through : Sh. Rohit Madan, Sh. P. Roychaudhuri and Sh. Ruchir Bhatia, Advocates, for the Revenue. Sh. Ajay Vohra, Sr. Advocate with Ms. Kavita Jha, Adv. for assessees. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.K. GAUBA S.RAVINDRA BHAT, J. (OPEN COURT) 1. These three appeals involve common questions of law directed against a common order of the Income Tax Appellate Tribunal (ITAT) dated 05.06.2000. Initially, a Division Bench had decided the case on, 08.10.2001, reported in (2002) 254 ITR 0538 (Commissioner of Income Tax v. Abhinandan Investments); it had ruled in favour of the assessee, holding that no substantial question of law arose. That judgment was challenged; the matter was sent back by remand, by the Supreme Court (in CA 4596/2003, decided on 19.01.2010) which, inter alia, framed a question of law, in the following terms: “Whether, on the facts and circumstances of this case, the Tribunal was justified in directing the Assessing Officer to allow deduction of the losses at Rs.111/- per NCD as a business loss?" 2. The brief facts are that the assessee in ITA 25/2001 (hereafter “Abhinandan”)and assessee in ITA 26/2001 (hereafter “JELCS”) claimed a loss of `111 per debenture on the sale of debentures of Jindal Iron and Steel Co (“JISCO”) to UTI. These assessees were shareholders of JISCO, which declared a right issue of secured redeemable non-convertible debentures (NCD) of `500/- each. The size of the issue was about `500 crores. The issue opened on 21.11.94 and closed on 19.12.94. Interest @10.5% was payable by JISCO on those debentures. To make the debenture issue attractive, JISCO fixed a detachable warrant (DW) with each debenture, the holder of which was eligible to apply for one share of JISCO within a specified period. The salient features of the rights issue of NCD as approved -by SEBI were as under: a) Each debenture was of face value of `500/-. b) Every residential shareholder had to pay a sum of `111/- per debenture on making application and balance of `389/- per NCD was payable on allotment. per debenture on making application and balance of `389/- per NCD was payable on allotment. c) For non-residence/FI’s NR renounces will contribute a sum of `500/- each debenture on application. sum of `500/- each debenture on application. d) If the company did not receive the minimum subscription of about 90% of the issue of NCD within sixty days from the closure of the issue the company had to refund the entire subscription amount received. of about 90% of the issue of NCD within sixty days from the closure of the issue the company had to refund the entire subscription amount received. e) NCD with DW was offered to existing shareholders of the company whose names appeared in the register of a company on 31.10.94. the company whose names appeared in the register of a company on 31.10.94. f) 23 debentures for every 100 equity shares held on 31.10.94 were to be issued. 31.10.94 were to be issued. 3. The shareholding pattern of JISCO as on 12.8.94 was under:- 1.Promoters 30.93% 2.Financial Institutions 14.84% 3.Mutual Funds 2.32% 3.Mutual Funds 2.32% 4.NRIs 6.46% 5.Banks 2.14% 6.Foreign Institutional 2.88% Investors 6.Foreign Institutional 2.88% Investors 7.Public 40.43% -------------------- 100% -------------------- The terms of the issue also stated that the promoters’ holding in percentage in JISCO will not fall below the existing percentage holding even after the allotment of the right issue. f) 23 debentures for every 100 equity shares held on 31.10.94 were to be issued. 31.10.94 were to be issued. 3. The shareholding pattern of JISCO as on 12.8.94 was under:- 1.Promoters 30.93% 2.Financial Institutions 14.84% 3.Mutual Funds 2.32% 3.Mutual Funds 2.32% 4.NRIs 6.46% 5.Banks 2.14% 6.Foreign Institutional 2.88% Investors 6.Foreign Institutional 2.88% Investors 7.Public 40.43% -------------------- 100% -------------------- The terms of the issue also stated that the promoters’ holding in percentage in JISCO will not fall below the existing percentage holding even after the allotment of the right issue. 4. Before the right issue, JISCO made certain arrangements with UTI in July 1994 according to which the allottees of NCDs could surrender all the NCDs to UTI after the application was made and UTI agreed to pay the balance allotment money (`389/- per NCD) to JISCO and secure the NCD registered in its name. The assessees and other promoter companies applied for NCDs as per their shareholding and made the payment of `111/- each NCD on application. However, all the said promoter companies (including the assessees) opted for the arrangement entered into between JISCO and the UTI - mentioned earlier. Therefore, when UTI paid the balance allotment money (`389/- per NCD) on behalf of assessee, and in exchange became debenture holder, the assessee was allotted the DWs. Abhinandan sold some DWs @ `20/- per DW and claimed difference (of `91/- per DW) as a short term capital loss for the assessment year. Similar action was taken by JELCS. Subsequently the assessees claimed before the AO that by such arrangement it sold their NDCs to UTI as a result of which it incurred a loss of `111 each NCD and, was deductible. 5. The AO considered the assessees’ claim and observed that JISCO had given loans to some Mumbai based group companies and in turn these group companies invested in the placement of preference shares of all the said assesses/appellant companies. The AO therefore felt that it was JISCO’s own fund which was used in subscribing to its NCD issue in the name of assessees. The AO also held that all the five assessees/ appellants were not acting in their own capacity or taking market oriented decisions and were acting on behalf of JISCO. He further observed that the funds flowed into the assessees from JISCO which has flowed back to JISCO in the shape of application money for NCDs. Thus the assessees were merely conduits in this transaction and, therefore, the loss claimed by it was not allowable. The AO further observed that the agreement between JISCO and UTI was for the benefit of the promoter company only. He observed that there was no reference to this arrangement in the letter of offer though the arrangement with UTI was already reached before the offer dated 12.11.94. The AO also noted that the five assessee companies endorsed the allotment letters issued to them, in favour of UTI, which paid the allotment money and that there was no agreement between the UTI and the assessees for making the payment of allotment money on their behalf. Rather, the arrangement was between JISCO and UTI and the assessee could not take the benefit of such arrangement. Relying on the decision of the Supreme Court in McDowell Ltd v Commercial Tax Officer 154 ITR 148 (SC), the AO held the arrangement to be a colorable device to avoid future tax liability, by booking the losses. The AO concluded that all the five assesses - including the present assessee, were name lenders and the loss claimed by the assessees was not genuine. He, therefore, disallowed the loss. 6. Aggrieved by the order (of the AO), Abhinandan and JELCS appealed to the CIT (A). In appeal it was highlighted that the assesses were investment companies like other shareholders and that during the year all the said five companies came up with a private placement of Jindal’s preference shares and also subscribed to the right issue of NCD of JISCO. The assessees also subscribed to the equity issue of Jindal Vijaynagar Steel Ltd. (JVSL), a new company of the group floated during February 1995. It was highlighted that the face value of JISCO’s NCD was `500/- and each entitled the holder to a detachable warrant (DW). The face value of the share was `10/- but the premium payable was `190/-. The DW was a post-dated entitlement by which the holder could buy one JISCO share @ `200/- at a time to be determined by JISCO but not later than 60 months. Secondly, the DWs were to be given to the holders only when the allotment money was paid. The DWs were to be listed and traded separately. The application money for this rights issue was `111/- per NCD and the allotment money was `389/- per NCD. The rights issue opened on 11.11.94. An arrangement with UTI, by JISCO was made in July, 1994 which was accepted by the former in September, 1994. In terms of the arrangement, NCD allottees could surrender the NCD to UTI which would pay the allotment money of `389/- per debenture to JISCO on behalf of subscribers. UTI accordingly paid the sum @ `389/- per NCD to JISCO on behalf of assessees. In turn the assessees transferred their NCDs to UTI, which were registered in the name of UTI. Originally the assessees claimed short term capital loss for each DW on the sale of DW. Later, however, the assessees revised the claim of loss before AO. Since the assessees suffered loss on the sale of NCDs to UTI, the loss at the rate of `111/- per NCD was allowable according to them. 7. The CIT (A) held that NCDs were allotted on January 14, 1995 on payment of application money of `111/- per NCD. Between January 20, 1995 and January 25, 1995, the assessees and others transferred the NCDs to UTI without consideration. It was also held that the assessees never became owners of the fully paid NCDs and that they had paid `111/- as application money to acquire NCD; the DWs were received gratis. The claim of loss of `111/- per debenture on its sale was made for the first time in appeal and not in assessment proceedings. It was noted that the assessees applied for NCDs after the arrangement between JISCO and the UTI without any consideration and with the intention of incurring loss of `111/- on each NCD and that they had not fully paid for the NCDs. Therefore they were disentitled to the DWs, because in terms of the issue conditions, the DW was to be allotted only after the NCDs were fully paid. The NCDs were transferred to UTI immediately after the allotment and entirely according to the arrangement between JISCO and the UTI. Such transfer was an act of forfeiture of application money at `111/- per NCDs. The beneficiary of the transfer was not UTI but JISCO. Thus, the loss was deliberately incurred for the benefit of JISCO. It was held that as such, no loss arose to the assessees on transfer of the NCDs and, therefore, the question of allowing loss did not arise. The CIT (A) consequently dismissed the assessee’s appeal. consideration and with the intention of incurring loss of `111/- on each NCD and that they had not fully paid for the NCDs. Therefore they were disentitled to the DWs, because in terms of the issue conditions, the DW was to be allotted only after the NCDs were fully paid. The NCDs were transferred to UTI immediately after the allotment and entirely according to the arrangement between JISCO and the UTI. Such transfer was an act of forfeiture of application money at `111/- per NCDs. The beneficiary of the transfer was not UTI but JISCO. Thus, the loss was deliberately incurred for the benefit of JISCO. It was held that as such, no loss arose to the assessees on transfer of the NCDs and, therefore, the question of allowing loss did not arise. The CIT (A) consequently dismissed the assessee’s appeal. 8. The assessees and other companies appealed to the ITAT and argued that together, they held 30.93% (and about 40.43% being held by general public) shares in JISCO and the balance was with the banks and the financial institutions. According to SEBI guidelines, if 90% of any given issue was not subscribed JISCO had to refund the entire application money received by it; the guidelines also prescribed that even after the issue and allotment of one share of each DW attached with the NCD, the shareholding pattern of the promoters would not undergo any change. Therefore, the assessees and other companies had no option but to subscribe to the issue of NCDs. Had they not so subscribed - to the public issue of NCDs, JISCO’s entire issue would have failed. As a promoter company this could have brought bad repute to the assessees. It was further urged that the most important aspect was that there was no underwriter to the issue. Thus, the assessees were compelled to subscribe to the issue of NCDs. Since 90% of the issue had to be subscribed by the existing shareholders, this was not an easy task. In order to make the issue attractive, a DW was attached to each NCD which could entitle the holder to apply for one equity share of JISCO at `200/- per share (`10 face value + `190 premium). As per the terms of the issue, `111/- per NCD was payable on application and the balance of `389/- was payable on allotment. The allotment of DW was to be only when the full payment at `500/- on each NCD was made. 9. With respect to balance amounts paid by UTI, assessees submitted that UTI’s certificate that it made paid at `389/- per NCD to JISCO on behalf of the assessees, was not considered. In a sense, their stand was that only when the entire consideration for the NCDs was received by JISCO further course of action was followed. The materials were placed to show that DWs were given to the assessees when NCDs were fully paid up. As to the conclusion of the CIT (A) that the assessees never became the owner of NCD/DWs, it was submitted that the letter of allotment was in the name of the assessees; UTI made payment of allotment money to JISCO on behalf of the assessees and in turn the assessees transferred the NCDs in favour of UTI which was registered in UTI’s name and therefore the factual conclusions of the CIT (A) were wrong. The assessees denied that they were the beneficiaries of the transaction but it was UTI who became the owner of the NCDs of the face value of `500/- by paying `389/- only per NCD. UTI also received interest from JISCO at full value of `500/- each debenture. Moreover UTI was entitled to the full redemption money at `500/- per debenture on redemption though actually they had paid at `389/-. UTI earned a substantial annual gain of 256% on this transaction. It was urged that the assessees too benefited due to the arrangement because after losing `111/- on each debenture it became entitled to one dividend warrant which enabled it (the assessee) to own an equity share at `200/- though the market price of the share on that date was much higher. A chart indicating the gains by the assessee-companies was also furnished before the ITAT. The assessees argued that there was no camouflage in the transaction to evade tax. that the assessees too benefited due to the arrangement because after losing `111/- on each debenture it became entitled to one dividend warrant which enabled it (the assessee) to own an equity share at `200/- though the market price of the share on that date was much higher. A chart indicating the gains by the assessee-companies was also furnished before the ITAT. The assessees argued that there was no camouflage in the transaction to evade tax. 10. The ITAT, in its impugned order held that the five assessee-companies were promoters of JISCO through whom JISCO invested in various public limited companies. They held about 34% of JISCO’s shareholding; the rest was held by the financial institutions and the public. During the assessment year in question, JISCO came up with the rights issue worth `500 crores. According to the terms of the issue - as approved by the SEBI - if 90% of the issue was not subscribed then it would fail and JISCO then was to refund the entire money collected by it. The assessees were therefore, compelled to subscribe to the rights issue. The failure of such issue would have been detrimental to the assessees and other companies, as they were investors/promoter companies of JISCO. Thus, the assessees had no option but to subscribe to the rights issue of NCDs. A sum of `111/- per NCD was payable on making application as per the terms of the issue and the balance `389/- was to be paid on allotment. To popularize the issue, JISCO also provided that on payment of the full value of the NCD, the subscriber was entitled to one DW which in turn would entitle the holder to one equity share of JISCO at `200/- per share. The market value of one share of JISCO was `320/-. As these conditions attached to the issue had SEBI approval, all the assessees applied for the rights issue and paid a sum of `111/- per NCD on application. JISCO was also interested that the rights issue should meet with success. They therefore negotiated with UTI and UTI was agreeable to making payment of allotment money on behalf of any subscriber on the sale of NCDs to UTI. But the price quoted by UTI after negotiation was `389/- per NCD and that too was limited to investment of `350 crores. Such arrangement was given effect to by the assessees. Resultantly, UTI made payment at `389/- per NCD directly to JISCO and in turn the assessee-companies transferred their NCDs worth `500/- per NCD in to the UTI. The assessee too benefited because they got DWs which entitled them to an equity share of JISCO at `200/- per share. The DWs were given to the assessees who later sold them and originally claimed the loss incurred as deduction. However, during the course of assessment proceedings the assessees claimed that as they sold NCDs worth `500/- per NCD at `389/- per NCD, they had suffered a loss @ `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 AO. The ITAT noted that in a large number of decisions it was held that any view the assessees propound may be irrelevant while considering assessment under the Act. The only consideration for the revenue at that point of time is as to what was the true legal effect of the transaction. Reference was made to several decisions in Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income Tax [1971] 82 ITR 363 (SC) ; Delhi Stock Exchange Association Ltd. v. Commissioner of Income Tax [1961] 41 ITR 495 (SC) and First Addl. ITO v. T. M. K. Abdul Kassim [1962] 46 ITR 149 (SC). It was therefore observed that even if the return filed by the assessee did not set out the proper position that cannot be a reason for not allowing the claim. observed that even if the return filed by the assessee did not set out the proper position that cannot be a reason for not allowing the claim. 11. The ITAT considered the reasoning of the AO and CIT (A) and held, firstly that when the assessees applied for NCDs and paid the requisite sum of `111/- per NCD, the offer of allotment was issued to them in terms of which all applicant companies had to make a further payment at `389/- per NCD. As the arrangement was in place with the UTI (which had to purchase the NCDs at `389/- per NCD), the assessees gave effect to it (the arrangement). UTI paid `389/- per debenture to JISCO and in turn the assessees transferred their NCDs in to UTI. Such transfers were also registered in the register of JISCO. Payment was made by UTI to JISCO on behalf of the assessees. Secondly, it was held that the approved condition of the SEBI that on payment of full consideration the holder of the NCD will be entitled to one DW which in turn entitled the holder to apply for one equity share of JISCO. In its letter, JISCO had clearly confirmed that the DWs were given to the assessees only when it had received the full amount of NCDs either from the assessees, or from UTI - on its behalf. Thirdly, dealing with the reasoning that the entire transaction was aimed at giving an undue advantage to JISCO, reference was made to a chart filed by the assessees, which indicated the extent to which the UTI had benefited from the transaction. Fourthly, with respect to the deployment of funds, it was held that actually the payment of application money was made by the assessees from their funds. Much later, some companies close to JISCO had made advances to the assessees. The ITAT observed that even assuming that the assessees were indirectly provided funds by JISCO to invest in the rights issue of NCDs, there was no legal bar for doing so. Lastly, dealing with the reasoning that the sale transaction between the assessees and UTI not being at arms’ length, since the NCDs were made over to UTI for `389/- when their face value was `500/-, the ITAT held the ground to of no substance. Here, it was noted that as per the scheme approved by the SEBI, the assessees had no option but to subscribe to the rights issue - a factor applicable to all the shareholders. The general public accounted for about 40% of the shareholding of JISCO. In case the assessees did not opt to subscribe to the issue, it would have failed, (as provided in the terms of the issue, which mandated subscription of 90% of the rights issue) and JISCO would have been compelled to refund the entire money. That would have been detrimental to the assessees, promoter companies of JISCO. ITAT found that UTI had secured an annual yield of about 25%. Therefore, it was held that the transaction of selling NCDs at the face value of `500/- to the UTI at `389/- per debenture was not a colourable device. It also noted that when JISCO came with the rights issue of NCDs, many other companies like Apollo Tyres, Usha Ispat Ltd., Dhunseri Tea Industries Ltd., and Sri Ram Industrial Enterprises, etc., had come out with similar rights issues with almost identical terms and conditions. In the case of Apollo Tyres, the buy-back was done by JM Financial and Investment Consultancy Services Ltd. whereas in the case of Usha Ispat, Dhunseri Tea and Sri Ram Industrial Enterprises, the buy-back was by UTI, DSP Financial Consultancies Ltd. and Sri Ram Financial Services Ltd. respectively. In the case of the assessees, the buy-back was by UTI which could not be influenced by the terms of either the assessee or JISCO. Consequently, it was held that the sum of `111/- per share had to be treated as business loss. Facts in Medicare Investments, ITA No. 840 of 2008 Facts in Medicare Investments, ITA No. 840 of 2008 12. The assessee company held shares in Max India Ltd. a widely held, listed company. During the previous year ended 31.03.96 Max India Ltd. came up with a Rights Issue in which the assessee company also participated as a shareholder. The facts relating to the said issue of Max India Ltd. were that 8,23,720, Zero coupon Fully Convertible Debentures (FCDs) of `500/- each were offered, for cash at par aggregating to `41,18,60,000/- on rights basis in the ratio of 1 FCD for every 10 Equity Shares held, to the existing Equity Shareholders. 12.5%, Secured, Non-convertible debentures (NCDs) aggregating 16,47,440, were issued, at `250/- each, for cash at par aggregating to `41,18,60,000/- along the Detachable Warrants (DWs) on rights basis in the ratio of 1 NCD for every 5Equity Shares held to the existing equity shareholders. The assessee subscribed to and was allotted, in the above referred rights issue of Max India Limited, 1,95,000, 12.5% Secured, redeemable Non-Convertible Debentures of ` 250/- each with (with Detachable warrants). The assessee company has sold these NCDs (without warrant), in terms of the Scheme, at the rate of `169/- per debenture. The issue price (at par) of `250/- was allocated as under: i) Non-Convertible Debenture `250/- ii) Warrant NIL 13. On the above basis, loss on sale of debentures was computed at `l,57,95,000/- (i.e. `250/- minus `169/-) x 1,95,000, and warrants were shown in the Balance sheet at NIL cost. The A.O. examined this issue and concluded that by opting for scheme B there was no acquisition of NCD by the assessee at all. The A.O. also observed that:- “Whatever may be the arrangements which the transaction has been gone through, one has to look at the very essence of the transaction. The essence of the transaction, here, is that, if the investor opts for Scheme-A, he gets two products namely, one combined price warrant plus NCD for Rs.250/-, but if he opts for Scheme-B, he gets only one product i. e. the warrant, for Rs.81/- and other product, the NCD is given to IL&FS for Rs.179/. The A.O. held that the arrangement was preconceived and the claim of loss is untenable. He has highlighted that there is no transaction which resulted in a loss of `81/- per warrant for the cost of the warrant has to be taken at `81/-For these reasons, the assessee’s contentions were rejected. 14. The assessee appealed to the CIT (A) where it was contended that in terms of Max India Ltd’s letter of offer dated December 8, 1995, each NCD carried a face value of `250 and was attached with one detachable warrant. Each warrant enabled the holder to apply for and be allotted one equity share of Max India Limited at a price which was to be calculated at a discount of 33% on the prevailing market price or `225, whichever was less, any time between the period of 24 to 48 months from the date of allotment of NCDs. It was argued that if the right attached to the warrant had not been exercised by the holder thereof within the period specified by Max India Ltd., the entitlement for the shares was liable to be automatically lapsed. It was also clarified that the warrant holders exercising their option for allotment of equity shares were not entitled to seek any appropriation of the amount paid on the NCDs against the amount payable for the equity shares which was to be paid in full separately. It was contended that the said warrants thus were completely detachable from the NCDs and their holders were entitled to sell the NCDs separately after detaching the warrants. It was also contended that since the purchase price, face value as well as redemption price of the said NCDs was `250 each, that was rightly taken as cost of acquisition by the assessee and the loss resulting in the sale of the said NCDs by taking the said cost of acquisition was allowable in the hands of the assessee. These arguments did not prevail and the reasoning of the AO was left undisturbed. The CIT (A) also observed that: since the purchase price, face value as well as redemption price of the said NCDs was `250 each, that was rightly taken as cost of acquisition by the assessee and the loss resulting in the sale of the said NCDs by taking the said cost of acquisition was allowable in the hands of the assessee. These arguments did not prevail and the reasoning of the AO was left undisturbed. The CIT (A) also observed that: " 4. I have carefully considered the matter. To my mind, the Assessing Officer‟s order suffers from no infirmity on this count. The Assessing Officer has correctly observed that the entire arrangement was pre-conceived. I find that the Assessing Officer has discussed this issue in a comprehensive manner and has correctly arrived at the finding that the cost of the warrant is to be taken at Rs.81 only and not nil. I am in agreement with the arguments given by the Assessing Officer in the assessment order. Accordingly, this ground is decided against the appellant-company. The disallowance of loss on sale of debentures of Rs.1,57,95,000 is upheld." The assessee appealed to the ITAT. By that time, the decision in Abhinandan’s case was rendered. Having regard to the orders of various Benches of the ITAT, a Special three member Bench was constituted to decide the issue, which was answered as follows: "On the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in upholding the order of the learned Assessing Officer in respect of the disallowance of Rs.1,57,95,000 on account of loss on sale of debentures." The ITAT preferred to follow the decision in Abhinandan’s case and allowed the assessee’s claim. Contentions of the revenue 15. It is argued by revenue that there was no sale of NCDs by the assessee to UTI as there was no agreement of sale between them. The arrangement was between JISCO and UTI. There was no stipulation in the scheme for buy back of khokha (NCDs) as was made by the other companies while issuing the prospectus for their rights issues on which the ITAT relied. No title was transferred to the UTI as the assessee claimed. ITAT also observed that the UTI paid `389 per debenture on behalf of the assessee. Were the NCDs sold to UTI (as claimed by the assessee), the question of paying allotment money at `389 would not have arisen, on the part of the assessee. If a transaction was for sale of NCDs, the UTI would have paid on its own behalf. Here the sale did not take place because as per the scheme only a paid up debenture entitled the holder/allottees to receive the DW. If the sale had taken place, only UTI would have been entitled for the DW. Here the DWs were issued to the assessee whereas the UTI had paid the allotment money. The assessee had shown the amount of application money as the cost of DWs which was evident from the fact that the assessee claimed the loss to the extent of DWs sold. It was in fact a financial arrangement between JISCO and the UTI and the UTI agreed to pay `389/- per debenture on the condition that (i) interest would be paid at 10.5 %; and (ii) refund of `500/- would be given in three instalments. In the process, the assesse allowed its capital to be forfeited by JISCO, which was a unilateral act on its part. It is like the case of unclaimed credits/ debts. A sum of `111/- per NCD was capital investment in the hands of the assessee as it had shown it as investment and declared the loss as short-term capital loss while filing its return. The assesse is an investment company of the Jindal group. 16. It was argued that no definition of “investment company” existed in the statute. However, several definitions were enacted. “Financial investment company” was inserted by the Finance (No. 2) Act, 1991. By Section 2(9)(d) it is defined as “a company whose gross total income consists mainly of income which is chargeable under the heads „Income from house property‟, „Capital gains‟ and „Income from other sources‟ or of income by way of interest on securities.” 16. It was argued that no definition of “investment company” existed in the statute. However, several definitions were enacted. “Financial investment company” was inserted by the Finance (No. 2) Act, 1991. By Section 2(9)(d) it is defined as “a company whose gross total income consists mainly of income which is chargeable under the heads „Income from house property‟, „Capital gains‟ and „Income from other sources‟ or of income by way of interest on securities.” It was highlighted that in the present case, money which had flowed from JISCO came back to it with financing from the UTI and the assessee also claimed loss in the year under consideration, to claim set off against an income of the present year as well as subsequent years. JISCO had made an arrangement with the UTI to finance the debentures at `389 per debenture. UTI had agreed to the extent of `350 crore. The UTI did not restrict it only for the promoters and to the exclusion of others. JISCO intended to avail of the 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. 17. Senior counsel for the assessee in all the cases argued that there is no infirmity in the approach and conclusions of the ITAT. It was submitted that the revenue’s arguments about the assessee not being allottee of the NCDs is baseless, because as a matter of record, they were allotted in its favour on 14.01.1995 (6,67,000 NCDs) and transferred later, on 25.01.1995 to UTI- evidenced from the endorsements at the reverse of the document. The share transfer form dated 20.01.1995 also strengthened this submission. That UTI funded `389/- per NCD was not relevant, because there is nothing in law prohibiting such arrangement. Likewise, the previous agreement whereby such funding took place also could not detract from the true nature of the transaction, which is what the ITAT looked at. Counsel urged that the assessee is an investment company and treated as a promoter of JISCO, whose shares to a substantial extent were acquired from time to time. Abhinandan’s ordinary line of business is investment in shares. Reliance is placed on three years’ income for previous years in support of this argument. Urging that it would be anomalous to uphold the revenue’s stand that on the one hand, it urges that JISCO’s shares were held as stock in trade and at the same time, contend that DWs - acquired as a consequence of the share-holding, had to be treated in the same manner. 18. Counsel also argued that the loss in question was a business loss and not a capital loss and further that according to the revenue itself the assessee’s JISCO shares were stock in trade (and therefore in the revenue account). In view of this stand, the Revenue cannot argue to the contrary. It would be contradictory and illogical to say that the shares of JISCO are to be held as stock in trade but the NCD’s which were acquired by virtue of the shareholding in JISCO and which were held for 10 days are to be treated as an investment and held on capital account. Analysis & Findings 19. Before we proceed to analyse the contentions of the parties, it would be useful to set out, in a tabular form, the salient facts relating to the two sets of appeals: 18. Counsel also argued that the loss in question was a business loss and not a capital loss and further that according to the revenue itself the assessee’s JISCO shares were stock in trade (and therefore in the revenue account). In view of this stand, the Revenue cannot argue to the contrary. It would be contradictory and illogical to say that the shares of JISCO are to be held as stock in trade but the NCD’s which were acquired by virtue of the shareholding in JISCO and which were held for 10 days are to be treated as an investment and held on capital account. Analysis & Findings 19. Before we proceed to analyse the contentions of the parties, it would be useful to set out, in a tabular form, the salient facts relating to the two sets of appeals: 20. The revenue's rationale for disallowing the loss claimed by the assessee is to be seen from the perspective that it was never its position that the cost of acquisition of NCD in the hands of the assessee was only `389 and the remaining amount of `111 was attributable to the DW cost. What entails scrutiny is whether the payment, by the assessee, towards `111/- per NCD signified the cost paid for each DW and the remaining sum, i.e., `389 was the cost actually paid for acquiring each NCD. This claim was rejected by the revenue authorities. They held that per NCD cost of acquisition was `500/- and the DW was received gratis, without consideration according to the terms of the scheme. The revenue could not suggest that the assessee never stated that the sum of `111/- paid by it, was to be treated as the price paid by it to acquire DWs: in fact, the assessee had contended as much when claiming loss on sale of DW @ `20/- each. The plea was rejected. 21. There is no doubt that the assessee claimed before ITAT that it incurred a loss of `111/- per debenture. Having spelt out its position that the entire amount of `500 paid by the assessee was on account of cost of acquisition of NCDS, the revenue never stated that `111/- paid by the assessee should be treated as the price paid for acquiring DWs. The ITAT nonetheless considered the salient features of the NCD rights issue with DWs as approved by SEBI; it also took note of the assessee's original claim before the AO which was subsequently altered due to the revenue's position i.e., that of the sum of `500 paid by the assessee under the said right issue, nothing was attributable to DWs which was received gratis without any consideration. The ITAT considered the different bases on which the assessee's claim regarding loss of `111/- on sale of debenture was disallowed by the AO as well as by the learned CIT (A). Thereafter, the ITAT considered the terms of the right issue and held that the true legal effect of the relevant transaction has to be seen for the purpose of income-tax assessment and not the entries made in the books of account or claim made in the return of income. ITAT therefore, accepted the claim of the assessee for loss of `111 per debenture stemming from sale thereof to UTI and consequently found that in terms of the allotment scheme, cost of acquisition of each debenture was `500 whereas the DW was received (by the assessee) cost-free- which was the true legal effect of the transaction. Therefore, the question of cost incurred by the assessee to acquire the NCD (as well as the DWs, which were intrinsic part of the scheme itself) was before the ITAT which duly considered it. 22. This Court notices that the salient facts are that the assessees (Abhinandan and JELCS) were promoters of JISCO. Together with other three assessee companies, these assessees held over 30.93% shares in JISCO. When the NCD offer was made, a necessary condition (stipulated by SEBI) was its mandatory subscription to the extent of 90%. Being a NCD rights offer, no doubt, existing share-holders had the option of choosing not 22. This Court notices that the salient facts are that the assessees (Abhinandan and JELCS) were promoters of JISCO. Together with other three assessee companies, these assessees held over 30.93% shares in JISCO. When the NCD offer was made, a necessary condition (stipulated by SEBI) was its mandatory subscription to the extent of 90%. Being a NCD rights offer, no doubt, existing share-holders had the option of choosing not to invest in the issue. However, there was an inherent risk, especially for promoters/shareholders such as the assessees - in case of under-subscription, (i.e., less than 90%) the amounts received - by JISCO, had to be refunded. This would have predictably resulted in loss of reputation to both JISCO and the assessees. The findings of the ITAT underscore the commercial compulsion which the assessees were faced with, in the circumstances, to subscribe to the extent of their shareholdings, in the NCDs. 23. Upon application the amount of `111/- was payable as application money. Thereafter- on allotment, the balance `389/- per NCD was payable. In this case, as a result of the terms agreed with UTI, the transfer of the NCD allotment to it meant that the balance `389 was payable. Concurrently, the rights to DW remained with the assessee companies. This court notices that fundamentally, the AO fell into error in overlooking that in fact, the NCDs were allotted on January 14, 1995 on payment of application money of `111 for NCDs. Between January 20, 1995 and January 25, 1995, they were transferred and transfer forms were executed. The CIT (A) no doubt took note of this singular omission (by the AO) but in turn erroneously held that the transfer was not based on any consideration. Both these authorities were considerably influenced by the fact that the NCD partial funding arrangement had been arrived at by JISCO with UTI sometime in July 1994. So they went about finding if there were other suspicious facts to establish that the entire scheme was a ruse to defraud the revenue. What was not considered was that the UTI scheme was apparently wide in nature; it sought to fund NCD applicants - the assessee shareholders and other companies being some of them, to the extent of 30.93 %, as much as 40% shares being held by the general public and the rest being institutional shareholders. Significantly, UTI limited the funding under the scheme to `350 crores. Equally, what was lost sight of was that both the UTI and the applicants stood to benefit, because (a) UTI picked up the NCDs at a discounted rate, i.e., `389/- whereas its face value was `500/- each (that amount being the redeemable value at the end of the maturity period). It also received 10.5% per annum interest on `500/- even though it invested only `389/- per NCD.The assessees on the other hand, retained the right to the DWs which entitled allotment of shares at a pre-determined rate of `200/-. The assessees held quoted shares as on 31.03.1995 to the extent of `165,526,458/50 of which the value of JISCO’s shares was `43,143,836/00. They held shares in 12 other listed companies besides shares in unlisted companies, debentures and other securities. Their dividend income was in excess of `75 lakhs. Other income, by way of interest, on loans, securities, etc was in excess of `1.05 crores. 24. Now, it is essential to deal with the findings of the AO that the loans advanced by `89,76,69,968/- to JISCO to one Sun Investments, found its way back to fund the NCDs in question and that the transaction involving UTI’s limited funding was not at arms’ length. These findings resulted in the conclusion that the purchase of the NCDs was not a genuine transaction. However, as noticed earlier, the share inventory and investments of Abhinandan were not confined to JISCO shares and securities. Likewise, the materials on record show that JELCS too had substantial shareholding and securities (more than `2.49 crores out of a total inventory of `5.50 crores) which had no connection with JISCO. It reported a total income of `2.23 24. Now, it is essential to deal with the findings of the AO that the loans advanced by `89,76,69,968/- to JISCO to one Sun Investments, found its way back to fund the NCDs in question and that the transaction involving UTI’s limited funding was not at arms’ length. These findings resulted in the conclusion that the purchase of the NCDs was not a genuine transaction. However, as noticed earlier, the share inventory and investments of Abhinandan were not confined to JISCO shares and securities. Likewise, the materials on record show that JELCS too had substantial shareholding and securities (more than `2.49 crores out of a total inventory of `5.50 crores) which had no connection with JISCO. It reported a total income of `2.23 crores, of which `81 lakhs was by dividends and `97.23 lakhs was from sale of investments. These figures establish that JELCS, like Abhinandan, had independent substantial sources of income and was not a conduit or alter ego of JISCO. 25. Here allotment of the NCDs with detachable warrants was made by JISCO in terms of clear and transparent offer under the SEBI Regulations. Apart from the observations of the AO and the CIT, based on incomplete appreciation of facts, there was no machination or tax evasion ruse. The NCDs were allotted to the assessees and transferred after the allotment(again a crucial point missed by the lower revenue authorities). Here, the right to allotment could not be renounced in favour of third party. The warrants were acquired for no price and the payment made was only for acquisition of the NCDs whose terms of issue included a return of 10.5 % annually. The purpose of issue was commercial and they were not issued by the JISCO only to attract subscriptions to the DWs attached thereto. Depending on share market volatility, the apparent sweetener (to the issue), i.e., the free DWs could become worthless; after all, the DWs entitled the holders to equity shares in the event of an issue, at a pre-determined price of`200/-. 26. A distinction made by the revenue between the case of Abhinandan and JELCS on the one hand and Medicare on the other was that in the former instance, the application cost was `111/- and the balance `389/- was payable by UTI, as the result of a prior arrangement whereas in the latter case, the terms of payment given in the offer document itself offered two options to the allottees and depending upon their exercise of option (at the stage of application itself), the amount payable was determined. The subscriber going for option (a) thereby agreeing to sell the NCDs, which is called Khoka sale, amount payable on application was only `81/- per NCD whereas the subscriber not exercising the option of Khoka sale as given in option (b), the entire face value of `250/- was payable on application. The contention was that the subscriber opting for option (a) thus, was paying `81/- per NCD on application as a consideration for detachable warrant and this was explicitly the true effect of the transaction. This court notices that the distinction was rejected by the ITAT, which reasoned as follows: application itself), the amount payable was determined. The subscriber going for option (a) thereby agreeing to sell the NCDs, which is called Khoka sale, amount payable on application was only `81/- per NCD whereas the subscriber not exercising the option of Khoka sale as given in option (b), the entire face value of `250/- was payable on application. The contention was that the subscriber opting for option (a) thus, was paying `81/- per NCD on application as a consideration for detachable warrant and this was explicitly the true effect of the transaction. This court notices that the distinction was rejected by the ITAT, which reasoned as follows: “31. After having given a careful consideration to this entire matter relating to the different options given to the allottee/subscriber in the offer documents in both the cases, we find it difficult to accept that the two options given by the issuing company in the present case m