1. This appeal of the assessee is directed against the order of the Commissioner of Income-Tax (Appeals)-XV, Mumbai dated 09^th August, 1996 for the assessment year 1993-94. The various ground of appeal taken up by the assessee pertain to the addition of a sum of Rs. 10,00,000/- received on sale of 25,000 detachable warrants of Reliance Industries Ltd. According to the assessee the learned Commissioner of Income-tax (Appeals) erroneously confirmed the action of assessing officer by making the addition to the business income of the assessee company. It is also submitted that the learned CIT(A) erred in not distinguishing the decision of the Hon'ble Punjab & Haryana High Court in the case of Hari Brothers Ind. Ltd. v. ITO (1964) 52 ITR 399. It is submitted that the detachable warrants were not held as stock-in-trade or trading assets.
2. The assessee company is carrying on the business in debentures, shares and financing. It also derives income from investment in shares.
The company is a partner in the firm M/s Advani Technology Devices whose profit is exempt Under Section 10A by virtue of an Industrial Undertaking established in SEEPZ. The assessee company filed the return of its income of Rs. 2,93,165/- on 31.12.1993. The AO found that it had credited its profit and loss account by a sum of Rs. 10 lakhs as "Capital receipt (on sale of entitlement/warrant)". The assessee had also deducted this sum from the statement of total income and a note had been appended with the remarks "Amount received on transfer of Detachable Warrants of Rs. 10 lakhs, being in the nature of capital receipt is not liable to tax and hence, the same is not included in the total income declared in the return".
3. The AO also noticed that during the accounting period relevant to assessment year 1992-93, the assessee had been allotted 25,000 debentures of Reliance Industries Ltd. The assessee company had paid Rs. 9,37,500/- for the same. The assessee had shown these debentures as stock-in-trade att eh end of the accounting year 1991-92. Alongwith the debentures, the assessee company was also given 25,000 detachable warrants. These detachable warrants were sold by the assessee company on 10-06-1992 to M/s Jayant Mody & Co for a consideration of Rs. 10,00,000/-. The assessee did not offer this amount for taxation for the reasons that according to the assessee it is a capital receipt. The assessee submitted before the AO that the cost of detachable warrant was Nil and the same was a capital asset. The assessee company also submitted that there was no cost of acquisition, therefore, it did not fall in the computation of capital gains Under Section 48 as held by the Supreme Court in the case of Commission of Income-tax, Bangalore v.B.C. Srinivasa Shetty 128 ITR 294. According to the assessee company, the sale consideration cannot be brought into computation as no cost is ascertainable as held by the Supreme Court in the case of Sunil Siddharth 156 ITR 509 and if it cannot be taxed as capital gain, the same also cannot be taxed under any other head.
4. The AO, however, did not accept the contention of the assessee on the ground that the assessee had treated the 25,000 debentures issued by Reliance Industries Ltd as stock-in-trade. According to the AO, the detachable warrant was issued by Reliance Industries Ltd alongwith the debenture certificates and hence the detachable warrant was a part of the debentures and since the assessee has treated the debentures as stock in trade, therefore, the same is a trading asset for the assessee; hence the consideration received by the company on sale of detachable warrant was a trading receipt. Therefore, the AO taxed the sale proceeds of detachable warrant of Rs. 10,00,000/- under the provisions of Section 28 of the Act as income from business or profession.
5. Regarding the contention of the assessee company that the detachable warrant did not have any cost, the AO has stated that M/s Reliance Industries Ltd had issued the debenture certificates alongwith the detachable warrant (SIC) since the paid up value of the debenture warrant was Rs. 37.50 per debenture, the value of the debenture-cum-detachable warrant was costing Rs. 37.50. Since the assessee had sold the debentures at Rs. 35/- per debenture, therefore, the balance of Rs. 2.5 should be considered as the cost per each detachable warrant. The AO, therefore, brought to tax the entire amount of rs. 10,00,000/- being the sale proceeds of detachable warrant of Reliance Industries Ltd. Under Section 28 of the Act.
6. The learned CIT(A) in his order has stated that the debentures alongwith the detachable warrants were issued to the assessee company by M/s Reliance Industries Ltd. The said detachable warrants entitled the assessee to apply for the equity shares of M/s Reliance Industries Ltd at the prescribed time. These warrants issued alongwith the debentures were detachable and traceable on their own. According to the learned CIT(A), there is also no dispute that the said debentures constituted the stock-in-trade of the assessee company. It is stated that the acquisition of these debentures was a part of this stock-in-trade and the assessee company was prompted to acquire these debentures by the offer of detachable warrants which were going to be issued alongwith the debentures. The learned CIT(A) has further stated that the assessee company paid Rs. 75/- per debenture being 50% of the face value of each debenture. The debenture had been allotted alongwith the warrants on payment of further sum of 25% of face value of each debenture in May, 1992 and immediately within 17 days of the said allotment, the assessee had sold warrants at a rate of Rs. 40/- per warrant. However, the debentures (paid up to Rs. 75/- per debenture were also sold at a rate of Rs. 35/- per debenture on 19-09-1992. Thus, according to the learned CIT(A), the cost of acquisition of the debentures alongwith the warrants were equal to the sale proceeds of the debentures and warrants though the debentures and warrants had been separately sold by the assessee. Thus, according to the learned CIT(A), there is neither any profit nor loss in this transaction. The learned CIT(A) referred to the case of Miss Dhun Dandabhouy Kapadia v. CIT (1967) 3 ITR 651 (SC) wherein the Hon'ble Supreme Court has observed - "In working out gain and loss, the principles that have to be applied are those which are a part of the commercial practice or which an ordinary man of business will resort to when making computation for his business purposes". According to the learned CIT(A), the assessee had not followed any such principle, on the one hand, it claimed a loss of Rs. 40/- on the sale of debentures as a business loss (the debentures being held as stock-in-trade), on the other hand, it claimed that the sale consideration received on the transfer of detachable warrants was not taxable at all. The learned CIT(A), thus, pointed out that the cost of acquisition of the debentures and warrants is equal to the sale proceeds of debentures and warrants. However, the separate sales made of the debentures and warrants has resulted in a situation where the assessee had declared a loss on sale of debentures but has shown a surplus on the sale of warrants. The learned CIT(A), therefore, came to the conclusion that the debentures form part of the stock-in-trade, and therefore, the same position will be for the warrants under consideration. Thus, according to him, sale proceeds of such warrants will constitute a trading receipt and form a part of the business profits. He, therefore, confirmed the addition made by the AO.7. At the time of hearing the learned counsel for the assessee contended that the cost of acquisition of the detachable warrants was Nil; therefore, the capital gain in this case cannot be computed.
According to the learned counsel, the detachable warrants were capital assets as has been held by the Punjab & Haryana High Court in the case of Hari Brothers Pvt Ltd. v. ITO, Special Investigation Circle-6, New Delhi and Anr. 52 ITR 399. He referred to page 3 of the compilation and contended that detachable warrants have not been mentioned as stock-in-trade therein. He argued that detachable warrants are nothing but a right to subscribe shares. The shares were to be allotted for detachable warrants and in addition to that some price was also paid to purchase the shares. He contended that the assessee company did not pay any additional cost to acquire the detachable warrants. According to him the detachable warrants were self-general assets and therefore, they were of capital nature and as there was no cost of acquisition, it does not fall in the computation of capital gains Under Section 48 as held by the Supreme Court in the case of B.C. Shrinivasa Shetty (supra). The learned counsel placed his reliance on the following court cases:Kalyani Exports & Investments (P) Ltd v. Dy. CIT (2001) 78 ITD 95 (Pune)(T.M.) In the alternative, the learned counsel contended that the cost of detachable warrants should be adopted at Rs. 40/- per warrant as the same were sold in May, 1992 and the debenture at the same time were sold at Rs. 35/-. According to him, the purchase value of one debenture was paid at Rs. 75/- being 50% of the face value of each which also included the value of one detachable warrant. As the debenture was sold at Rs. 35/-, the remaining value of Rs. 40/- should be considered as the value of each detachable warrant. The learned departmental representative placed his reliance on the findings of the lower authorities.
8. We have carefully considered submissions made by the rival parties.
We have also gone through the various documents produced before us alongwith the court cases relied upon by the leaned counsel for the assessee. M/s Reliance Industries Ltd had issued a letter of offer on 30-11-1991 for the issue of three different series of debentures which included, inter-alia, "76,00,000 14% secured Redeemable non-convertible Debentures of the face value of Rs. 150/- each for cash at par aggregating to Rs. 114/- crores attached with a Detachable Warrant, to the Equity Share-holders of the company on Rights basis entitling the warrant holders to apply for equity shares". The terms of the payment for the said series J Debentures were - (i) 25% on application; (ii) 25% on allotment and balance two or more calls. These debentures were redeemable on the expiry of 10 years from the date of allotment. The offer opened on 10-12-1991 and under it, every member of the company was offered 1 debenture for every 20 equity share held by him. It was also stated in the letter of offer that the warrant holders will have a right on the expiry of 24 months from the date of allotment of the said debentures to apply for an equity share per warrant at a price not exceeding Rs. 70/- per share. M/s Innova Tradecom Ltd, Bombay was a equity share holder of M/s Reliance Industries Ltd which has renounced the right to acquire the said debentures in favour of the assessee without consideration. Accordingly, the assessee company applied for 25,000 debentures on 07-01-1992. The Balance-sheet of the assessee company as on 31-03-1992 as mentioned by the learned CIT(A) in his order showed application money of Rs. 9,37,500/- being the application money or Rs. 37.50 per debenture (i.e. application money equal to 23% of the face value of a debenture for Rs. 150/- each) and the same was shown as part of its stock-in-trade under the head "current assets, loans and advances" in its Balance-sheet as on 31-03-1992. It was in the accounting period corresponding to assessment year 1993-94 under consideration that the assessee company made a further payment of Rs. 9,37,500/- being the amount of Rs. 37.50 per debenture on 23-05-1992.
Thus, allotment of 25000 debentures was also made in favour of the company alongwith 25000 detachable warrants. Immediately, thereafter, the assessee sold 25000 detachable warrants at a rate of Rs. 40/- per warrant for an aggregate sum of Rs. 10 lakhs on 10-06-1992, but it continued to hold 25000 debentures for which it had paid Rs. 75/- per debenture. Thereafter, the company sold 24310 debentures at a rate of Rs. 35/- per debenture on 19-09-1992. Since, the assessee was holding the debentures as its stock-in-trade, it had claimed a loss of Rs. 40/- per debenture while preparing its P & L account for assessment year 1993-94. Its balance-sheet shows as on 31-03-1993, the remaining 690 debentures, paid up Rs. 75/- per debenture (total cost Rs. 51,750/-) as forming part of its stock-in-trade.
9. As we have mentioned above, the company is a dealer in debentures and shares and an investor in shares. There are two main issues for consideration in this case - (i) whether the detachable warrants were of capital nature as contended by the learned counsel for the assessee; or (ii) whether the detachable warrants were part of the stock-in-trade as concluded by the tax authorities. In case, the detachable warrants are of capital nature, whether it would be possible to determine the cost of acquisition of the warrants and consequently whether the capital gain arising out of the sale of such warrants can be (SIC) In the case of (SIC) Sugar & Chemical Ltd v. CIT (1996) 62 ITR 566 (SC), the Hon'ble Supreme Court held that the Courts have to look not only into the documents but also at the surrounding circumstances so as to arrive at a decision as to what was the real nature of the transaction from the commercial point of view. No single test of universal application can be discovered for a solution of the question. The name which the party may give to the transaction which is the source of the receipt and characterisation of the receipt by them are of little consequences. Similarly in the case of Empire Jute Company Ltd. v. CIT (1980) 124 ITR 1 (SC), THE Apex Court laid down that the fact that a certain payment constitute income or capital receipt in the hands of the receipts is not material in determining whether the payment is revenue or capital disbursement qua the payer. Whether it is a capital expenditure or revenue expenditure would have to be determined having regard to the nature of the transaction and other relevant factors. In the present case, the assessee company is carrying on the business in debentures and shares. During the accounting period relevant to assessment year 1992-93, the assessee was allotted 25,000 debentures of Reliance Industries Ltd. Alongwith the said debentures, the assessee was also given 25,000 detachable warrants. These debentures were shown in stock-in-trade in the books of account by the assessee. Therefore, the debentures and warrants issued by the Reliance Industries Ltd to the assessee were part and parcel of the same transaction and they cannot be segregated to two different transactions. The warrants had been issued to the assessee company because the assessee was allotted debentures. Therefore, this is one transaction and if the assessee had shown the debentures as stock-trade, the warrant issued also formed part of the stock-in-trade. Therefore, the contention of the learned counsel that the detachable warrants were capital assets is without any substance. One has to look into the real nature of the transaction from the commercial point. The name which the parties may give to the transaction which is the source of receipt and the characterisation of the receipt by themself are of little consequences as has been laid down by the Apex Court in the case of Travancore Sugar & Chemicals Ltd (supra). The detachable warrants were issued by Reliance Industries Ltd alongwith the debentures certificates and therefore, the detachable warrants formed part of the debentures. As the assessee had treated the debentures as stock-in-trade, therefore, the detachable warrants are also trading assets as they also form part of the stock-in-trade.
10. The first consideration before holding a receipt to be profits or gains of business within Section 28 of the Act is to see if there was a business at all of which it could be said to be income. In the present case the assessee was carrying on the business in debenture and shares.
The assessee received the detachable warrants during the course of carrying on his business. Therefore, the sale consideration of detachable warrants of rs. 10,00,000/- was a business receipt and the same is assessable under the provision of Section 28 of the Act. In the case of CIT v. Maheshwari Devi Jute Mills Ltd (1965) 57 ITR 36 (SC), the Supreme Court held that distinction between revenue and capital in the law of Income-tax is fundamental. Tax is ordinarily not levied on capital profits; it is levied on income. It is well settled that sale of stock-in-trade or circulating capital or rendering service in the course of trading results in trading receipt whereas sale of assets which the assessee uses as fixed capital to enable him to carry him business results in capital receipt. In the present case the receipt of Rs. 10,00,000/- was out of the sale of stock of detachable warrants, therefore, the same was a trading receipt and taxable under Section 28 of the Act. In the case of CIT v. Ashok Leyland Ltd (1972) 86 ITR 549 (SC), the Hon'ble Supreme Court held that whether a sum is received on capital or revenue account depends or may depend upon the character of the business of the (SIC) and (SIC) related thereto. In the present case the assessee was carrying on the business in debentures and shares. During the course of business, the assessee received detachable warrants alongwith debentures purchased by the assessee. Therefore, the detachable warrants formed part of the stock-in-trade. In order to decide whether or not a payment is a revenue receipt, its true nature and substance must be looked into. If the payment is received in the ordinary course of business out of sale of stock-in-trade, it has to be treated as revenue receipt; if on the other hand, the payment received is towards the sale of profit earning source, such receipt not being in the ordinary course of business of the assessee is a capital receipt.
In the present case the stock-in-trade of detachable warrants has been sold by the assessee in the ordinary course of business, therefore, the sale proceeds of the stock-in-trade have to be treated as revenue nature. The detachable warrants were neither fixed assets of the business of the assessee nor they were profit earning source, therefore, the sale proceeds of such assets cannot be treated as capital in nature.
11. The assessee company applied for 25,000 debentures on 07-01-1992.
The assessee paid the application money of Rs. 9,37,500/- being application money of Rs. 37.50 per debenture which is equal to 25% of the face value of debentures for Rs. 150/- each. The assessee had shown these debentures as stock-in-trade under the head "Current assets, loans and advances" in its balance-sheet, as on 31-03-1992. The assessee company made further payment of Rs. 9,37,500/- being the amount of Rs. 37.50 per debenture on 23.5.1992. Thereafter the allotment of 25,000 debentures was made in favour of the assessee alongwith 25000 detachable warrants. Immediately thereafter, the assessee sold 25000 detachable warrants at a rate of Rs. 40/- per warrant for an aggregate sum of Rs. 10 lakhs on 10-06-1992, the Assessee sold 24310 (SIC) 09-1992. As the assessee was holding the debentures on its stock-in-trade, it had claimed a loss of Rs. 40/- per debenture while preparing the profit and loss account for the assessment year 1993-94. Now the main issue for consideration is that why the value of debentures has gone to Rs. 35/- when the same was purchased for Rs. 75/-. In our opinion, the value of debenture has gone down to Rs. 35/- because the assessee was allotted one detachable warrant free of cost alongwith the debenture. Therefore, it can be safely concluded that the allotment of debentures alongwith the detachable warrants was one transaction and the cost paid for debenture also included the cost of detachable warrant and that is why when the debenture was sold, the assessee incurred a loss of Rs. 40/- which he recovered by the sale of detachable warrant which was also sold at Rs. 40/-. Therefore, by taking the debentures in the stock-in-trade, in books of account and considering the detachable warrants as capital assets, the assessee company indulged in the device of evasion of tax.
We are, therefore, of the opinion that the allotment of (SIC) warrants (SIC) one and the (SIC) and the assessee company treated them differently for the reason to avoid the payment of tax. In the present case, the debentures form part of the stock-in-trade and therefore, the detachable warrants also form part of the stock-in-trade as both pertain to the same transaction. Therefore, the sale proceeds of such detachable warrants would constitute a trading receipt and the same would form part of the business profits. We, therefore, do not find any infirmity with the findings of the tax authorities in treating the sale proceeds of detachable warrants of Rs. 10 lakhs as business income of the assessee and the same are upheld.12. The various Court cases relied upon by the learned counsel have no application to the facts of the present case. In the case of B.C.Shrinivasa Shetty, the issue was regarding the determination of capital gains in the case of goodwill and the Hon'ble Supreme Court held that what is contemplated under Section 48 is an asset in the acquisition of which it is possible to envisage a cost. None of the provisions pertaining to the head "capital gains" suggests that they include an asset in the acquisition of which, no cost at all can be conceived. But in the present case, we have held that the detachable warrants were not capital assets, hence, the question of computation of capital gains does not arise. Similarly, the case of Modisam Laxmandas (P) Ltd (supra) of Bombay High Court is not relevant to the facts of the present case as in that case also the High Court dealt with the issue of computation of capital gain when the cost of acquisition of the asset is Nil. In the present case, the detachable warrants have been considered by us as trading assets, and hence the computation of capital gains becomes irrelevant. The Madras High Court decision in the case of K.S. Sheik Mohideen is also on the issue of computation of capital gains, hence not relevant to the facts of the present case.
Similarly, the decision of Punjab High Court in the case of Hari Brothers Pvt Ltd and the findings of the Pune Tribunal in the case of Kalyan Exports & Investments (P) Ltd (supra) have no application to the facts of the present case. The facts and circumstances under which the above cases had been decided are entirely different from the facts of the present case.
13. In the case of Commissioner of Income-tax, UP v. Kunjilal Gupta 81 ITR 474 (SC) the shares were held as stock-in-trade and the bonus shares were allotted in proportion to existing holding. The main issue for consideration was whether sale proceeds of bonus shares in the hands of the assessee were capital in nature or the same were revenue receipts. The Hon'ble Supreme Court held "on the facts, that the sale proceeds of bonus shares received in respect of ordinary shares held by the assessee as part of the stock-in-trade of his business was a revenue receipt". In the present case also the detachable warrants had been received by the assessee in respect of the debentures which are held by the assessee as stock-in-trade of the business, therefore, the sale proceeds of detachable warrants are revenue receipts. The case of the assessee is, therefore, squarely covered with the aforesaid decision of the Hon'ble Supreme Court. In view of the discussion above, we uphold the order of the learned CIT(A).