June 2013
DCIT vs. Kemper Holding Pvt. Ltd. ITAT Mumbai `A’ Bench Before Sanjay Arora (AM) and Sanjay Garg (JM) ITA Nos. 6426/M/2011 A.Y.: 2008-09. Decided on: 26th April, 2013. Counsel for revenue/assessee: Surinder Jit Singh/Pradeep Sagar
By Jagdish D. Shah, Jagdish T. Punjabi
Chartered Accountants
fiogf49gjkf0d
Section 2(47) – Conversion of warrants into shares is neither an extinguishment nor relinquishment of any rights in the assets.
Facts: During the financial year 2006-07 the assessee was allotted 7,00,000 warrants of Rs. 100 each. 10% of the cost of the warrant was paid on allotment and the balance 90% was to be paid at the time when the warrants were to be converted into shares. During the financial year 2007-08, the assessee paid the balance 90% and the said warrants were converted into shares. The market price of each share on the date of conversion was Rs. 231.35.
The Assessing Officer (AO) held that the assessee while exercising his option for conversion of warrants into equity shares had extinguished his rights in warrants and simultaneously gained rights in equity shares. He held that the shares were purchased at the price of Rs. 100 when their market value was Rs. 231.35. Therefore, he held that the assessee had gained a benefit of Rs. 131.35 per warrant. Thus Rs. 9,45,00,000 was charged to tax as long term capital gain in the hands of the assessee.
Aggrieved the assessee preferred an appeal to the CIT(A) who deleted the addition of Rs. 9,45,00,000 on the ground that there was no transfer at all and the AO had taken market value of the shares to be the full value of consideration. He even rejected the alternative contention of the AO that the said benefit is taxable u/s. 28(iv) of the Act. Aggrieved the revenue preferred an appeal to the Tribunal.
Held :
The conversion of warrant into shares by paying the remaining 90% amount was neither any extinguishment nor relinquishment of any rights in the assets. It observed that the assessee had purchased the warrants by paying 10% of the pre-determined price of the shares. There was an option for the assessee to get the said warrants converted into shares by paying 90% of the amount within the stipulated period, the nonpayment of which would have resulted in forfeiture of money. So the money paid for warrants was just an advance payment for the purchase of shares and the assessee exercised its rights within the stipulated time and got the shares allotted by paying the remaining 90% amount at the predetermined value of the shares. It can be said to be an investment in shares. The capital gain would have arisen if the assessee would have sold the said shares in the market at a higher price. The shares have been retained by the assessee and the gain or fall in the market value of the said shares does not itself constitute any transfer under the Act. The purchase of shares at a specified rate, which were booked by paying 10% amount in advance neither amounts to any transfer of shares or warrant by the assessee nor does it invite any tax liability under the Act. The Tribunal also held that the AO has wrongly and illegally interpreted proviso (iv) to section 48 of the Act. The Tribunal confirmed the order passed by CIT(A).
The Tribunal dismissed the appeal filed by the revenue.
