The Chennai bench of the Income Tax Appellate Tribunal (ITAT) has held that a right acquired through share warrants is a valuable right, can be treated as a capital asset for the purpose of the Income Tax Act, 1961.
Theassessee was issued Rs. 35 Lacs share warrants from M/s Shriram City Union Finance Ltd. (SCUFL). These warrants were convertible into equity shares within a period of 18 months. On allotment, the assessee paid amount of Rs.40/- per warrant on 15.05.2008 and the balance Rs.360/- per warrant was payable on conversion of warrant. Since, the assessee could not raise the balance amount payable, it relinquished its right to buy the shares and accordingly, the amount paid by the assessee for Rs.1400 Lacs was forfeited which was claimed as Short-Term Capital Loss. However, the claim was rejected by the income tax authorities.
Judicial Member V Durga Rao and Accountant Member Manoj Kumar Aggarwal found that so far as the factual matrix is concerned, the assessee has applied for 35 Lacs share warrants issued by SCUFL and accordingly, paid a sum of Rs.1400 Lacs upon allotment.
“The definition of capital asset is wide enough to cover property of any king held by the assessee. The right acquired by the assessee through share warrants, in our considered opinion, was a valuable right and covered within the meaning of capital asset as defined in Sec. 2(14). Proceeding further, transfer as defined in Sec. 2(47) would include sale, exchange or relinquishment of the asset or extinguishment of any rights therein. Clearly, upon forfeiture of share warrants, the assessee’s right in acquiring the warrants as well as resultant shares was extinguished and the assessee was deprived of a right in capital asset. Thus, the amount lost on forfeiture of share warrant, in our considered opinion, would give rise to capital loss in the hands of the assessee. It would be wholly immaterial as to how the recipient had accounted for such income in its computation of income,” the Tribunal said.
“A share in a company is nothing but share in the ownership of the company. While the right of the assessee to share in the ownership of the company stand extinguishedon account of forfeiture, the company, with all its assets, continues to exist. The forfeiture only results in one less shareholder. Therefore, the loss thus suffered by the assessee would be a capital loss. Respectfully following these decisions, we would hold that loss suffered by the assessee on account of forfeiture of share warrant would be deductible Short-Term Capital Loss,” the Tribunal said.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan AdFree. Follow us on Telegram for quick updates.
