Forfeiture of Convertible Warrant has resulted in extinguishment of Right of Assessee to obtain a Share in issuer company: ITAT [Read Order]

Forfeiture - extinguishment of the right - assessee - issuer company - ITAT - Taxscan

The Income Tax Appellate Tribunal (ITAT), Delhi Bench held that the forfeiture of the convertible warrant has resulted in the extinguishment of the right of the assessee to obtain a share in the issuer company.

The assessee company, Azalea Infrastructure Pvt. Ltd. has claimed short- term capital loss of Rs.1,087,500,000 originated from India bulls infrastructure Ltd on forfeiture of share warrants which was disallowed by the assessing officer but was allowed by the CIT.

The business of the company has been stated to be purchasing, selling, developing, constructing, hiring, or otherwise acquiring and dealing in all real estate. During the year, the assessee company had no business activity nor in the immediately preceding year, which is evident from the profit and loss account and noted by the learned assessing officer.

The scheme was so framed by the companies that the warrant issued by India Bulls Power limited would be converted into partly paid shares of the company and the holder was liable to pay 1% of the balance amount within two days from the effective date of scheme.

Naturally, the promoters of India Bulls group promoted all the companies who applied for the warrant of the assessee. Therefore, at the time of framing of the scheme, it was within their knowledge that the companies who have applied for warrant, has initially for payment of 25% of the warrant price has borrowed money from its holding company, which in turn borrowed from another company and that another company also borrowed fund from India bulls infrastructure and Power Ltd which is one of the company involved in the scheme.

The whole scheme was created for transferring a sum of  Rs.304.50 crores in the name of India bulls Power Ltd by transferring it from another company without any tax consequence. The assessee is one of the layers used by the Indiabulls group for doing this.

However as the case of the assessee is concerned it has incurred that loss on forfeiture of the share warrant to the extent of 25% amounting to Rs.108.75 crores which was never claimed by the assessee or set off against any other income.

The appellant company was created only for the reason of transferring money from the group concern to the assessee company and subsequently to another group company, booking loss in the assessee company. The assessee company is used as one of the layers for the transaction. Therefore, the remedy for the whole transaction does not lie under the Income Tax Act but under some other law.

The coram consisting of H.S.Sidhu and Prashant Maharishi observed that during the course of hearing, on looking at the strange set of facts, the information was called from the assessee with respect to the corporate restructuring and business justification for layering of the funds. Assessee merely submitted that the issue is squarely covered in favour of the assessee by several decisions and once again relying on the decision of the learned CIT.

As far as the scheme of things goes, it is evident for everybody. Nothing is further required to be mentioned that who is the beneficiary and who is the conduit, ITAT added.

The Tribunal said that the issue whether the forfeiture of the convertible warrant amount to a transfer within the meaning of Section 2 (47) has now been made clear by the Supreme Court in the case of Grace Collis wherein it was held that forfeiture of the convertible warrant has resulted in extinguishment of the right of the assessee to obtain a share in the issuer company.

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