Gujarat High Court: Sale Consideration Arising out of Transfer of Capital Asset is subject Capital Gain

Gujarat High Court: Sale Consideration Arising out of Transfer of Capital Asset is subject Capital Gain

The Gujarat High Court by its two judges bench comprising of Chief Justice Aravind Kumar and Justice Ashutosh Shastri ruled that detachable warrant has a separate existence and that, as such, a portion of the debenture's cost is attributable to the warrant, which is interconnected. The realization would be a sale consideration arising out of the transfer of a capital asset and is subject to capital gain.

The bench was hearing an appeal wherein the appellant/assessee, Deepak Nitrite Limited, was holding the shares of Deepak Fertilizers and Petrochemicals Limited, (in short DEPCL). Initially the Deepak Fertilizers issued partly convertible debentures of Rs.100 on right basis to its shareholders. Each debenture of Rs. 100 debenture was made up of three parts, each with its own warrant.

The appellant submitted that the holder of the warrant shall have the right to apply for and be allotted one equity share of Rs.10 at a price not exceeding Rs. 50 as may be decided by the Controller of Capital Issue (in short CCI) and these rights shall be exercised during a period of 3 months or such longer period as may be determined by Board of Directors of DEPCL between the expiry of 4 years and the expiry of 6 years from the date of allotment.

The issue that arose before the Court to consider was whether detachable warrants attached with part C of debentures of Deepak Fertilizers have any conceivable cost of acquisition or not and if not? whether to be treated as taxable capital gain on sale thereof or not?

According to the appellant, the Income Tax Appellate Tribunal (in short ITAT) had erroneously ruled that detachable warrants have any cost or any conceivable cost. The Tribunal failed to acknowledge the issue of whether detachable warrants have any cost or not, which is pending before the High Court and as such, it was desirable to send the matter back to the Assessing Officer to abide by the decision in the said reference.

The Court noted that the assessee had referred the decision passed in CIT vs. B.C. Srinivasa Shetty to claim that warrant had no cost of acquisition and same was not liable to be taxed, however the said decision was relating to a goodwill, which was undisputedly as self-generating asset while presently, the issue was of detachable warrant, which was having a separate existence and as such a part of cost of debenture attributable to the warrant, which are interlinked.

The Court observed, "firstly, the transaction of the assessee, in that case, was genuine or not was center of controversy and secondly, contention was raised whether detachable warrant had any cost or not, but that appears to be not the controversy between the parties."

Further the Court remarked that, when the assessee itself had accepted the cost, it was of the view that both the authorities had rightly concluded since the same was based upon the appellant's representation and order by the Commissioner of Income Tax (Appeals) was rightly affirmed by the Tribunal and dismissed the appeal.