Sale Consideration Out Of Transfer Of Capital Asset Is Liable To Capital Gain: Gujarat High Court

The Gujarat High Court has held that the detachable warrant has an existence of its own along with the debenture purchased by the assessee for a sum of Rs. 50. The realization would be a sale consideration arising out of the transfer of a capital asset and is subject to capital gain.

The division bench of Chief Justice Aravind Kumar and Justice Ashutosh Shastri observed that the 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 appellant/assessee, Deepak Nitrite Limited, was holding the shares of Deepak Fertilizers and Petrochemicals Ltd. On the right basis, Deepak Fertilizers issued partially convertible debentures of Rs 100 to its shareholders. Each 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 (CCI). The rights shall be exercised during a period of three months or longer, as may be determined by the Board of Directors of DEPCL, between the expiration of four years and the expiration of six years from the date of allotment.

The issue raised was whether the detachable warrants attached to Part "C" of the debentures of Deepak Fertilizers and Petrochemicals Ltd. had a conceivable cost of acquisition and were taxable capital gains on their sale.

The appellant contended that ITAT has erroneously held that detachable warrants have any cost or any conceivable cost. The Tribunal has failed to appreciate 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 reference.

The court noted that the assessee has already accepted the cost of Rs. 2.175. According to the assessee itself, some value has to be ascribed to the detachable warrants, and when the cost was accepted or rather agreed to an extent of Rs. 2.175, which led the CIT(A) to pass the order, this has been rightly affirmed by the Tribunal.

Case Title: Deepak Nitrate Versus DCIT [Tax Appeal No. 1653 of 2007]

Case Citation: 2023 Livelaw (Guj) 26

Date: 12.01.2023

Counsel For Appellant: Advocate Manish J. Shah

Counsel For Respondent: Advocate Kalpanak Raval

Click Here To Read The Order