2016 (10) TMI 1149 - AT - Income Tax

Tribunal corrects errors on Secured Premium Notes scheme, allows re-adjudication.

Nirma Limited Versus DCIT, Cent. Cir. 1 (1) Ahmedabad.

The Tribunal, after reviewing factual inaccuracies highlighted by the assessee, found errors in its earlier conclusions regarding the scheme of Secured ... Long term capital gains on account of receipt of sale proceeds out of transfer of SPNs - Held that:- AO has categorically observed that before redemption, promoters transferred the SPNs. to financial institutions and banks and disclosed long term capital gains on account of receipt of sale proceeds out of transfer of SPN. Emphasis was given that promoters have offered capital gain tax. How the Tribunal can record a finding that promoters have not paid taxes ? Similarly, it was brought to our notice that financial institutions treated difference of redemption proceeds at the rate of ₹ 361/- and cost of acquisition of SPNs. purchased from the promoters and non-promoters of Nirma Ltd., as income and disclosed the same in accounts. Thus, it was demonstrated that even the financial institutions have shown the income from SPNs. on their redemption. Then, how it can be alleged that no corresponding income was offered for taxation ? According to the ld.counsel for the assessee, it was not the case of the AO. The quantum may be different and nature may be different, but it cannot be alleged that income was not offered. Apart from above, we have been appraised with regard to other factual inaccuracy tabulated in the MA. On due considerations of all these facts, we are convinced that the Tribunal has conceived the facts in erroneous manner which has goad the Tribunal on a wrong conclusion, therefore, Tribunal has committed apparent error. The order of the Tribunal deserves to be recalled on this issue. Accordingly, we allow the MA and partly modify the order of the Tribunal. Issues Involved:1. Tribunal's power to adjudicate the Miscellaneous Application (MA) despite the pendency of an appeal before the High Court.2. Denial of interest expenditure incurred on Secured Premium Notes (SPNs).3. Alleged factual inaccuracies in the Tribunal's findings.4. Legal principles for exercising powers under section 254(2) of the Income Tax Act.5. Whether the scheme of SPNs was designed to defraud the Revenue.Issue-wise Detailed Analysis:1. Tribunal's Power to Adjudicate the MA:The Tribunal initially refrained from adjudicating the MA due to the pendency of an appeal before the High Court. However, the High Court directed the Tribunal to dispose of the MA without being influenced by the pending appeal. The High Court's order emphasized that the pendency of the appeal should not preclude the Tribunal from hearing and deciding the MA expeditiously.2. Denial of Interest Expenditure on SPNs:The assessee claimed interest expenditure on SPNs, which the AO and Tribunal disallowed, alleging it was a scheme to defraud the Revenue. The Tribunal concurred with the AO's conclusion that the interest expenditure on SPNs was a 'colourful device' and not an allowable deduction under section 36(1)(iii) of the Income Tax Act. The AO argued that the scheme was designed to benefit the promoters and not genuinely for borrowing purposes.3. Alleged Factual Inaccuracies:The assessee pointed out 19 instances of factual inaccuracies in the Tribunal's order. These included incorrect assumptions about the subscription of SPNs by the general public, the intention behind issuing SPNs, and the treatment of funds received through SPNs. For instance, the Tribunal incorrectly assumed that the scheme was designed so only promoters could subscribe to SPNs, whereas the offer was open to all shareholders. The Tribunal also erroneously concluded that the funds received through SPNs were akin to equity capital, which was factually incorrect as these funds were redeemed and not converted into equity.4. Legal Principles for Exercising Powers under Section 254(2):The Tribunal's power under section 254(2) is limited to rectifying 'an obvious and patent mistake' apparent from the record. The Tribunal cited the Supreme Court's decision in ACIT Vs. Saurashtra Kutch Stock Exchange Ltd., emphasizing that non-consideration of a jurisdictional High Court judgment constitutes a mistake apparent from the record. The Tribunal can rectify errors that are self-evident and not debatable issues requiring extensive reasoning.5. Whether the Scheme of SPNs was Designed to Defraud the Revenue:The Tribunal, agreeing with the AO, held that the scheme of SPNs was premeditated to benefit the promoters and defraud the Revenue. The Tribunal's findings included that the SPNs were structured in a way that only promoters could benefit, and the general public was kept in the dark about the redemption terms. The Tribunal also doubted the compliance of the scheme with the Companies Act and SEBI guidelines.Conclusion:The Tribunal, upon reviewing the factual inaccuracies highlighted by the assessee, found that many of its earlier conclusions were based on incorrect facts. For instance, the Tribunal's observation that the scheme was designed for promoters only was factually incorrect, as the offer was open to all shareholders. The Tribunal also erred in concluding that the funds received through SPNs were equivalent to equity capital. Consequently, the Tribunal allowed the assessee's MA, recalled its earlier finding on ground no.7, and restored this ground for re-adjudication. The Tribunal's order was pronounced on 28th October 2016 at Ahmedabad.