2012 (11) TMI 322 - HC - Income Tax

Appeal Dismissed Upholding Tribunal's Decision on Share Transfer & Income Recognition

The appeal challenging the Income Tax Appellate Tribunal's order for the assessment year 2004-05 was dismissed. The Tribunal's decision regarding the ... Shares transferred for settlement of debt - difference between the fair market value and the cost of shares - Held that:- There was no transfer of shares but only a pledge of shares for the purposes of obtaining a loan. This short term loan of ₹ 50 crores was repaid on 24.12.2004 as is evident from audited accounts and annual reports for the assessment year 2004-05. Further the balance sheet filed for assessment year 2005-06 also shows that an amount of ₹ 50 crores shown under the head other loans as on 31/3/2004 was shown as nil as on 31/3/2005. In case it was not a loan there would have been no occasion to repay the amounts. Also the evidence in the form of transaction statement of Demat Account dated 24/12/2004 was produced at the time of hearing showing the return of 5-crores shares of Reliance Infocomm Limited to the respondent on 24/10/2012 i.e. the date when the loan was returned by the respondent to one Mukesh Ambani - in favour of assessee. Operating lease - Whether lease hold rights are acquired on periodic payments of lease rent received as advance rent - assessee has received IRC fees in one go - Held that:- The agreement dated 30/4/2003 entered into between Reliance Infocomm Ltd. and the respondent assessee concluded that Reliance Infocomm Ltd. in terms of the agreement had only a right to use the net work during the tenure of the 20 year agreement. Further that the agreement was liable to be terminated at the sole discretion of Reliance Infocomm Ltd. and consequently, the amount received as advance for 20 years lease period would have to be returned on such termination for the balance un-utilized period. Thus the respondent assessee had in terms of AS-19 & relying on J.K. Industries ltd. v. CIT [2007 (11) TMI 401 - SUPREME COURT OF INDIA] wherein theory of matching principles and application of accounting standards upheld, correctly spread the entire fee of ₹ 3037 crores over the period of 20 years and to pay tax thereon over the entire period - in favour of assessee. Issues Involved:1. Challenge to the order passed by the Income Tax Appellate Tribunal under Section 260A of the Income Tax Act for the assessment year 2004-05.2. Whether the order under Section 143(3) dated 22/12/2006 was erroneous and prejudicial to the interest of the revenue.3. Treatment of the transfer of shares and fees received for grant of Indefeasible Right of Connectivity (IRC).4. Application of Accounting Standards (AS-19) in recognizing income arising from operating lease.Analysis:Issue 1: Challenge to Tribunal's OrderThe appeal by the revenue challenged the Tribunal's order dated 21/8/2009 regarding the assessment year 2004-05. The revenue raised questions of law related to the correctness of the Tribunal's decision.Issue 2: Erroneous Order under Section 143(3)The Commissioner of Income Tax found the assessment order dated 22/12/2006 erroneous and prejudicial to revenue's interest. The issues raised included the transfer of shares at a nominal value and the treatment of fees received as income for the assessment year 2004-05.Issue 3: Treatment of Share Transfer and IRC FeesThe respondent-assessee contended that the shares were pledged for a loan and not sold, while the IRC fees were received for granting rights over a network. The Commissioner held the shares were sold, and the fees were taxable for the assessment year 2004-05. However, the Tribunal disagreed, considering the nature of the transactions and the terms of the agreements.Issue 4: Application of Accounting StandardsThe Tribunal relied on Accounting Standards (AS-19) to determine the treatment of income from the lease agreement. The correct application of AS-19 in recognizing income from the operating lease over the lease term was crucial in deciding the tax liability for the IRC fees.In conclusion, the Tribunal's findings on the lack of share transfer and the correct recognition of income from the lease agreement were upheld. The appeal was dismissed, emphasizing that the questions raised were academic as the revision powers under Section 263 were deemed improperly exercised. The dismissal was based on the factual findings and the correct application of accounting principles, leading to no substantial legal questions for consideration.