TaxTMI 
TaxTMI 
TaxTMI 
2014 (9) TMI 423
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....d by the learned counsel that the assessee has given loan from time to time to Jindal Polyfilms Limited (JPL) and as on 30th October, 2000, the total loan payable by JPL to the assessee was Rs. 99 crores. That JPL was unable to pay the amounts due to financial constraints, therefore, JPL has offered to restructure the said advances by way of issue of Optionally Convertible Preference Shares (OCPS). Accordingly, JPL issued 6,60,00,000 0% OCPS of Rs. 10/- each at a premium of Rs. 5/- each. The OCPS were convertible at the option of the assessee into 10 equity shares of Rs. 10/- each for every 33 OCPS. The option was to be exercised within 18 months from the date of the issue of the debentures. That before the completion of 18 months from the issue of the debentures on 2nd May, 2001, there was change in the SEBI guidelines which restricted the promoters holding to a certain percentage. Due to above change in the SEBI guidelines, the option of conversion of preference shares into equity shares became unviable as it was legally not permissible. Therefore, JPL proposed modification in the terms of 0% OCPS by which the OCPS were converted into 2% Redeemable Cumulative Preference Shares (R....
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.... At that time also, the transaction was not held to be a sham or bogus transaction. Therefore, when during the year under consideration the assessee only realized the value of the RCPS on its redemption, how the transaction can be said to be sham or bogus? He further submitted that the facts of the assessee's case are altogether different than the facts before the Hon'ble Apex Court in the case of McDowell and Co.Ltd. (supra). The said decision would be applicable only when there is a colorable device to avoid tax. That in the case of the assessee, there is no device at all and there is no avoidance of tax also. The loan was advanced by the assessee to JPL long back. Genuineness of such loan was accepted by the Revenue in the case of JPL as well as assessee. The loan was converted into OCPS in the year 2000 which was again accepted by the Revenue. Part of the OCPS was sold in the year 2002 which was also accepted by the Revenue. Thereafter, OCPS was converted into RCPS which was also accepted by the Revenue. During the year under consideration, there was only redemption of such RCPS. Therefore, by no stretch of imagination, such redemption of RCPS can be said to be device s....
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....ng against JPL was Rs. 99 crores. That the JPL was unable to pay the amount due to financial constraints and therefore, it offered to restructure the said advance by way of issue of OCPS. The same was accepted by the assessee and accordingly, against the outstanding advance of Rs. 99 crores, JPL issued 6,60,00,000 0% OCPS of Rs. 10/- each at a premium of Rs. 5/- each. Part of the OCPS i.e. 1,60,00,000 was sold by the assessee during the accounting year relevant to assessment year 2002-03. The loss suffered on aforesaid sale of OCPS was not disputed by the Revenue. Subsequently, 0% OCPS was modified to 2% RCPS. During the accounting year relevant to the assessment year under consideration, RCPS was redeemed and assessee received Rs. 50 crores. The assessee claim the loss on the redemption of RCPS as long term capital loss amounting to Rs. 41,81,03,448/-. The same was claimed to be carried forward because such loss was not adjusted against any other capital gain during the year under consideration. The Assessing Officer disallowed the assessee's claim of long term capital loss and its carry forward with the following finding:- "The information u/s 133(6) was also called from M/s....
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.... sham transaction with the sole purpose of transferring funds from one company to another and generating huge long term capital loss so as to avoid the tax and whether on these facts, the decision of Hon'ble Apex Court in the case of McDowell And Co.Ltd. (supra) is applicable. After considering the arguments of both the sides and examining the facts of the case in detail, we are unable to agree with the above finding of the Assessing Officer. The loan was advanced from time to time prior to 30th October, 2000. Thus, the loan was advanced at least six years before the redemption of RCPS during the year under consideration. The assessee as well as JPL both are regularly assessed to income tax and in the years in which loan was advanced, the genuineness of the loan was never doubted by the Revenue either in the case of the assessee or in the case of JPL. The loan was converted into OCPS on 30th October, 2000 and in the assessment of the assessee as well as JPL for AY 2001-02, such conversion of loan into OCPS was not held to be bogus or sham transaction. Part of the OCPS was sold by the assessee on 9th March, 2002 and in the return of income for AY 2002-03, loss arising from such ....
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....ly, when there is no basis or evidence to hold so. On these facts, in our opinion, the decision of Hon'ble Apex Court in the case of McDowell and Co.Ltd. (supra) would not be applicable wherein their Lordships held as under:- "Tax planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. There is behind taxation laws as much moral sanction as is behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation. The proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax and whether the transaction is such that the judicial process may accord its....
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....its business within the four corners of the law. After considering the facts of the assessee's case, we are of the opinion that on these facts, the decision of Hon'ble Apex Court in the case of McDowell And Co.Ltd. (supra) would not be applicable but the decisions of Hon'ble Apex Court in the case of Arvind Narottam (supra), Azadi Bachao Andolan and Another (supra) and Walfort Share and Stock Brokers P.Ltd. (supra) would be applicable because in the case of the assessee, there is nothing on record to hold the series of the transactions as not genuine. On the other hand, in the past several years, all the transactions of the series have been accepted by the Revenue as genuine business transactions. Therefore, in the year of redemption of the 2% RCPS, the transactions cannot be presumed to be sham or bogus merely because it has resulted into long term capital loss which may be adjusted against the long term capital gain, if any, arising in future to the assessee. In view of the above, respectfully following the decisions of Hon'ble Supreme Court in the case of Arvind Narottam (supra), Azadi Bachao Andolan and Another (supra) and Walfort Share and Stock Brokers P.Ltd. ....
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....sallowance as per Rule 8D at Rs. 1,49,90,393/- from which after the deducting the sum of Rs. 7,73,525/- which was already disallowed by the assessee made further disallowance of Rs. 1,42,19,868/-. On appeal, learned CIT(A) deleted the disallowance made by the Assessing Officer with the following finding:- "I have carefully considered the submissions of ld.AR and have gone through the assessment order. Although the Assessing Officer has observed that for earning exempt income, expenses must have been incurred. However, these general observations are not supported by any specific instances. The Assessing Officer has not pointed out any discrepancy in the disallowances worked out by the appellant itself nor any material has been brought on record to link-up the further expenditure which has been incurred in relation to exempt income. The disallowance has been made by applying Rule 8D in the light of the decision of Daga Capital Management (P) Ltd., supra. However, the said decision of Hon'ble Special Bench of the ITAT has been overruled by Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg.Co.Ltd. vs. DCIT ITA No.626 of 2010 and W.P. No.758 of 2010 wherein it has bee....
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....claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act:] [Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.]." 16. From sub-section (1) of Section 14A, it is evident that the legislature has provided that no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to income which does not form part of total income. Therefore, incurring of some expenditure by the assessee in relation to exempt income is essential so as to invoke the provisions of Section 14A(1) by the Assessing Officer. As per sub-section (2) of Section 14A, the Assessing Officer is empowered to determine the expenditure incurred in relation to exempt income provided he is not satisfied with the correctness of the claim of the assessee in relation to the incurring of expenditure for earning of exempt income. As....