TaxTMI 
TaxTMI 
2016 (12) TMI 1629
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....-Tax - 01, Mumbai ("the PCIT") erred in invoking the provisions of section 263 of the Act and directing setting aside of the assessment order passed under section 143(3) of the Act by the Additional Commissioner of Income Tax, Range -1(3), Mumbai ("the Assessing Officer") dated 30.1.2014 on the alleged ground that the said assessment order was erroneous and prejudicial to the interest of the revenue. 2. The learned PCIT erred in invoking the provisions of section 263 of the Act without specifying as to how the prejudice is caused to the Revenue in as much as it is not pointed out as to where the order of the Assessing Officer is erroneous in law and therefore how the interest of the Revenue is affected adversely. The Appellant prays that it be held that the action of the Learned PCIT in invoking provisions of section 263 of the Act and directing the Assessing Officer to pass a fresh assessment order be held to be ab-initio and/or otherwise void and bad in law." 3. Briefly stated facts are that the assessee is Ltd. Company engaged in the business of marketing and distribution of insurance and mutual fund products, trading in bullion, real estate broking services, derivative....
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....111 the Assessee Company became subsidiary of Reliance Money Mall Ltd. w. e. f. July 8, 2010. Surprisingly, investment by Reliance Money Mall Ltd. in the shares of the Assessee Company was by borrowing funds from its associate companies. Why a huge loss making company was made a subsidiary by Reliance Money Mall Ltd.? Careful analysis of facts ought to have alerted the A.O. that something was unusual and investment by Reliance Money Mall Ltd. in equity shares of assessee company to the extent of acquiring stake as "holding company" did not make any commercial sense. On top of it, the Reliance Money Mall Ltd. subscribed to the preference shares of assessee company to the tune of Rs. 600 crores. This was highly intriguing. It is relevant to mention here that Reliance Money Mall Ltd. itself had not got sufficient funds to invest in preference shares of Assessee Company. It (Reliance Money Mall Ltd.) obtained funds from Reliance Capital Ltd. in the form of preference shares issued to Reliance Capital Ltd. at the premium of Rs. 999/- per share. The Reliance Money Mall Ltd. also was running into losses and had not started its business operations fully. The façade of preference sha....
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....hare) and simultaneous investment of the same amount i.e., Rs..600 crores by Emerging Money Mall Ltd. in the preference shares of Assessee Company (at a premium of Rs. 20/- per share), was undertaken to book losses in the books of Reliance Capital Ltd. pursuant to merger of the Merging Money Mall Ltd. with Reliance Capital Ltd. The Assessing Officer failed to appreciate this ploy of the Reliance Capital Ltd. Careful analysis of these facts ought to have alerted the A.O. that something was unusual and investment by Reliance Money Mall Ltd. in equity & preference shares of assessee company did not make any commercial sense. It can be inferred that actual nature of transaction has not been examined B. It is also stated in Schedule-16 giving details of "Significant Accounting Policies and Notes to Accounts" under the captioned 'Scheme of Arrangement'. Scheme of Arrangement: Pursuant to the Scheme of Arrangement u/s.391 to 394 of the Companies Act, 1956 sanctioned by the Hon'ble High Court of Judicature at Bombay vide its order dtd. 15th October, 2010 and, filled with the Registrar of Companies (RoC), Maharashtra on 4th February, 2011 and by the Hon'ble High Court ....
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....ng Officer allowed the higher amount of capital loss even though no revised return was filed as desired by the Apex Court in Goetze India Ltd. There was no time available with the assessee to file revised return u/s.139(5) of the I.T. Act and yet higher amount of capital loss of Rs. 2,75,76,240/- was allowed by the A.O. in the course of assessment. It amounts to going against the spirit provisions of Section 139(5) of the Act as such act would nullify the time limit within which revision can be made. Further, this action of the A.O. is against the ratio of the decision of Goetze India Ltd. It is admitted that some judicial pronouncements have carved out a small window for allowing claims of the assessee not made in the return filed. However, this power is available (As per the judicial pronouncement) only with the appellate authorities and A.O. still has no power to allow claim of the assessee made during the assessment proceedings which has not been made in the Return of Income filed and /or in the revised return. D. The assessee has claimed deduction for refund of referral fee of Rs. 9,60,44,600/- pursuant to Note received from Insurance Regulatory Development Authority. No de....
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....the broker, whether this huge amount was required or not, has not been considered at all by the A.O. What activity has been undertaken through this broker was not examined by the A.O. H. The assessee has taken the premises by way of lease and has claimed expenses of lease rent and huge expenditure has been claimed in respect of "improvement? on the leasehold property. There is substantial sale out of these improvements but no details had been examined by the A.O. despite the fact that the information has been made available to the A.O. in the course of assessment proceedings. Only cryptic statement was made before the A.O. that "sale of leasehold improvements" and, at various stations. What were the assets sold to whom these were sold have not been examined. Sale of leasehold improvements for Rs. 27,172,549/- has been accepted without carrying out any meaningfully enquiries. There is one more issue related to leased premises and that is "payment of property taxes" to the extent of Rs. 56,41,858/- Whether it was liability of lessee or not ought to have been examined after seeing the lease contract & whether there was reimbursement from the lessor was also not examined by the A....
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....ds loss of incurred on forward broking trade settlement of gold business. iv. Non-examination of claim of allowance of long-term capital loss on sale of shares amounting to Rs. 2,75,76,240/-. v. Non-examination of allowance of claiming of depreciation on cost of improvement of leasehold premises u/s 32(i) of the Act. vi. Lease rent and improvement expenditure. On the above issues the PCIT has only recorded the fact that the AO while completing the assessment u/s 143(3) of the Act failed to carry out the relevant and meaningful enquiries. Now, we will discuss the facts and evidences produced before the AO during the assessment proceedings by the assessee on the questionnaires and replies given. The brief facts relating to the first issue are that the PCIT while deciding the issue on revision u/s 263 of the Act noted that the assessee was asked to explain the source of credit introduced in the books of accounts by way of issue of 20 lakh preferential shares, each having face value of Rs. 10 at the premium of Rs. 20 each to its holding company RMML Ltd. According to PCIT no proper enquiry to verify the source of funds / credits introduced as well as genuineness of the tran....
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...., we have to examine detail and evidences produced by the assessee before AO during the course of the assessment proceedings. First of all, the learned Counsel for the assessee Shri Arvind Sonde referred to the notice issued by the AO u/s 142(1) of the Act vide No. DCIT 1(3)/Notice/13-14 dated 30-05-2013 and referred to question No.25 which reads as under: - "25. Whether the company has issued any fresh share during the year or raised any amount by way of debenture/FD etc. If so, how the issue expenses have been dealt with in the accounts." This detail was submitted by the assessee vide reply dated 17-01-2014 wherein complete detail of parties to whom new preferential shares were issue and preferential shares are redeemed and enclosed as Annexure-15 & 16. The relevant Annexure are enclosed at assessee's paper book page 47 and the relevant reads as under: - "Annexure-15 Sr. No Name of Party PAN Address Amount 1. Emerging Money Mall Ltd. AAECR3099M 570, Rectifier House, Naigum Cross Road, Next to Royal Industrial Estate, Wadala, Mumbai-31 2,000,000,000 Annexure-16 Sr. No Name of Party PAN Address Amount 1. Relia....
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....cature at Bombay and by the Hon‟ble High Court of Gujarat at Ahmedabad, the Infrastructure Services Division of the Company has been demerged and transferred to Reliance Capital Asset Management Ltd w. e. f. the Appointed date (Effective date0 in terms of the Scheme i.e. 17th February 2011." In view of the above of these facts, the learned Counsel for the assessee further argued that the AO has examined everything and even the nature of transaction in regard to the issue of share and it is also a fact that this investment was made on the basis of erosion of loss of the company as on 31-03-2011, wherein, paid up capital resulting in an erosion of its capital and amounts have been paid on a going concern basis on the understanding that finance will be available with the company for work-in-capital requirement from its promoters. In view of the above, the observation of PCIT that huge investment is made in loss making company by paying a premium of Rs. 20 per share does not make commercial sense and investment ought to have looked into closely by the assessee. The learned Counsel for the assessee argued that the promoter has brought in the funds by way of preference shares as....
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....e. The learned Counsel for the assessee stated that this is only conjunctures and surmises of the PCIT. He explained that the AO is required to look into the source of funds by way of share capital, which has been confirmed by the PCIT that the funds are fully explained. To confirm this the assessee explained vide letter dated 27-01-2014, whereby copy of board resolution allotting of shares of RMML was submitted which shows that the shares were allotted on 07-09-2010 and this fact was filed during the course of assessment proceedings. The assessee before the AO filed complete bank statements including the details of utilization of funds received on issued of preference shares. He referred to the utilization as under: - Name Amount in Crs Purpose Reliance Securities Ltd. 100 Redemption of preference shares Reliance capital Ltd. 100 Redemption of preference shares Reliance Capital Ltd 285 Repayment of loan Reliance Securities Ltd 112.38 Repayment of loan Name Amount in Crs Purpose - 2.62 Internal purposes Total 600 7. Another allegation of the Revenue that the RCL was holdi....
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.... the preference shares subscribed during the year, whereby majority shareholders being RMML, who was holding 62% equity shares being largest shareholder and they have infused the fund into the company by way of preferential shares, which gives them leeway to get the money back after the company starts performing well. As regards to the issue of amalgamation of RMML with RCL which took place on 31-03-2013, which is two years beyond the end of the preceding year for which the assessment was carried out by the AO but the subsequent funds i.e. as far as 2 years beyond cannot be looked upon by the Revenue authorities. It was clarified that the assessee issued shares to RMML on 07-09-2010 and RMML issued preference shares to RCL on 12-10-2010 and both the funds went during F.Y. 2010-11 relevant to this A.Y. 2011-12. However, amalgamation of RMML took place on 31-03-2013 from the date given above and hence observation of the PCIT that exercise of investment was made with a view to book loss in the RCL is prima facie incorrect as the event of amalgamation between RMML and RCL took place almost after 33 months from the issue of shares by the assessee as well as RMML. In such circumstances, ....
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....basis. In view of demerger of Infrastructure division of the company pursuant to Scheme of Arrangement, the figures for the current year are not comparable to those of the previous year. " It was explained by the learned Counsel Shri Arvind Sondhe that the scheme of an arrangement of demerger approved by Hon'ble High Court of Bombay and Hon'ble High Court of Gujarat, looked into all the aspects before approving the schemes of demerger and now the PCIT cannot raise any question on the judgement of Hon'ble High Courts. It was explained that the scheme and orders of Hon'ble High Courts are in public domain and the same are also filed with the Registrar of companies (ROC). It was explained that the same was filed along with the return of income and this was very well noticed by the AO while framing assessment and even that authorities below cannot take any adverse view on the issue of scheme of arrangement i.e. demerger of infrastructure undertaking from the assessee company because Hon'ble High Courts have approved the same. The learned Counsel for the assessee argued that as an effect of demerger scheme the loss of the company which were brought forward will be carry forward by....
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....t enquired into this aspect of deduction. Hence, he hold the assessment order as erroneous as well as prejudicial to the interest of the Revenue and passed revision order u/s 263 of the Act. On this aspect, the learned Counsel for the assessee detail out the evidences provided before AO during the course of assessment proceedings, wherein, assessee vide letter dated 27-01-2014, explained the issue of claim of deduction on referral fee that was refunded to its associate concern amounting to Rs. 9,60,44,600/- pursuant to note from IRDA. The assessee submitted the following explanation before the AO vide letter dated 27-01-2014 which reads as under: - "Reliance Money Infrastructure Ltd. (RML) is a Reliance ADA Group company which provides infrastructure and other support services to the Reliance ADA group companies. Reliance Composite Insurance Brokers Ltd (RCIBL) being part of Reliance ADA Group decided to utilize the services of RML for optimization for the cost and furtherance of its business. RCIBL entered into an arrangement with RMIL to avail the infrastructure support services and data base of RMIL. The leads generated were offered to select insurers depending on the require....
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....ther ground of claim of deduction towards loss incurred on forward brokering trade settlement. The assessee explained that the company is into distribution of gold coins to retail customers and to cover the risk of price fluctuation of gold, it hedged the gold position with MCX exchange on mark to market position and is accounted under the head Forward brokering Trade settlement. For this issue of hedging, it was explained that there is a considerable gap between the date of purchase and the date of sale and the company needs to hedged the same against the price movement of gold and company used gold futures at MCX to achieve this purpose. Assessee filed the details before the AO vide letter dated 17-01-2014 during the proceedings and the details are enclosed at page 49 of assessee paper book which reads as under: - " Scrip Purchase date Purchase Amount Indexed Factor Indexed Cost Sale Date Sale Proceeds Profit / (Loss) Reliance Spot Exchange India Ltd 25-02-09 245,000 582 299.304 23.07.10 245,000 (54,304) Bombay Stock exchange Ltd 24.03-09 15,000,000 582 18,324,742 24-06-10 15,000,000 (3,24,742) National....
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....e payment was made by way of forward brokerage trade settlement and qua this a reply was filed before the AO in lieu of query. The assessee now explained the complete business module before us as well as before PCIT which is reads as under: - "......The company was successful in the tender process of sale of gold coins through post office initiated by India post. The tender required the company to sale only Swiss minted gold coins of various denomination to be sold through the India post Offices. Accordingly, the company purchases Swiss minted golds coins from Ban of Nova Scotia and subsequently supplied and stored these god coins at the post offices as well as company‟s branches for sale. The same price of gold coins used based on daily price of gold and not fixed at the purchase price. Hence, company needs to hedge against the price movement of gold. The company used gold futures at Multi commodity exchange to achieve this purpose. At the time of every purchase of gold coins an equal quantity (weight) of gold coins‟ futures was sold on multi-Commodity Exchange (MCX) to hedge. Daily a report used to get generated of the quantity (weight) of gold coins sold ....
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.... AO during the course of assessment proceedings in lieu of query raised and it is presumed that the AO has applied his mind to the facts of the case and passed an appropriate order. 14. The another issue in this appeal of assessee is against the order of PCIT in holding the assessment order as erroneous and prejudicial to the interest of the Revenue for the purpose of claim of long term capital loss of shares. The AO, according to the learned Counsel, he examined the details of sale of shares of the following three companies which were sold at cost reads as under: - " Name of the company Sold to whom NO of shares Sale price of share Reliance Spot Exchange Infrastructure Ltd Reliance Exchange Next Ltd. 24,500 10 Bombay Stock Exchange Reliance Capital Ltd 1,30,000 115 National Multi-Commodity Exchange Ltd Reliance Capital Ltd 16,666,667 65 ....." The learned Counsel for the assessee stated that the shares of the above companies are still held by RCL and Reliance Exchange Next Ltd. as evident from the schedule of investments appearing in the financial statement of Reliance Capital Ltd and Reliance Exchange Next Ltd. as....
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....taken at Rs. 2,75,76,240/- instead of loss claim of Rs. 4,10,76,240/- in the return of income. The above error was purely unintentional and on realization of same, revised working along with support for sale is enclosed as Annexure 17." In view of the above the learned Counsel for the assessee stated that the complete details in respect of this transaction was filed before the AO and after having satisfied himself, he accepted the loss and even now according to the learned Counsel the PCIT could not point out what is the error in claiming this loss, he only wanted to revise the assessment that no inquiry is carried out, whereas complete enquiry was made by the AO before passing assessment order. 15. As regards the next issue on claim of depreciation on cost of improvement of lease hold premises u/s 32(1) of the Act. The PCIT only stated that the assessee has sold/transfer the lease hold premises during the year on account of demerger of its infrastructure division but no details, on the effect and accounting treatment given as a result of demerger, has been filed or called or verified by the AO. On this, the learned Counsel for the assessee drew our attention to the scheme of....
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....w our attention to the complete expenses of rent rates and taxes and details of rent premises which are filed before the AO vide letter dated 17-01-2014. The learned Counsel for the assessee also informed that the assessee has debited the sum of Rs. 56,41,858/- as property tax under the head rates and taxes and the details were submitted before the AO. It was further explained that premises on leave and license basis from Uptown Properties And Leasing Properties Pvt. Ltd. vide agreement dated 12-10-2007 was taken on lease and the same was evicted on 04-06-2009. It was stated that, the complete expenditure was paid as per agreement and reimbursement of municipal taxes was on actual basis at the rate of bills. In view of the above, it was argued by the learned Counsel for the assessee that compete details were filed before the AO during the course of assessment proceedings on a query from the AO and after satisfying the AO has passed the order u/s 143(3) of the Act. 17. Finally, the learned Counsel for the assessee argued that it is not in the hand of the assessee as to how the AO will write the assessment order or what he incorporates in the assessment order and that does not tan....
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....able with the company for work-in-capital requirement from its promoters. In view of the above, we are of the view that the observations of PCIT that huge investment made in loss making company by paying a premium of Rs. 20 per share does not make commercial sense and investment ought to have looked into closely is of no consequence because the promoter has brought in the funds by way of preference shares as their holding was 62%. From the terms of preference shares issued it can be seen that the same was redeemable at premium of Rs. 20 per share and the premium was required to be refunded by the company on its redemption. Hence, funds were brought in by the promoters and on the terms which cannot be said to be prejudicial to the interest of the Revenue. In view of the above, huge investment in quantity and that also preferential share was a commercial decision by a businessman and the Revenue has no authority to question the same. Another observation of the PCIT that the investment by RMML in the shares of assessee's company by borrowing funds from its associate companies that's why a huge loss making company was made as subsidiary by RMML is also without any basis for the reason ....
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....'ble High Court of Gujarat, looked into all the aspects before approving the schemes of demerger and now the PCIT cannot raise any question on the judgment of Hon'ble High Courts. We are of the view that when the scheme and orders of Hon'ble High Courts are in public domain and the same are also filed with the Registrar of companies (ROC), the same cannot be questioned by the Revenue and moreover in the revision proceedings u/s 263 of the Act. We find that the same was filed and this was very well noticed by the AO while framing assessment and even that authorities below cannot take any adverse view on the issue of scheme of arrangement i.e. demerger of infrastructure undertaking from the assessee company because Hon'ble High Courts have approved the same. Even otherwise on merit also as an effect of demerger scheme, the loss of the company which were brought forward will be carry forward by the assessee company and thus available loss of the assessee's company to have been reduced for carry forward purpose and this cannot be considered as prejudicial to the interest of the Revenue or even no error has caused to the Revenue. Accordingly also the order AO cannot be held to be errone....
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....e realized loss of Rs. 6,58,66,270/-and there is unrealized profit of Rs. 33,56,959 and the net loss is at Rs. 6,025,9,311/-. As explained by the learned Counsel for the assessee that this issue is as per the provisions of explanation to Section 43(5) of the Act wherein, speculative transaction is defined and he explained that in the present case the delivery of gold is taken by the assessee and hence, the transaction cannot be called as speculative in nature because Sub-Section 5 of Section 43 clearly stated that the transaction in which the contract for purchase or sale of any commodity is settled otherwise then by actual delivery or transfer of commodity or script i.e. be speculation transaction. But in the present case the assessee has taken actual delivery as noted by PCIT in his order even though payment is made by cash for purchase of gold and even instruction No.3 of 2010 issued by CBDT dated 23-03-2010 is not applicable i.e. there is mark to market loss but there is a profit. We are of the view that the case law relied on by the assessee on the decision of Hon'ble Supreme Court in the case of Woodward Governors India P. Ltd. (supra), wherein the issue as regards to foreign....
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....r the scheme of demerger of infrastructure undertaking between the assessee and Reliance Capital Asset Management Ltd. as per which various assets and liabilities were demerged and demerger was approved by Hon'ble Bombay High Court and Hon'ble Gujarat High Court. It was explained that vide note No. 14 of Schedule 16 gives broad headwise transfer of assets of such demerger and fixed asset of Rs. 4,53,81,530/- were transferred. We find that the sale of lease hold premises and improvement thereon is stated to be Rs. 2,71,72,549/- is not sale value but it is accumulated depreciation which is removed from the schedule of fixed assets on account of transfer of assets and demergers. We find from the facts of the case that the assessee filed complete details before AO which are available in assessee's paper book pages 223-227. Once it is a fact that this accumulated depreciation amounting to Rs. 2,71,72,549/- is not sale value, which is removed from fixed assets on account of transfer of assets and demerger of the companies. Even otherwise the complete details were available before the AO during the course of assessment proceedings, which were filed by the assessee on query from the AO. In....
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....s capital in nature. Another case relied on by the assessee of Hon'ble Bombay High Court in the case of Reliance Communication (supra) had considered the issue of cash credit in the nature of FCCB's i.e. Foreign Currency Convertible Bonds raised by the assessee during the year under consideration was accepted by the AO while completing the assessment and subsequently the CIT noticed that no investigation was carried out by the AO to establish the capacity and genuineness of the transaction. The CIT passed revision order and Tribunal set aside the revisional order. On further appeal Hon'ble High Court confirmed the order of Tribunal by observing that the AO has made detailed enquiries about the aforesaid facts and mere fact that he did not make any reference to the said issue in the reference order, the assessment order cannot be set to be erroneous so as to prejudicial to the interest of the revenue. Hon'ble High Court held in Para 9 to 11 as under: - "9. That decision refers to the assessment year 1998-99 where the assessee filed return of income ofRs.66 1 .1 5 crore and claimed deduction in the sum of Rs. 11 .41 crore under section 80-1, Rs. 21=8.62 crore under section 80-IA a....
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....ph 17 by Mr. Tejveer Singh have been made. That must be seen in the backdrop of the facts. In such circumstances, when the order in that case was found to be erroneous insofar as it is prejudicial to the interest of the Revenue that the Commissioner rightly stepped in.10. In the case before us, the concession of the assessee's authorized representative apart, what the Tribunal found and on all the three items highlighted by Mr. Tejveer Singh is that there were materials before the Assessing Officer. The Assessing Officer made enquiries about the above referred aspects and which have been noted by the Commissioner. The assessee made submissions by placing all relevant documents before the Assessing Officer. Thus the case does not fall within the parameters laid down in the decision of the Hon'ble Supreme Court and other High Courts. The mere fact that the Assessing Officer did not make any reference to these three issues in the assessment order cannot make the order erroneous when the issues were indeed looked into. The entire details were filed and the order itself indicates that it can be inferred that the Assessing Officer not only made enquiries, but satisfied himself wi....
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....is intended to plug leakage to the revenue by erroneous order passed by the lower authorities where the order of assessment by the AO is erroneous and prejudicial to the interest of the Revenue. But in the present case before us the AO has passed the assessment order after examining all the details, replies and documents filed by the assessee. In view of our observations hereinabove and judicial decisions of the various High Courts, we are of the considered view that revisionary order u/s 263 of the Act is wrong and accordingly quashed. 28. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 23-12-2016. ============= Document 1 Sr.No. 1 2 3. 4 5 6 7 8 9 10 11 12 Name of the company Gitanjali Lifestyle Ltd. VNM Jewel Crafts Ltd. Reliance Financial Ltd. LG Electronics Ltd. Ambuja Cement Ltd. Reliance Web Store Ltd. Hindustan Unilever Ltd. ACC Ltd. Bayer Cropscience Ltd. Kerala State Financial Enterprises Reliance Communications Ltd. Amount of Sale 60,34,35,442 32,24,66,335 32,02,99,601 10,01,50,112 5,17,95,177 4,71,96,517 2,58,01,635 2,....