TaxTMI 
TaxTMI 
2019 (4) TMI 1373
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.... revised and area of land to be purchased was reduced in acres which were purchased through acquisition of 6 companies; and now the reduced amount payable to Unitech Ltd. was agreed for Rs. 601 crores. The balance amount refundable to TRIL amounted to Rs. 1,59,39,46,799/-. In this year assessee has claimed the interest payment in view of settlement with TRIL, amounting to Rs. 7,24,88,104/- which has been debited as expenditure. Ld. AO held that there was no enabling clause in the MOU for the interest payment which warrant a situation, where interest was to be paid to TRIAL. He observed that, this issue was raised by the special auditor in Asstt. Year 2009-10 that the interest paid to TRIL was not paid in view of the MOU. He has also quoted clause 4 of the MOU dated 5.10.2007 and also amended MOU later on, which has been incorporated at page 13 to 14 of the assessment order. Thereafter, Ld. AO proceeded to disallow the claim of expenditure claimed after observing as under:- "6.2. In the assessment order for the A.Y. 2009-10, the AO found that: 1. No clauses enabling interest payment are applicable to situation warranting interest payment to TRIL which is elaborated....
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....n offered to tax, thus there is direct nexus also. Ld. AO while making the above disallowance has failed to appreciate and consider that; (i) Documentation on record clearly shows that conduct is between two unrelated parties and document has to be as a whole and selective inferences from the document should be seen to conclude adversely; (ii) Only question to which is to be seen is that, whether the expenditure for the business purpose was incurred in the assessment year or not. If it was expenditure actually made for the purpose of the business, then legitimate deduction is permissible under ss. 30 to 37 of the Act. It matters little whether expenditure has been incurred on the basis of a valid or invalid document. Ld. Counsel further relied upon the judgement of Hon'ble High Court in the case of CIT vs. Joly & Co. 259 ITR 657, wherein somewhat identical allegation was made by the revenue that initial agreement does not contain any interest clause and therefore disallowance was made by the Assessing Officer. The Tribunal has deleted the addition which has been confirmed by the High Court. 6. On the other hand Ld. CIT(DR) strongly relied upon the order of the AO and submitted t....
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....ll have any claims against the other for specific performance or otherwise Provided That the refund of the said deposit of Rs. 1700 Crores (Rupees One thousand seven hundred crores only) shall remain a charge on the said property" 8. Ld. Counsel has drawn our attention to revised MOU dated 9.10.2007, wherein similar kind of clause 4 was there and it had been contented that due to delay in transaction and non-performance of certain conditions mentioned in the clause, the deal of purchase itself got modified and assessee was required to refund the part of advance. Since assessee could return the advance at ago hence and there was delay in returning such advance, therefore, the advance was returned to TRIL along with the mutually agreed interest rate to be paid by the assessee. Thus, payment of interest in case of non-performance or part performance of a contract was very much flowing from the MoU. Not only that, we find that it is not in dispute that assessee has paid interest to TRIL on which TDS has duly been deducted. It is also not a case of the department that TRIL has not treated the interest as its interest income or has not offered it for tax. No inquiry or investigation h....
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.... No. 6 to 6.2); v) Addition of Rs. 3,92,03,610/- on account of treatment of income from house property as business income (ground 7 to 7.2); vi) Disallowance of expenditure of Rs. 5,27,339/- being expenditure (8 to 8.1); vii) Ground no. 9 and 10 relates to disallowance u/s 40A (3) and u/s 41, which has not been pressed before us. viii) Disallowance of Rs. 12,37,07,018/- u/s 14A. 11. The facts in brief qua the issue of treatment of capital gain as business income are that, assessee has shown as capital gain on sale of shares of wholly owned subsidiaries: - (i) Drass Properties Pvt. Ltd.: Rs. 92,80,000 (ii) Aral Properties Ltd.: Rs. 51,96,62,684 (iii) Unitech Service Apartments Ltd.: Rs. 89,01,11,100 (iv) Chintpurni Construction Pvt. Ltd.: Rs. 52,99,50,896 (vi) Greenline Builders Ltd.: Rs. 9,77,00,000 (vii) Sarnath Builders Ltd.: Rs. 6,15,20,000. 11.1 The AO noted that assessee has entered into share purchase agreement with various buyers in respect of shares of its wholly owned subsidiaries who were carrying business of land development rights which has been transferred to the buyers. As ....
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....rofit- not capital gain. These facts indicate that the only intention of the assessee was to not earn dividend but to gain profits by selling the shares of the subsidiary Cos. Consequently, the income from sale of shares is assessable as "income from business" and not "capital gains". 3.6 Hence, In the facts and circumstances discussed above, the income of Rs. 10,82,24,680/- {Rs.. 92,80,000/- (Drass Properties Pvt. Ltd.), Rs. 51,96,62,684/- (Aral Properties Ltd.), Rs. 89,01,11,100/- (Unitech Service Apartments Ltd.), Rs. 52,99,50,896/- (Chintpurni Construction Pvt. Ltd.), Rs. 9,77,00,000 (Greenline Builders Ltd.) and Rs. 6,15,20,000/- (Sarnath Builders Ltd.) arising to the assessee company is business income, and as such, is taxed u/s 28 of the Act." 12. Before us, Ld. Counsel submitted that the assessee had shown investment of shares of the subsidiary companies as investment in the balance sheet in the previous financial years which stands accepted by the revenue and in support he has also filed chart from assessment year 2002-03 to 2011-12, which for the sake of ready reference is reproduced as under: - Unitech Limited Detail of Capital Gain Receipt AY 2011-1....
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....upon the fact that CBDT has laid down that, if the shares held by the assessee as investment, then gain from such shares is to assessed as capital gain. He also drew our attention to following facts emerging from documents furnished before authorities below and also in the paper book before us; - "The shares were recorded and classified since the date of acquisition as investment under the head non-current assets in the books of account and were shown as such in the audited financial statement of the assessee audited by a reputed firm of Chartered Accountants Further, in the' Investment' Schedule of the audited balance sheet of the assessee as on 31.03.2009, the shares were grouped under the head 'Non-Trade' and not 'Trading' investments. In terms of Accounting Standard-I 3 on 'Accounting for Investments' issued by ICAI, the term 'investments' has been defined as under: "Investments arc assets held by an enterprise for earning income by way of dividends, interest, and rentals, for capital appreciation, or for other benefits to the investing enterprise. Assets held as stock-in-trade are not 'investments'. ....
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.... of account and in the balance sheets. What has been transferred and sold by the assessee are the shares held in the subsidiary companies and not the land owned by the subsidiaries. It is trite law that the shareholders subscribe to the shares of the company and not the underlying asset and by transfer of shares the underlying asset of the company does not get transferred as the asset remains with the company. Here in this case, at the time of purchase of shares they were recorded and classified under the head 'investment' in the books of accounts and was also reflected as such in the audited financial statements from year to year and never these shares have been treated as tradable or stock-in-trade, as the investment schedule was grouped under the head 'non-trade' investment. If investments are held by a company for earning income by way of interest, or dividend or for appreciation of capital or for any other benefits then it cannot be treated as stock in trade. The shares of the subsidiaries have been valued at cost and not of the cost of market price whichever is lower, which is normally done in case of stock-in-trade. Here the department has sought to adopt "look through appro....
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....application money as on 31st March 2011. The details of such outstanding balances were as under: - Share Application Money (Pending allotment) Sl. No. Particulars Opening Balance as on 01.04.2010 (Rs.) Money given during the year (Rs.) Total(Rs.) Interest @ 14% i.e. Average Borrowing Rate (Rs.) 1. HSARE APP. MONEY-ARIHANT UNITECH REALLTY PROJ LTD. 238,000,000 - 238,000,000 33,320,000 2. SHARE APP. MONEY-ATEN CAPITAL PVT. LTD. 17,500,000 17,500,000 284,795 3. SHARE APP. MONEY -CARMEL REALTY ESTATE 20,000,000 - 20,000,000 2,800,000 4. SHARE APP. MONEY-CARNOUSTIE MANAGEMENT PVT. LTD. 18,000,000 (18,000,000) - - 5. SHARE APP. MONEY-COLOSSAL DEVEL.P.LTD. 12,926,000 (12,926,000) - - 6. SHARE APP. MONEY -GAMBELL REALTY ESTATE 400,000,000 - 400,000,000 56,000,000 7. SHARE APP. MONEY -HOLYWOOD REAL ESTATE 20,000,000 1- 20,000,000 2,800,000 8. SHARE APP. MONEY -NASCENT REAL ESTATE 200,000,000 - 200,000,000 28,000,000 9. SHARE APP. MONEY -NASH REAL ESTATE 50,000,000 - 50,000,000 7,000,000 10 SHARE AP....
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....n money were made, is unrealistic, as the question arises then why assessee company had to borrow funds during the year and paid interest at average rate of 14% p.a. The issue involved is use of borrowed funds and of interest paid and whether the same were for business purposes. The facts show that (i) there were huge opening balances outstanding, (ii) by the eleven (11) companies, the shares were not allotted and (iii) most importantly the two issues that whether such companies had additional shares or subscription base to allot the shares to the assessee company and what benefit would have accrued to the assessee company from such transactions. The reply of assessee company is silent on same. 3. Further it is elaborated from following points that the share application money is only a device which is used for the purpose of advancing fund to the subjected companies: a) As per Rule 2( b) of Companies (Acceptance of Deposit) Rule, 1975; "deposit" means any deposit of money with, and includes any amount borrowed by, a company, but does not include - (vii) "any amount received by way of subscriptions to any shares, stock, bonds or debentures such bo....
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....serves increased by Rs. 460 crores, whereas assessee has made fresh investment in share application money during the assessment year at Rs. 245.34 crores, thus during the year also surplus fund exceeded the share application money. Further, the Ld. AO has taken the outstanding balance of share application money and also current year advances for the purpose of calculation of disallowance u/s 36(1)(iii) of the Act, which is not correct. The AO has not proved any nexus and has discharged the burden for making the disallowance u/s 36(1)(iii). In support he relied upon the judgment of Hon'ble Delhi High Court in the case of CIT vs Bharti Televentures Ltd. reported in 331 ITR 502. 19. On the other hand. Ld. CIT(DR) strongly relied upon the order of the AO and submitted that here in this case the shares have been allotted in subsequent years and amount of share application money given to the related companies after a reasonable time has to be treated as in the nature of loan given. Therefore, proportionate interest could have been charged on these loans because assessee company operating on borrowed funds. Thus, he strongly relied upon directions of the DRP. 20. We have heard the r....
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....lso needs to take into consideration, whether assessee company has sufficient surplus fund or not; and if surplus fund exceeded the amount of advance, then again, no notional interest or disallowance can be made. Here it is undisputed fact that assessee company has more than Rs. 9281.87 crores of accumulated reserves and during the year itself its reserves have increased by Rs. 1379 crores and amount of share application money advance was only Rs. 245.34 crores. Thus, in such circumstances, presumption is always in the favour of the assessee that these are advances out of surplus funds only and such presumption has been laid down by the Hon'ble Jurisdictional High Court in the case of CIT vs. Max India Ltd. (P&H) High Court, reported in 398 ITR 209. Thus, under the facts and circumstances of this case, we hold that no disallowance can be made. In so far as reliance placed on earlier year orders, Ld. Counsel has brought on record that the revenue's appeals for the Asstt. Year 2009- 10 and 2010-11 have been dismissed by the Tribunal by quashing the assessments on the ground of limitation. Thus, on merits we hold that no addition is called for and consequently the ground no. 4 to 4.2 ....
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....bmitted that such transaction cannot recharacterize as loan or capital financing. 24. On the other hand, Ld. DR strongly relied upon the order of the AO and submitted that here in this case, the share application money pending with the AE was for consideration time and therefore, it has to be reckoned as loan after a reasonable period of time and in an unrelated or uncontrolled transaction no third party would have given such share application money for a long time, hence such a transaction is not only international transaction but also interest has to be charged for determining the arms length price. 25. We have heard the rival submissions and also perused the relevant finding given in the impugned orders. First of all, we have to see, whether on a plain reading of section 92B (1) such a transaction falls within the purview of income arising from international transaction which is condition precedent for application of transfer pricing provision under chapter X. The transaction of subscribing of share application money is always on capital account and would become taxable to the extent it impacts the income. It is only income which is to be adjusted to the arm's length price....
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....arent transaction and substitute it by recharacterizing the said transaction without any material or exceptional circumstances that the assessee has tried to conceal the real transaction. Investment made in shares or applying for the shares cannot be given different colour so as to expand the scope of transfer pricing adjustment by recharacterizing it as interest free loan. Thus, we are unable to uphold the contention of the department that share application money pending allotment should be recharacterized as loan till the period it is allotted after a reasonable time. Accordingly, the adjustment made by the TPO is directed to be deleted. 27. In ground No. 6 to 7.2 assessee has challenged the disallowance of Rs. 1,32,17,15,364/- as interest imputed by AO on interest free loan/ advance to sister concerns. The facts in brief are that assessee company has given advances during the year to subsidiaries/joint venture/associates for sum of Rs. 233.01 crores. The outstanding balance as on 31.3.2001 aggregated to Rs. 986,67,87,694/-, the details of outstanding balances have been incorporated at page 11 of the assessment order. AO has held that this issue has been examined in detail dur....
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.... advanced, then presumption can be drawn that such advances have been given out of interest free funds. This view is now well supported by various judgments, like; CIT vs. Reliance Utilities Ltd. reported in 313 ITR 340 (Bom); and CIT vs. Max India Ltd., reported in 398 ITR 209 (P&H). Accordingly, such a disallowance is deleted on this ground also. 32. The next issue relates to addition of Rs. 3,92,03,610/- on account of treatment of rental income from properties as business income by the AO. The assessee company has shown rental income of Rs. 13,06,78,701/- under the head 'income from house property' and accordingly has claimed standard deduction @ 30% of a sum of Rs. 3,92,03,610/-. The AO on his own hypothesis presumed that assessee might be claiming maintenance expenditure in the profit and loss account indirectly for which it has not given any separate details and therefore, there is no justification to claim standard deduction claimed. However, he has allowed depreciation amounting to Rs. 98,73,901/-. Though he has not specifically held that it is business income but such an action of the AO ostensibly means that he has treated the rental income as business income of the as....
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....k volume V. Thus, under these facts and circumstances, we hold that rental income cannot be treated as business income and consequently, benefit of standard deduction of 30% has to be allowed. 36. The next issue relates to disallowance of prior period expenditure of Rs. 5,27,339/- as per the details given at page 4 of paper book volume V, which has been added back to the income of the assessee by the AO. 37. After considering the rival submissions and on perusal of the relevant finding given in the impugned order, we find that AO has nowhere doubted the veracity of the expenses though the same pertained to previous year. As pointed out by the Ld. Counsel the liability has been crystallised during the relevant assessment year and it was never claimed in preceding assessment year. He also drew our attention to the relevant bills given at page 4 of the additional paper book -V to show that most of the bills related to consultancy charges and travelling expenses of the Directors which was submitted and received by the assessee during the year and therefore, based on these bills assessee has claimed expenditure. Accordingly, when bills have been received during the year then we do....