TaxTMI 
TaxTMI 
2019 (4) TMI 1373
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....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 as under: 2. Clause 4 of MOU dated 5-10-2007 is no....
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....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 that, once, it has been found by special auditor in earlier years that such p....
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.... 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 has been done by the AO at any stage from TRIL seeking the details of interest paymen....
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....usiness 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 per the AO, what was being transferred through transfer of shares of all these companies, is in fact properties held by them. He further observed that in Asstt. Year 2009-1....
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...."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 2011-12 Sl. No. Assessment year Profit on sale of Investment as per Books. (Rs.) Capital Gain as per computation (Rs.) Assessment Status Remarks LTCG STCG 1. 2002-03 8,55 97,457 56,66,857 Ass....
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....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'. The shares of the subsidiaries were valued at cost and not at cost of market price whichever is lower, as is generally followed in case of stock-in-trade." 12.3 He also submitted that, predominant intention between holding of shares should be conclusive of such intention which has to be seen from the conduct of the assessee, because at no point of time shares of the subsidiary were held as stock-in-trade and in support he relied upon the following judgment:- Jud....
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....ed 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 approach" holding that it is not the subsidiary but the assessee which is the owner of the land and hence the transaction is of sale of land, disregarding the substance of the transaction as here what has been transferred is shares of subsidiary company and not the land. For disregarding an apparent transaction there has to be some information or material on record to digress from 'looking at' the transactions and sans any material, such a recharacterization of transaction by 'look through' approac....
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....RE 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 APP. MONEY -NAGVADA REAL ESTATE 20,000,000 - 20,000,000 2,800,000 11. SHARE APP. MONEY -NEELMANI REALTY PVT. LTD. 20,000,000 - 20,000,000 2,800,000 12. SHARE APP. MONEY -NKID 10,000,000 (8,000,000) 2,000,000 280,000 13. SHARE APP. MONEY -OMKAR REALTORS & DEVELOPERS 500,000,000 - 500,000,000 70,000,000 14. SHARE APP. MONEY - UNITECH ARDENT PROJ. PVT. LTD. 35,000,0000 (30,000,000) 5,000,000 6556,164 15. SHARE APP. MONEY-UNITECH ARDENT PROJ. PVT. LTD. 295,000,000 (295,000,000) - - 16. SHARE APP. MONEY -Unitech Infra Ltd. 2,800,000,000 2,800,000,000 29,488,219 17. SHARE ....
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....owing 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 bonds or debentures as are covered by sub-clause (x) pending the allotment of the said shares, stock, bonds or debentures and any amount received by way of calls in advance on shares, in accordance with the Articles of Association of the Company so long as such amount is not repayable to the members under the Articles of Association of the Company." As per the aforesaid rule, it is very much clear that any share application money which is repayable will be considered as deposit. 4.7 In view of the totality of the facts as discussed above, interest should have been charged on these loans as the company is operating on borrowed funds. Further, the" issue has been examined in detail during the assessment proceedings for the A.Y. 2009-10 and 2010-11, and ....
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....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 rival submissions and also perused the relevant finding given in the impugned orders. The assessee has subscribed for share application money in various companies which at the closing date of the balance sheet stood at Rs. 430,24,00,000/-. The Ld. AO held that, since the amount was blocked (pending allotment of shares) which had exceeded more than 60 days, therefore, such an application money has to be treated as interest free loan given to the parties. He further observed that, assessee has huge borrowings on which substantial interest is being paid, therefore, disallowance of interest on the payment of interest on borrowed should be made. He has also referred to Rule 2(b) of Companies (acceptance of deposit) Rule, 1975 and observed that share application money which is repayabl....
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....umstances 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 is treated as allowed. 22. The next ground relates to transfer pricing adjustment made by the TPO by recharacterizing the share application money invested in associate enterprises as loan and accordingly, disallowance of notional interest of Rs. 10,19,55,814/- u/s 36(1(iii) has been proposed. The facts in brief are that assessee company has invested sum of Rs. 1,64,15,00,400/- (equivalent to USD 3,63,50,000/-) by way of subscription of equity share capital in its wholly owned subsidiary, Nuwell Limited. Ld. TPO has held that such a transaction of subscription of shares in terms of amendment by Finance Act 2012 in 92B(1) read with Explanation (c) is an international transaction as it amounts to capital financing. The share application money was advanced in the financial year 201....
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....alls 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 and not tax on capital receipt. AO has recharacterized the share application money as a loan simply because during the year the shares have been not allotted. Such recharacterization first of all, cannot be made unless there is an intention of the parties or there is any arrangement, understanding or action in concert. If any money has been advanced for acquisition of shares which is a capital asset, same cannot be treated as capital financing unless the parties have intended or agreed to convert the same. Such an intention has to be gathered from any agreement or arrangement or understanding. If parties have treated it to be share application money for subscription of shares, then onus is upon the AO to prove it contrary that it is an international transaction. Here AO has drawn presumption on the ground t....
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....he 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 during the assessment proceedings for the assessment year 2009-10 and 2011-12, wherein it has been held that interest paid by the assessee on this borrowed fund should be disallowed @ 14%. Following the same precedent AO has calculated the disallowance of interest on borrowed capital funds to Rs. 1,32,17,15,364/- by applying the interest rate of 14%. 28. Before us, Ld. Counsel has submitted that the assessee has huge surplus funds which is evident from the fact that it has accumulated reserves of Rs. 9281.87 crores, therefore there cannot be any presumption that money has been advanced to subsidiaries out of borrowed funds. In any case the money which has been advanced to these companies/concerns were also engaged in real estate business and such an advance was for the business purpose which is incidental to th....
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....ectly 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 assessee. 33. Before us Ld. Counsel submitted that, first of all, no depreciation on the rental income has been claimed in the computation of income and right from the beginning the assessee has let out the property only for the purpose of earning rental income as owner of the property. Assessee has not incurred any expenditure in relation to the maintenance of the property, as such maintenance expenses have been borne by the tenants. In support, he has strongly relied upon the judgment of Hon'ble Supreme Court in the case of Chennai Properties vs CIT reported in 373 ITR 673 and Rayala Corporation vs. ACIT. 34. On the other land Ld. CIT(DR) strongly relied upon the order of the AO. 35. After hearing both the parties and on perusal of the impugned order it is seen that, nowhere it has been denied that the rental....