TaxTMI 
TaxTMI 
2022 (9) TMI 1235
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....eivable on preference shares as income of the assessee. The grievance of the assessee in this regard is projected in ground Nos.3 to 5 raised by the assessee before the Tribunal, which reads as follows: 3. The learned Commissioner of Income Tax (Appeals), has erred in confirming the addition of Rs.17,09,02,887/- made by the learned assessing officer on the facts and circumstances of the case. 4. The Assessee denies itself to be liable for the addition of Rs.17,09,02,887/- being notional premium receivable at the time of redemption of Preference Shares, held by the Assessee on the facts and circumstances of the case, in as much any appreciation received in the investment is taxable only at the time of redemption and not at any time before as also is subject to tax u/s 45 of the Act, subject to provisions thereof a is not a revenue receipt, chargeable to tax under the head 'Income From Other Sources' on the facts and circumstances of the case. 5. Without prejudice, the learned Commissioner of Income Tax (Appeals), failed to appreciate that the Interest Income from Other Sources on the ground that dividend/interest accrued on account of investment is....
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....s. For the above reasons, the AO treated the cumulative preference shares as akin to debt instrument on which the assessee is entitled to a fixed rate of premium/ dividend The AO therefore, treated the dividend on Preference share as equal to interest. 5. The AO also made an alternative case by observing that if the cumulative preference share is considered as an equity instrument, the dividend will accrue to the investor irrespective of the fact that the company has declared dividend or not. This income has to be paid in future out of the accumulated profits. Presuming that at the time the dividend distribution, dividend distribution tax is duly deducted by M/S. Ensource Consulting Private Limited, dividend may be claimed as exempt by the investor (i.e., the assessee). According to the AO, loan was taken by the assessee from M/ S KKR Capital for the purpose of subscribing to preference shares. So, if dividend is considered as having accrued to the assessee on accrual basis, then following matching principle, interest expenses incurred for that specific investment can also not be allowed because the interest expense would be expenditure incurred to earn exempt income. Therefore,....
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....he premium to tax on an annualized basis. On realizing its mistake, it promptly filed a revised return, well in time, by withdrawing the same as income. The assessee did not make any other change in its revised return. 2. The act of Redemption of Preference Shares amounts to a transfer of a Capital Asset u/s 2(47) of the Income Tax Act As natural corollary Premium, if any, received at the time of redemption, is not a revenue receipt, but a Capital receipt, which is exigible to tax under the head 'Income from Capital Gain s' in accordance with the provisions related to the same. The assessee relies upon the decision of the Hon'ble Supreme Court in the following cases wherein the Hon'ble Supreme Court has held that Redemption of Preference Shares amounts to transfer of a Capital Asset u/s 2 (47) of the Act, viz., ( a) Anarkali Sarabhai vs CIT 224 ITR 522; (b) Karthikeya Sarabhai vs CIT 228 ITR 163; 3. The assessee also relied upon a decision of the Income Tax Appellate Tribunal, Mumbai Bench, in the case of Parle Biscuits Pvt Ltd vs ACIT (TS-477-ITAT-2011-Mum), wherein the ITAT, following the decisions of the Supreme Court in the above cited cases of....
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.... be treated as part of cost of investment and be allowed for indexation while determining cost at the time of redemption of the shares. 10. The CIT(A) however concurred with the view of the AO. He formulated the issue that he has to decide viz., Whether the AO was right in adding the share premium to the income of the assessee on accrual basis under the head 'Income from other sources' treating it as revenue in nature. He observed that it is important to examine the nature of non convertible redeemable preference shares, whether it is a debt instrument or an equity instrument. Preference shares carries characteristics of fixed interest paying securities such as bonds/debentures and offers possible appreciation of the capital as in the case of regular equity shares. Preference shares are generally issued with a fixed rate of premium/interest/dividend, by whatever name called, and premium is paid out of the accumulated profits of the company. Even if the premium is not paid in any particular financial year due to any reason, it will accrue and get accumulated and paid in future if the preference shares are cumulative in nature as in the instant case. Apart from the assured....
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....ation may arise, however, when the issuer of the shares exercises its option, usually by formally notifying the shareholders of an intention to redeem the shares. AG26 When preference shares are non-redeemable, the appropriate classification is determined by the other rights that attach to them. Classification is based on an assessment of the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. When distributions to holders of the preference shares, whether cumulative or noncumulative, are at the discretion of the issuer, the shares are equity instruments." According to CIT(A), the factor of obligation to redeem give redeemable preference shares a distinct character of a financial liability which otherwise generally is in the nature of an equity instrument. The obligation to redeem coupled with non-convertibility of the preference shares in the instant case heavily tilts the nature of the instrument towards debt rather than the equity This fact becomes even more emphasized when seen in the backdrop that these preference shares were issued without any voting rights and with a fixed rate of premium which shall ac....
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....the redemption of preference shares did not amount to transfer u/s 2(47) of the Income tax Act. The Supreme Court ruled that the redemption of preference shares amounted to transfer within the meaning of Section 2(47) of the Income tax Act and the assessee was liable to pay the tax on capital gains it received. But the issue in dispute in the present appeal is totally different and distinguishable from the issue that was addressed in the above case laws cited by assessee. The CIT(A) was of the view that in the present case, there was no redemption of investment. The assessee has subscribed to the redeemable preference shares on 04/06/2015 and the redemption will happen in future on completion of 20 years from the date of allotment. Here, the premium on preference shares has been brought to tax on accrual basis by the AO and the Assessee is contesting this in appeal saying that the premium can be brought to tax only on redemption in future and not on year on year basis as is being done by the AO. Thus, the above case laws cited by the Assessee have no bearing on the issue at hand in the present appeal. 13. For the above reasons, the CIT(A) held that the AO has done the right thin....
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....ere is a fundamental difference between the capital made available to a company by issue of a share and money obtained by a company under a loan or a debenture. Respective incidences and consequences of issuing a share and borrowing money on loan or on a debenture are different and distinctive. Relying on the said decision, the learned Counsel reiterated his plea that the action of the Revenue authorities in treating redeemable preference shares as akin to debt and consequently holding that dividend / interest income has accrued to the assessee cannot be sustained. 15. Learned DR, on the other hand, submitted that as per the share subscription agreement, it is specifically provided that "preference shares shall be redeemed at such price, so as to net a premium of 16.5% p.a. Such premium shall accrue on a year-to-year basis and shall be payable on the redemption date". He also pointed that that in the event of liquidation of the company, preference shareholders rank lower than creditors but higher than equity shareholders. These features according to the learned DR show that the assessee was entitled to the dividend / interest income and on the basis on the accrual and therefore ....
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....o be paid was only a premium on redemption which was quantified at 16.5% P.A not any return as per the terms of offer letter dated 26.5.2015. The fact remains that the assessee was only a preference shareholder and by no stretch of imagination can it be said that the assessee was a debtor of the company issuing redeemable preference shares and was entitled to claim the redemption premium as a matter of right. As rightly pointed out by the learned Counsel for the assessee, the payment of redemption premium can be only out of profits of the company or out of reserves. Even if one were to be regarded the premium as akin to dividend, the assessee cannot claim dividend as a matter of right and it is for the directors of the Company to declare dividend which needs to be approved by the shareholders in an Annual General Meeting (AGM). Therefore, by no stretch of imagination can it be said that the preference shares issued by the assessee is in the nature of equity. It is only when the assessee has a right to receive periodic payments can it be said that income has accrued to an assessee under the mercantile system of accounting. For example, if the sum paid by the assessee is loan and as ....
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....The CIT(A) on the other hand, allowed the benefit which was claimed by the assessee. The Tribunal affirmed the view of the CIT(A) holding that the genuineness and credibility of the capital transaction was not disputed for the previous ten years. Both the Companies were juridical entities; the fact that the Companies were under common management would not indicate that the transfer was sham and that the view of the Appellate Authority was purely based on surmises and conjectures. The Tribunal has followed the judgment of the Supreme Court in Anarkali Sarabhai vs. CIT, in holding that the redemption of preference shares results in a transfer within the meaning of Section 2(47). Finally, the Tribunal has held that the noncumulative redeemable preference shares cannot be equated with debentures or bonds. According to the Tribunal, share capital issued in the form of non-cumulative redeemable preference shares can never be regarded as debentures or bonds. A debenture is a loan taken by the Company. On further appeal by the revenue, the Hon'ble Bombay High Court, the Hon'ble Bombay High Court while answering Question D which reads as follows: "D. Whether on the facts and in the....
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.... to be redeemed. Section 85 provides that 'preference share capital' means, with reference to any company limited by shares, whether formed before or after the commencement of the Act that part of the share capital which fulfills the following requirements, namely: "(a) that as respects dividends, it carries or will carry a preferential right to be paid a fixed amount or an amount calculated at a fixed rate, which may be either free of or subject to income-tax; and (b) that as respects capital, it carries or will carry, on a winding up or repayment of capital, a preferential right to be repaid the amount of the capital paid up or deemed to have been paid up, whether or not there is a preferential right to the payment of either or both of the following amounts, namely:- (i) any money remaining unpaid, in respect of the amounts specified in clause (a), up to the date of the winding up or repayment of capital; and (ii) any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company. Explanation.- Capital shall be deemed to be preference capital, notwithstanding that it is entitled to either of....
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....rtakes to pay the amount covered by it and till then it undertakes to pay interest to the debenture holders. The expression "share" has been defined in Section 2(46) of the Companies' Act, 1956 to mean share in the share capital of a company. On the other hand, a debenture is an instrument of debt executed by the Company acknowledging its liability to repay the amount represented therein at a specified rate of interest. In other words, a debenture is a certificate of a loan or a bond evidencing the fact that the Company is liable to pay an amount specified with interest. Though the amount which is raised by a Company through debentures becomes a part of its capital structure, it does not become part of share capital. 10. Section 48 denies the benefit of indexation to bonds and debentures other than capital indexed bonds issued by the Government. The four percent non-cumulative redeemable preference shares were not bonds or debentures within the meaning of that expression in Section 48 of the Income Tax Act, 1961. In these circumstances, the Tribunal was correct in its decision to that effect. 11. We accordingly, answer question (D) in the affirmative ....
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....ons of Sec.14-A of the Act, we find that the assessee had contended before the CIT(A) that premium on redemption of debentures is taxable in the year of redemption and hence there was no exempt income whatsoever warranting invocation of the provisions of Sec.14-A of the Act. The CIT(A) has not addressed the issue at all. The law is clear that premium on redemption is exigible to tax under the head 'Income from Capital Gains' as laid by the Hon'ble Supreme Court in the case of Anarkali Sarabai (supra) and Karthikeya Sarabai (supra) and is not exempt from tax. Further the investment in preference shares is to be regarded as an investment in an unlisted and unquoted security and is therefore definitely exigible to tax. Section 14A comes into play only in the case of investment, income from which, is completely exempt from tax. Hence the question of any disallowance u/s 14A in respect of interest paid on loans, which are utilised to make the investment, is to be allowed as a business expenditure. If the same is claimed and allowed as a business expenditure, the same cannot be treated as part of cost of investment and be allowed for indexation while determining cost at the time ....
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....lities such as PF, VAT, Service Tax & TDS. Further interest is paid on loans borrowed from Banks & NBFC's. Further the assessee has not claimed any payment of interest u/s 234 A, B or C as an item of expenditure. The entire claim is seen to be in order. The disallowance made by the AO was deleted by the CIT(A). 26. It can be seen from the table given above that out of the sum of Rs.1,27,53,372/- appearing under the nomenclature "interest paid on delayed payments of tax" only a sum of Rs.38,32,459/- relates to interest on delayed remittance of TDS. It is clear from ground No.1 raised by the Revenue that it is only this amount which is challenged by the Revenue in ground No.1 in this appeal. In so far as the nature on the interest on delayed remittance of TDS is concerned, this Tribunal has been taking a consistent view following the decision of the Hon'ble Madras High Court in the case of CIT Vs. Chennai Properties and Investments Ltd., 239 ITR 435 that interest paid takes colour from the nature of principal amount required to be paid but not paid in time and this principal amount being income tax, interest was also in the nature of direct tax and cannot be regarded as a comp....
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....t. 30. The CIT(A) considered additional evidence filed by the assessee and went on to observe that almost all these creditors have been having business & commercial relationships with the assessee earlier to the impugned assessment year and continue to have the same even after. He went on to analyze the details provided by the assessee and observed that the balances outstanding as on 31/03/2016 have been paid subsequently through banking channels and there is continuing relationship with most of them. Thereafter he gave finding with regard to each of the sundry creditors, and deleted the addition made by the AO. The following were the findings of the CIT(A): "7,5.2 A brief analysis of the same is as under: Addecco India Pvt Ltd: The balance as per the Assessee's books is Rs. 5,46,09,874/- The Balance as per confirmation received is Rs. 5,18,55,577/- Difference Rs. 27,54,297/- The AO has added the entire difference amount of Rs.27,54,297/-. The Assessee has filed a reconciliation statement, explaining the difference. It is seen that the Assessee has credited the Creditor with various amounts as per the bills raised by the ....
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..../2016 is Rs. 1,97,00,135/-. The Difference is Rs. 58,352/-, which the Assessee is unable to explain. It is also seen that the Assessee has made payment of Rs. 40,00,000/-on 02/06/2016, Rs. 20,00,000/- on 19/10/2016, Rs.20,00,000/- on 29/12/2016, Rs.20,00,000/-24/05/2017 and Rs.50,00,000/- on 23/10/2017, all through banking channels. The addition made to the extent of Rs.58,352/- is sustained and the balance addition of Rs.1,97,00,135/- is deleted. Eyasoft Technologies Pvt Ltd: The AO has added the entire closing balance of Rs. 2,06,46,026/- as on 31/03/2016. The Balance confirmed by the Creditor as on 31/03/2016 is Rs. 2,06,81,808/-, which is more than the amount due as per the Assessee by Rs. 35,782/-. IBM India Pvt Ltd: The AO has added the entire closing balance of Rs. 86,27,573/- as on 31/03/2016. The amount represents lease charges for computers taken on lease from the creditor vide agreement dated 19/09/2006. The Assessee has subsequently terminated this agreement with the creditor by a final settlement agreement dated 18/07/2016, wherein the creditor transferred the ownership of the assets to the Assessee & terminated the lease arrangement....
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....and that the parties before the CIT(A) should have equal opportunity of being heard. Rule 46A of the Rules prescribes the procedure for filing additional evidence before the CIT(A) and the circumstances under which the additional evidence can be filed before the CIT(A). Rule 46A(1) lays down that additional evidence shall be admitted by the CIT(A) only for reasons stated therein and Rule 46A(2) lays down that only after recording in writing reasons for admitting additional evidence, can additional evidence be admitted. Further, Rule 46A(3) specifically provides that CIT(A) shall not take into account any additional evidence produced under Rule 46A(1) of the Rules unless AO has been allowed reasonable opportunity to examine the additional evidence to produce evidence in rebuttal. Thus, in the present case, there is a clear violation of the mandate laid down in Rule 46A(3) of the Rules. 33. In so far as the argument of the learned Counsel for the assessee that under 46A(4) of the Rules, the CIT(A) can call for additional evidence on his own to decide the controversy in appeal and in such event, he need not follow the requirements of 46A(3) of the Rules is concerned, we find that t....