AI Drafter 
TaxTMI 
TaxTMI 
2023 (10) TMI 327
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.... Act and is therefore, liable to be quashed. 1.2 That the assessing officer erred on facts and in law in assessing total income of the appellant Rs. 414,84,28,733 as against returned/ declared income of Rs. 9,68,74,129. Re: Special Audit under section 142 (2A) of the Act 2.0 That the special auditor erred on facts and in law in exceeding jurisdiction under section 142 (2A) of the Act in commenting on legal aspects/ implications of the transactions while issuing audit report and thus, the same is vitiated in law and liable to be ignored/excluded: from consideration. 2.1 That on the facts and circumstances of the case, the assessing officer/DRP erred in merely relying on the observations/ comments of special auditor without any independent application of mind in ignorance of the correct factual and legal: position and consequently, the impugned order passed is illegal and bad in law. 2.2 That on the facts and circumstances of the case and in law, the assessing officer erred in directing the special auditor to deal. with issues which were outside purview of latter's jurisdiction but forms part of 'assessment 4 to be conducted-by assessing o....
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....e utilized to make- investment in preference shares of RMCL and, therefore, no interest expense could be disallowed. 4.2 Without prejudice, the assessing officer/DRP erred in adopting arbitrary higher interest rate of 8.84% p.a. for the purpose of computing aforesaid disallowance. Re: Sale of investment in shares of Aegon Religare Life Insurance Company Ltd ('ARLICL') taxed as business income instead of capital gains 5.0 That the assessing officer/DRP erred on facts and in law in re- characterizing gains arising on sale of shares/promoter stake in ARLICL as 'business income' [Rs. 392,77,49,391] under section 28 (va)/(iv) of the Act, as against 'capital gain' (long term Rs. 10,60,83,585 and short term- Rs. 38,12,53,581) offered by the appellant. 5.1 That the assessing officer/DRP erred on facts and in law in alleging that the appellant did not hold interest in ARLICL as shareholders' investment but was actively engaged in the business operation of the said company. 5.2 That the assessing officer/DRP erred on facts and in law in not appreciating that the investment in ARLICL is held by the appellant on capital account (as promoter stake) a....
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....asonable. 7.4 That the assessing officer erred in making the disallowance of interest without appreciating that similar interest provided for on NCDs in previous years stands accepted by the Department. 7.5 That the assessing officer erred in treating the interest paid to RSL as excessive without appreciating that the same being specified domestic transaction was duly reported in Form 3 CEB and was duly accepted to be at arm's length by the transfer pricing officer. 7.6 That the assessing officer erred in not correctly examining and deleting the disallowance despite binding directions of the DRP, which is in gross violation of the provisions of the Act. Re: Transfer Pricing Adjustment 8.0 That the assessing officer erred on facts and in law in making transfer pricing adjustment of Rs. 7,62,966 without considering the order dated 05,03.2021 passed by the Transfer Pricing Officer ('TPO') reducing the adjustment to Nil after giving effect to binding directions issued by the DRP. Re: Others 9.0 That on the facts and circumstances of the case and in law, education cess paid on total income and dividend distribution tax, shou....
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....cial auditor would have to verify the books of accounts of the Petitioner so that the report furnished by him, is of assistance to the Assessing Officer to determine the taxable income. We have per used the terms of reference and do not find the same to be inappropriate, especially having regard to the fact that despite the honest attempt made by the Assessing Officer in understanding the accounts of the assessee, it has not yielded the desired results, thereby warranting the appointment of the special auditor. At this stage, we cannot hold that there is no co-relation between the aspects which require scrutiny and the terms of reference for the special auditor under the law. Petitioner can raise such objections at the appropriate stage. 25. In view of the afore-going observations, the Court is of the opinion that there is no infirmity in the order directing the special audit. The writ petitions have no merit, and consequently the same are dismissed. The assessees in both the petitions are directed to cooperate with the special auditor. There shall be no order as to costs." 8. Since, the matter has been adjudicated by the Hon'ble High Court, this ground no. 2 & 2.1 of t....
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....the assessee company has siphoned off an amount of Rs. 1755.50 crores through instrument of investment in RCML over several years. Thus, the special auditor's has appropriately proposed to disallow the short term capital loss of Rs. 500 crores and long term capital loss of Rs. 344,26,75,159/- on account of write off of investment of Rs. 750 crores claimed during the year under consideration. Additionally, investment of Rs. 229 Cr. made by the assessee company, during the year under consideration, is also part of total investment made in its wholly owned subsidiary. Therefore, considering the amount of Rs. 5,19,61,760/- [2,29,40,00,000 * 8.84%, as computed by special auditor on page no. 64 of the special audit report in FORM 6 B] on funds being not utilized for wholly and exclusively for the purpose of the business but charged to the Profit & Loss account under Note No 24 'Finance Costs', is disallowed under Section 37 of Income Tax Act, 1961. Therefore based on the above facts and circumstances (i) short capital loss of Rs. 500 crores and long term capital loss of Rs. 344,26,75,159/- and (ii) proportionate interest expense amounting to Rs. 5,19,61,760/- under ....
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.... 17. RCMIML incurred huge losses resulting in erosion of the net worth of RCMIML and consequently, RCML made provision for diminution in the value of its investments in RCMIML. Consequently, the appellant company made provision for diminution in the value of the investment made in the shares of RCML. 18. RCML reduced its share capital against the accumulated losses. RCML after approval of board of directors and share holders carried capital reduction of fully paid up nonconvertible redeemable preference shares held by the appellant company. RCML accordingly filed scheme for reduction of 52,50,00,000, 0.001% Non-Convertible Cumulative Redeemable Preference Shares of Rs. 10 each fully paid-up aggregating to Rs.525 crores (face value) before Hon'ble Delhi High Court, which was approved on March 23, 2015 and thereafter, registered with the ROC on 8.5.2015. The Hon'ble High Court order is in the case of Religare Capital Markets Ltd. in which the assessee investments. 19. As a result of the order of the Hon'ble Delhi High Court, the value of the investment made by the appellant of Rs. 750 crores in the preference shares of RCML stood extinguished and became Nil and the assessee bo....
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....- in RCML despite of write off of Rs. 750,00,00,000/- in the same financial. The assessee company submitted its response on 11.10.2019 as follows: With respect to the information required by your goodself in the aforementioned point, please find attached following: 1. Copy of agreement entered into among the company, RHC Holding Pvt. Ltd. (RHC) and Religare Capital Market Limited on 13.02.2012 along with its first amendment and second amendment agreement is enclose d as Annexure-2, Annexure -2(a) and Annexure-2 (b). 2. The provision for diminution of Rs. 7,500,00,000/- was made in earlier year and written back in the year under consideration as per the order of Hon'ble Delhi High Court. Copy of order is enclosed as Annexure-3. Further, the provision of Rs. 2,294,000,000/- was created in the year under consideration however, the same was disallowed while computing the taxable income for the year under consideration. 3. The investment of Rs. 2,294,000,000/- was made by the assessee company in the year under consideration in the shares of M/s. Religare Capital Market Limited as per terms of agreement dated 13.02.2012 followed by its first a....
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....RCML & RCML (Mauritius) from the financial year 2011-12 to 2015-16. Also, Hemant Dhingra was director of RCML from 2007 to 2010. Similarly, Mr. Sunil Godhwani was the common director of the assessee company & RCML from the financial year 2011-12 to 2015-16, This shows that person taking decision are same in all companies and are inter-related. 5. Investment made by RCML in RCML (Mauritius) was controlled by RHC and the same was also made before funds were introduced as per agreement dated 28.03.2013 by the assessee company. 6. The Assessee company, through amendment agreement dated 28.03.2013, invest Rs. 810 crores in RCML. These funds were used by RCML to refund investment of Rs. 659 crores made by RHC in RCML preference shares along with redemption premium of Rs. 55 .60 crores which totals to Rs. 714.60 crores. 7. The Assessee company further made investment of Rs. 80.60 crores in financial year 2013-14 & Rs. 229.40 crores in financial year 2015-16 in RCML. 8. All value of investment made by the assessee company in RCML including investment shown in (7) above, were treated as permanently declined to NIL as and when made. This shows that the ass....
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....accounts of the assessee company, it is observed that the assessee company invested funds in making the investment of Rs. 229.40 crores in RCML which would otherwise results in earning of the interest income. The assessee company simultaneously created provision for diminution in the value of such investment there by reducing the value of investment to NIL. By no stretch of imagination this is a diminution of the value of the investment but such creation of the provision of the diminution of the value of the investment is nothing but an effective write off of the investment as done in the case of previous diminution of the value of the investment explained earlier with respect to Rs. 750 crores. These funds were utilized by RCML for clearing its financial commitments which got create d on account of its investment in its Mauritius subsidiary. Therefore, as established above, such investment is part of total investment of Rs. 1755.50 crores which were not used wholly and exclusively for the purpose of business of the company & accordingly, interest cost incurred by the assessee company is disallowed to the extent of utilization of funds in the such investments. During the year....
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....der: Date of Investment No. of preference shares purchased Purchase cost per share Total cost of purchase consideration May 2011 2,50,00,000 Rs. 100 (including premium of Rs. 90) Rs. 250,00,00,000 March 2013 50,00,00,000 Rs. 10 Rs. 500,00,00,000 Total 52,50,00,000 Rs. 750,00,00,000 The aforesaid preference shares were, it is submitted, in the nature of 0.001% non-convertible cumulative redeemable preference shares and for the purpose of acquiring 52,50,00,000 preference shares, the assessee paid total consideration of Rs.750 crores to RCML during the period May 2011 to March 2013. Religare Capital Market Limited (RCML) owned a wholly owned subsidiary company in Mauritius i.e. Religare Capital Markets International (Mauritius) Limited (RCMIL). Due to economic slowdown and significant decline in the investment banking business overseas, RCMIL incurred huge losses. This resulted in erosion of the net worth of RCMIL and consequently RCML made provision for diminution in the value of its investments in RCMIL and showed a loss of Rs. 1580.00 crores in its books of account as on 31^st March, 2014. Consequently, the asse....
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.... 1. The photocopy of the demat account showing the investment made by the assessee company in the shares of RCML Page No. 6 Submission dated 28.06.2019 - please refer Annexure- 15. - 1. The photocopies of the relevant extracts of bank statements showing payment for purchase of shares. Page No. 6 of the Submission dated 28.06.2019 - please refer Annexure- 16. - 1. A copy of opinion an opinion from a senior advocate Shri Arvind Datar in respect of capital loss on the extinguishment of the rights in the preference shares. Page No. 7 of the Submission dated 28.06.2019 - please refer Annexure- 18. - 1. A copy of agreement entered into among the company, RHC Holding Pvt. Ltd, (RHC) and Religare Capital Market Limited (RCML) on along with its first amendment dated and second amendment agreement dated 28.03.2013 Copy of the same is enclosed as Annexure- 1, 1 (a) and 1 (b) for your reference. Page No. 2 of the Submission dated 11.10.2019 - please refer Annexure- 2, 2 (a) and 2 (b). 1. A copy of the order of the Hon'ble Delhi High Court for the reduction in the capital investment made by the assessee company in RCML. Page No. 7 of the Submission date....
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....ital reduction of such preference shares should be denied, in arriving at such erroneous conclusion, the special auditor has made following false and base less allegations: 1. Investment made by the assessee in preference shares of RCML was not for earning any return therefrom, but was merely to facilitate RCML to repay one of its associate company i.e. RHC Holding Pvt. Ltd. (hereinafter referred to as 'RHC') by way of redeeming preference shares for Rs. 714.60 crores (including premium of Rs. 55.60 crores) held by RHC and on this account all the investments made by the assessee in RCML were immediately treated as permanently declined to NIL in the year of investment; 2. The funds which were earlier invested by RHC in RCML in the form of preference shares, was utilized by RCML to make investments in the form of unquoted equity instruments and 0% optionally convertible redeemable preference shares of Religare Capital Markets International (Mauritius) Limited ('RCMIL'), which had huge accumulated losses. AO held that 1. RHC controlled the management and financial decisions of RCML including appointment of key managerial persons and investment decision by....
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.... the same. Copy of questionnaire and submission made by the assessee company is enclosed as Annexure(s) 7 and 8. However, no adverse consequence on the aforesaid transaction observed by the assessing officer with respect to the investment made by the assessee company during the course of assessment proceedings u/s 143(3) and reassessment proceedings u/s 148 of the Act. 1. In assessment proceedings for AY 2013-14 the assessing officer vide its questionnaire dated June 09, 2015 has asked us to submit details respecting the details of investment made and in response to the aforesaid questionnaire the assessee company has submitted details vide its submission dated 29^th February, 2016. Copy of questionnaire and submission made by the assessee company is enclosed as Annexure(s) 9 and 10. However, no adverse consequence on the aforesaid transaction observed by the assessing officer with respect to the investment made by the assessee company. Furthermore apart from the specific questions raised during the course of assessment proceedings, it is pertinent to note that, the assessee company has duly disclosed its investments in audited financial statemen....
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....ope) Ltd. The said Europe subsidiary further established subsidiaries in various companies and entered in different businesses and joint ventures in Unite d Kingdom, United State of America, Hong Kong, Singapore, Japan, South Africa and Mauritius. Additionally, Religare Capital Markets International (Mauritius) Limited also acquired/ set-up subsidiaries in Sri Lanka and Australia. However/due to economic slowdown and significant decline in the investment banking business overseas, the business interest of RCMIL running through various subsidiaries were severely affected. Losses incurred by the RCMIML and its step down subsidiaries as on 31.03.2016 are tabulated as under : S. NO. Name of Entity Profit (Loss) incurred till 31.03.2016 (in USD) Losses Incurred during the year FY 2015-16 1. Religare Capital Market International Mauritius Limited. (405,662,933) (6,173,547) 2. Religare Capital (Europe) Limited. Market (118,197,000) (550,000) 3. Kyte Management Limited 9,940 (800) 4. Religare Capital Market (Hong Kong) Limited (486,499,354) (188,594,940) 5. Religare Capital Markets (Singapore) Pte Li....
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....ML from the FY 2010-11 to 2015-16 is enclosed as Annexure-16. It is further emphatically submitted that the funds infused in RCMIL was utilized by RCMIL for meeting operational expenses, making capital investment' in its subsidiaries. An overall fund utilization by RCMIL during the period from FY 2006-07 to FY 2015-16 is enclosed as Annexure-17. It may thus be appreciated that the funds were ultimately utilized by RCMIL purely for business purposes, in order to revive its faltering business overseas, which fact has not been denied by the auditor in the special audit report. However, despite best efforts, the banking business of RCMIL and its step-down subsidiaries continued to remain in slump owing to bad market conditions and global financial crisis. As a result, the company suffered consistent losses and some of the step down subsidiaries of RCMIL were forced to shut their operations (e .g. like UK, USA, Japan and Australia) and at some places, RCMIL had to re structure its business to hold minority stake (e.g. in Africa). The chart showing losses suffered by RCMIL in preceding assessment years is tabulated as under: Financial Year Profit (Loss) [in US....
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....y the assessee in RCML are provided as under: (i) Re: Investment of Rs. 750 crores in 0.001% preference shares of RCML It is submitted that total investment of Rs. 750 crores was made in 0.001% preference shares of RCML in two tranches as under: Re (i): Investment of Rs. 250 crores in preference shares of RCML in May, 2011: The assessee made investment of Rs. 250 crores in 0.001% non-convertible cumulative redeemable fully paid up preference shares of RCML on 31.05.2011. The aforesaid investment was made in compliance with all the requirements of various authorities as is evident from the following: i) Copy of allotment letter/term sheets issued by RCML for issue of shares to the assessee is enclosed as Annexure-23 ii) Photo copy of the Demat account showing the investment made by the assessee company in the shares of RCML is enclosed as Annexure-24. iii) Photo copies of the relevant extracts of bank statements showing payment for purchase of shares is enclosed Annexure-25. iv) Copy of board resolutions is enclosed as Annexure-26. The said funds were utilized by RCML for the purpose of investment in equity shares of RCMIL, its wholly ....
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.... the tripartite agreement are discussed hereunder: - Clause 2.3 requires RHC to make adequate capital available to RCML at all times to maintain the applicable capital adequacy. - Clause 4.2 requires that RCML shall utilize the capital contribution received under the agreement from RHC only for purpose of its capital requirement; - Clause 5 imposed certain restrictions on the assessee regarding transfer of equity shares of RCML held by it. Relevant extracts of clause 5.2 are re-produced as under: "5.2. In the event REL proposes to transfer all or part of equity shares of RCML held by it or its nominees, to any third party before all the Series B Preference Shares subscribed by RHC during the Capital Contribution Period are fully redeemed through the payment of Redemption Amount per Share for all Series B Preference Shares to RHC, REL shall be obliged to cause such third party to purchase all the outstanding Series B Preference Shares then held by RHC ("Outstanding Series B Preference Shares") along with the sale of equity shares held by the REL. Out of the proceeds of the sale of the equity shares held by REL and Outstanding Series B Preference S....
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....n in RCML upon any such request made by RCML. However, it was further provided that the assessee's obligation shall be limited to financial commitments aggregating to Rs. 1,119.83 crores that relate to period before 30.09.2011. - However, due to inability of the assessee to infuse funds in RCML in accordance with amended agreement dated 24.05.2012, RCML made a request to RHC for assistance in re-financing its debt, which was accepted by RHC vide letter dated 01.06.2012. - As a consequence, another amendment agreement was entered into between the parties on 28.03.2013 wherein the Clause 4A and 5A of the agreement were substituted. The relevant extracts of the amendment agreement are reproduced as under: "Clause 4A of Amendment No. 1 (i.e., RCML's UNDERTAKINGS) shall be deleted in its entirety and shall be replaced by the following: "4A RCML has delivered a written notice requesting REL to infuse capital for the purpose of satisfying the Financial Commitments and RCML hereby undertakes that the capital infused by REL towards satisfaction of the Financial Commitments shall be used only for the purpose of repaying the Financial Commitments of re-....
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....nowhere been able to pin point how such funds were utilized for non-business purposes. On the contrary, the auditor has accepted that the funds were used to fund RCMIL, which was suffering losses, which in itself prove s that the investment made by the assessee was clearly for the purpose of reviving its subsidiary's business, which was clearly to advance its own business interest and nothing more. In view of the aforesaid, the conclusion drawn by the special auditor that the funds invested by the assessee in RCML were siphoned off is based on surmises and conjectures and all such allegations leading to such an inference are false, base less and contrary to actual facts placed on record. In the present case, the following facts cumulatively establish, without any doubt whatsoever, that the transactions undertaken by the assessee were bona fide transactions driven by commercial motive: (a) The assessee being the ultimate holding company of RCML and RCMIL, undisputedly had deep business interest in both the entities, which were operating in the similar line of business and their performance had a direct impact on the assessee; (b) The assessee, being the ul....
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........................ Rebuttal to specific allegations made by the special auditor In the special audit report, the auditor has made certain specific allegation to conclude that the capital loss claimed by the assessee is not allowable as under: (a) The investment made by the assessee in RCML was not with the intent of earning any return but was merely to facilitate RCML to repay one of its associate company i.e. RHC, therefore, on this account all the investments made by the assessee in RCML were immediately treated as permanently declined to NIL in the year of investment and thereby does not qualify as a legitimate business investment; (b) The funds infused in the form of investments made in RCML were ultimately routed and utilized for the benefit of RCMIL, which is a loss making concern of the assessee group. (c) RHC controlled arid managed the operations of RCML; (d) The capital reduction undertaken by RCML was allegedly not approved by various regulatory authorities. (e) Mr. Shachindra Nath and Mr. Anil Saxena are common directors of RCML and RCML (Mauritius) from the financial year 2011-12 to 2015-16. Similarly, Mr....
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....view of the businessman and not of the Revenue. Reference in this regard is invited to the following decisions of the apex Court: • CIT vs. Malayalam Plantations Limited: 53 ITR 14 0 (SC) • CIT vs. Walchand & Co. etc. (1967) 65 ITR 381 • J K Woollen Manufacturers vs. CIT: 72 ITR 612(SC) • CIT vs. Birla Cotton Spg. And Wvg. Mills Ltd.: 82 ITR 166 (SC) • Madhav Prasad Jatia vs. CIT U.P.: 118 ITR 200 (SC) • S.A. Builders Ltd. vs. CIT: 288 ITR 1 (SC) The freedom available to carry on business in a manner most conducive to the assessee is, however, not unfettered. The assessee cannot, under the shield of such freedom, for instance, carry out transaction(s) which are sham, bogus or device to evade tax. So long as the transaction is within the framework of law, having 'commercial substance' (than merely/mainly to avoid payment of taxes), the authorities have no right to re-write the transaction, notwithstanding that the transaction may result in mitigation of tax liability. Reference, in this regard may be made to the decision of the Delhi High Court in the case of CIT v. EKL Appliances Ltd. 345 ITR 241 wh....
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....subsidiary. Merely because the assessee did not earn any return from such investment cannot be the basis to doubt the genuineness of the transaction, more so when the investment was made keeping in mind the long term business interest of the group as a whole. In view of the aforesaid, it is respectfully submitted that there is no warrant to disallow the capital loss suffered by the assessee on account of capital reduction undertaken by RCML Further, the said capital reduction scheme of RCML was approved by the Hon'ble Delhi High Court as submitted above. Therefore, questioning the capital reduction by the special auditor's tantamount to contempt of court. The revenue must abide by the order of the Hon'ble Delhi High Court and therefore, your goodself is requested to not consider the allegation of the special auditor and allow the claim of the assessee Further, with regard to allegation of creation of provision for diminution in value of investment immediately after making investment in RCML in preceding assessment years; it is categorically submitted to the special auditors as well as before your goodself that such provision in diminution in the value of investments was alway....
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....s of Rs. 106,44,71,329 /-. Relevant extract of CFS of RCML as on 31.03.2016 is enclosed as Annexure-34. RCML was incorporated as a wholly owned subsidiary of the assessee company. RCML and its subsidiaries were having global presence in the field of financial services. The object of a business is to do business and if there is loss from such business, it does not mean that immediately the business which had been set up after a lot of effort should be closed down immediately. Since, the said company was running in losses, an agreement was entered into amongst the assessee company, RHC and RCML dated 13.02.2012 as mentioned above which was subsequently amended on 24.05.2012 and 28.03.2013. As per the terms of the said agreement, the assessee company was required to fulfill the financial commitments due to the said company as on 30.09.2011. A statement showing the total commitments as on 30.09.2011 has been enclosed herewith as Annexure-35. Being the holding company of RCML and as per the terms of the agreement, the assessee company had to make investment in the shares of RCML. However, since there was accumulated losses in the said company and the said company with its subsidiarie....
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....f the assessee could not take off. When the losses accrued to the subsidiaries, the assessee made investment as a business decision to continue the said companies in the hope of favourable conditions and profit in future. The assessee company as well as its subsidiaries was registered with several government agencies and taken registration / licenses for running business. These licenses are not given so easily and therefore even if there were losses continuing the assessee company could not close down the said companies in the hope of future bene fits. It is a decision of the businessmen how to run the business, how to grow it, when to close down and till which time bear the losses. Furthermore, it is pertinent to note that, since, there were losses incurred by the RCML (Mauritius), the provision was created for diminution of the investment made by RCML in the said company. A copy of the audited financial statements of RCML (Mauritius) for the financial year ended on 31^st March, 2016 is enclosed as Annexure-12 above, showing the negative net worth of US $14,91,720/- (equivalent to Rs. 8,95,03,200/- considering US $ 1 = Rs. 60/-) of the said company. The Hon'ble Delhi High Court....
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....being satisfied that the assessee fulfilled all the stipulated conditions. It is emphatically submitted with all emphasis that it is trite law that it is not open to anyone, much less the Tax Authorities, to question the genuineness of the scheme duly approved by the High Court. Reliance in this regard is placed on the following decisions rendered in context with effect of scheme of amalgamation duty sanctioned by High Court: • The Supreme Court in the case of Miheer H. Mafatlal vs. Mafatlal Industries Ltd.: Civil Appeal No. 11 $ 79 of 1996 wherein the Apex Court specifically observed that while sanctioning a scheme, the Court has to consider the pros and cons of the scheme with a view to finding out whether scheme is fair, just and reasonable and is not contrary to any provisions of law and it does not violate any public policy. • The Gujarat High Court in Wood Polymer Ltd., in re: 109 ITR 177 observed that a scheme of amalgamation is framed for achieving some object; companies do not amalgamate for fun. The Court further held that the requirement that the scheme should not be prejudicial to public interest/policy would also include that it should not ....
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....as to what the special auditor wants to prove from this fact, RCML is the subsidiary company of the assessee company and RCML (Mauritius) is the subsidiary company of RCML. All these companies are related companies and investment by the assessee company was made in its related companies. When the companies are related companies, how does it matter that these companies are having common directors. It is very common in the business world that the director of the holding company is also director of the subsidiary company and the second layer of subsidiary company. Merely because there are common directors, does not make a transaction between these companies non genuine. For this purposes, the transfer pricing concept has been introduced in the Income tax Act. There is no observation of the transfer pricing officer for any transfer not being at arm's length price. There is no observation/evidence produced by the special auditor in the special audit report that the investments by the assessee were not genuine and were not at arm's length price. The investments were made by the assessee company as per the terms of the agreement, board resolutions, RBI approvals, wherever necessary etc. N....
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....said reason, the loss suffered on transfer of such preference shares held in its subsidiary company is, in the alternate, allowable as business loss in terms of section 28/37 of the Act. Re: Disallowance of interest cost of Rs. 5.19 crores on investment of Rs. 229.40 crores in RCML During the assessment year 2016-17, the assessee made investment of Rs. 229.40 crores in partly paid-up 0.002% preference shares of RCML. The said investment was made by the assessee out of its own surplus funds and money generated by liquidating other investments held. In the show-cause notice, your Honour has, by merely relying upon the observations made by the special auditor, directed the assessee to show-cause why the proportionate interest cost of Rs. 5.19 crores allegedly incurred in connection with investment of Rs. 299.40 crores made in RCML should be not disallowed. In the special audit report, it has been alleged that the investment of Rs. 229.40 crores made by the assessee in RCML was not wholly and exclusively utilized for the purpose of business of the company and accordingly, interest cost aggregating to Rs. 5.19 crores, being allegedly attributable to funds utilized for making....
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....er consideration, an investment of Rs. 229.40 crores was made by the assessee in preference shares of RCML. In this regard, we wish to submit following documents: (a) Copy of term sheet of preference shares enclosed as Annexure-36. (b) Copy of board resolution passed by the assessee-company at the time of making the investment is enclosed as Annexure-37. (c) Copy of call letters issued by RCML calling third and final call money is enclosed as Annexure-38. In accordance with the terms of amended tri-partite agreement, the aforesaid funds were utilized by RCML to repay its financial commitments and for repayment of its financial commitments which included redemption of money invested by RHC. The chart showing utilization of funds by RCML is tabulated as under: Detail of Investment Utilization Investment of Rs. 5 crores made on 21.09.2015 Funds were utilized by RCML to repay Inter-Corporate Deposits of Religare Comtrade Limited. Investment of Rs. 224 crores made on 30.12.2015 Funds were utilized by RCML to redeem preference shares issue d to RHC during the period June, 2012 to August, 2012 in accordance with the agreement. It may be a....
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....investment of Rs. 229.40 crores made by the assessee was not out of borrowed funds. During the said financial year, the assessee, it is submitted, had surplus funds amounting to Rs. 2539.97 crores (comprising of share capital of Rs. 203.33 crores and reserves & surplus of Rs. 2,336.64 crores). It is respectfully submitted that no portion of the borrowed funds were utilized for making investment in RCML. The said investment of Rs. 229.40 crores made by the assessee in the preference shares of RCML was out of its own surplus funds and no part of the borrowed funds were utilized to make any such investment as illustrated as under: Particulars Source of funds Investment of Rs. 5 crores made on 21.09.2015 Partly from proceeds of Rs. 47,00,97,881 received on redemption of investment made in Invesco Mutual Fund and partly from surplus funds available with the assessee. Investment of Rs. 224 crores made on 30.12.2015 Out of proceeds received on redemption of investments made in Inter-Corporate Deposits (ICD) of (a) Oscar Investment Ltd. - Rs. 155.04 crores; (b) ANR Securities Ltd. - Rs. 70 crores. It is submitted that the aforesaid investment in ICD was made by the ass....
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....iness as was drawn in Woolcomber's case [1982] 134 ITR 219 by the Calcutta High Court and was followed in three other cases of the same High Court, would essentially depend upon the fact as to whether the entire profits had been pumped into the overdraft account, whether such profits were more than the tax amount paid for the relevant year and ail other germane factors. But when the assessee never advanced the contention either before the Tribunal or before the High Court and the amplitude of the que stion posed before the High Court does not bring within its sweep the contention as is advanced by Mr. Bhattacharyya, learned counsel in this court, it would not be appropriate for this court to look into the additional papers produced by the assessee for entertaining the contention and answering the same ." ..................................... In the instant case, as demonstrated above, the assessee had sufficient own funds and thereby it can safely be presumed that the investment was made by the assessee in its subsidiary company out of its own funds. For the aforesaid cumulative reasons, in the absence of any direct nexus between the interest bearing borrowed funds and....
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....ad) • JCIT vs. Beekay Engg. Corpn.: 325 ITR 384 (Chhattisgarh HC) • Mid-Day Multimedia Ltd. vs. DCIT: ITA No. 263C/Mum/2010 (Mum ITAT) • Akula and Co. vs. ITO: ITA No. 1786/Mds/2Q 09 (ITAT Chennai) In view of the above, it is submitted that the no disallowance of interest expenditure of Rs. 5,19,61,760/- as computed by the special auditor is called for. 21. On going through the entire matter, the AO held as under: "The assessee is not able to justify the allegations of special auditors in respect of diversion of funds to RCMIML through its investment in wholly owned subsidiary RCML and the sole purpose of the investment in RCML is to take over the liability of RHC towards capital commitment or repayment of existing liability of RHC. There is no dispute to the fact that no one can step in the shoe of the businessmen but a business expediency need to be established. In the present case, the assessee failed to establish the same except that the same is done as per investment agreement. The investment of funds by the assessee in RCML is used to funds RCMIML which already incurring loss. It was also established that investment in RCM....
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....ssment year is a separate assessment and res-judicata does not apply in the proceedings under the Income tax Act. The investigations that have been carried out by the AO and special auditor were not available to the Revenue in the assessment year cited by the Appellant. Now that some new and material facts have come on record, the Revenue is entitled to the fruits of that efforts. It would be irrational to expect that these very material findings be ignored simply because this information was not available in a previous assessment. 4. The next objection of the Appellant is that once a transaction is done as per legal norms it cannot be termed as a sham. The Appellant has stated that so long as the trans action is within the framework of the law, the authorities have no right to deny the tax benefit if any, arising to the assessee, notwithstanding that the transaction may result a mitigation of tax liabilities. 5. In this connection it is submitted that simply because a transaction is given a legal form, the factual matrix against which any judgement ne eds to be made cannot be ignored. 6. In this connection certain material facts that have been brought on....
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.... assessee company was not in accordance with guidance provided in its Memorandum of Association. 10. RCML (Mauritius) has shown investment of more than Rs. 580.74 crores in an entity established in British Virgin Islands as on 31.03.2016, which shows that consequential assets of RCML and the assessee company stands recoverable. But the assessee company disclosed such investment as permanently decline to NIL. 11. No permission from RBI, Income Tax Department and Enforcement Department were taken for reduction of share capital of Rs. 750 crores at the time of taking approval from Hon'ble Delhi High court an only an undertaking was submitted by Anil Saxena, Director that RCML will comply with them. Therefore, this is for the first time that the issue of write off Rs. 750 crores is considered as per provisions of the Income Tax Act, 1961. 4.5 Special Auditor has further observed as below: "Therefore, based on above facts and circumstances, it is observed that funds invested by the assessee company in RCML was not made for any business investment but to repay its associate company i.e. RHC by routing of funds through RCML (Mauritius) and booked as los....
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....rred by the assessee company is disallowed to the extent of utilization of funds in the such investments. During the year under consideration, the shareholder funds was Rs. 2539.97 Crores and borrowed funds of Rs. 931.93 crores & investment in subsidiaries are Rs. 3198.62 crores (net of provision). The shows that the shareholder funds were not sufficient to invest in subsidiary and borrowed funds were used for such investment. Detailed working to compute weighted average cost of commercial paper raised during and working of disallowance of interest was calculated for Rs. 5,19,61,760/- Therefore, the interest of Rs. 5,19,61,760/- on funds being interest expenditure not laid out or expended wholly and exclusively for the purpose of the business & charged to the profit & loss account under not no 24 "Finance Costs" is proposed to be disallowed under Section 37 of Income Tax Act, 1961. Long Term Capital Loss & Short Term Capital Loss Claimed From the review of computation of total income submitted, it is observed that the assessee company has claimed short term capital loss of Rs. 500 Crores and long term capital loss of Rs. 344,26,75,159/- on account of writ....
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....is as under: "1. The appellant is in receipt of written submission dated 28.06.2023 filed by the learned Department Representative (DR) in the captioned matter in respect of Ground of Appeal No. 3 to 3.5 - Disallowance of capital loss of Rs. 844.26 crore on write-off of preference shares held in Religare Capital Markets Ltd. ('RCML'). 2. In this regard, it is respectfully submitted that the allegation/ contentions of the learned DR in the aforesaid submissions filed is support of the impugned assessment order, wherein loss on account of write-off of preference share on account of Court approved capital reduction of RCML is disallowed, has already been dealt in the written submissions dated 01.08.2021 already placed on record by the appellant. 3. In continuation to our detailed submission dated 01.08.2021, the point wise brief rebuttal to the submissions made by the Id. DR are as under: Para of DR Sub. Allegations in DR Submissions Rebuttal to Revenue's allegations/ observations 1 - 3 The Id. D R has mentioned that the arguments of the appellant that investments were accepted as genuine in the hands of RCML in earlier years is not tenable si....
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.... that scheme of reorganization sanctioned by High Court operates as a judgment in rem, binding on all stakeholders [refer Marshall Sons & Co (India) Ltd v. v. ITO: 223 ITR 809 (SC); Dalmia Power Ltd vs. ACIT: 420 ITR 339 (SC); Ponni Sugar (Erode) Ltd vs. ACIT: WP 12510 / 2004 (Mad)]. Benches of the Tribunal have in the undemoted cases unanimously held that sanctioned scheme of arrangement cannot be doubted as sham /colourable device by the Revenue: • Aamby Valley Ltd vs ACIT: ITA No. l 148 / Del/ 2017 (Delhi Trib.) • Priap us Developers (P) Ltd vs ACIT: 176 ITD 223 (Delhi Trib.) • ACIT vs TVS Motors Co Ltd: 8 taxmann. com 288 (Chennai Trib.) • Electrocast Sales India Ltd vs DCIT: 170 ITD 507 (Kolkata Trib.) • Purbanchal Power Co Ltd vs DIT: ITA No. 201/Kol/2010 (Kolkata Trib.) - affirmed by Calcutta High Court in 145 taxmann. com 215 (2022) In view of the a foresaid, the appellant was constrained to write off its investment made in preference shares of RCML which stood extinguished as a result of binding scheme of reduction of share capital sanctioned by High Court and accordingly, the loss incurred on such writ....
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....ition of either 'international transaction' or ' specified domestic transaction'. Being so, reference made to the TP provision for determining ALP is misplaced. That apart, the Id. DR has erred in conveniently shifting the burden on the assessee by alleging that it was the duty of the appellant to prove the genuineness. Be that as it may, it is reiterated that all the possible documentary evidences including the following was placed on record by the appellant: a) A detailed working showing the date of purchase, purchase price, number of shares, and consequential capital gain on b) extinguishment (pg 945 of PB Vol III); c) A copy of allotment letter/ term sheets issued by RCML for issue of shares to the appellant (p g 946 - 947 of P B Vol III); d) The photocopy of the demat account showing the investment made (pg 952 - 955 of PB Vol III); e) The photocopies of the relevant extracts of bank statements showing payment for subscription of shares (pg 956 of PB Vol III); f) A copy of agreement between the appellant comp any, RHC Holdings Pvt. Ltd. (RHC) and RCML entered on 13.02.2012 along with first amendment dated 24.05.2012 and second amendment agreement dated 28.....
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.... It was, in fact, the appellant' s responsibility to assist the subsidiaries inasmuch as the appellant was holding 100 % shares of RCML, which, in turn, held 100 % shares of the foreign subsidiaries. Further, as explained in detail in the written submissions, the funds were paid to RHC as repayment of commitments met by RHC for supporting RCML at request of the appellant. RHC was not the ultimate beneficiary as alleged and that, too, at the behest of the appellant suffering the losses. 24. We have perused the special audit report filed u/s 142(2a) of the Income Tax Act, 1961, Forensic Audit Report in the case of the assessee, order of SEBI u/s 11(1), u/s 11(4), u/s 11B of the SEBI Act, 1992, orders of the revenue authorities, submissions of both the counsels, written submissions and other facts on record. 25. The assessee invested Rs. 250 Cr. on account of purchase of 2.5 crores of shares each worth Rs. 10/- having a premium of Rs. 90/- per share in March 2011. The assessee has made further investments in March 2013 of Rs. 500 Cr. of 50 crores of shares each worth Rs. 10/- in its wholly owned subsidiary, M/s Religare Capital Market Ltd. (RCML). The RCML further owne....
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....ctions, exemptions and treaty benefits provided under the Income Tax Act. It is a process of arranging the financial activities and transactions in such a way that it legally minimizes the amount of the taxes, the taxable entities required to pay. It is an acceptable legitimate practice which allows the taxpayers to use the Income Tax Act to their advantage while observing the due compliances with the Act. Tax planning also involves processes namely, analysis, restructuring, investment, expansion, capitalization and other legal processes. At the same time, the concept of tax avoidance is primarily an Act of minimizing one's tax liability by legitimate methods and procedures which are within the contours of law and the legal proposition. It would be a well thought plan within the legal domain. Tax avoidance also involves structuring the financial affairs in such a way it complies with the letter of the law. It is for the tax authorities to unravel the actual working, structure and scheme of the assessees to bring such incomes to tax by collating, examining and investigating the affairs of the entity and collection of tangible evidences. Tax evasion is the activity in which the entit....
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.... through the forensic report in the case of the assessee submitted to SEBI which found out diversion of funds by the assessee. The relevant portion of the order of SEB I dated 14.03.2019 is reproduced as under: "1. Securities and Exchange Board of India (hereinafter referred to as "SEBI") received complaints, inter-alia, alleging financial mismanagement and diversion of funds in Religare Finvest Ltd. (hereinafter referred to as "RFL"), a subsidiary of Religare Enterprises Limited (hereinafter referred to as "REL"), a listed company, for the benefit of promoters/group companies of REL. The complaints alleged inter alia the following: a) RFL had not complied with its Board approved investment policy with respect to fixed deposits ("FDs") and that FDs amounting to Rs. 750 Crores (approx.) placed with Lakshmi Vilas Bank (hereinafter referred to as "LVB") had been adjusted by LVB against loan availed by two group companies of REL' s promoters. b) Investment by RFL in Non-Convertible Debentures ("NCDs") of OSPL Infradeal Private Limited (hereinafter referred to as "OSPL") amounting to Rs. 200 Crores was allegedly not consistent with the Board approved inves....
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....z. Pricewaterhouse Coopers (Pw C) had qualified their opinion on the financials of REL for FY 2016-17 highlighting the amounts doubtful of recovery to the tune of Rs. 1,846 Crores and highlighted directions from the RBI dated January 27, 2017 regarding concerns over the corporate loan portfolio of RFL. 2. In order to find the ultimate utilization of funds of RFL, the entire transactions in the bank accounts of the companies and the promoter/ promoter connected entities needed to be examined in detail from FY 2008-09 to FY 2017-18. This required analysis of voluminous data in trailing of funds in the bank statements of the RFL, promoter/ promoter connected entities and any other entities that have significant financial transactions with these entities along with the analysis of nature of transactions and underlying documents. Hence, SEBI appointed MSA Probe Consulting Pvt. Ltd. ("MSA") as a Forensic Auditor on May 10, 2018 to examine the alleged diversion of funds from REL/ its subsidiaries for the benefit of promoter/promoter connected entities. 3. MSA submitted its final report in the matter of REL/ RFL on December 12, 2018 (hereinafter referred to as " The audit....
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....all bank with total net worth (aggregate of Share Capital and Reserves & Surplus) of Rs. 1,763.59 Crores as on March 31, 2016. (f) Thus, as far as safety of the deposits is concerned, placing fixed deposits of Rs. 750 Crores at a single bank with relatively low net- worth is difficult to justify. Also, all the other FDs opened by RFL were with large sized banks. The choice of a much smaller bank for creating fixed deposits of such a huge amount against which it had not taken any loan itself or had not given it as security, raises doubts about its true purpose. (iii) The Notice nos. 24 and 25 (viz. Shri Malvinder Mohan Singh and Shri Shivinder Mohan Singh) shall not associate themselves with the affairs of REL and RFL, in any manner whatsoever, till further directions." 32 We have gone through the order of Hon'ble High Court in Company Petition No. 680 of 2014 in the matter of Section 100 to Section 105 of Companies Act, 1956 r.w.r. 46 and 47 of the Companies (Court) Rules, 1959. The petition filed pertains to Companies Act by which the Hon'ble High Court agreed the reduction in the share capital in accordance with the Companies Act. The assessee was authorized ....
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....nts. The sole purpose of the investment in RCML is to take over the liability of RHC towards capital commitment or repayment of existing liability of RHC and investment made by the assessee company are treated as loss. We are in agreement with the submissions that anti-avoidance provisions provides that the primary onus lies upon the assesses to show that the transaction it related party is a arm's length such a nature that would be as carried between unrelated entities. The assessee states that it be the ultimate holding company was obligated to support its subsidiary companies likes RCML to revive their business operations, if so, the entity RHC Holdings Pvt. Ltd. which is also part of this multi-national group and it is its responsibility to support the step-down subsidiaries as much it is that of the assessee. From the entire facts, it is clear that transaction has been so arranged that RHC Holdings Limited is the ultimate beneficiary of this entire transaction leaving the assessee to incur losses and hence, the capital loss claimed by the assessee cannot be allowed. 34. In the result, the appeal of the assessee on this ground is dismissed. With regard to the disallowance of....
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.... IV); • Copy of the original Joint Venture agreement dated 19.06.2007 read with Novation Agreement dated 23.05.2008 entered, inter alia, between the appellant with Aegon for investment in ARLIC (JV Agreement) (refer pg 1374-1485 of PB Vol IV); • Copy of the restated joint venture agreement entered by the appellant with Aegon for investment in ARLIC on 30.03.2013 (refer pg 1504-1531 of PB Vol IV); • Copy of the restated joint venture agreement entered by the appellant with Aegon for investment in ARLIC on 25.08.2014 (refer pg 1532-1569 of PB Vol IV); • Copy of first share purchase agreement entered into between the company & Benett Coleman & Co. Ltd. on 08.05.2015 (refer pg 1617-1646 of PB Vol IV); • Copy of secondary share purchase agreement entered on 08th May 2015 between the appellant company and Bennett, Coleman & Co. Ltd (refer pg 1647-1687 of PB Vol IV); • Copy of the demat account showing the shares held by the appellant and sold during the year under consideration (refer pg 1700 -1707 of PB Vol IV); • The relevant extracts of the copies of the bank statements and the audited balance s....
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....siness or profession, but does not include-any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession;" 5.13 The term 'stock in trade' has not been defined under the Act. In general parlance ' stock-in trade' is understood as an asset, which is held with an objective to deal therein. 5.14 'Stock-in- trade' is something "in which" a businessman deals, whereas a 'capital asset' is something "with which" he deals. The essential characteristic of stock-in-trade is that it must be a commodity in which there is dealing as distinguished from a commodity with which the busine ss is carried on, viz., from the exploitation of which income is derived [see H. Mohammed & Co. vs. CIT 107 ITR 637 (Guj.)]. 5.15 The nature of asset, whether 'stock in trade' or 'capital asset' primarily depends upon the intention with which investment is made. If the intention behind holding an asset is to deal in it, the same qualifies as 'stock in trade' and if the asset is held with an intent not to deal the rein but to reap bene fit through holding the same, by way of controlling interest, in the form of capital appreciation, deriving ren....
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....for a period of more than 12 months immediately preceding date of its transfer, if the assessee desires to treat income arising from transfer as capital gain, same shall not be put to dispute by assessing officer subject to condition that stand taken by assessee in a particular year would be followed in subsequent years. 5.19 It has similarly been held in the following cases: • • Sutlej Cotton Mills Supply A gency Ltd: 100 ITR 706 (SC) • Karam Chand Thapar & Bros. (P) Limited v. CIT: 82 ITR 899 (SC) • CIT v. Rewashankar A. Kothari: 283 ITR 338 (Guj.) • CIT vs. Sahara India Housing Corporation Ltd: ITA No. 740/2009 (Del.) • ITO V. Rohit Anand: 34 SOT 42 (Del.) affirmed in 327 ITR 445 (Del.) • CIT v. Vinay Mittal: 208 Taxman 106 (Del.)- Departmental SLP dismissed • Jindal Photo Investment Ltd.: 334 IT R 307 (St.) (SC) • CIT v. Devasan Investment Pvt. Ltd.: 365 ITR 452 (Del) (Supreme Court has dismissed the Department's SLP vide CC 17946/2014: 229 Taxman 496) • CIT v. Consolidated Finvest and Holding Ltd: 337 ITR 264 (Del.) • CIT v. Av....
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.... on transfer of shares have be en held to be capital gains after taking into consideration the aforesaid CBDT Circulars dated 29.02.2016 and 02.05.2016: • • PCIT v. Ramniwas Ramjivan Kasat: 248 Taxman 484 (Guj.) • PCIT vs. Bhanupr asad D Trivedi (HUF): 87 taxmann.com 137 (Guj)- Revenue's SLP dismissed in 256 Taman 292 (SC); • Suresh Babulal Shah (HUF) vs. DCIT: 161 ITD 514 (Pune) • DCIT vs. Mahender Kumar Bader: 48 ITR(T) 596 (Jaipur) • Sh. Anil Kumar Goel vs. ACIT: ITA No. 3142/Mds/2016 (Chennai) • ACIT v. Sachin Tendulkar: 163 ITD 65 (Mum.) • ACIT v. Puran Associates Pvt. Ltd.: ITA. No.3078/Del/2011(Del. Trib.) Legal position applied to the facts of the present case; 5.26 The appellant is, undisputedly, engage d in business of financing and is not a dealer in various instruments of investments. Purchase of shares/ securities is not at all the business of the appellant company. 5.27 It is also a matter of record, that the appellant made investment in shares of ARLIC as long-term strategic investment. The intent of making such investment was not to trad....
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....and funding on the basis of pro-rata shares (refer clause 16 of JV Agreement read with subsequent amendments)- refer pages 1396- 1397 of PB Vol IV. Trader shall not commit any such funding since the objective of the trader is short-term of earning gains/ profits by trading in shares. • Under the JV Agreement, there were substantive restrictions on transfer of shares including (refer clauses 17 to 21 of JV Agreement read with subsequent amendments) the following refer pages 1397- 1407 of PB Vol IV: - Transfer of shares was not permitted except in circumstances, specified (clause 17.1); - Shares can only be transferred subject to compliance of conditions prescribed in the JV Agreement and not otherwise (clause 17.2-17.3); - Transfer could not be made freely to anyone but to only eligible third parties which are prescribed in schedule to the JV Agreement (clause 17.2); - Transfer could be made after expiry of lock-in period of 9 year (subject to exceptions) (clause 18; - Specific exit mechanism had been prescribed and plain/ blanket sale was not permissible (clause 20); - If appellant seeks to transfer the shares, firs....
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....est income, capital appreciation over a period of time come under the purview of 'investments' as against 'stock in trade'. Accounting Standard 13 mandates investments to be valued at cost. On the other hand, in the case of securities held as stock-in-trade, valuation is required to be done as per Accounting Standard-2 on "Valuation of Inventories", which requires inventory to be valued at lower of cost or net realizable value. In terms of section 211 of the Companies Act, 1956, it is mandatory for every corporate-assessee to strictly follow the aforesaid accounting standards. The appellant has consistently followed the Accounting Standard 13 and value d the investments at cost and not at lower of cost or net realizable value. The accounting treatment followed by the appellant has always been accepted by the Revenue in the earlier year(s). Further, the Statutory Auditors in their Audit Report(s) over the years have also certified that the aforesaid accounting treatment to be correct, and has also been accepted by the Department. (g) In the audited profit and loss account, only net gain/loss on transfer of securities is shown, which is strictly in....
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.... 5.32 The Bombay High Court in the case of Accra Investments (P) Ltd. v. ITO: 359 ITR 116, held that profit arising from sale of shares of a company acquired by an assessee-investment company, in order to have controlling/managing interest in such company, would be taxable as capital gains and not business income (refer pages 40-49 of CLPB). 5.33 It has been held likewise by the Karnataka High Court in the case of CIT v. Nadatur Holdings and Investment (P) Ltd.: 210 Taxman 597. 5.34 The apex Court in the case of Ram N arain So ns (P.) Ltd. v. CIT: 41 ITR 534 held that where the shares were purchased for acquisition of managing agency, sale of some of the shares could not be treated as an adventure in the nature of trade to result in business income (refer pages 36-39 of CLPB). 5.35 The Delhi Bench of Tribunal in the case of Everplus Securities and Finance Ltd. vs DCIT: 101 ITD 151 held that investment in shares to acquire controlling interest did not mean that assessee was in the business of investment in shares. 5.36 In the case of Slocum Investment (P) Ltd. vs. DCIT: 106 ITD 1 before the Delhi Bench of the Tribunal, the assessee, being an....
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....the special auditor as followed by the assessing officer/DRP is that appellant was actively participating in the business of ARLIC, inasmuch as the appellant controlled the Board and other committees, the appellant had right to appoint CEO, consent of appellant was required for merger/ demerger, etc., and thus any gain from transfer of shares of ARLIC is to be allegedly assessed as business income under section 28(iv)/(va) of the Act. 5.41 The aforesaid allegation/observations are patently erroneous for the following reasons: 5.42 It is reiterated that the intention of the appellant in making investment in ARLIC was not for the purpose of carrying on insurance business but to co-promote a company as a joint venture with a foreign partner to carry on insurance business, with the underlying intent to enjoy return there from in the form of dividend and/or long-term appreciation in value of such strategic investment. It is submitted that the rights and privileges accorded to the appellant pursuant to the investment of 44% in ARLIC was merely incidental to acquiring controlling stake in the company and were merely in the nature of shareholder rights. 5.43 It i....
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....mpany is a parent company, that company's executive director(s) should lead the group and the company's shareholder's influence will generally be employed to that end. This obviously implies a restriction on the autonomy of the subsidiary's executive directors. Such a restriction, which is the inevitable consequences of any group structure, is gene rally accepted, both in corporate and tax laws. However, where the subsidiary's executive directors' competences are transferred to other persons/bodies or where the subsidiary's executive directors' decision making has become fully subordinate to the Holding Company with the consequence that the subsidiary's executive directors are no more than puppets then the turning point in respect of the subsidiary's place of residence comes about. ...................... 74..............The directors of the subsidiary under their Articles are the managers of the companies. If new directors are appointed even at the request of the parent company and even if such directors were removable by the parent company, such directors of the subsidiary will owe their duty to their companies (subsidiaries). They are not to be dictated ....
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.... intent to reap benefits on account of capital appreciation and not with an intent to engage in the business of sale-purchase of shares. This is clearly evident from the fact that investment in shares of Joint Venture was consistently being disclosed/ reflected under the head 'Non-Current Investment'/ 'capital asset' as opposed to 'stock in trade' in the financial statements of the appellant since financial year 2007-08 and which was always accepted by the Department in the past years. Further, the rights and privileges allowed to the appellant was merely incidental to its acquiring shareholding in ARLIC and were merely in the nature of shareholder rights. The business of the investee/ARLIC cannot be regarded as the business of the appellant merely because the appellant may exercise certain shareholder influence. 5.47 The assessing officer/ special auditor have to tally failed to appreciate the aforesaid settled principles. In view of the aforesaid, it is respectfully submitted that the appellant has rightly declared the gains arising on transfer of shares of joint venture under the head 'Capital Gains' and the action of the assessing officer in recharacterizing the gains ....
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....rsed. Expenses in connection with transfer- allowable as deduction 5.55 Further, the assessing officer also erred in disallowing professional fee paid to Credit Suisse Securities India Pvt. Ltd. ('CSS') holding that the business expediency of the said amount could not be explained as sale price for transfer of shares was pre-decided. 5.56 It is pertinent to mention that the impugned assessment order does not assign any reason for disallowance of the fee paid, other than stating that the sale price was pre-decided and hence fee paid to CSS is being disallowed, which is patently erroneous and unsustainable for the following reasons: 5.57 The appellant had paid professional advisory fee of Rs. 21.30 crores to CSS in connection with transfer of shares of ARLIC in terms of the agreement entered into with CSS for their assistance in sale of shares of ARLIC. Copy of agreement between appellant and CSS is placed at pg 1750-1756 of PB Vol IV and copy of invoice is placed at pages 1749 of PB Vol IV. The same is thus clearly allowable as deduction while computing capital gains under section 48 of the Act, which aspect has not been disputed by the assessing ....
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....ts, advise/ guidance on various terms and conditions including warranties, indemnification clauses, etc., to the agreed upon, terms relating to mode and manner of discharge of consideration etc. 5.63 The agreement between the appellant and CSS dated 19.09.2014 (pg 1750-1756 of PB Vol IV) clearly defines the scope of CSS in the transaction of sale of shares of ARLIC and provides as under: - CSS would act as exclusive financial advisor with respect of transaction involving appellant's stake in ARLIC; - The services of CSS would include: (a) Analysing and evaluating the business, operations and financial position of ARLIC; (b) Preparing and implementing a marketing plan relation to sale of ARLIC shares; (c) Coordinating the data room and due diligence investigations of potential purchasers of ARLIC shares; (d) Evaluating proposals that are received from Potential Purchasers; and (e) Structuring and negotiating the sale terms etc. 5.64 Further, TDS has been deducted and de posited by the appellant on the payment made to CSS details of which are at pages 1757-1758 of PB Vol IV. 5.65 It is submitted that the....
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....ohan Singh 100 0.00 Mr. Shivinder Mahan Singh 100 0.00 Total 5,050,000 100.00 43. We have also gone through the share purchase agreement between the assessee and the purchaser. We have gone through the conditions precedence in the agreement at page no. 1631 of PB. The relevant portion is as under: "(e) The Seller Company and the Company have informed the Purchaser that the Seller Company, Aegon and the Company have agreed that the Company shall and Aegon (to the extent it is able) shall cause the Company to: (i) complete the following actions within a maximum period of 90 days from the receipt of the Name Change Approval Date ("Name Change Period"). (x) remove the term "Religare" from the name of the Company; (y) remove the term "Religare" from the brand, logo, letterhead and all other branded mate rial of the Company, provided that the Company shall not be required to remove the term "Religare" or its logo from: (1) any existing or executed customer agreements, policies, written customer communications, customer documentation or other like documents that are in existence as on and including the date of issuance of the fresh cer....
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.... generally include immovable property, fixed assets, intellectual property, goodwill, know-how, incorporeal rights, debts and stock. The effect of a sale of business is such that the company as a legal entity remains and only those assets which were not sold, if any, remain in such company. Comparison Table 47. A sale of shares and a sale of business may be simply illustrated in the following table : Subject Selling Shares Selling Business Ownership of the Company Ownership of the company will change. The purchaser will now own the company by virtue of their newly acquired shareholding in the Company. Ownership of the company remains unchanged. The incorporator will still hold all of the shares in the company however, such company will no longer consist of the operating business. Ownership of the Business/Assets The business/assets will remain under the ownership of the Company. The business/assets will be transferred to the purchaser. Liabilities The purchaser will assume all of the assets and the liabilities pertaining to the Company. The purchaser may exclude certain liabilities relating to the business. If the purchaser does assume certain....
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.... expense Effective Rate of Interest Excessive Rate of interest Excess Amount of Interest (A) (B) (C) (D = A*C/B) 10,33,19,165 18.27% 4.27% 7,08,90,686 53. Therefore, the excess interest payment of Rs. 7,08,90,686/- i.e. 4.27% has been treated by the TPO to be excessive and unreasonable in terms of Section 40A(2)(b) and added back to the income of the assessee company. 54. Before the revenue authorities, the assessee submitted that during the previous year, the assessee allotted 8,455 Non-Convertible Debentures (NCDs), having face value of Rs. 10,00,000 to the following two entities and received total consideration of Rs. 845.50 crores as under: Particulars NCDs Amount Religare Securities Limited [Zero Coupon NCDs with yield rate of 14%] 3,000 Rs. 300 crores Standard Chartered Bank ['Regular' NCDs with yield rate of 14%] 5,455 Rs. 545.50 crores Total 8,455 Rs. 845.50 crores 55. Out of the aforesaid 8,445 NCDs issued, 3,372 NCDs were redeemed in the subsequent Assessme nt years) 2014-15 to 2016-17 as under: Particulars Total NCDs issued in AY 2013-14 NCDs redeemed in AY 2014-15 NCDs transferred ....
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....een classified as NCDs with "Zero Coupon Rate" as against 2,723 NCDs issued to Standard Chartered Bank with 14% p.a. coupon rate. Further, the terms of the allotment specifically provided that the NCDs issued to RSL was in the nature of "Zero Coupon Bond" with yield of 14% p.a. The relevant terms of the Debenture Trust deed dated 14.05.2013, in respect of 3000 NCDs issued to RSL in assessment year 2012-14 is extracted as under: ................... 2. issued, subscribed and paid-up ............... C. With a view to meet the company's requirements of funds and refinancing of existing debt, the company intended to raise certain funds by issuing Secured Rated Listed Redeemable Non-Convertible Debentures of the aggregate nominal value of Rs. 300,00,00,000 (Rupees Three Hundred Crores only) as follows: S. No Tenure Amount (Rs. In Crs.) No. NCDs Face Value per NCD (Rs.) Term Sheet/Information Memorandum dated Rate of interest (p.a.) and mode of interest payment date/yield on the Debentures (1) 5 years 300 3,000 Rs. 10,00,000 March 26, 2013 Zero coupon/yield at the rate of 14% p.a. Total 300 Cr. &n....
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....een same i.e. 14% only. The difference of Rs.7,08,90,686/- is on account of compound interest paid against the zero-co upon bond to Religare Securities Limited. In case of the regular bond issued at the rate of 14% to Standard Chartered bank the interest, was paid to the company against the debenture issued on annual basis. On the other hand, no interest on annual basis was paid to Religare Securities Limited as the payment in this case is to be made at the time of maturity when Religare Securities Limited supposed to receive the principal amount plus the accumulated compound interest over the period. Thus observing, the ld. DRP directed the AO to verify the assessee's claim on record that payment @ 14% interest rate was payable at the time of maturity under the said bond. 62. Since, the matter has been referred to the AO for examination, we refrain to interfere with the directions of the ld. DRP on this issue. 63. In the result, the appeal of the assessee on this ground is allowed for statistical purpose. Transfer Pricing Issue: Ground No. 8 ALP on Legal & Advisory Services: 64. The TPO made adjustment of Rs.7,62,966/- after determination of ALP for receipt o....