TaxTMI 
TaxTMI 
2024 (3) TMI 201
X X X X Extracts X X X X
X X X X Extracts X X X X
....in short 'WEPL'] and M/s. WS Alloy Holding Pvt. Ltd. [in short 'WSAHPL'] stood amalgamated with M/s. Welspun Steel Ltd [in short 'WSL' or 'assessee'] from the appointed date 01.04.2016. The assessee, M/s WSL, is therefore the successor company of M/s. WEPL. The assessee accordingly filed its return of income u/s. 139(1) of the Act on 28.11.2017 declaring income at Rs. 429,21,64,250/- which was later on revised to Rs. 472,53,77,990/-. The case of the assessee was originally selected for scrutiny by issue of notice u/s 143(2) of the Act dated 10.09.2018. The proceedings however stood abated as a consequence of the search action u/s 132 conducted on 30.06.2017 upon the Welspun Group. Pursuant thereto, notice u/s 153A of the Act was issued on 01.08.2018. In response, the assessee filed its return of income on 24.08.2018 declaring income of Rs. 472,53,77,990/-. 3. From the facts on record, it is noted that the WEPL (which stood merged with the assessee) had claimed capital loss of Rs. 423 crore on sale of shares of M/s. Welspun Energy Chhattisgarh Limited [ in short 'WECL'] to its related entity, M/s. Solarsys Infra Projects Pvt. Ltd. [ in short 'SIPPL']. It is noted that WEPL had so....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is noted that, the said loss of Rs. 300.5 crores were disallowed by WECL voluntarily in its return of income filed for AY 2015-16 and was not carried forward as well. 6. Subsequently, WEPL is noted to have again advanced loans aggregating to Rs. 305.20 crores to WECL on different dates during the period from September 2014 to November 2016. It is noted that, majority of the loan viz., Rs. 296.64 crores were advanced prior to 31st March, 2016. These loans received by WECL from its holding company was utilized for making downstream investments in three (3) project SPVs namely (i) M/s. Welspun Energy UP Pvt. Ltd. (ii) M/s. Welspun Energy MP Pvt. Ltd. and (iii) M/s. Welspun Energy Anuppur Pvt. Ltd. by combination of equity infusion and interest free loans. Later on, in the month of November 2016, these loans provided by WEPL to WECL for funding the project SPVs were converted into OCPS. WEPL also invested further sum of Rs. 5.40 cr on 17.03.2017 in OCPS of WECL. Subsequently, vide Share Purchase Agreement [in short 'SPA'] dated 29.03.2017, WEPL sold the entire OCPS of Rs. 686 crores (375 + 305.20 +5.40) held in WECL to SIPPL for an aggregate consideration of Rs. 300 crores. It is n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ial loss to reduce its capital gain liability. The AO was of the view that, the effective investment of WECL in three SPVs was only Rs. 300 crores and that WECL ultimately sold the investment in three SPVs to Adani Infra (India) Limited in 2019 for Rs. 295 crores. In AO's view therefore, if the real transaction was seen, there was an overall loss of only Rs. 5 crores whereas, the assessee claimed an higher artificial loss by taking refuge to the earlier investment of Rs. 375 crores which, according to him, was only on paper. The AO accordingly held that there was enough direct and circumstantial evidence surrounding the transaction, which showed that it was a colorable device deployed by the assessee to create a notional loss. The AO thus disregarded the transaction and disallowed the loss. For doing so, the AO referred to the decisions of the Hon'ble Apex Court in the cases of Sumati Dayal Vs CIT (214 ITR 801), Durgaprasad More (82 ITR 540), McDowell & Co. Ltd Vs CTO (154 ITR 148) and Vodafone International Holdings BV vs. UOI (204 Taxman 408). The AO also relied upon the decision of Hon'ble Karnataka High Court in the case of Wipro Ltd (50 taxmann.com 421) for disallowing the imp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rther contended that, the reliance placed by the Revenue on the statement of Shri Rajesh Verma was misplaced for twin reasons, viz.; (a) he was only a senior accounts staff and a non-managerial person and thus he could not be expected to explain the business rationale behind the decision which is taken in closed doors after much deliberation by the management and (b) he had only averred that he is unable to answer these questions and that nowhere he had stated anything adverse or admitted to any wrong doing. He further emphasized on the fact that, the Revenue was under mistaken assumption of fact that the loss arising because of the merger of WERPL with WEPL was claimed by the assessee. He particularly invited our attention to Para 10.21 of the Ld. CIT(A)'s order wherein it was noted that the loss of Rs. 300.5 crores debited by WECL as a consequence of this merger had been disallowed voluntarily and also not carried forward. The Ld. AR further contended that, the income-tax assessment of WEPL for AY 2015-16, was simultaneously completed by the same AO u/s 153A/143(3) of the Act and he showed us that no adverse inference was drawn either in respect of these transactions between WEPL....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 14. The above computation comprises of three material components viz., (i) cost of acquisition of first tranche of OCPS for Rs. 375 crores, (ii) cost of acquisition of second tranche of OCPS for Rs. 310.60 crores [Rs.305.20 crores + Rs. 5.40 crores], and (iii) sale consideration of Rs. 300 crores, which after indexation resulted in the impugned aggregate capital loss of Rs. 423 crores. It is noted that, the AO has held that this entire transaction of issuing OCPS, scheme of merger and subsequent sale of OCPS was a pre-arranged colorable device undertaken with the sole intent to create an artificial loss and avoid tax. 15. For arriving at the above finding, the AO is noted to have primarily doubted the initial investment of Rs. 375 crores made in OCPS of WECL by WEPL, holding it to be merely on paper. The AO as well as the Ld. DR has heavily stressed on the fact that, the investment so made was routed through wholly owned subsidiaries and received back by WEPL on the same date, which, according to them, showed that the transaction was not genuine. Although at first blush, this circular movement of funds did appear to be unnatural but later on upon being apprised of the rational....
X X X X Extracts X X X X
X X X X Extracts X X X X
....PL had first paid sum of Rs. 375 crores to WECL by subscribing to their OCPS, which in turn, had funded a SPV, WERPL again by way of OCPS. These acts of issuing OCPS is therefore noted to have created legal rights and obligations between the parties, which cannot be arbitrarily disregarded. The primary business rationale for the capital infusion in WERPL through WECL was to form an SPV to undertake specific project and ensure that the said SPV would meet the expected net-worth criteria as a part of performance qualifications. The Ld. AR further pointed out that, until the project was obtained and undertaken, there was no purpose for this SPV to keep the funds lying idle and therefore the same was advanced back by way of interest free loan to WEPL. The rationale for giving interest free loan was that, once any project was awarded to WERPL, then WEPL would repay the monies back to WERPL for undertaking the said project. Until then, the monies would be purposefully deployed within the group. 17. Having regard to the foregoing, we find merit in the submission of the Ld. AR that the acts involving issuance of OCPS by WECL and WERPL and thereafter the loan given by WERPL to WEPL was b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Companies Act, 2013, WECL could not be issued shares of its holding company i.e. WEPL in lieu of the OCPS held in WERPL and hence the entire investment value was provided for as a loss, as a consequence of the merger. The loss of Rs. 300.50 crores, which was debited in the Profit & Loss Account of WECL, was shown to have been disallowed voluntarily and the said capital loss was not even carried forward by WECL. The relevant findings of the Ld. CIT(A) in this regard are noted to be as under: - "10.21 Also, on perusal of the submissions made by the assessee, it is also noticed that due to merger of WERPL with WEPL, the loss suffered by WECL during the FY 2014-15 was not claimed or carried forward by WECL while filing its return of income for the FY 2014-15. It is seen that WECL, while debiting an expense of Rs. 300,05,00,000/- as "loss on cancellation of OCPS on merger', has re-cognized this loss as capital loss and the same has not been claimed as a deduction. This loss has also not been carried forward. The AO has completely ignored this fact." 20. Before us, the Ld. CIT, DR was unable to controvert the above finding nor was he able to show that this loss had been se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sly, is to save tax. Broadly speaking, it may be defined as an exercise, which a taxpayer undertakes, with a view to meet his tax obligations in an orderly, systematic, disciplined and scientific manner. The means which he adopts for reducing his tax burdens have to be legitimate and lawful and the transactions which he enters into have to be bona fide genuine. In this context, the following observations of the Hon'ble Supreme Court in CIT v. B.M. Kharwar [1969] 72 ITR 603(SC) can aptly be quoted, which are as follows: "It is now well-settled that taxing authorities are not entitled to ignore the legal character of the transaction which is the source of the receipt and to proceed on what they regard as the substance of the matter. The taxing authority is entitled to and indeed is bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device and legal relationship it is open to the taxing authorities to unravel the device and determine the true character of the relationship. But the legal effect of the transaction cannot be displaced by probing into the substance of the transaction". 23. Having regard to the ab....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to bid for power projects. Having regard to the foregoing explanation, it is noted that the scheme of merger cannot be alleged to lack commercial rationale. 25. We also note that the scheme of merger placed before the Hon'ble High Court contained the business rationale, which was never disputed by any statutory authorities, at the material time when the scheme was sanctioned. Also, no such adverse finding was rendered by the AO in the income-tax assessment completed u/s 153A/143(3) for AY 2015-16 i.e. the year of amalgamation, copy of which is found placed at Pages 84 to 93 of Paper-book. Hence, according to us, the allegation now being levelled that the scheme undertaken in AY 2015-16 was a colorable device, that too in the income-tax assessment for AY 2017-18, cannot be entertained. Further, as noted above, there was no undue tax benefit availed by this scheme as the purported loss being referred to by the AO had already been disallowed by WECL and therefore the allegation of tax avoidance is noted to have no legs to stand on. The Ld. CIT(A) is also noted to have analyzed the scheme of amalgamation from all angles and held that there was no adverse tax implication or undue ta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rtible into money or not, arising from business or the exercise of profession." 10.17.2 Section 28(iv) of the Act specifies the following conditions which need to be satisfied before making any addition which are as under: (i) there must be benefit or perquisite; (ii) it must arise out of the business or profession carried on by the recipient, and (iii) it must be revenue in nature seen " 10.17.3 In the instant case, it is noticed that no benefit or perquisite is arising out of the scheme of amalgamation. The assessee was indirectly holding or in other words was the ultimate holding company having the shares of WERPL through its 100% subsidiary which after the amalgamation ted to the direct ownership of the assets in the assessee's name. In the whole process, the assessee has neither become richer nor poorer. If any benefit or perquisite does not arise from the business or profession carried on by the assessee, the provisions of Section 28(iv) in any case cannot be applied. it is evident that the intention of the Legislature is not to apply the provisions of Section 28(iv) to a case where there is increase in the general reserves arising....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct to this transaction of amalgamation. It is evident that the capital reserve does not fall within the definition of 'Income' under Section 2(24) of Income Tax Act, 1961 and when a receipt is not on in the character of income it cannot form part of the book profit under Section 115JB of the Act, 1961. The same was held by Hon'ble Calcutta High Court in the case of PCIT vs. Ankit Metal and Power Ltd., (109 Taxmann.com 93) and by the Hon'ble Mumbai ITAT in case of Batliboi Limited Vs DCIT (ITAT Mumbai) ITA No. 5428/Mum/2015. In view of the above since the capital reserve, which arose in amalgamation, is not in nature of income and is not a revaluation reserve, the same cannot be included in book profit it u/s 115JB of the Act. 10.20 Further, as regards the cessation of liability in respect of the loan of Rs. 375 crore taken from WERPL by WEPL, owing to the merger, the assessee has explained: that the: same has been neutralized by the corresponding asset being taken over by WEPL. With regard to waiver of 'term loan' or any other loan in contrast to 'working capital loan', it was held as not chargeable to tax under section 41(1) in Mahindra & Mahindra Ltd. v. CIT [2003] 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
....evenue was unable to point out any infirmity or error in the above analysis undertaken by the Ld. CIT(A). Now, we come to the statement of Mr. Rajesh Verma, which forms the main basis of the AO as well as Ld. CIT, DR, to justify their contention that the scheme of merger between WEPL and WERPL lacked commercial rationale. Having perused the statement of Mr. Rajesh Verma, which has been extracted at Pages 14 to 18 of assessment order, we note that the concerned person never admitted to any tax avoidance or stated anything incriminating. Rather, he pleaded ignorance and stated that he was unaware about the commercial rationale for undertaking this transaction. The Ld. AR has pointed out that, Mr. Rajesh Verma held the designation of Senior Vice President (Accounts) and was therefore involved in accounting work of the WEPL. Since Mr. Rajesh Verma was not a part of the Board of Directors or senior management of WEPL who are in-charge of taking strategic business decisions, he was unable to answer the question posed by the Investigating authority. Having regard to the foregoing facts, we thus find ourselves to be in agreement with the following findings of the Ld. CIT(A) negating the re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s having been carried forward to AY 2017-18 for being set-off against capital gains earned in AY 2017-18." 28. For the above reasons, we therefore uphold the findings of the Ld. CIT(A) that, the acts involving issuance of OCPS of Rs. 375 crores in October 2014, and the subsequent scheme of merger undertaken in AY 2015-16; was neither a colorable device nor did it result in creation of any artificial loss. Accordingly, the cost of OCPS of Rs. 375 crores subscribed by WEPL in the first tranche cannot be disregarded or be said to exist only on paper. 29. Now we come to the second tranche of cost of acquisition of OCPS of Rs. 310.60 crores. The facts show that, the assessee had initially granted loan in several tranches to WECL, majorly from September 2014 to March 2016. Later on, these loans were converted to OCPS at face value in November 2016. The AO however suspected foul play because the assessee had sold the entire OCPS in the month of March 2017 to related entity SSIPL, and this particular tranche was subscribed only in November 2016. This according to AO was undertaken with the sole intent to generate loss and reduce capital gains tax liability. On the given facts before ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ss profile as per the Net Asset Value ('NAV') Method. Although this valuation report is noted to have been placed by the assessee before the AO, but no defect or infirmity therein has been pointed out by the AO. According to us therefore, when the sale consideration agreed upon between related parties was supported by an independent valuation report obtained from an expert in this field, there was no reason to allege it to be under-valued, unless the Revenue points out any defect or error in the valuation methodology. 31. As far as the MOU with Adani is concerned, we note that the initial MOU involved sale of shares of WECL for Rs. 422 crores, but the said MOU was ultimately never acted upon. The Ld. AR explained that, when the MOU was entered into in October 2014, the market fundamentals favoured the thermal energy business but by 2016, the business factors had become unfavourable. He showed us that, in 2014, the WECL held vital permissions from regulatory authorities to undertake coal based power projects, which made it an attractive investment for third parties like Adani. However, the National Green Tribunal, vide order dated 21st December 2016, copy of which is found at Pag....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ur corners of law. Indeed, the assessee had derived capital gains during the year. At the same time, the assessee held investment in shares which, having regard to their fair market value, were loss making. Accordingly, if the assessee decided to off-load such shares at its fair market value, even if, to its related entity, to mitigate the tax liability arising on capital gains, it cannot be said to be a tool for tax avoidance. There is no prohibition in law that an assessee cannot transact with related parties, but the burden is to demonstrate that the transaction is at arm's length. Hence, what essentially boils down to is whether the OCPS was sold at a fair value or whether the price was artificially arrived at to inflate the loss. In this respect, as noted by us above, the facts on record do not suggest that sale prices of OCPS was artificially deflated. Rather, it was supported by an independent report of merchant banker, and later on, the same investment was sold at a comparatively lower price to third party. We therefore do not find any infirmity in the sale consideration of OCPS as well. 34. The reliance placed by the Revenue on the decision of CIT Vs Wipro Ltd (50 taxma....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... crores only. Since WERPL merged with WEPL, the above said investment made by WECL was required to be written off. The fact would remain that the loss arising on account of writing off of Rs. 300 crores was not claimed as deduction by WECL nor was it carried forward. It is pertinent to note that the merger of WERPL with WEPL has taken place on the appointed date of 01-01-2015. Consequently, WECL has written of investments in the year relevant to AY 2015-16. 36. It can be noticed that both the above said transactions are independent transactions and they are nothing to do with each other, except for the fact that a part of amount of Rs. 375 crores collected by WECL by issuing OCPS was invested to the extent of Rs. 300 crores in the OCPS of WERPL. Thus, (a) the OCPS issued by WECL to WEPL and (b) the OCPS issued by WERPL to WECL are two different transactions carrying different rights and liabilities. Hence they are not connected with each other. However, it appears that the AO has mixed up both the transactions. We notice that the AO has examined the transactions relating to issue and writing off of Rs. 300 crores in AY 2017-18, even though those transactions....
X X X X Extracts X X X X
X X X X Extracts X X X X
....me Tax Act, 1961 in excess of exempt income earned by the Assessee during the assessment year in question?" 40. The Hon'ble jurisdictional High Court is noted to have taken note of the decisions of Hon'ble Delhi & Karnataka High Courts in the cases of Cheminvest Ltd. Vs. CIT (378 ITR 33) & Pragati Krishna Gramin Bank Vs. JCIT (256 Taxman 349). The Hon'ble High Court also referred to their view taken earlier in the case of PCIT Vs. HSBC Invest Direct (India) Ltd. to answer the question in favour of assessee and hold that, the disallowance u/s 14A cannot exceed the exempt income so earned by the assessee during the year. The relevant findings of the Hon'ble High Court are as follows :- "5. Having heard the learned Counsel for the parties and having perused the documents on record, consistently different High Courts in the country have taken a view that the disallowance under Section 14A of the Act read with Rule 8D of the Rules cannot exceed the Assessee's exempt income. The Delhi High Court, in the case of Cheminvest Ltd. Vs. Commissioner of Income Tax 1, has held that when the Assessee has not earned any income which was exempt from tax, disallowance of the expe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arose after the assessment year 2009-2010. Since in the present case, we are concerned with the assessment year 2009-2010, such formula was correctly applied by the Revenue. We however, notice that sub-section (1) of section 14A provides that for the purpose of computing total income under chapter IV of 3 [2015] 372 ITR 97 URS 4 of 7 5 3-ITXA 149-17.odt the Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the present case, the tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the tribunal held that disallowance under section 14A of the Act could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of CIT v Winsome Textile Industries Ltd. [2009] 319 ITR 204 in which also the Court had observed as under : "7. We do not find any merit in this submission. The judgement of this court in Abhishek Industries Ltd. (2006) 286 ITR 1 was on the issue of allowability of interest paid on loans g....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of Rs. 1,13,72,545/-." 41. It is also noted that this particular issue stands covered in favour of the assessee by the decision rendered by coordinate Bench of this Tribunal in assessee's own case for the earlier AYs 2013-14 & 2014-15 in ITA Nos.6759/Mum/2017 & 223/Mum/2018. In these decisions, the coordinate Bench has held that the disallowance u/s 14A cannot exceed the exempt income, and thus directed the AO to restrict the quantum of disallowance accordingly. 42. The Ld. CIT(A) is also noted to have taken note of the Explanation which has been inserted in the Finance Act, 2022 under Section 14A of the Act. The said Explanation clarifies that, the provisions of section 14A shall apply and be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year. The Ld. CIT(A) rightly observed that, the aforesaid amendment is explicitly clear that it shall be effective from 01.04.2022 and therefore has to be applied prospectively and not retrospectively. Gainful reference in this regard is made to the decision of Hon'ble Delhi High Court in the case of PCIT v. Era Infrastructure (India) Ltd. (ITA No. 204/2....