TaxTMI 
TaxTMI 
2026 (7) TMI 879
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....ved in developing and leasing investment property in Sector 135, Noida, Uttar Pradesh which has been notified as a SEZ by the Government of India. Being involved in the development of SEZ, the Assessee is eligible to claim deduction of profits derived from the business of development and operation of SEZ under section 80-IAB of the Act for any ten consecutive years out of the fifteen year period. This claim for deduction under section 80-IAB of the Act began in case of the Assessee from AY 2013-14. 2.1 The Assessee had filed its return of income (ROI) for AY 2017-18 on 21 November 2017 declaring a total income of INR 4,33,40,450 under the normal provisions of the Act and reporting book profit of INR 59,11,70,914 under section 115JB of the Act (MAT provisions) and claiming a refund of INR 4,75,51,680. The ROI was picked up for scrutiny assessment and the Ld. AO and in the impugned Assessment order the Ld. AO determined the total income at INR 66,93,96,660 under the normal provisions of the Act after making following additions and/or disallowances. Sr. No. Nature of Addition/disallowance Amount (Rs.) 1. Disallowance of interest expense in relation to the borrowed fu....
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....taken into consideration the rival contentions and perused the material on record. We first take the issue arising out of ground 2 to 10 in appeal of assessee, where in ld. AO has levied tax under section 115QA of the Act on the capital reduction carried out by the Assessee and interest levied under section 115P of the Act thereon. The relevant facts for this issue are that the Assessee had issued, subscribed and fully paid-up capital of INR 6,84,890 divided into 68,489 equity shares of INR 10/- each as per the financial statement dated 31 March 2016. These shares were held by BREP India Office Holdings IV Pte. Ltd. (BREP IV), a foreign company, incorporated and registered in Singapore and a tax resident of Singapore. BREP IV was registered as a foreign portfolio investor with the Security and Exchange Board of India. 5.1 During the year under consideration, the Assessee with a view to reduce its share capital as per the provision of section 100 of the Companies Act, 1956 passed a resolution dated 3 June 2016. As per the resolution, it was resolved that to reduce the equity shares of the Assessee held by BREP IV, being in excess of the requirements of the Assessee. Accordingly, ....
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....e as buyback transaction. The Ld. AO has stated that the Assessee reduced its share capital by way of extinguishment or cancellation and Ld. AO but has applied the provisions of Section 115QA of the Act as applicable in case of buy back of shares. Thus rejecting the claim of reduction of share capital. While concluding same the Ld. AO has held that the buyback of shares was a colourable device intended to evade tax and the transaction involved buyback of shares and the same is liable to tax under section 115QA of the Act. 6.1 Ld. Counsel has pointed out that, however, in computation sheet annexed to the Assessment order while taxing the entire sum repatriated to shareholder in hands of the Assessee, Ld. AO has ended up making addition of the same under section 2(22)(d) read with section 115 and levying interest under section 115P which actually is applicable only in the case of capital reduction and not buyback of shares. 7. The Ld. CIT(A) has upheld the impugned findings of ld. AO and has concluded as follows: a. The order of Hon'ble High Court of Bombay which approved capital reduction did not give any observation regarding taxability of the transaction ....
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....43(1) of the Act dated 3 March 2018 by the department. Thus prima facie there appears to be no substance in the allegation of ld. AO that the entire arrangement of the Assessee was a colourable device. The Ld. AO has to look at the arrangement as a whole and not in piecemeal. Reliance in this regard is rightly placed on the decision of Hon'ble Supreme Court in the case of Vodafone International Holdings B.V. us. UOI [2012] 341 IT1(SC): "68... In this connection, one may reiterate the "look at" principle enunciated in W.T. Ramsay Ltd. case (supra) in which it was held that the Revenue or the Court must look at a document or a transaction in a context to which it properly belongs to. It is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach. The Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/saving device but that it should apply the "look at" test to ascertain its true legal nature." 10. Then we find that to support the allegation of colorable transaction, the Ld. Tax authorities hav....
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....the existing deemed dividend provisions under section 2(22)(d) read with section 115-O of the Act applicable to capital reduction will result into double taxation, which does not seem to be the intent of the law. 13. We appreciate the contention that the concept of 'Buy-back of shares was first introduced in the Companies Act of 1956 vide insertion of Section 77A in the year 1999. Before the insertion of Section 77A, the Companies Act did not allow for buy back of shares except with the express order of the Court. On the contrary, Section 77 of the Companies Act of 1956 specifically restricted a company to purchase its own shares. 13.1 The original scheme of the Companies Act of 1956, and precisely Section 77 of the Companies Act was essentially based upon the company law doctrine of capital maintenance. The doctrine of capital maintenance provides that a company must obtain proper consideration for shares that it issues and that having received such capital it must not repay it to members except in certain circumstances is a fundamental principle of company law. Thus, as per the original scheme of the Companies Act of 1956, there was no provision for buy back of shares a....
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....een said to be "re-purchased" or "bought back" by the company on reduction of capital. 18. On the contrary, in case of a buy-back of shares, a company is required to take physical delivery of shares (where the shares are in physical format) or the shares are credited to the Company's DEMAT account, before they are extinguished. This clearly shows that buy-back is a repurchase of shares. Thus, the provisions relating to reduction of capital are not applicable in respect of buy back of securities under section 77A of the Companies Act, 1956. 19. We also find that there is difference in the two concepts under the Act as well and is evident from the provisions of section 2(22) of the Act pertaining to the definition of dividend. Relevant extract is reproduced as under: "Dividend' includes - (a).... .. (d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before theist day of April, 1933, whether such accumulated profits have been capitalized or not;" 20. Therefore, by implication of law, ....
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....any for issue of said share: Provided that if the sum or any part of it so returned was chargeable to additional income-tax under section 115-O and the company has paid such additional income tax then such sum or part thereof, as the case may be, shall not be reduced. (Emphasis Supplied) 26. This again re-emphasizes the fact that buy-back and capital reduction are distinct. Therefore, tax under section 115QA should not be levied once the tax has already been discharged under section 115-O of the Act. 27. Ld. Counsel has relied the decision of the Hon'ble High Court of Bombay in the case of Capgemini India (P.) Ltd [2016] 67 taxmann.com 1 where Hon'ble High Court has specifically held that merely because the company opted for buy-back of shares and not 'capital reduction' or vice-versa, the revenue authorities cannot hold that the transaction was for evasion of tax just because the transaction did not attract income-tax. Hence, by opting for a scheme of capital reduction, it cannot be held that the Assessee Company had intended to evade tax by way of a colorable device. Hon'ble Andhra Pradesh High Court in the case of Chetan G. Cholera V. Rockwool (....
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....disputes and also presents a tax arbitrage opportunity of scaling up of consideration particularly under a tax neutral business reorganisation followed by buyback of shares. In order to provide clarity and remove any ambiguity on the above issues, it is proposed to amend section 115QA to provide that the provisions of this section shall apply to any buy back of unlisted share undertaken by the company in accordance with the provisions of the law relating to the Companies and not necessarily restricted to section T7A of the Companies Act, 1956. It is further proposed to provide that for the purpose of computing distributed income, the amount received by the Company in respect of the shares being bought back shall be determined in the prescribed manner. The rules would thereafter be framed to provide for manner of determination of the amount in various circumstances including shares being issued under tax neutral reorganisations and in different tranches. The amendment will take effect from 1st June, 2016. (Emphasis Supplied) 29. The intention behind the above amendment was to cover "buy-back" of shares undertaken under other sections say under section 391 to ....
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.... the conditions laid down for one method cannot by deeming fiction made applicable to another method. The two set of provisions operate in independent fields and leave different purpose for company. A 'capital reduction' is at the volition of the Company, for the benefit of the Company, in as much as it has to service a lower capital in future. While, a buy-back, although at the volition of the Company, is for the benefit of the shareholder, in as much as he can exit at a reasonable price, to his satisfaction. In fact, Ld. AO's treatment of Capital reduction as akin to buy-back of shares will be in direct contradiction to the legislative intent behind introduction of the 'Buy-back' provisions which, were introduced to allow company to buy its own securities without the interference of the court. 31. Then we are of considered view that if the Income Tax Act 1961, does provide for any charging provision to consider a transaction recognized under some other statue to be giving rise to any deeming income or gives ld. Tax authorities power to raise a presumption of said transaction to be considered to be substantively an all together different transaction, then the ac....
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....se rentals collected from the occupants was to be deposited in the designated account maintained with the bank to ensure the repayment of the term loan. The additional Term Loan taken by the Assessee was nothing other than a discounting of future receivables, whereby the bank paid a portion of the future receivables upfront and collected those receivables as and when they became due. In substance, the interest was a discount payable for the accelerated realisation of future receivables. Thus it is not a simple case of borrowing for acquiring any interest in an asset but it appears to be a well designed and calculated business restructuring of share capital and the prospective revenues to bring some methodical shift in the income generation and profit distribution. The capital reduction of equity shares was done on grounds of commercial expediency, and the loan could be said to have been taken in order indirectly to carry on of the business of the Assessee. The borrowing of a loan and actual application thereof are two separate transactions. The transaction of borrowing is not the same as the transaction of investment, which could be either revenue or capital. The borrowing here is ....
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.... business" given its wide meaning by judicial pronouncements. 39. Further, ld. CIT(A) has disallowed the claim of the Assessee stating that borrowed funds has been used for capital purpose which has enduring benefit to the business of the Assessee. In this regard we are of considered view that interest expenditure incurred for carrying out capital reduction in any manner did not enhance the capital structure of the Assessee or provided any enduring benefit and thus is revenue in nature and not capital in nature. Reliance in this regard is rightly placed by ld. Counsel on the decision of the Mumbai Tribunal in the case of Colgate-Palmolive (India) Ltd. v. ACIT [2020] 118 taxmann.com 399 (Mumbai - Trib.) wherein the Tribunal held that expenditure incurred for implementing the capital reduction scheme is revenue in nature as the Assessee has neither acquired any benefit of enduring nature nor has such expenditure resulted into any asset. The relevant extract of the judgement has been reproduced below for conclusive reference - "12. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. 10. I....
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....penses amounting to INR 8,16,28,764 pertaining to interest paid towards CCDs to BSREP IV. In this regard, the Assessee had vide its detailed reply dated December 23, 2019 (available at Page No. 72-82 of Paperbook and December 24, 2019 ( Page No. 85-89 of Paperbook) submitted that the Assessee has not accepted the disallowance of CDs as unexplained cash credit and appeal has been filed against the assessment order dated October 28, 2019 for AY 2015-16 before this Tribunal. 41.1 We find that vide ITA No. 9237/Del/2019 this appeal of the assessee for AY; 2015-16 has been decided by the Coordinate Bench on 30.01.2026 wherein the appeal was allowed on the basis that the assessment order was barred by limitation thereby the assessment order was quashed. So actually there is no conclusive findings about genuineness of transaction and thereby giving this bench opportunity to consider the genuineness of the transaction too. 42. Now admittedly, during the course of assessment proceedings for AY 2017-18, the Assessee had submitted all possible and available documentary evidence for proving identity, creditworthiness and genuineness of the transaction of subscription of CCDs by BREP IV. ....
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....ook) v. Financial Statements of the BREP IV for the year ended 31 December 2015 (refer Page No. 215-243 of Paperbook) vi. Electronic receipt of fund issued by Standard Chartered Bank (refer Page No. 244- 246 of Paperbook) vii. Tranche wise certificate of Foreign Inward Remittance, form FC-GPR filed with the Reserve Bank of India and Valuation Reports (refer Page No. 247-325 of Paperbook) viii. Board Resolution of allotment of compulsorily convertible debenture (refer Page No. 326-330 of Paperbook) ix. Ledger account of the debenture holder in the books of the Company (refer Page No.331 of Paperbook) x. Bank statement of the company indicating / highlighting various debits and credits during the financial year to the debenture holder (refer Page No. 332-346 of Paperbook) xi. Copy of ledger account confirmation by BREP IV (refer Page No. 347 of Paperbook). 46. These evidences have not been rebutted by ld. AO by pointing out anything to show that same do not form part of a genuine transaction of investment in Assessee. Further, by providing the electronic receipt of fund issued by Standard Chartered Bank and a board res....
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....y the company acknowledging its liability to repay the amount represented therein at a specified rate of interest; in other words, debenture is a certificate of loan or bond evidencing the fact that the company is liable to pay an amount specified with interest. Though the amount which is raised by a company through debentures becomes part of its capital structure, the same does not become part of share capital, the apex Court further observed. 12. Further, reliance is placed on the following case laws to contend that the Hon'ble Courts and benches of the Tribunal have recognized the difference between CCDs / OCDs, on the one hand, and shares, on the other, to hold that expenses incurred on issuance of CCDs / OCDs being debt instruments, which is different from shares, is allowable deduction under the provisions of the Act. * Sahara India Real Estate Corporation Limited and Ors v. Securities Exchange Board of India (Civil appeal no 9833 of 2011) * Authority for Advance Ruling (Income Tax) reported in 307 ITR 40 (re: LMN India Ltd) * DCIT us. UAG Builders (P) Ltd.: 53 SOT 370, 13. Now from these decisions what we can conclude is that ....
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.... Candor India Office Parks Private Limited (CIOPPL) on the premise that CIOPPL is a related party and that similar services are also being rendered by other service providers like Jones Lang Lasaale Building Operations Private Limited (JLL). Ld. Counsel has also pointed out that the Ld. AO inadvertently disallowed INR 19,70,03,457 instead of INR 9,70,03,457. During the proceedings before ld. CIT(A), same was deleted by following findings: - "In the assessment order that AO has observed that "It appears that the bogus expense was booked by the assessee company on account of Property Maintenance to M/s Candor India Office Parks Put Ltd. The maintenance cost is also comparatively higher than that of the M/s Jones Lang Lasalle Building Operations Put Ltd" and "in the absence of any corroborative material to prove the services has been rendered" while disallowing the expenditure on property maintenance expenditure to M/s Candor India Office Parks Put Ltd. There seems to be a mere assumption by the Assessing Officer in comparison to the payments done to another party by the appellant. However here also the AO qualifies that the services rendered to the appellant are of different....
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....itted by the Assessee to Ld. AO. Further, during the proceedings before ld. CIT(A), the Assessee had furnished the sample tenant agreement (Page No. 428-446 of Paperbook), sample invoices (Page No. 467-471 of Paperbook) and sample credit notes (Page No. 447-471 of Paperbook) as additional evidence to explain excess collection of CAM and that the Assessee was contractually obligated to repay tenants for which credit notes were also issued to tenants. The ld. CIT(A) had forwarded the same for verification by Ld. AO and asked Ld. AO to prepare remand report. However, the Ld. AO did not provide any comments on the same. The Ld. CIT(A), on perusal of documents and explanations provided by the Assessee, deleted the additions made. The relevant findings at page 74 -75 of CIT(A), are reproduced below; "My Decision: In the assessment order that AO has observed that "It appears that the bogus expense was booked by the assessee company on account of Property Maintenance to M/s Candor India Office Parks Pvt. Ltd. The maintenance cost is also comparatively higher than that of the M/s Jones Lang Lasalle Building Operations Pvt. Ltd" and "in the absence of any corroborative material to p....