2013 (9) TMI 6 - AT - Income Tax

Optionally Fully Convertible Debentures (OFCDs), whether a security or a loan & deposit For contravention of section 269SS, penalty u/s 271D to be levied Held that - Relying upon the decision of the Hon ble Supreme Court in Sahara India Real Estate Corpn. Ltd. & Others 2012 (9) TMI 559 - SUPREME COURT , the OFCDs of the assessee are neither loans , nor deposits , but securities - Hybrids , i.e., hybrid securities, i.e., OFCDs are securities under the Companies Act as well as under the SEBI Act. In the case of Sahara India Real Estate Corpn. Ltd. & Others it has been held that debenture issued by a company is a Security and not a Loan or Deposit and, therefore, the subscription received for issue of debenture cannot be equated with receipt of Loan or Deposit within the meaning of section 269SS of the I. T. Act Further, it has been held by the Superme Court that interest on investments (Securities and bonds and debentures) was not in the nature of interest on Loan or Advance to which the provisions of Interest Tax Act where applicable. Therefore, the monies which are received by the appellant company by way of subscription money for allotment of debenture cannot be equated with respect of any deposit within the meaning of Section 269SS of the I. T. Act and the provisions of section 269SS will not be attracted to the subscription received for issue of debenture and, therefore, the penalty levied u/s 271D is cancelled. In the present case, Ld. CIT (A) cancelled the penalty levied on the assessee u/s 271D of the Act, observing the provisions of Section 269SS of the Act to be not attracted. Obviously, when the OFCDs of the assessee do not fall under and cannot be equated with receipt of loan or deposit under the provisions of Section 269SS of the IT Act, evidently, no violation of the said Section can be said to have been committed by the assessee. Hence, penalty u/s 271D of the IT Act is entirely not attracted Further, the question of the assessee having been prevented by reasonable cause within the meaning of Section 273B of the IT Act for not complying with the provisions of Section 269SS of the Act, no longer survives Decided against the Revenue.

Summary

Issues Involved:
1. Whether the OFCDs of the assessee company are loans attracting the provisions of Section 269SS and consequently, Section 271D of the IT Act.
2. Whether the assessee was prevented by reasonable cause within the meaning of Section 273B of the Act for not complying with the statutory provisions of Section 269SS, thereby attracting the penalty levied under Section 271D of the Act.

Issue-wise Detailed Analysis:

1. Whether the OFCDs of the assessee company are loans attracting the provisions of Section 269SS and consequently, Section 271D of the IT Act:
The primary issue was whether the Optionally Fully Convertible Debentures (OFCDs) issued by the assessee company could be classified as loans or deposits under Section 269SS of the IT Act. The Assessing Officer (AO) argued that the OFCDs were unsecured loans, as reflected in the assessee's balance sheet, and thus fell within the purview of Section 269SS, which mandates that loans or deposits above a certain threshold must be accepted through an account payee cheque or bank draft. The AO imposed a penalty of Rs. 35,56,79,900 under Section 271D for violating this provision.

The assessee contended that OFCDs were securities, not loans or deposits, citing expert opinions and definitions from various acts, including the Companies Act and the Securities Contracts (Regulation) Act. The CIT (A) agreed with the assessee, noting that the terms 'loan' and 'deposit' are not defined in the IT Act, and that debentures are recognized as securities under other relevant statutes.

The Tribunal referred to the Supreme Court's decision in the 'Sahara India Real Estate Corporation Ltd. and Others vs. Securities & Exchange Board of India and Anr.' case, which classified OFCDs as securities. The Tribunal concluded that since OFCDs are securities, they do not fall under the definition of loans or deposits in Section 269SS. Consequently, no violation of Section 269SS occurred, and the penalty under Section 271D was not applicable.

2. Whether the assessee was prevented by reasonable cause within the meaning of Section 273B of the Act for not complying with the statutory provisions of Section 269SS:
Given the Tribunal's finding that OFCDs are securities and not loans or deposits, the question of whether the assessee had a reasonable cause for non-compliance with Section 269SS became moot. The Tribunal upheld the CIT (A)'s decision to delete the penalty, confirming that the provisions of Section 269SS were not attracted in this case.

Conclusion:
The Tribunal dismissed the department's appeal, confirming that the OFCDs issued by the assessee were securities and not loans or deposits. Consequently, the penalty imposed under Section 271D for violating Section 269SS was deleted. The Tribunal's decision was based on the Supreme Court's ruling in the 'Sahara India Real Estate Corporation Ltd.' case, which held that OFCDs are securities.