2023 (10) TMI 327 - AT - Income Tax

Special Audit u/s 142(2A) - return filed by the appellant was selected for scrutiny and was then referred to transfer pricing officer (TPO) u/s 92CA in respect of international transactions entered into by the appellant - HELD THAT - The matter stands settled by the order of the Hon ble High Court of Delhi 2019 (9) TMI 734 - DELHI HIGH COURT said that there is no reason to hold that the Assessing Officer has shifted the responsibility of scrutinizing the accounts and passed buck to the special auditor, as has been contended by the Petitioner. Special auditor who has been appointed, has been asked to give comments on several issues. Of course, while carrying out the audit, the special 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 AO 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. 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. Long- term and short term capital loss on write- off of investment in preference shares of Religare Capital Markets Ltd ( RCML ) - Disallowance of loss as investment made in loss making foreign entities - entire monies in the Indian company went into subsidiary companies situated abroad and Mauritius entity namely, RCMIML incurred losses resulting in erosion of its net worth - conclusion drawn by the special auditor merely on the basis of fact that RCML has made investment in its loss making foreign subsidiary - Whether business rationale behind making such investment is highly erroneous? - clear case of flight of capital from India to abroad and Indian entity incurring and claiming long term capital loss and short term capital loss - scope of concepts of tax planning vs. tax avoidance vs. tax evasion. HELD THAT - From the entire events, it can be found that the 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 loss in RCML (Mauritius) financial statements. 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. In the result, the appeal of the assessee on this ground is dismissed. With regard to the disallowance of interest, since the assessee had sufficient own funds, no disallowance on account of interest is called for. Correct head of income - Sale of Investment in Shares (ARLIC) - as per AO transaction is taxable as business income and not capital gains, treated the aforesaid sale of investment in shares as sale of business in joint venture company and re-characterized the gains arising thereon as business income of the appellant in terms of section 28(va) r.w.s. 28(iv) - HELD THAT - We find that the assessee has continuously treated the same as investments in the balance sheet. We have gone through the page no. 1376 of the paper book reflecting joint venture agreement relating to Life Insurance business in India amongst Aegon International NV and Religare Insurance Holding Company Ltd. As per this agreement, the par ties agreed to establish the JV company for the purpose of carrying on the business of providing insurance products. The assessee has invested 99.41% of share capital consisting of 50,20,000 shares In this case, the assessee has made investment in the share s over a period of 8 years and sold the shares to M/s Bennett Coleman Co. Ltd. and the proceeds have been offered under the head capital gains . We have gone through the provisions of Section 28(va) and Section 28(iv) invoked by the revenue authorities. The assessee has invested the amount for acquiring 44% stake in the ARLIC and sold the same. Hence, it cannot be said that there is sale of business as the assessee do not own the 100% stake in ARLIC. The receipts be taxed under the head capital gains after giving due indexation. The AO shall verify the expenses incurred in connection with the transfer of shares and allow the same. Prior Period Expenses - assessee has claimed expenses as disallowed holding that they are prior period expenses - as submitted that the expenses have been crystallized during the year and were not claimed in any of the earlier years - HELD THAT - Having gone through the facts on record, we hold that the expenses be allowed in the current year - In the result, the appeal of the assessee on this ground is allowed. Disallowance of Interest on Non-Convertible Debentures (NCD) u/s 40(A)(2)(b) - excess interest payment 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 - HELD THAT - As primary difference between a regular bond and a zero-coupon bond is the payment of interest, known as coupons. A regular bond pays regular annual interest to bondholders, while a zero-coupon bond does not make such interest payments and instead, zero-coupon bondholders receive the entire value of the bond inclusive of compounded interest when it reaches maturity/redemption. The interest of Rs. 30,33,19,164/- was recorded as payable by the assessee to RSL on the Zero coupon NCDs that were outstanding as on 31.03.2018. The ld. DRP held that the assessee has stated that the interest rate for the regular bond and zero-coupon bond issued to Standard Chartered bank and Religare Securities Limited ( RSL ) respectively, has been 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. 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. TP Adjustment - ALP on Legal Advisory Services - HELD THAT - As having gone through the FAR of the comparables and direct the AO to recompute the margin by considering the 5 comparables mentioned above.

Summary

Issues Involved:

1. Legality and Limitation of Assessment Order.
2. Special Audit under Section 142(2A) of the Income Tax Act.
3. Disallowance of Long-Term and Short-Term Capital Loss on Write-off of Investment in Preference Shares.
4. Disallowance of Interest Expenditure Related to Investment in Preference Shares.
5. Taxation of Gains from Sale of Investment in Shares as Business Income.
6. Disallowance of Prior Period Expenses.
7. Disallowance of Interest on Non-Convertible Debentures under Section 40(A)(2).
8. Transfer Pricing Adjustment.
9. Deduction of Education Cess and Computation of Interest under Sections 234B and 234C.

Judgment Summary:

1. Legality and Limitation of Assessment Order:
The general nature of these grounds did not require specific comments from the Tribunal.

2. Special Audit under Section 142(2A) of the Income Tax Act:
The Tribunal dismissed the assessee's grounds on the special audit, citing the Delhi High Court's decision which found no infirmity in the order directing the special audit.

3. Disallowance of Long-Term and Short-Term Capital Loss on Write-off of Investment in Preference Shares:
The Tribunal upheld the disallowance of the capital loss claimed by the assessee. It found that the investments in RCML were made to repay the liabilities of RHC and not for genuine business purposes, leading to the conclusion that the transactions were arranged to benefit RHC Holdings Limited, leaving the assessee to incur losses.

4. Disallowance of Interest Expenditure Related to Investment in Preference Shares:
The Tribunal found that the assessee had sufficient own funds and thus, no disallowance on account of interest was called for.

5. Taxation of Gains from Sale of Investment in Shares as Business Income:
The Tribunal held that the gains from the sale of shares in ARLIC should be taxed under the head "capital gains" and not as business income. The Tribunal directed the AO to verify and allow the expenses incurred in connection with the transfer of shares.

6. Disallowance of Prior Period Expenses:
The Tribunal allowed the assessee's claim for prior period expenses, holding that they were crystallized during the year and were not claimed in any of the earlier years.

7. Disallowance of Interest on Non-Convertible Debentures under Section 40(A)(2):
The Tribunal upheld the AO's direction to verify the assessee's claim that the payment was at a 14% interest rate payable at maturity under the zero-coupon bond.

8. Transfer Pricing Adjustment:
The Tribunal directed the AO to recompute the margin by considering the five comparables mentioned in the order.

9. Deduction of Education Cess and Computation of Interest under Sections 234B and 234C:
This ground was not pressed by the assessee.

Conclusion:
The appeal was partly allowed, and the stay application was dismissed. The Tribunal's decision involved detailed scrutiny of the transactions, affirming the disallowance of capital losses, and allowing the claim of capital gains on the sale of shares, while directing further verification on certain issues.