2019 (7) TMI 390 - HC - Income Tax

TP Adjustment - share application money remained parked with AE - re-characterize the transaction - Department holds a belief that for the period during which the share application money remained parked with AE, the same should be brought to tax on notional interest basis - Tribunal made an interim judgment deleting the addition on the ground that the Assessing Officer cannot re-characterize the transaction - HELD THAT - The facts as noted, are not seriously in dispute. The assessee s share application money remained with its AE for a considerable period of time before the shares were allotted. AO, therefore, treated this transaction as one of loans. It was under similar circumstances that this Court Pr. Commissioner of Income Tax-6 Versus M/s. Aegis Limited - 2019 (4) TMI 858 - BOMBAY HIGH COURT dismissed Revenue s facts on record would suggest that the assessee had entered into a transaction of purchase and sale of shares of an AE. Nothing is brought on record by the Revenue to suggest that the transaction was sham. In absence of any material on record, the TPO could not have treated such transaction as a loan and charged interest thereon on notional basis. No question of law arises

Summary

Issues:
1. Whether the Tribunal was justified in deleting the adjustment and confirming the stand of the DRP regarding the provisions of Section 92(2) of the Income Tax Act, 1961?

Analysis:
1. The appellant, the Revenue, challenged the judgment of the Income Tax Appellate Tribunal (Tribunal) regarding the treatment of share application money as an interest-free loan to the Associated Enterprise (AE). The Tribunal had deleted the addition made by the Assessing Officer, stating that re-characterizing the transaction was not justified as there was no interest-free loan by the assessee to its AE.

2. The Revenue contended that the Tribunal erred in its decision and highlighted a similar question admitted by the Court in a previous appeal. The respondent-assessee opposed the appeal, mentioning that a similar issue had already been examined by the Court in a previous case where the Revenue's appeal was dismissed.

3. The Court noted that the share application money remained with the AE for a significant period before shares were allotted. The Assessing Officer treated this as a loan transaction, similar to a previous case where the Court dismissed the Revenue's appeal, stating that the TPO cannot re-characterize a share subscription transaction into an unsecured loan without sufficient material or exceptional circumstances.

4. The Court agreed with the Tribunal's view, emphasizing that the transaction involved the purchase and sale of shares with no evidence of sham transaction. Without material to support re-characterization, the TPO could not treat the transaction as a loan and charge interest on a notional basis. Therefore, the Court found no legal question to arise and dismissed the income tax appeal filed by the Revenue.

5. Another appeal filed by the assessee presented a converse decision by the Tribunal, leading to the dismissal of the income tax appeal by the Revenue. The Court's decision was based on the lack of justification to admit the Revenue's appeal due to the differing outcomes in the two cases.