2022 (9) TMI 1235 - AT - Income Tax

Accrual of income - Addition being notional premium receivable on preference shares as income of the assessee - HELD THAT - As rightly pointed out by assessee, the payment of redemption premium can be only out of profits of the company or out of reserves. Even if one were to be regarded the premium as akin to dividend, the assessee cannot claim dividend as a matter of right and it is for the directors of the Company to declare dividend which needs to be approved by the shareholders in an Annual General Meeting (AGM). By no stretch of imagination can it be said that the preference shares issued by the assessee is in the nature of equity. It is only when the assessee has a right to receive periodic payments can it be said that income has accrued to an assessee under the mercantile system of accounting. If the sum paid by the assessee is loan and as per the terms of the loan agreement, certain rate of intereset is payable by the borrower every year then it can be said that under the mercantile system of accounting, interest accrues to the assessee as income, irrespective of actual receipt of payment. In the case of preference shares, such an inference cannot be drawn and the repayment of the face value of the preference shares as well as the premium on redemption is uncertain. In such circumstances, the action of the Revenue authorities in making the impugned additions cannot be sustained. We, therefore, hold that the income brought to tax by the Revenue authorities cannot be sustained and the said addition is directed to be deleted. Whether the revenue authorities can overlook the legal effect when a person holds cumulative preference shares and treat as loan instrument rather than a share capital/equity instrument? - The revenue authorities cannot disregard the legal effect of issue of cumulative preference shares and say that the same is akin to debt and therefore the cumulative preference shares which is a capital instrument is a debt or in the nature of debentures. The decision of ENAM SECURITIES (P.) LTD. 2012 (5) TMI 257 - BOMBAY HIGH COURT is a complete answer to the question that the revenue authorities cannot disregard the legal effect of a document evidencing a debt and that which evidences holding shares in a limited liability company. The legal consequences thereof cannot be ignored and a share characterized as a debt instrument. Such a course is permissible under the thin capitalization rules which were introduced w.e.f. 1.4.2018 by virtue of the provisions of Sec.94B of the Act, but those provisions are applicable only in the case of transactions with Associated Enterprise which is not a tax resident of India. It is a common practice among multinational companies globally to lessen their tax outgo by resorting to extensive use of legal arrangements for parking profits in low or no-tax jurisdictions, formally coined as base erosion and profit shifting (BEPS). One of the simplest profit-shifting techniques available in international tax planning is by way of interest payments and therefore, specific Action Plan, viz., Limiting Base Erosion Involving Interest Deductions and Other Financial Payments ( BEPS Action Plan 4 ) has been devoted by the OECD to tackle BEPS through payments in the nature of interest and payments economically equivalent to interest. In BEPS Action Plan 4, OECD has set out the best practice approaches for countries to prevent erosion of their tax base by way of excess interest deductions claimed by multinational group entities. BEPS Action Plan 4 is focused on the use of third-party, related-party, and intra group debt to obtain excessive deductions or to finance the production of exempt or deferred income. Adopting the recommendations of BEPS Action Plan 4, India introduced section 94B in the domestic tax law, viz., Income-tax Act, 1961 ( the Act ), as an anti-tax avoidance provision to restrict deduction of interest paid to non-resident associated enterprises (AEs). As already stated, the said provisions are applicable only when interest is paid to non-resident associated enterprises and such a feature is absent in the present case. Application of the provisions of Sec.14-A - . The law is clear that premium on redemption is exigible to tax under the head 'Income from Capital Gains' as laid by the Hon ble Supreme Court in the case of Anarkali Sarabai 1997 (1) TMI 5 - SUPREME COURT and Karthikeya Sarabai 1997 (9) TMI 2 - SUPREME COURT and is not exempt from tax. Further the investment in preference shares is to be regarded as an investment in an unlisted and unquoted security and is therefore definitely exigible to tax. Section 14A comes into play only in the case of investment, income from which, is completely exempt from tax. Hence the question of any disallowance u/s 14A in respect of interest paid on loans, which are utilised to make the investment, is to be allowed as a business expenditure. If the same is claimed and allowed as a business expenditure, the same cannot be treated as part of cost of investment and be allowed for indexation while determining cost at the time of redemption of the shares. Therefore, the disallowance cannot be sustained even by application of the provisions of Sec.14-A of the Act. We hold that the Revenue authorities were not justified in adding a sum being notional premium receivable on preference shares as income of the assessee. The appeal of the assessee is accordingly allowed. Interest on delayed remittance of TDS - Whether such interest partakes the character of tax and hence is not an allowable deduction? - HELD THAT - In so far as the nature on the interest on delayed remittance of TDS is concerned, this Tribunal has been taking a consistent view following the decision of the Hon ble Madras High Court in the case of CIT Vs. Chennai Properties and Investments Ltd. 1998 (4) TMI 89 - MADRAS HIGH COURT that interest paid takes colour from the nature of principal amount required to be paid but not paid in time and this principal amount being income tax, interest was also in the nature of direct tax and cannot be regarded as a compensatory payment and allowed as business expenditure. Thus we reverse the order of the CIT(A) in so far as it relates to the sum being remittance of delayed TDS and hold that the said sum is not an allowable deduction. Admission of additional evidences by CIT-A - Whether CIT(A) ought to have remanded additional evidences w.r.t. disallowance of trade payable made by the AO before admitting and accepting the same? - HELD THAT - Rule 46A(1) lays down that additional evidence shall be admitted by the CIT(A) only for reasons stated therein and Rule 46A(2) lays down that only after recording in writing reasons for admitting additional evidence, can additional evidence be admitted. Further, Rule 46A(3) specifically provides that CIT(A) shall not take into account any additional evidence produced under Rule 46A(1) of the Rules unless AO has been allowed reasonable opportunity to examine the additional evidence to produce evidence in rebuttal. Thus, in the present case, there is a clear violation of the mandate laid down in Rule 46A(3) of the Rules. Whether under 46A(4) of the Rules, the CIT(A) can call for additional evidence on his own to decide the controversy in appeal and in such event, he need not follow the requirements of 46A(3) of the Rules? - As we find that the CIT(A) in the present case has not called for additional evidence on his own and it has been produced only by the assessee before the CIT(A). In such circumstances, we are of the view that the assessee cannot place reliance on the decision of the Hon ble Karnataka High Court in the case of CIT Vs. Sam Family Trust (supra). In the given facts and circumstances of the case, we are of the view that it would be just and appropriate to set aside the order of the CIT(A) on the issue raised in ground 2 to the AO for fresh consideration with a direction to the AO to consider the additional evidence filed by the assessee before CIT(A) and also such other evidences the assessee may seek to rely on in support of its claim. Appeal of the assessee is allowed while appeal of the Revenue is partly allowed.

Summary

Issues Involved:
- Taxability of notional premium receivable on preference shares.
- Allowability of interest on delayed remittance of TDS.
- Addition of sundry creditors/trade payables.

Issue-wise Detailed Analysis:

1. Taxability of Notional Premium Receivable on Preference Shares:

The primary issue in ITA No.2332/Bang/2019 was whether the Revenue authorities were justified in adding Rs.17,09,02,887/- as notional premium receivable on preference shares as income. The assessee initially declared this amount as "Premium accrued on Redeemable Preference shares" under "Income from Other Sources" but later revised the return, claiming it should be taxed only upon redemption as capital gains.

The AO argued that the preference shares had features of both equity and debt, with assured financial benefits akin to interest, and thus should be taxed on an accrual basis. The AO also suggested that if treated as equity, the dividend would accrue regardless of declaration, and thus expenses related to earning such exempt income should be disallowed under Section 14A.

The CIT(A) concurred with the AO, treating the preference shares as a hybrid instrument and taxing the premium on an accrual basis. The CIT(A) relied on Indian Accounting Standards (Ind AS)-32, which classifies redeemable preference shares as financial liabilities due to the obligation to redeem.

The Tribunal, however, disagreed with the Revenue's stance, emphasizing that the preference shares could not be treated as debt. The Tribunal noted that the premium on redemption could only be paid out of profits or reserves, and thus could not be considered as accrued income. The Tribunal also referenced the decision of the Hon'ble Bombay High Court in the case of Enam Securities Pvt. Ltd., which distinguished between bonds/debentures and preference shares, affirming that preference shares are not debt instruments. Consequently, the Tribunal held that the notional premium could not be taxed annually on an accrual basis and directed its deletion.

2. Allowability of Interest on Delayed Remittance of TDS:

In ITA No.2550/Bang/2019, the Revenue challenged the CIT(A)'s decision allowing the deduction of interest on delayed remittance of TDS. The AO had disallowed Rs.1,27,53,372/- debited as interest on delayed payment of tax, treating it as non-deductible.

The CIT(A) allowed the deduction, distinguishing the interest as compensatory rather than penal, relying on the ITAT Kolkata's decision in DCIT vs. Narayani Ispat Pvt Ltd and the Hon'ble Supreme Court's decision in Lachmandas Mathura vs CIT.

The Tribunal, however, reversed the CIT(A)'s decision regarding the sum of Rs.38,32,459/- related to delayed TDS remittance, following the Hon'ble Madras High Court's decision in CIT Vs. Chennai Properties and Investments Ltd., which held that such interest is not compensatory and thus not deductible.

3. Addition of Sundry Creditors/Trade Payables:

The AO added Rs.8,09,73,776/- as unexplained trade payables, citing the assessee's failure to prove the genuineness and creditworthiness of the credits. The CIT(A) deleted most of the additions after considering additional evidence provided by the assessee, which included ledger extracts, confirmation of balances, PAN numbers, addresses, and reconciliation statements.

The Revenue contended that the CIT(A) admitted additional evidence without remanding it to the AO as required under Rule 46A. The Tribunal agreed with the Revenue, noting that the CIT(A) did not follow the procedure under Rule 46A, which mandates allowing the AO to examine the additional evidence. Consequently, the Tribunal set aside the CIT(A)'s order on this issue and remanded it to the AO for fresh consideration, directing the AO to examine the additional evidence and decide the matter afresh.

Conclusion:

The Tribunal allowed the assessee's appeal regarding the taxability of notional premium on preference shares, holding that it could not be taxed on an accrual basis. The Tribunal partly allowed the Revenue's appeal, disallowing the interest on delayed TDS remittance and remanding the issue of sundry creditors/trade payables to the AO for fresh consideration.