9911796707
TMI Blog2017 (11) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... business of manufacturing of detergent powder, detergent cake, toilet soap, shampoo and other consumer products. The assessee also manufactures some of the intermediary chemicals for its end products. The assessee has several manufacturing plants situated across the State. 3. During the financial year 1996-1997, the assessee had decided to set up a soda ash manufacturing plant at Bhavnagar, a product which would be used for the manufacture of soaps and detergents. For setting up the said plant, the assessee would require sizeable capital investment estimated at Rs. 1037.28 crores. The assessee would raise such amount through various sources such as the Rupee Term loan and Foreign Currency loan from IFCI, internal accruals and funds raised from shareholders of one NCL upon the scheme of amalgamation coming into effect. All these sources would still leave a residue of Rs. 162.83 crores which the assessee decided to raise through the rights issue of Non Convertible Debentures ('NCD' for short) and Secured Premium Notes('SPN' for short) with share warrants. 4. The prospectus published by the assessee company for issuing such NCD/SPN contained detailed terms and condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeting held on 24.1.2000, the Board of Directors of Nirma resolved, subject to receiving consent from the holders of NCD/SPN in writing representing atleast 3/4th of the outstanding amount agreeing for earlier redemption, to approve the redemption of all NCDs and SPNs with effect from 15.3.2000. It was further resolved that the company would pay Rs. 237/per NCD which would comprise of face value of Rs. 200/and interest from 1.10.1999 to 14.3.2010 of Rs. 15.46 and premium of Rs. 21.54 on early payment and Rs. 361/per SPN which would comprise of face value of Rs. 200/, premium of Rs. 123.14 and additional premium of Rs. 37.86 for early payment. This decision was duly conveyed to the stock exchange by Nirma under a letter dated 24.1.2000. Under a subsequent letter dated 27.1.2000, the company also conveyed to the stock exchange that it had received requisite consent in writing from the holders of 3/4th of the outstanding amount of NCD/SPN and the company had decided to fix the Record Date as 10.3.2000 for prepayment of redemption proceeds to NCD/SPN holders. 7. In the return filed by the assessee for the assessment year 1999-2000, the company had raised a claim of project expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he banks and financial institutions shortly before redemption contending that the same had resulted into capital gains. The banks and financial institutions would offer a small margin to tax by way of their profits. 8. After hearing the objections of the assessee in the order dated 28.3.2002, the Assessing Officer disallowed the total interest expense of Rs. 4,504 lacs on the SPNs for the assessment year 1999-2000. This would include within its sweep the entire interest expenses claimed by the assessee for the soda ash division and lab project on the ground that the entire device was created to defraud the Revenue. Series of transactions in his opinion had to be seen cumulatively and when looked in its entirety, premeditated plan to defraud the Revenue was visible. 9. The assessee carried the matter in appeal. The Commissioner(Appeals) noted that in earlier years such expenditure was allowed. However, in his opinion in the present year, the Assessing Officer had brought on record fresh facts and aspects which were overlooked earlier. He therefore, examined the question in new light. He formulated three questions for himself namely, i) Whether the capital borrowed on which inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly favourable to the holders. The shares were issued to the SPN holders at Rs. 50/per share when the market value was much higher. He concluded that the entire issuance of SPN was to plough back surplus funds lying with the group entities and promoters for granting personal advantages to them. 14. The assessee carried the matter in appeal before the Tribunal. The Tribunal by the impugned judgment confirmed the view of the revenue authorities. After referring to the orders of the Assessing Officer and CIT(Appeals) at great length, the Tribunal proceeded to give its own reasonings. The Tribunal analysed the shareholding pattern of the company before and after amalgamation of NCL and after issuance of shares to NCD and SPN shareholders. The Tribunal also noted the difference in the terms offered to the NCD and and SPN holders. The Tribunal recorded that out of 107 lakhs SPNs, 102 lakhs or 96% were subscribed by the promoters and relatives. The Tribunal observed that at the time of issuance of NCD, the outsiders were kept in dark that the same would be redeemed early, even before payment of 1st premium. This was known only to the promoters. The Tribunal also noted that at the time of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent for first four years. The accumulated return would be paid in four installments. c) The premature redemption was done in both the cases NCD as well as SPN. The premium paid on premature redemption was also calculated depending on market forces and was similar in both the cases. No special or favourable treatment was given to SPN holders. d) The decision of premature redemption was already announced when the promoters SPN holders sold their notes to the banks and financial institutions. The SPN holders as well as the financial institutions were aware about the price at which early redemption would be made. There was thus no element of surprise. Early redemption of SPN did not result into any advantage, either to the company or to the subscribers in terms of tax benefits. Even if there was no early redemption, it was always open for the holders to sell off the same to the banks and financial institutions and claim a similar treatment of capital gain as was done in the present case. e) Counsel submitted that the decision to foreclose NCD and SPN issues early was bona fide taken by the company since the rate of interest in the market had gone down over a period of time and it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jute Co. Ltd. v. Commissioner of Income Tax reported in (1980) 124 ITR 1 in which the Supreme Court observed that there may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may nonetheless, be on revenue account and the test of enduring benefit may break down. 17. On the other hand, learned counsel Shri Mihir Thakore appearing for the Revenue opposed the appeal contending that : 1) Two revenue authorities and the Tribunal have concurrently held that the entire transaction was a colourable device, a sham transaction. These conclusions were based on assessment of materials on record. These factual findings correctly arrived at by the revenue authorities call for no interference. There is no perversity in such findings. 2) Counsel submitted that the Tribunal has come to a conclusion that entire transaction was an impermissible manner of tax evasion and in the process left the other two questions raised by CIT(Appeals) undecided. 3) Counsel submitted that in essence the transaction is one of allotment of shares. He highlighted that there was a close proximity between the sale of debentures by the promoters and redemption of SPNs by the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und to be colourable or artificial and in which case it may be open for the Revenue to look beyond by piercing the corporate veil. 18. Before addressing the issue of the very nature of the transaction, we may clear a few peripheral issues. We have noted at some length the reasonings recorded by the Assessing Officer, CIT(Appeals) and the Tribunal. Since all the three authorities have reached at the same conclusions but by adopting slightly different routes, if we superimpose the orders of the three authorities below eliminating the repetition, the following principal objections of the Revenue emerge : i) The borrowing was for capital expenditure. The interest on such borrowing therefore, cannot be an allowable deduction. ii) The company was in the process of setting up a new industry. It was not for the purpose of expansion or extension of the existing business. iii) The liability had not accrued and was merely a contingent liability. iv) The entire transaction was a sham and colourable device to avoid tax. 19. We may recall the assessee's claim of deduction arises out of section 36(1)(iii) of the Act under which while computing the income under section 28 of the Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the documents on record, we notice that CIT (Appeals) and the Tribunal concurrently came to the conclusion that there was interconnection, interlacing and interdependence of the management, financial and administrative control of various units of Nirma Limited. It was on this ground, the Tribunal held that the business in question is continuation of the existing business and not a new business. In this context, the decision relied on by the authorities below of this Court in the case of Alembic Glass Industries Ltd. (supra) laid down tests for ascertaining whether a business was part of existing business or the assessee was starting a new unit. It was held that merely because the unit was coming to a distant point by itself would not mean that it was a new business. 10. If the facts as recorded by the CIT (Appeals) and the Tribunal can be said to have achieved finality, it would emerge that the assessee through its existing administrative mechanism started a new facility for production of soda ash and had also set up facility for production of a material called lab for its captive consumption for the purpose of its existing manufacturing business. It is no doubt that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest in the year in which it was paid. 24. In the present case, similar situation has arisen. The assessee resolved to redeem the SPNs prematurely which was one of the options retained by the company. While doing so, the assessee paid the accrued return added by premium for early foreclosure and claimed the entire expenditure by way of interest liability during the year under which the same was expended. It was not a case of contingent liability since in the process the company would avoid liability of future payment of such SPNs. 25. The central issue may now be addressed. While deciding the issue, following significant aspects would have to be borne in mind. a) The assessee in order to fund its upcoming soda ash plant at a cost of Rs. 1037.28 crores, the company decided to issue NCDs/SPNs which would raise a total of Rs. 162.83 crores. b) NCDs would receive 17% interest six monthly from the first year itself. SPNs would receive no return for the first four years but the holders would receive premium of Rs. 60/, Rs. 60/, Rs. 60/and Rs. 70/at the end of 4th, 5th, 6th and 7th years. The mode of returning the principal sum of Rs. 200/deposited by NCD/SPN holders was identical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough this source. There is no material suggesting that the funds were not required for the purpose of business. The prospectus for issuance of NCDs and SPNs itself gave a breakup of such total requirement of Rs. 1037.28 crores. These figures are not disputed by the Revenue. It also gave the breakup of how such amount would be raised. Rs. 333.74 crores would be raised from Rupee Term loan from IFCI, Rs. 116.26 would be raised from Foreign Currency loan again from IFCI, Rs. 359.45 crores would be available through internal accruals, Rs. 65 crores upon amalgamation of NCL and the remaining Rs. 162.83 crores would be raised through rights issue. In what manner, the assessee should raise its required funds is essentially a business decision and the Revenue certainly cannot question the priority of the company in this respect. If we therefore, proceed on the basis that the company did require a sum of Rs. 162.83 crores for financing its upcoming soda ash plant, the subsequent question is, was there anything hidden in the terms of two options offered by the company to its subscribers? We have noted the two sets of terms and conditions. Broadly, NCDs would carry interest every six months, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir SPNs to the banks and the financial institutions, the banks and the financial institutions were very much aware about the price at which such SPNs would be redeemed and the date on which the same would be done. Had the decision of the company to resort to premature redemption and terms on which such redemption would be done was not taken or announced, the Revenue, in our opinion, could build a strong case for viewing the entire transaction as a colourable device. The close proximity between the transfer of SPNs in unison by all promoters SPN holders and the redemption by the company once the SPNs were transferred by them and the small margin between the transfer price and the redemption price would be strong indicators of promoters SPN holders being in know of things which were not known to public at large, since they themselves were in the position to influence the policy planning of the company. This could then perhaps give foothold to Revenue to argue that the entire plan was devised from inception and did not evolve at a later stage, in the process point out that by overwhelming majority, it was the promoters shareholders who had opted for SPN over NCDs. 30. In the present ..... X X X X Extracts X X X X X X X X Extracts X X X X
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