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TMI Blog2019 (4) TMI 1373X X X X Extracts X X X X X X X X Extracts X X X X ..... onable nexus between the expenditure and business. Apart from that, here the transaction is between two unrelated parties who have entered into a business transaction and have renegotiated the terms and conditions of the contract when the performance by one of the parties was not as per the terms agreed and non-performance entailed payment of interest which has actually been paid which fact is not in dispute. Thus, there could be no question of disallowance. Income from sale of shares - business income OR capital gain - HELD THAT:- What has to be seen is, firstly, the objective of acquiring the shares, that is, whether it has been treated as investment or to enjoy income there from or to make profit by buying and selling shares in short run; secondly, the period of which shares have been held, that is, whether the shares are held for more than three years; thirdly, whether there is frequency of transactions in a particular share; and lastly, the treatment and classification given in the books of accounts has to be given significance. If we apply the said guidelines, then all the factors indicate that intention was never to trade in shares. Here the revenue s stand that there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e it is an international transaction of capital financing. Such a presumption cannot change the character of transaction. TPO/ AO cannot disregard any apparent transaction and substitute it by recharacterizing the said transaction without any material or exceptional circumstances that the assessee has tried to conceal the real transaction. Investment made in shares or applying for the shares cannot be given different colour so as to expand the scope of transfer pricing adjustment by recharacterizing it as interest free loan. Thus, we are unable to uphold the contention of the department that share application money pending allotment should be recharacterized as loan till the period it is allotted after a reasonable time. Accordingly, the adjustment made by the TPO is directed to be deleted. Treatment of rental income from properties - business income OR income from house property - HELD THAT:- Here the entire rental income has been earned from letting out the properties owned by the assessee, hence when income has been earned from simply letting out the property then it has to be taxed under the head income from house property . Hon ble Supreme Court in the case of Raj Dadar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avour of the assessee. - ITA.No.6585/Del/2015 - - - Dated:- 12-2-2019 - SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER For The Assessee : Shri Shailesh Gupta, Advocate For The Revenue : Shri H.K. Choudhary CIT-D.R. ORDER PER AMIT SHUKLA, J.M.:- The aforesaid cross appeals have been filed by the assessee as well as by the revenue against DRP s direction u/s 144C (5) vide order dated 27.10.2015, culminating into final assessment order dated 2. We will first take up revenue s appeal wherein the only ground raised is, deletion of addition of ₹ 7,24,88,104/- proposed by the AO on account of interest paid to Tata Realty Infrastructure Limited. The facts in brief are that assessee company had entered into a MOU with Tata Realty Infrastructure Limited (TRIL) on 5.10.2007 for purchase of land, by virtue of which, TRIL was to pay ₹ 2,500 crores to M/s. Unitech Ltd. for a land purchase pertaining to 517 acres, against which sum of ₹ 1700 crores were paid as advance. Later on, the said deal was revised and area of land t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction; and MOU specifically provided for charge of interest which is evident from clause 4 of the MOU dated 5.10.2007, wherein there was a clause of interest payment @ 12% per annum on the refund of the deposit of ₹ 1700 crores. Even under the MOU dated 9.1.2007, assessee and TRIL as agreed to a similar clause. The department has neither conducted any inquiry or the investigation whatsoever from TRIL to controvert the claim of the assessee and accordingly such a disallowance of interest is purely based on suspicion and surmises. Further, the assessee has actually paid interest as per the MOU s recipient of interest, i.e., and TRIAL has offered this income for taxation and has also confirmed that such interest was received during the year. Not only that, TDS was also deducted on interest payment by the assessee. Once interest is paid in accordance with the terms of contract and for commercial expediency agreed between the parties, then no disallowance can be made when nothing has been brought on record that advance received by the assessee from TRIL does not entail any interest in case of eventuality mentioned therein. Further, it was submitted that assessee has also earne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year along with the interest. During the year full and final settlement was made and sum of ₹ 7,24,88,104/- was paid as interest. One of the main grounds for making the disallowance by the Assessing Officer was that the MOU did not contain any clause, enabling interest payment applicable to a situation stated by the assessee which warranted any amount of interest payment. Since similar addition was made in the earlier years, therefore, AO has made the addition in this year. Admittedly the Ld. CIT (A) in Asstt. Year 2009-10 and 2010-11 has deleted the said addition which has been followed by the DRP. First of all, it is seen that clause 4 of MOU dated 5.10.2007, reads as under: - Notwithstanding what is stated herein above the Solicitors for the purchaser shall be entitled to independently examine the title to the said property and carry out accounting and legal due diligence, In the event the due diligence report are not to the satisfaction of the purchaser, then in such event the vendors shall forthwith return the entire deposit of ₹ 1700 Crores (Rupees One thousand seven hundred crores only) with interest @ 12% per annum and the purchaser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here could be no question of disallowance. The decision of Hon ble Delhi High Court in the case of CIT Vs. Jolly Company (supra) also supports the case of the assessee. Accordingly, we do not find any reason as to why such a disallowance could have been made. 9. It has been informed by the Ld. Counsel at the time of hearing that the revenue s appeal for the assessment years 2009-10 and 2010- 11, this Tribunal has quashed the assessment on the issue of limitation and no decision was given on merits. Since, we have already deleted the disallowance on merits based on material facts on record, therefore our finding is independent of past precedence. The order of the Ld. DRP in deleting the said disallowance is thus upheld. In the result appeal of the revenue is dismissed. 10. Now we come to the assessee s appeal, wherein the assessee has raised several grounds. The main issue raised are: - i) treatment of capital gain as business income (ground No. 2 to 2.4 3); ii) disallowance of ₹ 23,71,65,830/- by characterising share application money as interest free advance (ground No. 4 to 4.2): i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Policies; Cash Flow Statement; Segment Reporting. The management has also accepted and felt proud in pointing out in the Management Discussion and Analysis of the Annual Report of 2006-07 that the company had earned a significant amount on account of revenue from the real estate that is the company's core business as depicted in the profit and loss account. It is mentioned here that the profit so resulting claimed by assessee company as capital gain is a business income on three account: a. It is a colourable device devised and proved from the trail of transaction given; b. Assessee is engaged in an organised manner to do business of real estate through forming 1 acquiring companies as 100% subsidiaries and do business of forming / acquiring companies and have land in them and made sale of companies through transfer of shares. c. What was received by assessee by selling shares was consideration for shares, and also sale of shares had nexus with trading activity of assessee, therefore it is justified to tax excess income derived from sale of shares as business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. 2002-03 8,55 97,457 56,66,857 Assessed as such 2. 2003-04 89 25,766 77,24,566 10,36,933 Assessed as such 3. 2005-06 75 60,000 (20,79,344) - Assessed as such 4. 2007-08 11,10,82 73,627 3,01,54,20,707 8,09,28,52,920 u/s. 148, LTCG ₹ 153.98 Crores assessed as Business Income Pending in ITAT 5. 2008-09 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31-Mar-07 5. Greenline Builders Ltd. 50,000 2005-06 10-Feb-06 6. Sarnath Builders Ltd. 50,000 2007-08 28-May-07 12.2 He also drew our attention to the judgment of the Hon ble Karnataka High Court in the case of Bhoruka Engineering Inds. Ltd. vs DCIT 356 ITR 25 and submitted that the ratio and principle laid down in this judgement is squarely applicable to the facts of the present case also. He submitted that here in this case what has been transferred by the assessee is the shares held in the subsidiary and not the land owned by the subsidiaries and the said shares were held as investment, not with the objective of trading therein. He also placed reliance on CBDT circular No. 6 of 2016 and stress upon the fact that CBDT has laid down that, if the shares held by the assessee as investment, then gain from such shares is to assessed as capital gain. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principle of Hon ble Karnataka High Court as relied upon by the Ld. Counsel will not apply. 14. We have heard the rival submissions and also the material referred to before us. The sole reason for treating the sale of shares of subsidiary company as business income by the Revenue is that, assessee company is engaged in an organised manner to do business of real estate and have acquired 100% shares in its subsidiary companies who in turn were owning land. Thus, assessee is selling land held by these companies through transfer of shares and what has been received by the assessee company is sale price of land and therefore, there is direct nexus with trading activity of the assessee company. According to AO, these transactions have been carried out in a manner which indicates systematic and organised activity with profit motive, therefore, it becomes a business profit and not capital gain. However, from the perusal of the documents referred to by the Ld. Counsel, it is seen that shares of these companies were acquired way back in financial year 2005-06 and 2007-08 and the shares in the subsidiary companies were always shown as investment in the books of account and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an three years; thirdly, whether there is frequency of transactions in a particular share; and lastly, the treatment and classification given in the books of accounts has to be given significance. If we apply the said guidelines, then all the factors indicate that intention was never to trade in shares. Here the revenue s stand that there was trading of under lying assets of the subsidiary companies, cannot be upheld in law as shareholder does not have right to assets of the company but only share in profit. The company alone can with the approval of board of directors sell its assets. Thus, we do not find any reason as to why sale of shares is treated as trading in land so as to be taxed as business income in the hands of the assessee. Hence, in view of our discussion made above, we hold that income from sale of shares cannot be taxed as business income but has to taxed as capital gain. In the result, these grounds are allowed. 16. The next issue relates to disallowance to ₹ 23,71,65,830/- by recharacterizing the share application money as interest free advance. The facts in brief are that the assessee has shown sum of ₹ 4,30,24,00,000/- as an outstan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. SHARE APP. MONEY -NASCENT REAL ESTATE 200,000,000 - 200,000,000 28,000,000 9. SHARE APP. MONEY -NASH REAL ESTATE 50,000,000 - 50,000,000 7,000,000 10 SHARE APP. MONEY -NAGVADA REAL ESTATE 20,000,000 - 20,000,000 2,800,000 11. SHARE APP. MONEY -NEELMANI REALTY PVT. LTD. 20,000,000 - 20,000,000 2,800,000 12. SHARE APP. MONEY -NKID 10,000,000 (8,000,000) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on money, therefore, interest on amount advanced in the form of share application money to the Indian Entities has to be imputed at an average borrowing rate and same has to disallowed or added. Accordingly, he worked out disallowance of ₹ 23,71,65,830/- The reasoning given by him for making the disallowance was as under:- The nature of the funds given by the assessee company has following further issues to be seen for disallowance u/s 36(1)(iii) :- 1. Almost entire amounts are getting forward from earlier years and since how long the same are outstanding have not been clarified by the assessee. 2. Assessee's contention that it had adequate surplus owned funds through which these investment in share application money were made, is unrealistic, as the question arises then why assessee company had to borrow funds during the year and paid interest at average rate of 14% p.a. The issue involved is use of borrowed funds and of interest paid and whether the same were for business purposes. The facts show that (i) there were huge opening balances outstanding, (ii) by the eleven (11) companies, the shares were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest on the ground that assessee company could have earned interest if this transaction were to be regarded as nature of loan and hence he has disallowed interest paid on loan by the assessee. He submitted that amount received by a company on those shares which have been allotted or have been subscribed as shares cannot fall within the definition of deposit as long as they are not repayable to the members of the company. Even otherwise also, assessee company has sufficient surplus fund and hence there can always be presumption that money has been advanced out of surplus fund available with the assessee and in that case no such disallowance could have been made holding it to be diversion of borrowed funds. He pointed out that, assessee has more than ₹ 9281.87 crores of accumulated reserves, whereas the loan fund amounted to ₹ 4460.40 crore. During the impugned assessment year accumulated reserves increased by ₹ 460 crores, whereas assessee has made fresh investment in share application money during the assessment year at ₹ 245.34 crores, thus during the year also surplus fund exceeded the share application money. Further, the Ld. AO has taken the ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with regard to those shares were for allotment or were subscribed, hence it does not fall within the definition of deposits. The said clause only comes into operation only when persons become member of the said company either by way of subscribing to the memorandum or subscribing to the partly paid up shares. Nowhere it is borne out that the amount was repayable to the members under the articles of the association of the company. If AO is making notional disallowance of the interest paid for capital borrowed for the business purpose, then he has to prove the nexus, that the borrowed capital has been used for interest free advance or loan and that to be for non-business purpose. If such nexus is not proved then AO cannot proceed to make disallowance on the interest paid u/s 36(1)(iii). 21. Further, if at all such disallowance is being made on notional and hypothetical basis treating share application money as advance or interest free loan, then AO also needs to take into consideration, whether assessee company has sufficient surplus fund or not; and if surplus fund exceeded the amount of advance, then again, no notional interest or disallowance can be made. Here i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transaction u/s 92B(1) as capital financing is different from capital contribution. The recharacterization of transaction of a share application money as deemed loan transaction is not permissible under the Act and in support he relied upon the following judgements: - ( i) Judgment of Hon ble Bombay High Court in the case of Vodafone India Services (P.) Ltd. vs UOI reported in 368 ITR 1 ( ii) Order of Hon ble ITAT Delhi in the case of First Blue Home Finance Ltd. vs. DCIT in ITA No. 3072/Del/2013 ( iii) Order of Hon ble ITAT Mumbai Aegis Limited vs. ACIT in ITA No. 1213/M/2014. ( iv) Bharti Airtel vs ACIT (ITAT Delhi) reported in 161 TTJ 428. 23.1 He further submitted that the reasonable period in case of share application money remitted by non-resident shareholders as per the RBI is 180 days; and alternatively also, foreign currency denominated investment is to benchmark by applying LIBOR and not SBI lending rate. Strongly relying upon the aforesaid judgements, he submitted that such transaction cannot recharacterize as loan or capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is for acquisition of capital asset and money received by the company is a capital receipt. A capital receipt is not an income under section 2(24) unless it is chargeable to tax as capital gains under Section 45. It is for this reason that under section 2(24)(vi) the Legislature has expressly stated, that income shall include any capital gains chargeable under section 45. Otherwise, a capital receipt is not reckoned as income. This issue of recharacterization of share application money into loan has been considered at length by the Hon ble Bombay High Court in the case of Vodafone India Services (P) Ltd. vs UOI (Supra), wherein Hon ble High Court after detail discussion has concluded that provisions of chapter X are not applicable to international transaction of issuance of equity shares. Here in this case it has been brought on record that the shares have been allotted to the assessee company in the subsequent year; and therefore, such shares ostensibly fall into capital account that cannot be treated as capital financing which needs to be benchmarked for the purpose of determining the ALP by imputing any kind of interest. TPO/ AO cannot disregard any apparent transaction and sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r considering the rival submissions and relevant finding given in the impugned orders, we find that nowhere the AO has rebutted the contention of the assessee that these advances to sister concerns were for business purpose or for commercial expediency nor he has tried to establish the nexus between the money advanced from the borrowed funds or has asked the assessee to establish that such advance has been given out of surplus or interest through fund. Here in this case the subsidiary companies/concerns to whom money have been advanced were also engaged in real estate business with whom assessee company had entered into joint venture for various projects. Once such a contention of the assessee has not been rebutted or refuted by the AO, then it has to be accepted that such an advance was for the business purpose. Accordingly, we hold that such an advance was for commercial expediency and therefore, no disallowance could have been made in view of the judgment of Hon ble Supreme Court in the case of SA Builders Ltd. vs CIT(A) 288 ITR 1(SC). 31. It is further noticed that the assessee company had huge surplus funds which far exceeded the advances; and therefore, with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed certain expenditure in relation to the earning of rental income without identify as to which expenditure can be said to be related to earning of rental income or there is any systematic activity for exploiting the property for commercial or business purpose. Here the entire rental income has been earned from letting out the properties owned by the assessee, hence when income has been earned from simply letting out the property then it has to be taxed under the head income from house property . Hon ble Supreme Court in the case of Raj Dadarkar vs ACIT reported in 394 ITR 592, after considering the earlier judgements of the Hon ble Supreme Court as cited by the Ld. Counsel has held that wherever there is an income from leasing out of premises and collecting rent, normally such an income is to be treated as income from house property, if the conditions of provisions of Section 22 of the Act are satisfied. Moreover, it has also been pointed out by the Ld. Counsel that all throughout in the earlier years assessee has been showing rental income under the head income from house property which has been accepted by the revenue under the scrutiny proceedings in various years. The detai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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