9911796707
TMI Blog2023 (10) TMI 327X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GESH KUMAR US, JUDICIAL MEMBER For the Appellant : Sh. Ajay Vohra, Sr. Adv. & Sh. Deepesh Jain, CA For the Respondent : Sh. Bhaskar Goswami, CIT DR ORDER Per Dr. B. R. R. Kumar, Accountant Member: The present appeal and Stay Application have been filed by the assessee against the order dated 31.03.2021 passed by the AO u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961. 2. Following grounds have been raised by the assessee: "1.0 That on the facts and circumstances of the case and in law, impugned assessment completed vide order dated 31.03.2021 passed under section 143(3) read with section 144C of the Income Tax Act, 1961 ('the Act 5) by the assessing officer ('impugned order") is illegal and bad in law. 1.1 That or the facts and in law, the impugned order passed by the assessing officer is barred by limitation in terms of section 153 (1) of the Act and is therefore, liable to be quashed. 1.2 That the assessing officer erred on facts and in law in assessing total income of the appellant Rs. 414,84,28,733 as against returned/ declared income of Rs. 9,68,74,129. Re: Special Audit under section 142 (2A) of the Act 2.0 That the special auditor erred on facts an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as genuine by the Department. 3.5 Without prejudice, on the facts and circumstances of the case, write off of investments in RCML ought to be alternatively allowed as business deduction/ loss in the hands of the appellant. Re: Disallowance of alleged interest expenditure relatable to investment in preference shares of RCML 4.0 That the assessing officer/DRP erred on facts and in law in arbitrarily disallowing interest expenditure to the extent of Rs. 5,19,61,760 imputed on investment of Rs. 229.40 crores made in preference shares of RCML during the year, alleging that the investments were not made for the purposes of business. 4.1 That the assessing officer/DRP failed to appreciate that the non-interest bearing funds/ owned funds of appellant were utilized to make- investment in preference shares of RMCL and, therefore, no interest expense could be disallowed. 4.2 Without prejudice, the assessing officer/DRP erred in adopting arbitrary higher interest rate of 8.84% p.a. for the purpose of computing aforesaid disallowance. Re: Sale of investment in shares of Aegon Religare Life Insurance Company Ltd ('ARLICL') taxed as business income instead of capital gains 5.0 That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CB, without appreciating that rate/ yield payable on both the loans/ instruments is same @ 14% p.a. 7.2 That the assessing officer in not appreciating that excess amount computed and disallowed is basically compounded interest @ 14% only, on interest accrued but not paid annually on zero coupon NCDs as the same is payable only on maturity as against interest payable annually on loans from SCB. 7.3 That the assessing officer failed to appreciate that interest paid to RSL was at arm's length and comparable to interest paid on same category zero coupon bonds issued to M/s Peerless Mutual Funds (unrelated party) and was thus neither excessive nor unreasonable. 7.4 That the assessing officer erred in making the disallowance of interest without appreciating that similar interest provided for on NCDs in previous years stands accepted by the Department. 7.5 That the assessing officer erred in treating the interest paid to RSL as excessive without appreciating that the same being specified domestic transaction was duly reported in Form 3 CEB and was duly accepted to be at arm's length by the transfer pricing officer. 7.6 That the assessing officer erred in not correctly examining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds settled by the order of the Hon'ble High Court of Delhi wherein the WP (C) 9358/2019 filed by the assessee has been dismissed vide order dated 28.08.2019. The operative part of the said order is as under: "24………………….We do not find any 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. The 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 Assessing Officer 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in RCML was treated by the assessee as permanently declined to NIL as and when made by the assessee over last several years, which show that there is no intention of receiving it back or earning any income from it. The assessee has also submitted that reduction of capital is made as per order of Delhi High court. This fact is not disputed but the genuineness of investment made by the assessee is considered and found to be bogus. Therefore, it is established that the assessee company has siphoned off an amount of Rs. 1755.50 crores through instrument of investment in RCML over several years. Thus, the special auditor's has appropriately proposed to disallow the short term capital loss of Rs. 500 crores and long term capital loss of Rs. 344,26,75,159/- on account of write off of investment of Rs. 750 crores claimed during the year under consideration. Additionally, investment of Rs. 229 Cr. made by the assessee company, during the year under consideration, is also part of total investment made in its wholly owned subsidiary. Therefore, considering the amount of Rs. 5,19,61,760/- [2,29,40,00,000 * 8.84%, as computed by special auditor on page no. 64 of the special audit report ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16. RCML had a wholly owned subsidiary company in Mauritius, i.e., Religare Capital Markets International (Mauritius) Limited ('RCMIML'). RCMIML, in turn, had a UK subsidiary called Religare Capital Markets (Europe Limited, UK, which acquired investment banking business, which, in turn, had Joint Ventures (JV)/ Wholly Owned Subsidiary (WOS) in various countries like UK, US, Hongkong, Singapore, Japan, South Africa, etc. 17. RCMIML incurred huge losses resulting in erosion of the net worth of RCMIML and consequently, RCML made provision for diminution in the value of its investments in RCMIML. Consequently, the appellant company made provision for diminution in the value of the investment made in the shares of RCML. 18. RCML reduced its share capital against the accumulated losses. RCML after approval of board of directors and share holders carried capital reduction of fully paid up nonconvertible redeemable preference shares held by the appellant company. RCML accordingly filed scheme for reduction of 52,50,00,000, 0.001% Non-Convertible Cumulative Redeemable Preference Shares of Rs. 10 each fully paid-up aggregating to Rs.525 crores (face value) before Hon'ble Delhi High Court, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement entered into among the company, RHC Holding Pvt. Ltd. (RHC) and Religare Capital Markets Ltd. (RCML) on 13.02.2012 for capital contribution commitment and any changes thereafter. 2. Board resolution specifying the terms & conditions for creation in the value of such diminution. 3. Board resolution authorizing investment of Rs. 229,40,00,000/- in RCML despite of write off of Rs. 750,00,00,000/- in the same financial. The assessee company submitted its response on 11.10.2019 as follows: With respect to the information required by your goodself in the aforementioned point, please find attached following: 1. Copy of agreement entered into among the company, RHC Holding Pvt. Ltd. (RHC) and Religare Capital Market Limited on 13.02.2012 along with its first amendment and second amendment agreement is enclose d as Annexure-2, Annexure -2(a) and Annexure-2 (b). 2. The provision for diminution of Rs. 7,500,00,000/- was made in earlier year and written back in the year under consideration as per the order of Hon'ble Delhi High Court. Copy of order is enclosed as Annexure-3. Further, the provision of Rs. 2,294,000,000/- was created in the year under consideration however, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ML & the assessee company entered on 13.02.2012, 24.05.2012 & 28.03.2013 were signed by same persons namely Mr. Hemant Dhingra (RHC), Mr. Shachindra Nath (the assessee company) and Mr. Anil Saxena (RCML). 4. Mr. Shachindra Nath & Mr. Anil Saxena were common directors of RCML & RCML (Mauritius) from the financial year 2011-12 to 2015-16. Also, Hemant Dhingra was director of RCML from 2007 to 2010. Similarly, Mr. Sunil Godhwani was the common director of the assessee company & RCML from the financial year 2011-12 to 2015-16, This shows that person taking decision are same in all companies and are inter-related. 5. Investment made by RCML in RCML (Mauritius) was controlled by RHC and the same was also made before funds were introduced as per agreement dated 28.03.2013 by the assessee company. 6. The Assessee company, through amendment agreement dated 28.03.2013, invest Rs. 810 crores in RCML. These funds were used by RCML to refund investment of Rs. 659 crores made by RHC in RCML preference shares along with redemption premium of Rs. 55 .60 crores which totals to Rs. 714.60 crores. 7. The Assessee company further made investment of Rs. 80.60 crores in financial year 2013-14 & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the assessee company made investment of Rs. 229.40 crores in RCML and claimed long term & short term loss on investment of Rs. 750 crores. 1. Regarding investment of Rs. 229.40 crores: From the review of books of accounts of the assessee company, it is observed that the assessee company invested funds in making the investment of Rs. 229.40 crores in RCML which would otherwise results in earning of the interest income. The assessee company simultaneously created provision for diminution in the value of such investment there by reducing the value of investment to NIL. By no stretch of imagination this is a diminution of the value of the investment but such creation of the provision of the diminution of the value of the investment is nothing but an effective write off of the investment as done in the case of previous diminution of the value of the investment explained earlier with respect to Rs. 750 crores. These funds were utilized by RCML for clearing its financial commitments which got create d on account of its investment in its Mauritius subsidiary. Therefore, as established above, such investment is part of total investment of Rs. 1755.50 crores which were not used wholly a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gare Capital Market Ltd. (hereinafter referred to as 'RCML') as under: Date of Investment No. of preference shares purchased Purchase cost per share Total cost of purchase consideration May 2011 2,50,00,000 Rs. 100 (including premium of Rs. 90) Rs. 250,00,00,000 March 2013 50,00,00,000 Rs. 10 Rs. 500,00,00,000 Total 52,50,00,000 Rs. 750,00,00,000 The aforesaid preference shares were, it is submitted, in the nature of 0.001% non-convertible cumulative redeemable preference shares and for the purpose of acquiring 52,50,00,000 preference shares, the assessee paid total consideration of Rs.750 crores to RCML during the period May 2011 to March 2013. Religare Capital Market Limited (RCML) owned a wholly owned subsidiary company in Mauritius i.e. Religare Capital Markets International (Mauritius) Limited (RCMIL). Due to economic slowdown and significant decline in the investment banking business overseas, RCMIL incurred huge losses. This resulted in erosion of the net worth of RCMIL and consequently RCML made provision for diminution in the value of its investments in RCMIL and showed a loss of Rs. 1580.00 crores in its books of account as on 31st March, 2014. Conseque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... photocopy of the demat account showing the investment made by the assessee company in the shares of RCML Page No. 6 Submission dated 28.06.2019 - please refer Annexure- 15. - 1. The photocopies of the relevant extracts of bank statements showing payment for purchase of shares. Page No. 6 of the Submission dated 28.06.2019 - please refer Annexure- 16. - 1. A copy of opinion an opinion from a senior advocate Shri Arvind Datar in respect of capital loss on the extinguishment of the rights in the preference shares. Page No. 7 of the Submission dated 28.06.2019 - please refer Annexure- 18. - 1. A copy of agreement entered into among the company, RHC Holding Pvt. Ltd, (RHC) and Religare Capital Market Limited (RCML) on along with its first amendment dated and second amendment agreement dated 28.03.2013 Copy of the same is enclosed as Annexure- 1, 1 (a) and 1 (b) for your reference. Page No. 2 of the Submission dated 11.10.2019 - please refer Annexure- 2, 2 (a) and 2 (b). 1. A copy of the order of the Hon'ble Delhi High Court for the reduction in the capital investment made by the assessee company in RCML. Page No. 7 of the Submission dated 28.06.2019 - Please refer Annexure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and base less allegations: 1. Investment made by the assessee in preference shares of RCML was not for earning any return therefrom, but was merely to facilitate RCML to repay one of its associate company i.e. RHC Holding Pvt. Ltd. (hereinafter referred to as 'RHC') by way of redeeming preference shares for Rs. 714.60 crores (including premium of Rs. 55.60 crores) held by RHC and on this account all the investments made by the assessee in RCML were immediately treated as permanently declined to NIL in the year of investment; 2. The funds which were earlier invested by RHC in RCML in the form of preference shares, was utilized by RCML to make investments in the form of unquoted equity instruments and 0% optionally convertible redeemable preference shares of Religare Capital Markets International (Mauritius) Limited ('RCMIL'), which had huge accumulated losses. AO held that 1. RHC controlled the management and financial decisions of RCML including appointment of key managerial persons and investment decision by virtue of certain agreements. Thus, it has been presumed that investment made by RCML in RCMIL was controlled by RHC. 2. The capital reduction of preference share cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent made by the assessee company during the course of assessment proceedings u/s 143(3) and reassessment proceedings u/s 148 of the Act. 1. In assessment proceedings for AY 2013-14 the assessing officer vide its questionnaire dated June 09, 2015 has asked us to submit details respecting the details of investment made and in response to the aforesaid questionnaire the assessee company has submitted details vide its submission dated 29th February, 2016. Copy of questionnaire and submission made by the assessee company is enclosed as Annexure(s) 9 and 10. However, no adverse consequence on the aforesaid transaction observed by the assessing officer with respect to the investment made by the assessee company. Furthermore apart from the specific questions raised during the course of assessment proceedings, it is pertinent to note that, the assessee company has duly disclosed its investments in audited financial statements every year and all the transactions have been duly verified and assessed by the AO in AY 2012-13, AY 2013-14 and AY 2014-15 and after undertaking detailed verification, the investment was accepted as genuine and no adverse inference was drawn in any of the past a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tius) Limited also acquired/ set-up subsidiaries in Sri Lanka and Australia. However/due to economic slowdown and significant decline in the investment banking business overseas, the business interest of RCMIL running through various subsidiaries were severely affected. Losses incurred by the RCMIML and its step down subsidiaries as on 31.03.2016 are tabulated as under : S. NO. Name of Entity Profit (Loss) incurred till 31.03.2016 (in USD) Losses Incurred during the year FY 2015-16 1. Religare Capital Market International Mauritius Limited. (405,662,933) (6,173,547) 2. Religare Capital (Europe) Limited. Market (118,197,000) (550,000) 3. Kyte Management Limited 9,940 (800) 4. Religare Capital Market (Hong Kong) Limited (486,499,354) (188,594,940) 5. Religare Capital Markets (Singapore) Pte Limited (22,170.043) (1,913,889) 6. Religare Capital Markets Corporate Finance Pte Limited (38,610,994) (2,668,609) The same facts are evident from the relevant extract of audited financial statements of entities mentioned above enclosed as Annexure(s)-12, (12a), (12b), (12c) (12d) and (12e). In order to meet the financial requirements of its wholly-owned subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purely for business purposes, in order to revive its faltering business overseas, which fact has not been denied by the auditor in the special audit report. However, despite best efforts, the banking business of RCMIL and its step-down subsidiaries continued to remain in slump owing to bad market conditions and global financial crisis. As a result, the company suffered consistent losses and some of the step down subsidiaries of RCMIL were forced to shut their operations (e .g. like UK, USA, Japan and Australia) and at some places, RCMIL had to re structure its business to hold minority stake (e.g. in Africa). The chart showing losses suffered by RCMIL in preceding assessment years is tabulated as under: Financial Year Profit (Loss) [in USD] 2011 -12 (193,704,946) 2012 -13 (168,645,752) 2013 -14 (27,548,179) 2014 -15 (6,346,753) 2015 -16 (6,173,547) The aforesaid losses, it is submitted, resulted in significant erosion in the net-worth of RCMIL and consequent decline in net-worth of RCML. As a result, RCML even made provision for diminution of Rs. 1165 crores in the value of its investments in RCMIL as on 31.03.2013 and showed a cumulative loss of Rs. 264.7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce with all the requirements of various authorities as is evident from the following: i) Copy of allotment letter/term sheets issued by RCML for issue of shares to the assessee is enclosed as Annexure-23 ii) Photo copy of the Demat account showing the investment made by the assessee company in the shares of RCML is enclosed as Annexure-24. iii) Photo copies of the relevant extracts of bank statements showing payment for purchase of shares is enclosed Annexure-25. iv) Copy of board resolutions is enclosed as Annexure-26. The said funds were utilized by RCML for the purpose of investment in equity shares of RCMIL, its wholly owned foreign subsidiary, in compliance with various statutory requirements as is evident from the following: i) Copy of board resolutions passed in the meetings of RCML is enclosed as Annexure- 27; ii) Copy of approvals obtained from RBI for remittances made to RCMIL along with copy of application made to RBI is enclosed as Annexure-28. iii) Copy of various reporting made to RBI is enclosed as Annexure-29; iv) Copy of No objection obtained from SEBI along with copy of application made is enclosed as Annexure-30. v) Relevant extract of financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s nominees, to any third party before all the Series B Preference Shares subscribed by RHC during the Capital Contribution Period are fully redeemed through the payment of Redemption Amount per Share for all Series B Preference Shares to RHC, REL shall be obliged to cause such third party to purchase all the outstanding Series B Preference Shares then held by RHC ("Outstanding Series B Preference Shares") along with the sale of equity shares held by the REL. Out of the proceeds of the sale of the equity shares held by REL and Outstanding Series B Preference Shares RHC shall first be paid Redemption Amount per Share for all the Outstanding Series B Preference Shares. Provided however, if the third party refuses to purchase the Preference Shares, REL shall not consummate the sale of its equity shares in RCML." - Schedule 2 of the Agreement further gave right to RHC to appoint director/nominee director to the Board of RCML Relevant extracts of the schedule are re-produced as under: "7. Board of directors of RCML a. As long as any Series B Preference Shares are outstanding, RHC shall be entitled to appoint 1 (one) director on the board of directors of RCML, RHC shall also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amendment agreement are reproduced as under: "Clause 4A of Amendment No. 1 (i.e., RCML's UNDERTAKINGS) shall be deleted in its entirety and shall be replaced by the following: "4A RCML has delivered a written notice requesting REL to infuse capital for the purpose of satisfying the Financial Commitments and RCML hereby undertakes that the capital infused by REL towards satisfaction of the Financial Commitments shall be used only for the purpose of repaying the Financial Commitments of re-payment of any refinancing of such Financial Commitments." Clause 5A of Amendment No. 1 shall be deleted in its entirety and shall be replaced by the following: "5A On the effective date, REL undertakes to fulfill the Financial Commitments in full by agreeing to subscribe to Series D Preference Shares amounting to Rs. 111 9,83,24,660 (Rupees One Thousand One Hundred Nineteen Crores Eighty Three Lakhs Twenty Four Thousand Six Hundred and Sixty Only) at such terms as mutually agreed between REL and RCML at the time of issuance of such Series D Preference Shares. For the avoidance of doubt, it is hereby clarified that unless otherwise agreed in writing amongst the Parties, REL obligation t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts cumulatively establish, without any doubt whatsoever, that the transactions undertaken by the assessee were bona fide transactions driven by commercial motive: (a) The assessee being the ultimate holding company of RCML and RCMIL, undisputedly had deep business interest in both the entities, which were operating in the similar line of business and their performance had a direct impact on the assessee; (b) The assessee, being the ultimate holding company, was obligated to help revive its step down subsidiary RCMIL which was operating in overseas market, in order to advance its own business interest; (c) It was only account of temporary inability on the part of the assessee to infuse funds in RCML that RHC was constrained to make investment in RCML and eventually when the assessee fulfilled its commitment, the funds infused by the assessee was first utilized by RCML to repay RHC; (d) The assessee had, as a matter of fact, invested in preference shares of RCML, its wholly owned subsidiary which was duly supported by various documentary; (e) The funds infused by the assessee in RCML in the form of investment in preference shares of the said company was undisputedly, as al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is a loss making concern of the assessee group. (c) RHC controlled arid managed the operations of RCML; (d) The capital reduction undertaken by RCML was allegedly not approved by various regulatory authorities. (e) Mr. Shachindra Nath and Mr. Anil Saxena are common directors of RCML and RCML (Mauritius) from the financial year 2011-12 to 2015-16. Similarly, Mr. Sunil Godhwani was the common director of the assessee -company and RCML from the financial year 2011-12 to 2015-16. During these financial years, investment were made by the assessee company in RCML and accordingly, RCML made investment in RCML (Mauritius). (f) In the financial statements of RCML (Mauritius) it has shown investment of US $ 7,30,85,459/- (equivalent to INR 580.74 crores) in Kyte Management Limited which was further invested by Kyte in Religare Capital Markets (Hong Kong). Thus, there are assets which are available with RCML (Mauritius) and therefore, the 100% diminution in the value of investment by the assessee company in RCML is not based on facts and circumstances. Each of the aforesaid allegation of the special auditor is rebutted as under: Re (a): Investment made without intent of earning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities have no right to re-write the transaction, notwithstanding that the transaction may result in mitigation of tax liability. Reference, in this regard may be made to the decision of the Delhi High Court in the case of CIT v. EKL Appliances Ltd. 345 ITR 241 wherein, the Court, in the context of transfer pricing provisions, frowned upon, re-characterization of the transaction, inter-alia, observing s under : "The significance of the guidelines of OECD lies in the fact that they recognize that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually under taken and structured by the associated enterprises. It is of further significance that the guidelines discourage restructuring of legitimate business transactions. The reason for characterization of such restructuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of investment immediately after making investment in RCML in preceding assessment years; it is categorically submitted to the special auditors as well as before your goodself that such provision in diminution in the value of investments was always suo-moto disallowed and never claimed as deduction by the assessee while computing its taxable income. The details respecting the provisions for diminution created on the investment made in RCML from the FY 2011-12 to FY 2015-16 and their treatment is as follows: Financial Year Amount of provision created Remarks 2011-12 2,50,00,00,000 The provision was created in the FY 2011-12 and the same is disallowed while computing, the taxable income of FY 2011-12 2012-13 8,10,00,00,000 The provision was created in the FY 2012-13 and the same is disallowed while computing the taxable income Of FY 2012-13 2013-14 80,60,00,000 The provision was created in the FY 2013-14 and the same is disallowed white computing the taxable income of FY 2013-14 2015-16 2,20,40,00,000 The provision was created in the FY 2015-16 and the same is disallowed while computing the taxable income of FY 2015-16 Computation of income highlighting the disallowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per the terms of the agreement, the assessee company had to make investment in the shares of RCML. However, since there was accumulated losses in the said company and the said company with its subsidiaries was having negative net worth, the provision was made in the books of account for diminution of the value of the investment. For the said reason, as per the accounting policy, the provision was made for diminution for the value of such 'Non-Current Investments' in RCML. However, the said provision was not claimed by the assessee as loss till the assessment year 2015-16. It is only after the or der of the Hon'ble Delhi High Court dated 23rd March, 2015, the value of shares issued to the assessee company by RCML were considered at Nil and the loss on the same was considered as capital loss. Merely stating that the provision for diminution was made immediately on the date of investment made by the assessee company in RCML does not prove that the investment made by the assessee in the shares of RCML was not genuine transaction. It was the pure decision of the assessee company whether to invest in a company or not. The revenue cannot dictate the assessee as to how to do business. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is enclosed as Annexure-12 above, showing the negative net worth of US $14,91,720/- (equivalent to Rs. 8,95,03,200/- considering US $ 1 = Rs. 60/-) of the said company. The Hon'ble Delhi High Court has also considered the said fact and considering the same only the order was passed for reduction in the share capital of RCML. Refer para no. 6 and 7 of the said order in which the submission of the assessee company were given as were considered by the Hon'ble Delhi High Court. Merely because there were losses in the subsidiary companies of the assessee company, it cannot be stated that no investment can be made in such case by the holding company in its subsidiary company. In support of the fact that the step down subsidiary and the foreign subsidiaries were incurring losses, we are placing on record the financial statements of the following entities as Annexure-12 above: a) RCML b) RCM International (Mauritius) Ltd. c) Kyte Management Limited d) RCM (Hong Kong) Ltd. e) RCM (Singapore) Pte. Ltd. f) RCM Corporate Finance Pte. Ltd. In view of the aforesaid, it is respectfully submitted that adverse conclusion drawn by the special auditor merely on the basis of fact that R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cheme should not be prejudicial to public interest/policy would also include that it should not be in contravention of any law, including tax law. * It was similarly held by the Karnataka High Court in the case of Shankaranarayana Hotels Pvt. Ltd. vs. Official Liquidator, Govt. of Karnataka (1992) 74 Comp. Cases 290 It may thus be appreciated that once the Scheme is approved by the Court after following due process of law, it cannot be said that the sole purpose of the Scheme was only to avoid tax; indeed, it is settled law that the arrangement, once approved by the Company Court, gets statutory recognition. Reliance in this regard is placed on the following decisions: * The Gujarat High Court in the case of Vo dafone Essar Ltd. Vs. Department of Income Tax: 35 taxmann.com 397, which has subsequently been affirmed by the Supreme Court in Department of Income-tax Vs. Vodafone Essar Gujarat Ltd. (66 taxmann.com 374), held that if the scheme has been framed and is approved by the shareholders in their wisdom, it cannot be said that the scheme itself is floated with the sole criteria of tax avoidance simply because it may have effect and result into avoidance tax. * The Bombay H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olutions, RBI approvals, wherever necessary etc. No deficiency could be pointed out by the special auditor in any of the documents furnished by the assessee before the special auditor as well, as in the assessment proceedings vide several letters submitted earlier. The copies of the RBI approval letters, board resolutions; investment call letters, letter to SEBI, FEMA compliances etc. are enclosed as Annexure - 15(a) above. Thus, the observation of the special auditor that the directors were common director s does not prove anything and should not be considered against the assessee company. Re (f): Creation of 100% diminutio n in the value of investment by the assessee company in RCML is not based on facts and circumstances as RCML (Mauritius) had investment of US $ 7,30,85.459/-(equivalent to Rs. 580.74 crores) in Kyte Management Limited: In this regard, first of all it is stated that the reduction in the value of shares was as per the order of the Hon'ble Delhi High Court in the case of RCML as per which, the value of shares issued to REL would have no value. Copy of order of Hon'ble Delhi High court is enclosed as Anneure-3 above. Thus, questioning the value of shares at nil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to funds utilized for making such investment is proposed to be disallowed. In response to the aforesaid allegation, it is respectfully submitted as under: Re: Investment in RCML not wholly and exclusively for the purpose of business It is submitted that during the relevant assessment year 2016-17, investment of Rs. 229 .40 crores was made by the assessee in partly paid-up preference shares of RCML as under: Date of investment Amount 21.09.2015 Rs. 4,99,99 ,900 30.12.2015 Rs. 224,40,00,100 Total Rs. 229,40,00,000 It is submitted that RCML is wholly owned subsidiary of the assessee and is engaged in the business of providing securities broking services and investment banking & financial advisory services. Further, RCML holds 100% shares of Religare Capital Markets International (Mauritius) Limited ("RCMIL"), which in engaged in the business of investment and banking in overseas market. However, due to economic slowdown and significant decline in the investment banking business overseas, the busine ss interest of RCMIL running through various subsidiaries were severely affected. Therefore, in order to meet the financial requirements of its wholly-owned subsidiary a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the ultimate holding company, was obligated to support its subsidiary company(ies) i.e., RCML and RCMIL to revive its business operations which was negatively impacted on account of adverse overseas market conditions as it had deep rooted interest in the business of its step down subsidiary which was in the similar line of business as that of the assessee. Accordingly, the investment was made purely on account of pressing business expediency and was undoubtedly with bona-fide intentions to revive the business of its subsidiary. In view of the aforesaid, the conclusion drawn by the special auditor that the funds invested by the assessee in RCML were not utilized wholly and exclusively for the purpose of business, is based on surmises and conjectures and all such allegations leading to such an inference are false, baseless and contrary to actual facts placed on record. The special auditor did not appreciate that the Hon'ble Delhi High Court accepted the petition considering the business transactions and the losses incurred by the petitioner RCML (i.e. the subsidiary company of the assessee company) and reduced the capital of the petitioner company during FY 2015-16. The copy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nderstanding entered with the said companies is enclosed as Annexure-39. It is thus evident from the above that the assessee had more than sufficient own funds to invest in its subsidiary company and the presumption drawn by the special auditor that the investment was made out of borrowed funds is factually incorrect and unsubstantiated. That apart, your Honour's kind attention in this regard is invite d to the following decisions wherein it has been held that in the case of mixed pool of funds, where own funds exceed the amount of investment and sufficient funds/ depo sits are available for advancing interest free loans or making investment in shares etc. and there is nothing on record to show that borrowed funds have been directly utilized for such purpose, presumption can be drawn that own funds and not borrowed funds have been used to make investments. The Supreme Court in the case of East India Pharmaceutical Works Ltd. Vs. CIT: 224 ITR 627, though dismissed the appeal of the assessee on the ground that the contention * now raised by the assessee before this Court was not raised before the Tribunal or the High Court, approved the contention of the assessee that, where i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n preference shares made by the assessee, no disallowance of interest expenditure is called for. Without prejudice to the aforesaid, it is submitted that, even otherwise, assuming without admitting that borrowed funds were utilized for making investment in RCML during the year since the assessee had deep financial interest in its subsidiary, even then no part of the interest expenditure can be disallowed, since the investment was made out of commercial expediency and, thus interest expenditure was incurred for the purpose of business as explained above. It is a settled principle of law that where interest free advance/investment is made by a company to another company pursuant to commercial expediency, then interest on funds borrowed by the borrowing company is admissible as business deduction, irrespective of the fact that no interest is charged/ actually received on such loan. in the aforesaid decisions, interest on borrowed funds utilized to make investment in sister concerns/ subsidiary companies were held to be allowable as deduction so long as it is established that such investment was made on account of commercial expediency. Further the expression "commercial expedie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no intention of receiving it back or earning any income from it. The assessee has also submitted that reduction of capital is made as per order of Delhi High court. This fact is not disputed but the genuineness of investment made by the assessee is considered and found to be bogus. Therefore, it is established that the assessee company has siphoned off an amount of Rs. 1755.50 crores through instrument of investment in RCML over several years. Thus, the special auditor' s has appropriately proposed to disallow the short term capital loss of Rs. 500 crores and long term capital loss of Rs. 344,26,75,159/- on account of write off of investment of Rs. 750 crores claimed during the year under consideration. Additionally, investment of Rs. 229 Cr. made by the assessee company, during the year under consideration, is also part of total investment made in its wholly owned subsidiary. Therefore, considering the amount of Rs. 5,19,61,760 /- [ 2,29,40,00,000 * 8.84 %, as computed by special auditor on page no. 64 of the special audit report in FORM 6 B] on funds being not utilized for wholly and exclusively for the purpose of the business but charged to the Profit & Loss account under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Mauritius) from funds made available by RHC before 31.03.2013. RCML (Mauritius) has shown accumulated losses for US$ 39,31,42,633/- (equivalent to Rs. 2,358 crores (@US 1 = INR 60) in its financial statements before 2014. 1. RCH controlled management & financial decision of RCML including appointment of CEO, CFO and investment decision by virtue of agreement dated 13.02.2012, which remain unchanged even after amendment agreements dated 24.05.2012 & 28.03.2013. 2. All agreements between RHC, RCML & the assessee company entered on 13.02.2012, 24.05.2015 & 28.03.2013 were signed by same persons namely Mr. Hemant Dhingra (RHC), Mr. Shachindra Nath (the assessee company) and Mr. Anil Saxena (RCML). 4. Mr. Shachindra Nath & Mr. Anil Saxena we re common directors of RCML & RCML (Mauritius) from the financial year 2011-12 to 2015-16. Also, Hemant Dhingra was director of RCML from 2007 to 2010. Similarly, Mr. Sunil Godhwani was the common director of the assessee company & RCML from the financial year 2011-12 to 2015-16. This shows that person taking decision are same in all companies and are interrelated. 5. Investment made by RCML in RCML (Mauritius) was controlled by RHC and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted as loss. Therefore it is established that the assessee company has siphoned off an amount of Rs. 1755.50 crores through investment of investment in RCML from the financial year 2007-08 to 2015-16 (more than 75% invested after financial year 2011-12). This issue of investment in Mauritius company over the period of time by the assessee company which are reduced to NIL as and when made, needs to be scrutinized by with respect to financials of the RCML (Mauritius) for which the assessing officer may take appropriate decisions as considered necessary relating to investment made from financial year 2007-08 to 2014-15 and years succeeding year under consideration. During the year under consideration out of Rs. 1755.50 crores the assessee company made investment of Rs. 229.40 crores in RCML and claimed long term & short term loss on investment of Rs. 750 crores. (i) Regarding investment of Rs. 229.40 crores from the review of books of accounts of the assessee company, it is observed that the assessee company invested funds in making the investment of Rs. 229.40 crores in RCML which would otherwise results in earning of the interest income. The assessee company simultaneous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 344.26 crores claimed by the assessee company are proposed to be disallowed. 7. It is absolutely clear from the facts that have been brought on record that no matter what is claimed by the Appellant, this transaction is definitely such that its genuineness is in grave doubt. 8. The next objection of the tax payer is that the transaction being one between related parties, cannot be the so le basis to the genuineness. In this connection it is submitted that transactions between the related parties need to be established to be identical to those that a carried out in an uncontrolled environment. This is the basis of the framing of Transfer Pricing rules all over the world. It may also be pointed out that Transfer Pricing rules within Income Tax Act are anti-avoidance provisions which mean 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. 9. The Appellant has stated that it be the ultimate holding company was obligated to support its subsidiary companies likes RCML to revive their business operations. The Appellant seems to ignore the facts that RH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ointed out that relevant investments were made in previous years relevant to assessment years 2012-13 and 2013-14 and such investments were duly accepted as genuine by the assessing officer in the hands of the appellant after detailed verification in those years as demonstrated from the questionnaire raised and replies furnished. Further, as regards write off, the same was a consequence Court approved capital reduction of investee company, i.e., RCML. It is important to note that the capital reduction is accepted as genuine in the hands of RCML as no adverse inference is drawn in the hands of RCML. 4 and 5 The appellant has objected that once a transaction is done as per legal norms and falls within the framework of law, it cannot be termed as a sham. In this connection it is submitted that simply because a transaction is given a legal form, the factual matrix against which any judgement needs to be made cannot be ignored. It is respectfully sub mitted that the investment in preference shares of RCML was made out of business exigency to enable RCML to expand investment banking business overseas through a wholly owned subsidiary company in Mauritius, i.e., Religare Capital Mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 8 Transactions related parties between need to be established to be identical to those carried out in an uncontrolled environment. This is the basis of the framing of Transfer Pricing rules all overt he world. It may also be pointed out that Transfer Pricing rules within Income Tax Act are anti - avoidance provisions which mean that the primary onus lies upon the assesses to show that the transaction with related party is a arm' s length such a nature that wo uld be as carried bet ween unrelated entities. In this regard, as stated supra, the shares have been written off by the appellant only as a consequence of the reduction of share capital of RCML sanctioned by the Delhi High Court. Merely because the transaction was between related parties, the same cannot be the basis to doubt the genuineness of the transaction. The appellant has, in order to provide the genuineness of the transaction, placed on record all possible documentary evidences and the business rationale has been established beyond doubt. Pertinently, not an iota of evidence to the contrary has been placed by the assessing officer or special auditor. In view of the aforesaid, the write-off of shares, as a cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the preference shares (pg 1229 - 1236 of PB Vol III). j) Detailed explanation and rebuttal to all the allegations of the assessing officer/ special auditor. On the other hand, Revenue has not brought on record any evidence, much less credible evidence, to prove that the transaction entered into by the appellant was not genuine. In absence of any evidence, the adjustment made by the assessing officer is illegal and bad in law. 9 The Appellant has stated that it be the ultimate holding company was Obligated to support its subsidiary companies like RCML to revive their business operations. The Appellant seems to ignore the facts that RHC Holdings Pvt. Ltd. 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 Appellant. Therefore, the plea that such a responsibility lies up only upon the Appellant is rather out of place. It is extremely clear that transaction has been so arranged that RHC Holdings Limited is the ultimate beneficiary of this entire transaction, leaving the assessee to suffer losses. It is not a transaction that answers the arm's length standard. While making the said allegations, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant of Rs. 750 Cr. in the RCML stood extinguished became Nil and the assessee booked capital loss on such investments. 26. The arguments of the assessee that the investment was duly accepted as genuine in the past years and hence the disallowance of loss cannot be upheld is found to be a nonplausible explanation as the revenue has examined the source of investment which doesn't necessarily certify the purpose, scheme and the genuineness of the investment. The sources have been examined by the revenue department in relation to the provisions of Section 68. Hence, it cannot be considered as a contrary view taken by the revenue in disallowing the losses claimed. It is a fact on record that the investments have been made in RCML owing to the losses incurred by the RCMIML and since RCML did not have sufficient own funds to cater the financial needs of foreign subsidiary, the funds of the assessee have been used. The assessee tried to protect the brand name of the group by infusing the capital in RCML in the form of preferential shares which have been ultimately utilized by RCMIML. In total, the assessee made investments aggregating to Rs. 1755.55 Cr. in RCML from F.Y. 2008-09 to F. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed losses and some of the step down subsidiaries of the RCMIML have shut down their operations. The RCMIML has consistently incurred losses from the F.Y. 2011-12 to F.Y. 2015-16. The RCMIML is a Mauritius entity which in turn had a UK subsidiary. The losses made by RCMIML in the last 5 years is tabulated below: Financial Year Loss incurred (USD) 2011-12 (193,704,946) 2012-13 (168,645,752) 2013-14 (27,548,179) 2014-15 (6,346,753) 2015-16 (6,173,547) 29. The assessee has invested in the company RCML which is the 100% shareholder of RCMIML in the A.Y. 2011-12 and A.Y. 2012-13. There was no benefit received by the assessee by making investment in this company. It is not necessary that all the investments should yield profits and the revenue also cannot look into business propositions of the assessee. At the same time, the taxation principles in any sovereign nation aims & pro tects the amounts due to them by way of taxation. 30. Further, we have found that the losses incurred by RCMIML and its step down subsidiary are as under: S. NO. Name of Entity Loss incurred till 31.03.2016 (in USD) Losses Incurred during the year FY 2015-16 1. Religare Capital Market Internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for REL' s promoters and their agents. There was no approval or documentation with respect to corporate loan given by RFL to Bharat Road Network Limited (hereinafter referred to as "BRNL") amounting to Rs. 50 Crores. There was allegedly no credit justification for making these investments, which appear to be of dubious quality, given lack of interest payment and non-repayment. d) On January 27, 2017, RBI issued a letter to RFL raising concerns regarding its Corporate Loan Book ("CLB") for the FY 2014-15. RBI, in its letter, inter alia, mentioned that some of the top borrowers of RFL were related entities and financials of such borrowers were weak and raised concerns regarding the creditworthiness of some borrowers and inefficient credit appraisal methodologies adopted by RFL to advance loans to group companies with weak financial standing. Further, RBI had raised concerns regarding improper practices followed by RFL and observed that accounts of various borrowers were used by RFL to route the funds to group companies. RFL had submitted its reply to RBI (letter dated February 20, 2017) stating that it would be able to reduce the CLB portfolio by Rs. 100 Crores in the first quart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nuary 09, 2017 (Rs. 350 Crores) at interest rates ranging from 4.50% - 5.25% per annum. At the same time, the company had outstanding working capital loans in the form of Cash credit and Overdraft loans facilities from different entities during the same period borrowed at a cost between 10.10% - 10.19% per annum. Thus the company placed funds in fixed deposits earning them 4.50% - 5.25% when they were paying 10.10% - 10.19% for Overdraft loans, resulting in a direct loss of over 5% on the whole amount. (c) As the cost of funds to RFL was much higher (almost double) than the rate of return i.e. interest on fixed deposits it was getting from LVB, the fixed deposits placed by RFL were not in the normal course of business. (d) The audit report stated that apart from the two fixed deposits placed with LVB, RFL had opened multiple fixed deposits during the year 2016-2017 for various business purposes, such as for availing Overdraft Facility, giving guarantees to Regulatory Authorities or for facilitating securitization transactions. All of these fixed deposits were pledged and made with specific business related purposes. Given that the fixed deposits placed with LVB were the only on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (RCML). Mr. Shachindra Nath & Mr. Anil Saxena were common directors of RCML & RCML (Mauritius) from the financial year 2011-12 to 2015-16. Also, Hemant Dhingra was director of RCML from 2007 to 2010. Similarly, Mr. Sunil Godhwani was the common director of the assessee company & RCML from the financial year 2011-12 to 2015-16. This shows that person taking decision are same in all companies and are same. Investment made by RCML in RCML (Mauritius) was controlled by RHC and the same was also made before funds were introduced as per agreement dated 28.03.2013 by the assessee company. Ultimately, the funds invested in RCML or used to refund investment of RHC in RCML preference shares. The Assessee company further made investment of Rs. 80.60 crores in financial year 2013-14 & Rs. 229.40 crores in financial year 2015-16 in RCML. All value of, investment made by the assessee company in RCML including investment shown in (7) above, were treated as permanently declined to NIL as and when made. The shows that the assessee company knows before making such investment, that value of its investment will be zero and through such investment, repayment were made to RHC only. RCML (Mauritius) has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmed by appellant and Aegon, i.e., ARLIC was duly registered with the Insurance Regulatory and Development Authority ('IRDA') vide certificate dated 27th June, 2008. The aforesaid investment in shares of ARLIC was disclosed by the appellant under the head 'Non-Current Investments' in its balance sheet in the re levant financial year(s) 2007-08 to 2014-15. 37. During the year under consideration, the appellant sold its entire holding in ARLIC i.e., 57,66,20,000 shares to M/s. Bennett Coleman & Co. Ltd. In pursuance of the said transaction of sale of shares, the appellant company disclosed long-term capital gain of Rs. 10,60,83,585 and short-term capital gain of Rs. 38,12,53,181, which was duly offered for tax in the return of income under the head "capital gains". The details are as under: Particulars As per Profit and Loss Account Profit as per the computation of income Profit on Sale LTCG STCG Total Sale Consideration 971,45,04,162 871,74,79,507 99,70,24,655 971,45,04,162 COA/Indexed COA 576,62,00,000 840,18,04,975 59,18,00,000 899,36,04,975 Cost on sale/expenses 23,35,62,021 20,95,90,947 2,39,71,074 23,35,62,021 Net Amount 371.47,42,141 10,60,83,585 38, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business of acquisition of shares and securities of subsidiary companies/ joint venture companies. The appellant, being a non-de posit taking Core Investment Company (CIC) is not engaged in the business of purchase and sale of shares but invests amount in shares of group companies/joint ventures to earn reasonable return/appreciation on such investments. Investing in shares of group companies with an intent to earn appreciation, it will be appreciated, is the business model of the appellant company, which is in accordance with the guidelines issued by the RBI for CICs. 5.10 In this background, it will be appreciated that investment in shares of ARLIC was made with a purpose of long-term capital appreciation and not as 'stock-in-trade'. The said investment, it is submitted, was not made with a purpose of starting a new line of business, but to hold shares of a company engage d in insurance business as a long-term strategic investment. Legal position: 5.11 It is respectfully submitted that the nature of income arising from shares de pends upon the nature of asset, viz., whether the shares were held as "capital asset" or as "stock-in-trade". 5.12 The term 'capital a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reliance, in this regard, is made to the following decisions where in it has been consistently held that classification of assets as 'investment' or 'stock in trade' primarily depends on the intention with which such asset was acquired: 5.17 The Hon'ble Supreme Court in the case of Raja Bahadur Kamakhya Narain Singh: 77 ITR 253 observed as under: "The fact that the original purchase was made with the intention to resell if an enhanced price could be obtained is by itself not enough but in conjunction with the conduct of the assessee and other circumstances it may point to the trading character of the transaction. For instance, an assessee may invest his capital in shares with the intention to resell them if in future their sale may bring in higher price. Such an investment, though motivated by a possibility of enhanced value. does not render the investment a transaction in the nature of trade. The test often avnlied is. has the assessee made his shares and securities the stock-in-trade of a business.''(emphasis supplied) 5.18 The Gujarat High Court in the case of PCIT v. Ramniwas Ramjivan Kasat: 248 Taxman 484 (refer pages 19-22 of CLPB) after considering Circular dated 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nlisted shares for which no formal market exists for trading, a need has been felt to have a consistent view in assessments pertaining to such income. It has, accordingly, been decided that the income arisins from transfer of unlisted shares would be considered under the head 'Capital Gainirrespective of period of holding, with a view to avoid disputes/litigation and to maintain uniform approach……….." (emphasis supplied) 5.23 On perusal of the aforesaid Circulars, it may be noted that the controversy on the issue of taxability of gains arising on sale of shares has been put to rest by the CBDT by clarifying/ directing that income arising from transfer of unlisted shares shall be considered under the head 'capital gains' in every situation, irrespective of period of holding. 5.24 It is trite law that Circulars issued by the CBDT are binding on the Department [ refer K.P. Varghese v. ITO: 131 ITR 597 (SC), Navnit Lai C. Javeri v. AAC: 56 ITR 198 (SC), Ellerman Lines Ltd. v. CIT: 82 ITR 913 (SC)]. 5.25 Attention is further invited to the following decisions wherein gains on transfer of shares have be en held to be capital gains after taking into consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mended from time to time): * The appellant is mandatorily required to make investment for acquisition of substantial stake, i.e., 44% while balance stake would be held by other co-promoter(s) [refer Clause F to 'Whereas' recitals of the JV Agreement]- page 1385 of PB Vol IV. * The appellant has powers to nominate certain members of the Board (refer clause 6 read with clause 9 of JV Agreement read with subsequent amendments) which is usually provided when an investor acts as a co-promoter/ strategic-long term investor and not where shares are held as trader for purpose of tradingpage 1388, 1389 of PB Vol IV. * Various binding covenants and undertakings were given/ undertaken (refer clause 15 of JV Agreement read with subsequent amendments)- refer 1394 to 1396 of PB Vol IV. No trader in shares shall take upon itself similar binding covenants/ under takings. * Fixed commitments were agreed with respect to investment of capital and funding on the basis of pro-rata shares (refer clause 16 of JV Agreement read with subsequent amendments)- refer pages 1396- 1397 of PB Vol IV. Trader shall not commit any such funding since the objective of the trader is short-term of earning ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the decision of the Supreme Court in the case of Karam Chand Thapar (supra) where in their Lordships observed that the manner of disclosure in the balance -sheet, though not conclusive, is a relevant circumstance. (f) Accounting Standard-13 on 'Accounting for Investments' being followed: As per Accounting Standard-13 on 'Accounting for Investments' issued by the Institute of Chartered Accountants of India (ICAI), the term 'investments' has been defined as under: "Investments are assets held by an enterprise for earning income by way of dividends, interest, and rentals, for capital appreciation, or for other benefits to the investing enterprise. Assets held as stockin-trade are not 'investments." The aforesaid definition clearly states that investments in shares / mutual fund units held for earning dividend/ interest income, capital appreciation over a period of time come under the purview of 'investments' as against 'stock in trade'. Accounting Standard 13 mandates investments to be valued at cost. On the other hand, in the case of securities held as stock-in-trade, valuation is required to be done as per Accounting Standard-2 on "Valuation of Inventories", which requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tments in shares of ARLIC were held by the appellant as "investments" on capital account (not as "stock in trade") and, the refore, profit arising from sale thereof is liable to tax under the head 'capital gains' only. Re: Shareholding represented controlling stake/interest 5.30 As evident from the facts on record, the appellant acquired controlling stake/ promotor stake aggregating to 44% in ARLIC pursuant to the JV Agreement (as amended from time to time). 5.31 Reliance, is placed on the following decisions, wherein shares acquired with a view to have controlling interest in the companies were held to be 'capital assets' and profit arising from sale thereof was held as resulting in income taxable under the head 'capital gains': 5.32 The Bombay High Court in the case of Accra Investments (P) Ltd. v. ITO: 359 ITR 116, held that profit arising from sale of shares of a company acquired by an assessee-investment company, in order to have controlling/managing interest in such company, would be taxable as capital gains and not business income (refer pages 40-49 of CLPB). 5.33 It has been held likewise by the Karnataka High Court in the case of CIT v. Nadatur Holdings and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to any substantial question of law. 5.38 The Delhi Bench of the Tribunal in the case of Pace Industries Ltd.: ITA No. 1106/Del/2004 held that the gains arising on sale of shares held by the assessee promoter company in the promoted company are to tax under the head 'capital gains'. Revenue's appeal against the said order has been dismissed by the Delhi High Court in ITA No. ITA No.252/2009. 5.39 In view of the above, it is submitted that the shares of ARLIC were held as capital assets and again on transfer was on capital account, which was outside the ambit of section 28 of the Act. Re: Rebuttal to specific allegations of special auditor/assessing officer 5.40 The primary case of the special auditor as followed by the assessing officer/DRP is that appellant was actively participating in the business of ARLIC, inasmuch as the appellant controlled the Board and other committees, the appellant had right to appoint CEO, consent of appellant was required for merger/ demerger, etc., and thus any gain from transfer of shares of ARLIC is to be allegedly assessed as business income under section 28(iv)/(va) of the Act. 5.41 The aforesaid allegation/observations are patently e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on profits derived in consideration of their shareholding/ participations, such as capital gains. Now a days, it is fairly well settled that for tax treaty purposes a subsidiary and its parent are also to tally separate and distinct taxpayers. 67. It is generally accepted that the group parent company is involved in giving principal guidance to group companies by providing general policy guidelines to group subsidiaries. However, the fact that a parent company exercises shareholder's influence on its subsidiaries does not generally imply that the subsidiaries are to be deemed residents of the State in which the parent company resides. Further, if a company is a parent company, that company's executive director(s) should lead the group and the company's shareholder's influence will generally be employed to that end. This obviously implies a restriction on the autonomy of the subsidiary's executive directors. Such a restriction, which is the inevitable consequences of any group structure, is gene rally accepted, both in corporate and tax laws. However, where the subsidiary's executive directors' competences are transferred to other persons/bodies or where the subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the autonomy and independence of the subsidiary; f) Once the director s of the subsidiary are appointed under their Articles, even at the request of the parent company and such directors may be removable by the parent company, such directors of the subsidiary owe their duty to their respective companies (i.e ., subsidiaries); g) Undertaking of certain shareholder's activities exercising control over the investee' company is well accepted and does not in any manner affect the independence of the investee. 5.46 In the present case, it is reiterated that investment in shares ARLIC, an unlisted company, was made with the pre dominant intent to reap benefits on account of capital appreciation and not with an intent to engage in the business of sale-purchase of shares. This is clearly evident from the fact that investment in shares of Joint Venture was consistently being disclosed/ reflected under the head 'Non-Current Investment'/ 'capital asset' as opposed to 'stock in trade' in the financial statements of the appellant since financial year 2007-08 and which was always accepted by the Department in the past years. Further, the rights and privileges allowed to the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C) - Jindal Equipments Leasing and Consultancy Services Ltd.: 325 ITR 87 (Del) 5.53 In the instant case, the appellant has received cash consideration on transfer of shares, i.e., consideration in the form of actual money and is not a benefit per se. Thus, provisions of section 28(iv) of the Act have no application at the very threshold. 5.54 For the aforesaid cumulative reasons, it is respectfully submitted that the action of the assessing officer in re-characterizing the gains received on transfer of shares in ARLIC is patently erroneous and the same calls for being reversed. Expenses in connection with transfer- allowable as deduction 5.55 Further, the assessing officer also erred in disallowing professional fee paid to Credit Suisse Securities India Pvt. Ltd. ('CSS') holding that the business expediency of the said amount could not be explained as sale price for transfer of shares was pre-decided. 5.56 It is pertinent to mention that the impugned assessment order does not assign any reason for disallowance of the fee paid, other than stating that the sale price was pre-decided and hence fee paid to CSS is being disallowed, which is patently erroneous and unsus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of shares. It has not been appreciated that transaction of sale of shares does not merely involve negotiation on sale price but involves various complex facets of' negotiations including but not limited to identifying the buyer, deciding/negotiating various terms of the share purchase, preparing the marketing plan, documentation to be prepared for entering into binding share purchase and connected agreements, advise/ guidance on various terms and conditions including warranties, indemnification clauses, etc., to the agreed upon, terms relating to mode and manner of discharge of consideration etc. 5.63 The agreement between the appellant and CSS dated 19.09.2014 (pg 1750-1756 of PB Vol IV) clearly defines the scope of CSS in the transaction of sale of shares of ARLIC and provides as under: - CSS would act as exclusive financial advisor with respect of transaction involving appellant's stake in ARLIC; - The services of CSS would include: (a) Analysing and evaluating the business, operations and financial position of ARLIC; (b) Preparing and implementing a marketing plan relation to sale of ARLIC shares; (c) Coordinating the data room and due diligence investigatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iliates of RHC as follows: Name of entity No. of Shares Percentage of Equity Share Capital Religare Enterprises Limited 5,020,000 99.41 Oscar Investments Limited 15,000 0.30 Ralaxy Holding Company 14,600 0.29 Mr. Sunil Godwani 100 0.00 Mr. Harpal Singh 100 0.00 Mr. Malvinder Mohan Singh 100 0.00 Mr. Shivinder Mahan Singh 100 0.00 Total 5,050,000 100.00 43. We have also gone through the share purchase agreement between the assessee and the purchaser. We have gone through the conditions precedence in the agreement at page no. 1631 of PB. The relevant portion is as under: "(e) The Seller Company and the Company have informed the Purchaser that the Seller Company, Aegon and the Company have agreed that the Company shall and Aegon (to the extent it is able) shall cause the Company to: (i) complete the following actions within a maximum period of 90 days from the receipt of the Name Change Approval Date ("Name Change Period"). (x) remove the term "Religare" from the name of the Company; (y) remove the term "Religare" from the brand, logo, letterhead and all other branded mate rial of the Company, provided that the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r a consideration of some form. The term "going concern" simply means a whole or part of the business that is capable of generating income. Notwithstanding that the business as an operating entity is being sold, the sale involves the separate legal transfer of each type of asset constituting the business. Such assets generally include immovable property, fixed assets, intellectual property, goodwill, know-how, incorporeal rights, debts and stock. The effect of a sale of business is such that the company as a legal entity remains and only those assets which were not sold, if any, remain in such company. Comparison Table 47. A sale of shares and a sale of business may be simply illustrated in the following table : Subject Selling Shares Selling Business Ownership of the Company Ownership of the company will change. The purchaser will now own the company by virtue of their newly acquired shareholding in the Company. Ownership of the company remains unchanged. The incorporator will still hold all of the shares in the company however, such company will no longer consist of the operating business. Ownership of the Business/Assets The business/assets will remain under the ownersh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -Convertible Debentures to its subsidiary company i.e. Religare Securities Ltd. of Rs. 30,33,19,165/- on Rs. 1,66,00,00,000/- the effective rate of which comes out to be 18.27% p.a. the difference of 4.27% comes to Rs. 7,08,90,686/- as shown below: Total interest expense Effective Rate of Interest Excessive Rate of interest Excess Amount of Interest (A) (B) (C) (D = A*C/B) 10,33,19,165 18.27% 4.27% 7,08,90,686 53. Therefore, the excess interest payment of Rs. 7,08,90,686/- 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. 54. Before the revenue authorities, the assessee submitted that during the previous year, the assessee allotted 8,455 Non-Convertible Debentures (NCDs), having face value of Rs. 10,00,000 to the following two entities and received total consideration of Rs. 845.50 crores as under: Particulars NCDs Amount Religare Securities Limited [Zero Coupon NCDs with yield rate of 14%] 3,000 Rs. 300 crores Standard Chartered Bank ['Regular' NCDs with yield rate of 14%] 5,455 Rs. 545.50 crores Total 8,455 Rs. 845.50 crores 55. Out of the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . On perusal of the above, it could be noted that 1,660 NCDs issued to RSL has been classified as NCDs with "Zero Coupon Rate" as against 2,723 NCDs issued to Standard Chartered Bank with 14% p.a. coupon rate. Further, the terms of the allotment specifically provided that the NCDs issued to RSL was in the nature of "Zero Coupon Bond" with yield of 14% p.a. The relevant terms of the Debenture Trust deed dated 14.05.2013, in respect of 3000 NCDs issued to RSL in assessment year 2012-14 is extracted as under: ………………. 2. issued, subscribed and paid-up …………… C. With a view to meet the company's requirements of funds and refinancing of existing debt, the company intended to raise certain funds by issuing Secured Rated Listed Redeemable Non-Convertible Debentures of the aggregate nominal value of Rs. 300,00,00,000 (Rupees Three Hundred Crores only) as follows: S. No Tenure Amount (Rs. In Crs.) No. NCDs Face Value per NCD (Rs.) Term Sheet/Information Memorandum dated Rate of interest (p.a.) and mode of interest payment date/yield on the Debentures (1) 5 years 300 3,000 Rs. 10,00,000 March 26, 2013 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 62. 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. 63. In the result, the appeal of the assessee on this ground is allowed for statistical purpose. Transfer Pricing Issue: Ground No. 8 ALP on Legal & Advisory Serv ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
