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TMI Blog2024 (3) TMI 201X X X X Extracts X X X X X X X X Extracts X X X X ..... vt. Ltd. [in short 'WSAHPL'] stood amalgamated with M/s. Welspun Steel Ltd [in short 'WSL' or 'assessee'] from the appointed date 01.04.2016. The assessee, M/s WSL, is therefore the successor company of M/s. WEPL. The assessee accordingly filed its return of income u/s. 139(1) of the Act on 28.11.2017 declaring income at Rs. 429,21,64,250/- which was later on revised to Rs. 472,53,77,990/-. The case of the assessee was originally selected for scrutiny by issue of notice u/s 143(2) of the Act dated 10.09.2018. The proceedings however stood abated as a consequence of the search action u/s 132 conducted on 30.06.2017 upon the Welspun Group. Pursuant thereto, notice u/s 153A of the Act was issued on 01.08.2018. In response, the assessee filed its return of income on 24.08.2018 declaring income of Rs. 472,53,77,990/-. 3. From the facts on record, it is noted that the WEPL (which stood merged with the assessee) had claimed capital loss of Rs. 423 crore on sale of shares of M/s. Welspun Energy Chhattisgarh Limited [ in short 'WECL'] to its related entity, M/s. Solarsys Infra Projects Pvt. Ltd. [ in short 'SIPPL']. It is noted that WEPL had sold the investment of Rs. 686 crore held in WEC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts return of income filed for AY 2015-16 and was not carried forward as well. 6. Subsequently, WEPL is noted to have again advanced loans aggregating to Rs. 305.20 crores to WECL on different dates during the period from September 2014 to November 2016. It is noted that, majority of the loan viz., Rs. 296.64 crores were advanced prior to 31st March, 2016. These loans received by WECL from its holding company was utilized for making downstream investments in three (3) project SPVs namely (i) M/s. Welspun Energy UP Pvt. Ltd. (ii) M/s. Welspun Energy MP Pvt. Ltd. and (iii) M/s. Welspun Energy Anuppur Pvt. Ltd. by combination of equity infusion and interest free loans. Later on, in the month of November 2016, these loans provided by WEPL to WECL for funding the project SPVs were converted into OCPS. WEPL also invested further sum of Rs. 5.40 cr on 17.03.2017 in OCPS of WECL. Subsequently, vide Share Purchase Agreement [in short 'SPA'] dated 29.03.2017, WEPL sold the entire OCPS of Rs. 686 crores (375 + 305.20 +5.40) held in WECL to SIPPL for an aggregate consideration of Rs. 300 crores. It is noted that, the sale consideration agreed upon was based on the valuation report obtained fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of WECL in three SPVs was only Rs. 300 crores and that WECL ultimately sold the investment in three SPVs to Adani Infra (India) Limited in 2019 for Rs. 295 crores. In AO's view therefore, if the real transaction was seen, there was an overall loss of only Rs. 5 crores whereas, the assessee claimed an higher artificial loss by taking refuge to the earlier investment of Rs. 375 crores which, according to him, was only on paper. The AO accordingly held that there was enough direct and circumstantial evidence surrounding the transaction, which showed that it was a colorable device deployed by the assessee to create a notional loss. The AO thus disregarded the transaction and disallowed the loss. For doing so, the AO referred to the decisions of the Hon'ble Apex Court in the cases of Sumati Dayal Vs CIT (214 ITR 801), Durgaprasad More (82 ITR 540), McDowell & Co. Ltd Vs CTO (154 ITR 148) and Vodafone International Holdings BV vs. UOI (204 Taxman 408). The AO also relied upon the decision of Hon'ble Karnataka High Court in the case of Wipro Ltd (50 taxmann.com 421) for disallowing the impugned capital loss. 9. Being aggrieved by the above order of the AO, the assessee preferred an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed for twin reasons, viz.; (a) he was only a senior accounts staff and a non-managerial person and thus he could not be expected to explain the business rationale behind the decision which is taken in closed doors after much deliberation by the management and (b) he had only averred that he is unable to answer these questions and that nowhere he had stated anything adverse or admitted to any wrong doing. He further emphasized on the fact that, the Revenue was under mistaken assumption of fact that the loss arising because of the merger of WERPL with WEPL was claimed by the assessee. He particularly invited our attention to Para 10.21 of the Ld. CIT(A)'s order wherein it was noted that the loss of Rs. 300.5 crores debited by WECL as a consequence of this merger had been disallowed voluntarily and also not carried forward. The Ld. AR further contended that, the income-tax assessment of WEPL for AY 2015-16, was simultaneously completed by the same AO u/s 153A/143(3) of the Act and he showed us that no adverse inference was drawn either in respect of these transactions between WEPL, WECL and WERPL or in relation to this merger. The AO had neither held the scheme of amalgamation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f OCPS for Rs. 310.60 crores [Rs.305.20 crores + Rs. 5.40 crores], and (iii) sale consideration of Rs. 300 crores, which after indexation resulted in the impugned aggregate capital loss of Rs. 423 crores. It is noted that, the AO has held that this entire transaction of issuing OCPS, scheme of merger and subsequent sale of OCPS was a pre-arranged colorable device undertaken with the sole intent to create an artificial loss and avoid tax. 15. For arriving at the above finding, the AO is noted to have primarily doubted the initial investment of Rs. 375 crores made in OCPS of WECL by WEPL, holding it to be merely on paper. The AO as well as the Ld. DR has heavily stressed on the fact that, the investment so made was routed through wholly owned subsidiaries and received back by WEPL on the same date, which, according to them, showed that the transaction was not genuine. Although at first blush, this circular movement of funds did appear to be unnatural but later on upon being apprised of the rationale behind the same, it is noted that neither did this transfer of funds result in creation of any loss and that there was indeed commercial rationale behind doing so, which we have discusse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve created legal rights and obligations between the parties, which cannot be arbitrarily disregarded. The primary business rationale for the capital infusion in WERPL through WECL was to form an SPV to undertake specific project and ensure that the said SPV would meet the expected net-worth criteria as a part of performance qualifications. The Ld. AR further pointed out that, until the project was obtained and undertaken, there was no purpose for this SPV to keep the funds lying idle and therefore the same was advanced back by way of interest free loan to WEPL. The rationale for giving interest free loan was that, once any project was awarded to WERPL, then WEPL would repay the monies back to WERPL for undertaking the said project. Until then, the monies would be purposefully deployed within the group. 17. Having regard to the foregoing, we find merit in the submission of the Ld. AR that the acts involving issuance of OCPS by WECL and WERPL and thereafter the loan given by WERPL to WEPL was based on business prudence to create specific rights and obligations amongst the entities in the regular course of business. Moreover, as rightly pointed out by Ld. AR that, the movement of fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsequence of the merger. The loss of Rs. 300.50 crores, which was debited in the Profit & Loss Account of WECL, was shown to have been disallowed voluntarily and the said capital loss was not even carried forward by WECL. The relevant findings of the Ld. CIT(A) in this regard are noted to be as under: - "10.21 Also, on perusal of the submissions made by the assessee, it is also noticed that due to merger of WERPL with WEPL, the loss suffered by WECL during the FY 2014-15 was not claimed or carried forward by WECL while filing its return of income for the FY 2014-15. It is seen that WECL, while debiting an expense of Rs. 300,05,00,000/- as "loss on cancellation of OCPS on merger', has re-cognized this loss as capital loss and the same has not been claimed as a deduction. This loss has also not been carried forward. The AO has completely ignored this fact." 20. Before us, the Ld. CIT, DR was unable to controvert the above finding nor was he able to show that this loss had been set-off or claimed by WECL in any subsequent year. Apart from the foregoing, the Revenue was unable to point out any other purported loss created in this scheme of amalgamation, which according to AO, render ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eans which he adopts for reducing his tax burdens have to be legitimate and lawful and the transactions which he enters into have to be bona fide genuine. In this context, the following observations of the Hon'ble Supreme Court in CIT v. B.M. Kharwar [1969] 72 ITR 603(SC) can aptly be quoted, which are as follows: "It is now well-settled that taxing authorities are not entitled to ignore the legal character of the transaction which is the source of the receipt and to proceed on what they regard as the substance of the matter. The taxing authority is entitled to and indeed is bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device and legal relationship it is open to the taxing authorities to unravel the device and determine the true character of the relationship. But the legal effect of the transaction cannot be displaced by probing into the substance of the transaction". 23. Having regard to the above legal principle, in the case before us, WERPL had merged with WEPL. Since the shareholder of WERPL i.e. WECL was a subsidiary of WEPL, Section 19 of Companies Act, 2013 prohibited the holding company to issue its s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble High Court contained the business rationale, which was never disputed by any statutory authorities, at the material time when the scheme was sanctioned. Also, no such adverse finding was rendered by the AO in the income-tax assessment completed u/s 153A/143(3) for AY 2015-16 i.e. the year of amalgamation, copy of which is found placed at Pages 84 to 93 of Paper-book. Hence, according to us, the allegation now being levelled that the scheme undertaken in AY 2015-16 was a colorable device, that too in the income-tax assessment for AY 2017-18, cannot be entertained. Further, as noted above, there was no undue tax benefit availed by this scheme as the purported loss being referred to by the AO had already been disallowed by WECL and therefore the allegation of tax avoidance is noted to have no legs to stand on. The Ld. CIT(A) is also noted to have analyzed the scheme of amalgamation from all angles and held that there was no adverse tax implication or undue tax benefit arising therefrom. The relevant findings of Ld. CIT(A), as noted by us, are as follows: - "10.15 For this we need to further analyse the merger and amalgamation which took place between WEPL and WERPL. It is se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business or profession carried on by the recipient, and (iii) it must be revenue in nature seen " 10.17.3 In the instant case, it is noticed that no benefit or perquisite is arising out of the scheme of amalgamation. The assessee was indirectly holding or in other words was the ultimate holding company having the shares of WERPL through its 100% subsidiary which after the amalgamation ted to the direct ownership of the assets in the assessee's name. In the whole process, the assessee has neither become richer nor poorer. If any benefit or perquisite does not arise from the business or profession carried on by the assessee, the provisions of Section 28(iv) in any case cannot be applied. it is evident that the intention of the Legislature is not to apply the provisions of Section 28(iv) to a case where there is increase in the general reserves arising due to recording of the shares in the balance sheet of the assessee at their market value. 10.17.4 Further, it is also observed that a book entry recording a reserve is a consequence of the amalgamation, which is required to be passed for the limited purpose of balancing the accounts based on the double entry system employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT vs. Ankit Metal and Power Ltd., (109 Taxmann.com 93) and by the Hon'ble Mumbai ITAT in case of Batliboi Limited Vs DCIT (ITAT Mumbai) ITA No. 5428/Mum/2015. In view of the above since the capital reserve, which arose in amalgamation, is not in nature of income and is not a revaluation reserve, the same cannot be included in book profit it u/s 115JB of the Act. 10.20 Further, as regards the cessation of liability in respect of the loan of Rs. 375 crore taken from WERPL by WEPL, owing to the merger, the assessee has explained: that the: same has been neutralized by the corresponding asset being taken over by WEPL. With regard to waiver of 'term loan' or any other loan in contrast to 'working capital loan', it was held as not chargeable to tax under section 41(1) in Mahindra & Mahindra Ltd. v. CIT [2003] 128 Taxman 394/261 ITR 501 (Bom.): The Apex Court affirmed the decision of the Bombay High Court recently which is reported in Commissioner v. Mahindra and Mahindra Ltd. [2018] 93 taxmann.com 32/255 Taxman 305. Also, the Apex Court held that for applying section 28(iv) the benefit must have been received by the assessee in some other form rather than in shape of money. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Pages 14 to 18 of assessment order, we note that the concerned person never admitted to any tax avoidance or stated anything incriminating. Rather, he pleaded ignorance and stated that he was unaware about the commercial rationale for undertaking this transaction. The Ld. AR has pointed out that, Mr. Rajesh Verma held the designation of Senior Vice President (Accounts) and was therefore involved in accounting work of the WEPL. Since Mr. Rajesh Verma was not a part of the Board of Directors or senior management of WEPL who are in-charge of taking strategic business decisions, he was unable to answer the question posed by the Investigating authority. Having regard to the foregoing facts, we thus find ourselves to be in agreement with the following findings of the Ld. CIT(A) negating the reliance placed by the AO upon the statement of Mr. Rajesh Verma. "10.12 .....The AO has perhaps placed too much reliance on the statement of Sh. Rajesh Verma, employee of WEPL, who could not explain the business rationale behind these transactions and also who could not explain the business rationale behind the amalgamation. The fact remains that he has not admitted anything adverse regarding th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dingly, the cost of OCPS of Rs. 375 crores subscribed by WEPL in the first tranche cannot be disregarded or be said to exist only on paper. 29. Now we come to the second tranche of cost of acquisition of OCPS of Rs. 310.60 crores. The facts show that, the assessee had initially granted loan in several tranches to WECL, majorly from September 2014 to March 2016. Later on, these loans were converted to OCPS at face value in November 2016. The AO however suspected foul play because the assessee had sold the entire OCPS in the month of March 2017 to related entity SSIPL, and this particular tranche was subscribed only in November 2016. This according to AO was undertaken with the sole intent to generate loss and reduce capital gains tax liability. On the given facts before us, this suspicion of the AO is noted to be unfounded. The assessee is noted to have furnished evidence that the funds were primarily infused into WECL much prior i.e. between September 2014 and March 2016 and that in November 2016, it had only converted the loans into OCPS. Such act was shown to have been necessitated due to the petition, which had since been filed before the National Green Tribunal. Because of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it to be under-valued, unless the Revenue points out any defect or error in the valuation methodology. 31. As far as the MOU with Adani is concerned, we note that the initial MOU involved sale of shares of WECL for Rs. 422 crores, but the said MOU was ultimately never acted upon. The Ld. AR explained that, when the MOU was entered into in October 2014, the market fundamentals favoured the thermal energy business but by 2016, the business factors had become unfavourable. He showed us that, in 2014, the WECL held vital permissions from regulatory authorities to undertake coal based power projects, which made it an attractive investment for third parties like Adani. However, the National Green Tribunal, vide order dated 21st December 2016, copy of which is found at Pages 131 to 179 of the Paper Book, had set aside the environmental clearance granted to WECL to set-up coal based thermal plants, which indeed adversely impacted its valuation. The contemporaneous fact is also that, even Adani ultimately did not acquire WECL for Rs. 422 crores. Rather, it was in April / May 2019 that, Adani acquired the three SPVs of WECL for an aggregate consideration of Rs. 295 crores. Having regard to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce. There is no prohibition in law that an assessee cannot transact with related parties, but the burden is to demonstrate that the transaction is at arm's length. Hence, what essentially boils down to is whether the OCPS was sold at a fair value or whether the price was artificially arrived at to inflate the loss. In this respect, as noted by us above, the facts on record do not suggest that sale prices of OCPS was artificially deflated. Rather, it was supported by an independent report of merchant banker, and later on, the same investment was sold at a comparatively lower price to third party. We therefore do not find any infirmity in the sale consideration of OCPS as well. 34. The reliance placed by the Revenue on the decision of CIT Vs Wipro Ltd (50 taxmann.com 421) is found to be factually distinguishable. In the decided case, the assessee had earned short-term capital gains from sale of shares in one transaction. Thereafter, to avoid this capital gains tax liability, it had sold the shares of its subsidiary, WFL, which it had acquired at a premium of almost Rs. 107 crores for a pittance rate of a paisa being Rs. 75,000/- in aggregate to three ex-employees of the group. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to AY 2015-16. 36. It can be noticed that both the above said transactions are independent transactions and they are nothing to do with each other, except for the fact that a part of amount of Rs. 375 crores collected by WECL by issuing OCPS was invested to the extent of Rs. 300 crores in the OCPS of WERPL. Thus, (a) the OCPS issued by WECL to WEPL and (b) the OCPS issued by WERPL to WECL are two different transactions carrying different rights and liabilities. Hence they are not connected with each other. However, it appears that the AO has mixed up both the transactions. We notice that the AO has examined the transactions relating to issue and writing off of Rs. 300 crores in AY 2017-18, even though those transactions are relevant for AY 2015-16. The AO has taken adverse view with respect to the same and accordingly, arrived at the conclusion that the investment made by WEPL in the OCPS issued by WECL is also sham, even though it is an independent transaction. However, we are of the view that the AO was not justified in doing so. Hence the disallowance of claim of both long term and short term capital loss was not correct on this reasoning also. 37. In view of the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nswer the question in favour of assessee and hold that, the disallowance u/s 14A cannot exceed the exempt income so earned by the assessee during the year. The relevant findings of the Hon'ble High Court are as follows :- "5. Having heard the learned Counsel for the parties and having perused the documents on record, consistently different High Courts in the country have taken a view that the disallowance under Section 14A of the Act read with Rule 8D of the Rules cannot exceed the Assessee's exempt income. The Delhi High Court, in the case of Cheminvest Ltd. Vs. Commissioner of Income Tax 1, has held that when the Assessee has not earned any income which was exempt from tax, disallowance of the expenditure under Section 14A read with 8D of the Rules would not be permissible. 6. Karnataka High Court, in the case of Pragati Krishna Gramin Bank Vs. Joint Commissioner of Income-tax2, has held that expenditure in relation to income not includable in the total income cannot exceed such income. It was observed as under. "14. We make it clear that the expenditure for earning exempted income has to have a reasonable proportion to the income, so earned, going by the common financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Act. In the present case, the tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the tribunal held that disallowance under section 14A of the Act could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of CIT v Winsome Textile Industries Ltd. [2009] 319 ITR 204 in which also the Court had observed as under : "7. We do not find any merit in this submission. The judgement of this court in Abhishek Industries Ltd. (2006) 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present case, admittedly the assessee did not make any claim for exemption. In such a situation section 14A could have no application." 5. We do not find any question of law arising. Appeal is therefore dismissed." 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inserted in the Finance Act, 2022 under Section 14A of the Act. The said Explanation clarifies that, the provisions of section 14A shall apply and be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year. The Ld. CIT(A) rightly observed that, the aforesaid amendment is explicitly clear that it shall be effective from 01.04.2022 and therefore has to be applied prospectively and not retrospectively. Gainful reference in this regard is made to the decision of Hon'ble Delhi High Court in the case of PCIT v. Era Infrastructure (India) Ltd. (ITA No. 204/2022), following which the coordinate Bench of this Tribunal in the case of Asstt. CIT v. Bajaj Capital Ventures (P.) Ltd. (196 ITD 24) has held that the amendment to Section 14A introduced by the Finance Act 2022 shall apply from Assessment Year 2022-23. 43. Before us, the Ld. DR was unable to bring on record any contrary judicial precedent or any change in position of law to controvert the above findings of the Ld. CIT(A). In view of the above and following the binding decisions of jurisdictional High Court (supra), we see no reason to interfere with ..... X X X X Extracts X X X X X X X X Extracts X X X X
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