2017 (11) TMI 1599 - AT - Income Tax

Disallowance of debentures transferred in contravention of the directions of the Hon ble High Court of Delhi - shares have been issued for consideration other than cash being OCDs - assets so transferred in the scheme of demerger - Held that - As admitted by both the parties that the source of investment of Rs. 200 crores as OCDs is not the subject matter of examination u/s 68 of the Incometax Act 1961 in the hands of the assessee company. The source has been explained being money received by CHPL from the sale of shares held by it to Indian Hotels Company Limited. The company has also paid the capital gains tax on the said transaction. The Department had not even challenged this issue and therefore the only issue before us is whether Rs. 128 crores received by the assessee company as OCDs between 01.04.2009 to 25.05.2010 is the income of the assessee u/s 2(24) of the Act. From the above discussion we feel that it is merely a case where Rs. 128 crores of OCDs having been received by the assessee company against issuance of shares in the ratio of 1 6 to the owner of the said OCDs. It is thus a case of issuance of shares for consideration other than cash. We fail to understand how the consideration received can be said to be an income of the assessee company. The company has received debentures against which it has issued shares at a premium. As further observe that in AY 2009-10 there was no requirement in law even in section 56 or any other section which mandates that the company would not issue shares at other than the fair market value. Hence a company was free to issue shares at a premium or at par based on the decision taken by its Board. Therefore it is a simple case where shares have been issued for consideration other than cash being OCDs and this is a transaction clearly on capital account. The Ld. CIT(A) has extensively dealt with this issue and his findings of facts are accurate and correct. We find no reason to interfere with the order of Ld. CIT(A) and the addition of Rs. 200 crores made by the Assessing Officer has rightly been deleted by the ld. CIT(A) vide impugned order. - Decided against revenue

Summary

Issues Involved:
1. Deletion of Rs. 200,00,00,000/- addition by AO on account of disallowance of debentures transferred in contravention of the directions of the Hon’ble High Court of Delhi.

Detailed Analysis:

1. Background and Facts:
The assessee filed its return of income declaring Rs. 4,70,51,350/-. The case involves a scheme of demerger between Asian Hospitality Management Pvt. Ltd. (AMHPL), Claridges Hotel Pvt. Ltd. (CHPL), and the assessee company, which was approved by the Hon’ble Delhi High Court. The scheme transferred the Business Convention Division of CHPL to the assessee company along with stocks, shares, debentures, and other assets.

2. Assessing Officer's (AO) Findings:
The AO observed that the assets transferred included Rs. 200 crores in Optionally Convertible Debentures (OCDs) which, according to the AO, were not part of the demerger scheme approved by the Delhi High Court. The AO added the entire Rs. 200 crores to the income of the assessee under section 2(24) of the Income Tax Act, 1961, contending that the OCDs were transferred in contravention of the High Court’s order and constituted income.

3. Assessee's Contentions:
The assessee argued that Rs. 72 crores out of Rs. 200 crores were part of the current assets as per the High Court’s order. The remaining Rs. 128 crores were invested by CHPL in OCDs of GSL and transferred to the assessee between the appointed date and the effective date of the demerger. The assessee contended that these transactions were in accordance with the demerger scheme, and the shares were issued to the shareholders of CHPL in the ratio of 1:6.

4. CIT(A)'s Findings:
The CIT(A) deleted the addition of Rs. 200 crores, holding:
- Rs. 72,23,63,000/- was correctly shown as current assets in the schedule approved by the High Court.
- The Rs. 127.72 crores were further invested by CHPL in OCDs of GSL and transferred before the effective date with the concurrence of the assessee company.
- The transaction of issuing shares against debentures is a capital account transaction and not income.
- The source of investment by CHPL in debentures of GSL was established from the sale of shares in ELEL Hotels to Indian Hotels Company Limited.

5. Department's Arguments:
The Department argued that OCDs cannot be considered current assets and that the investment in OCDs was not linked to the business convention division. It contended that the debentures transferred constituted income in the hands of the assessee company.

6. Tribunal's Analysis:
The Tribunal examined the balance sheets and found that the current asset of Rs. 72,23,63,000 included debenture application money pending allotment, which was correctly transferred to the assessee company. The Tribunal endorsed the CIT(A)'s findings that Rs. 128 crores of OCDs were transferred with the concurrence of the assessee company as per the demerger scheme. It was held that the transaction was a case of issuance of shares for consideration other than cash, which is a capital account transaction and not income under section 2(24).

7. Conclusion:
The Tribunal upheld the CIT(A)'s order, confirming that the addition of Rs. 200 crores made by the AO was rightly deleted. The appeal by the Revenue was dismissed, and the order of CIT(A) was confirmed on the issue under consideration.

Order Pronounced:
The appeal is dismissed, and the order was pronounced in the open court on 27.11.2017.