TMI Blog2013 (1) TMI 811X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the Appellant had offered the income in the original return of income filed much before the date of search, ought to have a nulled the entire 153C proceedings as no Undisclosed documents were found in relation to the disclosed transaction by the Appellant , and hence the order passed by the learned CIT(A)-I, Hyderabad is wholly unsustainable and is to be quashed. 3. The learned CIT(A)-I, Hyderabad ought to have clearly held that the proceedings u/s. 153C of the I.T. Act 1961 initiated against the Appellant was on a wrong foundation of reasoning arising out of presumptions, assumptions and reappraisal of the same set of facts in respect of a disclosed transaction much before the date of search and was thus not capable of being upheld statutorily or otherwise and therefore the order passed by the A.O. ought to have been quashed by the learned CIT(A)-I. 4. The learned CIT(A) I, Hyderabad ought to have clearly held that the extinguishment of debt redeemed with the financial institutions resulted in a notional surplus/surplus on capital account not exigible to tax. The learned CIT(A) I ought to have deleted the entire amount of ₹ 42,20,31,114/- which included t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The CIT(A) is not justified in restricting the addition made on account of profit earned on debt assignment to ₹ 6,43,20,260 as against ₹ 42,20,114/- arrived at by the Assessing Officer. 3. The CIT(A) is not correct in adopting the value of Share of LVS Power Ltd. at ₹ 10/- per share instead of ₹ 50 /- as adopted by the Assessing Officer. 4. The CIT(A) ought to have appreciated the fact that the assessee company itself has adopted the value at ₹ 50/- per share in its books of account while recording the transaction of debt assignment. 5. The CIT(A) ought to have ordered for addition of ₹ 5,30,23,056/- of interest received by the assessee from LVS Power Ltd., during the year as noted in Su-Para 4 of 4.5.1 of the Assessment order, when he differed with the figures adopted by the Assessing Officer. 6. .. 4. Briefly stated facts of the case are that action u/s.132 of the I.T. Act was initiated in the case of one A. Venkat Rama Reddy and his family companies on 20-08-2009. In the course of search proceedings in the above case, certain documents and loose sheets belonged to the assessee were seized from the residence of A.Venk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he financial institutions. As per the MOU,M/s.LVS Power would offer equity in the event of default, as part payment based on the valuation of the Chartered Accountants. Accordingly, they engaged M/s. Surya Chandra Associates, Hyderabad to ascertain its net worth of M/s. LVS Power Ltd vide valuation report dated 31-12-2007 and arrived at the share value at ₹ 55.82/- (face value ₹ 10/-). M/s. LVS Power Ltd has repaid its debt towards financial institutions to the assessee company by cheques on various dates and also by allotment of shares of 89,42,772 @ ₹ 50/- per share, totalling ₹ 44,71,38,600/-. In brief, the assessee company has settled the debt to the tune of ₹ 78.39 crores by paying ₹ 33.67 crores to the Fls and made a profit of ₹ 42.20 crores. 6. The shares thus acquired by the assessee company were sold to one Shri A.Raghava Reddy and one Shri A.Jaipal Reddy who are having business relations with Venkata Rama Reddy for ₹ 4.OO and ₹ 3.75 respectively on 21-02-2008 who in turn sold all the shares to one Shri Narasimha Reddy for ₹ 2.25/-. Shri Narasimha Reddy again sold all the shares to Shri A.Venkata Rama Reddy on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its balance sheet and only the amounts paid to banks have been shown as an investment in LVS Power Ltd. In AY 2008-09, there is no entry in the balance sheet on the debt assignment. The ledgers of debt assignment and capital reserve submitted by the assessee along with reply is only an afterthought and not part of neither the seized material nor it was submitted by the assessee during assessment proceedings. The Assessing Officer brushed aside the explanation of the assessee that it had inadvertently taken the surplus on account of debt assignment as income by wrong advice/guidance for the finding that assessee set off the carry forward losses to the tune of ₹ 31 lakhs from out of income earned on debt assignment. 8. The Assessing Officer held that assessee adopted a grand tax evasive design in a systematic way by - (i) assigning the debt to it, (ii)diluting the existing shares of LVS Power Ltd, (iii) allotting the shares to assessee company by LVS Power Ltd at ₹ 5O/-per share, (iv) routing these shares through pre-arranged name lenders viz A.Jaipal Reddy and A. Raghava Reddy and A.Narasimha Reddy and (v) finally channelizing the entire set of 89,42,772 shares to Ven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght to tax by the Assessing Officer, and further, the Assessing Officer did not appreciate the entire transaction, and should have accepted the income offered. The assessee has raised various grounds, running into 18 before the CIT(A). The CIT(A) has considered the issue whether the provisions of S.153C are proper or not and held that in view of seizure of documents, S.153C were validly initiated by the Assessing Officer. With reference to the issue of computation of profit made by the Assessing Officer, while accepting that the assessee has correctly taken the valuation of shares at ₹ 50 and has recorded the same in the books, he found that there is no justification to interfere with the value adopted by the Assessing Officer in respect of the shares received by the assessee company, in view of debt assignment which is as per the accounts. He further held that the Assessing Officer was not correct in computing the profit upto the date of allotment of shares ignoring that subsequent sale of shares and therefore, the profit brought to tax by the Assessing Officer was deleted. However, he did not accept that the sale price of the shares could be so low as contended by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndly, it was submitted that there is no satisfaction recorded by the Assessing Officer to indicate that the documents found and seized during the course of search are incriminating. The documents found during the course of search action has not unearthed any transaction not disclosed to the department by the assessee. In the absence of any such satisfaction, the proceedings initiated under S.153A culminated into order under S.143(3) read with S.153C dated 29.12.2010 is bad in law and void ab initio. In this context, the learned counsel placed reliance on the following decisions- (a) Decision of Bombay Bench H of the Tribunal in the case of Bejay Securities Finance Ltd. V/s. ACIT (ITA No.4859 to 4865/Mum/2009 AYs 2001-02 to 2007-08) dated 24.6.2011; (b) Decision of Bombay Bench H of the Tribunal in the case of Anil P.Khimani V./s. Dy. CIT (ITA No.2855 to 2860/Mum/2008 for assessment years 1999-2000 to 20004-05) dated 23.2.2010; (c) Jindal Stainless Learned. V/s. ACIT(120 ITD 301)-Del. (d) Singhad Technical Education Society V/s. ACIT (140 TTJ 233)- Pune. (e) SSP Aviation Ltd. V/s. DCIT (346 ITR 177)-Del. (f) Ingram Micro (India) Exports V/s. DDIT ITAT (Mumbai) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14 is not justified. It is further submitted that the CIT(A) is not justified in replacing the actual sale consideration with a notional figure of sale consideration. The addition of ₹ 6,43,20,260, thus made, is not at all justified and the same may be deleted. Reliance in this behalf is placed on the decision of the Mumbai Bench of the Tribunal in the case of Rupee Finance Management (P) Ltd. V/s. ACIT (129 ITD 539). 16. The learned counsel for the assessee further contended that the assessee has invested in the shares of LVS Power Ltd. in the year 2001. The debt of LVS Power Ltd. was acquired by assessee to protect the initial interest. Thus, the entire transaction is an investment and not an adventure in the nature of trade. In support of this contention, reliance is placed on the following decisions of the Calcutta High Court (a) CIT V/s. Guest Keen Nettlefold Ltd. (115 ITR 205) (b) CIT V/s. Calcutta Discount Co.(P)Ltd (1672 ITR 680). 17. In reply, the Learned Departmental Representative submitted on the preliminary legal issue, that all that section 153C contemplates is that during the course of search material pertaining to another persons should be foun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that taking over debt is itself a risky transaction, and a person who takes over a debt is entering into an activity in the nature of adventure. If he is able to recover the debt or part of the debt, which in the first place was itself bought at discounted rate, is profit. If he is not able to recover, it is a loss. Therefore, the very activity of taking over a debt is in the nature of adventure or trade and is, therefore, rightly assessable under S.28 of the Act. Whether the entries are in capital side or revenue side is not really relevant. To illustrate, it is submitted by the Learned Departmental Representative, a person may buy a plant and machinery, make some repairs and sell it off at a profit. Just because Plant and Machinery is capital item, the profits derived do not take the character of capital receipt. 20. Reconciling the figures of Business Profit (GP-interest paid) arrived at by the Assessing Officer at ₹ 42,61,92,176 and by the CIT(A) at ₹ 6,43,20,260, the Learned Departmental Representative submitted that the main issue is whether the value of shares allotted should be adopted at ₹ 50 per share or at ₹ 10 per share as done by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the debt assignment activity. The assessee instead of taking the book value of the shares allotted to the assessee by M/s. LVS Power Ltd., which were subsequently sold for an amount of ₹ 3.46 crores, took the sale price directly as part of the receipts on debt assignment transaction. Even though the assessee has considered the sale consideration as part of the debt settlement, without making entries for adjustment to shares issued at premium of ₹ 50 and subsequent sale at discounted price, thereby incurring loss at the time of sale of shares. The net result is the same. The Assessing Officer ignoring the sale of shares at a loss considered the allotment of shares at a premium as part of the debt and brought to tax the above amount of ₹ 44.71 crores. It was rightly pointed out by the Ld. CIT(A) vide his observations in para 9.1, that Assessing Officer computed the amount of ₹ 42 crores as income, taking into consideration the value of equity accepted in the assignment of debt directly to Receipt and Payment Account as on 31st January, 2008, instead of computing the income as on 31.3.2008, i.e. as at the end of the year. Therefore, we are of the opinion that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er share to be reasonable and fair for the purpose of computing the profit on sale of shares. Therefore, as against ₹ 3.46 crores received by the assessee, he directed the Assessing Officer to adopt the value of ₹ 8.94 crores, thereby making an addition of ₹ 6,43,20,260. 26. As rightly contended by the Ld. counsel for the assessee before us, the CIT(A) does not have any power to decide the sale price under the provisions of the Act, unless the transaction is considered as bogus or there is any evidence to indicate that the assessee has received more than what it stated to have received. The Income-tax Act does not permit change of sale value of sale of shares transaction. There are provisions to redetemine the purchase cost, if the transaction is collusive or with related parties, but refixing the sale value by certain notional means is not permitted in law while computing business income, except as provided specifically while calculating Capital Gains. Moreover, in arriving at the value of the shares at ₹ 10/-, the CIT(A) has considered the subsequent sale of shares in September, 2008 to March, 2009 at ₹ 10 per share by IDBI. As pointed out before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee company under s. 28(iv). 8.2 We take up third and fourth issues first. Sec. 69 reads as follows : 69. Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the AO, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year. The undisputed facts in this case are that the assessee company has purchased certain shares at a price which is below the market value. There is no dispute of the fact that the price paid for the shares by the assessee company were the cost incurred by the purchaser. It is also not disputed that all these investments were recorded in the books of account. Under s. 69 only such value of the investments may be deemed to be the income of the assessee for the financial year, if they are not recorded in the books of account. Thus s. 69 is not applicable in this case. The first appellate au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company, will be assessable in the hands of the assessee as his income under the head Profits and gains of business or profession . The condition of invoking s. 28(iv) is that the chargeable income of the assessee should arise from the business or in the exercise of profession. There must be a nexus between the business of the assessee and the benefit the assessee derived. The assessee in this case purchased certain shares at a certain price and was required to hold these shares for a period of three years. It is not in dispute that this was an investment made by the assessee company hence irrespective of the fact as to whether these investments were made in pursuance of the MoU or not, we are of the consideration opinion that such investments cannot be said to be a benefit arisen out of the business of the assessee. Moreover the assessee is the purchaser of the shares and there is no event that has taken place during the current accounting year which can be said to have resulted in any income being accrued or arisen to the assessee company during the year. If at all the assessee transfers the shares, then the benefit of profit in question can be brought to tax in those part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the business transaction one party should give to the other party an irretrievable benefit or advantage, as an obligation or facility or a concession. In our opinion, only if the seller had incurred an expense or a liability or had provided a facility to the purchaser, then the value in cash of such expenses or benefit or perquisite shall be treated as income. In this case, the seller has not incurred any expenses or liability or has provided a facility. It sold its shares at a reduced price. Respectfully following the above, we are of the opinion that the CIT(A) has traversed beyond the jurisdiction to re-determine the sale price, when the Assessing Officer himself has not re-determined the sale price, nor considered the transactions as bogus. In view of this, we are not in a position to uphold the order of the CIT(A) in re-determining the sale price and confirming the addition of ₹ 6,43,20,260. Therefore, the assessee s grounds No.1, 6 and 7 on this issue are allowed. 28. Coming to the other contentions about the jurisdiction for initiation of proceedings under S.153C, these issues have become academic in nature. However, as seen from the additional grounds r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of S.153C. This issue along with the contention that the satisfaction was not recorded need not be considered at present and can be examined in an appropriate case. As stated above, on facts and on jurisdiction under S.153C, the orders passed by the Assessing Officer and as partly confirmed by the CIT(A) are not correct, and therefore, the assessee s contentions on these aspects are to be allowed. 31. Another contention raised was that the transfer of shares cannot be considered as business income. This contention is only academic in nature, as the assessee itself has shown debt assignment as a business transaction and offered the profit and the CIT(A) s finding that the income has to be assessed as business income are to be upheld. Consequently, the shares received in lieu of the debt become stock in trade and sale thereof may result in business loss. The Assessing Officer as well as the assessee treated the same as business transactions. Therefore, the ground 5 raised by the assessee that it cannot be treated as business income cannot be accepted on the facts of the case. 32. However, since the gain on the debt assignment gets set off by the loss in the sale ..... X X X X Extracts X X X X X X X X Extracts X X X X
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