TMI Blog2021 (7) TMI 1018X X X X Extracts X X X X X X X X Extracts X X X X ..... ia Switzerland DTAA. Accordingly, addition is deleted. These grounds are allowed Disallowance of long-term capital loss arising from sale of shares - HELD THAT:- Undisputedly, after applying the computational provisions of sections 48 and 49 of the Act to the sale transaction of shares of TTK, long term capital loss arises. Therefore, the assessee is entitled to claim such long term capital loss. As regards the allegation of the assessing officer that assessee had not valued the shares under rule 11UA, we fully agree with the submissions of assessee that rule 11UA is application for valuation of assets specified under section 56(2)(vii), 56(2)(viia) and 56(2)(viid). Therefore, rule 11UA cannot be applied for determining the value of unlisted equity shares for any purpose other than section 56(2) of the Act. In any case of the matter, the assessee, on its part, has furnished valuation report of an expert determining the value of shares. Whereas, no such valuation has been done by the assessing officer to counter assessee s valuation. Similarly, the allegation of the assessing officer that the promoter of Vidal Healthcare Services Ltd, Shri Girish Rao was linked to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services Pvt Ltd (SRSIPL). Assessee has entered into an agreement with SRSIPL on 01-04-2009 for availing certain services from the Indian subsidiary, the details of which are enumerated in the agreement. As per the terms of the agreement, for rendering services, the Indian subsidiary is remunerated at cost (+) mark-up of 12%. In course of assessment proceedings, the assessing officer, on verifying materials on record, noticed that during the year under consideration the assessee had received insurance premia aggregating to the tune of ₹ 1639,97,85,017/- from Indian insurers. Noticing this, the assessing officer called upon the assessee to explain why the aforesaid amount received from re-insurance business in India should not be brought to tax in India. In response, it was submitted by the assessee that since it has neither any business connection nor any permanent establishment (PE) in India, the amount received from reinsurance business cannot be taxed in India as per Article 7 of the India Switzerland Double Taxation Avoidance Agreement (DTAA, in short). The assessing officer, however, did not accept the claim of the assessee. He was of the view that since the assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncluded that neither the assessee has any business connection in India as per Explanation 2 to section 9(1) of the Act nor does it have any PE in India. The Tribunal, in very clear terms held that SRSIPL cannot be considered as a service/dependent agent PE of the assessee. The same view was reiterated by the Tribunal while deciding appeals for assessment years 2011-12 and 2012013 vide ITA Nos 1350 1351/Mum/2016 dated 223-01-2018, for assessment year 2013-14 vide ITA No.2759/Mum/2017 dated 04-07-2017 and for assessment year 2015-16 in ITA No.4898/Mum/2018 dated 26-12-2018. Thus, from the facts discussed above it is amply clear that the issue, whether SRSIPL can be considered as a PE of the assessee in India has arisen time and again before the Tribunal and the Tribunal has consistently decided in favour of the assessee. In fact, the impugned direction of the learned DRP would reveal that though learned DRP was conscious of the fact that the Tribunal has decided the issue in favour of the assessee in assessment year 2010-11; however, since the revenue has filed an appeal against the decision of the Tribunal, learned DRP decided the issue against the assessee just for the sake of k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o furnished a valuation report under DCF method valuing the share at (-) ₹ 363/-. After examining the factual details, the assessing officer noticed that despite the fact that TTK was incurring cash loss in financial years 2008-09 and 2009-10, the assessee went ahead in buying shares with heavy premium. Further, he observed, when the assessee was called upon to value the shares of TTK as per rule 11UA, the assessee submitted that Rule 11UA prescribes the methodology for determining the fair market value of unquoted shares of a company for the purpose of section 56(2)(viia) and (viib) of the Act. Further, the assessee submitted, both section 56((2)(viia) and rule 11UA are attracted to the recipient of shares where there is an inadequate consideration paid by such recipient on purchase of shares. Therefore, it was submitted, since the assessee has sold the shares, section 56(2)(viia) and rule 11UA would not be applicable. The assessing officer, however, was not convinced with the aforesaid submissions of the assessee. He observed, there is no justifiable reason for the assessee in investing in shares of TTK with very high premium and thereafter selling them at huge loss. Therea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TTK to justify the payment of unduly high premium by the assessee for buying the shares, whereas, during the same period shares were issued at par to the Indian promoter. He submitted, in response to the query raised by the IRDA, TTK had furnished its reply justifying subscription of shares at high premium by the assessee. The learned counsel submitted, assessee had to subscribe to shares of TTK to keep the company going. 11. Countering various allegations of the assessing officer, learned senior counsel submitted, various allegations made by the assessing officer are without any basis. He submitted, when the events of acquisition and sale of shares have not been doubted and is factually proved, the loss arising from such transaction cannot be treated as artificial loss, as it has to be computed in terms of section 48 and other provisions of the Act. Further, he submitted, the allegation of the assessing officer that to set off the carry forward loss against the long term capital gain arising in future, the assessee has devised this mechanism, is wholly baseless as at the time of sale of shares, the assessee could not have foreseen the future event of capital gain arising in as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92 crores against the capital gain of ₹ 107.12 crores. Thus the assessing officer correctly observed that the loss was artificially created for setting off against future gain. The very fact that the assessee had purchased shares at huge premium, whereas, the shares were sold at part value to other shareholders and subsequent sale of shares by the assessee sold at a substantially low value of ₹ 5 per share, does not reflect natural behaviour of a prudent businessman. 13. In support of his contention, he relied upon the decision of ITAT, Delhi Bench in case of Heresh W. Chadha L/H of late W. N. Chadha vs DCIT (2011) 43 SOT 544(Del). Further, relying upon the decision of Vodafone International Holdings B.V. vs UOI (2012) 341 ITR 1 (SC) and applying the test/ratio laid down therein to ascertain whether the transaction entered into by the assessee relating to purchase and sale of share is bonafide or not, learned departmental representative submitted, very fact that the assessee had purchased the shares at huge premium as against similar shares sold at par value to other shareholders and the assessee subsequently sold the shares at below par value clearly indicates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Swiss Re invested in TTK at a premium throughout FY 2007,FY 2008 and FY 2009. 2. Berkshire Hathaway provided funds to help the Swiss reinsurer bounce back after it announced losses in 2008 and 2009. 3. In January 2010, the Berkshire Hathaway and Swiss Re agreed to a retrocession transaction, under which Berkshire Hathaway took on a portfolio of Swiss Re's annually renewable life insurance policies, limiting Swiss Re's exposure to claims. 4. In 2010, Swiss Re invested in TTK in two major tranches at a huge premium of ₹ 4703.71 and ₹ 5131.05. 5. TTK continued to allot the same shares which it allotted to Swiss Re at a premium, to its other shareholders at par value, ie, ₹ 10 6. Swiss re continued to buy shares of TTK in FY 201 0-1 1 at huge premiums of ₹ 4703 and ₹ 5131 till 05.08.2010 inspite of the fact that Swiss Re had made up its mind of divesting its interests in TTK in FY 2010- 11 itself. The company to whom the stake was proposed to be sold was Vidal Healthcare Services Pvt Ltd and it was incorporated on 24 August. 2010 i.e. iust 15 days prior to this big announcement, by Mr Girish Rao. 7. All su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares of TTK and then selling them at below par value to accommodate Hathaway Berkshire's interests through Cigna as part of its deal outside India. b. To cause windfall gains to IvlK Girish'Rao c. Use the current year loss to set off.the capital gains arising In future years of the assessee itself and hence lower its own tax liability in the future years. 16. It is a fact that assessee had challenged the disallowance of long term capital loss before learned DRP and in course of proceedings before learned DRP, the assessee had contested each of the aforesaid reasoning of the assessing officer with counter arguments supported by evidence. However, learned DRP has endorsed the decision of the assessing officer, more or less, accepting the reasoning of the assessing officer. Now, the sole issue before us is, whether the long term capital loss claimed by the assessee is allowable or not. Before we proceed to decide the core issue, it is necessary to observe, by share purchase agreement dated 08-12-2006, the assessee had initially purchased shares of TTK numbering 11,11,236 equity share of ₹ 10/ face value at ₹ 45. Subsequently, the assessee had pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DCF method. Complying with the aforesaid regulation, shares of TTK were issued to the assessee at a price not less than the fair market value as per the valuation report. As regards the decision of investing in shares at a high premium, it is a commercial decision of the assessee and is not in violation of any rules or regulations including FEMA regulations. It is observed from the facts and materials on record, the assessing officer, while coming to his conclusion has not properly appreciated the facts on record and has based his conclusion on either half-baked facts or purely on presumption and surmises. The submissions of the assessee that since TTK during the financial years 2008-09 and 2009-10 was facing financial hardship and to help TTK tide over the hardship the assessee had infused the additional capital by subscribing to shares at a premium, has not been properly appreciated in spite of the fact that the loss incurred by TTK is an undisputed factual position. Further, the explanation of the assessee that even after infusion of such capital, the revenue of TTK continued to decline, necessitating assessee s decision to dispose of its shareholding, has not been countered wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the impugned assessment year at a loss. The fact that the shares sold by the assessee are long term capital asset is not disputed. Therefore, once the assessee had sold its long term capital asset, the computational provisions contained in section 48 and 49 of the Act would automatically get triggered and the gain/loss arising out of such transaction has to be computed in terms of sections 48 and 49 of the Act. 21. In the facts of the present case, undisputedly, after applying the computational provisions of sections 48 and 49 of the Act to the sale transaction of shares of TTK, long term capital loss arises. Therefore, the assessee is entitled to claim such long term capital loss. As regards the allegation of the assessing officer that assessee had not valued the shares under rule 11UA, we fully agree with the submissions of learned counsel for the assessee that rule 11UA is application for valuation of assets specified under section 56(2)(vii), 56(2)(viia) and 56(2)(viid). Therefore, rule 11UA cannot be applied for determining the value of unlisted equity shares for any purpose other than section 56(2) of the Act. In any case of the matter, the assessee, on its part, has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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