9911796707
TMI Blog2021 (10) TMI 505X X X X Extracts X X X X X X X X Extracts X X X X ..... red to as ld. AO). ITA No.4345/Mum/2007- Revenue Appeal 2. The primary facts of the assessee are that it is engaged in manufacturing and sale of pharmaceuticals dealing in both prescription and OTC products as well as bulk drugs, chemicals and skin care products. The company has its registered office and head office at Lower Parel, Mumbai and its units at Deonar, Pithampur, Malad, Thane, Mulund, Bhandup and Paithan. 2.1. During the A.Y.2002-03, the assessee company has amalgamated Rhone Poulenc (India) Limited (RPIL), Super Pharma Limited (SPL) and assets and liabilities (excluding certain assets and liabilities as per Schedule A of the Scheme) of amalgamation of NPIL Finvest Private Limited (NFL) with itself under the scheme of arrangement as approved by the Bombay High Court vide its order dated 29/09/2001. As per the scheme of arrangement, all the assets and liabilities of RPIL and SPL and certain specified assets of NFL stand transferred and vested with the assessee company w.e.f. 01/04/2001 being the effective date. Further during the A.Y.2002-03, the assessee company has also acquired the pharmaceutical division of ICI (India) Limited as a going concern for a total conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the sale value as recorded in the books of the purchasing company. 18. Insofar the disallowance of the claim of depreciation pertaining to BMIL is concerned, we find that the same being a recurring issue is covered by the order of the Tribunal in the assesses own case for A.Y. 2008-09 in favour of the assessee. We find that the Tribunal while disposing off the appeal of the assessee for A.Y. 2008-09, had observed that it was an admitted fact that BMIL before its merger had not claimed depreciation on the assets in the A.Y. 1995-96 & A.Y 1996-97. In fact, the assessee had claimed depreciation for the first time on the assets taken over from BMIL. It was observed by the Tribunal that as per the provisions of Sec. 32 of the IT Act applicable to the relevant assessment year, the assessee was free to either claim or not claim depreciation, as per its own option. On the basis of the aforesaid deliberations, it was concluded by the tribunal that the A.O was not justified in notionally reducing the depreciation for A.Y 1995-96 & A.Y 1996-97 from the WDV of the assets of BMIL while quantifying the depreciation in the hands of the assessee. As a matter of fact, the Tribunal while concl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an itemised sale of assets. On the basis of his aforesaid observations, the A.O worked out the WDV of the block of assets by taking the values of the assets as were recorded in the books of accounts of the purchasing company, as the sale value, and reduced the same from the different block of assets. In the backdrop of his aforesaid reworking of the WDV the A.O scaled down the assesses claim of depreciation in respect of assets of PHL. 20. On a perusal of the records, we find that it is the claim of the assessee that the CIT(A) while disposing off its appeal for A.Y 1999-2000 had observed that the sale of two divisions viz. (i). Glass Division (GGL); and (ii). Bulk Drug Division (BDD) by the assessee was rightly claimed as slump sale transaction. However, as is discernible from the order of the DRP, the issue as to whether the sale of the aforesaid two divisions was to be construed as itemized sale of assets or slump sale is pending before the ITAT in the preceding years of the assessee. Accordingly, the DRP had directed the A.O to allow depreciation to the assessee on the basis of the outcome of the main appeal regarding slump sale vs. itemized sale. In the backdrop of the afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Apex Court had held that deduction u/s.80HHE had to be worked out on the basis of adjusted book profit u/s.115JA of the Act and not on the basis of profits computed under regular provisions of law applicable to computation of profits and gains of business. Respectfully following the same, we do not find any infirmity in the order passed by the ld. CIT(A). Accordingly, the ground No.1(b) raised by the Revenue is dismissed. 5. Ground No.1(c) raised by the Revenue is challenging the action of the ld. CIT(A) in directing the ld. AO to allow deduction for provision of bad and doubtful debts while computing book profits u/s.115JB of the Act. 5.1. We have heard rival submissions and perused the materials available on record. We find that assessee had made provision for bad and doubtful debts in the sum of Rs. 2,53,88,267/-. This sum was duly disallowed by the assessee voluntarily while computing income under normal provisions of the Act. However, while computing book profits u/s.115JB of the Act, the assessee claimed deduction for the same. The ld. AO proceeded to disallow the same while computing book profits u/s.115JB of the Act on the ground that the said provision for bad and doubtf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act that the respondent-assessee has debited the provision of doubtful debt to the profit and loss account and correspondingly reduced the assets by reducing the amount of unsecured loans. On the aforesaid facts, the Tribunal held that this would amount to writing off of the debt. Thus, on examination of facts it concluded that the respondent-assessee has written off the loan and would be entitled to the claim of bad debts. The Tribunal by the impugned order also recorded a finding of fact that once the respondent-assessee has lent surplus money and offered the interest to tax as business income, then the activity of the respondent-assessee of lending money is a business activity. Therefore, the debt qualifies for deduction under Section 36(1)(vii) read with Section 36(2) of the Income Tax Act, 1961. In view of the finding of fact recorded by the Tribunal that the provision has been written off and reliance placed on the decision of the Apex Court in the matter of Vijaya Bank (supra), we see no reason to entertain question (c). 8. In so far as question (k) is concerned, the grievance of the Revenue is that for the purpose of computing profits under Section 115JB, the provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Clause (i)- the amount or amounts set aside as provision for diminution in the value of any asset" 5.5. We find that this amendment has been brought in the statute by Finance Act, 2009 with retrospective effect from 01/04/2001. As stated earlier, Section 115JB of the Act is a self-contained code by itself starting with a non-obstante clause. The Hon'ble Supreme Court in the case of Apollo Tyres reported in 255 ITR 273 had already held that the book profits reported by the assessee which has been approved by their shareholders in the Annual General Body meeting could not be tinkered with by the ld. AO other than those additions or deductions specified in Explanation-1 to Section 115JB (2) of the Act. Clause (i) of Explanation to Section 115JB(2) of the Act specifically mandates that provision for diminution in value of any asset should be added back while computing book profits u/s.115JB of the Act. It is not in dispute that the provision for doubtful debts in the instant case does represent provision made for diminution in value of asset. There is absolutely no quarrel that the case does not fall under Clause "C" of Explanation 1 to Section 115JB(2) of the Act. We hold that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The ld. AO noted that amalgamating company i.e. GBDFC had hived one of its Ibuprofen unit on 01/11/2002 which was having installed capacity of 720 MTS by way of slump sale to another sister concern of GBDFC namely Alpex International Pvt. Ltd., (hereinafter referred to as Alpex), the ld. AO thus alleged by doing the slump sale, GBDFC intentionally reduced installed capacity to 150 MTS as total installed capacity of GBDFC prior to slump sale was 870 MTS. Accordingly, the ld. AO concluded that the purpose of amalgamation was only to transfer huge unabsorbed depreciation and accumulated business losses of GBDFC to the assessee company. 6.3. It was pleaded before the ld. CIT(A) that assessee company, (i) had filed a copy of merger agreement along with resolution to specify the conditions of amalgamation and set off; (ii) had furnished detailed note along with copies of the Hon'ble Bombay High Court order sanctioning the scheme of amalgamation; (iii) had furnished copy of Minutes of meeting of the assessee company; (iv) had furnished copies of returns of income and balance sheet of erstwhile GBDFC together with its prescribed certificate in Form No.62 as specified in Rule 9C of the Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. AR made a statement from the Bar that the assessee company does not hold any shares in GBDFC or in its holding company i.e. Nidus Fincom Pvt. Ltd., (hereinafter referred to as Nidus) and none of the Directors of the assessee company are the Directors on the Board of GBDFC or Nidus. It was also submitted by him that GBDFC is not a related party of the assessee company. In this regard, he drew our attention to page 25 of the factual paper book containing audited balance sheet of the assessee company for the year ended 31/03/2003. Similarly, he also drew our attention to the audited balance sheet of GBDFC as on 31/12/2002 at page 89 and 90 of the factual paper book containing related party transactions thereon, as per Accounting Standard 18 issued by the Institute of Chartered Accountants of India (ICAI). It was also submitted by him that GBDFC is a pharmaceutical company having substantial exports and that there was commercial rationale for the merger of GBDFC with the assessee company. In this connection, he drew our attention to the news article reported in "FINANCIAL EXPRESS" on 29/11/2002 under the caption "NPIL Board approves merger with GBDFC.". In the said news article wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent in the instant case. He led more emphasis on the following dates together with the events and argued that obviously the petition for amalgamation could have been filed by the assessee company on prior to slump sale:- Date of Slump Sale 01/11/2002 Appointed Date for amalgamation 01/01/2003 Order of the Hon'ble High Court approving the scheme of amalgamation 20/02/2003 6.8. From the above mentioned dates, the ld. DR argued that obviously the assessee company could have filed the scheme of amalgamation before the Hon'ble Bombay High Court prior to the date of slump sale i.e. 01/11/2002 and hence, the entire transaction by way of amalgamation was only done as a measure of colourable device to buy losses of GBDFC to be set off with the profits of the assessee company. He also led emphasis on the fact that Ibuprofen undertaking which is a profit making undertaking was sold by the GBDFC on 01/11/2002 by way of slump sale to its sister concern Alpex for a paltry sum of Rs. 50 lakhs. The loss making Hyderabad unit remaining with GBDFC got merged with assessee only for utilisation of its losses and not for its revival. This clearly brings out the colourable devise adopted by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duly approved by the Hon'ble High Court having in mind the larger public interest, the same cannot be disturbed by the Revenue by merely alleging that the merger was done only to buy losses and it was done only as a measure of colourable device. It is also pertinent to note that scheme of amalgamation when it goes for approval before the Hon'ble Bombay High Court, Union of India is made a party to the said scheme, which means all the Central Government regulatory authorities had a right to raise objections to the scheme of merger before the Hon'ble High Court. In the instant case, Income Tax department which is part of Union of India had not filed any objections before the Hon'ble High Court objecting to the merger. No evidence has been brought on record by the ld. DR before us in this regard. Hence, the department cannot object to the same at this point of time while implementing the said order of merger. We find that the scheme of amalgamation approved by the Hon'ble Bombay High Court had to be understood and looked into in a holistic way. It would be just and fair to believe that the scheme of amalgamation would be approved by the Hon'ble High Court only after ensuring that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration." 7.3. We find that the aforesaid observations of Hon'ble Supreme Court had been followed in yet another decision by the Hon'ble Bombay High Court in the case of Sadanand Varde vs. State of Maharashtra reported in 247 ITR 609 wherein it was held that Once a scheme becomes sanctioned by the court, it ceases to operate as a mere agreement between the parties and becomes binding on the company, the creditors and the shareholders and has statutory operation by virtue of the provisions of Section 391 of the Companies Act." 7.4. The said judgment of Hon'ble Bombay High Court further provided that an appeal, if any, against the order of amalgamation lies u/s.391(7) of the Companies Act 1956 and the same cannot be agitated in any collateral proceedings. The relevant extract of the said judgment is reproduced hereunder:- "We are of the view that the amalgamation, which has become final and binding, cannot be permitted to be challenged by the petitioners, without locus standi, in a collateral proceeding in the present writ petition. An amalgamation order can only be challenged under the Companies Act by an appeal under Section 391(7) by any one of the parties, but no such appeal w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also find that assessee in the instant case had duly specified the commercial rationale beyond doubt which goes to prove the complete revival of GBDFC. This fact is also reiterated in the "FINANCIAL EXPRESS" news paper on 29/11/2002 Mumbai edition which date happens to be prior to the date of amalgamation. In other words, the said intention behind merger of GBDFC with assessee company, by exploiting the business prospects and inherent networking advantages of GBDFC, which was reported in the news paper on 29/11/2002 stood ratified and strengthened by the subsequent act of the assessee by fully utilizing the resources of GBDFC. At this juncture, we are conscious of the fact that the income tax dispute cannot be determined based on newspaper reports. But in the instant case, the facts stated in the newspaper reports stood subsequently ratified by the actual events that had taken place post merger. We are completely in agreement with the argument advanced by the ld. AR that since assessee was not in control of the operations of GBDFC prior to the merger including the sale of ibuprofen undertaking on 01/11/2002 by way of slump sale, the assessee cannot be held responsible for the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss that it has incurred by selling off its share holding. In this regard, the assessee submitted that as stated earlier, the capital and reserves of Charak Piramal P. Ltd had been completely eroded. Further, Reckitt Piramal Pvt. Ltd. was incurring huge losses. Thus, the assessee decided that it would be prudent to exit from the company than incur further losses. The assessee exercised enough business prudence and foresight to reduce the further losses it could have incurred, had it not sold the shares. Thus, the assessee exercised appropriate caution in accordance with prudent business practices in its decision to sell the shares and receive whatever little consideration it could and took precautions to reduce the loss it suffered. However, the ld. AO failed to appreciate the action of the assessee without realizing the true intention of the assessee i.e. to avoid the further loss it could have suffered. 8.4. Further, the ld. AO failed to observe that the transaction on sale of shares of both the companies were at arm"s length i.e the shares were not sold to any of the group concerns of assessee. Also, there is no receipt in the hands of the assessee over and above the sale pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ported by way of any valuation report and accordingly, pleaded for restoring this issue to the file of the ld. AO with a direction to the assessee to produce the valuation report. We feel that this is not required to be done as there was no requirement as per the mandate of law on the part of the assessee to furnish a valuation report for sale of unlisted shares in the year under consideration. We find that the assessee had completely narrated the facts and circumstances under which it had to sell the shares for Rs. 75,00,000/-. If the ld. AO has got any doubt on the same, it is for the ld. AO to bring on record the comparable instances to prove that the share sale consideration shown by the assessee is incorrect. Nothing prevented the ld AO to even make cross reference to the buyer of the shares to ascertain the fact that the share sale consideration was anything more than Rs. 75 lacs. The revenue had not brought any material on record to dispute the same and no material is also brought on record to prove whether any corresponding action has been taken in the hands of purchaser of shares. Admittedly, as pointed out earlier, the ld. AO had not brought any comparable instances of sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Assessing Officer by invoking the provisions of Section 2(22B) (i) of the Income Tax Act 1961 for working out the long term capital gain?" 8.10. This question was disposed of by the Hon'ble Court by observing as under:- "4. Regarding question no.(ii): a) The issue which arises herein for consideration is whether it is open to the Assessing Officer to substitute the 'full value of consideration received on sale of shares by its 'fair market value' in the subject Assessment Year. The impugned order of the Tribunal allowed the Respondent assessee's appeal by inter alia holding that the reliance by the Revenue on Section 2(22B) of the Act is not justified. This is for the reason that there is no provision under the Act which would permit the Assessing Officer to substitute the 'full value of consideration' received on sale of shares by 'fair market value'. The only provision in the Act at the relevant time allowing substitution of consideration received by the market value was Section 50C of the Act. Section 50C of the Act deals only with substitution of full consideration received by 'fair market value' in respect of land and/or bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue. (d) In the above view, the question as formulated does not give rise to any substantial question of law. Thus not entertained." 8.11. In view of our aforesaid elaborate observations, in the facts and circumstances of the instant case and respectfully following the aforesaid decisions of the Hon'ble Jurisdictional High Court, we do not find any infirmity in the action of the ld. CIT(A) allowing capital loss on sale of shares of Reckitt Piramal Pvt. Ltd., and Charak Piramal Pvt. Ltd., in the sum of Rs. 11,75,06,652/-. Accordingly, the ground No.1(e) raised by the Revenue is dismissed. 9. The ground No.1(f) raised by the Revenue is with regard to allowability of bad debts as deduction in the sum of Rs. 46,00,000/- by the ld. CIT(A). 9.1. We have heard rival submissions and perused the materials available on record. The ld. AR did not advance any fresh arguments in this regard and vehemently relied on the order of the ld. CIT(A). Per contra, the ld. DR also did not advance any argument and did not narrate the issue in dispute before us and vehemently relied only on the order of the ld. AO. Hence, we deem it fit to reproduce the observations of ld. CIT(A) in this regard for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench decision of the Jurisdictional Tribunal in the case of Oman International Bank. I hold that it is no longer necessary for the appellant to establish that the debt which is written off has become bad during the year. The A.O. is therefore directed to allow bad debts of Rs. 46,00,000/-. This ground of appeal is therefore allowed." 9.3. In view of the elaborate discussions of the ld. CIT(A) on the impugned issue, we do not find any infirmity in the order of the ld. CIT(A) granting relief to the assessee in this regard. Accordingly, ground No.1(f) raised by the Revenue is dismissed. 10. In the result, appeal of the Revenue in ITA No.4345/Mum/2007 for A.Y.2003-04 is partly allowed. ITA No.4000/Mum/2007 (Assessee Appeal) A.Y.2003-04 11. The ground No. I raised by the assessee is challenging the addition in respect of unutilized MODVAT credit u/s.145A of the Act. 11.1. We have heard rival submissions and perused the materials available on record. Both the parties mutually agreed before us that this issue is already adjudicated by this Tribunal in assessee"s own case for A.Y. 2002-03 in ITA No.3927/Mum/2006 dated 20/02/2020 wherein it was held as under:- "5.1. We have heard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the accounting principles laid down by Accounting Standard-2 (for short "AS-2"); (ii). that the ICAI had issued "Guidance Note on Tax Audit under Section 44AB of the I-T Act", which specifically requires the formats in which information as regards the valuation of purchases, sales and inventories under both inclusive and exclusive method are to be presented, and the same provides that irrespective of the methods being followed, the net impact on the profit and loss will be nil; and (iii). that irrespective of whether the assessee follows Inclusive or Exclusive method of valuation of stock, the amount of unutilized MODVAT credit will have no impact on the profits of the assessee. Apart there from, the assessee had also objected to the calculation of the "closing stock" and "opening stock" by the A.O by multiplying the stock value by the ratio of purchases (including excise) and purchases (net of excise). It is further averred by the ld. A.R that insofar the valuation of inventories as per Sec. 145A was concerned, the raw material, packing material, stores and works-in-progress was valued at cost, while for the finished goods were valued at cost or net realisable value, whichever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "due date" of filing of the return of income. As the ld. D.R had submitted that the aforesaid working of the assessee would require to be verified, we therefore, in all fairness restore the matter to the file of the A.O for readjudication. Needless to say, the A.O shall in the course of the set aside proceedings afford a reasonable opportunity of being heard to the assessee, who shall remain at a liberty to substantiate its claim before him. The Ground of appeal No. V is allowed for statistical purposes." 5.2. Respectfully following the same, we deem it fit and appropriate, to remand this issue to the file of the ld. AO to decide the same in the light of directions issued by the Tribunal for the A.Y.2009-10 . Accordingly, the Ground No. II raised by the assessee is allowed for statistical purposes". 11.2. The workings for the MODVAT credit are enclosed in pages 161-164 of the paper book filed by the assessee. Respectfully following the aforesaid decision, we restore this issue to the file of the ld. AO to decide the same in the light of directions issued by this Tribunal for A.Y.2009-10. Accordingly, the ground No. I raised by the assessee is allowed for statistical purposes. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said case, the Hon'ble Apex Court held as under: "In our opinion, the decisions relating to section 37 of the Act will also be applicable to section 36(l)(iii) because in Section 37 also the expression used is "for the purpose of business". It has been consistently held in the decisions relating to section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. Thus in Atherton Vs. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not necessity and grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business. The above test in Atherton's case [1925] 10 TC 155 (HL) has been approved by this court in several decisions, e.g. Eastern Investments Ltd. Vs. CIT [1951] 20 ITR 1, CIT Vs. Chandulal Keshavlal and Co. [1960] 38 ITR 2 601 etc. 26. The expression "Commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regarded the contentions of the assessee and disallowed the claim of the assessee by treating it as capital expenditure. The ld. CIT(A) however, observed that since this expenditure had been incurred pursuant to amalgamation of RPIL with assessee company, the same would fall within the ambit of provisions of Section 35DD of the Act and accordingly only 1/5th of the said expenditure would be eligible for deduction. Against this action of the ld. CIT(A) both assessee as well as the revenue are in appeal before us. 7.2. We find that the genuinity of incurrence of this expenditure by way of making payment to Accenture in the total sum of Rs. 522.97 lakhs is not in dispute. We find that the payment was made by the assessee to Accenture based on agreement which mandated Accenture to assess in the integration of RPIL with the assessee. As per the agreement, the NPIL management had requested Accenture to submit a proposal to ensure the realization of further value to the group through the proposed integration between NPIL and RPIL. Thus, team of Accenture consultants had conducted a detailed pre-proposal study spanning over five weeks to revive NPIL and RPIL operations with a view to ide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m interest payments, it is submitted that interest receipts consists of interest received on Term deposits with companies. on receivable and others whereas, interest payments also consists of payment in respect of interest on loan, debentures and others which was incurred during the normal course of business having direct nexus with each other. Hence, it is purely related to business only. As for as Other income Rs. 53.00 crores (Schedule 15) if concerned, Dividend Rs,22.09 crores, Profit on sale of Assets Rs. 7,80 crores, Rent Received Rs. 6.22 cores included in Other Income Rs. 53.00 crores have already been excluded from the Business Income. Please refer Schedule 2 and Annexure A of Form No. 10CCAC forming part of enclosure of Return of Income. Other income which are forming part of Business Income is as under : Rs.In Crores a) Processing charges received 2.93 b) Services & Commission 8. 64 Miscellaneous- Income c) Scrap Sales 1.62 d) Cash discount 0.37 e) Sales Tax Refund 0.08 f) Export Incentives 0.26 g) Insurance claim 0.93 h) Misc. Income 2.06 5.32 14.2. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly." 14.5. We find that the short dispute in this regard which is to be addressed before us is that while computing the 90% of interest together with rent, miscellaneous income, service charges, commission etc., for the purpose of reducing the same from profits from business eligible for deduction u/s.80HHC of the Act in order to arrive at the adjusted profits of the business, whether the gross interest income or net interest income is to be considered. We find that this issue is no longer res integra in view of the decision of the Hon'ble Supreme Court in the case of ACG Associated Capsules (P) Ltd., vs. CIT reported in 343 ITR 89 wherein it was held that net interest is to be considered. We find that the Hon'ble Apex Court in para 10 of its order had held that 90% of net amount of receipt of nature of interest, rent, commission etc. which is actually included in the profits of the assessee is to be deducted from the profits of the assessee for determining "profits of the business" of the assessee under Explanation (baa) of Section 80HHC of the Act. Respectfully following the same, the ground No. IV raised by the assessee is allowed. The ld. AO is directed to recompute the deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions and perused the materials available on record. We find that assessee company had declared the income from house property in respect of rent received from RPIL House and Centre Point. The ld. AO observed that RPIL House has been sold by the assessee company in A.Y.2002-03 and capital gains offered thereon and registration of the said property was also done in A.Y. 2002-03, the ownership of the said property does not vest with the assessee company. Similarly, the assessee company had entered into a purchase agreement with Morarjee Goculdas Spinning and Weaving Co. Ltd, (MGM) for purchase of office premises at Centre Point, which duly did not materialize. Hence, the ownership of the said premises does not vest with the assessee company. In view of the same, the ld. AO proceeded to treat the rental income received on letting out of the aforesaid property to be taxed under the head "income from other sources" by consequentially denying 30% standard deduction u/s.24(a) of the Act. The ld. AO however, observed that assessee would be eligible only for deduction that qualify u/s.57(iii) of the Act. 19.2. The ld. CIT(A) upheld the action of the ld. AO in respect of treatment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he entire transaction has been carried out by the assessee as a measure of colourable device. In response to the notice of enhancement issued by the ld. CIT(A), the assessee explained that the said loss claimed by it is not fictitious and that the loss arose only because of indexation benefit provided in the statute and the redemption was made at par. The ld. CIT(A) however, completely ignored the contentions of the assessee and denied the claim of long term capital loss on the following grounds:- 1 . GBDFC was a loss making entity and hence, there was no need for its holding company i.e. Nidus to infuse Rs. 40 Cr as equity share capital to enable the redemption of the preference shares as held by the assessee. The assessee was 87% owner of GBDFC. 2. Nidus borrowed money from BMK Laboratories Private Limited ("BMK") which in turn allegedly borrowed money from Nozaki Finance and Investment Company ("Nozaki"). The CIT(A) further alleged that Nidus, BMK and Nozaki are all group companies of the assessee. 3. Had the amalgamation taken place without the redemption of preference shares, the preference shares held by the assessee would have got cancelled and there would have been no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. CIT(A). We hold that the entire method adopted by the ld. CIT(A) to classify this transaction as a colourable device is absolutely without any basis. We find lot of force in the argument of the ld. AR that had the preference shares not been redeemed at par, considering the fact of losses incurred by GBDFC, then the assessee company could not have even got back its investment value. Hence, it could be safely concluded that assessee had taken due cognizance of the fact of incurring huge losses in the books of GBDFC, which apparently had enabled the assessee company to take a conscious call to redeem preference shares at par value so that at least the investment cost could be recovered by the assessee company. This business decision coupled with business prudence having a proper commercial rationale cannot be doubted in the facts and circumstances of the instant case and cannot be classified as a colourable device as wrongly pointed out by the ld. CIT(A). 21.6. With regard to the fact of NIDUS investing fresh equity capital of Rs. 40 Crores in GBDFC to enable the redemption of preference shares held by the assessee is concerned, we find that as per the provisions of the Companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arose only due to the fact of indexation statutorily provided in the Act to the assessee. Hence, the same cannot be denied to the assessee. We find that the Hon'ble Jurisdictional High Court in the case of CIT vs. Enam Securities Pvt. Ltd., reported in 345 ITR 64 had an occasion to look into the similar issue on allowability of long term capital losses arising due to indexation at the time of redemption of preference shares. In the said case before the Hon'ble Bombay High Court, the transactions were carried out with related parties, whereas in the instant case before us, the transactions were carried out with non-related parties. Despite the fact that the transactions were carried out with related parties, the Hon'ble Bombay High court held that there was nothing wrong in claim of long term capital loss arising due to benefit of indexation. The questions raised before the Hon'ble Bombay High Court are as under:- "B. Whether on the facts and in the circumstances of the case the Tribunal was right in holding that there was absolutely no basis whatsoever about the Assessing Officer coming to the conclusion that the redemption of preference shares was a sham even though the managem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Authority was purely based on surmises and conjectures. The Tribunal has followed the judgment of the Supreme Court in Anarkali Sarabhai v. CIT [1997] 224 ITR 422/90 Taxman 502 in holding that the redemption of preference shares results in a transfer within the meaning of Section 2(47). Finally, the Tribunal has held that the non-cumulative redeemable preference shares cannot be equated with debentures or bonds. According to the Tribunal, share capital issued in the form of non-cumulative redeemable preference shares can never be regarded as debentures or bonds. A debenture is a loan taken by the Company. The Companies' Act, 1956 envisages two types of capital, equity share capital and preference share capital. Hence, the Tribunal came to the conclusion that since redeemable preference shares are not bonds or debentures, the assessee would not be deprived of the benefit of indexation under Section 48 of the Income Tax Act, 1961. 5. As regards question (B), there is a finding of fact that the transaction was not questioned by the Revenue for over ten years; that both the assessee and the Company of which the assessee held redeemable preference shares were juridical entities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly in the provisions of the Companies' Act, 1956. Section 2(12) of the Companies' Act, 1956 defines the expression "debenture" to include debenture stock bonds and any other securities of a company, whether constituting a charge on the assets of the company or not. Under Section 80(1) a company limited by shares may, if so authorised by its articles, issue preference shares which are, or at the option of the company are to be liable, to be redeemed. Section 85 provides that 'preference share capital' means, with reference to any company limited by shares, whether formed before or after the commencement of the Act that part of the share capital which fulfills the following requirements, namely: "(a) that as respects dividends, it carries or will carry a preferential right to be paid a fixed amount or an amount calculated at a fixed rate, which may be either free of or subject to income-tax; and (b) that as respects capital, it carries or will carry, on a winding up or repayment of capital, a preferential right to be repaid the amount of the capital paid up or deemed to have been paid up, whether or not there is a preferential right to the payment of either or bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repayment of principal and interest. There is a clear distinction between bonds and share capital because a bond does not represent ownership of equity capital. Bonds are in essence interest bearing instruments which represent a loan. This distinction has been accepted by the Supreme Court in R.D. Goyal v. Reliance Industries Ltd. [2003] 113 Comp. Cas. 1/[2002] 40 SCL 503. The Supreme Court noted that a debenture is simply an instrument of acknowledgement of debt by a company whereby it undertakes to pay the amount covered by it and till then it undertakes to pay interest to the debenture holders. The expression "share" has been defined in Section 2(46) of the Companies' Act, 1956 to mean share in the share capital of a company. On the other hand, a debenture is an instrument of debt executed by the Company acknowledging its liability to repay the amount represented therein at a specified rate of interest. In other words, a debenture is a certificate of a loan or a bond evidencing the fact that the Company is liable to pay an amount specified with interest. Though the amount which is raised by a Company through debentures becomes a part of its capital structure, it does not be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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