TMI Blog2023 (10) TMI 327X X X X Extracts X X X X X X X X Extracts X X X X ..... y having regard to the fact that despite the honest attempt made by the AO in understanding the accounts of the assessee, it has not yielded the desired results, thereby warranting the appointment of the special auditor. At this stage, we cannot hold that there is no co-relation between the aspects which require scrutiny and the terms of reference for the special auditor under the law. Petitioner can raise such objections at the appropriate stage. In view of the afore-going observations, the Court is of the opinion that there is no infirmity in the order directing the special audit. Long- term and short term capital loss on write- off of investment in preference shares of Religare Capital Markets Ltd ( RCML ) - Disallowance of loss as investment made in loss making foreign entities - entire monies in the Indian company went into subsidiary companies situated abroad and Mauritius entity namely, RCMIML incurred losses resulting in erosion of its net worth - conclusion drawn by the special auditor merely on the basis of fact that RCML has made investment in its loss making foreign subsidiary - Whether business rationale behind making such investment is highly erroneous? - clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsurance business in India amongst Aegon International NV and Religare Insurance Holding Company Ltd. As per this agreement, the par ties agreed to establish the JV company for the purpose of carrying on the business of providing insurance products. The assessee has invested 99.41% of share capital consisting of 50,20,000 shares In this case, the assessee has made investment in the share s over a period of 8 years and sold the shares to M/s Bennett Coleman Co. Ltd. and the proceeds have been offered under the head capital gains . We have gone through the provisions of Section 28(va) and Section 28(iv) invoked by the revenue authorities. The assessee has invested the amount for acquiring 44% stake in the ARLIC and sold the same. Hence, it cannot be said that there is sale of business as the assessee do not own the 100% stake in ARLIC. The receipts be taxed under the head capital gains after giving due indexation. The AO shall verify the expenses incurred in connection with the transfer of shares and allow the same. Prior Period Expenses - assessee has claimed expenses as disallowed holding that they are prior period expenses - as submitted that the expenses have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above. - DR. B. R. R. KUMAR, ACCOUNTANT MEMBER SH. YOGESH KUMAR US, JUDICIAL MEMBER For the Appellant : Sh. Ajay Vohra, Sr. Adv. Sh. Deepesh Jain, CA For the Respondent : Sh. Bhaskar Goswami, CIT DR ORDER Per Dr. B. R. R. Kumar, Accountant Member: The present appeal and Stay Application have been filed by the assessee against the order dated 31.03.2021 passed by the AO u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961. 2. Following grounds have been raised by the assessee: 1.0 That on the facts and circumstances of the case and in law, impugned assessment completed vide order dated 31.03.2021 passed under section 143(3) read with section 144C of the Income Tax Act, 1961 ( the Act 5) by the assessing officer ( impugned order ) is illegal and bad in law. 1.1 That or the facts and in law, the impugned order passed by the assessing officer is barred by limitation in terms of section 153 (1) of the Act and is therefore, liable to be quashed. 1.2 That the assessing officer erred on facts and in law in assessing total income of the appellant Rs. 414,84,28,733 as against returned/ declared income of Rs. 9,68,74,129. Re: Specia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that major part of investment in RCML was made by the assessee in earlier years, in which years investments were accepted as genuine by the Department. 3.5 Without prejudice, on the facts and circumstances of the case, write off of investments in RCML ought to be alternatively allowed as business deduction/ loss in the hands of the appellant. Re: Disallowance of alleged interest expenditure relatable to investment in preference shares of RCML 4.0 That the assessing officer/DRP erred on facts and in law in arbitrarily disallowing interest expenditure to the extent of Rs. 5,19,61,760 imputed on investment of Rs. 229.40 crores made in preference shares of RCML during the year, alleging that the investments were not made for the purposes of business. 4.1 That the assessing officer/DRP failed to appreciate that the non-interest bearing funds/ owned funds of appellant were utilized to make- investment in preference shares of RMCL and, therefore, no interest expense could be disallowed. 4.2 Without prejudice, the assessing officer/DRP erred in adopting arbitrary higher interest rate of 8.84% p.a. for the purpose of computing aforesaid disallowance. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st paid Standard Chartered Bank ( SCB ). 7.1 That the assessing officer erred of facts in holding that effective yield/interest paid to RSL (related, concern) is 18.27% as against 14% payable to SCB, without appreciating that rate/ yield payable on both the loans/ instruments is same @ 14% p.a. 7.2 That the assessing officer in not appreciating that excess amount computed and disallowed is basically compounded interest @ 14% only, on interest accrued but not paid annually on zero coupon NCDs as the same is payable only on maturity as against interest payable annually on loans from SCB. 7.3 That the assessing officer failed to appreciate that interest paid to RSL was at arm s length and comparable to interest paid on same category zero coupon bonds issued to M/s Peerless Mutual Funds (unrelated party) and was thus neither excessive nor unreasonable. 7.4 That the assessing officer erred in making the disallowance of interest without appreciating that similar interest provided for on NCDs in previous years stands accepted by the Department. 7.5 That the assessing officer erred in treating the interest paid to RSL as excessive without appreciating that the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... special audit under section 142(2A) of the Act vide order dated 06.08.2019. Ground No. 1.0 to 1.2 6. General in nature so do not require any comments on our part. Ground No. 2.0 to 2.2 Special Audit u/s 142(2A) of the Act: 7. The matter stands settled by the order of the Hon ble High Court of Delhi wherein the WP (C) 9358/2019 filed by the assessee has been dismissed vide order dated 28.08.2019. The operative part of the said order is as under: 24 .We do not find any reason to hold that the Assessing Officer has shifted the responsibility of scrutinizing the accounts and passed buck to the special auditor, as has been contended by the Petitioner. The special auditor who has been appointed, has been asked to give comments on several issues. Of course, while carrying out the audit, the special auditor would have to verify the books of accounts of the Petitioner so that the report furnished by him, is of assistance to the Assessing Officer to determine the taxable income. We have per used the terms of reference and do not find the same to be inappropriate, especially having regard to the fact that despite the honest attempt made by the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is not able to justify the allegations of special auditors in respect of diversion of funds to RCMIML through its investment in wholly owned subsidiary RCML and the sole purpose of the investment in RCML is to take over the liability of RHC towards capital commitment or repayment of existing liability of RHC. There is no dispute to the fact that no one can step in the shoe of the businessmen but a business expediency need to be established. In the present case, the assessee failed to establish the same except that the same is done as per investment agreement. The investment of funds by the assessee in RCML is used to funds RCMIML which already incurring loss. It was also established that investment in RCML was treated by the assessee as permanently declined to NIL as and when made by the assessee over last several years, which show that there is no intention of receiving it back or earning any income from it. The assessee has also submitted that reduction of capital is made as per order of Delhi High court. This fact is not disputed but the genuineness of investment made by the assessee is considered and found to be bogus. Therefore, it is established that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pattern of the assessee company is as under: 14. From the above, it can be deciphered that the losses were infact suffered by Religare Capital Markets International (Mauritius) Ltd. (RCMIML) and Religare Capital Markets (Europe) Ltd. [Investment Banking Business acquired in UK] which are independent entities situated in Mauritius and UK/Europe. These entities are taxable in their respective countries. 15. The appellant had invested in 0.001% non-convertible cumulative re deemable preference shares of its wholly owned subsidiary, M/s Religare Capital Market Ltd. ( RCML ) as under: - May 2011 : Rs. 250 crores [2.5 crores shares @ Rs. 100 (including Rs. 90 premium)] - March 2013 : Rs. 500 crores [50 crore shares @ Rs. 10] 16. RCML had a wholly owned subsidiary company in Mauritius, i.e., Religare Capital Markets International (Mauritius) Limited ( RCMIML ). RCMIML, in turn, had a UK subsidiary called Religare Capital Markets (Europe Limited, UK, which acquired investment banking business, which, in turn, had Joint Ventures (JV)/ Wholly Owned Subsidiary (WOS) in various countries like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of RCML the financial year 2011-12 (Rs. 250 crores) and financial year 2012-2013 (Rs. 500 crores). Questionnaire was issued to the assessee company for providing details relating to such investment vide our letter no. DGA/REL/16-17/001 dated 08.08.2019 as reproduced below: 1. The company has shown investment of Rs. 385,55,00,000/- in equity shares, Rs. 620,00,00,000/- in 0.002% of Cumulative Non Convertible Preference Shares, Rs. 750,00,00,000/- in 0.001% Cumulative Non Convertible Preference shares of Religare Capital Markets Ltd. totaling to Rs. 1755,55,00,000/-. Out of the same, it is observed that provision for diminution of Rs. 750,00,00,0 00/- was made in earlier years and provision for diminution of Rs. 229,40,00,000/- was created during the year under consideration. Please provide following documents: 1. Copy of agreement entered into among the company, RHC Holding Pvt. Ltd. (RHC) and Religare Capital Markets Ltd. (RCML) on 13.02.2012 for capital contribution commitment and any changes thereafter. 2. Board resolution specifying the terms conditions for creation in the value of such diminution. 3. Board resolution authorizing investment of Rs. 229,40,00,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company has submitted that the investment of Rs. 229,40,0,000/- was made in the shares of M/s. Religare Capital Market Limited as per terms of agreement dated 13.02.2012 with amendment agreements dated 24,05.2012 28.03.2013. Therefore, from above discussion/ following facts are observed: 1. RCML has made investment in RCML (Mauritius) from funds made available by RHC before 31.03.2013. RCML (Mauritius) has shown accumulated losses for US $ 39,31.42,633/- (equivalent to Rs. 2,358 crores (@ US 1 = INR 60) in its financial statements before 2014. 2. RHC controlled management financial decision of RCML including appointment of CEO, CFO and investment decision by virtue of agreement dated 13.02.2012, which remain unchanged even after amendment agreements dated 24.05.2012 28.03.2013. 3. All agreements between RHC , RCML the assessee company entered on 13.02.2012, 24.05.2012 28.03.2013 were signed by same persons namely Mr. Hemant Dhingra (RHC), Mr. Shachindra Nath (the assessee company) and Mr. Anil Saxena (RCML). 4. Mr. Shachindra Nath Mr. Anil Saxena were common directors of RCML RCML (Mauritius) from the financial year 2011-12 to 2015-16. Also, He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invested by RHC earlier was already transferred to RCML(Mauritius) and booked as loss in RCML (Mauritius) financial statements. The sole purpose of the investment in RCML is to take over the liability of RHC towards capital commitment or repayment of existing liability of RHC. Similarly, investment were made in the financial year 2013-14 2015-16 which was treated as loss. This issue of investment in Mauritius company over the period of time by the assessee company which are reduced to NIL as and when made, needs to be scrutinized by with respect to financials of the RCML (Mauritius) for which the assessing officer may take appropriate decisions as considered necessary relating to investment made from financial year 2007-08 to 2014-15 and years succeeding the year under consideration. During the year under consideration, out of Rs. 1755.50 crores, the assessee company made investment of Rs. 229.40 crores in RCML and claimed long term short term loss on investment of Rs. 750 crores. 1. Regarding investment of Rs. 229.40 crores: From the review of books of accounts of the assessee company, it is observed that the assessee company invested funds in making the investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted, it is observed that The assessee company claimed short term capital loss of Rs. 500 crores and long term capital loss of Rs. 344,26,75,159/- on account of write off of investment of Rs. 750 crores in preference shares of RCML as per following details: Date of acquisition Nature of security Value of investment Indexed Cost Sale price Capital Loss Nature of capital loss 31 May 11 Preference shares 2,50,00,00,000 3,44,26,75,159 3,44,26,75,159 Long Term 31 May 12 Preference shares 5,00,00,00,000 5,00,00,00,000 Long Term Total 7,50,00,00,000 8,44,26,75,159 The assessee was issued show cause as to why this amount should not be disallowed. 1. In response, the assessee vide its submissions dated 24.02.2020 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -convertible redeemable preference shares held by the assessee company to the extent of Rs. 525 crores. The reduction of capital pursuant to section 100 of the Companies Act, 1956 was approved in the EGM of RCML on 22.10.2014. Subsequently, RCML, it is further submitted, had filed scheme for reduction of 52,50,00,000 0.001% Non-convertible Cumulative Redeemable Preference Shares of Rs. 10 each fully paid up aggregating to Rs. 525,00,00,000 before Hon ble Delhi High Court, which was approved on March 23, 2015 and the order was duly registered with the Registrar of Companies (ROC) on May 8, 2015. A copy of the judgment of the Hon'ble Delhi High Court is already submitted with letter dated 28.06.2019. As a result of the order of the Hon ble Delhi High Court, the value of the investment made by the assessee of Rs. 750 crores in the preference shares of RCML became nil and the assessee company booked capital loss for the investment made by it in RCML. In support of the investment in the preference shares of RCML and extinguishment of preference shares, the assessee company submitted the following documents vide letter dated 28.06.2019, 11.10.2019 and 21.10.2019 during the course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 A resolution passed in 2013 for infusing Rs. 1120 cr. by REL in RCML along with call letters received from RCML with respect to the outstanding amount on partly paid up preference share. Copy of the same is enclosed as Annexure- 2 2 (a) for your reference. Page No. 2 of the Submission dated 21 st October, 2019 - Please refer Annexure- 1 and 1 (a). In pursuance of the aforesaid reduction of preference share capital which was effective from May 8, 2015, the assessee was constrained to write off the entire cost of investment in preference shares of its subsidiary company i.e., RCML aggregating to Rs. 750 crores in the previous year relevant to the assessment year 2016-17 i.e., the year under consideration. Further, since the reduction in preference share capital resulted in transfer of such preference shares, being permanent extinguishment of rights of the assessee in such preference shares, the consequential capital loss of Rs. 8,44,26,75,159 suffered thereon was declared in the return of income as under: 1. Long term capital loss - Rs. 344.26 crores 2. Short term capital loss- Rs. 500 crores The calculation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decisions of RCML including appointment of key managerial persons and investment decision by virtue of certain agreements. Thus, it has been presumed that investment made by RCML in RCMIL was controlled by RHC. 2. The capital reduction of preference share capital of Rs. 750 crores was undertaken by RCML in the absence of permissions/approvals from RBI, Income tax authorities and Enforcement department. In rebuttal to the aforesaid the assessee submitted that the conclusions sought to be drawn by the special auditor is base d on incorrect appreciation of facts and position in law as demonstrated hereunder: Investment duly accepted as genuine in past years In this regard, it is at the outset respectfully submitted that the entire capital loss of Rs. 844 crores claimed by the assessee was undisputedly in respect of investments made in RCML in the past assessment year(s) i.e., much prior to assessment year 2016-17 and such investments were duly accepted as genuine by the assessing officer after undertaking detailed verification in the year such investment was made as demonstrated here under: 1. In the assessment proceedings for AY 2012-13 under section 143(3) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial statements every year and all the transactions have been duly verified and assessed by the AO in AY 2012-13, AY 2013-14 and AY 2014-15 and after undertaking detailed verification, the investment was accepted as genuine and no adverse inference was drawn in any of the past assessment proceedings. It may thus be appreciated that once the genuineness of investment is tested in the year of acquisition, it is not open to the Revenue authorities to doubt the transaction in the year of transfer of such investment. In the present case, it is respectfully submitted that the genuineness of the investment having been accepted by the assessing officer after due verification in the year such investment was made i.e., in AY 2012-13 and 2013-14, it is now not open to deny the claim of loss on transfer of such investments, that too based on mere conjectures and surmises. Thus, on the aforesaid preliminary ground itself, the comments of the special auditor calls for being ignored from consideration and there remains no ground for denial of loss claimed by the assessee. Investment in RCML genuine Without prejudice to the above, it is submitted that investment made by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gement Limited 9,940 (800) 4. Religare Capital Market (Hong Kong) Limited (486,499,354) (188,594,940) 5. Religare Capital Markets (Singapore) Pte Limited (22,170.043) (1,913,889) 6. Religare Capital Markets Corporate Finance Pte Limited (38,610,994) (2,668,609) The same facts are evident from the relevant extract of audited financial statements of entities mentioned above enclosed as Annexure(s)-12, (12a), (12b), (12c) (12d) and (12e). In order to meet the financial requirements of its wholly-owned subsidiary and other step-down subsidiaries, RCML was constrained to infuse funds in RCMIL. However, since RCML did not have sufficient own funds to cater to huge financial needs of its foreign subsidiary and its business, it was constrained to request the assessee i.e., its holding company and RHC to provide support in the form of capital funding/infusion. Copy of request letter(s) received from RCML is enclosed as Annexure-13. In pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidiaries of RCMIL were forced to shut their operations (e .g. like UK, USA, Japan and Australia) and at some places, RCMIL had to re structure its business to hold minority stake (e.g. in Africa). The chart showing losses suffered by RCMIL in preceding assessment years is tabulated as under: Financial Year Profit (Loss) [in USD] 2011 -12 (193,704,946) 2012 -13 (168,645,752) 2013 -14 (27,548,179) 2014 -15 (6,346,753) 2015 -16 (6,173,547) The aforesaid losses, it is submitted, resulted in significant erosion in the net-worth of RCMIL and consequent decline in net-worth of RCML. As a result, RCML even made provision for diminution of Rs. 1165 crores in the value of its investments in RCMIL as on 31.03.2013 and showed a cumulative loss of Rs. 264.77 crores in its books of account as on 31 st March, 2013. Consequently, the assessee company being the holding company of RCML also made provision for diminution in the value of the investment made by i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing the investment made by the assessee company in the shares of RCML is enclosed as Annexure-24. iii) Photo copies of the relevant extracts of bank statements showing payment for purchase of shares is enclosed Annexure-25. iv) Copy of board resolutions is enclosed as Annexure-26. The said funds were utilized by RCML for the purpose of investment in equity shares of RCMIL, its wholly owned foreign subsidiary, in compliance with various statutory requirements as is evident from the following: i) Copy of board resolutions passed in the meetings of RCML is enclosed as Annexure- 27; ii) Copy of approvals obtained from RBI for remittances made to RCMIL along with copy of application made to RBI is enclosed as Annexure-28. iii) Copy of various reporting made to RBI is enclosed as Annexure-29; iv) Copy of No objection obtained from SEBI along with copy of application made is enclosed as Annexure-30. v) Relevant extract of financial statement stating holding of RCML as on 31.03.2012 is enclosed as Annexure- 31. It may be appreciated in this regard, that due to economic slowdown, the business of RCMIL, the wholly owned subsidiary of RCML, was adversely affected. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B Preference Shares to RHC, REL shall be obliged to cause such third party to purchase all the outstanding Series B Preference Shares then held by RHC ( Outstanding Series B Preference Shares ) along with the sale of equity shares held by the REL. Out of the proceeds of the sale of the equity shares held by REL and Outstanding Series B Preference Shares RHC shall first be paid Redemption Amount per Share for all the Outstanding Series B Preference Shares. Provided however, if the third party refuses to purchase the Preference Shares, REL shall not consummate the sale of its equity shares in RCML. - Schedule 2 of the Agreement further gave right to RHC to appoint director/nominee director to the Board of RCML Relevant extracts of the schedule are re-produced as under: 7. Board of directors of RCML a. As long as any Series B Preference Shares are outstanding, RHC shall be entitled to appoint 1 (one) director on the board of directors of RCML, RHC shall also be entitled to appoint its nominee director on the audit committee of RCML. b. In the event RCML or REL breach the terms and conditions of this Agreement, RHC shall have the right, subject to the receipt of requis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requesting REL to infuse capital for the purpose of satisfying the Financial Commitments and RCML hereby undertakes that the capital infused by REL towards satisfaction of the Financial Commitments shall be used only for the purpose of repaying the Financial Commitments of re-payment of any refinancing of such Financial Commitments. Clause 5A of Amendment No. 1 shall be deleted in its entirety and shall be replaced by the following: 5A On the effective date, REL undertakes to fulfill the Financial Commitments in full by agreeing to subscribe to Series D Preference Shares amounting to Rs. 111 9,83,24,660 (Rupees One Thousand One Hundred Nineteen Crores Eighty Three Lakhs Twenty Four Thousand Six Hundred and Sixty Only) at such terms as mutually agreed between REL and RCML at the time of issuance of such Series D Preference Shares. For the avoidance of doubt, it is hereby clarified that unless otherwise agreed in writing amongst the Parties, REL obligation to make capital infusion shall only be limited to the Financial Commitments and REL shall not be responsible for any new borrowings nor interest accrued on such new borrowings that relate to a period after September 30, 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RCML and RCMIL, undisputedly had deep business interest in both the entities, which were operating in the similar line of business and their performance had a direct impact on the assessee; (b) The assessee, being the ultimate holding company, was obligated to help revive its step down subsidiary RCMIL which was operating in overseas market, in order to advance its own business interest; (c) It was only account of temporary inability on the part of the assessee to infuse funds in RCML that RHC was constrained to make investment in RCML and eventually when the assessee fulfilled its commitment, the funds infused by the assessee was first utilized by RCML to repay RHC; (d) The assessee had, as a matter of fact, invested in preference shares of RCML, its wholly owned subsidiary which was duly supported by various documentary; (e) The funds infused by the assessee in RCML in the form of investment in preference shares of the said company was undisputedly, as also admitted by the special auditor, utilized by RCML to make investment in RCMIL, in order to revive its faltering business; (f) There was actual payment of consideration by the assessee to RCML and the shares wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a are common directors of RCML and RCML (Mauritius) from the financial year 2011-12 to 2015-16. Similarly, Mr. Sunil Godhwani was the common director of the assessee -company and RCML from the financial year 2011-12 to 2015-16. During these financial years, investment were made by the assessee company in RCML and accordingly, RCML made investment in RCML (Mauritius). (f) In the financial statements of RCML (Mauritius) it has shown investment of US $ 7,30,85,459/- (equivalent to INR 580.74 crores) in Kyte Management Limited which was further invested by Kyte in Religare Capital Markets (Hong Kong). Thus, there are assets which are available with RCML (Mauritius) and therefore, the 100% diminution in the value of investment by the assessee company in RCML is not based on facts and circumstances. Each of the aforesaid allegation of the special auditor is rebutted as under: Re (a): Investment made without intent of earning return In the special audit report, the auditor has alleged that the assessee made investment in RCML without the intent of earning any profit/return therefrom as the funds were ultimately infused by RCML into RCMIL, which was suffering huge losses. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 241 wherein, the Court, in the context of transfer pricing provisions, frowned upon, re-characterization of the transaction, inter-alia, observing s under : The significance of the guidelines of OECD lies in the fact that they recognize that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually under taken and structured by the associated enterprises. It is of further significance that the guidelines discourage restructuring of legitimate business transactions. The reason for characterization of such restructuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured. The Revenue authorities, therefore, cannot, it is submitted, dictate to the assessee, the method/ manner of implementing a transaction nor can the Revenue re-write a legitimate, bonafide commercial transaction merely because incidental tax benefit r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... always suo-moto disallowed and never claimed as deduction by the assessee while computing its taxable income. The details respecting the provisions for diminution created on the investment made in RCML from the FY 2011-12 to FY 2015-16 and their treatment is as follows: Financial Year Amount of provision created Remarks 2011-12 2,50,00,00,000 The provision was created in the FY 2011-12 and the same is disallowed while computing, the taxable income of FY 2011-12 2012-13 8,10,00,00,000 The provision was created in the FY 2012-13 and the same is disallowed while computing the taxable income Of FY 2012-13 2013-14 80,60,00,000 The provision was created in the FY 2013-14 and the same is disallowed white computing the taxable income of FY 2013 14 2015-16 2,20,40,00,000 The provision was created in the FY 2015-16 and the same is disallowed while computing the taxable income of FY 2015-16 Computation of income highli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e holding company of RCML and as per the terms of the agreement, the assessee company had to make investment in the shares of RCML. However, since there was accumulated losses in the said company and the said company with its subsidiaries was having negative net worth, the provision was made in the books of account for diminution of the value of the investment. For the said reason, as per the accounting policy, the provision was made for diminution for the value of such Non-Current Investments in RCML. However, the said provision was not claimed by the assessee as loss till the assessment year 2015-16. It is only after the or der of the Hon ble Delhi High Court dated 23 rd March, 2015, the value of shares issued to the assessee company by RCML were considered at Nil and the loss on the same was considered as capital loss. Merely stating that the provision for diminution was made immediately on the date of investment made by the assessee company in RCML does not prove that the investment made by the assessee in the shares of RCML was not genuine transaction. It was the pure decision of the assessee company whether to invest in a company or not. The revenue cannot dictate the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the financial year ended on 31 st March, 2016 is enclosed as Annexure-12 above, showing the negative net worth of US $14,91,720/- (equivalent to Rs. 8,95,03,200/- considering US $ 1 = Rs. 60/-) of the said company. The Hon ble Delhi High Court has also considered the said fact and considering the same only the order was passed for reduction in the share capital of RCML. Refer para no. 6 and 7 of the said order in which the submission of the assessee company were given as were considered by the Hon ble Delhi High Court. Merely because there were losses in the subsidiary companies of the assessee company, it cannot be stated that no investment can be made in such case by the holding company in its subsidiary company. In support of the fact that the step down subsidiary and the foreign subsidiaries were incurring losses, we are placing on record the financial statements of the following entities as Annexure-12 above: a) RCML b) RCM International (Mauritius) Ltd. c) Kyte Management Limited d) RCM (Hong Kong) Ltd. e) RCM (Singapore) Pte. Ltd. f) RCM Corporate Finance Pte. Ltd. In view of the aforesaid, it is respectfully submitted that adverse conclusion draw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s do not amalgamate for fun. The Court further held that the requirement that the scheme should not be prejudicial to public interest/policy would also include that it should not be in contravention of any law, including tax law. It was similarly held by the Karnataka High Court in the case of Shankaranarayana Hotels Pvt. Ltd. vs. Official Liquidator, Govt. of Karnataka (1992) 74 Comp. Cases 290 It may thus be appreciated that once the Scheme is approved by the Court after following due process of law, it cannot be said that the sole purpose of the Scheme was only to avoid tax; indeed, it is settled law that the arrangement, once approved by the Company Court, gets statutory recognition. Reliance in this regard is placed on the following decisions: The Gujarat High Court in the case of Vo dafone Essar Ltd. Vs. Department of Income Tax: 35 taxmann.com 397, which has subsequently been affirmed by the Supreme Court in Department of Income-tax Vs. Vodafone Essar Gujarat Ltd. (66 taxmann.com 374), held that if the scheme has been framed and is approved by the shareholders in their wisdom, it cannot be said that the scheme itself is floated with the sole criteria of tax avo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gth price. The investments were made by the assessee company as per the terms of the agreement, board resolutions, RBI approvals, wherever necessary etc. No deficiency could be pointed out by the special auditor in any of the documents furnished by the assessee before the special auditor as well, as in the assessment proceedings vide several letters submitted earlier. The copies of the RBI approval letters, board resolutions; investment call letters, letter to SEBI, FEMA compliances etc. are enclosed as Annexure - 15(a) above. Thus, the observation of the special auditor that the directors were common director s does not prove anything and should not be considered against the assessee company. Re (f): Creation of 100% diminutio n in the value of investment by the assessee company in RCML is not based on facts and circumstances as RCML (Mauritius) had investment of US $ 7,30,85.459/-(equivalent to Rs. 580.74 crores) in Kyte Management Limited: In this regard, first of all it is stated that the reduction in the value of shares was as per the order of the Hon ble Delhi High Court in the case of RCML as per which, the value of shares issued to REL would have no value. Cop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for the purpose of business of the company and accordingly, interest cost aggregating to Rs. 5.19 crores, being allegedly attributable to funds utilized for making such investment is proposed to be disallowed. In response to the aforesaid allegation, it is respectfully submitted as under: Re: Investment in RCML not wholly and exclusively for the purpose of business It is submitted that during the relevant assessment year 2016-17, investment of Rs. 229 .40 crores was made by the assessee in partly paid-up preference shares of RCML as under: Date of investment Amount 21.09.2015 Rs. 4,99,99 ,900 30.12.2015 Rs. 224,40,00,100 Total Rs. 229,40,00,000 It is submitted that RCML is wholly owned subsidiary of the assessee and is engaged in the business of providing securities broking services and investment banking financial advisory services. Further, RCML holds 100% shares of Religare Capital Markets International (Mauritius) Limited ( RCMIL ), which in engaged in the business of investment and banking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of Rs. 5 crores made on 21.09.2015 Funds were utilized by RCML to repay Inter-Corporate Deposits of Religare Comtrade Limited. Investment of Rs. 224 crores made on 30.12.2015 Funds were utilized by RCML to redeem preference shares issue d to RHC during the period June, 2012 to August, 2012 in accordance with the agreement. It may be appreciated that the assessee, being the ultimate holding company, was obligated to support its subsidiary company(ies) i.e., RCML and RCMIL to revive its business operations which was negatively impacted on account of adverse overseas market conditions as it had deep rooted interest in the business of its step down subsidiary which was in the similar line of business as that of the assessee. Accordingly, the investment was made purely on account of pressing business expediency and was undoubtedly with bona-fide intentions to revive the business of its subsidiary. In view of the aforesaid, the conclusion drawn by the special auditor that the funds invested by the assessee in RCML were not utilized wholly and exclusively for the purpose of business, is based on surmises and conje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Partly from proceeds of Rs. 47,00,97,881 received on redemption of investment made in Invesco Mutual Fund and partly from surplus funds available with the assessee. Investment of Rs. 224 crores made on 30.12.2015 Out of proceeds received on redemption of investments made in Inter-Corporate Deposits (ICD) of (a) Oscar Investment Ltd. Rs. 155.04 crores; (b) ANR Securities Ltd. Rs. 70 crores. It is submitted that the aforesaid investment in ICD was made by the assessee out of its own surplus funds. Copy of Memorandum of Understanding entered with the said companies is enclosed as Annexure-39. It is thus evident from the above that the assessee had more than sufficient own funds to invest in its subsidiary company and the presumption drawn by the special auditor that the investment was made out of borrowed funds is factually incorrect and unsubstantiated. That apart, your Honour's kind attention in this regard is invite d to the following decisions wherein it has been held that in the case of mixed pool of funds, where own funds exceed the amount of investment and sufficient funds/ depo sits are available for adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be appropriate for this court to look into the additional papers produced by the assessee for entertaining the contention and answering the same . . In the instant case, as demonstrated above, the assessee had sufficient own funds and thereby it can safely be presumed that the investment was made by the assessee in its subsidiary company out of its own funds. For the aforesaid cumulative reasons, in the absence of any direct nexus between the interest bearing borrowed funds and investment in preference shares made by the assessee, no disallowance of interest expenditure is called for. Without prejudice to the aforesaid, it is submitted that, even otherwise, assuming without admitting that borrowed funds were utilized for making investment in RCML during the year since the assessee had deep financial interest in its subsidiary, even then no part of the interest expenditure can be disallowed, since the investment was made out of commercial expediency and, thus interest expenditure was incurred for the purpose of business as explained above. It is a settled principle of law that where interest free advance/investment is made by a company to another company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that no one can step in the shoe of the businessmen but a business expediency need to be established. In the present case, the assessee failed to establish the same except that the same is done as per investment agreement. The investment of funds by the assessee in RCML is used to funds RCMIML which already incurring loss. It was also established that investment in RCML was treated by the assessee as permanently declined to NIL as and when made by the assessee over last several years, which show that there is no intention of receiving it back or earning any income from it. The assessee has also submitted that reduction of capital is made as per order of Delhi High court. This fact is not disputed but the genuineness of investment made by the assessee is considered and found to be bogus. Therefore, it is established that the assessee company has siphoned off an amount of Rs. 1755.50 crores through instrument of investment in RCML over several years. Thus, the special auditor s has appropriately proposed to disallow the short term capital loss of Rs. 500 crores and long term capital loss of Rs. 344,26,75,159/- on account of write off of investment of Rs. 750 crores claimed du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otwithstanding that the transaction may result a mitigation of tax liabilities. 5. In this connection it is submitted that simply because a transaction is given a legal form, the factual matrix against which any judgement ne eds to be made cannot be ignored. 6. In this connection certain material facts that have been brought on record by the Hon ble DRP (quo ted from the reports of the special auditors) are reproduced below: 4.4 The Special auditor has given its findings as under: RCML has made investment in RCML (Mauritius) from funds made available by RHC before 31.03.2013. RCML (Mauritius) has shown accumulated losses for US$ 39,31,42,633/- (equivalent to Rs. 2,358 crores (@US 1 = INR 60) in its financial statements before 2014. 1. RCH controlled management financial decision of RCML including appointment of CEO, CFO and investment decision by virtue of agreement dated 13.02.2012, which remain unchanged even after amendment agreements dated 24.05.2012 28.03.2013. 2. All agreements between RHC, RCML the assessee company entered on 13.02.2012, 24.05.2015 28.03.2013 were signed by same persons namely Mr. Hemant Dhingra (RHC), Mr. Shachin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further observed as below: Therefore, based on above facts and circumstances, it is observed that funds invested by the assessee company in RCML was not made for any business investment but to repay its associate company i.e. RHC by routing of funds through RCML (Mauritius) and booked as loss in RCML (Mauritius) financial statements. The sole purpose of the investment in RCML is to take over the liability of RHC towards capital commitment or re payment of existing liability of RHC. Similarly, investment were made in the financial year 2013-14 2015-16 which was treated as loss. Therefore it is established that the assessee company has siphoned off an amount of Rs. 1755.50 crores through investment of investment in RCML from the financial year 2007-08 to 2015-16 (more than 75% invested after financial year 2011-12). This issue of investment in Mauritius company over the period of time by the assessee company which are reduced to NIL as and when made, needs to be scrutinized by with respect to financials of the RCML (Mauritius) for which the assessing officer may take appropriate decisions as considered necessary relating to investment made from financial year 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m Capital Loss Short Term Capital Loss Claimed From the review of computation of total income submitted, it is observed that the assessee company has claimed short term capital loss of Rs. 500 Crores and long term capital loss of Rs. 344,26,75,159/- on account of write off of investment of Rs. 750 crores in preference shares of RCML, as per following details. As established above, such investment is part of total investment of Rs. 1755.50 crores which were siphoned off by assessee company through RCML, therefore, the short term capital loss of Rs. 500 crores and long term capital loss of Rs. 344.26 crores claimed by the assessee company are proposed to be disallowed. 7. It is absolutely clear from the facts that have been brought on record that no matter what is claimed by the Appellant, this transaction is definitely such that its genuineness is in grave doubt. 8. The next objection of the tax payer is that the transaction being one between related parties, cannot be the so le basis to the genuineness. In this connection it is submitted that transactions between the related parties need to be established to be identical to those that a carried out in an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR Sub. Allegations in DR Submissions Rebuttal to Revenue s allegations/ observations 1 - 3 The Id. D R has mentioned that the arguments of the appellant that investments were accepted as genuine in the hands of RCML in earlier years is not tenable since principles of res judicata do not apply to the income tax proceedings. The revenue has failed to appreciate the argument of the appellant. It is not the sole case of the assessee that since investments have been accepted as genuine in the hands of RCML in earlier years, loss on write off cannot be doubted in the hand s of the appellant. The appellant has, at pages 8-12 of the written submissions, pointed out that relevant investments were made in previous years relevant to assessment years 2012-13 and 2013-14 and such investments were duly accepted as genuine by the assessing officer in the hands of the appellant after detailed verification in those years as demonstrated from the questionnaire raised and replies furnished. Further, as regards write off, the same was a consequence Court approved capital reduction of investee company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 (Kolkata Trib.) - affirmed by Calcutta High Court in 145 taxmann. com 215 (2022) In view of the a foresaid, the appellant was constrained to write off its investment made in preference shares of RCML which stood extinguished as a result of binding scheme of reduction of share capital sanctioned by High Court and accordingly, the loss incurred on such write off is allowable. This aspect has been dealt in detail in the written submissions and not repeated herein for the sake of brevity. 6-7 Referred to DRP order and observations in Special Audit Report The observations of the DRP/AO basis the report of the special auditor, as reproduced by the DR in para 6 and 7, have been rebutted at length at pages 12-37 of the written submission dated 01.08.2021 filed by the appellant and the same are not repeated here for the sake of brevity. 8 Transactions related parties between need to be established to be identical to those carried out in an uncontrolled environment. This is the basis of the framing of Transfer Pricing rules all overt he world. It may also be pointed out that Trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant (p g 946 - 947 of P B Vol III); d) The photocopy of the demat account showing the investment made (pg 952 - 955 of PB Vol III); e) The photocopies of the relevant extracts of bank statements showing payment for subscription of shares (pg 956 of PB Vol III); f) A copy of agreement between the appellant comp any, RHC Holdings Pvt. Ltd. (RHC) and RCML entered on 13.02.2012 along with first amendment dated 24.05.2012 and second amendment agreement dated 28.03.2013 (detailed infra) (pg 957 - 986 of PB Vol III); g) Resolution passed in 2013 for infusing Rs. 1120 crores by appellant in RCML along with call letters from RCML qua outstanding amount on partly paid- up preference share (pg 988 - 991 of PB Vol III) ; h) Order of the Delhi High Court approving reduction in the capital investment made by the appellant company in RCML (pg 1181 - 1190 of PB Vol III) ; i) A copy of opinion from Shri Arvind Datar, Senior Advocate in respect of capital loss on the extinguishment of the rights in the preference shares (pg 1229 - 1236 of PB Vol III). j) Detailed explanation and rebuttal to all the allegations of the assessing officer/ special auditor. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, order of SEBI u/s 11(1), u/s 11(4), u/s 11B of the SEBI Act, 1992, orders of the revenue authorities, submissions of both the counsels, written submissions and other facts on record. 25. The assessee invested Rs. 250 Cr. on account of purchase of 2.5 crores of shares each worth Rs. 10/- having a premium of Rs. 90/- per share in March 2011. The assessee has made further investments in March 2013 of Rs. 500 Cr. of 50 crores of shares each worth Rs. 10/- in its wholly owned subsidiary, M/s Religare Capital Market Ltd. (RCML). The RCML further owned a subsidiary company in Mauritius namely M/s Religare Capital Market International (Mauritius) Ltd., (RCMIML). This company RCMIML had UK subsidiary called M/s Religare Capital Markets (Europe) Ltd. which had JVs/ wholly owned subsidiary (WOS) in various countries like, US, UK, Singapore. Thus, the entire monies in the Indian company went into subsidiary companies situated abroad. The Mauritius entity namely, RCMIML incurred losses resulting in erosion of its net worth. RCML by the way of the Hon ble High Court order allowing the value of the investments made by the appellant of Rs. 750 Cr. in the RCML stood extinguished be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax liability by legitimate methods and procedures which are within the contours of law and the legal proposition. It would be a well thought plan within the legal domain. Tax avoidance also involves structuring the financial affairs in such a way it complies with the letter of the law. It is for the tax authorities to unravel the actual working, structure and scheme of the assessees to bring such incomes to tax by collating, examining and investigating the affairs of the entity and collection of tangible evidences. Tax evasion is the activity in which the entity deliberately underreports the income, inflates the deductions and shows bogus expenses in order to minimize the tax liability. Tax evasion involves acts like nonreporting of cash transactions and stashing of money in offshore accounts etc. The processes of tax evasion, tax avoidance and tax planning are to be examined keeping in view the nature attributes, permissibility, motives, adjectives and consequences. 28. In the instant case, the banking business of the RCMIML and its step down subsidiary remained in slump as per the assessee as a result of which the RCMIML suffered losses and some of the step down subsidiaries o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the case of the assessee submitted to SEBI which found out diversion of funds by the assessee. The relevant portion of the order of SEB I dated 14.03.2019 is reproduced as under: 1. Securities and Exchange Board of India (hereinafter referred to as SEBI ) received complaints, inter-alia, alleging financial mismanagement and diversion of funds in Religare Finvest Ltd. (hereinafter referred to as RFL ), a subsidiary of Religare Enterprises Limited (hereinafter referred to as REL ), a listed company, for the benefit of promoters/group companies of REL. The complaints alleged inter alia the following: a) RFL had not complied with its Board approved investment policy with respect to fixed deposits ( FDs ) and that FDs amounting to Rs. 750 Crores (approx.) placed with Lakshmi Vilas Bank (hereinafter referred to as LVB ) had been adjusted by LVB against loan availed by two group companies of REL' s promoters. b) Investment by RFL in Non-Convertible Debentures ( NCDs ) of OSPL Infradeal Private Limited (hereinafter referred to as OSPL ) amounting to Rs. 200 Crores was allegedly not consistent with the Board approved investment policy of RFL. As per the complai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pinion on the financials of REL for FY 2016-17 highlighting the amounts doubtful of recovery to the tune of Rs. 1,846 Crores and highlighted directions from the RBI dated January 27, 2017 regarding concerns over the corporate loan portfolio of RFL. 2. In order to find the ultimate utilization of funds of RFL, the entire transactions in the bank accounts of the companies and the promoter/ promoter connected entities needed to be examined in detail from FY 2008-09 to FY 2017-18. This required analysis of voluminous data in trailing of funds in the bank statements of the RFL, promoter/ promoter connected entities and any other entities that have significant financial transactions with these entities along with the analysis of nature of transactions and underlying documents. Hence, SEBI appointed MSA Probe Consulting Pvt. Ltd. ( MSA ) as a Forensic Auditor on May 10, 2018 to examine the alleged diversion of funds from REL/ its subsidiaries for the benefit of promoter/promoter connected entities. 3. MSA submitted its final report in the matter of REL/ RFL on December 12, 2018 (hereinafter referred to as The audit report ). The major findings of MSA are as under: A. Dive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 1,763.59 Crores as on March 31, 2016. (f) Thus, as far as safety of the deposits is concerned, placing fixed deposits of Rs. 750 Crores at a single bank with relatively low net- worth is difficult to justify. Also, all the other FDs opened by RFL were with large sized banks. The choice of a much smaller bank for creating fixed deposits of such a huge amount against which it had not taken any loan itself or had not given it as security, raises doubts about its true purpose. (iii) The Notice nos. 24 and 25 (viz. Shri Malvinder Mohan Singh and Shri Shivinder Mohan Singh) shall not associate themselves with the affairs of REL and RFL, in any manner whatsoever, till further directions. 32 We have gone through the order of Hon ble High Court in Company Petition No. 680 of 2014 in the matter of Section 100 to Section 105 of Companies Act, 1956 r.w.r. 46 and 47 of the Companies (Court) Rules, 1959. The petition filed pertains to Companies Act by which the Hon ble High Court agreed the reduction in the share capital in accordance with the Companies Act. The assessee was authorized by virtue of Article 24 of its Articles of Association to reduce its share capital as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital commitment or repayment of existing liability of RHC and investment made by the assessee company are treated as loss. We are in agreement with the submissions that anti-avoidance provisions provides that the primary onus lies upon the assesses to show that the transaction it related party is a arm s length such a nature that would be as carried between unrelated entities. The assessee states that it be the ultimate holding company was obligated to support its subsidiary companies likes RCML to revive their business operations, if so, the entity RHC Holdings Pvt. Ltd. which is also part of this multi-national group and it is its responsibility to support the step-down subsidiaries as much it is that of the assessee. From the entire facts, it is clear that transaction has been so arranged that RHC Holdings Limited is the ultimate beneficiary of this entire transaction leaving the assessee to incur losses and hence, the capital loss claimed by the assessee cannot be allowed. 34. In the result, the appeal of the assessee on this ground is dismissed. With regard to the disallowance of interest, since the assessee had sufficient own funds, no disallowance on account of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 38. In support of the aforesaid, the following documents have, inter alia, been placed on record before the revenue authorities: Detailed working of capital gain/loss (refer pg 1367-1368 of PB Vol IV); Detailed working of sale consideration (refer pg 1 369-1372 of PB Vol IV); Copy of the original Joint Venture agreement dated 19.06.2007 read with Novation Agreement dated 23.05.2008 entered, inter alia, between the appellant with Aegon for investment in ARLIC (JV Agreement) (refer pg 1374-1485 of PB Vol IV); Copy of the restated joint venture agreement entered by the appellant with Aegon for investment in ARLIC on 30.03.2013 (refer pg 1504-1531 of PB Vol IV); Copy of the restated joint venture agreement entered by the appellant with Aegon for investment in ARLIC on 25.08.2014 (refer pg 1532-1569 of PB Vol IV); Copy of first share purchase agreement entered into between the company Benett Coleman Co. Ltd. on 08.05.2015 (refer pg 1617-1646 of PB Vol IV); Copy of secondary share purchase agreement entered on 08th May 2015 between the appellant company and Bennett, Coleman Co. Ltd (refer pg 1647-1687 of PB Vol IV); Copy of the demat account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital asset has been defined in section 2(14) of the Act as under: 'Capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession; 5.13 The term stock in trade has not been defined under the Act. In general parlance stock-in trade is understood as an asset, which is held with an objective to deal therein. 5.14 Stock-in- trade is something in which a businessman deals, whereas a capital asset is something with which he deals. The essential characteristic of stock-in-trade is that it must be a commodity in which there is dealing as distinguished from a commodity with which the busine ss is carried on, viz., from the exploitation of which income is derived [see H. Mohammed Co. vs. CIT 107 ITR 637 (Guj.)]. 5.15 The nature of asset, whether stock in trade or capital asset primarily depends upon the intention with which investment is made. If the intention behind holding an asset is to deal in it, the same qualifies as stock in trade and if the asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19-22 of CLPB) after considering Circular dated 29.02.2016 {infra) was pleased to hold that in respect of listed shares and securities held for a period of more than 12 months immediately preceding date of its transfer, if the assessee desires to treat income arising from transfer as capital gain, same shall not be put to dispute by assessing officer subject to condition that stand taken by assessee in a particular year would be followed in subsequent years. 5.19 It has similarly been held in the following cases: Sutlej Cotton Mills Supply A gency Ltd: 100 ITR 706 (SC) Karam Chand Thapar Bros. (P) Limited v. CIT: 82 ITR 899 (SC) CIT v. Rewashankar A. Kothari: 283 ITR 338 (Guj.) CIT vs. Sahara India Housing Corporation Ltd: ITA No. 740/2009 (Del.) ITO V. Rohit Anand: 34 SOT 42 (Del.) affirmed in 327 ITR 445 (Del.) CIT v. Vinay Mittal: 208 Taxman 106 (Del.)- Departmental SLP dismissed Jindal Photo Investment Ltd.: 334 IT R 307 (St.) (SC) CIT v. Devasan Investment Pvt. Ltd.: 365 ITR 452 (Del) (Supreme Court has dismissed the Department s SLP vide CC 17946/2014: 229 Taxman 496) CIT v. Consolidated Finvest a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in gains on transfer of shares have be en held to be capital gains after taking into consideration the aforesaid CBDT Circulars dated 29.02.2016 and 02.05.2016: PCIT v. Ramniwas Ramjivan Kasat: 248 Taxman 484 (Guj.) PCIT vs. Bhanupr asad D Trivedi (HUF): 87 taxmann.com 137 (Guj)- Revenue s SLP dismissed in 256 Taman 292 (SC); Suresh Babulal Shah (HUF) vs. DCIT: 161 ITD 514 (Pune) DCIT vs. Mahender Kumar Bader: 48 ITR(T) 596 (Jaipur) Sh. Anil Kumar Goel vs. ACIT: ITA No. 3142/Mds/2016 (Chennai) ACIT v. Sachin Tendulkar: 163 ITD 65 (Mum.) ACIT v. Puran Associates Pvt. Ltd.: ITA. No.3078/Del/2011(Del. Trib.) Legal position applied to the facts of the present case; 5.26 The appellant is, undisputedly, engage d in business of financing and is not a dealer in various instruments of investments. Purchase of shares/ securities is not at all the business of the appellant company. 5.27 It is also a matter of record, that the appellant made investment in shares of ARLIC as long-term strategic investment. The intent of making such investment was not to trade there in but to reap bene fits on account of long-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndments)- refer pages 1396- 1397 of PB Vol IV. Trader shall not commit any such funding since the objective of the trader is short-term of earning gains/ profits by trading in shares. Under the JV Agreement, there were substantive restrictions on transfer of shares including (refer clauses 17 to 21 of JV Agreement read with subsequent amendments) the following refer pages 1397- 1407 of PB Vol IV: - Transfer of shares was not permitted except in circumstances, specified (clause 17.1); - Shares can only be transferred subject to compliance of conditions prescribed in the JV Agreement and not otherwise (clause 17.2-17.3); - Transfer could not be made freely to anyone but to only eligible third parties which are prescribed in schedule to the JV Agreement (clause 17.2); - Transfer could be made after expiry of lock-in period of 9 year (subject to exceptions) (clause 18; - Specific exit mechanism had been prescribed and plain/ blanket sale was not permissible (clause 20); - If appellant seeks to transfer the shares, first right of refusal was with the AEGON (clause 21). 2 year non-compete clause after exit from shareholding exists in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments to be valued at cost. On the other hand, in the case of securities held as stock-in-trade, valuation is required to be done as per Accounting Standard-2 on Valuation of Inventories , which requires inventory to be valued at lower of cost or net realizable value. In terms of section 211 of the Companies Act, 1956, it is mandatory for every corporate-assessee to strictly follow the aforesaid accounting standards. The appellant has consistently followed the Accounting Standard 13 and value d the investments at cost and not at lower of cost or net realizable value. The accounting treatment followed by the appellant has always been accepted by the Revenue in the earlier year(s). Further, the Statutory Auditors in their Audit Report(s) over the years have also certified that the aforesaid accounting treatment to be correct, and has also been accepted by the Department. (g) In the audited profit and loss account, only net gain/loss on transfer of securities is shown, which is strictly in line with the method of re cognition of profits on transfer of capital investments. Had the shares/ securities been held as stock in trade and not as investments , cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to have controlling/managing interest in such company, would be taxable as capital gains and not business income (refer pages 40-49 of CLPB). 5.33 It has been held likewise by the Karnataka High Court in the case of CIT v. Nadatur Holdings and Investment (P) Ltd.: 210 Taxman 597. 5.34 The apex Court in the case of Ram N arain So ns (P.) Ltd. v. CIT: 41 ITR 534 held that where the shares were purchased for acquisition of managing agency, sale of some of the shares could not be treated as an adventure in the nature of trade to result in business income (refer pages 36-39 of CLPB). 5.35 The Delhi Bench of Tribunal in the case of Everplus Securities and Finance Ltd. vs DCIT: 101 ITD 151 held that investment in shares to acquire controlling interest did not mean that assessee was in the business of investment in shares. 5.36 In the case of Slocum Investment (P) Ltd. vs. DCIT: 106 ITD 1 before the Delhi Bench of the Tribunal, the assessee, being an investment company as defined by the objects clause of its Memorandum, had acquired shares of HCL Ltd., to acquire and retain controlling interest in the said company. The said shares were shown by the assessee-compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... point CEO, consent of appellant was required for merger/ demerger, etc., and thus any gain from transfer of shares of ARLIC is to be allegedly assessed as business income under section 28(iv)/(va) of the Act. 5.41 The aforesaid allegation/observations are patently erroneous for the following reasons: 5.42 It is reiterated that the intention of the appellant in making investment in ARLIC was not for the purpose of carrying on insurance business but to co-promote a company as a joint venture with a foreign partner to carry on insurance business, with the underlying intent to enjoy return there from in the form of dividend and/or long-term appreciation in value of such strategic investment. It is submitted that the rights and privileges accorded to the appellant pursuant to the investment of 44% in ARLIC was merely incidental to acquiring controlling stake in the company and were merely in the nature of shareholder rights. 5.43 It is submitted that on account of majority shareholding in the JV, the appellant was provided with certain rights, including the power to nominate directors on the board of the JV Company, which merely constituted shareholder rights and nothi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... executive directors. Such a restriction, which is the inevitable consequences of any group structure, is gene rally accepted, both in corporate and tax laws. However, where the subsidiary s executive directors competences are transferred to other persons/bodies or where the subsidiary s executive directors decision making has become fully subordinate to the Holding Company with the consequence that the subsidiary s executive directors are no more than puppets then the turning point in respect of the subsidiary s place of residence comes about. . 74 ..The directors of the subsidiary under their Articles are the managers of the companies. If new directors are appointed even at the request of the parent company and even if such directors were removable by the parent company, such directors of the subsidiary will owe their duty to their companies (subsidiaries). They are not to be dictated by the parent company if it is not in the interests of those companies (subsidiaries). The fact that the parent company exercises share holder s influence on its subsidiaries cannot obliterate the decision-making power or authority of its (subsidiary s) directors. They cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital asset as opposed to stock in trade in the financial statements of the appellant since financial year 2007-08 and which was always accepted by the Department in the past years. Further, the rights and privileges allowed to the appellant was merely incidental to its acquiring shareholding in ARLIC and were merely in the nature of shareholder rights. The business of the investee/ARLIC cannot be regarded as the business of the appellant merely because the appellant may exercise certain shareholder influence. 5.47 The assessing officer/ special auditor have to tally failed to appreciate the aforesaid settled principles. In view of the aforesaid, it is respectfully submitted that the appellant has rightly declared the gains arising on transfer of shares of joint venture under the head Capital Gains and the action of the assessing officer in recharacterizing the gains as business income calls for being reversed. Re: Section 28(va) and Sect ion 28(iv) of the Act - Not applicable 5.48 The assessing officer has applied provisions of 28(va)/(iv) of the Act to tax the gains on transfer of shares of ARLIC as business income. In this regard, it is submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as pre-decided. 5.56 It is pertinent to mention that the impugned assessment order does not assign any reason for disallowance of the fee paid, other than stating that the sale price was pre-decided and hence fee paid to CSS is being disallowed, which is patently erroneous and unsustainable for the following reasons: 5.57 The appellant had paid professional advisory fee of Rs. 21.30 crores to CSS in connection with transfer of shares of ARLIC in terms of the agreement entered into with CSS for their assistance in sale of shares of ARLIC. Copy of agreement between appellant and CSS is placed at pg 1750-1756 of PB Vol IV and copy of invoice is placed at pages 1749 of PB Vol IV. The same is thus clearly allowable as deduction while computing capital gains under section 48 of the Act, which aspect has not been disputed by the assessing officer. 5.58 Reliance in this regard is placed on the following decisions where in it has been held that expenses incurred in connection with transfer of capital asset are allowable as deduction for the purpose of computation of capital gains: CIT vs. Shakuntala Kantilal: 190 ITR 56 (Bom.) Gopee Nath Paul and Sons v. DCI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of transaction involving appellant s stake in ARLIC; - The services of CSS would include: (a) Analysing and evaluating the business, operations and financial position of ARLIC; (b) Preparing and implementing a marketing plan relation to sale of ARLIC shares; (c) Coordinating the data room and due diligence investigations of potential purchasers of ARLIC shares; (d) Evaluating proposals that are received from Potential Purchasers; and (e) Structuring and negotiating the sale terms etc. 5.64 Further, TDS has been deducted and de posited by the appellant on the payment made to CSS details of which are at pages 1757-1758 of PB Vol IV. 5.65 It is submitted that there is no legal bar on the assessee/ taxpayer seeking appropriate advice before or at the time of entering into a transaction and so long as expenditure is incurred in connection with the transaction undertaken, the same is allowable as expenditure. 5.66 The aforesaid clearly substantiate that the expenditure has been incurred in correction with sale of shares of ARLIC by the appellant and is allowable as deduction under section 48(i) of the Act. 5.67 Without prejudice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Malvinder Mohan Singh 100 0.00 Mr. Shivinder Mahan Singh 100 0.00 Total 5,050,000 100.00 43. We have also gone through the share purchase agreement between the assessee and the purchaser. We have gone through the conditions precedence in the agreement at page no. 1631 of PB. The relevant portion is as under: (e) The Seller Company and the Company have informed the Purchaser that the Seller Company, Aegon and the Company have agreed that the Company shall and Aegon (to the extent it is able) shall cause the Company to: (i) complete the following actions within a maximum period of 90 days from the receipt of the Name Change Approval Date ( Name Change Period ). (x) remove the term Religare from the name of the Company; (y) remove the term Religare from the brand, logo, letterhead and all other branded mate rial of the Company, provided that the Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The term going concern simply means a whole or part of the business that is capable of generating income. Notwithstanding that the business as an operating entity is being sold, the sale involves the separate legal transfer of each type of asset constituting the business. Such assets generally include immovable property, fixed assets, intellectual property, goodwill, know-how, incorporeal rights, debts and stock. The effect of a sale of business is such that the company as a legal entity remains and only those assets which were not sold, if any, remain in such company. Comparison Table 47. A sale of shares and a sale of business may be simply illustrated in the following table : Subject Selling Shares Selling Business Ownership of the Company Ownership of the company will change. The purchaser will now own the company by virtue of their newly acquired shareholding in the Company. Ownership of the company remains unchanged. The incorporator will still hold all of the shares in the company however, such company will no longer consist of the operating business. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of Interest on Non-Convertible Debentures (NCD)- U/s 40(A)(2)(b): 52. During the year under consideration, the assessee company has made payment of interest on Non-Convertible Debentures to Standard Chartered Bank at the rate of 14% p.a. However, the assessee company has made payment of interest on Non-Convertible Debentures to its subsidiary company i.e. Religare Securities Ltd. of Rs. 30,33,19,165/- on Rs. 1,66,00,00,000/- the effective rate of which comes out to be 18.27% p.a. the difference of 4.27% comes to Rs. 7,08,90,686/- as shown below: Total interest expense Effective Rate of Interest Excessive Rate of interest Excess Amount of Interest (A) (B) (C) (D = A*C/B) 10,33,19,165 18.27% 4.27% 7,08,90,686 53. Therefore, the excess interest payment of Rs. 7,08,90,686/- i.e. 4.27% has been treated by the TPO to be excessive and unreasonable in terms of Section 40A(2)(b) and added back to the income of the assessee company. 54. Before the revenue authoriti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities concluded that interest on NCDs issued to RSL is excessive or unreasonable to the extent of Rs. 7,08,90,686 (i.e. 4.27%) and disallowable in terms of section 40A(2)(b) of the Act. 58. During the hearing, it was submitted that the NCDs issued to both RSL and Standard Chartered bank had the same yield rate of 14% p.a. However, the only distinguishing feature was that the NCDs issued to RSL was in the nature of Zero Coupon Bond i.e., interest payout is made only at the time of redemption of the bond as against regular NCDs issued to Standard Chartered Bank with 14% coupon rate, where interest/yield was payable on an annual basis. These facts were duly disclosed in the audited annual accounts of the assessee for the financial year ended 31.03.2016 under the head Long term borrowings as under: 5.1 Details of Privately Placed Secured Non-Convertible Debentures (NCDs) outstanding as on March 31, 2016 are as below: Coupon Rate Current Non-Current As at March 31, 2016 Current Non-current As at March 31, 2016 14% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cash at para on private placement basis to the subscribers of the NCDs (hereinafter referred to as the Debenture Holders or Debenture-holders ) as under: Aggregate nominal value of NCDs (Rs. In crores) No. of NCDs Computation of interest and frequency on interest payment Deemed date of allotment Redemption/maturity date and put/call option dates Rs. 300,00,00,000 (Rupees three hundred crores only) 3000 Zero Coupon March 28, 2013 March 28, 2018 . 60. It was submitted that thus the yield on 3000 NCDs issued to RSL was 14% p.a. only i.e., at par with NCDs issued to Standard Chartered Bank, as against 18.27% p.a. alleged by the revenue authorities. It was argued that the revenue authorities have failed to appreciate the concept of Zero Coupon Bond , which is explained as under: 4.10 A zero-coupon bond is a debt security that does not pay interest annually, but is compounded at a stated rate. Thus, it is only when the bond is redeemed at maturity that the entire payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OP/OR 1. Indovision Securities Private limited 3.10% 2. BN Rathi Securities Limited 3.73% 3. Cholamandalam Securities Limited 4.32% 4. P P F A S Asset Mgmt. Pvt. Ltd. 11.19% 5. I C R A Management Consulting Services Ltd. 12.15% 6. Alankit Ltd. 16.75% 7. Aditya Birla PE Advisors Pvt. Ltd. 25.78% 8. Pushpak Financial Services Ltd. 30.41% 9. Inmacs Management Services Ltd. 44.36% OP/OR 35th percentile 3.15 11.19% 65th percentile 5.85 16.75% Median 12.15% 65. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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