TMI Blog2024 (3) TMI 201X X X X Extracts X X X X X X X X Extracts X X X X ..... to March 2016. Later on, these loans were converted to OCPS at face value in November 2016. As in absence of any foreseeable cash flows, which would enable WECL to clear the loans obtained from the assessee, a commercial decision was taken to convert the outstanding loans into OCPS. Further, the first tranche of Rs. 375 crores was subscribed more than two year ago i.e. in October 2014. Having regard to surrounding circumstances and based on human probabilities, one cannot infer that the assessee would have known the outcome of the petition before the NGT which would adversely impact the valuation in the relevant FY 2016-17 and thus the assessee could have planned to purportedly generate overall loss by selling OCPS which were subscribed as far back in October 2014. According to us therefore, the overall cost of acquisition of Rs. 686 crores, for capital gain computation purposes, is found to be tenable and includable in computing cost of acquisition deductible from the sale consideration, for arriving at capital gain/loss. Sale consideration component involved in this transaction - AO was of the view that the transaction with SIPPL, a related entity was a controlled transaction and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, it appears that the AO has mixed up both the transactions. We notice that the AO has examined the transactions relating to issue and writing off of Rs. 300 crores in AY 2017-18, even though those transactions are relevant for AY 2015-16. The AO has taken adverse view with respect to the same and accordingly, arrived at the conclusion that the investment made by WEPL in the OCPS issued by WECL is also sham, even though it is an independent transaction. However, we are of the view that the AO was not justified in doing so. Hence the disallowance of claim of both long term and short term capital loss was not correct on this reasoning also. AO was unjustified in disallowing the aggregate capital loss by treating the transaction involving sale of OCPS by WEPL to be a colorable device and accordingly uphold the order of Ld. CIT(A) deleting the impugned disallowance. This ground is therefore dismissed. Disallowance u/s 14A both while computing income under normal computational provisions as well as book profit computed u/s 115JB - AO rejected the same and invoked Rule 8D and thereby computed disallowance u/s 14A being 1% of average value of investments - HELD THAT:- We note that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income at Rs. 429,21,64,250/- which was later on revised to Rs. 472,53,77,990/-. The case of the assessee was originally selected for scrutiny by issue of notice u/s 143(2) of the Act dated 10.09.2018. The proceedings however stood abated as a consequence of the search action u/s 132 conducted on 30.06.2017 upon the Welspun Group. Pursuant thereto, notice u/s 153A of the Act was issued on 01.08.2018. In response, the assessee filed its return of income on 24.08.2018 declaring income of Rs. 472,53,77,990/-. 3. From the facts on record, it is noted that the WEPL (which stood merged with the assessee) had claimed capital loss of Rs. 423 crore on sale of shares of M/s. Welspun Energy Chhattisgarh Limited [ in short WECL ] to its related entity, M/s. Solarsys Infra Projects Pvt. Ltd. [ in short SIPPL ]. It is noted that WEPL had sold the investment of Rs. 686 crore held in WECL to SIPPL for total consideration of Rs. 300 crore on 29.03.2017, which had yielded the impugned loss. The said loss inter alia comprised of long-term capital loss (after indexation) of Rs. 249 crore and short-term capital loss of Rs. 178 crores. Since WSL was the successor company to WEPL, the aggregate capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arch, 2016. These loans received by WECL from its holding company was utilized for making downstream investments in three (3) project SPVs namely (i) M/s. Welspun Energy UP Pvt. Ltd. (ii) M/s. Welspun Energy MP Pvt. Ltd. and (iii) M/s. Welspun Energy Anuppur Pvt. Ltd. by combination of equity infusion and interest free loans. Later on, in the month of November 2016, these loans provided by WEPL to WECL for funding the project SPVs were converted into OCPS. WEPL also invested further sum of Rs. 5.40 cr on 17.03.2017 in OCPS of WECL. Subsequently, vide Share Purchase Agreement [in short SPA ] dated 29.03.2017, WEPL sold the entire OCPS of Rs. 686 crores (375 + 305.20 +5.40) held in WECL to SIPPL for an aggregate consideration of Rs. 300 crores. It is noted that, the sale consideration agreed upon was based on the valuation report obtained from a merchant banker. Later on, in April/May 2019, WECL (which was now owned by SIPPL) had sold its stake in the three project SPVs to Adani Infra (India) Ltd [ in short Adani ] for an aggregate consideration of Rs. 295 crores. 7. Having regard to the above facts, the AO in the course of assessment vide show-cause notice dated 22.11.2019 had requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he earlier investment of Rs. 375 crores which, according to him, was only on paper. The AO accordingly held that there was enough direct and circumstantial evidence surrounding the transaction, which showed that it was a colorable device deployed by the assessee to create a notional loss. The AO thus disregarded the transaction and disallowed the loss. For doing so, the AO referred to the decisions of the Hon ble Apex Court in the cases of Sumati Dayal Vs CIT (214 ITR 801), Durgaprasad More (82 ITR 540), McDowell Co. Ltd Vs CTO (154 ITR 148) and Vodafone International Holdings BV vs. UOI (204 Taxman 408). The AO also relied upon the decision of Hon ble Karnataka High Court in the case of Wipro Ltd (50 taxmann.com 421) for disallowing the impugned capital loss. 9. Being aggrieved by the above order of the AO, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to delete the disallowance of the impugned capital loss. Now, the Revenue is in appeal before us. 10. Assailing the action of the Ld. CIT(A), the Ld. DR vehemently supported the order of the AO. The Ld. DR narrated the entire timeline of events and submitted that the assessee had created this artificial loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated anything adverse or admitted to any wrong doing. He further emphasized on the fact that, the Revenue was under mistaken assumption of fact that the loss arising because of the merger of WERPL with WEPL was claimed by the assessee. He particularly invited our attention to Para 10.21 of the Ld. CIT(A) s order wherein it was noted that the loss of Rs. 300.5 crores debited by WECL as a consequence of this merger had been disallowed voluntarily and also not carried forward. The Ld. AR further contended that, the income-tax assessment of WEPL for AY 2015-16, was simultaneously completed by the same AO u/s 153A/143(3) of the Act and he showed us that no adverse inference was drawn either in respect of these transactions between WEPL, WECL and WERPL or in relation to this merger. The AO had neither held the scheme of amalgamation to be sham or not tax-neutral in the income-tax assessment completed for AY 2015-16. The Ld. AR accordingly submitted that, the AO was completely unjustified in disputing the transactions and scheme of amalgamation undertaken in AY 2015-16 in the income-tax assessment for the relevant AY 2017-18. 12. The Ld. AR further submitted that, indeed WEPL had entere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te an artificial loss and avoid tax. 15. For arriving at the above finding, the AO is noted to have primarily doubted the initial investment of Rs. 375 crores made in OCPS of WECL by WEPL, holding it to be merely on paper. The AO as well as the Ld. DR has heavily stressed on the fact that, the investment so made was routed through wholly owned subsidiaries and received back by WEPL on the same date, which, according to them, showed that the transaction was not genuine. Although at first blush, this circular movement of funds did appear to be unnatural but later on upon being apprised of the rationale behind the same, it is noted that neither did this transfer of funds result in creation of any loss and that there was indeed commercial rationale behind doing so, which we have discussed in the succeeding paragraph. Although the funds were routed amongst the group entities but the character and color of funds changed in each leg creating different rights and obligations inter-se the parties and hence, it was not a simple circular movement of funds as was alleged by the AO. 16. From the facts placed before us, it is noted that WEPL was engaged in the business of engineering, procuremen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and undertaken, there was no purpose for this SPV to keep the funds lying idle and therefore the same was advanced back by way of interest free loan to WEPL. The rationale for giving interest free loan was that, once any project was awarded to WERPL, then WEPL would repay the monies back to WERPL for undertaking the said project. Until then, the monies would be purposefully deployed within the group. 17. Having regard to the foregoing, we find merit in the submission of the Ld. AR that the acts involving issuance of OCPS by WECL and WERPL and thereafter the loan given by WERPL to WEPL was based on business prudence to create specific rights and obligations amongst the entities in the regular course of business. Moreover, as rightly pointed out by Ld. AR that, the movement of funds amongst the entities did not result in any creation of tax loss or tax claim and therefore there was no reason to dispute the same. In our view therefore, this sequence of transactions cannot be simply stated as sham. 18. The Revenue is further noted to have linked the above movement of funds with the subsequent action involving merger of WERPL with WEPL, which according to them, resulted in creation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PL with WEPL, the loss suffered by WECL during the FY 2014-15 was not claimed or carried forward by WECL while filing its return of income for the FY 2014-15. It is seen that WECL, while debiting an expense of Rs. 300,05,00,000/- as loss on cancellation of OCPS on merger , has re-cognized this loss as capital loss and the same has not been claimed as a deduction. This loss has also not been carried forward. The AO has completely ignored this fact. 20. Before us, the Ld. CIT, DR was unable to controvert the above finding nor was he able to show that this loss had been set-off or claimed by WECL in any subsequent year. Apart from the foregoing, the Revenue was unable to point out any other purported loss created in this scheme of amalgamation, which according to AO, rendered the merger to be non-tax neutral. We therefore note that there was no artificial loss created or claimed or carried forward pursuant to this scheme of amalgamation and hence the genesis of dispute raised by the AO doubting the scheme of merger and suspecting it to be done only to create artificial loss is noted to be non-existent and hence factually unfounded. 21. The Ld. AR further showed us that, the linkage of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction which is the source of the receipt and to proceed on what they regard as the substance of the matter. The taxing authority is entitled to and indeed is bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device and legal relationship it is open to the taxing authorities to unravel the device and determine the true character of the relationship. But the legal effect of the transaction cannot be displaced by probing into the substance of the transaction . 23. Having regard to the above legal principle, in the case before us, WERPL had merged with WEPL. Since the shareholder of WERPL i.e. WECL was a subsidiary of WEPL, Section 19 of Companies Act, 2013 prohibited the holding company to issue its shares to its subsidiary company. Accordingly, the OCPS held by WECL in WERPL was extinguished resulting in provision of loss in the books of WECL. Similarly, since WEPL could not issue shares in lieu of the OCPS held by WECL in WERPL, it correspondingly resulted in creation of equivalent capital reserve. This effect to the scheme of merger and entries passed in the books of accounts is noted to be a consequence of operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levelled that the scheme undertaken in AY 2015-16 was a colorable device, that too in the income-tax assessment for AY 2017-18, cannot be entertained. Further, as noted above, there was no undue tax benefit availed by this scheme as the purported loss being referred to by the AO had already been disallowed by WECL and therefore the allegation of tax avoidance is noted to have no legs to stand on. The Ld. CIT(A) is also noted to have analyzed the scheme of amalgamation from all angles and held that there was no adverse tax implication or undue tax benefit arising therefrom. The relevant findings of Ld. CIT(A), as noted by us, are as follows: - 10.15 For this we need to further analyse the merger and amalgamation which took place between WEPL and WERPL. It is seen that a result of the merger, the assets and liabilities of WERPL became the assets and liabilities of WEPL. As per section 47(vi) of the Act, such transaction is not regarded as a transfer and hence not liable for tax. The said section is reproduced below: Clause (vi) of section provides as follows: (vi) any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the whole process, the assessee has neither become richer nor poorer. If any benefit or perquisite does not arise from the business or profession carried on by the assessee, the provisions of Section 28(iv) in any case cannot be applied. it is evident that the intention of the Legislature is not to apply the provisions of Section 28(iv) to a case where there is increase in the general reserves arising due to recording of the shares in the balance sheet of the assessee at their market value. 10.17.4 Further, it is also observed that a book entry recording a reserve is a consequence of the amalgamation, which is required to be passed for the limited purpose of balancing the accounts based on the double entry system employed and cannot give rise to any benefit or perquisite in the course of the business. The only relationship between the two companies i.e WEPL and WERPL was that of indirect holding between them. In this factual background, it cannot be said that the amalgamation reserve arose out of any business activity of the assessee. Scheme of Amalgamation cannot also be regarded as an adventure in the nature of trade. Thus; the reserve created on account of amalgamation is cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing to the merger, the assessee has explained: that the: same has been neutralized by the corresponding asset being taken over by WEPL. With regard to waiver of term loan or any other loan in contrast to working capital loan , it was held as not chargeable to tax under section 41(1) in Mahindra Mahindra Ltd. v. CIT [2003] 128 Taxman 394/261 ITR 501 (Bom.): The Apex Court affirmed the decision of the Bombay High Court recently which is reported in Commissioner v. Mahindra and Mahindra Ltd. [2018] 93 taxmann.com 32/255 Taxman 305. Also, the Apex Court held that for applying section 28(iv) the benefit must have been received by the assessee in some other form rather than in shape of money. In this case, the loan was not a trading liability and as such not chargeable to tax u/s 41(1). Further, the loan was received as cash receipt and in case of its waiver, section 28(iv) was not applicable. 10.21 Also, on perusal of the submissions made by the assessee, it is also noticed that due to merger of WERPL with WEPL, the loss suffered by WECL during the FY 2014-15 was not claimed or carried forward by WECL while filing its return of income for the FY 2014-15. It is seen that WECL, while deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agement of WEPL who are in-charge of taking strategic business decisions, he was unable to answer the question posed by the Investigating authority. Having regard to the foregoing facts, we thus find ourselves to be in agreement with the following findings of the Ld. CIT(A) negating the reliance placed by the AO upon the statement of Mr. Rajesh Verma. 10.12 ..The AO has perhaps placed too much reliance on the statement of Sh. Rajesh Verma, employee of WEPL, who could not explain the business rationale behind these transactions and also who could not explain the business rationale behind the amalgamation. The fact remains that he has not admitted anything adverse regarding these transactions. It is not the case that he admitted that these transactions were sham transactions to create artificial losses. 27. Overall, we also find merit in the alternate contention of the assessee that, the scheme of amalgamation between WEPL and WERPL was made effective from appointed date 01.01.2015 and that all the entries giving effect to the said scheme was passed and accounted for in the books of AY 2015-16. The income-tax assessment of the assessee WECL for AY 2015-16 had been framed by the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... month of March 2017 to related entity SSIPL, and this particular tranche was subscribed only in November 2016. This according to AO was undertaken with the sole intent to generate loss and reduce capital gains tax liability. On the given facts before us, this suspicion of the AO is noted to be unfounded. The assessee is noted to have furnished evidence that the funds were primarily infused into WECL much prior i.e. between September 2014 and March 2016 and that in November 2016, it had only converted the loans into OCPS. Such act was shown to have been necessitated due to the petition, which had since been filed before the National Green Tribunal. Because of this litigation, it was expected that considerable time would be involved in ultimately getting environmental clearance for the thermal power projects. Hence, in absence of any foreseeable cash flows, which would enable WECL to clear the loans obtained from the assessee, a commercial decision was taken to convert the outstanding loans into OCPS. Further, the first tranche of Rs. 375 crores was subscribed more than two year ago i.e. in October 2014. Having regard to surrounding circumstances and based on human probabilities, one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons from regulatory authorities to undertake coal based power projects, which made it an attractive investment for third parties like Adani. However, the National Green Tribunal, vide order dated 21st December 2016, copy of which is found at Pages 131 to 179 of the Paper Book, had set aside the environmental clearance granted to WECL to set-up coal based thermal plants, which indeed adversely impacted its valuation. The contemporaneous fact is also that, even Adani ultimately did not acquire WECL for Rs. 422 crores. Rather, it was in April / May 2019 that, Adani acquired the three SPVs of WECL for an aggregate consideration of Rs. 295 crores. Having regard to foregoing, we therefore find merit in the submissions of Ld. AR that, the sale consideration of Rs. 300 crores agreed between the assessee and SIPPL cannot be said to be under-valued or on the lower side. 32. The Ld. AR has also explained the rationale behind the decision taken to sell the shares of WECL to SIPPL. It was shown that BK Goenka Group held majority stake i.e. 62% in the assessee. Apart from BK Goenka Group, Mr. V.K. Mittal held 38%. As already noted at Para 16 above, the WEPL was in EPC business and involved in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me investment was sold at a comparatively lower price to third party. We therefore do not find any infirmity in the sale consideration of OCPS as well. 34. The reliance placed by the Revenue on the decision of CIT Vs Wipro Ltd (50 taxmann.com 421) is found to be factually distinguishable. In the decided case, the assessee had earned short-term capital gains from sale of shares in one transaction. Thereafter, to avoid this capital gains tax liability, it had sold the shares of its subsidiary, WFL, which it had acquired at a premium of almost Rs. 107 crores for a pittance rate of a paisa being Rs. 75,000/- in aggregate to three ex-employees of the group. The sale consideration was found to be grossly under-valued for the reason that, the fundamentals of WFL did not justify this price and that assessee had acquired shares in WFL from a third party in the immediately preceding year for Rs. 17.25 share as opposed to sale for one paisa per share. Also, immediately after divesting the stake for Rs. 75,000/-, the assessee had again reinvested and acquired stake of Rs. 95 crores in the same WFL which clearly showed that it never intended to divest and that the fair value of shares sold was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO has mixed up both the transactions. We notice that the AO has examined the transactions relating to issue and writing off of Rs. 300 crores in AY 2017-18, even though those transactions are relevant for AY 2015-16. The AO has taken adverse view with respect to the same and accordingly, arrived at the conclusion that the investment made by WEPL in the OCPS issued by WECL is also sham, even though it is an independent transaction. However, we are of the view that the AO was not justified in doing so. Hence the disallowance of claim of both long term and short term capital loss was not correct on this reasoning also. 37. In view of the above facts and for the reasons set out above, we therefore hold that the AO was unjustified in disallowing the aggregate capital loss of Rs. 423 crores by treating the transaction involving sale of OCPS by WEPL to be a colorable device and accordingly uphold the order of Ld. CIT(A) deleting the impugned disallowance. This ground is therefore dismissed. 38. Ground Nos. 2 3 relates to the disallowance of Rs. 9,69,98,557/- made by the AO u/s. 14A of the Act both while computing income under normal computational provisions as well as book profit comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est Ltd. Vs. Commissioner of Income Tax 1, has held that when the Assessee has not earned any income which was exempt from tax, disallowance of the expenditure under Section 14A read with 8D of the Rules would not be permissible. 6. Karnataka High Court, in the case of Pragati Krishna Gramin Bank Vs. Joint Commissioner of Income-tax2, has held that expenditure in relation to income not includable in the total income cannot exceed such income. It was observed as under. 14. We make it clear that the expenditure for earning exempted income has to have a reasonable proportion to the income, so earned, going by the common financial prudence. Therefore, even if the Assessing Authority has to make an estimate of such an expenditure incurred to earn exempted income, it has to have a rational nexus with the amount of income earned itself. Disallowance under Section 14A of Rs. 2,48,85,000/- as expenses to earn exempted Dividend income of Rs. 1,80,30,965/- is per se absurd and 1 378 ITR 33 2 [2018] 256 Taxman 349 (Karnatama) URS 3 of 7 4 3-ITXA 149-17.odt hypothetical. The disallowance under Section 8D cannot exceed the expenses claimed by assessee under the Proviso to Rule 8D. Therefore, whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Abhishek Industries Ltd. (2006) 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present case, admittedly the assessee did not make any claim for exemption. In such a situation section 14A could have no application. 5. We do not find any question of law arising. Appeal is therefore dismissed. 8. Recently, this Court, in a decision dated 4th February, 2019, in the case of The Pr. Commissioner of Income Tax-10 Vs. HSBC Invest Direct (India) Ltd. had observed as under. 4. Having heard learned Counsel for the parties and perused documents on record, we notice that in Cheminvest Ltd. (supra) Delhi High Court had referred to and relied upon its earlier decision in the case of CIT Vs. Holcim India (P) Ltd. (I.T.A. No.486 of 2014, decided on 5 th September 2014). we further notice that this Court in Income Tax Appeal No.693 of 2015 by an order dated 21 st November, 2017 whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infrastructure (India) Ltd. (ITA No. 204/2022), following which the coordinate Bench of this Tribunal in the case of Asstt. CIT v. Bajaj Capital Ventures (P.) Ltd. (196 ITD 24) has held that the amendment to Section 14A introduced by the Finance Act 2022 shall apply from Assessment Year 2022-23. 43. Before us, the Ld. DR was unable to bring on record any contrary judicial precedent or any change in position of law to controvert the above findings of the Ld. CIT(A). In view of the above and following the binding decisions of jurisdictional High Court (supra), we see no reason to interfere with the above findings of the Ld. CIT(A) restricting the disallowance u/s 14A to the extent of exempt income i.e. Rs. 55/- as suo moto offered by the assessee. 44. Now we come to the addition made on account of Section 14A read with Rule 8D, while computing book profit u/s 115JB. We find that this Tribunal in assessee s own case for earlier AYs 2013-14 2014-15 (supra), following the decision of the Special Bench in the case of ACIT Vs Vireet Investments Pvt Ltd (82 taxmann.com 415), has held that Rule 8D cannot be invoked and applied, while computing book profit under clause (f) of Explanation (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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